TIDMSCRF
RNS Number : 4883G
SME Credit Realisation Fund Limited
23 July 2019
NOT FOR RELEASE, DISTRIBUTION OR PUBLICATION, IN WHOLE OR IN
PART, IN OR INTO THE UNITED STATES
*****
23 July 2019
SME Credit Realisation Fund Limited
(the "Company")
SME Credit Realisation Fund Limited (the "Company") has
published its results for the year ended 31 March 2019.
The Annual Report and Accounts are attached to this release and
are available on the Company's website
(www.smecreditrealisation.com).
CONTACTS
Richard Boleat, Chairman
+44 (0) 1534 615 656
Richard.Boleat@smecreditrealisation.com
Secretary and Administrator
Sanne Group (Guernsey) Limited
smecreditrealisation@sannegroup.com
+44 (0) 1481 739810
Corporate Broker
Numis Securities
Nathan Brown
+44 (0) 207 260 1000
n.brown@numis.com
Investor Relations
IR@smecreditrealisation.com
Website
www.smecreditrealisation.com
The ISIN number of the Ordinary Shares is GG00BYYJCZ96, the
SEDOL code is BYYJCZ9 and the TIDM is SCRF
The LEI number of the Company is 549300ZQIYQVNIZGOW60.
*****
ABOUT SME Credit Realisation Fund Limited
The Company is a registered closed-ended collective investment
scheme registered pursuant to the Protection of Investors
(Bailiwick of Guernsey) Law, 1987, as amended and the Registered
Collective Investment Scheme Rules 2015 issued by the Guernsey
Financial Services Commission ("GFSC").
*****
IMPORTANT NOTICES
This announcement contains "forward-looking" statements, beliefs
or opinions. These forward-looking statements involve known and
unknown risks and uncertainties, many of which are beyond the
control of the Company and all of which are based on its directors'
current beliefs and expectations about future events.
Forward-looking statements are sometimes identified by the use of
forward-looking terminology such as "believes", "expects", "may",
"will", "could", "should", "shall", "risk", "intends", "estimates",
"aims", "plans", "predicts", "projects", "continues", "assumes",
"positioned" or "anticipates" or the negative thereof, other
variations thereon or comparable terminology, or by discussions of
strategy, plans, objectives, goals, future events, assumptions or
intentions. These forward-looking statements include all matters
that are not historical facts. Forward-looking statements may and
often do differ materially from actual results. They appear in a
number of places throughout this announcement and include
statements regarding the intentions, beliefs or current
expectations of the Board or the Company with respect to future
events and are subject to risks relating to future events and other
risks, uncertainties and assumptions relating to the Company's
business concerning, amongst other things, the financial
performance, liquidity, prospects, growth and strategies of the
Company. These forward-looking statements and other statements
contained in this announcement regarding matters that are not
historical facts involve predictions. No assurance can be given
that such future results will be achieved; actual events or results
may differ materially as a result of risks and uncertainties facing
the Company. Such risks and uncertainties could cause actual
results to vary materially from the future results indicated,
expressed or implied in such forward-looking statements. The
forward-looking statements contained in this announcement speak
only as of the date of this announcement. Nothing in this
announcement is, or should be relied on as, a promise or
representation as to the future. The Company disclaims any
obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained in this
announcement to reflect any change in its expectations or any
change in events, conditions or circumstances on which such
statements are based unless required to do so by applicable law,
the Prospectus Rules, the Listing Rules or the Disclosure Rules and
Transparency Rules of the FCA. No statement in this announcement is
intended as a forecast or profit estimate.
Neither this announcement nor any copy of it may be made or
transmitted into the United States of America (including its
territories or possessions, any state of the United States of
America and the District of Columbia) (the "United States"), or
distributed, directly or indirectly, in the United States or to US
Persons (as such term is defined in Regulation S under the US
Securities Act of 1933, as amended (the "Securities Act"). Neither
this announcement nor any copy of it may be taken or transmitted
directly or indirectly into Australia, Canada, Japan or South
Africa or to any persons in any of those jurisdictions, except in
compliance with applicable securities laws. Any failure to comply
with this restriction may constitute a violation of United States,
Australian, Canadian, Japanese or South African securities laws.
The distribution of this announcement in other jurisdictions may be
restricted by law and persons into whose possession this
announcement comes should inform themselves about, and observe, any
such restrictions. This announcement does not constitute or form
part of any offer or invitation to sell or issue, or any
solicitation of any offer to purchase or subscribe for securities
in the United States, Australia, Canada, Japan or South Africa or
in any jurisdiction to whom or in which such offer or solicitation
is unlawful.
SME CREDIT REALISATION FUND LIMITED
ANNUAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 MARCH 2019
FORWARD-LOOKING STATEMENTS
This report includes statements that are, or may be considered,
"forward-looking statements". The forward-looking statements can be
identified by the use of forward-looking terminology, including the
terms "believes", "estimates", "anticipates", "expects", "intends",
"may", "will" or "should" or, in each case, their negative, or
other variations or comparable terminology. These statements are
made by the Directors in good faith based on the information
available to them up to the time of their approval of this report
and such statements should be treated with caution due to the
inherent uncertainties, including both economic and business risk
factors, underlying any such forward-looking information.
FINANCIAL HIGHLIGHTS
-- Total comprehensive loss for the year amounted to GBP0.59
million (2018: comprehensive income of GBP17.24 million).
-- Aggregate dividends of 4.25 pence per Ordinary share declared
for the year ended 31 March 2019 (2018: 6.50 pence).
-- Total shares bought back during the year was 11,239,500 at an
average price of 86.30p, which contributed +0.21% to the NAV total
return for the year.
The information below is presented for the year ended 31 March
2019 and as at 31 March 2019 unless expressly stated to cover a
different period.
Description Performance
NAV per Ordinary Share 95.45p
---------------
Total Net Assets GBP308mil
---------------
Ordinary Share Price 85.90p
---------------
Market Capitalisation GBP278 million
---------------
Discount on Share Price (10.0%)
---------------
Annualised Dividends per Ordinary
share 4.25p
---------------
Earnings per Ordinary share (after
effect of IFRS 9) (0.18p)
---------------
Earnings per Ordinary share (before
effect of IFRS 9) 1.82p
---------------
Share Price Total Return (inception
to date) (0.3%)
---------------
NAV Total Return (inception to date) 15.0%
---------------
Total shares repurchased 11.24 million
---------------
Average price of share repurchases 86.30p
---------------
Impact of share repurchases to NAV
Total Return 0.21%
---------------
SUMMARY INFORMATION
About the Company
SME Credit Realisation Fund Limited (formerly Funding Circle SME
Income Fund Limited) (the "Company" or the "Fund") is a
closed-ended investment company incorporated with liability limited
by shares in Guernsey under The Companies (Guernsey) Law, 2008 (as
amended), on 22 July 2015.
Group Structure
The Company holds a number of its investments in loans through
SPVs. This annual report for the year ended 31 March 2019 (the
"Annual Report") includes the results of Basinghall Lending
Designated Activity Company ("Basinghall"), Tallis Lending
Designated Activity Company ("Tallis"), Lambeth Lending Designated
Activity Company ("Lambeth"), and Queenhithe Lending Designated
Activity Company ("Queenhithe"). The Company, Basinghall, Tallis,
Lambeth and Queenhithe are collectively referred to in this report
as the "Group".
Capital Management
In June 2016, the Company entered into a structured finance
transaction with the European Investment Bank (the "EIB
transaction"). The transaction involved the Company participating
in the financing of an Irish domiciled special purpose vehicle
("EIB SPV"). The Company invested GBP25 million into the junior
Class B Note issued by the EIB SPV whilst the European Investment
Bank ("EIB") committed GBP100 million in a senior loan to the EIB
SPV.
In January 2018, the Company entered into a transaction with
Citibank London ("Citibank") to establish Lambeth to make loans to
UK small businesses through the Funding Circle platform. Under the
terms of the agreement, Citibank provided GBP50 million into the
transaction, by entering into a senior floating rate loan. The
Group contributed a portfolio of existing UK small business loans
with a value of GBP53,472,022.
In July 2018, the Citibank transaction was amended whereby the
senior loan from Citibank was increased to GBP66 million with a
corresponding net increase to the Group's lending to Lambeth. As a
result, Basinghall has increased its investments into Lambeth to
keep the proportional exposure between Citibank and Basinghall. The
additional investment by Basinghall to Lambeth was settled by
transferring a portfolio of loans during the year.
In August 2018, the Group entered into a transaction to provide
lending to a special purpose vehicle, Queenhithe Lending Designated
Activity Company ("Queenhithe") to make loans to UK small
businesses. The Group provided initial funding of approximately
GBP9.2 million through subscription into a Class B note issued by
Queenhithe. In November 2018, the transaction was updated whereby
the Department for Business, Energy and Industrial Strategy
("BEIS") - the British Business Bank's ("BBB") sole shareholder -
agreed to provide up to GBP150 million of funding via a senior
floating rate loan to Queenhithe. It was originally expected that
the senior loan facility would be drawn down over a period of up to
18 months, after which there would be a reinvestment period of a
further 18 months before the facility began to amortise monthly,
with principal repayment in relation to the Group's investment
sequential to the senior loan. The facility came with a 12-year
legal maturity. Following the result of the extraordinary general
meeting ("EGM") as described below, the Group ceased further
investment into Queenhithe and no further drawdown on the facility
have been made.
As at 31 March 2019 the total number of shares in issue was
323,044,293 (excluding 11,239,500 shares held in treasury).
The Company issued scrip dividends during the year with a value
of GBP1,667,415, involving the issuance of 1,609,898 shares (2018:
GBP2,009,470 and 1,953,598 shares) as a result of its scrip
dividend programme as described in note 14. The scrip dividend
programme has been discontinued by the Company as at 31 March
2019.
In December 2018, the Company commenced a programme of
repurchases of its shares in the secondary market. As at 31 March
2019, the Company has purchased a total of 11,239,500 shares which
have been and remain held in treasury.
On 21 May 2019, the Company published a circular and notice of
an extraordinary general meeting ("EGM") which set out details of,
and sought shareholder approval for, certain Proposals. The
Proposals involved modifying the Company's Investment Objective and
Policy to reflect a realisation strategy, for the detailed reasons
set out in that circular, and amending its Articles to include a
mechanism to enable the Company to redeem shares in the Company
compulsorily so as to return cash to shareholders.
On 11 June 2019, the Proposals were approved at the EGM as
discussed in detail in the Strategic Report below.
CHAIRMAN'S STATEMENT
Dear Shareholder,
When I wrote to you in December 2018 in respect of the financial
period ended 30 September 2018, I noted that the Company had faced
some significant challenges in meeting its performance targets in
Q3 of that year, and that performance had continued to be
negatively impacted in Q4. That performance weakness was noted as
having derived from three factors; credit stress in the higher risk
segments of some historic UK loan cohorts, adverse interest rate
differential effects arising from the costs of hedging the US
portfolio's currency exposure back to British pounds, and higher
than forecasted costs from IFRS 9 modelling and the professional
and administrative costs of maintaining the Company's financing
structures. These three factors gave rise to a NAV total return
performance in H2/2018 of -0.2%, and a full year 2018 performance
of just +0.7%. 2019 performance through 30 June, being the latest
date for which net asset value per share has been calculated,
showed a NAV total return of +1.6% which, when stripping out the
positive effects of the Company's share buyback programme, is
equivalent to a performance return of +0.8%, below the guidance
provided to shareholders in December 2018.
Performance Review
An analysis of the performance of the Company for the period to
31 March 2019 is set out below:
Return Attribution - 6 months to 31
March 2019
Gross Income 6.08%
------- --------
Impairment & FV Adj. (IFRS
9 basis) -5.54%
------- --------
Servicing Fees -0.53% 0.00%
------- --------
Operating Expenses -0.66%
------- --------
FX Hedging Costs -0.16%
------- --------
Loan Interest Expense -0.28%
------- --------
Share Buybacks 0.34% -0.77%
------- --------
Net NAV Return -0.78%
------- --------
Performance is inevitably coloured by the commencement of share
buybacks, but in summary exhibits very limited differences from
those on which I reported in December 2018 in respect of the period
to 30 September 2018. In particular, delinquencies in the historic
UK cohorts have continued to drag on performance. The board
continues to anticipate that, based on Funding Circle's guidance,
returns for the UK portfolio will improve over time as the stressed
cohorts are repaid. Both the US and Continental European portfolios
performed broadly in line with the board's expectations during the
period. The Company is also likely to benefit from an unwinding of
the IFRS 9 provision on performing loans, as the book amortises
(see below).
Response to Performance Weakness
In my previous statement, I outlined to you a number of steps
that the board, in conjunction with Funding Circle, intended to
take to improve the performance of the Company, including
rebalancing the geographical mix away from USD-denominated assets
and towards Euro-denominated assets, and implementing a share
buyback programme to reduce the discount at which the Company's
shares were trading in the market. I did also note, however, that
these steps were likely to take some time to generate meaningfully
improved performance, and I also noted that there were risks to the
downside from the uncertainty faced by UK-based businesses arising
from the continuing delay in the finalisation of the form that the
UK's exit from the EU will ultimately take.
Subsequent to the publication of the Company's interim financial
statements in December 2018, I had the opportunity, alongside the
team at Funding Circle, to speak to a number of the Company's
investors, both institutional and private. Those interactions were
extremely helpful in understanding concerns and aspirations that
investors had for their holdings in the Company, and it became
clear that there was limited appetite in allowing the Company's
performance improvement steps to take effect, given the likely time
period involved and the continuing risk to the performance of the
portfolio from geopolitical factors. Consequently, the Company
published an announcement on 5 April 2019 to the effect that it
would shortly make certain Proposals to shareholders which, if
passed, would result in the Company ceasing new investment,
entering a managed wind-down to return capital to shareholders
before ultimately being liquidated. A circular to all shareholders
was published on 21 May 2019 setting out these matters, with the
consequential meeting of shareholders being convened for 11 June
2019. At that meeting, the Proposals were overwhelmingly approved,
and thus post year end, the Company has entered a managed
wind-down.
Implementation of Shareholder Resolutions
In the circular to shareholders, I explained how the managed
wind-down would work if shareholders voted to approve it. I have
nothing further to add to what was said in that circular in that
respect, and investors wishing to refresh their memories should
re-examine the circular which appears in the Investor Relations
section of the Company's website at
https://www.smecreditrealisation.com/documents/investor-relations.
Since the passing of the shareholder resolutions, the share buyback
programme has been reinstituted to seek to provide a degree of
market liquidity for investors wishing to sell their shares
alongside generating accretion to net asset value arising from
purchasing of shares at a discount to that metric. The board
intends to continue to purchase shares in the market on an ongoing
basis for these purposes.
In addition, the Company has engaged with Funding Circle and its
other professional advisors to consider how best to return capital
to shareholders as the Company's portfolio of loans is repaid.
Investors will note that in the Company's latest factsheet, the
portfolio maturity analysis indicates that only 25% of the
portfolio is due to fully mature by the end of 2021, with the
balance continuing to mature progressively until H1/2024. It makes
sense, therefore, for the Company to examine whether it is possible
to sell all or part of its portfolio to third parties in order to
return capital at earlier dates. The necessary planning and data
preparation process is already under way, and it is expected that
price discovery will commence formally later this year. Any
decision to move forward with portfolio sales will be governed by a
strict and objective analysis of the value of any offer that the
Company may receive by reference to the value that the Company, and
thus shareholders, would otherwise derive
from allowing the relevant credit assets held by the Company to
amortise naturally over time, taking account of the risks and
uncertainties that inevitably arise from an extended run-off
period. The Company will report meaningful progress with this
initiative as appropriate in due course. To the extent that the
Company does not generate cash by way of portfolio sales, surplus
liquidity arising from the repayment of the Company's credit assets
will be paid to shareholders by way of a compulsory redemption of
shares at the then prevailing net asset value per share as
published by the Company from time to time. Investors should note
that the Company has resolved, with immediate effect, to move to
quarterly publication of net asset values, and thus the next net
asset value to be reported to shareholders will be that for the
period to 30 September 2019.
Conclusion
The process to give effect to the Company's revised strategy of
returning capital is now well under way. Please take a moment to
read the strategic report in these audited consolidated financial
statements for more background as to the consequences and risks of
the capital return programme. Investor interaction has been very
helpful in shaping the direction of travel for the Company as it
has faced performance challenges and will continue to provide
valuable calibration to the board as the programme continues.
Investors are reminded that they can email the Chairman directly at
Richard.Boleat@smecreditrealisation.com. It has been an intensive
period of work for the board, its advisors and the Funding Circle
team and I thank them for their tireless hard work and
guidance.
RICHARD BOLÉAT
Chairman of the Board of Directors
23 July 2019
STRATEGIC REPORT
Strategy and Business Model
The Group was established to provide shareholders with a
sustainable and attractive level of dividend income, primarily by
way of investment in Credit Assets originated both directly through
the platform operated by Funding Circle and indirectly, in each
case as detailed in the Company's original investment policy. The
Group identified the Funding Circle platform as a leader in the
growing direct lending space to SMEs with its established
infrastructure, scale of origination volumes and expertise in
accurately assessing loan applications.
On 5 April 2019, the Company announced that, following
consultation with shareholders accounting for over two thirds of
the share register, the Board acknowledged their preference to
cease investment in new Credit Assets and commence a process to
return capital in an orderly and expeditious manner with the
objective of optimising returns to shareholders.
On 21 May 2019, the Company published a circular and notice of
extraordinary general meeting ("EGM") which sets out details of,
and sought shareholder approval for, certain Proposals. The
Proposals involved modifying the Company's Investment Objective and
Policy to reflect a realisation strategy and amending its Articles
of Incorporation (the "Articles") to include a mechanism to enable
the Company to redeem shares in the Company compulsorily so as to
return cash to shareholders.
