Funding Circle Plc (FCH) Funding Circle Plc: Full Year Results
02-March-2023 / 07:00 GMT/BST
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Funding Circle Holdings plc
Full Year 2022 Results
Embargoed until 7.00am, 02 March 2023
THIS ANNOUNCEMENT INCLUDES INSIDE INFORMATION AS DEFINED IN
ARTICLE 7 OF THE MARKET ABUSE REGULATION NO. 596/2014
Funding Circle Holdings plc ("Funding Circle") today announces
results for the year ended 31 December 2022.
Lisa Jacobs, CEO at Funding Circle, says:
"We've made good progress against our medium-term strategy,
expanding our reach in distribution and depth in products. We
introduced lending as a service in the US, and expanded our product
set through the launch of super prime loans in the US and near
prime loans in the UK. We have continued to see strong engagement
with FlexiPay - so our customers can now not only borrow, but pay
and spend with Funding Circle for the first time.
"I'm really pleased with how the business reacted to the
evolution of the economic environment and transitioned back to
commercial lending, with government schemes phasing out in 2022.
Overall we delivered a solid financial performance. We were prudent
in our lending in 2022, and will continue to be whilst conditions
remain challenging - as expected in the UK in 2023, where we have
pushed out our 2025 income targets by a year. We're confident in
the US and are excited about new FlexiPay growth over the medium
term. Having built strong foundations to deliver against the plan,
we expect to double Group income over the next three years."
Executive Summary:
-- Following a period of significant market uncertainty, Funding
Circle has proven resilient through change,delivering a solid
financial performance in FY 22 as government loan schemes were
phased out.
-- Loan returns remained robust and attractive with upgraded
returns for several cohorts.
-- Continued institutional investor demand to fund loans with
new forward flow agreements in the UK and US.
-- In 2022, lending through Funding Circle contributed GBP6.9bn
to UK GDP, supported 106,000 jobs andcontributed tax revenues of
GBP1.4bn to the UK economy.[1]
-- Customer satisfaction remained strong with Group NPS at 77
and a UK Trustpilot score of 4.6. In the UK ittakes only six
minutes to complete an online application with an instant decision
for 70% of applications.
-- Good early progress made against the three strategic pillars
of our medium-term plan:? Attract more businesses: two Lending as a
Service ("LaaS") partnerships in the US; ? Say yes to more
businesses: expanded customer segments to super prime in the US and
near prime in theUK; ? #1 in new products: tripled FlexiPay
transactions from H1 to H2; launched FlexiPay card in beta.
-- Our balance sheet remains a strategic asset, with net assets
of GBP284m, including cash of GBP178m.
-- We have introduced guidance for 2023 and medium-term guidance
is updated.? UK Loans reflects the challenging economic environment
in 2023 pushing back 2025 targets by one year. ? US Loans guidance
for 2023 shows strong momentum and medium-term guidance is
unchanged. ? The significant progress we've made on FlexiPay means
we have outlined our expectations for the firsttime, including a
step up in investment in 2023.
-- Now including FlexiPay, we target a doubling of Group total
income by 2025.
Financial Performance:
2022 2021
GBPm GBPm
Originations 1,481 2,296
Loans under Management (LuM) 3,743 4,457
Operating income 131.4 165.5
Net investment income[2] 17.3 41.4
Total income 148.7 206.9
Fair value gains 4.8 28.6
Net income 153.5 235.5
AEBITDA[3] 6.8 91.8
Operating (loss)/profit (14.7) 64.2
(Loss)/profit before taxation (12.9) 64.1
Cash 177.7 224.0
Net assets 284.0 288.0
1 Funding Circle research in partnership with Oxford
Economics.
2 Net investment income comprises investment income less
investment expense.
3 Adjusted EBITDA ("AEBITDA") is an alternative performance
measure and represents operating profit/(loss) before depreciation
and amortisation, share based payment charges, associated social
security costs, foreign exchange gains / (losses), and exceptional
items. A reconciliation between AEBITDA and operating profit/(loss)
is shown in the Business Review.
Financial Summary:
-- Originations of GBP1.5bn (2021: GBP2.3bn) down 35%
year-on-year but in line with expectations following thepeak of the
government-guaranteed loan schemes in H1 21.
-- Both H1 and H2 22 originations up on H2 21, but reduced in H2
22 from H1 22 following credit tighteningin response to the more
challenging UK economic environment.
-- Loans under management of GBP3.7bn (31 December 2021:
GBP4.5bn) down 16% following anticipated earlyrepayments of CBILS
loans in UK and PPP loan forgiveness in US.
-- Operating income was GBP131.4m (2021: GBP165.5m) down 21%
against the high levels of income fromgovernment-guaranteed loan
schemes in 2021. 2021 also included GBP2.1m of deferred PPP
revenue.
-- Investment income was GBP17.3m (2021: GBP41.4m) down by 58%,
as expected, as investments have either beensold or amortised
down.
-- Fair value gain of GBP4.8m (2021: GBP28.6m gain) reflects
continued positive revaluations for improvedunderlying credit
performance.
-- AEBITDA of GBP6.8m (2021: GBP91.8m) and operating loss of
GBP14.7m (2021: profit of GBP64.2m) reflect thereduction in net
income following the closure of the government-guaranteed loan
schemes.
-- Net assets remain healthy at GBP284.0m (31 December 2021:
GBP288.0m), including cash balance of GBP177.7m (31December 2021:
GBP224.0m), of which GBP165.7m (31 December 2021: GBP199.4m) was
unrestricted[4].
Operating and Strategic Summary:
-- We are delivering against our medium-term plan which brings
significant growth opportunities in a largeaddressable market:? In
March 2022, we announced our medium-term plan to transform Funding
Circle into a multi-productplatform, serving a direct and embedded
audience. ? We are focused on enabling SMEs to borrow, pay and
spend. ? A year into this plan, we are delivering against our
strategic pillars: -- Attract more businesses: strengthening
existing distribution channels and expanding into newembedded and
intermediated channels to enable more businesses to reach us?
Launched two Lending as a Service pilot partnerships, with Pitney
Bowes and DreamSpring inthe US. ? Developed our distribution
partnerships in UK and US. ? Launched our first sports sponsorship
with Premiership Rugby to drive brand awareness
andconsideration.
-- Say yes to more businesses: serving more businesses through
an expanded set of personalisedFunding Circle products and further
integration with third party lenders? Expanded US Loans proposition
to serve super prime businesses. ? Expanded UK Loans proposition to
include near prime lending. ? Increased Marketplace originations
with lending up 24% y-o-y.
-- #1 in new products: using our capabilities to enter new
markets where we can developmarket-leading products? SME B2B
payments represents a new major market opportunity. ? FlexiPay
rolled out to additional customer segments during 2022, with strong
growthtrajectory and high customer engagement: >3x growth in
cumulative transaction value H1 22 to H2 22;GBP60m total
transactions in FY 22 (GBP3.5m FY 21); > 2,000 active accounts
at end FY 22 (c.250 FY 21); >20,000 transactions to date; 1.4
transactions per month per active customer. ? FlexiPay card
launched in beta at the end of 2022.
4 Unrestricted cash refers to total cash less cash that is
restricted in use. The restricted cash is cash that is not
available for general use by the company as it is held within
investment vehicles and is payable to third parties. Outlook:
We have introduced guidance for FY 23, updated our medium-term
guidance for FY 25 and included FlexiPay guidance for the first
time, as shown below.
FY 23 Medium Term (FY 25)
Group to double total income by
Expectation of challenging UK economic environment in FY 23 FY 25 (incl. FlexiPay);
Prior UK medium-term guidance
delayed by one year[5]
UK and US Loans FlexiPay UK Loans5 US Loans FlexiPay
At least
GBP150m - GBP160m GBP175m
Total income Over GBP10m At least At least
Continued momentum in GBP70m GBP50m
US, broadly flat in UK
GBP(10-20)m
AEBITDA GBP0-10m Margins of AEBITDA AEBITDA
FY 23 investment into FlexiPay, AEBITDA loss 25-30% positive positive
dependent on speed we choose to scale
Analyst presentation:
Management will host an analyst and shareholder presentation and
conference call at 9:30am UK time (GMT), on Thursday 2 March 2023,
including an opportunity to ask questions.
To watch and listen to the webcast, with the opportunity to
submit written questions, please use this link to register and gain
access to the event.
For conference call access, with the opportunity to ask live
questions, please dial +44 33 0551 0200 or +1 786 697 3501. Quote
Funding Circle Full Year Results if prompted.
An on-demand replay and transcript will also be available on the
Funding Circle website following the presentation.
Investor relations and media relations:
Funding Circle Investor Relations
Morten Singleton (+44 7736 297 929)
ir@fundingcircle.com
Funding Circle Media Relations
Abigail Whittaker (+44 7989 876 136)
press@fundingcircle.com
Headland Consultancy
Mike Smith / Stephen Malthouse (+44 20 3805 4822)
About Funding Circle:
Funding Circle (LSE: FCH) is a lending platform for SME
borrowers. Established in the UK in 2010, and now the leading
lending platform to SMEs, the Group also has a material and growing
presence in the US. Globally, Funding Circle has extended more than
GBP15bn in credit to c.135,000 businesses.
For SME borrowers, Funding Circle provides an unrivalled
customer experience, delivered through its technology and data,
coupled with a human touch. Its solutions continue to help
customers access the funding they need to succeed.
For institutional investors, Funding Circle provides access to
an alternative asset class in an underserved market, and delivers
robust and attractive returns.
5 Previous UK FY 25 guidance of total income GBP220m and AEBITDA
margins of 30-35%.
Forward looking statements and other important information:
This document contains forward looking statements, which are
statements that are not historical facts and that reflect Funding
Circle's beliefs and expectations with respect to future events and
financial and operational performance. These forward looking
statements involve known and unknown risks, uncertainties,
assumptions, estimates and other factors, which may be beyond the
control of Funding Circle and which may cause actual results or
performance to differ materially from those expressed or implied
from such forward-looking statements. Nothing contained within this
document is or should be relied upon as a warranty, promise or
representation, express or implied, as to the future performance of
Funding Circle or its business. Any historical information
contained in this statistical information is not indicative of
future performance.
The information contained in this document is provided as of the
dates shown. Nothing in this document should be construed as legal,
tax, investment, financial, or accounting advice, or solicitation
for or an offer to invest in Funding Circle. Business Review
At Funding Circle we deliver an unrivalled customer experience
powered by data and technology, coupled with a human touch. We have
now helped more than 135,000 SMEs to access more than GBP15
billion. Over the past 12 years, we've revolutionised SME lending
and built the capability for SMEs in the UK to receive an instant
lending decision. This is a first in SME term lending.
We have an attractive and proven business model:
-- Loan returns remain robust and attractive. This reflects the
quality of Funding Circle underwriting withthree times better risk
discrimination than bureau scores.
-- Our proven model has been demonstrated through the cycle as
seen by the strength of our loan returns.
-- We continue to take a prudent approach to originations and
adjusted borrower pricing to reflect therising base rate
environment.
-- We continue to see institutional investor demand to fund
loans with new forward flow agreements in the UKand US.
Our world-class technology continues to deliver a superior
customer experience:
-- We are reinventing SME lending through technology and data,
coupled with a human touch.
-- Our world-class tech platform delivers significant customer
benefits and creates a deep moat around ourbusiness. As we continue
to grow, we feed the Funding Circle flywheel:? Attract more
borrowers: Funding Circle is revolutionising SME lending and
delivering a superiorcustomer experience resulting in strong
satisfaction scores and high repeat rates. ? Accumulate more data:
As we attract more customers to our platform we augment our data
lake - whichhas more than 2 billion data points on 29 million SMEs
across the UK and US. ? Develop better machine learning models: Our
data enables us to build accurate and predictive riskmodels. In the
UK, our 8th generation models are three times better at risk
discrimination than traditionalbureau scores, optimising access
whilst delivering strong loan returns. ? Say yes to more
businesses: Our decision engine generates personalised customer
journeys, pricing andpropositions which help to increase
conversion. ? Greater operating leverage: Automation delivers lower
processing costs and scalability. As we grow wedeliver increased
margins from leveraging the platform. ? New products: The strength
of our customers, our technology and our platform enables us to
offer newproducts and capabilities to meet more customer needs.
These generate deeper relationships with our existingcustomers and
help attract new customers.
Overview of the year ended 31 December 2022
Against a backdrop of an increasingly challenging UK economic
environment, our overall performance in 2022 was in line with our
expectations. It followed a very strong prior year when our markets
were distorted by the continued availability of various
government-guaranteed loan schemes in both the UK and US which
brought forward and exaggerated demand for loans by SMEs in H1 21.
This led to a drop in demand for loans when these government
schemes concluded, with a gradual recovery in demand evident
through H2 21 and H1 22. In mid-2022, through our proactive
monitoring, we noticed increasing signs of stress in the market and
we therefore adjusted and tightened our credit criteria
accordingly. This tightening is noticeable in the UK originations
profile below.
Originations 2022 2021
H1 H2 FY H1 H2 FY
GBPm GBPm GBPm GBPm GBPm GBPm
Loans
United Kingdom 641 454 1,095 1,381 591 1,972
United States 145 182 327 247 69 316
Other[6] - - - 7 1 8
786 636 1,422 1,635 661 2,296
FlexiPay[7] 17 42 59 - - -
Total 803 678 1,481 1,635 661 2,296
6 Other represents the previously presented Developing Markets
segment. As this business has been closed and is in wind-down it
has been renamed Other for segmental purposes.