The Proposals also included the appointment of Funding Circle
Global Partners Limited ("FCGPL") to facilitate potential portfolio
sales on behalf of the Company and the change of the name of the
Company into SME Credit Realisation Fund Limited ("SCRF")
consistent to the proposed modification of the Company's Investment
Objective and Policy.
On 11 June 2019, these Proposals were approved at the EGM that
enabled the Directors to facilitate a managed wind-down of the
Company in a prudent manner consistent with the principles of good
investment management as required by the Listing Rules.
Prior to the EGM, the Company had been purchasing its own shares
in the secondary market. The Company announced on 19 June 2019
that, in light of the weakness in the Company's share price, the
Board reserved the right to recommence share repurchases in the
secondary market to the extent that liquidity is available to do
so, and has conducted certain share repurchases since that
time.
Investment Objective and Policy
In order to implement the managed wind-down, it was necessary to
amend the Company's Investment Objective and Policy to reflect the
objective of realising the Company's portfolio.
The Investment Objective and Policy applicable prior to the
approval of the Proposals was set out in the prior year Annual
Report and also appended to the circular published on 21 May 2019.
The revised Investment Objective and Policy is set out below.
"The Company will be managed with the intention of realising all
remaining assets in the portfolio in a prudent manner which
achieves a balance between maximising the value from the
realisation of the Company's investments and making timely returns
of capital to shareholders."
The managed wind-down will be affected with a view to the
Company realising all of its investments in accordance with the
Investment Objective. Such realisations will comprise natural
amortisation of the Company's investments in Credit Assets as well
as potentially opportunistic portfolio sales.
The Company will not allocate new capital to Credit Assets,
directly or indirectly via Leveraged Transactions or SPVs, or
undertake capital expenditure except where necessary in the
reasonable opinion of the Board in order to protect or enhance the
value of any existing investments or to facilitate orderly
disposals.
Any cash received by the Company as part of the realisation
process prior to its distribution to shareholders will be held by
the Company as cash on deposit and/or as cash equivalents.
The following analyses of the Group's investments in Credit
Assets are provided as reference.
As at 31 March 2019, the Company held indirect investments in
loans through the following investing companies:
Investing Company Jurisdiction of Loans
------------------ -------------------------
Basinghall United Kingdom
Tallis Germany, the Netherlands
and Spain*
EIB SPV United Kingdom
Lambeth United Kingdom
Queenhithe United Kingdom
------------------ -------------------------
*From January 2017, Tallis discontinued further lending to
Spain. The Company retains a small portfolio of loans in Spain.
Investment Objective and Policy
Loans by geographical region
UK Investment % US Investment % CE Investment %
South East 26 Other 37 Germany 56
--- -------------- --- ---------------- ---
London 16 California 18 The Netherlands 44
--- -------------- --- ---------------- ---
Midlands 13 Texas 10 Spain 0
--- -------------- --- ---------------- ---
North West 11 Florida 9
--- -------------- --- ---------------- ---
North East 9 Illinois 6
--- -------------- --- ---------------- ---
South West 9 New York 6
--- -------------- --- ---------------- ---
Scotland 6 Michigan 4
--- -------------- --- ---------------- ---
Wales 4 Georgia 4
--- -------------- --- ---------------- ---
East Anglia 4 Virginia 3
--- -------------- --- ---------------- ---
Norther Ireland 2 Ohio 3
--- -------------- --- ---------------- ---
Basinghall, Tallis, Lambeth, Queenhithe and the EIB SPV were
formed solely in connection with the implementation of the previous
investment policy of the Company.
Industry split
UK Investment % US Investment % CE Investment %
Wholesale and retail
Property and construction 18 Retail Trade 17 trade 35
--- ------------------------ --- ------------------------- ---
Professional,
Scientific and Professional, Scientific
Wholesale and retail 18 Technical Services 17 and Technical Services 13
--- ------------------------ --- ------------------------- ---
Professional and Healthcare and
business support 11 Social Assistance 11 Construction 10
--- ------------------------ --- ------------------------- ---
Manufacturing and
engineering 11 Construction 10 Manufacturing 8
--- ------------------------ --- ------------------------- ---
Accommodation Administrative
IT and Telecommunications 9 and Food Services 10 and Support Activities 6
--- ------------------------ --- ------------------------- ---
Other Services
(except Public Accommodation and
Leisure and Hospitality 7 Administration) 9 Food Services 5
--- ------------------------ --- ------------------------- ---
Administrative Transporting and
Healthcare 5 and Support Activities 7 Storage 5
--- ------------------------ --- ------------------------- ---
Information and
Transport and Logistics 4 Wholesale Trade 3 Communication 5
--- ------------------------ --- ------------------------- ---
Automotive 4 Arts and Entertainment 2 Other Service Activities 3
--- ------------------------ --- ------------------------- ---
Other 13 Other 14 Other 10
--- ------------------------ --- ------------------------- ---
Loans acquired by Basinghall, Tallis and the EIB SPV (subject to
the investment policy, any Portfolio Limits and Available Cash) are
funded, in whole or in part, by advances made by the Company under
the note programmes. The notes issued by Basinghall and Tallis to
the Company are listed on the Irish Stock Exchange. Loans acquired
by Lambeth and Queenhithe are funded in part by Basinghall.
The assets held by each of Basinghall, Tallis, Lambeth,
Queenhithe and the EIB SPV are ring-fenced from other entities or
special purpose vehicles and there is no cross-collateralisation
between special purpose vehicles in which the Company invests.
Borrowing Limitation
In pursuit of the original investment objective, the Company was
able to borrow or use leverage, and also guarantee the borrowings
of its Affiliates and Near Affiliates. The aggregate leverage or
borrowings of the Company, its Affiliates and any Near Affiliates
(including Basinghall, Tallis, Lambeth and/or Queenhithe) and
guarantees of such borrowing or leverage by such person(s), was not
permitted to exceed (at the time the relevant indebtedness is
incurred or guarantee given) 0.5 times the then current NAV. The
Company's leverage ratio, taking into account the EIB transaction
on a "look through" basis, was approximately 49% as at 31 March
2019 which is within the Board's approved leverage limit of
50%.
Following the approval of the resolution to execute a managed
wind-down of the Company in its EGM on 11 June 2019, the leverage
limit as described above no longer applies to the Company.
Principal Risk and Risk Management
There are a number of actual and potential risks and
uncertainties which could have a material impact on the Group's
Actual results which may differ materially from expected and
historical results, particularly given the implementation of the
managed wind-down.
The Board of Directors has overall responsibility for risk
management and internal control within the context of achieving the
Company's objectives. The Board agrees the strategy for the
Company, approves the Company's risk appetite and monitors the risk
profile of the Company. The Company also maintains a risk register
to identify, monitor and control risk concentration, which has been
updated to reflect the managed wind-down.
The Company has established a risk matrix, consisting of the key
risks and controls in place to mitigate those risks. The risk
matrix provides a basis for the Audit Committee and the Board to
regularly monitor the effective operation of the controls and to
update the matrix when new risks are identified. The Board's
responsibility for conducting a robust assessment of the principal
risks are embedded in the Company's risk matrix and stress testing
which helps position the Company to ensure compliance with The
Association of Investment Companies Code of Corporate Governance's
("the AIC Code") requirements.
The Board continues to monitor the Company's systems of risk
management and internal control and will continue to receive
updates from the Company's external service providers to ensure
that the principal risks and challenges faced by the Group are
fully understood and managed appropriately. The Board did not
identify any significant weaknesses during the year and up to the
date of this Annual Report.
An overview of the principal risks and uncertainties that the
Board considers to be currently faced by the Company are provided
below, together with the mitigating actions being taken. The
Directors have also linked the key performance indicators to the
risks where relevant. Risks arising from the Group's use of
financial instruments are set out in note 17 of the consolidated
financial statements.
Principal risk Mitigation and update of Company's financial
risk assessment KPI affected by risk
Default risk
Borrowers' ability to The impact of the uncertainties Total distributions
comply with their payment facing the UK and the EU to the shareholders.
obligations in respect as they continue negotiations
of loans may deteriorate over the United Kingdom's
due to adverse changes withdrawal from the European
in economic and political Union cannot be quantified.
factors. The Board has assessed
that this risk may have
Actual defaults may be been impacted but the magnitude
greater than indicated and direction of the change
by historical data and remains unclear at this
the timing of defaults stage.
may vary significantly
from historical observations. Economic uncertainties
or developments including
increases in interest rates
may also impact upon default
rates.
----------------------------------- --------------------------
Future wind-down risk
Below are the key risks
associated with the managed
wind-down of the Company,
beyond those inherent
in the holding of amortising
Credit Assets. Further
details are available
within the Circular published
on 21 May 2019: The board will actively Total distributions
monitor and control the to the shareholders.
The Company intends to preparation and price discovery
conduct price discovery process to seek to ensure
processes for the purpose that it is operationally
of determining whether and economically optimised.
it is in the interests
of the Company and shareholders
as a whole to dispose
of certain portions of
the Company's loan portfolios,
"en bloc". This process
inevitably entails material
costs in the establishment
and population of a data
room, including the preparation
of vendor DDQ materials, Total distributions
draft sale and purchase to the shareholders.
agreements and the like. The board will actively
To the extent that the seek to "right size" the
Company's price discovery Company's overhead base
process does not result as net asset value reduces,
in a consummated transaction through renegotiation with
or transactions, the costs counterparties.
of this process may be
written off.
Share price volatility
As the managed wind-down
proceeds, and capital
is returned to shareholders,
the Company's fixed and The board will actively
variable costs, some of seek to manage the use
which are not capable of various capital return
of material mitigation techniques so as to seek
due to the publicly listed to fairly balance the differing
status of the Company, outcomes of those techniques.
are likely to rise as
a proportion of the Company's
net asset value, prior
to dissolution of the Total distributions
Company. to the shareholders.
The Company presently
intends to deploy surplus
liquidity arising from
portfolio amortisation The board will seek to
and, potentially, portfolio maintain and enhance banking Share price volatility
sales, by way of capital counterparty relationships and total distributions
return to shareholders. to seek to retain access to shareholders.
This capital return may to institutional pricing.
take the form of dividends,
share buybacks and compulsory
redemptions of shares
or any combination of The board will seek to
these techniques. The communicate the effect
balance of techniques of these changes to shareholders
used may result in greater in detail, and will also
or lesser share price seek to minimise the costs
volatility and varied of adoption of the revised
tax treatments for investors. accounting methodology
through competitive tendering.
As the size of the Company's
non-UK portfolios decrease
through amortisation (in
the absence of portfolio
sales), the Company's
ability to deploy foreign
currency hedges at appropriate
cost may be impaired.
As the Company moves through
the wind-down process,
the board anticipates
that accounting standards
will require the Company
to prepare its accounts
on a basis other than
going concern in due course.
As the natural amortisation
of the Company's investments
in Credit Assets takes
place and potentially
opportunistic portfolio
sales are pursued, the
latter will have the effect
of requiring the adoption
of a fair value methodology
for the valuation
of Credit Assets. This
is likely to give rise
to certain accounting
adjustments which are
not reflective of the
underlying performance
of the Company, and will
also require the Company
to incur third party costs
to enable accurate measurement
of fair values.
----------------------------------- --------------------------
In addition to the principal risks considered above, the Board
also considers other key operational risks as part of its ongoing
risk monitoring process.
The Company has no employees and is reliant on the performance
of third party service providers
The Company's investment administration functions have been
outsourced to external service providers. Any failure by any
external service provider to carry out its obligations could have a
materially detrimental impact on the effective operation, reporting
and monitoring of the Company's financial position. This may have
an effect on the Company's ability to meet its investment objective
successfully. The Board receives and reviews reports from its
principal external service providers. The Board may request a
report on the operational effectiveness of controls in place at the
service providers. The results of the Board's review are reported
to the Audit Committee.
Cybersecurity breaches
The Company is reliant on the functionality of Funding Circle's
software and IT infrastructure to facilitate the process of
servicing the Company's remaining Credit Assets. The Company is
also reliant on the functionality of the IT infrastructure of its
other service providers. These systems may be prone to operational,
information security and related risks resulting from failures of,
or breaches in, cybersecurity.
Along with other holders of risk assets generally, the Group is
exposed to a range of macroeconomic, geopolitical and regulatory
factors which could, in certain circumstances either individually
or in combination have a negative effect on carrying values,
portfolio returns, delinquencies and operating costs. These factors
are kept under review by the Board and relevant Board committees as
appropriate.
Hedging
The Board's policy is to seek to fully hedge currency exposure
between Sterling and any other currency in which the Group's assets
are denominated. During the year, the Company entered into forward
foreign exchange contracts to minimise the risk of loss due to
fluctuation of the Sterling to US Dollar exchange rate and the
Sterling to Euro exchange rate in pursuance of this policy. There
were unavoidable costs incurred in the hedge related to the
interest rate differential between Sterling and US Dollars in the
Group's assets and liabilities ("negative carry").
Foreign currency hedging activity is carried out by a specialist
third party on behalf of the Company, in accordance with the
hedging policy that the Board maintains.
Financial Performance
The key transactions and events that had an impact on the
Group's performance are set out in the Directors' Report.
On 5 April 2019, the Company announced that following
consultation with shareholders accounting for over two thirds of
the register, the Board acknowledged their preference to cease
investment in new Credit Assets and commence a process to return
capital in an orderly and expeditious manner with the objective of
optimising returns to shareholders.
On 21 May 2019, the Company published a circular and notice of
EGM which set out details of, and sought shareholder approval for,
certain Proposals. The Proposals involved modifying the Company's
Investment Objective and Policy to reflect a realisation strategy
and amending its Articles to include a mechanism to enable the
Company to redeem shares in the Company compulsorily so as to
return cash to shareholders.
On 11 June 2019, the Proposals were approved at the EGM as
discussed in detail in this Strategic Report above.
The Board considered the following as the key performance
indicators of the Group's financial performance before the change
in the Company's Investment Objective and Policy:
-- Share price total return
-- NAV total return
-- Share price premium or discount to NAV
-- Capital deployed
-- Dividend per share
-- Credit losses
The Board notes that some or all of the key performance
indicators used in the past will no longer be relevant now that the
Company has started the process of the managed wind-down.
A review of the above key metrics utilised by the Board to
measure and monitor the performance of the Company are summarised
below for reference. As noted above, the key performance indicators
may be revised in future financial reporting in line with the
change in the Company's Investment Objective and Policy.
Total return and share price premium/(discount)
For the period from inception to 31 March 2019, the total return
on the ordinary share price was -0.3% and the NAV total return was
15.0%. The ordinary share was trading at a discount of 10% to NAV
per ordinary share as at 31 March 2019.
Capital deployed
As at 31 March 2019, the Company had deployed 93% of the issued
capital in direct and indirect loans to SMEs in the UK, US and
CE.
In accordance with the Company's investment policy, the Company
holds sufficient cash for working capital purposes.
In respect of the EIB transaction, the Group's indirect
investment in loans within the unconsolidated Irish domiciled SPV
has been included in the below asset allocation on a look through
basis, as if the loans were held directly by the Group.
Asset allocation
UK 64%
US 16%
----
CE 13%
----
Cash 7%
----
Dividend per share
The Board declared dividends during the year totalling 4.25
(2018: 6.50) pence per Ordinary share.
In June 2018, after careful review of the effects to the total
return of the material increase in hedging costs on the Company's
USD-denominated assets and the leverage employed, the Company
provided revised forward dividend guidance for the next 12 months,
being annual dividends of, in aggregate, 5 to 6 pence per Ordinary
share with effect from the quarter ended 30 September 2018 then
subsequently paid annualised dividends in line with this guidance
up to 31 December 2018.
In March 2019, the Company confirmed that there was no change in
dividend guidance and confirmed the intention to maintain a
dividend payment of 5.25 pence per share on an annualised basis in
respect of at least the period ended 31 March 2020, even if
partially uncovered.
As discussed above and note 14, the Company discontinued its
scrip dividend programme as at 31 March 2019.
In May 2019, the Company published a circular and notice of EGM
which set out details of, and sought shareholder approval for,
certain Proposals. Pursuant to the Proposals, the Company has the
power, under the New Articles, to make Compulsory Redemptions of
shares in volumes and on dates to be determined at the Directors'
sole discretion, with the amount distributed in respect of the
shares on each occasion representing the cash available for
distribution by the Company at the relevant time.
In addition to distributions made by way of the Compulsory
Redemption process, or by means otherwise determined appropriate by
the Directors, the Company currently intends to maintain quarterly
dividend payments of 5.25 pence per Ordinary Share on an annualised
basis in respect of at least the period ended 31 March 2020, which
may be partially uncovered by income. The Directors will continue
to periodically review the Company's dividend policy in response to
shareholder feedback and the progression of the managed
wind-down.
On 11 June 2019, the Proposals were approved at the EGM as
discussed in detail in this Strategic Report.
Credit losses
The Board carefully monitors the level of defaults arising
within the Group's portfolio. The credit loss provision as at 31
March 2019 was GBP36.6m (including the cumulative effect of IFRS 9
adoption of GBP6.6m) against outstanding principal and interest
amounts of the loan portfolio of GBP340.2m (31 March 2018:
provision of GBP8.4m against an outstanding principal and interest
amounts of the loan portfolio of GBP330.6m).
Implementation of IFRS 9
The Group formally adopted IFRS 9 from 1 April 2018. The
implementation of IFRS 9 led to a net decrease in the opening
retained earnings position of GBP2.3m and a net decrease in profit
for the year of GBP3.3m, as a result of required accounting
adjustments. A more detailed analysis of the effect of the adoption
of IFRS 9 is provided in note 2 to the consolidated financial
statements.
Viability Statement
Following the result of the EGM in June 2019, the Company's
Investment Objective and Policy were updated to facilitate the
managed wind-down of the Company. The Directors consider that a
period of three years is a reasonable timeframe for making an
assessment of the Company's viability taking into account the
process of achieving the managed wind-down.