7 Given the size, FlexiPay loans of GBP4m were not presented in
2021.
In the UK, the government-guaranteed Recovery Loan Scheme
("RLS") was introduced in April 2021 and operated until May 2022.
We continued to offer our commercial loans alongside the RLS,
transitioning to operate solely our commercial lending from June
2022 onwards. We now also offer our commercial loans to near prime
businesses. In the prior year, we offered government-guaranteed
CBILS loans until the processing of those loans finished in June
2021. CBILS had particularly high levels of demand, due to the
favourable terms for borrowers, driving peak originations in H1
21.
In the US, we have continued to offer our commercial loan
product, expanding our offering to also serve super prime
businesses. In the first half of 2021, we operated the Paycheck
Protection Program ("PPP") government-guaranteed loan scheme
through the Small Business Administration ("SBA") which closed in
May 2021.
During 2022, we have continued to grow originations via our
Marketplace which connects borrowers with other lenders in the
market, providing further products beyond what Funding Circle
currently offers, such as larger loans, asset finance and invoice
finance, and we see this growing further in the coming year.
Our new line of credit product offering, FlexiPay, has been
launched in the market and continues to gain traction. FlexiPay
card is now in beta testing and we will continue to expand this
during 2023. We remain very excited about the huge market
opportunity for FlexiPay to support SMEs with their shorter-term
financial needs.
Characteristics of government loan schemes
The loans under each of the government schemes have different
characteristics, and therefore the income that Funding Circle earns
on them is different:
-- CBILS - for loans issued under this scheme, the British
Business Bank ("BBB") provided an 80% guaranteeto lenders, should
the loan default, in exchange for a fee from the funding investors.
The BBB paid the originationfees (transaction fees) on behalf of
borrowers together with the interest due on the loans for the first
year. Noprincipal repayments were required in the first year.
Thereafter borrowers pay the interest and principalrepayments.
Funding investors continue to pay servicing fees.
-- RLS - for loans under this scheme, the BBB continued to
provide a guarantee to lenders to ensure thatthere was sufficient
availability from lenders to support SMEs, again in exchange for a
fee from the fundinginvestors (which in Funding Circle's case, as
with CBILS, was shared proportionately among Funding Circle and
itsapplicable funding investors, with Funding Circle's share of
both the loan amounts and fees being approximately 1%of the total).
The loans then had characteristics similar to our core commercial
loan product with borrowers payingthe origination fees, interest
and repayments and funding investors paying the servicing fees.
However, theborrower, not the BBB, pays the fees and interest in
the first year.
-- PPP - the loans issued under the PPP scheme have very
different characteristics to those under CBILS orRLS. Under this
scheme, Funding Circle earns an origination fee, paid by the SBA,
but there are no servicing feesassociated with the loans. This is
because borrowers are allowed to apply for the loans to be forgiven
by the SBAif the funds are used to pay eligible expenses such as
payroll costs of employees.
31 December 2022 31 December 2021
Loans under Management (LuM)
GBPm GBPm
Loans
United Kingdom 3,311 3,944
United States 375 425
Other 39 88
3,725 4,457
FlexiPay1 18 -
Total 3,743 4,457
1. Given the size, FlexiPay loans of GBP2m were not presented in 2021
Loans under management declined during the year by 16% to
GBP3,743m. This was principally driven by:
-- Early repayments on CBILS loans which were expected as there
were no principal payments required in thefirst year and the
government was paying the interest. As the first borrower payments
became due, some borrowersrepaid the loans in full.
-- Reduction in PPP loans as they were forgiven by the US
government, provided certain borrower conditionson usage were
satisfied. No servicing fees are charged on PPP loans. PPP loans
totalled GBP125m at 31 December 2021reducing to GBP28m by 31
December 2022.
-- FlexiPay loans under management continued to grow. Currently
the product features a revolving three-monthline of credit
facility.
Funding Circle uses its balance sheet where it makes the
business stronger. This has been through securitisation programmes
and private funds in 2019/20, co-investing as required by the
government-guaranteed loan schemes, short-term funding as we
onboard new investors, and in funding the early stages of FlexiPay.
At 31 December 2022, Funding Circle's equity invested in the above
Loans under Management was c.2.5% at GBP97m (31 December 2021:
c.1.5% at GBP70m). This is described in further in "Balance sheet
and investments" below.
Segmental highlights
31 December 2022 31 December 2021
Loans FlexiPay Total Loans FlexiPay Total
Net income/(loss)
United United Other United United United Other United
Kingdom States Kingdom Kingdom States Kingdom
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Operating income 107.2 21.1 1.6 1.5 131.4 137.7 25.1 2.7 - 165.5
Net investment income 9.8 7.5 - - 17.3 21.7 19.7 - - 41.4
Total income 117.0 28.6 1.6 1.5 148.7 159.4 44.8 2.7 - 206.9
Fair value (losses)/gains (2.4) 7.2 - - 4.8 10.5 18.1 - - 28.6
Net income 114.6 35.8 1.6 1.5 153.5 169.9 62.9 2.7 - 235.5
Segment profit
Adjusted EBITDA 11.7 (3.7) 2.8 (4.0) 6.8 61.9 28.4 1.5 - 91.8
Depreciation and amortisation (11.7) (5.2) (0.1) - (17.0) (9.7) (4.1) (0.1) - (13.9)
Share-based payments and social (3.9) (0.8) - - (4.7) (7.6) (1.3) - - (8.9)
security costs
Foreign exchange gains/(losses) 0.2 - - - 0.2 (0.3) (0.6) - - (0.9)
Exceptional items - - - - - - (3.9) - - (3.9)
Operating (loss)/profit (3.7) (9.7) 2.7 (4.0) (14.7) 44.3 18.5 1.4 - 64.2
Operating AEBITDA[8] 4.3 (18.4) 2.8 (4.0) (15.3) 29.7 (9.4) 1.5 - 21.8
Investment AEBITDA8 7.4 14.7 - - 22.1 32.2 37.8 - - 70.0
United Kingdom
During the year we continued to originate loans under RLS until
the scheme ended in June 2022 as well as providing commercial loans
throughout the year. As expected, we experienced slower initial
demand when the RLS scheme ended, consistent with CBILS ending, as
both schemes brought forward the appetite for SMEs to take out
loans.
Demand has largely returned, although general credit quality has
weakened and accordingly our conversion levels are lower than they
were before the pandemic. With the increasing economic uncertainty
in the UK, we tightened our credit criteria in July 2022 and
introduced interest rate increases on our loans (which are all
fixed rate) to align with increasing base rates.
Throughout 2022 there remained strong appetite from
institutional investors to invest in both the RLS and commercial
loans. Four forward flow agreements were signed totalling GBP2.4bn
and an additional material forward flow agreement was signed in
January 2023.
As previously reported, investment from retail investors was
closed at the start of the pandemic as they were not allowed to
participate in the government loan schemes. We closed the retail
platform to new investment altogether in March 2022 and retail
investors now represent only 2% of the overall LuM.
The UK delivered total income of GBP117.0m (2021: GBP159.4m)
with operating income of GBP107.2m (2021: GBP137.7m) and net
investment income of GBP9.8m (2021: GBP21.7m).
The reduction in operating income was largely driven by lower
volumes of originations, partially offset by higher servicing fees
(reflecting higher LuM experienced during the peak of CBILS lending
in early 2021).
The reduction in net investment income resulted from a reduction
in the SME loans held on balance sheet. This was driven by the exit
of the UK warehouse in November 2021, loans continuing to be paid
down, and the wind down and subsequent sale in 2022 of the majority
of loans held in the UK securitisation vehicle.
The UK generated operating AEBITDA of GBP4.3m, lower than the
GBP29.7m of the prior year when CBILS was operating. Total AEBITDA
was GBP11.7m (2021: GBP61.9m) with an AEBITDA margin of 10%.
Operating loss was GBP3.7m (2021: profit of GBP44.3m). The
reduction in both total AEBITDA and operating profit was driven by
the lower levels of income generated post CBILS and reduced
investment AEBITDA.
8 Investment AEBITDA is defined as investment income, investment
expense and fair value adjustments, and operating AEBITDA
represents AEBITDA excluding investment AEBITDA. United States
The US transitioned away from government-guaranteed loans in May
2021. We restarted commercial lending in July 2021, and although
demand started at a low level this has gradually and consistently
increased month on month.
We also see continued demand from institutional investors to
lend although, with increasing economic uncertainty and rising base
rates, concluding funding deals with institutions is taking longer.
We anticipate adding further new institutional investors during
2023.
In H2 2022, we funded c.GBP20m of originations directly whilst
concluding a major funding deal which was signed shortly after the
year-end. The majority of these loans were sold in February
2023.
Originations for the year were GBP327m in 2022 (2021: GBP316m).
Originations have continued to grow since PPP ceased in May 2021
with H2 2022 originations of GBP182m (H1 2022: GBP145m; H2 2021:
GBP69m).
Total income for the US was GBP28.6m (2021: GBP44.8m) comprising
operating income of GBP21.1m (2021: GBP25.1m) and net investment
income of GBP7.5m (2021: GBP19.7m). Yields on PPP loans were nearly
40% higher than those on commercial loans, driving the fall in
operating income relative to originations year on year.
Similar to the UK, the reduction in investment income reflects
the amortising nature of the investment in SME loans held on
balance sheet. Additionally, 2021 benefited from six months of
interest on the US warehouse which was sold in June 2021.
Operating AEBITDA was negative GBP18.4m (2021: negative
GBP9.4m). Investment AEBITDA was GBP14.7m (2021: GBP37.8m)
principally reflecting the amortising loan book and warehouse sold
in June 2021 together with large fair value gains in 2021 following
the investments delivering strong returns, lower levels of default
and an improved economic outlook at that time.
Total AEBITDA was negative GBP3.7m (2021: positive GBP28.4m) and
operating loss was GBP9.7m (2021: profit of GBP18.5m).
Summary Financial Information
2022 2021
H1 H2 FY H1 H2 FY
GBPm GBPm GBPm GBPm GBPm GBPm
Originations 803 678 1,481 1,635 661 2,296
Loans under Management (LuM) 4,071 3,743 3,743 4,933 4,457 4,457
Operating income 66.4 65.0 131.4 94.5 71.0 165.5
Net investment income 10.9 6.4 17.3 26.1 15.3 41.4
Total income 77.3 71.4 148.7 120.6 86.3 206.9
Fair value gains 1.5 3.3 4.8 8.1 20.5 28.6
Net income 78.8 74.7 153.5 128.7 106.8 235.5
AEBITDA 10.6 (3.8) 6.8 53.3 38.5 91.8
Operating profit/(loss) 1.5 (16.2) (14.7) 35.5 28.7 64.2
Profit/(loss) before taxation 1.6 (14.5) (12.9) 35.4 28.7 64.1
Cash 200.7 177.7 177.7 168.1 224.0 224.0
Net assets 299.3 284.0 284.0 254.1 288.0 288.0
Finance review
Overview
Group total income was GBP148.7m (2021: GBP206.9m), down 28%,
and net income was GBP153.5m (2021: GBP235.5m).
Net income is total income plus fair value movements on SME
loans held for sale and investments in trusts. The fair value gain
in 2021 reflected a strong performance from the consolidated SME
loans with lower defaults and higher recoveries than expected.
The Group's operating loss was GBP14.7m for the year (2021:
profit of GBP64.2m).
Profit and loss
31 December 2022 31 December 2021
Before exceptional items Exceptional items
Total Total
GBPm GBPm
GBPm GBPm
Transaction fees 77.5 115.0 - 115.0
Servicing fees 47.9 47.0 - 47.0
Interest income 1.9 - - -
Other fees 4.1 3.5 - 3.5
Operating income 131.4 165.5 - 165.5
Investment income 22.0 53.7 - 53.7
Investment expense (4.7) (12.3) - (12.3)
Total income 148.7 206.9 - 206.9
Fair value gains 4.8 28.6 - 28.6
Net income 153.5 235.5 - 235.5
People costs (85.9) (77.7) - (77.7)
Marketing costs (38.4) (46.9) - (46.9)
Depreciation, amortisation and impairment (17.0) (13.9) (3.9) (17.8)
Expected credit loss credit/(charge) 1.5 (1.2) - (1.2)
Other costs (28.4) (27.7) - (27.7)
Operating expenses (168.2) (167.4) (3.9) (171.3)
Operating (loss)/profit (14.7) 68.1 (3.9) 64.2
Operating income includes transaction fees, servicing fees,
interest income from loans held at amortised cost and other fees
and was GBP131.4m (2021: GBP165.5m).
-- Transaction fees, representing fees earned on originations,
decreased to GBP77.5m (2021: GBP115.0m). Theoverall decrease in
transaction fees was driven by lower trading volumes as the Group
transitioned away from thegovernment-guaranteed loan schemes in the
UK and the US.
In line with increasing base rates, our average origination fee
yields grew in the UK to c.5.5% (2021: 4.7%); yields on CBILS loans
in the prior year were fixed at 4.75%. Yields in the US averaged
4.6% with varying but higher yields experienced in the prior year
as PPP loans had higher yields on small loan amounts.
-- Servicing fees, representing income for servicing Loans under
Management, were GBP47.9m (2021: GBP47.0m).Whilst Loans under
Management have fallen in 2022, it peaked at the end of the CBILS
lending in June 2021 and, withyields on CBILS, RLS and UK
commercial loans at c.1.25% (higher than the c.1.0% of older loan
cohorts), servicingfees remained similar to 2021 levels. There is
no servicing fee earned on PPP loans.