In their assessment of the viability of the Company, the
Directors have considered each of the principal risks and
uncertainties listed above and in particular the risks associated
with the managed wind-down. The Board believes that the principal
risks, other than tail risks beyond its control, that may impact on
the Company's ability to continue as a viable business are:
-- Default risk; and
-- Asset devaluation.
The Directors have also considered the Company's income,
expenditure and cash flow projections and the fact that the
Company's investments held directly or through its subsidiaries do
not comprise readily realisable securities which can be sold to
meet funding requirements if necessary. The viability analysis
includes a review of higher level defaults, realisable values and
higher expenses. The Company maintains a risk register to identify,
monitor and control risk concentration. In addition, overall credit
and economic conditions are monitored to provide insight with
respect to potential warnings on adverse changes at a macroeconomic
level. In particular, the Directors highlight the uncertainties
facing the UK and the EU as they continue negotiations over the
United Kingdom's withdrawal from the European Union and the impact
these may have on defaults within the Group's existing loan
portfolio.
The Directors confirm that they have a reasonable expectation
that the Company will be able to continue in operation and pay its
liabilities as they fall due over the period of the managed
wind-down.
Employees, Social, Human Rights and Environmental Issues
The Company has no employees and the Board comprises five
non-executive Directors, all of whom, except Sachin Patel are
independent of Funding Circle. As an investment company, the
Company has no direct impact on the community and as a result does
not maintain specific policies in relation to these matters.
The Company operates by outsourcing significant parts of its
operations to reputable professional companies, who are required to
comply with all relevant laws and regulations and take account of
social, environmental, ethical and human rights factors, where
appropriate.
The Company has no greenhouse gas emissions to report from its
operations, nor does it have responsibility for any other
emissions-producing sources, including those within its underlying
investment portfolio.
In carrying out its investment activities and in relationships
with suppliers, the Company aims to conduct itself responsibly,
ethically and fairly.
Diversity and Inclusion
The Board of Directors of the Company comprises five male
directors.
The Remuneration and Nominations Committee and the Board are
committed to diversity at Board level and is supportive of
increased gender and ethnic diversity but recognises that it may
not always be in the best interest of shareholders to prioritise
this above other factors. The Remuneration and Nominations
Committee regularly reviews the structure, size and composition
required of the Board, taking into account the challenges and
opportunities facing the Company. In considering future candidates,
appointments will be made on merit, including taking account of the
specific skills, experience, independence, and knowledge needed to
ensure a rounded Board and the diversity benefits each candidate
can bring to the overall Board composition. The commencement of the
managed wind-down is inevitably limiting in the Board's ability to
implement enhanced diversity and inclusion strategies, given the
limited future life of the Company.
DIRECTORS' REPORT
The Directors present their annual report and audited
consolidated financial statements for the year ended 31 March 2019.
In the opinion of the Directors, the annual report and audited
consolidated financial statements are fair, balanced and
understandable and provide the information necessary for
Shareholders to assess the Company's performance, business model
and strategy.
Incorporation
The Company is a limited liability company registered in
Guernsey under The Companies (Guernsey) Law, 2008 (as amended) with
registered number 60680.
Activities
The Company is registered as a closed-ended collective
investment scheme in Guernsey pursuant to The Protection of
Investors (Bailiwick of Guernsey) Law, 1987, as amended. Prior to
the amendment of the Company's Investment Objective and Policy, the
primary activity of the Company was investment in loans to small
and medium sized enterprises in the United Kingdom, the United
States and Continental Europe, in order to seek to provide
shareholders with a sustainable and attractive level of dividend
income. Following the result of the EGM on 11 June 2019, the
Company has ceased investment into Credit Assets as the Company's
Investment Objective and Policy were updated to facilitate the
managed wind-down of the Company.
Results and dividends
The total comprehensive loss for the year, determined under
International Financial Reporting Standards ("IFRS"), amounted to
GBP0.59 million (2018: comprehensive income of GBP17.24 million).
The payment of any dividend by the Company is subject to the
satisfaction of a solvency test as required by The Companies
(Guernsey) Law, 2008 (as amended). Following the result of the EGM,
the Directors expect to maintain quarterly dividend payments of
5.25 pence per Ordinary Share on an annualised basis in respect of
at least the period ended 31 March 2020, which may be partially
uncovered by income. Dividends declared during the year are
disclosed in note 14.
Business review
The Group formally adopted IFRS 9 from 1 April 2018. The
implementation of IFRS 9 led to a net decrease in the opening
retained earnings position of GBP2.3m and a net decrease in profit
for the year of GBP3.3m.
The Citibank transaction was amended and restated in July 2018
whereby the Senior Loan from Citibank was increased to GBP66
million with a corresponding net increase to the Group's lending of
GBP17m.
In August 2018, the Group entered into a transaction to provide
lending to a special purpose vehicle, Queenhithe, to make loans to
UK small businesses. The Group provided initial funding of
approximately GBP9.2 million through subscription into a Class B
note issued by Queenhithe. In November 2018, the transaction was
updated whereby the Department for Business, Energy and Industrial
Strategy ("BEIS") - the British Business Bank's ("BBB") sole
shareholder - agreed to provide up to GBP150 million of funding via
a senior floating rate loan to Queenhithe.
In December 2018, the Company commenced repurchases of the
Company's shares in the secondary market. As at 31 March 2019, the
Company had purchased a total of 11,239,500 shares which have been
held in treasury.
On 21 May 2019, the Company published a circular and notice of
EGM which sets out details of, and sought shareholder approval for,
certain Proposals. The Proposals involved modifying the Company's
Investment Objective and Policy to reflect a realisation strategy
and amending its Articles to include a mechanism to enable the
Company to redeem shares in the Company compulsorily so as to
return cash to shareholders.
On 11 June 2019, the Proposals were approved at the EGM as
discussed in detail in the Strategic Report.
The Strategic Report includes further information about the
Company's principal activities, financial performance during the
year and indications of likely future developments.
Going concern
The Directors have considered the financial performance of the
Group and the impact of the market conditions at the financial year
end date and subsequently.
Whilst the managed wind-down of the Company was approved at the
EGM, there is no definite and final plan in place for the timing of
liquidation of the Company's assets and the process of returning
capital to shareholders. As a result, the Directors continue to
present the consolidated financial statements on a going concern
basis.
The Directors expect that the Company will have to revisit the
basis of preparation, classification and measurement of its assets
and liabilities in line with the revised Investment Objective and
Policy in due course, as discussed in the Strategic Report.
Alternative Investment Fund Managers Directive ("AIFMD")
The AIFMD requires Alternative Investment Fund Managers ("AIFM")
to comply with certain disclosure, reporting and transparency
obligations for Alternative Investment Funds ("AIF") that it
markets in the EU. The Company is a self-managed AlF for the
purpose of the AIFMD and therefore has to comply with the
disclosure requirements of the AIFMD.
The Company regularly publishes updates on the website in the
form of factsheets. These, along with the regular announcements
made through the Regulatory News Service ("RNS"), cover the
disclosures required by AIFMD. The Directors highlight the changes
to the Company's Investment Objective and Policy as noted
above.
The Directors consider that any change in respect of which a
reasonable investor, becoming aware of such information, would
reconsider its investment in the Company, including because the
information could impact on the investor's ability to exercise its
rights in relation to its investment, or otherwise prejudice that
investor's (or any other investor's) interest in the Company should
be considered material. In setting this threshold, the Directors
have had regard to the current risk profile of the Company which
outlines the relevant measures to assess the Company's exposure or
potential exposure to those risks, as well as with due regard to
the Company's investment restrictions set out in the Company's
Prospectus. As required by the Listing Rules, any material change
to the investment policy of the Company will be made only with the
approval of the shareholders and as such, shareholders' approval
was sought at the EGM on 11 June 2019 to implement the modification
of the Company's Investment Objective and Policy as noted in the
Strategic Report.
The AIFMD also requires the Company to disclose the remuneration
of its investment manager (if any) providing analysis between fixed
and variable fees along with the information of how much of such
remuneration was paid to senior management at the investment
manager and how much was paid to members of staff. As a
self-managed AIF, the Company has no investment manager and thus
has no information to report.
United States of America Foreign Account Tax Compliance Act
("FATCA")
Guernsey has entered into an Intergovernmental Agreement ("IGA")
with the US Treasury in order to comply with FATCA and has also
entered into an IGA with the UK in order to comply with the UK's
requirements for enhanced reporting of tax information in
accordance with FATCA principles. Under such IGAs, the Company is
regarded as a Foreign Financial Institution ("FFI") resident in
Guernsey. The Board continues to monitor developments in the rules
and regulations arising from the implementation of FATCA in
conjunction with its tax advisors.
Common Reporting Standard ("CRS")
On 13 February 2014, the Organisation for Economic Co-operation
and Development released the Common Reporting Standard ("CRS")
designed to create a global standard for the automatic exchange of
financial account information, similar to the information to be
reported under FATCA. On 29 October 2014, 51 jurisdictions signed
the multilateral competent authority agreement ("Multilateral
Agreement") that activates this automatic exchange of FATCA-like
information in line with the CRS.
Pursuant to the Multilateral Agreement, certain disclosure
requirements may be imposed in respect of certain investors in the
Company who are, or are entities that are controlled by one or
more, residents of any of the signatory jurisdictions. It is
expected that, where applicable, information that would need to be
disclosed will include certain information about investors, their
ultimate beneficial owners and/or controllers, and their investment
in and returns from the Company and its subsidiaries.
Guernsey, along with 60 other jurisdictions, including some EU
Member States, has adopted the CRS with effect from 1 January 2016,
with the first reporting completed in 2017. The Group continues to
comply with the requirements of CRS.
Directors
The Directors who held office during the financial year end and
up to the date of approval of this report were:
Date of appointment
-------------------- --------------------
Frederic Hervouet 12 August
2015
Jonathan Bridel 19 August
2015
Richard Boléat 19 August
2015
Richard Burwood 12 August
2015
Sachin Patel 18 May 2017
Phillip Hyett, who is Head of Funds at Funding Circle, acts as
Alternate Director for Sachin Patel.
Directors' shares and interests
A list of all Directors who served during the year and up to the
date of this report and their biographies are included below.
The appointment and replacement of Directors is governed by the
Company's Articles of Incorporation, The Companies (Guernsey) Law
2008 (as amended) and related legislation. The Articles of
Incorporation themselves may be amended by special resolution of
the Shareholders.
As at 31 March 2019, the Directors held the following Ordinary
shares of the Company:
Number of shares
2019 2018
--------------------- ----------------- ----------------
Frederic Hervouet 107,000 107,000
Jonathan Bridel 5,000 5,000
Richard Boléat 5,000 5,000
Richard Burwood 5,000 5,000
Sachin Patel - -
122,000 122,000
--------------------- ----------------- ----------------
During the year, no Director had a material interest in a
contract to which the Company was a party (other than his own
letter of appointment). Mr. Patel is an employee of Funding Circle
Limited.
Substantial shareholdings
As at 31 March 2019, the Company had been informed of the
following notifiable interests of 5% or more in the Company's
voting rights in accordance with Disclosure and Transparency Rule
5.1.2:
Shareholder Number of Ordinary Percentage
shares holding
----------------------------------- ------------------- -----------
Invesco Limited 88,560,992 27.28
Railways Pension Trustee Company
Limited 82,505,754 25.41
BlackRock Investment Management
(UK) Limited 58,283,105 17.95
SG Kleinwort Hambros Bank Limited 17,995,534 5.54
Significant agreements
The Company is not party to any significant agreements which
take effect after or terminate upon a change of control of the
Company, nor has the Company entered into any agreements with its
Directors to provide for compensation for loss of office as a
result of a takeover bid.
Acquisition of Company's own shares
As noted above, the Company commenced repurchases of the
Company's shares in the secondary market in December 2018. As at 31
March 2019, the Company had purchased a total of 11,239,500 shares
which have been held in treasury.
Information to be disclosed in accordance with UK Listing Rule
9.8.4
A statement of the amount of interest The Company has not capitalised
capitalised by the Company during any interest in the year under
the period under review with an review.
indication of the amount and treatment
of any related tax relief.
Any information required in relation Not applicable.
to the publication of unaudited
financial information.
------------------------------------------
Details of any long-term incentive Not applicable.
schemes.
------------------------------------------
Details of any arrangements under Sachin Patel has waived his remuneration.
which a director of the Company
has waived or agreed to waive
any emoluments from the Company.
------------------------------------------
Details of any pre-emptive issues Not applicable.
of equity not for cash.
------------------------------------------
Details of any non-pre-emptive Not applicable.
issues of equity for cash by any
unlisted major subsidiary undertaking.
------------------------------------------
Details of parent participation Not applicable.
in a placing by a listed subsidiary.
------------------------------------------
Details of any contract of significance Richard Burwood is a Director
in which a director is or was of Basinghall, Tallis and Queenhithe.
materially interested.
Sachin Patel is an employee of
Funding Circle Limited.
Phillip Hyett (Alternate Director
and Director of Lambeth Lending
DAC and the EIB SPV) is an employee
of Funding Circle Limited.
Sachin Patel is a Director of
FCGPL.
------------------------------------------
Details of any contract of significance Not applicable.
between the Company (or one of
its subsidiaries) and a controlling
shareholder.
------------------------------------------
Details of waiver of dividends Not applicable.
by a shareholder.
------------------------------------------
Board statement in respect of Not applicable.
relationship agreement with the
controlling shareholder.
------------------------------------------
Disclosure of information to the Auditor
The Directors who held office at the date of approval of this
Directors' Report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company's
Auditor is unaware and each Director has taken all the steps that
he ought to have taken as a Director to make himself aware of any
relevant audit information and to establish that the Company's
Auditor is aware of that information.
Auditor
PricewaterhouseCoopers CI LLP ("PwC") served as auditor during
the financial year and has expressed its willingness to continue in
office. A resolution to re-appoint PwC as auditor was approved in
the Annual General Meeting.
The maintenance and integrity of the Group and Company's website
is the responsibility of the Directors. The work carried out by the
independent auditor does not involve consideration of these matters
and accordingly, the auditor accepts no responsibility for any
changes that may have occurred to the consolidated financial
statements since they were initially presented on the website.
Legislation in Guernsey governing the preparation and dissemination
of financial statements may differ from legislation in other
jurisdictions.
Company Secretary
The Company Secretary is Sanne Group (Guernsey) Limited of Third
Floor, La Plaiderie Chambers, La Plaiderie, St Peter Port, Guernsey
GY1 1WG, Channel Islands until 1 April 2019 on which date the
registered office of the Company Secretary changed to De Catapan
House, Grange Road, St Peter Port, Guernsey GY1 2QG.
By order of the Board
Authorised Signatory
Sanne Group (Guernsey) Limited, Company Secretary
CORPORATE GOVERNANCE REPORT
The Company became a member of the Association of Investment
Companies ("AIC") in November 2015 and has applied the AIC Code
from that date.
The Financial Reporting Council ("FRC"), the UK's independent
regulator for corporate reporting and governance responsible for
the Corporate Governance Code, has endorsed the AIC Code meaning
that companies who report in accordance with the AIC Code fully
meet their obligations under the UK Corporate Governance Code (the
"Code") and the related disclosure requirements contained in the
Listing Rules.
Statement of how the principles of the AIC Code are applied
Throughout the financial year ended 31 March 2019 the Company
has been in compliance with the relevant provisions set out in the
AIC Code and the relevant provisions of the Code. The Code includes
provisions relating to: the roles of the chief executive, executive
directors' remuneration; and the need for an internal audit
function, each of which is not considered by the Board to be
relevant to the Company. The Company has therefore not reported
further in respect of these provisions.
Board of Directors
The Board is comprised of five Directors, all of whom are
non-executive. All the Directors are independent except for Sachin
Patel who is an employee of Funding Circle Limited. Richard Boléat
is the Chairman of the Board and Jonathan Bridel is the Senior
Independent Director. The Company did not use an external search
consultancy nor any open advertising in the selection of the
Chairman and the non-executive Directors. The Company was satisfied
that the formal selection process from a pool of candidates with
the relevant expertise and skills was appropriate for the needs of
the Company. Biographies of the Directors are shown below and
demonstrate the range and depth of skills and experience each
brings to the Board.
The Directors ensure that, at all times, the Board is composed
of members who, as a whole, have the required knowledge, abilities
and expert experience to properly complete their tasks and are
sufficiently independent. A Board member is considered independent
if he has no business or personal relations which cause a conflict
of interest with those of the Company. Every member of the Board
ensures that he has sufficient time to perform his mandate. The
Board considers the skills, competence and independence of
candidates in the context of the overall board composition. The
Board has put in place appropriate insurance cover in respect of
any legal action against the Directors.
The Company does not have a policy on length of service of
Directors. The Board has not stipulated a maximum term of any
directorship.
Copies of the letters of appointment are available on request
from the Company Secretary.
Independence of Directors
In accordance with the AIC Code, the Board has reviewed the
independence of the individual directors and the Board as a whole.
Each of the Directors except Sachin Patel is considered
independent.
Board evaluation
A formal Board evaluation process has been put in place in line
with the Board's policy to monitor and improve performance of the
Directors. The Board carries out a formal evaluation process on an
annual basis. The Directors complete self-assessment forms which
are reviewed and discussed with the Chairman. The Senior
Independent Director performs an annual review of the Chairman's
performance. The Directors carry out an annual review of the Board
as a whole discussing its composition, size and structure and
ensuring that there is a good balance of skills and experience. The
answers to these questionnaires will be discussed by the
Remuneration and Nominations Committee.
The Board shall offer induction training to new Directors about
the Company, its key service providers, the Directors' duties and
obligations and other matters as may be relevant from time to time.
A regular review will be undertaken by the Board to ensure that the
Directors' ongoing training and development needs are met.
Election/Re-election of Directors
It is the Company's policy that at each Annual General Meeting
of the Company all Directors shall retire from office, but, subject
to the Articles, shall be eligible for re-appointment.
Committees of the Board
Audit, Risk, Management Engagement and Remuneration and
Nominations Committees have been established by the Board and each
Committee has formally delegated duties, responsibilities and terms
of reference, which are available from the Company Secretary upon
request.
An outline of the responsibilities of each of the Committees is
set out below.
Audit Committee
The Board has established the Audit Committee comprising of all
the Directors except for Sachin Patel and is chaired by Jonathan
Bridel. The Audit Committee meets at least three times a year and
is responsible for ensuring, inter alia, that the financial
performance of the Company is properly reported on and monitored
and provides a forum through which the Company's external auditor
may report to the Board. The Audit Committee reviews and recommends
to the Board the adoption and approval of the annual and half
yearly consolidated financial statements, results, internal control
systems and procedures and accounting policies of the Company.
Risk Committee
The Company has established a risk committee, which comprises of
all of the Directors, with Frederic Hervouet as chairman. The risk
committee meets approximately four times a year or more often if
required. The risk committee takes responsibility for the risk
management policies of the Company's operations and oversight of
the operation of the Company's risk management framework as well as
completing all risk reporting for regulatory purposes.
Management Engagement Committee
The Company has established a Management Engagement Committee
which is chaired by Richard Burwood and comprises of all the
Directors except for Sachin Patel. The Management Engagement
Committee meets at least once a year or more often if required. The
principal duties of the Committee are to review the actions and
judgments of Funding Circle UK, Funding Circle US and Funding
Circle CE and also the terms of agreements appointing each of them.
The Committee is also responsible for monitoring the compliance of
other service providers with the terms of their respective
agreements.
Remuneration and Nominations Committee
The Company has established a Remuneration and Nominations
Committee which is chaired by Richard Boléat and comprises all of
the Directors. The Directors believe that the appointment of the
chairman of the Remuneration and Nominations Committee does not
affect his independence.
The Remuneration and Nominations Committee meets at least once a
year or more often if required. The duties of the Committee
include:
-- determining and agreeing with the Board the framework or
broad policy for the remuneration of the Company's Chairman and
non-executive Directors pursuant to the Company's Articles of
Incorporation;
-- reviewing the structure, size and composition (including the
skills, knowledge and experience) required of the Board compared to
its current position and make recommendations to the Board with
regard to any changes necessary; and
-- giving full consideration to succession planning of
Directors, taking into account the challenges and opportunities
facing the Company.
Meetings and attendance
There were 10 Board meetings held during the financial year
ended 31 March 2019. The attendance record of each of the Directors
was as follows:
Number of attendances
during the year
--------------------- ----------------------
Frederic Hervouet 10
Jonathan Bridel 10
Richard Boléat 10
Richard Burwood 10
Sachin Patel 8
----------------------- ----------------------
There were 4 Risk Committee meetings, 5 Audit Committee
meetings, 2 Management Engagement meetings and 2 Remuneration and
Nominations Committee meetings held during the financial year ended
31 March 2019. Phillip Hyett attended 2 Board meetings as alternate
to Sachin Patel during the year.
The attendance record of each of the Committee members was as
follows:
Number of attendances during the year
Management Remuneration
Engagement and Nominations
Audit Committee Risk Committee Committee Committee
--------------------- ---------------- --------------- ------------ -----------------
Frederic Hervouet 5 4 2 2
Jonathan Bridel 5 4 2 2
Richard Boléat 5 4 2 2
Richard Burwood 5 4 2 2
Sachin Patel N/A 4 N/A 2
--------------------- ---------------- --------------- ------------ -----------------
Board Observers
Funding Circle UK has the right (pursuant to the Services
Agreement) to nominate up to two observers to attend meetings of
the Board. Those nominees may (other than in limited circumstances)
attend each such meeting as observers, but do not have any rights
to participate in the conduct of the business of the Company or to
vote on any matter.
The Board may require that those nominees not attend the part of
any Board meeting which considers (i) the termination of any
agreement to which Funding Circle is party, or (ii) any dispute or
litigation between Funding Circle and the Company.
Company Secretary
The Board appointed Sanne Group (Guernsey) Limited to act as
Company Secretary on 22 July 2015. The principal duties of the
Company Secretary are to monitor compliance with the established
corporate governance framework, report to the Board and to arrange
and host Board and Committee meetings.
Internal Control Review
The Board is responsible for ensuring the maintenance of a
robust system of internal control and risk management and for
reviewing the effectiveness of the Company's overall internal
control arrangements and processes following recommendations from
the Audit Committee.
The Directors may delegate certain functions to other parties
such as Funding Circle UK, Funding Circle US, Funding Circle CE,
FCGPL, the Administrator and other service providers. In
particular, the Directors have appointed Funding Circle UK, Funding
Circle US and Funding Circle CE to service the Company's
investments in loans and FCGPL to provide corporate services to the
Company. Notwithstanding these delegations, the Directors have
responsibility for exercising overall control and supervision of
the services provided by Funding Circle UK, Funding Circle US and
Funding Circle CE, for the risk management of the Company and
otherwise for the Company's management and operations.
The Management Engagement Committee carries out regular reviews
of the performance of Funding Circle UK, Funding Circle US and
Funding Circle CE together with other service providers appointed
by the Company.
Investor Relations
All shareholders have the opportunity to attend and vote, in
person or by proxy, at the AGM or other meetings of shareholders.
The notice of the AGM, which is sent out at least fourteen days in
advance, sets out the business of the meeting. Shareholders are
encouraged to attend the AGM and to participate in proceedings. The
Chairman of the Board and the Directors, together with
representatives of Funding Circle, will be available to answer
shareholders' questions at the AGM.
Shareholders and other interested parties are able to contact
the Company through a dedicated investor relations function.
Contact details are as follows:
Email: ir@smecreditrealisation.com
Shareholders are also able to contact the Company via the
Chairman or Company Secretary as follows:
Richard Boléat
Tel: +44 (0) 1534 615 656
Email: Richard.Boleat@smecreditrealisation.com
Sanne Group (Guernsey) Limited
Tel: +44 (0) 1481 739 810
Email: smecreditrealisation@sannegroup.com
AUDIT COMMITTEE REPORT
Membership
Jonathan Bridel - Chairman (Independent non-executive
Director)
Richard Burwood (Independent non-executive Director)
Fred Hervouet (Independent non-executive Director)
Richard Boléat (Company Chairman* and Independent non-executive
Director)
* The Board believes it is appropriate for the Company Chairman
to be a member of the Audit Committee as he is a Fellow of the
Institute of Chartered Accountants in England & Wales and is an
independent Director.
Key Objectives
The provision of effective governance over the appropriateness
of the Company's financial reporting, taking into account the
consolidation of its subsidiaries, including the adequacy of
related disclosures, the performance of the external auditor and
the management of the Company's systems of internal controls and
business risks.
Responsibilities
The primary responsibilities of the Audit Committee are:
-- reviewing the Company's financial results announcements and
financial statements and monitoring compliance with relevant
statutory and listing requirements;
-- reporting to the Board on the appropriateness of the
Company's accounting policies and practices including critical
accounting policies and practices;
-- advising the Board on whether the Committee believes the
annual report and financial statements, taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the Company's performance, business
model and strategy;
-- scrutiny of the loans held at amortised cost;
-- compiling a report on its activities to be included in the
Company's annual report;
-- overseeing the relationship with and appointment of the
external auditor;
-- agreeing with the external auditor the audit plan including
discussions on the key risk areas within the consolidated financial
statements;
-- considering the financial and other implications on the
independence of the auditor arising from any non-audit services to
be provided by the auditor; and
-- considering the appropriateness of appointing the auditor for
non-audit services.
The Audit Committee members have a wide range of financial and
commercial expertise necessary to fulfil the Committee's duties.
The Chairman of the Committee, Jonathan Bridel, is a Fellow of the
Institute of Chartered Accountants in England and Wales, and has
recent and relevant financial experience, as required by the AIC
Code. He serves as Audit Chairman on other listed companies and
previously worked in senior positions in banking and finance and
investment management including SME lending. The Board is satisfied
he has recent and relevant financial experience and has designated
him as its financial expert on the Committee. The Committee as a
body has the competence and experience relevant to the sector. The
qualification of the members of the committee are noted in the
biographies section below.
Committee Meetings
The Committee meets formally at least three times a year. Only
members of the Audit Committee have the right to attend Audit
Committee meetings. However, other Directors and representatives of
Funding Circle and the Administrator are invited to attend Audit
Committee meetings on a regular basis and other non-members may be
invited to attend all or part of the meetings as and when
appropriate and necessary. The Company's external auditor,
PricewaterhouseCoopers CI LLP ("PwC"), is also invited to meetings
as is appropriate.
Main Activities during the year
The Committee assists the Board in carrying out its
responsibilities in relation to financial reporting requirements,
risk management and the assessment of internal controls and key
procedures adopted by the Company's service providers. The
Committee also manages the Company's relationship with the external
auditor and considers the appointment of external auditor,
discusses with the external auditor the nature and scope of the
audit, keeps under review the scope, results, cost and
effectiveness of the audit and reviews the independence of the
external auditor. The Committee also considers the objectivity of
the auditor and reviews the external auditor's letter of engagement
and management letter.
Meetings of the Committee generally take place prior to a
Company Board meeting. The Committee reports to the Board, as part
of a separate agenda item, on the activity of the Committee and
matters of particular relevance to the Board in the conduct of
their work. The Board requires that the Committee advise it on
whether it believes the annual report and financial statements,
taken as a whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the Company's
performance, business model and strategy.
At its meetings during the year, the Committee focused on:
Financial reporting
The primary role of the Committee in relation to financial
reporting is to review with Funding Circle, the Administrator and
the External Auditor the appropriateness of the half-year and
annual consolidated financial statements concentrating on, amongst
other matters:
-- The quality and acceptability of accounting policies and
practices;
-- The clarity of the disclosures and compliance with financial
reporting standards and relevant financial and governance reporting
requirements including the application of IFRS 9 and IFRS 10;
-- Material areas in which significant judgments have been
applied or where there has been discussion with the external
auditor;
-- Whether the annual report and consolidated financial
statements, taken as a whole, are fair, balanced and understandable
and provide the information necessary for shareholders to assess
the Company's performance, business model and strategy; and
-- Any correspondence from regulators and listing authorities in
relation to financial reporting.
To aid its review, the Committee considers reports from Funding
Circle and the Administrator.
Significant risks
In relation to the annual report and consolidated financial
statements for the year ended 31 March 2019, the following
significant risks were considered by the Audit Committee as they
are most relevant to the nature of the Group's business:
-- Impairment and carrying values of loans advanced
The measurement of loans advanced is in accordance with the
accounting policy set out in note 3 of the consolidated financial
statements. A formal policy has been developed by the Board using
data provided by Funding Circle to estimate the impairment on
loans. The Audit Committee regularly reviews this policy and the
underlying loan models and has satisfied itself as to the
impairment and carrying values of loans advanced in the
consolidated financial statements. The Company revised the
impairment policy from 1 April 2018, following the adoption of IFRS
9 (see note 2 to the consolidated financial statements).
-- Fair value estimation of the EIB transaction
The estimation of the fair value of the Group's investment in
the EIB transaction presented as a financial asset at fair value
through profit or loss in the Consolidated Statement of Financial
Position is an area that requires estimation and exercise of
judgement (see note 5 and 17 of the consolidated financial
statements).
-- Fraud risk in income recognition
Mitigating factors were reviewed through the risk register and
internal controls framework which is reviewed and approved by the
Committee on a regular basis. The Committee has considered and
challenged as appropriate the assessment of risks within these
documents and obtained evidence about the effective operation of
the internal controls in place, including critically assessing
reporting provided by Funding Circle. The Audit Committee is
satisfied that the accounting policy for recognition of the
interest earned on loans is in line with the relevant accounting
standards.
Internal Control and Risk Management
The Committee along with the Risk Committee has established a
process for identifying, evaluating and managing all major risks
faced by the Group. The process is subject to regular review by the
Board and accords with the AIC Code of Corporate Governance. The
Board is responsible overall for the Group's system of internal
control and for reviewing its effectiveness. However, such a system
is designed to manage rather than eliminate risks of failure to
achieve the Company's business objectives and can only provide
reasonable and not absolute assurance against material misstatement
or loss.
The Committee receives reports from the Risk Committee on the
Group's risk evaluation process and reviews changes to significant
risks identified. The Committee has undertaken a full review of the
Group's business risks, which have been analysed and recorded in a
risk report, which is reviewed and updated regularly. Each quarter
a Funding Circle report outlines the steps taken to monitor the
areas of risk including those that are not directly the
responsibility of Funding Circle and reports the details of any
known internal control failures.
Separately, Funding Circle has established an internal control
framework to provide reasonable but not absolute assurance on the
effectiveness of the internal controls operated on behalf of its
clients. The effectiveness of the internal controls is assessed by
Funding Circle's compliance and risk department on an on-going
basis. Funding Circle's controls processes have also been outlined
to the Board. The Board's assessment of the Company's principal
risks and uncertainties is set out in the Strategic Report above.
By means of the procedures set out above, the Board confirms that
it has reviewed the effectiveness of the Group's system of internal
controls for the year ended 31 March 2019 and subsequently and that
no material issues have been noted.
External Audit
The effectiveness of the external audit process is dependent on
appropriate audit risk identification at the start of the audit
cycle. The Committee received a detailed audit plan from PwC,
identifying their assessment of these key risks. For the year ended
31 March 2019 significant risks were identified in relation to
impairment and the carrying values of loans advanced, fair value
estimation of the EIB transaction and the risk of fraud in revenue
recognition (in addition to the risk of management override of
controls). These risks are tracked through the year and the
Committee challenged the work done by the auditor to test
management's assumptions and estimates around these areas. The
Committee has assessed the effectiveness of the audit process
addressing these matters through the reporting received for the
year-end financial statements. In addition, the Committee will seek
feedback from the Administrator on the effectiveness of the audit
process. For the year ended 31 March 2019, the Committee was
satisfied that there had been appropriate focus and challenge on
the primary areas of audit risk and assessed the quality of the
audit process to be good.
Appointment and Independence
The Committee considers the reappointment of PwC, including the
rotation of the Audit Engagement Partner, and assesses their
independence on an annual basis. The external auditor is required
to rotate the Audit Engagement Partner responsible for the
Company's audit every five years. The current Audit Engagement
Partner has been in place since appointment for the period ended 31
March 2016 and is considered to be independent. The Audit Committee
will engage with the external auditor to ensure an effective
rotation of the Audit Engagement Partner during the fifth year of
appointment. In its assessment of the independence of the auditor,
the Committee receives details of any relationships between the
Company and PwC that may have a bearing on their independence and
receives confirmation that they are independent of the Company. The
Committee approved the fees for audit services for the year ended
31 March 2019 after a review of the level and nature of work to be
performed and after being satisfied that the fees were appropriate
for the scope of the work required.
Non Audit Services
To safeguard the objectivity and independence of the external
auditors from becoming compromised, the Committee has a formal
policy governing the engagement of the external auditors to provide
non-audit services. No material changes have been made to this
policy during the year. The auditor and the Directors have agreed
that all non-audit services require the pre-approval of the Audit
Committee prior to commencing any work. Fees for non-audit services
are tabled annually so that the Audit Committee can consider the
impact on auditor's objectivity. The auditor (and their affiliated
network firms) was remunerated GBP300,870 (2018: GBP227,439) for
their audit and non-audit services rendered for the year ended 31
March 2019. The Committee assessed whether PwC should be appointed
in relation to certain transaction related services and concluded
that it would be in the best interest of the Company to do so.
PwC were remunerated as follows for the year ended 31 March
2019:
2019 2018
---------------------- ----------------------
Type of service PwC CI PwC Ireland PwC CI PwC Ireland
GBP GBP GBP GBP
--------------------------------- -------- ------------ -------- ------------
Audit of the Group 134,460 108,798 97,732 68,833
Review of half yearly financial
statements 22,000 - 21,450 -
Tax compliance review - 21,601 - 12,424
Transaction related services 14,011 - 27,000* -
170,471 130,399 146,182 81,257
--------------------------------- -------- ------------ -------- ------------
* This includes GBP15,000 paid to PwC UK for assistance with the
implementation of IFRS 9.
The Committee is satisfied with the effectiveness of the audit
provided by PwC, and is satisfied with the auditor's independence.
The Committee has therefore recommended to the Board that PwC be
reappointed as external auditor for the year ending 31 March 2020,
and to authorise the Directors to determine their remuneration and
terms of engagement. Accordingly, a resolution proposing the
reappointment of PwC as auditor will be put to the shareholders at
the 2019 AGM.
Committee Evaluation
The Committee's activities form part of the performance
evaluation that will be carried out by the Board.
Jonathan Bridel
Chairman of the Audit Committee
23 July 2019
DIRECTORS' REMUNERATION REPORT
The Board has established a Remuneration and Nominations
Committee which met three times during the current financial
year.
Composition
The Remuneration and Nominations Committee was formed on 28
September 2015, comprising all the members of the Board. The Board
has appointed Richard Boléat as Chairman of the Committee.
The Directors and Company Secretary are the only officers of the
Company. Copies of the Directors' letters of appointment are
available upon request from the Company Secretary at the registered
office and will be available for inspection at the AGM. The Company
Secretary is engaged under a Company Secretarial Agreement with the
Company. The Company has no employees.
The Directors are each entitled to serve as non-executive
Directors on the boards of other companies and to retain any
earnings from such appointments.