-- Interest income represents interest earned on loans held at
amortised cost. This predominantly relates toFlexiPay, where we
charged a flat 3% fee in 2022 which is spread over three months, in
line with borrowerrepayments.
-- Other fees arose principally from collection fees we
recovered on defaulted loans and from fee premiumswe received from
certain institutional investors in the year in respect of buying
back certain defaulted loansunder a historical loan purchase
commitment.
Net investment income represents the investment income, less
investment expense, on loans within Funding Circle's investment
vehicles and was GBP17.3m (2021: GBP41.4m). This decline followed
the sale of US and UK warehouses in June 2021 and November 2021
respectively, together with the effect of continued amortisation on
the remaining consolidated loans.
The Group took the opportunity to simplify the balance sheet and
wound up the UK securitisation (SBOLT-19) in June 2022,
subsequently selling the majority of the remaining loans in October
2022. Additionally, we wound up one of the US securitisations
(SBIZ-19A) in October 2022 and anticipate doing the same for the
remaining US securitisation vehicle (SBIZ-20A) during 2023.
Net income, defined as total income after fair value
adjustments, was GBP153.5m (2021: GBP235.5m). This reflects the
reduction in operating income from the higher levels in 2021 when
CBILS was operating together with a reduction in net investment
income.
The fair value gain in 2021 reflected a strong performance from
the consolidated SME loans with an improved economic outlook, lower
defaults and higher recoveries than expected. The consolidated SME
loans have continued to perform well, and ahead of our expectations
in 2022, however, due to the amortising nature of the remaining
loan book, loan sales that have occurred and higher discount rates
(affected by higher base rates) utilised in valuations, the total
fair value gains are much lower than 2021.
Operating expenses
At an overall level, operating expenses were in line with 2021,
with increased people costs (driven by increased headcount and
inflation) being largely offset by reduced marketing spend (driven
particularly by the effect of reduced originations on broker
commission levels).
People costs (including contractors), which represent the
Group's largest ongoing operating cost, increased during the year
by 15% to GBP98.4m (2021: GBP85.9m), before the capitalisation of
development spend. This was driven by an overall headcount rise of
10%, largely due to increased investment in the technology and
FlexiPay teams, and wage inflation.
The share-based payment charge for the year, included in people
costs, was GBP4.7m (2021: GBP8.9m) with the reduction driven
predominantly by lapses of share awards from leavers.
31 December
31 December
2021
2022 Change
GBPm
GBPm %
People costs 98.4 85.9 15
Less capitalised development spend ("CDS") (12.5) (8.2) 52
People costs net of CDS 85.9 77.7 11
Average headcount (incl. contractors) 1,035 929 11
Year-end headcount (incl. contractors) 1,075 979 10
Marketing costs reduced in the year to GBP38.4m (2021: GBP46.9m)
driven by lower broker commissions from reduced origination
volumes, together with strong cost control from spend optimisation.
Marketing spend overall was 29% of operating income (2021: 28%)
with the Group investing more in above the line marketing channels
(direct mail and online) which were required less when the
government schemes were operating.
Depreciation, amortisation and impairment costs of GBP17.0m
(2021: GBP17.8m) largely represent the amortisation of the cost of
the Group's capitalised technology development and the depreciation
and impairment of right-of-use assets related to the Group's office
leases. The Group incurred a write down of GBP1.8m (2021: GBP3.9m)
on its San Francisco office and associated assets.
Balance sheet and investments
The Group's net equity was GBP284m at 31 December 2022 (31
December 2021: GBP288m). This reduction reflects the Group's
operating losses and the purchase of own shares by the Employee
Benefit Trust ("EBT") offset by foreign exchange gains on its US
business and the recognition of deferred tax assets.
The majority of the Group's balance sheet is represented by cash
and equity invested as shown below. The equity invested is in
certain SME loans, either directly or through investment vehicles,
and in the FlexiPay lines of credit.
31 31
Operating business Investment business December December
2022 2021
Trading Securitisation Securitisation US CBILS/RLS/ Private
business1 FlexiPay SPVs loan buyout funding Commercial funds
loans2 Total Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
SME loans 24.8 16.0 27.3 18.5 19.8 32.2 2.7 141.3 273.8
Cash and cash 174.9 - 2.8 - - - - 177.7 224.0
equivalents
Other assets/ - - 0.9 - - - - 0.9 (0.5)
(liabilities)
Borrowings/ (22.6) - (23.7) - - - - (46.3) (213.5)
bonds
Cash and net 177.1 16.0 7.3 18.5 19.8 32.2 2.7 273.6 283.8
investments
Other assets 64.1 - - - - - - 64.1 67.9
Other (53.7) - - - - - - (53.7) (63.7)
liabilities
Equity 187.5 16.0 7.3 18.5 19.8 32.2 2.7 284.0 288.0
1 Trading business includes GBP22.4m of PPP loans together with
the associated Federal Reserve borrowings which we expect will both
reduce as the remaining PPP loans are forgiven.
2 US funding loans includes GBP19.8m of loans funded temporarily
whist it was onboarding a new investor. The majority of these were
sold in February 2023.
The table below provides a further breakdown of Funding Circle's
net equity invested in products and vehicles:
31 December
31 December 2021
Investment in product/vehicles 2022
GBPm
GBPm
1. Securitisation SPVs 1 7 21
2. CBILS/RLS/Commercial 1 32 39
3. Securitisation loan buyout 19 -
4. Private funds 3 8
5. US funding loans 20 -
Net investment equity 81 68
6. FlexiPay 16 2
Total net equity 97 70
1 These vehicles are bankruptcy remote 1. Securitisation SPVs -
This relates to the investment in securitisation vehicles. During
2022, the Groupcalled options to wind down UK (SBOLT-19A) and US
(SBIZ-19A) securitisations and bought out the remainingbondholders.
The Group retains legacy securitisation loans of GBP19m, and these
are presented in "3. Securitisationloans buyout" above. 2.
CBILS/RLS/Commercial - As part of our participation in the CBILS
and RLS UK government loan schemes, wewere required to co-invest
c.1% alongside institutional investors. As the underlying CBILS and
RLS SME loans are70-80% guaranteed our exposure is limited.
However, where some of the investment is via warehouses, the
increase inbase rates have increased borrowing costs in combination
with a revision to default stress expectations growinggradually and
being longer lasting have impacted projected returns through these
structures in the period andresulted in a fair value loss. 3.
Securitisation loan buyout - This relates to loans held following
the closure of certain consolidatedsecuritisation SPVs of GBP19m.
4. Private funds - There are a small amount of other loans,
comprising seed investments in private fundsheld as associates. 5.
US funding loans - GBP20 million of loans in the US where we
directly funded the loans for a brief periodwhilst finalising a
funding deal. The majority of these loans were sold in February
2023. 6. FlexiPay - This relates to FlexiPay drawn lines of credit.
Cash flow
At 31 December 2022, the Group held cash and cash equivalents of
GBP177.7m (31 December 2021: GBP224.0m). Of this balance GBP165.6m
(31 December 2021: GBP199.4m) is unrestricted in its use.
Total cash has reduced by GBP46.3m. GBP27.0m of this decrease
was driven by increased equity investment. The remainder of the
reduction was due largely to the funding of our US and FlexiPay
operations and the purchase of own shares by the EBT, offset by
foreign exchange gains on cash held in the US business.
Free cash flow, which is an alternative performance measure,
represents the net cash flows from operating activities less the
cost of purchasing intangible assets, property, plant and
equipment, lease payments and interest received. It excludes the
investment vehicle financing and funding cash flows together with
FlexiPay lines of credit. The Directors view this as a key
liquidity measure and it is the net amount of cash used or
generated to operate and develop the Group's platform each
year.
Free cash flow reduced in 2022 due to lower AEBITDA and large
working capital movements associated with CBILS where GBP27m of
fees were received early in 2021 relating to 2020 originations.
The table below shows how the Group's cash has been
utilised:
2022 2021
GBPm GBPm
Adjusted EBITDA 6.8 91.8
Fair value adjustments (4.8) (28.6)
Purchase of tangible and intangible assets (13.9) (9.4)
Payment of lease liabilities (6.1) (7.9)
Working capital/other 3.6 36.9
Free cash flow (14.4) 82.8
Net distributions from associates 5.4 3.9
Net movement in trusts and co-investments 3.6 (18.8)
Net originations of lines of credit (16.0) (1.6)
Net movement in other SME loans (22.4) (0.4)
Net movement in warehouses and securitisation vehicles - 53.4
Purchase of own shares (8.7) -
Other 2.4 0.5
Effect of foreign exchange 3.8 0.9
Movement in the year (46.3) 120.7
Cash and cash equivalents at the beginning of the year 224.0 103.3
Cash and cash equivalents at the end of the year 177.7 224.0
Statement of Director's responsibilities
The Funding Circle Report and Accounts for year end 31 December
2022 contains a responsibility statement in the following form:
The Directors consider that the Annual Report and accounts,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Group's
and Company's position and performance, business model and
strategy.
Each of the Directors, whose names and functions are listed in
the Report of the Directors confirm that, to the best of their
knowledge:
-- the Group and Company financial statements, which have been
prepared in accordance with UK-adoptedinternational accounting
standards, give a true and fair view of the assets, liabilities and
financial position ofthe Group and Company, and of the profit of
the Group; and
-- the Strategic report includes a fair review of the
development and performance of the business and theposition of the
Group and Company, together with a description of the principal
risks and uncertainties that theyface.
In the case of each Director in office at the date the
Directors' report is approved:
-- so far as the Director is aware, there is no relevant audit
information of which the Group's andCompany's auditors are unaware;
and
-- they have taken all the steps that they ought to have taken
as a Director in order to make themselvesaware of any relevant
audit information and to establish that the Group's and Company's
auditors are aware of thatinformation.
By order of the Board
Lisa Jacobs, Chief Executive Officer
Oliver White, Chief Financial Officer
02 March 2023
Consolidated statement of comprehensive income
for the year ended 31 December 2022
31 December 31 December Exceptional 31 December
2022 2021 Items1 2021
Before
Note
exceptional
items
GBPm GBPm GBPm GBPm
Transaction fees 77.5 115.0 - 115.0
Servicing fees 47.9 47.0 - 47.0
Interest income2 1.9 - - -
Other fees 4.1 3.5 - 3.5
Operating income 131.4 165.5 - 165.5
Investment income 22.0 53.7 - 53.7
Investment expense (4.7) (12.3) - (12.3)
Total income 148.7 206.9 - 206.9
Fair value gains/(losses) 4.8 28.6 - 28.6
Net income 2 153.5 235.5 - 235.5
People costs 3, 5 (85.9) (77.7) - (77.7)
Marketing costs 3 (38.4) (46.9) - (46.9)
Depreciation, amortisation and impairment 3 (17.0) (13.9) (3.9) (17.8)
Credit/(provision) for expected credit losses3 3, 12, 13 1.5 (1.2) - (1.2)
Other costs 3 (28.4) (27.7) - (27.7)
Operating expenses 3 (168.2) (167.4) (3.9) (171.3)
Operating (loss)/profit (14.7) 68.1 (3.9) 64.2
Finance income 2.3 0.1 - 0.1
Finance costs (0.9) (1.1) - (1.1)
Share of net profit of associates 0.4 0.9 - 0.9
(Loss)/profit before taxation (12.9) 68.0 (3.9) 64.1
Income tax credit/(charge) 6 6.0 (2.9) - (2.9)
(Loss)/profit for the year (6.9) 65.1 (3.9) 61.2
Other comprehensive income
Items that may be reclassified subsequently to profit and
loss:
Exchange differences on translation of foreign operations 5.8 1.4 - 1.4
Total comprehensive (loss)/profit for the year (1.1) 66.5 (3.9) 62.6
Total comprehensive (loss)/profit attributable to:
Owners of the Parent (1.1) 66.5 (3.9) 62.6
(Loss)/earnings per share
Basic (loss)/earnings per share 7 (2.0)p 18.5p 17.4p
Diluted (loss)/earnings per share 7 (1.8)p 17.1p 16.0p
1. Exceptional items are detailed within note 4.
2. Interest income recognised on assets held at amortised cost
under the effective interest rate method.
3. The comparative year ended 31 December 2021 has been
re-presented to present "credit/(provision) for expected credit
losses" which was previously included within "other costs".
All amounts relate to continuing activities.
Consolidated balance sheet
as at 31 December 2022
31 December 31 December
Note 2022 20211
GBPm GBPm
Non-current assets
Intangible assets 8 28.2 24.9
Property, plant and equipment 9 10.0 14.1
Investment in associates 2.7 7.6
Investment in trusts and co-investments 13 28.7 39.1
SME loans (other) 13 24.8 74.2
Deferred tax asset 6 6.9 -
Trade and other receivables 10 3.4 4.1
104.7 164.0
Current assets
SME loans (warehouse) 13 2.4 3.2
SME loans (securitised) 13 45.8 148.1
SME loans (other) 13 20.9 -
Lines of credit 13 16.0 1.6
Trade and other receivables 10 16.5 25.0
Cash and cash equivalents 14 177.7 224.0
279.3 401.9
Total assets 384.0 565.9
Current liabilities
Trade and other payables 11 31.8 36.4
Bonds 13 23.7 140.3
Short-term provisions and other liabilities 12 1.0 3.4
Lease liabilities 9 7.2 6.9
63.7 187.0
Non-current liabilities
Long-term provisions and other liabilities 12 1.1 0.7
Bank borrowings 13 22.6 73.2
Lease liabilities 9 12.6 17.0
Total liabilities 100.0 277.9
Equity
Share capital 0.4 0.4
Share premium account 293.1 293.0
Foreign exchange reserve 16.9 11.1
Share options reserve 22.2 19.1
Accumulated losses (48.6) (35.6)
Total equity 284.0 288.0
Total equity and liabilities 384.0 565.9
1. The comparative year as at 31 December 2021 has been
re-presented to present FlexiPay drawn lines of credit within
"lines of credit" which was previously included within "SME loans
(other)".