Responsibilities
The primary responsibilities of the Committee are:
-- determine and agree with the Board the framework or broad
policy for the remuneration of the Company's Chairman and
non-executive directors pursuant to the Company's Articles of
Incorporation;
-- review the ongoing appropriateness and relevance of the
remuneration policy;
-- ensure that contractual terms on termination, and any
payments made, are fair to the individual and the Company, that
failure is not rewarded and that the duty to mitigate loss is fully
recognised;
-- annually review the structure, size and composition
(including the skills, knowledge and experience) required of the
Board compared to its current position and make recommendations to
the Board with regard to any changes as necessary;
-- give full consideration to succession planning of directors,
taking into account the challenges and opportunities facing the
Company, and what skills and expertise are therefore needed on the
Board in the future; and
-- keep under review the leadership needs of the Company with a
view to ensuring the continued ability of the Company to compete
effectively in the Platform.
Remuneration Policy
In setting the Company's remuneration policy, the Remuneration
and Nominations Committee has sought (so far as it considers
appropriate for a company with a non-executive Board) to align the
interests of the Board with those of the Company and to incentivise
the Directors to help the Company to achieve its investment
objective.
The Directors shall be paid such remuneration by way of fees for
their services as is defined in each of the Directors' letters of
appointment. Under the terms of their appointments as non-executive
Directors of the Company, the Directors (other than Sachin Patel
who has waived his entitlement to an annual fee) are entitled to
the following annual fees:
Annual fee Notes
GBP
--------------------- ----------- ----------------------------------
Frederic Hervouet 40,000 Chairman of the Risk
Committee
Jonathan Bridel 40,000 Chairman of the Audit
Committee
Richard Boléat 50,000 Chairman of the Board
and Chairman of the Remuneration
and Nominations Committee
Richard Burwood* 45,000 Chairman of the Management
Engagement Committee
Sachin Patel - Waived annual Director's
fee
--------------------- ----------- ----------------------------------
175,000
--------------------- ----------- ----------------------------------
*The annual fee for Richard Burwood includes GBP5,000 director's
fee for each of Tallis Lending Designated Activity Company,
Basinghall Lending Designated Activity Company and Queenhithe
Lending Designated Activity Company.
The Directors are not entitled to any other fixed or variable
remuneration.
No Director has a service contract with the Company, nor are any
such contracts proposed. The retirement, disqualification and
removal provisions relating to the Directors (in their capacity as
Directors) are set out in their letters of appointment.
No annual bonus will be paid to any Director and the Company
does not operate a long term incentive plan.
The Directors are entitled to be repaid by the Company all
properly incurred out-of-pocket expenses reasonably incurred in the
execution of their duties.
In setting the level of each non-executive Director's fees, the
Company has had regard to: the time commitments expected, the level
of skill and experience of each Director, the current market, the
fee levels of companies of similar size and complexity.
On termination of their appointment, Directors shall only be
entitled to such fees as may have accrued to the date of
termination, together with reimbursement in the normal way of any
expenses properly incurred prior to that date. If the Board
considers it appropriate to appoint a new director, the new
director remuneration will comply with the current policy.
Directors' remuneration and Share interests
The total remuneration of the Directors for the year ended 31
March 2019 was as follows:
31 March 31 March
2019 2018
GBP GBP
--------------------- --------- ---------
Frederic Hervouet 40,000 40,000
Jonathan Bridel 40,000 40,000
Richard Boléat 50,000 57,895
Richard Burwood 35,439 32,705
Sachin Patel* - -
--------------------- --------- ---------
165,439 170,600
--------------------- --------- ---------
*Director's fee waived
Richard Burwood is also a Director of Basinghall, Tallis and
Queenhithe. The total remuneration to the Directors disclosed in
the above table excludes GBP7,376 (2018: GBP23,576) representing
Director's expenses charged to the Company, Basinghall, Tallis and
Queenhithe. There were no other items in the nature of
remuneration, pension entitlements or incentive scheme arrangements
which were paid or accrued to the Directors during this year.
As at 31 March 2019 each of Richard Boléat, Jonathan Bridel, and
Richard Burwood had a share interest in the Company, in the form of
5,000 (2018: 5,000) Ordinary shares, representing 0.0015% (2018:
0.0024%) interest in voting rights. Frederic Hervouet had a share
interest in the Company in the form of 107,000 (2018: 107,000)
Ordinary shares, representing 0.0330% in the voting rights as at 31
March 2019 (2018: 0.0522%). There have been no changes to the
shares held by the Directors up to the date of this report.
During the year no remuneration was received by any Director in
a form other than cash. Furthermore, no payments were made for loss
of office, other benefits or other compensation for extra services
to any Director or former Director of the Company.
The Company has no employees other than its Directors who are
all non-executive. When periodically considering the level of fees,
the Remuneration and Nominations Committee evaluates the
contribution and responsibilities of each Director and the time
spent on the Company's affairs. Following this evaluation, the
Committee will determine whether the fees as set out in the
Remuneration Policy continue to be appropriate. Although the
Company has not to date consulted shareholders on remuneration
matters, it has reviewed the remuneration of Directors of other
investment companies of similar size and complexity and to the
limits set out in the Company's Articles of Incorporation. The
Company welcomes any views the shareholders may have on its
remuneration policy.
Richard Boléat
Chairman of the Remuneration and Nominations Committee
23 July 2019
STATEMENT OF DIRECTORS' RESPONSIBILITIES
IN RESPECT OF THE FINANCIAL STATEMENTS
The Directors are responsible for preparing the Directors'
Report and the consolidated financial statements in accordance with
applicable law and regulations.
The Companies (Guernsey) Law, 2008 (as amended) requires the
Directors to prepare financial statements for each financial year
and under that law they have elected to prepare the consolidated
financial statements in accordance with IFRS as issued by the
International Accounting Standards Board ("IASB").
The consolidated financial statements are required by law to
give a true and fair view of the state of affairs of the Group and
of the profit or loss of the Group for that year.
In preparing these consolidated financial statements, the
Directors are required to:
-- Select suitable accounting policies and then apply them consistently;
-- Make judgements and estimates that are reasonable and prudent;
-- State whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the consolidated financial statements; and
-- Prepare the consolidated financial statements on the going
concern basis unless it is inappropriate to presume that the Group
will continue in business.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Group and to enable them to ensure that
the consolidated financial statements comply with The Companies
(Guernsey) Law, 2008 (as amended). They have general responsibility
for taking such steps as are reasonably open to them to safeguard
the assets of the Group and to prevent and detect fraud and other
irregularities.
The Directors confirm that they have complied with the above
requirements in preparing the consolidated financial statements and
that to the best of their knowledge and belief:
-- This annual report includes a fair review of the development
and performance of the business and the position of the Group
together with a description of the principal risks and
uncertainties that the Group faces;
-- The consolidated financial statements, prepared in accordance
with IFRS adopted by the IASB and interpretations issued by the
IFRS Interpretations Committee, give a true and fair view of the
assets, liabilities, financial position and results of the Group;
and
-- The annual report and consolidated financial statements,
taken as a whole, provide the information necessary to assess the
Group's position and performance, business model and strategy and
is fair, balanced and understandable.
Richard Boléat Jonathan Bridel
Chairman Chairman of the Audit Committee
23 July 2019 23 July 2019
INDEPENT AUDITOR'S REPORT
TO THE MEMBERS OF SME CREDIT REALISATION FUND LIMITED
Report on the audit of the consolidated financial statements
________________________________________________________________________________________________________
Our opinion
In our opinion, the consolidated financial statements give a
true and fair view of the consolidated financial position of SME
Credit Realisation Fund Limited (formerly Funding Circle SME Income
Fund Limited) (the "Company") and its subsidiaries (together "the
Group") as at 31 March 2019, and of their consolidated financial
performance and their consolidated cash flows for the year then
ended in accordance with International Financial Reporting
Standards and have been properly prepared in accordance with the
requirements of the Companies (Guernsey) Law, 2008.
________________________________________________________________________________________________________
What we have audited
The Group's consolidated financial statements comprise:
-- the consolidated statement of financial position as at 31 March 2019;
-- the consolidated statement of comprehensive income for the year then ended;
-- the consolidated statement of changes in shareholders' equity for the year then ended;
-- the consolidated statement of cash flows for the year then ended; and
-- the notes to the consolidated financial statements, which
include a summary of significant accounting policies.
________________________________________________________________________________________________________
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing ("ISAs"). Our responsibilities under those
standards are further described in the Auditor's responsibilities
for the audit of the consolidated financial statements section of
our report.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
________________________________________________________________________________________________________
Independence
We are independent of the Group in accordance with the ethical
requirements that are relevant to our audit of the consolidated
financial statements of the Group, as required by the Crown
Dependencies' Audit Rules and Guidance. We have fulfilled our other
ethical responsibilities in accordance with these requirements.
________________________________________________________________________________________________________
Our audit approach
Context
Our audit of the Group for the year ended 31 March 2019 was
planned and executed having considered the key activities of the
Group during the year, including a transaction entered into by the
Company to provide lending to a special purpose vehicle, Queenhithe
Lending Designated Activity Company ("Queenhithe"), which will make
loans to UK small businesses. Our assessment is that the primary
operations of the Group remained largely unchanged from the prior
year up until 31 March 2019.
The Group formally adopted IFRS 9 on 1 April 2018 and as a
result, from the date of this adoption, the Group was required to
estimate the expected credit loss allowances on its portfolio of
loans advanced and to measure its investment in the EIB
transaction. Our overall audit approach in terms of scoping and key
audit matters was therefore largely focused on the valuation of
loans advanced reported at amortised cost and the valuation of the
investment in the EIB transaction which is held as a financial
asset at fair value through profit or loss.
Post year-end, at the Extraordinary General Meeting on 11 June
2019 the shareholders of the Company voted to amend the Company's
investment objective and policy to implement a managed wind-down of
the Company by means of natural amortisation of the Company's
investments in credit assets as well as potential, opportunistic
portfolio sales. This did not have a significant impact on the
consolidated financial statements for the year ended 31 March 2019
and the Group is still considered to be a going concern.
Overview
Materiality
* Overall group materiality was GBP6.9 million which
represents 2.25% of consolidated net assets.
------------------------------------------------------------------
Audit scope
* The Company is based in Guernsey, with subsidiaries
located in Ireland, and engages Funding Circle Ltd
(the "Portfolio Administrator") to administer its
loan portfolio. The consolidated financial statements
are a consolidation of the Company and all of its
subsidiaries.
* We conducted our audit of the consolidated financial
statements from using information provided by Sanne
Group (Guernsey) Limited (the "Administrator"), to
whom the board of directors has delegated the
provision of certain functions. We also had
significant interaction with the Portfolio
Administrator in completing aspects of our overall
audit work.
* We conducted our audit work in Guernsey and we
tailored the scope of our audit, taking into account
the types of investments within the Group, the
involvement of the third parties referred to above,
the accounting processes and controls, and the
industry in which the Group operates.
------------------------------------------------------------------
Key audit matters
* Impairment and carrying value of loans advanced.
* Valuation of the financial asset at fair value
through profit or loss (investment in the EIB
transaction).
------------------------------------------------------------------
Audit scope
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the consolidated
financial statements. In particular, we considered where the
directors made subjective judgements; for example, in respect of
significant accounting estimates that involved making assumptions
and considering future events that are inherently uncertain. As in
all of our audits, we also addressed the risk of management
override of internal controls, including among other matters,
consideration of whether there was evidence of bias that
represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform
sufficient work to enable us to provide an opinion on the
consolidated financial statements as a whole, taking into account
the structure of the Group, the accounting processes and controls,
and the industry in which the Group operates.
The Company is based in Guernsey with four underlying
subsidiaries located in Ireland. The consolidated financial
statements are a consolidation of the Company and all underlying
subsidiaries.
Scoping was performed at the Group level, irrespective of
whether the underlying transactions took place within the Company
or within the subsidiaries. The Group audit was led, directed and
controlled by PricewaterhouseCoopers CI LLP and all audit work for
material items within the consolidated financial statements was
performed in Guernsey by PricewaterhouseCoopers CI LLP. All
subsidiaries and the parent that make up the Group were in scope
for our audit procedures over the consolidated financial
statements.
________________________________________________________________________________________________________
Materiality
The scope of our audit was influenced by our application of
materiality. An audit is designed to obtain reasonable assurance
whether the consolidated financial statements are free from
material misstatement. Misstatements may arise due to fraud or
error. They are considered material if individually or in
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of the consolidated
financial statements.
Based on our professional judgement, we determined certain
quantitative thresholds for materiality, including the overall
Group materiality for the consolidated financial statements as a
whole as set out in the table below. These, together with
qualitative considerations, helped us to determine the scope of our
audit and the nature, timing and extent of our audit procedures and
to evaluate the effect of misstatements, both individually and in
aggregate on the consolidated financial statements as a whole.
Overall Group materiality GBP6.9 million (2018: GBP6.9 million)
How we determined it 2.25% of consolidated net assets
----------------------------------------
Rationale for the materiality benchmark We believe that consolidated net assets
is the most appropriate benchmark
because this is the key metric of
interest to investors. It is also
a generally accepted measure used
for companies in this industry.
----------------------------------------
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP346,000, as well
as misstatements below that amount that, in our view, warranted
reporting for qualitative reasons.
________________________________________________________________________________________________________
Key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the
consolidated financial statements of the current period. These
matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters.
Key audit matter How our audit addressed the Key
audit matter
----------------------------------------------- ------------------------------------------------------------------
Impairment and carrying value of loans We understood and assessed the
advanced methodology and assumptions applied
by the Group in determining the
Refer to Notes 2 to 4 to the consolidated amortised cost of loans advanced
financial statements and the Audit less provisions for impairment,
Committee Report. by reference to accounting standards
and industry practice.
Loans advanced are recorded at amortised
cost in the Consolidated Statement We understood and evaluated the
of Financial Position and amounted internal controls relating to the
to GBP340.2m as at 31 March 2019. reconciliation, accounting and
The amount is net of provisions for reporting of loans advanced.
impairment and allowance for expected
credit losses in accordance with IFRS We understood and evaluated the
9 of GBP36.6m (shown in Note 4 to valuation methodology and assumptions
the consolidated financial statements). applied, by reference to IFRS 9
and industry practice, and tested
The impairment assessment requires the techniques used, in determining
estimates and significant judgements the amortised cost, and recognition
to be applied by the Directors, especially of any expected credit loss. Our
around expected credit loss allowances testing included:
for IFRS 9, such that changes to key * detailed testing over the loan models used by
inputs to the estimates and/or judgements management to value the loans at amortised cost using
made can result in a material change the effective interest rate method;
to the valuation.
* validating the inputs in the loan models, including
interest rates and loan maturity, and agreeing to the
legal loan documentation on a sample basis;
* reviewing the methodology used to determine the
expected credit losses against the requirements of
IFRS 9;
* assessing key assumptions used, such as those
relating to when a significant increase in credit
risk has occurred;
* assessing the key parameters and assumptions within
the expected credit loss models, such as selection of
economic scenarios, the probabilities of default,
loss given default, exposure at default and
macroeconomic environment adjustments; and
* testing the integrity of the data used in the
expected credit loss models and its completeness and
accuracy.
We found that the recording of
loans advanced at amortised cost
was consistent with the accounting
policies and that the assumptions
used to calculate the impairment
provision were supported by appropriate
evidence.
----------------------------------------------- ------------------------------------------------------------------
Valuation of the financial asset held We understood and evaluated the
at fair value through profit or loss valuation methodology applied,
(investment in the EIB transaction) by reference to IFRS 9 applicable
for the current year and industry
Refer to Notes 2, 3 and 5 to the consolidated practice, and tested the techniques
financial statements and the Audit used in determining the valuation
Committee Report. of the investment in the EIB transaction.
Our testing included:
The valuation of the financial asset
held at fair value through profit * obtaining and understanding all legal agreements
or loss (the "investment in the EIB entered into as part of the investment in the EIB
transaction"), is GBP12.3m as at 31 transaction;
March 2019.
As part of the Group's transition * consideration of management's assessment of the
to IFRS 9, the investment in the EIB accounting classification of the investment in the
transaction has been transferred from EIB transaction under IFRS 9;
being held at amortised cost to fair
value through profit or loss. The
fair value of the investment in the * assessment of the supporting evidence for the fair
EIB transaction is determined by considering value of the senior loan note by performing the
the fair value of the senior loan following testing:
note in the structured finance transaction
and the fair value of the underlying
loan portfolio, and any adjustments o evaluating the appropriateness
for other material assets and liabilities. of the valuation methodology and
testing its application; and
The investment in the EIB transaction o evaluating the reasonableness
is classified as a level 3 instrument and performing sensitivity analyses
as its valuation is based on a discounted over the key inputs and assumptions
cash flow model incorporating a range including as future default rates
of unobservable inputs, such as estimated and prepayment rates, and the timings
cash flows which are dependent on of forecast cash flows.
the performance of an underlying portfolio * review of the cash flow forecast by assessing the
of loans and an appropriate discount carrying value of the underlying loan portfolio held
rate. at amortised cost less provisions for impairment. Our
testing included:
As such, the valuation of the investment
in the EIB transaction is judgmental,
increasing the risk of material misstatement o detailed testing over the loan
in relation to the overall consolidated models used by management to value
financial statements. the loans at amortised cost using
the effective interest rate method;
o validating the inputs in the
loan models, including interest
rates and loan maturity, and agreeing
to the legal loan documentation
on a sample basis;
o reviewed and analysed the methodology
used to determine the expected
credit losses against the requirements
of IFRS 9;
o assessing key assumptions used,
such as those relating to when
a significant increase in credit
risk has occurred;
o assessing the key parameters
within the expected credit loss
models, such as selection of economic
scenarios, the probabilities of
default, loss given default, exposure
at default and macroeconomic environment
adjustments; and
o testing the integrity of the
data used in the expected credit
loss models and its completeness
and accuracy.
We found that the valuation of
the investment in the EIB transaction
was supported by the audit evidence
we obtained.
----------------------------------------------- ------------------------------------------------------------------
Other information
The directors are responsible for the other information. The
other information comprises all the information included in the
Annual Report and Audited Consolidated Financial Statements but
does not include the consolidated financial statements and our
auditor's report thereon.
Our opinion on the consolidated financial statements does not
cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other
information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If, based on the work
we have performed, we conclude that there is a material
misstatement of this other information, we are required to report
that fact. We have nothing to report in this regard.
_______________________________________________________________________________________________________
Responsibilities of the directors for the consolidated financial
statements
The directors are responsible for the preparation of the
consolidated financial statements that give a true and fair view in
accordance with International Financial Reporting Standards, the
requirements of Guernsey law and for such internal control as the
directors determine is necessary to enable the preparation of
consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the
directors are responsible for assessing the Group's ability to
continue as a going concern, disclosing, as applicable, matters
relating to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
Group or to cease operations, or have no realistic alternative but
to do so.
_______________________________________________________________________________________________________
Auditor's responsibilities for the audit of the consolidated
financial statements
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditor's report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated
financial statements.
As part of an audit in accordance with ISAs, we exercise
professional judgement and maintain professional scepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide
a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal
control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Group's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by the directors.
-- Conclude on the appropriateness of the directors' use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Group's
ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in
our auditor's report to the related disclosures in the consolidated
financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor's report. However, future
events or conditions may cause the Group to cease to continue as a
going concern. For example, the terms on which the United Kingdom
may withdraw from the European Union are not clear, and it is
difficult to evaluate all of the potential implications on the
Group and the wider economy.
-- Evaluate the overall presentation, structure and content of
the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair
presentation.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the Group to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and
performance of the Group audit. We remain solely responsible for
our audit opinion.
We communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide those charged with governance with a statement
that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with those charged with
governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements
of the current period and are therefore the key audit matters. We
describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in
extremely rare circumstances, we determine that a matter should not
be communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
________________________________________________________________________________________________________
Report on other legal and regulatory requirements
Under The Companies (Guernsey) Law, 2008 we are required to
report to you if, in our opinion:
-- we have not received all the information and explanations we require for our audit;
-- proper accounting records have not been kept; or
-- the consolidated financial statements are not in agreement with the accounting records.
We have no exceptions to report arising from this
responsibility.
We have nothing to report in respect of the following matters
which we have reviewed:
-- the directors' statement set out above in relation to going
concern. As noted in the directors' statement, the directors have
concluded that it is appropriate to adopt the going concern basis
in preparing the consolidated financial statements. The going
concern basis presumes that the Group has adequate resources to
remain in operation, and that the directors intend it to do so, for
at least one year from the date the consolidated financial
statements were signed. As part of our audit we have concluded that
the directors' use of the going concern basis is appropriate.
However, because not all future events or conditions can be
predicted, these statements are not a guarantee as to the Group's
ability to continue as a going concern;
-- the directors' statement that they have carried out a robust
assessment of the principal risks facing the Group and the
directors' statement in relation to the longer-term viability of
the Group. Our review was substantially less in scope than an audit
and only consisted of making inquiries and considering the
directors' process supporting their statements; checking that the
statements are in alignment with the relevant provisions of the UK
Corporate Governance Code; and considering whether the statements
are consistent with the knowledge acquired by us in the course of
performing our audit; and
-- the part of the Corporate Governance Statement relating to
the parent Company's compliance with the ten further provisions of
the UK Corporate Governance Code specified for our review.
This report, including the opinion, has been prepared for and
only for the members as a body in accordance with Section 262 of
The Companies (Guernsey) Law, 2008 and for no other purpose. We do
not, in giving this opinion, accept or assume responsibility for
any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
Nicholas John Vermeulen
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
23 July 2019
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARED 31 MARCH 2019
2019 2018
Notes GBP GBP
------------------------------------ ------ ----------------- -----------------
Operating income
Interest income on loans advanced 4 37,335,418 28,359,186
Net loss on the change in
fair value of financial asset
at fair value through profit
or loss 5 (3,498,426) -
Bank interest income 61,834 133,350
------------------------------------- ------ ----------------- -----------------
33,898,826 28,492,536
------------------------------------ ------ ----------------- -----------------
Operating expenditure
Net realised and unrealised
loss on foreign exchange 17 1,027,173 1,419,342
Impairment of loans 4 24,847,832 5,085,333
Loan servicing fees 16 3,451,137 2,213,848
Company administration and
secretarial fees 16 448,888 372,382
Directors' remuneration and
expenses 15 172,815 194,176
Audit, audit-related and non-audit
related fees 16 300,870 227,439
Corporate broker services 137,800 155,190
Corporate services fees 16 323,643 239,338
Regulatory fees 94,557 44,844
Advisory services fees 739,041 240,480
Loan interest payable 10 1,599,456 242,908
Legal and professional fees 696,053 358,719
Other operating expenses 653,884 458,923
------------------------------------- ------ ----------------- -----------------
34,493,149 11,252,922
------------------------------------ ------ ----------------- -----------------
Operating (loss) / profit
for the year before taxation (594,323) 17,239,614
Taxation 12 (500) (500)
Total comprehensive (loss)
/ income for the year (594,823) 17,239,114
------------------------------------- ------ ----------------- -----------------
Earnings per share
Basic and diluted 13 (0.18p) 8.41p
------------------------------------- ------ ----------------- -----------------
Number of shares Number of shares
Weighted average number of
shares outstanding
Basic and diluted 13 330,497,235 205,036,341
Other comprehensive income
There were no items of other comprehensive income in the current
year or the prior year.
The Notes below form part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2019
31 March 2019 31 March 2018
Notes GBP GBP
---------------------------------------- ------ -------------- --------------
ASSETS
Cash and cash equivalents 7 29,408,480 33,381,211
Other receivables and prepayments 590,648 220,715
Fair value of currency derivatives 8 992,114 1,327,404
Financial asset at fair value through
profit or loss 5 12,349,178 -
Loans advanced 4 340,222,868 330,607,047
TOTAL ASSETS 383,563,288 365,536,377
---------------------------------------- ------ -------------- --------------
EQUITY AND LIABILITIES
Capital and reserves
Share capital 11 320,944,247 303,795,869
Retained (deficit) earnings (12,596,119) 4,524,566
---------------------------------------- ------ -------------- --------------
TOTAL SHAREHOLDERS' EQUITY 308,348,128 308,320,435
---------------------------------------- ------ -------------- --------------
LIABILITIES
Loans payable 10 73,651,620 50,000,000
Accrued expenses and other liabilities 9 1,563,540 7,215,942
---------------------------------------- ------ -------------- --------------
TOTAL LIABILITIES 75,215,160 57,215,942
---------------------------------------- ------ -------------- --------------
TOTAL EQUITY AND LIABILITIES 383,563,288 365,536,377
---------------------------------------- ------ -------------- --------------
NAV per share outstanding 95.45p 100.18p
---------------------------------------- ------ -------------- --------------
The consolidated financial statements were approved and
authorised for issue by the Board of Directors on 23 July 2019 and
were signed on its behalf by:
Richard Boléat Jonathan Bridel
Chairman Chairman of the Audit Committee
The Notes below form part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARED 31 MARCH 2019
Retained
Share capital earnings Total
Notes GBP GBP GBP
--------------------------------------- ------ -------------- ------------- -------------
Balance at 1 April 2018 303,795,869 4,524,566 308,320,435
Change in accounting policy 2 - (2,342,862) (2,342,862)
--------------------------------------- ------ -------------- ------------- -------------
Adjusted balance at 1 April 2018 303,795,869 2,181,704 305,977,573
Issue of Shares 11 25,476,817 - 25,476,817
Share issue costs 11 (324,829) - (324,829)
Scrip dividends issued 11 1,667,415 - 1,667,415
Share buybacks 11 (9,671,025) - (9,671,025)
Dividends declared 14 - (14,183,000) (14,183,000)
Total comprehensive loss for the year - (594,823) (594,823)
Balance at 31 March 2019 320,944,247 (12,596,119) 308,348,128
--------------------------------------- ------ -------------- ------------- -------------
Balance at 1 April 2017 161,916,399 2,835,892 164,752,291
Issue of Shares 142,000,000 - 142,000,000
Share issue costs (2,130,000) - (2,130,000)
Scrip dividends issued 2,009,470 - 2,009,470
Dividends declared 14 - (15,550,440) (15,550,440)
Total comprehensive income for the
year - 17,239,114 17,239,114
Balance at 31 March 2018 303,795,869 4,524,566 308,320,435
------------------------------------ --- ------------ ------------- -------------
The Notes below form part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARED 31 MARCH 2019
2019 2018
Notes GBP GBP
--------------------------------------------- ------ -------------- --------------
Operating activities
Total comprehensive (loss)/income
for the year (594,823) 17,239,114
Adjustments for:
Tax expense 500 500
Foreign exchange (gain)/loss 17 (7,890,252) 8,687,125
Interest income on loans advanced (37,335,418) (28,359,186)
Net loss on the change in fair value
of financial asset at fair value
through profit or loss 5, 17 3,498,426 -
Impairment of loans 4 24,847,832 5,085,333
Fair value movement of currency derivatives 17 335,290 (1,088,150)
--------------------------------------------- ------ -------------- --------------
Operating cash flows before movements
in working capital (17,138,445) 1,564,736
Loans advanced (208,385,335) (286,359,394)
Principal and interest collections
on loans advanced 4 187,074,243 127,292,985
Principal and interest collections
on financial asset at fair value
through profit or loss 5 12,308,089 -
(Increase)/decrease in other receivables
and prepayments (369,933) 151,204
Increase in accrued expenses and
other liabilities 508,713 367,967
Decrease in collateral for currency
derivatives 8 - 270,000
--------------------------------------------- ------ -------------- --------------
Net cash used in operating activities (26,002,668) (156,712,502)
--------------------------------------------- ------ -------------- --------------
Financing activities
Proceeds from issue of Shares 11 25,151,988 142,000,000
Initial costs of issue of Shares - (2,130,000)
Loans issued 33,741,424 50,000,000
Loans paid 10 (10,089,804) -
Dividends paid (17,516,449) (11,220,870)
Repurchase of shares 11 (9,671,025) -
--------------------------------------------- ------ -------------- --------------
Net cash from financing activities 21,616,134 178,649,130
--------------------------------------------- ------ -------------- --------------
Net (decrease)/increase in cash and
cash equivalents (4,386,534) 21,936,628
Cash and cash equivalents at the
beginning of the year 33,381,211 12,331,519
Foreign exchange gains/(losses) on
cash and cash equivalents 413,803 (886,936)
Cash and cash equivalents at the
end of the year 29,408,480 33,381,211
--------------------------------------------- ------ -------------- --------------
The Notes below form part of these consolidated financial
statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARED 31 MARCH 2019
1. GENERAL INFORMATION
The Company is a closed-ended limited liability company
registered under The Companies (Guernsey) Law, 2008 (as amended)
with registered number 60680. The Company is a registered
collective investment scheme in Guernsey and its shares are listed
on the premium segment of the London Stock Exchange's Main Market
for listed securities. The Company's home member state for the
purposes of the EU Transparency Directive is the United Kingdom. As
such, the Company is subject to regulation and supervision by the
Financial Conduct Authority, being the financial markets supervisor
in the United Kingdom. The registered office of the Company was
Third Floor, La Plaiderie Chambers, La Plaiderie, St Peter Port,
Guernsey GY1 1WG, Channel Islands until 1 April 2019 on which date
the registered office changed to De Catapan House, Grange Road, St
Peter Port, Guernsey GY1 2QG.
The Company was established to provide shareholders with
sustainable and attractive levels of dividend income, primarily by
way of investment in loans originated both directly through the
Platforms operated by Funding Circle and indirectly, in each case
as detailed in the investment policy. The Company identified
Funding Circle as a leader in the growing Platform lending space
with its established infrastructure, scale of origination volumes
and expertise in accurately assessing loan applications.
On 21 May 2019, the Company published a circular and notice of
extraordinary general meeting ("EGM") which sets out details of,
and sought shareholder approval for, certain Proposals. The
Proposals involved modifying the Company's Investment Objective and
Policy to reflect a realisation strategy and amending its Articles
to include a mechanism to enable the Company to redeem shares in
the Company compulsorily so as to return cash to shareholders as
also discussed in note 20.
On 11 June 2019, the Proposals were approved at the EGM as
discussed in detail in the Strategic Report above.
The Company publishes net asset value statements on its website
at www.smecreditrealisation.com.
2. Basis of preparation
a) Statement of compliance
The consolidated financial statements, which give a true and
fair view, have been prepared in accordance with International
Financial Reporting Standards ("IFRS") and are in compliance with
The Companies (Guernsey) Law, 2008 (as amended).
The Directors of the Company have adopted the exemption in
Section 244 of The Companies (Guernsey) Law 2008 (as amended) and
have therefore elected to only prepare consolidated financial
statements for the year.
Assets and liabilities of the Group have been presented in the
Statement of Financial Position in their order of liquidity as
permitted by International Accounting Standard 1, Presentation of
Financial Statements.
On 5 April 2019, the Company announced that following
consultation with shareholders accounting for over two thirds of
the register, the Board acknowledged their preference to cease
investment in new Credit Assets and commence a process to return
capital in an orderly and expeditious manner with the objective of
optimising returns to shareholders.
As noted above, the Company published a circular and notice of
EGM which sets out details of, and sought shareholder approval for,
certain Proposals. On 11 June 2019, the shareholders approved the
Proposals which resulted in, amongst other things, the change to
the Company's Investment Policy and Objective to achieve a managed
wind-down of the Company.
Whilst the managed wind-down of the Company was approved at the
EGM, there is no definite and final plan in relation to the timing
of the liquidation of the Company's assets and the process of
returning capital to shareholders. The Company will continue to be
considered a going concern. However, this may be required to change
through the course of the managed wind-down as the natural
amortisation of the Company's investments in Credit Assets takes
place and potentially opportunistic portfolio sales are pursued,
there may be consequential changes in the Company's future
accounting policies following the adoption of the Proposals, which
may impact the methodology of the valuations of its assets and
liabilities.
New Accounting Standards, amendments to existing Accounting
Standards and/or interpretations of existing Accounting Standards
(separately or together, "New Accounting Requirements") adopted in
the current year
In the Directors' opinion, except for the standards referred to
below, all non-mandatory New Accounting Requirements are either not
yet permitted to be adopted, or would have no material effect on
the reported performance, financial position or disclosures of the
Group and consequently have neither been adopted nor listed.
IFRS 9 - "Financial Instruments" (Replacement of IAS 39 -
"Financial Instruments: Recognition and Measurement") - effective
for accounting periods beginning on or after 1 January 2018.
The Group adopted IFRS 9 in its consolidated financial
statements for the year beginning on 1 April 2018. The accounting
policies of the Group have been updated to comply with the
requirements of IFRS 9 for the purpose of preparing these
consolidated financial statements. As permitted by the transitional
provisions of IFRS 9, the Group elected not to restate comparative
figures. The key changes from the adoption of IFRS 9 are set out
below:
Classification and measurement
IFRS 9 requires financial assets to be classified into the
following measurement categories: (i) those measured at fair value
through profit or loss; (ii) those measured at fair value through
other comprehensive income; and, (iii) those measured at amortised
cost. The determination is made at initial recognition. Unless the
option to designate a financial asset as measured at fair value
through profit or loss is applicable, the classification depends on
the entity's business model for managing its financial instruments
and the contractual cash flow characteristics of the
instrument.
From 1 April 2018, the Group classifies its financial
instruments in the following measurement categories:
-- fair value through profit or loss; or
-- amortised cost.
The Group holds debt instruments and derivative financial
instruments. Debt instruments are those that meet the definition of
a financial liability from the issuer's perspective, such as the
Group's loans advanced, investment in the EIB structured finance
transaction and loans payable. Classification and subsequent
measurement of these debt instruments depend on:
-- the Group's business model for managing the instrument; and
-- cash flow characteristics of the instrument.
Derivative financial instruments relate to the Group's forward
foreign exchange transactions that are covered in more detail later
in this note.
Financial assets
Amortised cost
Financial assets that are held for collection of contractual
cash flows where those cash flows represent solely payments of
principal and interest ("SPPI"), and that are not designated at
fair value through profit or loss, are measured at amortised cost.
The carrying amount of these assets is adjusted by any expected
credit loss allowance measured as described below. Interest income
from these financial assets is included in the 'interest income on
loans advanced'.
The Group's cash and cash equivalents and loans advanced are
included in this category.
Fair value through other comprehensive income
Financial assets that are held for collection of contractual
cash flows and for selling the assets, where the assets' cash flows
represent solely payments of principal and interest, and that are
not designated at fair value through profit or loss, are measured
at fair value through other comprehensive income. Movements in the
carrying amount are taken through other comprehensive income,
except for the recognition of impairment gains or losses, interest
revenue and foreign exchange gains and losses on the instrument's
amortised cost which are recognised in profit or loss.
The Group does not have any financial asset that falls within
this category.
Fair value through profit or loss
Assets that do not meet the criteria for amortised cost or fair
value through other comprehensive income are measured at fair value
through profit or loss. A gain or loss on a debt investment that is
subsequently measured at fair value through profit or loss and is
not part of a hedging relationship is recognised in profit or loss
within 'net income on financial asset at fair value through profit
or loss'. Interest income from these financial assets is included
within the same line using the effective interest rate method.
The Group's investment in the EIB structured finance transaction
falls within this category and has been reclassified from amortised
cost financial assets to financial assets at fair value through
profit or loss as this investment has exposure to returns that is
affected by the profitability of the underlying SPV. The Directors
believe that the contractual cash flows are not solely linked to
payments of principal and interest consistent with a basic lending
arrangement.