Consolidated statement of changes in equity
for the year ended 31 December 2022
Share Foreign Share (Accumulated
Share Total
premium exchange options losses)/
Note capital retained equity
account reserve reserve
GBPm earnings GBPm
GBPm GBPm GBPm
GBPm
Balance at 1 January 2021 0.3 292.6 9.7 13.6 (98.6) 217.6
Profit for the year - - - - 61.2 61.2
Other comprehensive income
Exchange differences on translation of foreign - - 1.4 - - 1.4
operations
Total comprehensive income - - 1.4 - 61.2 62.6
Transactions with owners
Transfer of share option costs - - - (1.8) 1.8 -
Issue of share capital 0.1 0.4 - - - 0.5
Employee share schemes - value of employee services
- - - 7.3 - 7.3
Balance at 31 December 2021 0.4 293.0 11.1 19.1 (35.6) 288.0
Loss for the year - - - - (6.9) (6.9)
Other comprehensive income
Exchange differences on translation of foreign - - 5.8 - - 5.8
operations
Total comprehensive income - - 5.8 - (6.9) (1.1)
Transactions with owners
Transfer of share option costs - - - (2.6) 2.6 -
Purchase of own shares held in employee benefit trust - - - - (8.7) (8.7)
Issue of share capital - 0.1 - - - 0.1
Employee share schemes - value of employee services
- - - 5.7 - 5.7
Balance at 31 December 2022 0.4 293.1 16.9 22.2 (48.6) 284.0
Consolidated statement of cash flows
for the year ended 31 December 2022
31 December 31 December
Note 2022 2021
GBPm GBPm
Net cash (outflow)/inflow from operating activities 14 (10.4) 98.5
Investing activities
Purchase of intangible assets 8 (12.7) (8.6)
Purchase of property, plant and equipment 9 (1.2) (0.8)
Originations of SME loans (other)1 13 (24.0) (209.9)
Cash receipts from SME loans (other)1 13 59.5 161.7
Cash receipts from SME loans (warehouse phase) 13 2.8 58.6
Proceeds from sale of SME loans (warehouse phase) 13 - 176.1
Cash receipts from SME loans (securitised) 13 86.8 150.2
Proceeds from sale of SME loans (securitised) 13 39.5 -
Investment in trusts and co-investments 13 (6.4) (22.1)
Cash receipts from investments in trusts and co-investments 13 10.0 3.3
Redemption in associates 5.1 3.9
Dividends from associates 0.3 -
Interest received 2.3 0.1
Net cash inflow from investing activities 162.0 312.5
Financing activities
Proceeds from bank borrowings 13 - 208.2
Repayment of bank borrowings 13 (57.9) (331.3)
Payment of bond liabilities 13 (129.1) (160.6)
Proceeds from the exercise of share options 0.1 0.4
Proceeds from subleases 1.2 0.2
Purchase of own shares (8.7) -
Payment of lease liabilities 9 (7.3) (8.1)
Net cash outflow from financing activities (201.7) (291.2)
Net (decrease)/ increase in cash and cash equivalents (50.1) 119.8
Cash and cash equivalents at the beginning of the year 224.0 103.3
Effect of foreign exchange rate changes 3.8 0.9
Cash and cash equivalents at the end of the year 14 177.7 224.0
1. As disclosed in note 1, FlexiPay drawn lines of credit have
been re-presented within "Origination of/cash receipts from lines
of credit" within cash flows from operating activities and were
previously presented within "Origination of/ cash receipts from SME
loans (other)" in cash flows from investing activities in the year
ended 31 December 2021.
The impact of exceptional items on the consolidated statement of
cash flows is detailed in note 4.
Notes forming part of the consolidated financial statements
for the year ended 31 December 2022
1. Basis of preparation
The results for the year ended 31 December 2022 have been
extracted from the audited financial statements of Funding Circle
Holdings plc. The Group presents its annual financial statements in
conformity with United Kingdom laws and regulations.
The financial information in this statement does not constitute
statutory accounts within the meaning of s434 of the Companies Act
2006. The statutory accounts for the year ended 31 December 2022,
on which the auditors have given an unqualified audit report, have
not yet been filed with the Registrar of Companies.
The preparation of financial statements requires the use of
certain accounting estimates. It also requires management to
exercise its judgement in the process of applying the Group's
accounting policies. Changes in assumptions may have a significant
impact on the financial statements in the year the assumptions
changed. Management believes that the underlying assumptions are
appropriate. The areas involving a higher degree of judgement or
complexity, or areas where assumptions and estimates are
significant to the financial statements, are disclosed in note
16.
Except as described below in note 15, the principal accounting
policies applied in the preparation of the consolidated financial
statements are consistent with those of the annual financial
statements for the year ended 31 December 2021, as described in
those financial statements.
Re-presentation of comparative information
The Group has continued to scale up lending through lines of
credit in its FlexiPay product.
Through FlexiPay, borrowers are provided with a facility which
can be drawn to pay invoices and expenses, and are subsequently
repaid over three months. A fee of 3% was charged in 2022 on the
drawn amount which is recognised over the three-month life of the
drawdown in interest income under the effective interest rate
method. The accounting policy regarding FlexiPay is outlined in
note 15.
As outlined later, the loans are measured at amortised cost. As
FlexiPay will continue to become a larger part of the Group's
business, this has been disclosed as a separate segment within note
2. As a result the Group has presented FlexiPay under 'lines of
credit' in the balance sheet and reclassified the comparative which
was previously presented in 'investment in SME loans (other)' and
cash flows have been re-presented within "Origination of/cash
receipts from lines of credit" within cash flows from operating
activities and were previously presented within "Origination of/
cash receipts from SME loans (other)" in cash flows from investing
activities in the year ended 31 December 2021.
Additionally, the comparative year ended 31 December 2021 has
been re-presented to present "credit/(provision) for expected
credit losses" which was previously presented within "other
costs".
Going concern
The Group's business activities together with the factors likely
to affect its future development and position are set out in the
Strategic Report.
The financial statements are prepared on a going concern basis
as the Directors are satisfied that the Group has the resources to
continue in business for the foreseeable future (which has been
taken as at least 12 months from the date of approval of the
financial statements).
The Group made a total comprehensive loss of GBP1.1m during the
year ended 31 December 2022 (2021: profit of GBP62.6m). As at 31
December 2022, the Group had net assets of GBP284.0m (2021:
GBP288.0m). This includes GBP177.7m of cash and cash equivalents
(2021: GBP224.0m) of which GBP12.1m (2021: GBP24.6m) is held within
the securitisation vehicles or for other specific purposes and is
restricted in use. Additionally, within the net assets, the Group
holds GBP96.5m (2021: GBP69.7m) of invested capital, some of which
is capable of being monetised if liquidity needs arise.
The Group has prepared detailed cash flow forecasts for the next
15 months and has updated the going concern assessment to factor in
the potential ongoing impact of Covid-19, inflation and related
economic stress.
The base case scenario assumes:
. continued growth in origination of the Group's commercial
lending product until June 2024;
. there remains macroeconomic stress in 2023 from inflation, and
supply chain pressures with a peak in defaults, which gradually
de-stress in the following years;
. no extensions or new government schemes that the Group
participated in;
. the rollout of the new FlexiPay product using the Group's
balance sheet to fund it; and
. costs and headcount grow modestly with the new product and
with investment in technology.
Management prepared a severe but plausible downside scenario in
which:
. further macroeconomic volatility continues through the period
with increased inflation and interest rates reducing originations
and increasing costs;
. investment returns reduce owing to increased funding costs,
widening discount rates and deterioration in loan performance;
. an operational event occurs requiring a cash outlay; and
. a downside loss scenario is applied to Funding Circle's
on-balance sheet investment in SME loans resulting in higher
initial fair value losses and lower cash flows to the investments
it owns.
Management has reviewed financial covenants the Group must
adhere to in relation to its servicing agreements. These are with
institutional investors for which there are unrestricted cash,
tangible net worth and debt to tangible net worth ratios.
Management has also reviewed regulatory capital requirements. In
the downside scenario the risk of covenant or capital requirement
breach is considered remote.
The Directors have made enquiries of management and considered
budgets and cash flow forecasts for the Group and have, at the time
of approving these financial statements, a reasonable expectation
that the Company and the Group have adequate resources to continue
in operational existence for the foreseeable future.
2. Segmental information
IFRS 8 Operating Segments requires the Group to determine its
operating segments based on information which is used internally
for decision making. Based on the internal reporting information
and management structures within the Group, it has been determined
that there are four reportable segments described below. Reporting
on this basis is reviewed by the Global Leadership Team ("GLT")
which is the chief operating decision maker ("CODM"). The GLT is
made up of the Executive Directors and other senior management and
is responsible for the strategic decision making of the Group.
The four reportable segments consist of the segments in Loans
and in FlexiPay. The Loans businesses consist of three geographic
segments: the United Kingdom, the United States and Other. The
Other segment includes the Group's businesses in Germany and the
Netherlands. In light of the increasing prominence of new products
such as FlexiPay, an additional segment is reported to the CODM
related to FlexiPay and has been disclosed separately for the first
time for the year to 31 December 2022.
The GLT measures the performance of each segment by reference to
a non-GAAP measure, adjusted EBITDA, which is defined as
profit/loss before finance income and costs, taxation, depreciation
and amortisation ("EBITDA"), and additionally excludes share-based
payment charges and associated social security costs, foreign
exchange and exceptional items (see note 4). Together with
operating profit/loss, adjusted EBITDA is a key measure of Group
performance as it allows better comparability of the underlying
performance of the business. The segment reporting, including
Adjusted EBITDA, excludes the impact of the Group's transfer
pricing arrangements as this is not information presented to, or
used by, the CODM in decision making or the allocation of
resources.
Net income
31 December 2022 31 December 2021
Loans FlexiPay Total Loans FlexiPay Total
United United United United
Other United Other
Kingdom States Kingdom States United Kingdom
GBPm Kingdom GBPm GBPm GBPm
GBPm GBPm GBPm GBPm GBPm
GBPm
Total income 117.0 28.6 1.6 1.5 148.7 159.4 44.8 2.7 - 206.9
Fair value gains/(losses) (2.4) 7.2 - - 4.8 10.5 18.1 - 28.6
-
Net income 114.6 35.8 1.6 1.5 153.5 169.9 62.9 2.7 - 235.5
Segment (loss)/profit
31 December 2022 31 December 2021
Loans FlexiPay Total Loans FlexiPay Total
United United United United
Other Other
Kingdom States United Kingdom States United
GBPm Kingdom GBPm GBPm Kingdom GBPm
GBPm GBPm GBPm GBPm
GBPm GBPm
Adjusted EBITDA 11.7 (3.7) 2.8 (4.0) 6.8 61.9 28.4 1.5 - 91.8
Depreciation and amortisation (11.7) (5.2) (0.1) - (17.0) (9.7) (4.1) (0.1) - (13.9)
Share-based payments and social
security costs (3.9) (0.8) - - (4.7) (7.6) (1.3) - (8.9)
-
Foreign exchange gains/(losses) 0.2 - - - 0.2 (0.3) (0.6) - - (0.9)
Exceptional items (note 4) - - - - - - (3.9) - (3.9)
-
Operating (loss)/profit (3.7) (9.7) 2.7 (4.0) (14.7) 44.3 18.5 1.4 64.2
-
3. Operating expenses
31 December 2022 31 December 2021
Before
Exceptional
Total exceptional Total
items?
GBPm items GBPm
GBPm
GBPm
Depreciation 5.1 5.9 - 5.9
Amortisation 10.1 8.0 - 8.0
Rental income and other recharges (1.0) (0.9) - (0.9)
Operating lease rentals:
- Land and buildings 0.3 0.1 - 0.1
Employment costs (including contractors) 85.9 77.7 - 77.7
Marketing costs 38.4 46.9 - 46.9
(excluding employment costs)
Data and technology 9.7 9.0 - 9.0
Expected credit loss impairment (credit)/charge (1.5) 1.2 - 1.2
Impairment of intangible and 1.8 - 3.9 3.9
tangible assets
Other expenses 19.4 19.5 - 19.5
Total operating expenses 168.2 167.4 3.9 171.3
4. Exceptional items
31 December 31 December
2022 2021
GBPm GBPm
Impairment of non-financial assets (note 9) - 3.9
Total - 3.9
Exceptional items are the items of income or expense that the
Group considers are material, one-off in nature and of such
significance that they merit separate presentation in order to aid
the reader's understanding of the Group's financial
performance.
During the year to 31 December 2021 certain floors of the San
Francisco office were sublet to third parties for the remainder of
the term of the head lease for an amount lower than the head lease
rental. As a result the sublease was determined to be a finance
lease which resulted in the right-of-use asset being derecognised
and a net investment in sublease recognised on the balance sheet.
The difference between the carrying value of the right-of-use asset
and the net investment in the sublease was GBP3.3m and has been
recorded in the statement of comprehensive income as an impairment
under exceptional items. Additionally it was determined that the
fixed assets associated with the office were impaired in full as
they were no longer used by the Group resulting in impairment of
GBP0.6m. There was no cash movement in relation to the
impairment.
In 2020, the Group restructured the German and Dutch (Other)
businesses to focus on referring loans it originates to local
lenders. This restructuring resulted in one-off costs comprising
redundancy costs and a related share-based payment credit and
impairment on right-of-use assets. Cash payments associated with
these items totalled GBP0.8m in the previous year ended 31 December
2021. See note 12 for movement in associated provisions and note 14
for cash flow.
5. Employees
The average monthly number of employees (including Directors)
during the year was:
2022 2021
Number Number
UK 686 632
FlexiPay 20 2
US 177 155
Other 10 15
893 804
In addition to the employees above, the average monthly number
of contractors during the year was 142 (2021: 125).
Employment costs (including Directors' emoluments) during the
year were:
31 December
31 December
2022
2021
GBPm
GBPm
Wages and salaries 72.2 61.4
Social security costs 7.6 6.2
Pension costs 1.9 1.8
Share-based payments 4.7 8.9
86.4 78.3
Contractor costs 12.0 7.6
Less: capitalised development costs (12.5) (8.2)
Employment costs net of capitalised development costs 85.9 77.7
6. Income tax (credit)/charge
The Group is subject to all taxes applicable to a commercial
company in its countries of operation. The UK (losses)/ profits of
the Company are subject to UK income tax at the standard
corporation tax rate of 19% (2021: 19%).
31 December 31 December
2022 2021
GBPm GBPm
Current tax
UK
Current tax on (losses)/profits for the year 0.3 2.7
Adjustment in respect of prior years (0.3) (0.1)
- 2.6
US and Other
Current tax on (losses)/profits for the year 0.4 -
Adjustment in respect of prior years 0.5 0.3
0.9 0.3
Total current tax charge 0.9 2.9
Deferred tax
UK
Deferred tax on (losses)/profits for the year - -
Adjustment in respect of prior years - -
- -
US and Other
Deferred tax on (losses)/profits for the year (6.9) -
Adjustments in respect of prior years - -
(6.9) -
Total deferred tax (credit) (6.9) -
Total tax (credit)/charge (6.0) 2.9
The above current tax charge represents the expected tax on the
Research and Development Expenditure Credit ("RDEC") receivable for
2022 and US state taxes. In the prior year, the tax charge
represents the tax liability on the Group's taxable profit and the
amount of tax deducted from the RDEC receivable for 2021. The
deferred tax credit represents recognition of a deferred tax asset
in respect of US losses previously unrecognised.
The Group (credit)/charge for the year can be reconciled to the
(loss)/profit before tax shown per the consolidated statement of
comprehensive income as follows.
Factors affecting the tax (credit)/charge for the year
31 December 31 December
2022 2021
GBPm GBPm
(Loss)/profit before taxation (12.9) 64.1
Taxation on (loss)/profit at 19% (2021: 19%) (2.4) 12.2
Effects of:
Research and development 0.3 (0.6)
Effect of foreign tax rates 0.3 2.6
Non-taxable/non-deductible expenses 1.0 1.8
Movement in deferred tax not recognised 5.3 (8.4)
Utilisation of tax losses previously unrecognised (4.0) (5.9)
Adjustment in respect of prior years 0.2 0.1
Deferred tax assets recognised (6.9) -
Impairment charge and other exceptional items 0.2 1.1
Total tax (credit)/charge (6.0) 2.9
The Group is taxed at different rates depending on the country
in which the profits arise. The key applicable tax rates include
the UK 19%, the US 21%, Germany 30% and the Netherlands 25%. The
effective tax rate for the year was (45.85%) (2021: 4.5%).
The statutory UK corporation tax rate is currently 19%
(effective 1 April 2020). The UK government announced on 3 March
2021 and confirmed in November 2022 that the rate of corporation
tax will be increased to 25% from 1 April 2023.
The Group has recognised a deferred tax liability of GBP2.8
million (2021: GBP3.2 million) relating to the property, plant and
equipment in the UK. The deferred tax liability is predominantly
due to the accelerated capital allowances of GBP2.8 million (2021:
GBP2.6 million) and in relation to securitisation and warehouse
vehicles of the UK which are domiciled in Ireland of GBPnil (2021:
GBP0.6 million).
A deferred tax asset relating to unrelieved tax losses of GBP2.8
million (2021: GBP3.3 million) has been recognised in the UK to the
extent of the above mentioned deferred tax liability pursuant to
IAS 12 para 74. Deferred tax has been determined using the
applicable effective future tax rate that will apply in the
expected period of utilisation of the recognised deferred tax
assets or liabilities.
The Group has recognised a deferred tax asset of GBP6.9 million
in respect of GBP32.9 million of the US federal losses.
The Group has utilised tax losses in the US for the first time
in 2021 and the Group's transfer pricing arrangements between the
UK and US entitle the US to earn an agreed profit margin. It is
probable that the US will be in a profitable position going
forwards such that it could use some of its historical federal
losses to offset profits.
In determining the amount of losses to recognise as deferred tax
assets the Group has used the forecasts applied in the Parent
Company impairment testing with regards to the investment in the US
business, which will be disclosed in the annual report and accounts
for the year ended 31 December 2022. It has then applied
probability weightings to those five-year forecasts the further out
it projects to reflect greater levels of uncertainty with limited
recognition beyond this point.
The estimated amount of deferred tax recognised is not
materially sensitive to reasonably possible changes in these
assumptions.
7. (Loss)/earnings per share
Basic (loss)/earnings per share amounts are calculated by
dividing the (loss)/profit for the year attributable to ordinary
equity holders of the Company by the weighted average number of
ordinary shares outstanding during the year.
For diluted (loss)/earnings per share, the weighted average
number of ordinary shares in issue is adjusted to assume conversion
of all dilutive potential ordinary shares. The dilutive potential
ordinary shares include those share options granted to employees
under the Group's share-based compensation schemes which do not
have an exercise price or where the exercise price is less than the
average market price of the Company's ordinary shares during the
year.
The following table reflects the (loss)/profit and share data
used in the basic and diluted (loss)/earnings per share
computations:
31 December 31 December
2022 2021
(Loss)/profit for the year (GBPm) (6.9) 61.2
Basic weighted average number of ordinary shares in issue (million) 348.6 351.5
Basic (loss)/earnings per share (2.0)p 17.4p
(Loss)/profit for the year before exceptional items (GBPm) (6.9) 65.1
Basic weighted average number of ordinary shares in issue (million) 348.6 351.5
Basic (loss)/earnings per share before exceptional items (2.0)p 18.5p
(Loss)/profit for the year (GBPm) (6.9) 61.2
Diluted weighted average number of ordinary shares in issue (million) 379.5 381.7
Diluted (loss)/earnings per share (1.8)p 16.0p
(Loss)/profit for the year before exceptional items (GBPm) (6.9) 65.1
Diluted weighted average number of ordinary shares in issue (million) 379.5 381.7
Diluted (loss)/earnings per share before exceptional items (1.8)p 17.1p
Weighted average number of ordinary shares in issue (million) 348.6 351.5
Effect of dilutive share options (million) 30.9 30.2
Diluted weighted average number of ordinary shares in issue (million) 379.5 381.7
8. Intangible assets
Capitalised
Computer Other
development Total
software intangibles
costs GBPm
GBPm GBPm
GBPm
Cost
At 1 January 2021 45.5 0.8 1.1 47.4
Exchange differences (0.2) 0.1 0.1 -
Additions 8.5 0.1 - 8.6
Disposals (4.8) (0.1) - (4.9)
At 31 December 2021 49.0 0.9 1.2 51.1
At 1 January 2022 49.0 0.9 1.2 51.1
Exchange differences 1.9 - - 1.9
Additions 12.7 - - 12.7
Disposals (8.8) (0.1) - (8.9)
At 31 December 2022 54.8 0.8 1.2 56.8
Accumulated amortisation
At 1 January 2021 21.3 0.7 1.0 23.0
Exchange differences (0.1) - 0.2 0.1
Charge for the year 8.0 - - 8.0
Disposals (4.8) (0.1) - (4.9)
At 31 December 2021 24.4 0.6 1.2 26.2
At 1 January 2022 24.4 0.6 1.2 26.2
Exchange differences 1.2 - - 1.2
Charge for the year 10.0 0.1 - 10.1
Disposals (8.8) (0.1) - (8.9)
At 31 December 2022 26.8 0.6 1.2 28.6
Carrying amount
At 31 December 2022 28.0 0.2 - 28.2
At 31 December 2021 24.6 0.3 - 24.9
9. Property, plant and equipment, right-of-use assets and lease
liabilities
The Group has right-of-use assets which comprise property leases
held by the Group. Information about leases for which the Group is
a lessee is presented below.
Analysis of property, plant and equipment between owned and
leased assets
31 December 31 December
2022 2021
GBPm GBPm
Property, plant and equipment (owned) 2.7 2.7
Right-of-use assets 7.3 11.4
10.0 14.1
Reconciliation of amount recognised in the balance sheet
Right-of-use
Leasehold Computer Furniture
assets Total
improvements equipment and fixtures
(property) GBPm
GBPm GBPm GBPm
GBPm
Cost
At 1 January 2021 6.1 3.6 2.8 46.8 59.3
Disposals (1.4) (1.8) (1.0) - (4.2)
Additions - 0.7 0.1 - 0.8
Exchange differences - 0.2 - (0.4) (0.2)
Derecognition of right-of-use assets - - - (15.4) (15.4)
At 31 December 2021 4.7 2.7 1.9 31.0 40.3
At 1 January 2022 4.7 2.7 1.9 31.0 40.3
Disposals - (0.8) - - (0.8)
Additions1 0.5 1.0 0.1 0.7 2.3
Exchange differences - 0.1 0.1 1.0 1.2
Derecognition of right-of-use assets - - - - -
At 31 December 2022 5.2 3.0 2.1 32.7 43.0
Accumulated depreciation
At 1 January 2021 3.7 3.2 1.7 22.0 30.6
Disposals (1.4) (1.8) (1.0) - (4.2)
Charge for the year 0.8 0.6 0.3 4.2 5.9
Impairment (exceptional) 0.2 - 0.4 3.3 3.9
Exchange differences (0.1) (0.1) 0.1 - (0.1)
Derecognition of right-of-use assets - - - (9.9) (9.9)
At 31 December 2021 3.2 1.9 1.5 19.6 26.2
At 1 January 2022 3.2 1.9 1.5 19.6 26.2
Disposals - (0.8) - - (0.8)
Charge for the year 0.7 0.7 0.2 3.5 5.1
Impairment - - - 1.8 1.8
Exchange differences - 0.1 0.1 0.5 0.7
Derecognition of right-of-use assets - - - - -
At 31 December 2022 3.9 1.9 1.8 25.4 33.0
Carrying amount
At 31 December 2022 1.3 1.1 0.3 7.3 10.0
At 31 December 2021 1.5 0.8 0.4 11.4 14.1
1. Leasehold improvement additions in the year are non-cash in
nature.
Certain right-of-use assets related to the US San Francisco
office have been sublet under an operating sublease. Due to a
reduction in market values since inception of the sublet, the
estimated cash flows expected on expiry of the existing sublet and
negotiation of further sublet are lower and as a result an
impairment of GBP1.8m was recognised in the year ended 31 December
2022. The impairment was not treated as an exceptional item.
During the previous year ended 31 December 2021, certain other
right-of-use assets related to the US San Francisco office were
sublet in a finance sublease. As a result the right-of-use asset
was derecognised and a net investment in sublease was recognised
within other receivables. During the previous year the right-of-use
asset related to the Netherlands business was exited along with the
corresponding head lease liability. The carrying values of the
right-of-use asset and lease liability at the point of
derecognition were GBP0.4m. See note 4 for related exceptional
items.
Lease liabilities
Amounts recognised on the balance sheet were as follows:
31 December 31 December
2022 2021
GBPm GBPm
Current 7.2 6.9
Non-current 12.6 17.0
Total 19.8 23.9
Amounts recognised in the statement of comprehensive income were
as follows:
31 December 31 December
2022 2021
GBPm GBPm
Depreciation charge of right-of-use assets (property) 3.5 4.2
Interest expense (included in finance costs) 0.9 1.1
Expense relating to short-term leases and leases of low-value assets 0.4 0.1
The total cash outflow for leases (excluding short-term and
low-value leases) in 2022 was GBP7.3m (2021: GBP8.1m).
As at 31 December 2022 the potential future undiscounted cash
outflows that have not been included in the lease liability, due to
lack of reasonable certainty the lease extension options might be
exercised, amounted to GBPnil (2021: GBPnil).
10. Trade and other receivables
31 December 31 December
2022 2021
GBPm GBPm
Other receivables 3.4 4.1
Non-current trade and other receivables 3.4 4.1
Trade receivables 0.4 1.8
Other receivables¹ 5.3 10.0
Prepayments 3.7 4.8
Accrued income 4.8 6.2
Rent and other deposits 2.3 2.2
Current trade and other receivables 16.5 25.0
19.9 29.1
1. Includes GBPnil (2021: GBP3.6m) in relation to cash and
liquidity reserves held in the UK securitisation vehicle.
The maximum exposure to credit risk at the reporting date is the
carrying value of each class of receivables described earlier.
No trade receivables were overdue or impaired.
Included in rent and other deposits are GBP1.3m of rental
deposits (2021: GBP1.6m) in respect of the Group's property leases
which expire over the next five years.
The Directors consider that the carrying amount of trade and
other receivables approximates to their fair value.