Impairment
IFRS 9 replaced the "incurred loss" model in IAS 39 with an
"expected credit loss" model in the measurement of impairment loss.
The overall effect of the change from IAS 39 to IFRS 9 is that the
assessment of impairment loss is intended to be more forward
looking under IFRS 9. At initial recognition, an impairment
allowance is required for expected credit losses ("ECL") resulting
from possible default events within the next 12 months. When an
event occurs that increases the credit risk of the counterparty, an
allowance is required for ECL for possible defaults over the term
of the financial instrument. The change in credit risk of the
counterparty will also have an impact to the recognition of income
on the financial asset.
The following table summarises the changes in ECL and basis of
interest income recognition based on the 'stage' of the financial
assets.
ECL Basis for calculating
interest income
----------------------------------------- --------- ----------------------------
Stage 1 - no change in credit risk 12-month Gross outstanding principal
Stage 2 - significant increase in credit Lifetime Gross outstanding principal
risk but not yet defaulted
Stage 3 - default Lifetime Principal less impairment
----------------------------------------- --------- ----------------------------
The impairment requirements of IFRS 9 apply to the Group's loans
and receivables. The Board has built a custom model for estimating
impairment losses that complies with the requirements of IFRS 9.
The model calculates the ECL on either a 12-month or lifetime basis
depending on whether a significant increase in credit risk has
occurred since initial recognition or whether an asset is
considered to be credit-impaired. 12-month and lifetime expected
credit losses are calculated based on three metrics:
1. Probability of Default ("PD") - this is the likelihood of a
default event, estimated for each loan at origination. The lifetime
PD is calculated by applying a term structure to the 12 month PD
determined at origination. The term structure is derived from
historical observed data on each of the loan portfolios.
2. Loss Given Default ("LGD") - the expected loss for each loan
in the event of default, based on historic recovery experience.
3. Exposure At Default ("EAD") - the expected future outstanding
balance of the loan in the event of default, taking in to account
contractual amortisation and historic prepayments.
These metrics are forecast for each loan for the next 12 months
and to maturity, then a 12-month and lifetime expected credit loss
can be calculated. These future losses are discounted at the
Effective Interest Rate ("EIR") individually for each loan.
Credit risk is not monitored on individual loans post
origination, instead the collective performance of loans against
expectations at origination on a vintage level is monitored. As a
result, lifetime expected credit losses are taken as a portion of
each cohort anticipated to be in stage 2 and a weighted average ECL
is calculated. Lifetime expected credit losses are also taken as an
impairment for loans delinquent by more than 30 days.
The Group classifies loans that are 91 or more days late as
credit impaired or defaulted for which lifetime expected loss is
taken as an impairment. The treatment of defaulted loans is the
same as the Group's policy before adoption of IFRS 9 which was
disclosed in the last annual consolidated financial statements.
Use of forward-looking information
Forecast PD for loans are adjusted to take in to account the
current and future macroeconomic environment based on a modelled
relationship with key macroeconomic variables. This is forecast for
a base case scenario and for multiple alternative scenarios.
Impact of IFRS 9 adoption to the Group's assets, liabilities and
financial performance
Taking into account the effect of the reclassification of the
Group's investment in the structured finance transaction and
adoption of the new impairment model, the implementation of IFRS 9
led to a net decrease in the opening balance of retained earnings
of GBP2,342,862 and net decrease in profit for the period of
GBP3,279,350. There have been no significant changes in estimation
techniques made during the reporting period.
The table below summarises the effect of adoption of IFRS 9 to
the opening balance of the following accounts in the Group's
consolidated financial statements:
Loans advanced Financial Retained
asset at earnings
fair value
through
profit or
loss
--------------------------------------- --------------- ------------ -----------
Balance under previous accounting
policies at 1 April 2018 330,607,047 - 4,524,566
Reclassification of investment
in the EIB transaction to financial
asset at fair value through profit
or loss (including accrued interest) (27,178,954) 27,178,954 -
Increased impairment allowance
on loans and fair value movement
on financial asset (on opening
balance) (3,319,601) (3,319,601)
Fair value movement of financial
asset at fair value through profit
or loss - 976,739 976,739
Balance under IFRS 9 at 1 April
2018 300,108,492 28,155,693 2,181,704
---------------------------------------- --------------- ------------ -----------
IFRS 15 "Revenue from Contract with Customers" -- effective for
accounting periods commencing on or after 1st January 2018
The Company's adoption of IFRS 15 had no material impact on the
recognition and measurement of income in the consolidated financial
statements. The Company's revenue from loans advanced is solely
collection of principal and interest which are in scope of IFRS
9.
Financial liabilities
In both the current and prior period, the Group's loans payable
are classified as subsequently measured at amortised cost. The
Group does not hold any financial liabilities that meet the
criteria for subsequent measurement at fair value through profit or
loss.
Derivative financial instruments
The Group's derivative financial instruments continue to be
accounted for at fair value through profit or loss.
Derecognition of financial instruments
Financial assets, or a portion thereof, are derecognised when
the contractual rights to receive the cash flows from the assets
have expired, or when they have been transferred and either (i) the
Group transfers substantially all the risks and rewards of
ownership, or (ii) the Group neither transfers nor retains
substantially all the risks and rewards of ownership and the Group
has not retained control.
There may be instances when the Group renegotiates or otherwise
modifies the contractual cash flows of loans to customers. When
this happens, the Group assesses whether or not the new terms are
substantially different to the original terms. If the terms are
substantially different, the Group derecognises the original
financial asset and recognises a 'new' asset initially at fair
value and recalculates a new effective interest rate for the
asset.
Financial liabilities and derivative financial instruments are
derecognised when they are extinguished or when the obligation
specified in the contract is discharged, cancelled or expired.
b) Basis of measurement and consolidation
These consolidated financial statements have been prepared on a
historical cost basis, as modified by the valuation of derivative
financial instruments at fair value. The methods used to measure
fair value are further disclosed in note 17.
The Company owns all the Profit Participating Notes issued by
Basinghall Lending Designated Activity Company ("Basinghall"),
Tallis Lending Designated Activity Company ("Tallis") and
Queenhithe Lending Designated Activity Company ("Queenhithe"),
companies incorporated in the Republic of Ireland.
Basinghall retains substantially all of the risks and rewards of
the underlying portfolio of the loans transferred to Lambeth. The
Directors believe that the Company's ownership of the Profit
Participating Notes issued by Basinghall, Tallis and Queenhithe and
the substantial retention of the risks and rewards on the
underlying loan portfolio held by Lambeth constitute control as it
exposes the Company to variability of returns from its involvement
with the financial and operating activities of these entities.
Therefore, these financial statements have been prepared on a
consolidated basis.
Intercompany transactions including intercompany gains and
losses on currency translation between the Company and its
subsidiaries were eliminated in the consolidation process.
c) Functional and presentation currency
These consolidated financial statements are presented in Pound
Sterling, which is the functional currency of each of the entities
in the Group and the presentation currency of the Group. In the
Directors' opinion, the Pound Sterling is the functional currency
of the Company, Basinghall, Lambeth and Queenhithe because
substantially all their financing and operating activities are
carried out in Pound Sterling. The Directors believe that the
functional currency of Tallis is the Pound Sterling as its
operations are carried out as an extension of the Company's
operations. The Group hedges the projected cash flows from its US
dollar and Euro investments such that its principal exposure is to
the Pound Sterling.
d) Use of estimates and judgements
The preparation of financial statements in accordance with IFRS
requires the Board to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts of
assets and liabilities and income and expenses. The estimates and
associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making the
judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates.
The estimates and underlying assumptions are reviewed at least
on an annual basis except for the estimates used in the calculation
of the fair value of the EIB transaction which is reviewed on a
regular basis consistent to the frequency of the NAV reporting.
Revisions to accounting estimates are recognised in the period in
which the estimate is revised if the revision affects only that
period, or in the period of the revision and future periods if the
revision affects both current and future periods.
In particular, information about significant areas of estimation
uncertainty and critical judgements in applying accounting policies
that have the most significant effect on the amounts recognised in
the consolidated financial statements are included in the
following:
-- Note 2(b) - The assumption that the Company's business model
of holding credit assets to collect is still deemed appropriate as
at year end. This assumption will be reassessed in future financial
periods.
-- Note 2(b) - The accounting treatment of Lambeth and
Queenhithe as consolidated subsidiaries based on the assessment
that the retention of substantially all of the risks and rewards on
the underlying portfolio of loans sold by Basinghall to each of
Lambeth and Queenhithe is deemed to constitute control as it
exposes the Group to variability of returns from its involvement
with the financial and operating activities of Lambeth and
Queenhithe.
-- Note 2(c) - One of the subsidiaries has its primary assets
and liabilities denominated in Euro. The Directors assessed whether
the functional currency is the Euro or Pound Sterling. The
subsidiary's operations are considered to be an extension of the
operations of the Company and therefore the Directors believe that
the appropriate functional currency for the subsidiary is Pound
Sterling, the functional currency of the Company.
-- Note 3(b) - The estimation of impairment of loans require
judgement based on the model set out above. In relation to the
investment in notes issued by the Irish SPVs (see note 4), the
receipt of and estimated timing of scheduled and unscheduled
repayments of loans advanced in the Irish SPV and the impact on the
carrying value and interest income of the notes.
-- Note 3(k) - The Directors assessed whether the Group had a
single operating segment based on its business model (origination
of loans) or several operating segments based on the jurisdictions
where loans are originated. After consideration of the financial
information that the Board regularly reviews in making economic
decisions, the Board concluded that operating segments based on
jurisdiction is a more appropriate basis.
-- Note 17 - The estimation of fair values of the Group's loans
and receivables require estimation of revised cash flows and
judgement on the appropriate market interest rate to apply. The
fair value of the EIB transaction has been estimated by discounting
future cash flows from the investment (note 17). The Directors
considered that a discounted cash flow model using appropriate
market interest rates at the reporting date would not result in any
material difference to the amortised cost amount reported for loans
and receivables on the Consolidated Statement of Financial
Position.
3. Significant accounting policies
The accounting policies set out below have been applied
consistently throughout the year and the prior year except for the
impact of adoption of IFRS 9 which became effective from 1 April
2018.
a) Foreign currencies
Transactions in foreign currencies are initially translated at
the foreign currency exchange rate ruling at the date of the
transaction. Monetary assets and monetary liabilities denominated
in foreign currencies are retranslated to Pound Sterling at the
foreign currency closing exchange rate ruling at the reporting
date.
None of the Group entities have a functional currency different
to presentation currency.
b) Financial instruments
i) Loans advanced
Loans advanced are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market.
Loans advanced are recognised when the funds are advanced to
borrowers or when the agreements with the borrowers have been
completed.
Loans advanced are measured at amortised cost using the
effective interest method, less any impairment. The effective
interest method calculates the amortised cost by allocating all
relevant cash flows over the relevant period. The effective
interest rate is the rate that exactly discounts estimated future
cash receipts (including all fees paid or received that form an
integral part of the effective interest rate, transaction costs and
other premiums or discounts) through the expected life of the loans
to the net carrying amount on initial recognition.
ii) Impairment of financial assets
At initial recognition, an impairment allowance is required for
expected credit losses ("ECL") resulting from possible default
events within the next 12 months. When an event occurs that
increases the credit risk of the counterparty, an allowance is
required for ECL for possible defaults over the term of the
financial instrument. The change in credit risk of the counterparty
will also have an impact to the recognition of income on the
financial asset.
The model built by the Board for estimating impairment losses
calculates the ECL on either a 12-month or lifetime basis depending
on whether significant increase in credit risk has occurred since
initial recognition or whether an asset is considered to be
credit-impaired.
These metrics used to calculate the 12-month and lifetime
expected credit losses are forecast for each loan for the next 12
months and to maturity, then a 12-month and lifetime expected
credit loss can be calculated. These future losses are discounted
at the Effective Interest Rate (EIR) individually for each
loan.
Credit risk is not monitored on individual loans post
origination, instead the collective performance of loans against
expectations at origination on a vintage level is monitored. As a
result, lifetime expected credit losses are taken as a portion of
each cohort anticipated to be in stage 2 and a weighted average ECL
is calculated. Lifetime expected credit losses are also taken as an
impairment for loans delinquent by more than 30 days.
The Group classifies loans that are 91 or more days late as
credit impaired or defaulted for which lifetime expected loss is
taken as an impairment charge. The treatment of defaulted loans is
the same as the Group's policy before adoption of IFRS 9 which was
disclosed in the last annual consolidated financial statements.
If, in a subsequent period, the amount of the default allowance
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised (such as an
improvement in the debtor's credit rating), the reversal of the
previously recognised default allowance is recognised in the
Consolidated Statement of Comprehensive Income.
Where a loan is not recoverable, it is written off within the
related provision for loan impairment. Subsequent recoveries of
amounts previously written off are reflected against the impairment
losses recorded in the Consolidated Statement of Comprehensive
Income.
iii) Financial asset at fair value through profit or loss
The Group's investment in the EIB structured finance transaction
has been classified as a financial asset at fair value through
profit or loss. This investment has exposure to returns that is
affected by the profitability of the underlying SPV. This
investment is measured initially and subsequently at fair value
with changes in fair value recognised in the Consolidated Statement
of Comprehensive Income.
iv) Derivative financial instruments
The Group holds derivative financial instruments to minimise its
exposure to foreign exchange risks. Derivatives are classified as
financial assets or financial liabilities (as applicable) at fair
value through profit or loss. They are initially recognised at fair
value with attributable transaction costs recognised in the
Consolidated Statement of Comprehensive Income when incurred.
Subsequent to initial recognition, derivatives are measured at fair
value and changes therein are recognised in the Consolidated
Statement of Comprehensive Income. The fair values of derivative
transactions are measured at their market prices at the reporting
date.
v) Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount
is reported within assets and liabilities where there is a legally
enforceable right to set-off the recognised amounts and there is an
intention to settle on a net basis, or realise the asset and settle
the liability simultaneously.
c) Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and
highly liquid interest-bearing securities with original maturities
of three months or less.
d) Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of Ordinary shares are
recognised as a deduction from the proceeds.
Shares issued under the scrip dividend scheme are recognised at
the reference price. The calculation of the reference price is
disclosed in more detail in note 14.
Shares purchased by the Company during the year are held in
Treasury.
e) Treasury shares
Treasury shares are classified as equity.
f) Earnings per share
The Company presents basic and diluted earnings per share
("EPS") data for its Ordinary shares. Basic EPS is calculated by
dividing the profit or loss attributable to Ordinary shareholders
by the weighted average number of Ordinary shares outstanding
during the year. The diluted EPS is calculated by adjusting the
profit or loss attributable to Ordinary shareholders for the
effects of all dilutive potential Ordinary shares. For further
details, see note 13.
g) Income
Income on loans held at amortised cost is recognised under the
effective interest rate method, by reference to the principal
outstanding and at the effective interest rate applicable, which is
the rate that exactly discounts estimated future cash receipts
through the expected life of the loan to its net carrying amount on
initial recognition.
In calculating the effective interest rate, the Group estimates
cash flows considering all contractual terms of the financial
instrument but does not consider future credit losses. The
calculation includes all fees received and paid and costs borne
that are an integral part of the effective interest rate and all
premiums or discounts above or below market rates.
Bank interest and other income receivable are accounted for on
an accruals basis.
h) Expenses and fees
Expenses are accounted for on an accruals basis and are
recognised in the Consolidated Statement of Comprehensive
Income.
i) Taxation
The Company is classified as exempt for taxation purposes under
the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 (as
amended) and as such incurs a flat fee (presently GBP1,200 per
annum). No other taxes are incurred in Guernsey.
Basinghall, Tallis, Lambeth and Queenhithe are Irish resident
companies that are subject to corporation tax in Ireland at a rate
of 25% on their profits.
The tax currently payable by Basinghall, Tallis, Lambeth and
Queenhithe is based on the taxable profit of the companies for the
year. Taxable profit differs from net profit as reported in the
Consolidated Statement of Comprehensive Income because it excludes
items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or
deductible. The Group's liability for current tax is calculated
using tax rates that have been enacted or substantively enacted at
the reporting date.
Deferred tax is the tax expected to be payable or recoverable on
temporary differences between the carrying amounts of assets and
liabilities in the consolidated financial statements and the
corresponding tax bases used in the computation of taxable profit,
and is accounted for using the liability method. Deferred tax
liabilities are recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset is
realised based on tax rates that have been enacted or substantively
enacted at the Consolidated Statement of Financial Position
date.
The carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered.
j) Dividends payable
Dividends payable on the Company's shares are recognised in the
Consolidated Statement of Changes in Shareholders' Equity when
declared by the Directors or, where applicable, when approved by
the Shareholders. The Directors consider declaration of a dividend
on a quarterly basis, having regard to various considerations,
including the financial position of the Company. The payment of any
dividend by the Company is subject to the satisfaction of a
solvency test as required by The Companies (Guernsey) Law, 2008 (as
amended).
k) Segment reporting
An operating segment is a component of the Group that engages in
business activities from which it may earn revenues and incur
expenses. The Group has three operating segments based on
jurisdiction: UK, US and Continental Europe.
4. LOANS ADVANCED
31 March 2019 31 March 2018
GBP GBP
----------------------------------------------------------------------------------- -------------- --------------
Balance at the beginning of the year 330,607,047 155,881,911
Opening balance of loans advanced reclassified to financial asset at fair value (27,178,954) -
through profit
or loss
Increased impairment allowance in prior year adjusted to the opening balance of (3,319,601) -
retained earnings
----------------------------------------------------------------------------------- -------------- --------------
Adjusted balance at the beginning of the year 300,108,492 155,881,911
Advanced 207,224,584 286,841,227
Interest income 37,335,418 28,062,416
Principal and interest collections (187,074,243) (127,292,985)
Impairment allowance for the year (24,847,832) (5,085,333)
Foreign exchange gains/(losses) 7,476,449 (7,800,189)
------------------------------------------------------------------------------------ -------------- --------------
Balance at the end of the year 340,222,868 330,607,047
------------------------------------------------------------------------------------ -------------- --------------
The Group predominantly made unsecured loans in previous periods
and prior to the modification of the Company's investment policy
subsequent to the year end. As at 31 March 2019, the carrying value
of loans secured by charges over properties is GBP2,254,567 (31
March 2018: GBP5,453,709).