11. Trade and other payables
31 December 31 December
2022 2021
GBPm GBPm
Trade payables 2.5 3.7
Other taxes and social security costs 5.0 4.9
Other creditors 9.7 11.4
Accruals and deferred income 14.6 16.4
31.8 36.4
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value.
12. Provisions and other liabilities
Dilapidation Loan repurchase Restructuring?1 Other1?? Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 0.9 5.2 1.1 2.7 9.9
Exchange differences - (0.3) (0.1) 0.2 (0.2)
Additional provision/liability - - - 1.1 1.1
Amount utilised - (2.6) (0.8) (0.2) (3.6)
Amount reversed (0.3) (0.1) - (2.7) (3.1)
At 31 December 2021 0.6 2.2 0.2 1.1 4.1
Exchange differences - 0.1 - 0.1 0.2
Additional provision/liability 0.5 - - 0.5 1.0
Amount utilised - (0.9) (0.2) (0.2) (1.3)
Amount reversed - (0.9) - (1.0) (1.9)
At 31 December 2022 1.1 0.5 - 0.5 2.1
1. Restructuring provision is in relation to reorganisation of
the US, German and Dutch businesses; see note 4. Other provisions
includes provisions for operational buybacks. GBP0.3m (2021:
GBPnil) of expected credit loss impairment allowance related to
undrawn FlexiPay lines of credit is also included within other.
31 December 31 December
2022 2021
GBPm GBPm
Current provisions and other liabilities 1.0 3.4
Non-current provisions and other liabilities 1.1 0.7
2.1 4.1
The dilapidation provision represents an estimated cost for
dismantling the customisation of offices and restoring the
leasehold premises to its original state at the end of the tenancy
period. The provision is expected to be utilised by 2025.
Loan repurchase liability
In certain historical circumstances, in Germany and the
Netherlands, Funding Circle entered into arrangements with
institutional investors to assume the credit risk on the loan
investments made by the institutional investors. Under the terms of
the agreements, the Group is required either to make payments when
the underlying borrower fails to meet its obligation under the loan
contract or buy the defaulted loan from the investors at its
carrying value. In return for these commitments, the Group is
entitled to the excess returns or additional income which is
recorded as other fees.
Under IFRS 9, the Group is required to provide for these loan
repurchases under the expected credit loss ("ECL") model.
The liability related to each loan arranged is based on the ECLs
associated with the probability of default of that loan in the next
12 months unless there has been a significant increase in credit
risk of that loan since origination. The Group assumes there has
been a significant increase in credit risk if outstanding amounts
on the loan investment exceed 30 days, in line with the rebuttable
presumption per IFRS 9.
The Group defines a default, classified within non-performing,
as a loan investment with any outstanding amounts exceeding a
90-day due date, which reflects the point at which the loan is
considered to be credit impaired.
If the loan is bought back by the Group, at the point of
buyback, the financial asset associated with the purchase meets the
definition of purchased or originated credit impaired ("POCI"),
this element of the reserve is therefore based on lifetime ECLs.
After being bought back, POCI loans and associated impairment
provisions are recognised within investment in SME loans (other) on
the balance sheet.
The Group bands each loan investment using an internal risk
rating and assesses credit losses on a collective basis.
Performing: Underperforming: Non-performing:
12-month lifetime lifetime Total
ECL ECL ECL GBPm
GBPm GBPm GBPm
At 1 January 2021 2.2 1.5 1.5 5.2
Exchange differences (0.1) (0.1) (0.1) (0.3)
Liability against loans transferred between stages (0.2) (0.5) 1.7 1.0
Amounts utilised - - (2.6) (2.6)
Loans repaid (0.9) (0.4) (0.6) (1.9)
Change in probability of default 0.4 (0.1) 0.5 0.8
At 31 December 2021 1.4 0.4 0.4 2.2
Exchange differences - 0.1 - 0.1
Liability against loans transferred between stages (0.1) (0.2) 0.7 0.4
Amounts utilised - - (0.9) (0.9)
Loans repaid (0.9) (0.1) (0.2) (1.2)
Change in probability of default (0.2) (0.1) 0.2 (0.1)
At 31 December 2022 0.2 0.1 0.2 0.5
Gross assets
Basis for of external Loan
Expected credit
recognition of parties subject repurchase
At 31 December 2021 loss coverage
loan repurchase to loan repurchase liability
%
liability liability GBPm
GBPm
Performing (due in 30 days or less) 15.3 12-month ECL 8.8 1.4
Underperforming (31-90 days overdue) 63.6 Lifetime ECL 0.6 0.4
Non-performing (90+ days overdue) 76.5 Lifetime ECL 0.6 0.4
Total 10.0 2.2
Gross assets
Basis for of external Loan
Expected credit
recognition of parties subject repurchase
At 31 December 2022 loss coverage
loan repurchase to loan repurchase liability
%
liability liability GBPm
GBPm
Performing (due in 30 days or less) 9.6 12-month ECL 2.4 0.2
Underperforming (31-90 days overdue) 32.6 Lifetime ECL 0.2 0.1
Non-performing (90+ days overdue) 92.9 Lifetime ECL 0.2 0.2
Total 2.8 0.5
The percentages applied above are based on the Group's past
experience of delinquencies and loss trends, as well as
forward-looking information in the form of macroeconomic scenarios
governed by an impairment committee, which considers macroeconomic
forecasts such as changes in interest rates, GDP and inflation
which are incorporated into scenarios and probability weighted.
Estimation is required in assessing individual loans and when
applying statistical models for collective assessments, using
historical trends from past performance as well as forward-looking
information including macroeconomic forecasts in each market
together with the impact on loan defaults.
The maximum exposure the Group might have to pay at the balance
sheet date if 100% of eligible loans were required to be bought
back would be GBP2.8m (2021: GBP10.0m). This would be dependent on
the timing of any eligible loans defaulting. Repayments of eligible
loans are no longer reinvested and therefore the final loan is due
to expire in December 2024, along with the associated financial
guarantees. At 31 December 2022, there is only one portfolio of
loans.
13. Financial risk management
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework.
The risk management policies are established to identify and
analyse the risks faced by the Group, to set appropriate risk
limits and controls and to monitor risks and ensure any limits are
adhered to. The Group's activities are reviewed regularly and
potential risks are considered.
Risk factors
The Group has exposure to the following risks from its use of
financial instruments:
. credit risk;
. liquidity risk; and
. market risk (including foreign exchange risk, interest rate
risk and other price risk).
Principal financial instruments
The principal financial instruments used by the Group, from
which financial instrument risk arises, are as follows:
. SME loans;
. lines of credit;
. investments in trusts and co-investments;
. trade and other receivables;
. cash and cash equivalents;
. trade and other payables;
. bank borrowings;
. bonds;
. lease liabilities; and
. loan repurchase liabilities.
Categorisation of financial assets and financial liabilities
The tables show the carrying amounts of financial assets and
financial liabilities by category of financial instrument as at 31
December 2022:
Fair
Amortised
value through Total
Assets cost
profit and loss Other GBPm
GBPm
GBPm GBPm
SME loans (other) 20.9 24.8 - 45.7
SME loans (warehouse) 2.4 - - 2.4
SME loans (securitised) 45.8 - - 45.8
Lines of credit - 16.0 - 16.0
Investment in trusts and co-investments 28.7 - - 28.7
Trade and other receivables - 16.2 - 16.2
Cash and cash equivalents 121.6 56.1 - 177.7
219.4 113.1 - 332.5
Fair
Amortised
value through Total
Liabilities cost
profit and loss Other GBPm
GBPm
GBPm GBPm
Trade and other payables - (12.2) - (12.2)
Loan repurchase liability - - (0.5) (0.5)
Bank borrowings - (22.6) - (22.6)
Bonds - (23.7) - (23.7)
Lease liabilities - (19.8) - (19.8)
- (78.3) (0.5) (78.8)
The tables show the carrying amounts of financial assets and
financial liabilities by category of financial instrument as at 31
December 2021:
Fair
Amortised
value through Total
Assets cost
profit and loss Other GBPm
GBPm
GBPm GBPm
SME loans (other) - 74.2 - 74.2
SME loans (warehouse) 3.2 - - 3.2
SME loans (securitised) 148.1 - - 148.1
Lines of credit - 1.6 - 1.6
Investment in trusts and co-investments 39.1 - - 39.1
Trade and other receivables - 24.3 - 24.3
Cash and cash equivalents 112.1 111.9 - 224.0
302.5 212.0 - 514.5
Fair
Amortised
value through Total
Liabilities cost
profit and loss Other GBPm
GBPm
GBPm GBPm
Trade and other payables - (15.2) - (15.2)
Loan repurchase liability - - (2.2) (2.2)
Bank borrowings - (73.2) - (73.2)
Bonds (12.8) (127.5) - (140.3)
Lease liabilities - (23.9) - (23.9)
(12.8) (239.8) (2.2) (254.8)
Financial instruments measured at amortised cost
Financial instruments measured at amortised cost, rather than
fair value, include cash and cash equivalents, trade and other
receivables, certain SME loans (other), bank borrowings, lease
liabilities, certain bonds and trade and other payables. Due to
their nature, the carrying value of each of the above financial
instruments approximates to their fair value.
Other financial instruments
Loan repurchase liabilities are measured at the amount of loss
allowance determined under IFRS 9.
Financial instruments measured at fair value
IFRS 13 requires certain disclosures which require the
classification of financial assets and financial liabilities
measured at fair value using a fair value hierarchy that reflects
the significance of the inputs used in making the fair value
measurement.
Disclosure of fair value measurements by level is according to
the following fair value measurement hierarchy:
. level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities that the entity can
access at the measurement date;
. level 2 inputs are inputs other than quoted prices included
within level 1 that are observable for the assets or liabilities,
either directly or indirectly; and
. level 3 inputs are unobservable inputs for the assets or
liabilities.
The fair value of financial instruments that are not traded in
an active market (for example, investments in SME loans) is
determined by using valuation techniques. These valuation
techniques maximise the use of observable market data where it is
available and rely as little as possible on entity-specific
estimates. If all significant inputs required to fair value an
instrument are observable, the instrument is included in level 2.
If one or more of the significant inputs is not based on observable
market data, the instrument is included in level 3. An assessment
that the level applied to financial instruments is appropriate and
whether a transfer between levels is required is undertaken at the
end of each accounting period. There were no transfers between
levels during the year or prior year.
The Finance department of the Group performs the valuations of
items required for financial reporting purposes, including level 3
fair values. This team reports to the Chief Financial Officer
(CFO). Discussions of valuation processes and results are held
regularly at Balance Sheet Management and Investment Valuation
Committees along with regular updates provided to the Audit
Committee.
Fair value measurement using
Quoted prices Significant Significant
in active observable unobservable
Total
31 December 2022 markets inputs inputs
GBPm
(level 1) (level 2) (level 3)
GBPm GBPm GBPm
Financial assets
SME loans (warehouse) - - 2.4 2.4
SME loans (securitised) - - 45.8 45.8
SME loans (other) - - 20.9 20.9
Investment in trusts and co-investments - - 28.7 28.7
Cash and cash equivalents 121.6 - - 121.6
121.6 - 97.8 219.4
Financial liabilities
Bonds - - - -
- - - -
Fair value measurement using
Quoted prices Significant Significant
in active observable unobservable
Total
31 December 2021 markets inputs inputs
GBPm
(level 1) (level 2) (level 3)
GBPm GBPm GBPm
Financial assets
SME loans (warehouse) - - 3.2 3.2
SME loans (securitised) - - 148.1 148.1
Investment in trusts and co-investments - - 39.1 39.1
Cash and cash equivalents 112.1 - - 112.1
112.1 - 190.4 302.5
Financial liabilities
Bonds - - (12.8) (12.8)
- - (12.8) (12.8)
The fair value of SME loans (warehouse) has been estimated by
discounting future cash flows of the loans using discount rates
that reflect the changes in market interest rates and observed
market conditions at the reporting date. The estimated fair value
and carrying amount of the SME loans (warehouse) was GBP2.4m at 31
December 2022 (2021: GBP3.2m).
The fair value of SME loans (securitised) represents loan assets
in the securitisation vehicles and legacy loans of this nature and
has been estimated by discounting future cash flows of the loans
using discount rates that reflect the changes in market interest
rates and observed market conditions at the reporting date. The
estimated fair value and carrying amount of the SME loans
(securitised) was GBP45.8m at 31 December 2022 (2021:
GBP148.1m).
Bonds represent the unrated tranches of bond liabilities
measured at fair value through profit and loss (the rated tranches
of bonds are measured at amortised cost). The fair value has been
estimated by discounting estimated future cash flows in relation to
the bonds using discount rates that reflect the changes in market
interest rates and observed market conditions at the reporting
date. The estimated fair value and carrying amount of the bonds was
GBPnil at 31 December 2022 (2021: GBP12.8m).
Investment in trusts and co-investments represents the Group's
investment in the trusts and other vehicles used to fund CBILS, RLS
and certain commercial loans and is measured at fair value through
profit and loss. The government-owned British Business Bank will
guarantee up to 80% of the balance of CBILS loans in the event of
default (and between 70% and 80% of RLS loans). The fair value has
been estimated by discounting future cash flows in relation to the
trusts using discount rates that reflect the changes in market
interest rates and observed market conditions at the reporting
date. The estimated fair value and carrying amount of the
investment in trusts and co-investments was GBP28.7m at 31 December
2022 (2021: GBP39.1m).
The SME loans (other) held at fair value represents loan assets
temporarily funded by the Group in relation to the relaunch of
commercial loans and is estimated by discounting future cash flows
of the loans using discount rates that reflect the changes in
market interest rates and observed market conditions at the
reporting date. The estimated fair value and carrying amount of the
SME loans (other) was GBP20.9m (2021: GBPnil).
The most relevant significant unobservable inputs relate to the
default rate estimate and discount rates applied to the fair value
calculation, details of which are set out in note 16 for those with
material estimation uncertainty.
Fair value movements on SME loans (warehouse), SME loans
(securitised), SME loans (other), investments in trusts and bonds
(unrated) are recognised through the profit and loss account in
fair value gains/(losses).
A reconciliation of the movement in level 3 financial
instruments is shown as follows:
SME loans SME loans Investment Trade and
Bonds
in trusts and other
(warehouse) (securitised) (unrated) SME receivables
co-investments loans
GBPm GBPm GBPm (other) GBPm
GBPm
GBPm
At 1 January 2021 221.8 279.8 (7.8) 21.2 - 0.2
Additions - - - 22.1 - -
Transfers 0.2 - - - - (0.2)
Repayments (58.6) (150.2) - (3.3) - -
Disposal (176.1) - - - - -
Net gain/(loss) on the change in fair value of
financial instruments at fair value through 16.3 18.2 (5.0) (0.9) - -
profit and loss
Foreign exchange (loss)/gain (0.4) 0.3 - - - -
At 31 December 2021 3.2 148.1 (12.8) 39.1 - -
Additions - - - 6.4 22.6 -
Repayments (2.8) (86.8) 16.3 (10.0) (0.8) -
Disposal - (39.5) - - - -
Net gain/(loss) on the change in fair value of
financial instruments at fair value through 2.0 14.7 (3.5) (7.0) (1.4) -
profit and loss
Foreign exchange gain - 9.3 - 0.2 0.5 -
At 31 December 2022 2.4 45.8 - 28.7 20.9 -
Financial risk factors
Credit risk
Credit risk is the risk of financial loss to the Group if a
customer or counterparty to a financial instrument fails to meet
its contractual obligations, and arises principally from the
Group's receivables from customers and cash and cash equivalents
held at banks.
The Group's maximum exposure to credit risk by class of
financial asset is as follows:
31 December 31 December
2022 2021
GBPm GBPm
Non-current
SME loans (other) 24.8 74.2
Investment in trusts and co-investments 28.7 39.1
Trade and other receivables:
- Other receivables 3.4 4.1
Current
Line of credit 16.0 1.6
SME loans (other) 20.9 -
SME loans (warehouse) 2.4 3.2
SME loans (securitised) 45.8 148.1
Trade and other receivables:
- Trade receivables 0.4 1.8
- Other receivables 5.3 10.0
- Accrued income 4.8 6.2
- Rent and other deposits 2.3 2.2
Cash and cash equivalents 177.7 224.0
Total gross credit risk exposure 332.5 514.5
Less bank borrowings and bond liabilities1 (46.3) (213.5)
Total net credit risk exposure 286.2 301.0
1. Included within bank borrowings are GBP22.6m (2021: GBP73.2m)
in relation to draw downs on the PPPLF.
In addition the Group is subject to financial guarantees it has
issued to buy back loans detailed in the loan repurchase liability
in note 12. The Group's maximum exposure to credit risk on
financial guarantees were every eligible loan required to be bought
back would be GBP2.8m (2021: GBP10.0m).
An expected credit loss allowance related to undrawn lines of
credit on the FlexiPay product of GBP0.3m (2021: GBPnil) is held
within provisions and other liabilities. The Group's maximum
exposure to credit risk on the undrawn lines of credit if they were
all to be fully drawn would be GBP41.6m (2021: GBP4.2m).
SME loans (warehouse) and SME loans (securitised) relate to the
underlying pool of SME loans in both the warehouse and
securitisation vehicles or are loans from the legacy warehouses and
SPVs that have since been purchased or novated into other Funding
Circle entities, but remain held at FVTPL with the business model
of holding the loans for sale. Whilst there is credit risk from the
loans defaulting, certain of these SME loans (securitised) and the
third party bonds that remain in SPVs are held within bankruptcy
remote vehicles. If the SME loans were to all default, then the
bank debt or third party bonds do not receive their money back.
Therefore the overall exposure to the Group for these investments
is the Group's net investment in the SME loans which is after
taking account of the bank debt and third party bonds.
SME loans (other) includes GBP20.9m (2021: GBPnil) loans
originated by the Group with the intention of selling onwards,
which are held at FVTPL and are therefore disclosed as current.
Under IFRS 9, the Group is required to provide for loans
measured at amortised cost under the expected credit loss ("ECL")
model. The impairment related to each loan is based on the ECLs
associated with the probability of default of that loan in the next
12 months unless there has been a significant increase in credit
risk of that loan since origination. The Group assumes there has
been a significant increase in credit risk if outstanding amounts
on the loan investment exceed 30 days, in line with the rebuttable
presumption per IFRS 9.
The Group defines a default, classified within non-performing,
as a loan investment with any outstanding amounts exceeding a
90-day due date, which reflects the point at which the loan is
considered to be credit impaired. In some circumstances where loans
are bought back by the Group, the financial asset associated with
the purchase meets the definition of purchased or originated credit
impaired ("POCI"); this element of the impairment is therefore
based on lifetime ECLs.
Lines of credit utilised the same default definition and
probability of default under IFRS 9, however, are assessed based on
12-month probability of default at the overall available line of
credit level, estimating the expected utilisation of the line of
credit at the estimated point of default. The expected credit loss
impairment associated with undrawn lines of credit is disclosed
within other liabilities in note 15 and in note 27.
SME loans (other) includes PPP loans funded by the use of the
PPPLF. The loans are guaranteed by the US government in the event
of default and the loans are anticipated to be forgiven. At the
point of default and subsequent collection of the guarantee or
point of forgiveness, the loan and the respective borrowings under
the PPPLF are extinguished. SME loans (other) also includes loans
which have been brought back from investors and are held at
amortised cost.
Lines of credit comprises GBP16.0m (2021: GBP1.6m) of drawn
amounts through the FlexiPay product net of expected credit loss
impairment, enabling businesses to spread UK invoices or payments
over three months with the initial payment made on a borrower's
behalf. The gross principal value of SME loans (other) is GBP39.6m
(2021: GBP89.5m) and drawn lines of credit held at amortised cost
is GBP17.6m (2021: GBP1.6m), totalling GBP57.2m (2021: GBP91.1m),
and an allowance for expected credit losses of GBP14.8m (2021:
GBP15.3m) and GBP1.6m (2021: GBPnil) respectively, totalling
GBP16.4m (2021: GBP15.3m), is held against these loans and drawn
lines of credit as detailed below.
An impairment credit of GBP0.9m (2021: charge of GBP1.3m) was
recognised through the statement of comprehensive income in the
year to 31 December 2022 within credit/(provision) for expected
credit losses in the income statement.
Performing: Underperforming: Non-performing: POCI:
Total
12-month Lifetime Lifetime Lifetime
ECL ECL ECL ECL
GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 0.1 - 0.4 12.2 12.7
Impairment against additions 0.1 - - 2.6 2.7
Exchange differences - - - (0.6) (0.6)
Impairment against loans transferred from /(to) performing - 0.3 0.7 - 1.0
Loans repaid (0.1) - - (0.9) (1.0)
Change in probability of default or loss given default 0.5 - - - 0.5
assumptions
At 31 December 2021 0.6 0.3 1.1 13.3 15.3
Impairment against additions 0.1 - - 1.1 1.2
Exchange differences 0.1 - 0.1 1.0 1.2
Impairment against loans transferred from /(to) performing (0.1) 0.3 0.3 - 0.5
Loans repaid (0.3) (0.3) (0.5) (1.2) (2.3)
Change in probability of default or loss given default 0.7 - (0.1) (0.1) 0.5
assumptions
At 31 December 2022 1.1 0.3 0.9 14.1 16.4
Expected credit Provision for Net
loss coverage Basis for recognition of Gross lines of credit expected credit carrying
expected credit loss and SME loans (other) GBPm loss amount
% impairment
GBPm GBPm
As at 31 December
2021
Performing (due in 0.7 12-month ECL 75.7 (0.6) 75.1
30 days or less)
Underperforming
(31-90 days 100.0 Lifetime ECL 0.3 (0.3) -
overdue)
Non-performing (90+ 100.0 Lifetime ECL 1.1 (1.1) -
days overdue)
POCI (90+ days 95.1 Lifetime ECL 14.0 (13.3) 0.7
overdue)
Total 91.1 (15.3) 75.8
As at 31 December
2022
Performing (due in 2.7 12 month ECL 39.2 (1.1) 38.1
30 days or less)
Underperforming
(31-90 days 36.5 Lifetime ECL 0.7 (0.3) 0.4
overdue)
Non-performing (90+ 43.1 Lifetime ECL 2.3 (0.9) 1.4
days overdue)
POCI (90+ days 94.2 Lifetime ECL 15.0 (14.1) 0.9
overdue)
Total 57.2 (16.4) 40.8
Trade receivables represent the invoiced amounts in respect of
servicing fees due from institutional investors. The risk of
financial loss is deemed minimal because the counterparties are
well established financial institutions.
Ongoing credit evaluation is performed on the financial
condition of other receivables and, where appropriate, a provision
for expected credit losses is recorded in the financial
statements.
Other receivables include net investment in subleases of offices
representing the present value of future sublease payments
receivable. Where appropriate, impairment is recorded where the
receivable is in doubt.
Individual risk limits for banks and financial institutions are
set by the Group with reference to external rating agencies. The
Group's treasury policy has set limits and quantities that the
Group must remain within. No credit or counterparty limits were
exceeded during the year. The Group's cash and cash equivalents
split by S&P counterparty rating were A/A- rated: GBP56.2m
(2021: GBP111.9m), A+ or better rated: GBP121.5m (2021: GBP112.0m)
and below A- rated: GBPnil (2021: GBP0.1m).
14. Notes to the consolidated statement of cash flows
Cash (outflow)/inflow from operating activities
31 December 31 December
2022 2021
(re-presented)
1
GBPm
GBPm
(Loss)/profit before taxation (12.9) 64.1
Adjustments for
Depreciation of property, plant and equipment 5.1 5.9
Amortisation of intangible assets 10.1 8.0
Impairment of intangible and tangible assets (prior year exceptional item) 1.8 3.9
Interest receivable (2.3) (0.1)
Interest payable 0.9 1.1
Non-cash employee benefits expense - share-based payments and associated social security 4.7 8.5
costs
Fair value (gains)/losses (4.8) (28.6)
Movement in restructuring provision (prior year exceptional item) (0.2) (0.9)
Movement in loan repurchase liability (1.8) (3.0)
Movement in other provisions (0.1) (1.9)
Share of gains of associates (0.4) (0.9)
Other non-cash movements 1.4 (0.7)
Changes in working capital
Movement in trade and other receivables 8.8 46.4
Movement in trade and other payables (3.7) 1.4
Tax paid (1.0) (3.1)
Originations of lines of credit1 (59.6) (3.6)
Cash receipts from lines of credit1 43.6 2.0
Net cash (outflow)/inflow from operating activities (10.4) 98.5
1. As disclosed in note 1, FlexiPay drawn lines of credit have
been re-presented within "Origination of/cash receipts from lines
of credit" within cash flows from operating activities and were
previously presented within "Origination of/ cash receipts from SME
loans (other)" in cash flows from investing activities in the
previous year ended 31 December 2021.
Cash and cash equivalents
31 December 31 December
2022 2021
GBPm GBPm
Cash and cash equivalents 177.7 224.0
The cash and cash equivalents balance is made up of cash, money
market funds and bank deposits. The carrying amount of these assets
is approximately equal to their fair value. Included within cash
and cash equivalents above is a total of GBP12.1m (2021: GBP24.6m)
in cash which is restricted in use. Of this GBP1.1m (2021: GBP1.0m)
is restricted in use in the event of rental payment defaults and
cash held in the securitisation SPVs of GBP2.9m (2021: GBP14.4m)
which has been collected for on-payment to bond holders and is
therefore restricted in its use. A further GBP8.1m (2021: GBP9.2m)
of cash is held which is restricted in use to repaying
institutional investors in CBILS and RLS loans and paying CBILS and
RLS-related costs to the UK government.
At 31 December 2022, money market funds totalled GBP121.6m
(2021: GBP112.1m).
15. Significant changes in the current reporting year
The financial position and performance of the Group were
affected by the following events and transactions during the year
ended 31 December 2022:
i) Sale of securitised SME loans and unwind of UK and US SPVs
(note 13)
In May 2022, Funding Circle exercised the call rights associated
with the majority ownership of the unrated junior residual tranches
of Small Business Origination Loan Trust 2019-3's bonds in the UK.
The call option became exercisable as the portfolio and bond
liabilities of the SPV had amortised to below a minimum threshold.
Funding Circle and the other junior note holder purchased the loans
from the SPV, in line with their proportional ownership of the note
tranches, at fair value. The proceeds, cash and other assets of the
vehicle were liquidated and used to repay outstanding expenses and
interest and principal on the bond liabilities. As the SPV is
consolidated, the net impact on the Group's financial statements
was a sale of 49% of the UK securitised SME loans to the other
junior note holder and repayment of the bond liabilities. The bond
liabilities held at FVTPL were repaid at an amount higher than
their previous fair value estimate as the cash flows were delivered
sooner and at a higher amount resulting in a fair value loss as set
out in note 15. As a result, there are no unrated bond liabilities
remaining for the Group. Subsequently the Group owned 51% of the
securitised SME loans, directly through the subsidiary Funding
Circle Ltd. The majority of the retained loans were sold to a third
party with an economic cut off of 30 June 2022 and cash settlement
in September 2022 for their fair value, with no gain or loss on
sale, and as a result only a smaller portfolio of delinquent and
defaulted loans was retained by the Group.
In October 2022, Funding Circle exercised the call rights
associated with the ownership of the unrated junior residual
tranches of Small Business Lending Trust 2019-A's bonds in the US.
The call option became exercisable as the portfolio and bond
liabilities of the SPV had amortised to below the minimum
threshold. Funding Circle purchased the loans from the SPV at fair
value. The proceeds, cash and other assets of the vehicle were
liquidated and used to repay outstanding expenses, and interest and
principal on the bond liabilities. As the SPV is consolidated, the
net impact on the Group's financial statements was the repayment of
the bond liabilities of the vehicle. The Group continues to
consolidate 100% of the securitised SME loans, now owned directly
by the subsidiary FC Marketplace LLC.
The Group continues to consolidate both the SPVs, which
subsequently began a liquidation process, and holds an immaterial
amount of cash and accruals, through exposure to the majority of
the variability in any excess cash flows available after the
liquidation is completed.
The loans retained continue to be held at fair value through
profit and loss, within SME Loans (securitised), as the Group
continues to hold these with the intention of selling them if, and
when, an attractive price can be realised.
ii) Scaling up of new products
The Group has continued to scale up lending through lines of
credit in its FlexiPay product.
Through FlexiPay, borrowers are provided with a facility which
can be drawn to pay invoices and expenses, and are subsequently
repaid over three months. A fee of 3% was charged in the year on
the drawn amount which is recognised over the three-month life of
the drawdown in interest income under the effective interest rate
method. The accounting policy regarding FlexiPay is outlined
below.
As outlined later, the loans are measured at amortised cost. As
FlexiPay will continue to become a larger part of the Group's
business, this has been disclosed as a separate segment within note
2. As a result the Group has presented FlexiPay under "lines of
credit" on the balance sheet and reclassified the comparative which
was previously presented in "investment in SME loans (other)".
Lending through the FlexiPay product is recognised on the
balance sheet within lines of credit. This represents the drawn
amount of the facilities. The contractual cash flows represent
solely payments of principal and interest ("SPPI") and the business
model under which they are held is in order to collect the
contractual cash flows resulting in the lines of credit being
measured initially at fair value and subsequently at amortised
cost. The Group has presented FlexiPay under "lines of credit" in
the balance sheet and reclassified the comparative which was
previously presented in "investment in SME loans (other)" where
they were also measured at amortised cost. The origination fee
associated with FlexiPay is recognised under IFRS 9 within interest
income at the effective interest rate in the consolidated statement
of comprehensive income and is recognised over the contractual term
of the draw down.
The FlexiPay lines of credit are held net of expected credit
loss allowances under IFRS 9, the methodology and definitions of
which align to the existing Group accounting policy on impairment
of financial assets held at amortised cost with the exception of
being assessed at the available line of credit level, estimating
the utilisation of the line of credit to the estimated point of
default and are detailed further within note 13. Additionally, the
Group assesses the expected credit loss allowance in relation to
undrawn lines of credit, estimating the probability of default,
loss given default and exposure at default in relation to these
lines of credit were they to be drawn. This has resulted in a
GBP0.3 million (2021: GBPnil) loss allowance recognised within
other liabilities in note 12.
iii) Redemption of investment in associate
In July 2022 an agreement was signed by Funding Circle European
Private Fund DAC I to sell the loans held by the fund as part of
its strategy to return capital to shareholders in a cost effective
manner. The Group received GBP2.6m in cash in August 2022 as a
final capital distribution and the corresponding investment in
associate held by the Group was reduced by this distribution to
nil.
16. Critical accounting judgements and key sources of estimation
uncertainty
The preparation of the consolidated financial statements
requires the Group to make estimates and judgements that affect the
application of policies and reported amounts. Critical judgements
represent key decisions made by management in the application of
the Group accounting policies. Where a significant risk of
materially different outcomes exists due to management assumptions
or sources of estimation uncertainty, this will represent a key
source of estimation uncertainty.
Estimates and judgements are continually evaluated and are based
on experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
Although these estimates are based on management's best knowledge
of the amount, event or actions, actual results ultimately may
differ from those estimates.
The significant judgements and estimates applied by the Group in
the financial statements have been applied on a consistent basis
with the financial statements for the year to 31 December 2021.
Critical judgements
Consolidation and deconsolidation of special purpose vehicles
("SPVs") and investment in trusts and co-investments (note 13)
As part of its asset-backed securitisation programmes, the Group
has established warehouse and securitisation SPVs. Judgement is
required in determining who is most exposed to the variability of
returns and who has the ability to affect those returns and
therefore who should consolidate these vehicles and subsequently
deconsolidate them. Where the Group has a significant interest in
the junior tranches of the securitisation vehicles or the
subordinated debt in the warehouses, the Group is deemed to be
exposed to the majority of the variability of the returns of those
vehicles and controls them, and therefore consolidates them. Where
this interest is reduced, the Group considers whether the vehicles
should be deconsolidated.
The Group also holds a minority beneficial ownership in trusts
set up to fund CBILS, RLS and commercial loans with the remaining
majority of the beneficial ownership held by institutional
investors. The SME loans are originated by a Group subsidiary,
Funding Circle Focal Point Lending Limited for CBILS and Funding
Circle Eclipse Lending Limited for RLS and commercial loans, which
retain legal title to the loans. These entities hold this legal
title of trust on behalf of the majority investors who
substantially retain the economic benefits the CBILS, RLS and
commercial loans generate and therefore the trusts and the assets
held within, including the SME loans, are not consolidated.
The Group assesses whether it controls the trust structure under
the criteria of IFRS 10. Control is determined to exist if the
Group has the power to direct the activities of entities and
structures and uses this control to obtain a variable return, to
which it is exposed to the majority of the variability. As the
Group's holding is small in comparison to the majority investor and
is pari passu, the Group is not exposed to the majority of the
variability in the cash flows of the trust, and it is not
considered to control the trust structures, so they are not
consolidated by the Group.
Loans originated through the platform
The Group originates SME loans through its platform which are
funded primarily by banks, asset managers, other institutional
investors, funds, national entities, retail investors or by usage
of its own capital. Judgement is required to determine whether
these loans should be recognised on the Group's balance sheet.
Where the Group, its subsidiaries or SPVs which it consolidates
have legal and beneficial ownership to the title of those SME
loans, they are recognised on the Group's balance sheet. Where this
is not the case, the loans are not recognised at the point of
origination.
Key sources of estimation uncertainty
The following are the key sources of estimation uncertainty that
the Directors have identified in the process of applying the
Group's accounting policies and have the most significant effect on
the amounts recognised in the financial statements.
Fair value of financial instruments (note 13)
At 31 December 2022, the carrying value of the Group's financial
instrument assets held at fair value was GBP219.4m (2021:
GBP302.5m) and the carrying value of financial liabilities carried
at fair value was GBPnil (2021: GBP12.8m).
In accordance with IFRS 13 Fair Value Measurement, the Group
categorises financial instruments carried on the consolidated
balance sheet at fair value using a three-level hierarchy.
Financial instruments categorised as level 1 are valued using
quoted market prices and therefore there is minimal estimation
applied in determining fair value. However, the fair value of
financial instruments categorised as level 2 and, in particular,
level 3 is determined using valuation estimation techniques
including discounted cash flow analysis and valuation models. The
most significant estimation is with respect to discount rates and
default rates.
Since 31 December 2021 the assumptions related to estimating
fair value have been revised to reflect the observed actual
performance of SME loans (securitised) and a revision to the timing
of the assumed defaults to occur later in light of the observed
resilience of the loans performance and noting that the
macroeconomic environment may lead to a later, more gradual but
longer lasting stress than the sooner and sharper stress previously
expected. Additionally, recoveries have been observed to have
performed more favourable to previous stress assumptions and
expectations have been revised upwards. The combination of
favourable observed performance, higher recoveries and later
defaults on an amortising pool of loans has led to a lower lifetime
cumulative default expectation and a higher relative estimation of
fair value.
However, market drivers of discount rates such as observed
widening in collateralised loan obligation spreads and increases in
the risk-free rate due to central bank interest rate rises in order
to curb inflationary pressures have resulted in the estimated cash
flows being discounted at a higher rate, which has led to a lower
relative estimation of fair value compared to carrying value of the
loans partially offsetting the favourable revisions from default
and recovery expectations.
With respect to investments in trusts and co-investments, where
the Group holds a minority equity pari passu co-investment
structured through warehouse vehicles, the increase in interest
rates and future expected increases in interest rates has decreased
the estimated fair value in these structures, as the floating rate
interest on senior borrowing facilities within the vehicle is paid
before returns to the equity holders, including Funding Circle, are
made. Additionally, while the majority of default stress
particularly on CBILS loans was previously expected to occur at the
end of the product's first year payment free period, with lower
defaults observed than anticipated, the macroeconomic environment
may lead to further defaults on these portfolios through the same
more gradual default stress outlined above. The nature of the
vehicles is such that, while the loans may be government
guaranteed, an uptick in defaults in combination with higher
borrowing costs will reduce the lifetime return to the equity
holder and the inbuilt mechanisms of the vehicles which prioritise
repayments to the senior lender could lead to cash flowing to the
equity holder later.
As a result the estimated fair value of the investment has
decreased.
Sensitivities to assumptions in the valuation of, SME loans
(warehouse), SME loans (other) and money market funds within cash
and cash equivalents are not disclosed below as reasonably possible
changes in the current assumptions would not be expected to result
in material changes in the carrying values.
Sensitivities to the default rates and discount rates are
illustrated below.
Fair
value Relationship of
Description Unobservable input Inputs unobservable inputs to fair value
GBPm
SME 45.8 Lifetime cumulative US: 14.6%
loans default rate as % of and 17.1%
(securitised) original 1
UK: 6.9%
A change in the lifetime cumulative default rate would have
the following impact:
US SPV1¹: +68/-17 bps would decrease/increase fair value by GBP
(0.8)m/GBP0.3m respectively.
US SPV2¹: +127/-34 bps would decrease/increase fair value by
GBP(1.8)m/GBP0.6m respectively.
UK: +36/-36 bps would decrease/increase fair value by GBP(0.4)m
/ GBP0.4m respectively.
Investments in 28.7 Lifetime cumulative Blended:
Trusts and default rate as % of 16.0%
co-investments original
A change in the lifetime cumulative default rate by +230/-480
bps would decrease/increase fair value by (GBP0.8)m and GBP1.8m
respectively.
1. Two cumulative default rates are presented for the US
representing the portfolios in each of the two respective pools of
SME loans (securitised) related to the remaining and legacy
securitisation vehicles. Separate sensitivities to default rates
for the US securitisation vehicles represent the respective
seasoning of the loans and the different reasonably possible range
of outcomes. US SPV2 default definition is "synthetic default"
being 90+days past due based on original contractual terms
including where borrowers became 90+ days late due to going on
approved forbearance measures such as payment holidays. UK and US
SPV1 default definition is based on "contractual default"
definition of 90+ days past due based on current contractual terms
which may have been revised since the original contract. The UK and
US SPV1 default definition was previously aligned to the US SPV2
but amended after the loans were sold from the SPVs, driving the
divergence in lifetime expected default rates presented between the
SPVs.
The above sensitivities represent management's estimate of the
reasonably possible range of outcomes and as a result the fair
value of the assets and liabilities measured at fair value could
materially diverge from management's estimate.
Fair
value Relationship of
Description Unobservable Inputs unobservable inputs to fair value
GBPm input
SME 45.8 Risk-adjusted US:
loans discount rate 15.1%
(securitised)
UK:18.5% A change in the discount rates by +/-200 bps would decrease/ increase
fair value by GBP0.8m/GBP(0.8)m respectively.
Investments in 28.7 Risk-adjusted 7.5% to
Trusts discount rate 20.3%
and
co-investments A change in the discount rate by +200/-200 bps would decrease/
increase fair value by GBP1.0m/GBP(1.0)m respectively.
It is considered that the range of reasonably possible outcomes
in relation to the discount rate used could be +/
-200 bps and as a result the fair value of the assets could
materially diverge from management's estimate.
As the discount rate is risk adjusted, it should be noted that
the sensitivities to discount rate and to lifetime cumulative
default rate contain a level of overlap regarding credit risk. The
sensitivity in expected lifetime cumulative defaults should not
also be applied to the sensitivity of the credit risk element of
the risk-adjusted discount rate and the sensitivities are most
meaningful viewed independently of each other.
17. Subsequent events
Subsequent to the 31 December 2022, an agreement was signed in
February 2023 to sell loans valued at GBP19.8m at 31 December 2022
and presented within SME loans (other) to a third party investor.
The sale did not give rise to a material gain or loss.
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Dissemination of a Regulatory Announcement, transmitted by EQS
Group. The issuer is solely responsible for the content of this
announcement.
-----------------------------------------------------------------------------------------------------------------------
ISIN: GB00BG0TPX62
Category Code: FR
TIDM: FCH
LEI Code: 2138003EK6UAINBBUS19
OAM Categories: 3.1. Additional regulated information required to be disclosed under the laws of a Member State
Sequence No.: 226823
EQS News ID: 1572519
End of Announcement EQS News Service
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(END) Dow Jones Newswires
March 02, 2023 02:00 ET (07:00 GMT)
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