Each loan has a contractual payment date for principal and
interest. The Group considers a loan as past due when the
borrower's repayment has not been received for at least 30 days
from the scheduled payment date. A loan is classified as defaulted
when the borrower's repayment is late by 91 or more days.
The following table shows the movement in impairment allowance
during the year. The Group has not restated the prior year
comparative balance but has adjusted the opening retained earnings
position by GBP2,342,862 consists of 1) GBP3,319,601 decrease due
to the additional impairment allowance as shown in the table below
and 2) GBP976,739 increase due to the fair value movement of the
financial asset at fair value through profit or loss that would
have been recognised in the prior year had the comparative balances
been restated as shown in note 2.
The total impairment allowance charged for the current year to
the Consolidated Statement of Comprehensive Income of GBP24,847,832
consists of: 1) GBP21,568,482 impairment allowance for the current
period calculated based on the accounting policies before adoption
of IFRS 9; and 2) GBP3,279,350 increased impairment charge in the
current period due to the effect of adoption of IFRS 9.
31 March 2019 31 March 2018
GBP GBP
------------------------------------------------ -------------- -------------
Impairment allowance at beginning of the
year - previously reported 8,398,444 3,313,111
Effect of adoption of IFRS 9 at the beginning
of the year 3,319,601 -
------------------------------------------------ -------------- -------------
Adjusted impairment allowance at beginning
of the year - IFRS 9 11,718,045 3,313,111
Impairment allowance for the year - measured
based on previous accounting policies 21,568,482 5,085,333
Impairment allowance for the year - additional
allowance based on IFRS 9 model 3,279,350 -
Impairment allowance at the end of the year 36,565,877 8,398,444
------------------------------------------------ -------------- -------------
The table below shows an analysis of the principal and interest
of the loans along with the amount recognised as an impairment
allowance analysed by the stages described within IFRS 9:
31 March 2019
---------------------------
Principal Impairment
and interest allowance
--------------------------------------------------- -------------- -----------
Stage 1 - no change in credit risk from inception 329,333,471 6,781,070
Stage 2 - significant increase in credit risk
but not yet defaulted 15,304,021 4,460,631
Stage 3 - defaulted 32,141,603 25,324,176
376,779,095 36,565,877
--------------------------------------------------- -------------- -----------
The table below shows an analysis of the principal and interest
of the loans along with the amount recognised as an impairment
allowance as at 31 March 2018. As noted above, the Group did not
restate the prior year amounts to take into account the new
impairment model under IFRS 9:
31 March 2018
------------------------------------
Principal Impairment allowance
and interest
GBP GBP
------------------------------- -------------- --------------------
Current 326,342,878 -
Past due but not impaired 4,167,513 1,793,111
Defaulted (net of recoveries) 8,495,100 6,605,333
339,005,491 8,398,444
------------------------------- -------------- --------------------
Structured Finance Transactions
In June 2016, the Company entered into a structured finance
transaction with the European Investment Bank (the "EIB
transaction"). The transaction involved the Company participating
in the financing of an Irish domiciled special purpose vehicle
("EIB SPV"). The Company invested GBP25 million into the junior
Class B Note issued by the EIB SPV whilst the European Investment
Bank ("EIB") committed GBP100 million in a senior loan to the EIB
SPV.
In August 2018, the Group entered into a transaction to provide
lending to a special purpose vehicle, Queenhithe, which makes loans
to UK small businesses. The Group provided an initial funding of
approximately GBP9.2 million through subscription into the Class B
note issued by Queenhithe. Queenhithe has been accounted for in
these consolidated financial statements as a subsidiary
consolidated into the results of the Group.
In November 2018, the transaction was updated whereby the
Department for Business, Energy and Industrial Strategy ("BEIS") -
the British Business Bank's ("BBB") sole shareholder - agreed to
provide up to GBP150 million of funding via a senior floating rate,
loan to Queenhithe. It was expected that the senior loan facility
would be drawn down over a period of up to 18 months, after which
there would be a reinvestment period of a further 18 months before
the facility began to amortise monthly, with principal repayment in
relation to the Group's investment sequential to the senior loan.
The facility came with a 12-year legal maturity.
Following the result of the EGM on 11 June 2019, the Group has
ceased any further investment through Queenhithe.
The transactions entered into by the Group in respect of the
structured financing arrangements for Lambeth are discussed in note
10.
5. FINANCIAL ASSET AT FAIR VALUE THROUGH PROFIT OR LOSS
31 March 2019
GBP
-------------------------------------- -------------
Balance at the beginning of the -
year
Opening balance of loans advanced
reclassified to financial asset
at fair value through profit or
loss 27,178,954
Fair value movement adjusted to
the opening balance of retained
earnings 976,739
---------------------------------------- -------------
Adjusted balance at the beginning
of the year 28,155,693
Principal and interest collections (12,308,089)
Net loss on the change in fair value
of financial asset at fair value
through profit or loss during the
year (3,498,426)
---------------------------------------- -------------
Balance at the end of the year 12,349,178
---------------------------------------- -------------
The Group's financial asset at fair value through profit or loss
relates to the investment in the EIB transaction. This was
previously classified as loans advanced measured at amortised cost.
As disclosed in note 2, the investment in the EIB transaction has
been reclassified to financial asset at fair value through profit
or loss following adoption of IFRS 9. The calculation of the fair
value is discussed in note 17.
6. SEGMENTAL REPORTING
The Group operates in the UK, US, Germany, Spain and the
Netherlands. For financial reporting purposes, Germany, Spain and
the Netherlands combine to make up the Continental Europe operating
segment. The Group ceased originating loans in Spain from January
2017.
The measurement basis used for evaluating the performance of
each segment is consistent with the policies used for the Group as
a whole. Assets, liabilities, profits and losses for each
reportable segment are recognised and measured using the same
accounting policies as the Group.
Except for the EIB transaction, all of the Group's investments
are loans to small and medium-sized entities ("SMEs"). Each
individual SME loan does not generate income that exceeds 10% of
the Group's total income.
The structured finance transaction and the corresponding income
have been reported under the 'UK' segment below. All items of
income and expenses not directly attributable to specific
reportable segments have been included in 'Other income and
expenses' column.
Segment performance for the year ended 31 March 2019 identified
as Alternative Performance Measures ("APM")
With IFRS 9 impact
UK US CE Other income Consolidated
and expenses
GBP GBP GBP GBP GBP
------------------------ ------------- ------------ ------------ ----------------- -------------
Total revenue 16,401,550 12,988,715 4,446,727 61,834 33,898,826
Impairment of loans (13,111,000) (9,745,909) (1,990,923) - (24,847,832)
(Loss)/profit before
finance costs (3,778,134) 2,161,527 2,049,455 (1,027,173) (594,323)
UK US CE Other assets Consolidated
and liabilities
GBP GBP GBP GBP GBP
---------------- --------------------- ------------ ------------ ----------------- -------------
Assets 246,709,422 73,110,354 62,604,976 1,138,536 383,563,288
Liabilities (73,868,672) (70,617) (398,807) (877,064) (75,215,160)
As disclosed in note 2, the Group adopted IFRS 9 during the
year. The most significant impact of IFRS 9 was the recognition of
impairment losses on loans advanced as soon as they are issued.
This means that increased levels of lending will generally increase
the amount of impairment loss recognised compared to the accounting
policies before adoption of IFRS 9.
Comparative segmental information without IFRS 9 impact has been
presented below to aid in evaluating the financial performance of
each segment.
Without IFRS 9 impact
UK US CE Other income Consolidated
and expenses
GBP GBP GBP GBP GBP
---------------------- ------------- ------------ ---------- -------------- -------------
Total revenue 16,401,550 12,988,715 4,446,727 61,834 33,898,826
Impairment of loans (10,826,945) (9,744,012) (997,525) - (21,568,482)
(Loss)/profit before
finance costs (1,494,078) 2,163,424 3,042,854 (1,027,173) 2,685,027
UK US CE Other assets Consolidated
and liabilities
GBP GBP GBP GBP GBP
------------- ------------- ----------- ----------- ----------------- -------------
Assets 250,125,530 75,010,041 63,888,132 1,138,536 390,162,239
Liabilities (73,868,672) (70,617) (398,807) (877,064) (75,215,160)
Segment performance for the year ended 31 March 2018
UK US CE Other income Consolidated
and expenses
GBP GBP GBP GBP GBP
Total revenue 18,168,596 8,931,025 1,259,565 133,350 28,492,536
Profit/(loss) before
finance costs 13,768,690 4,163,636 593,280 (1,285,992) 17,684,372
Segment assets and liabilities as at 31 March 2018
UK US CE Other assets Consolidated
and liabilities
GBP GBP GBP GBP GBP
------------- ------------- ------------ ----------- ----------------- -------------
Assets 217,650,034 125,192,495 21,145,729 1,548,119 365,536,377
Liabilities (50,279,960) (90,639) (15,978) (6,829,365) (57,215,942)
The Company is domiciled in Guernsey whilst Basinghall, Tallis,
Lambeth and Queenhithe are domiciled in Ireland. The Group incurred
net loss of GBP3,498,426 (2018: net income of GBP4,382,029) as a
result of the EIB transaction during the year. All other income was
earned from SME borrowers in the UK, US and CE.
7. cash and cash equivalents
31 March 2019 31 March 2018
GBP GBP
-------------------------------- ---------------- ----------------
Cash at bank 13,898,740 10,151,333
Cash equivalents 15,509,740 23,229,878
Balance at the end of the year 29,408,480 33,381,211
-------------------------------- ---------------- ----------------
Cash equivalents are term deposits held with different banks
with maturities between overnight and 90 days.
8. Derivatives
Foreign exchange swaps are held to hedge the currency exposure
generated by US dollar assets and Euro assets held by the Group
(see note 17). The hedges have been put in place taking into
account the fact that derivative positions, such as simple foreign
exchange swaps, could cause the Group to require cash to fund
margin calls on those positions. The Group negotiated the terms of
the contracts with each counterparty such that no collateral is
required on the initial transaction and in instances of temporary
negative fair value positions.
Fair value of currency derivatives
Fair value Fair value
31 March 2019 31 March
2018
GBP GBP
---------------------------------------------- ---------------- -------------
Valuation of currency derivatives 992,114 1,327,404
992,114 1,327,404
---------------------------------------------- ---------------- -------------
Fair value Fair value
31 March 2019 31 March
GBP 2018
GBP
--------------------------------------------- ---------------- -------------
Euro 1,016,261 190,286
USD (24,147) 1,137,118
Total 992,114 1,327,404
--------------------------------------------- ---------------- -------------
9. ACCRUED EXPENSES and other LIABILITIES
31 March 31 March
2019 2018
GBP GBP
------------------------------------------------ ---------- ----------
Dividends payable - 5,000,864
Payable for loans committed but not yet funded 308,489 1,469,240
Service fees payable 377,987 284,141
Share buybacks payable 356,605 -
Audit fees payable 286,577 169,340
Legal fees payable 23,769 173,288
Administration fees payable 7,253 37,894
Loan interest payable (see note 4) 96,220 65,807
Taxation payable 500 500
Other liabilities 106,140 14,868
------------------------------------------------- ---------- ----------
1,563,540 7,215,942
------------------------------------------------ ---------- ----------
The amount payable for loans committed but not yet funded
represents funds not released to borrowers but for which fully
executed loan agreements are in place. The Group has acquired the
rights to principal and interest repayments for these loans and
these are therefore included in the loans advanced with a
corresponding liability recognised for funds to be released to the
borrowers.
10. loanS payable
31 March 2019 31 March 2018
GBP GBP
------------------------------------------ ----------------- --------------
Balance at the beginning of the year 50,000,000 -
Drawdown 33,741,424 50,000,000
Repayment (10,089,804) -
Balance at the end of the year 73,651,620 50,000,000
------------------------------------------ ----------------- --------------
In January 2018, the Group entered into the Citibank transaction
to provide lending to a special purpose vehicle, Lambeth, which
makes loans to UK small businesses. Under the terms of the Senior
Facility Agreement, Citibank provided GBP50 million into the
transaction, by entering into a senior floating rate loan.
In July 2018, the Citibank transaction was amended whereby the
senior loan from Citibank was increased to GBP66 million with a
corresponding net increase to the Group's lending to Lambeth. As a
result, Basinghall has increased its investments into Lambeth to
keep the proportional exposure between Citibank and Basinghall. The
additional investment by Basinghall to Lambeth was settled by
transferring a portfolio of loans during the year.
During the year, the senior loan from Citibank has entered its
amortisation period and the partial payments to Citibank were made
in accordance with the original Senior Facility Agreement.
In August 2018, the Group entered into a transaction to provide
lending to Queenhithe. The Group provided initial funding of
approximately GBP9.2 million through subscription into the Class B
note issued by Queenhithe. In November 2018, the transaction was
updated whereby the Department for Business, Energy and Industrial
Strategy ("BEIS") - the British Business Bank's ("BBB") sole
shareholder - agreed to provide up to GBP150 million of funding via
a senior floating rate loan to Queenhithe. The facility came with a
12-year legal maturity. As at 31 March 2019, Queenhithe has drawn
GBP17,741,424 from the facility.
The Group, with the assistance of the Administrator and Funding
Circle, monitors certain covenants under the terms of the agreement
with Citibank. The most material covenants relate to the default
levels on the portfolio and allocation limits on credit risk bands
of the loans. There has been no breach of such covenants during the
period.
The loan from Citibank bears a floating interest rate plus a
margin. Total interest expense on this loan during the year was
GBP1,517,953 with GBP78,982 outstanding as at 31 March 2019. The
loan has a termination date of 107 months from the closing date on
17 January 2018.
The loan with BBB bears a floating interest rate plus a margin.
Total interest expense on this loan during the year was GBP81,503
with GBP17,238 outstanding as at 31 March 2019.
11. Share capital
Issued and fully paid Number of shares Shares issued Issue costs Net Shares
amount amount
Ordinary GBP GBP GBP
shares
------------- ---------------- ----------------- -------------- ------------ -------------
At 31 March 2018 307,745,501 309,215,940 (5,420,071) 303,795,869
Issue of shares - treasury
(see below) 24,928,394 25,476,817 (324,829) 25,151,988
Issue of shares - scrip
dividends 1,609,898 1,667,415 - 1,667,415
Share repurchases (11,239,500) (9,671,025) - (9,671,025)
------------------------------- ----------------- -------------- ------------ -------------
At 31 March 2019 323,044,293 326,689,147 (5,744,900) 320,944,247
------------------------------- ----------------- -------------- ------------ -------------
In May 2018, the Company's Ordinary shares held in Treasury (the
"Treasury shares") were made available to meet market demand from
existing and new investors. The sale price per Treasury share was
102.20p, representing a discount of 2.2% to the Ordinary share
price as at close of trading on 30 April 2018 and a premium to the
estimated NAV per Ordinary share of 2-3%, which included a
provision for IFRS 9 adjustments.
The Company issued scrip dividends during the year amounting to
GBP1,667,415 and 1,609,898 shares (2018: GBP2,009,470 and 1,953,598
shares). In December 2018, the Company commenced repurchases of the
Company's shares in the secondary market. As at 31 March 2019, the
Company has purchased a total of 11,239,500 shares which have been
held in treasury.
Rights attaching to the Ordinary share class
All shareholders have the same voting rights in respect of the
share capital of the Company. Every member who is present in person
or by a duly authorised representative or proxy shall have one vote
on a show of hands and on a poll every member present shall have
one vote for each share of which he is the holder, proxy or
representative. All shareholders are entitled to receive notice of
the Annual General Meeting and any other General meetings.
Each Ordinary share will rank in full for all dividends and
distributions declared after their issue and otherwise pari passu
in all respects with each existing Ordinary share and will have the
same rights (including voting and dividend rights and rights on a
return of capital) and restrictions as each existing Ordinary
share.
12. taxation
31 March 31 March
2019 2018
GBP GBP
--------------------------------------------- ----------- -----------
Operating (loss)/profit before taxation (594,823) 17,239,614
---------------------------------------------- ----------- -----------
Tax at the standard Guernsey income - -
tax rate of 0%
Effects of tax rates in other jurisdictions (500) (500)
Taxation expense (500) (500)
---------------------------------------------- ----------- -----------
The Group may be subject to taxation under the tax rules of the
jurisdictions in which it invests. During the year, Basinghall,
Tallis, Lambeth and Queenhithe which are consolidated into the
Group's results were subject to a corporation tax rate of 25% in
Ireland.
13. Earnings per share ("EPS")
The calculation of the basic and diluted EPS is based on the
following information:
31 March 31 March
2019 2018
GBP GBP
----------------------------------------- ------------ ------------
(Loss)/profit for the purposes of basic
and diluted EPS (594,823) 17,239,114
Weighted average number of shares for
the purposes of EPS:
Basic and diluted 330,497,235 205,036,341
Basic and diluted EPS (0.18p) 8.41p
------------------------------------------ ------------ ------------
14. Dividends
The following table shows a summary of dividends declared during
the year, and previous year, in relation to Ordinary shares and C
Shares.
31 March 2019 Date declared Ex-dividend Per share Total Number of shares
date issued as
Pence GBP scrip dividend
------------------ --------------- ------- -------- ------------- ----------- -----------------
Ordinary shares
Interim dividend 13 June 2018 21 June 2018 1.625 5,428,777 69,823
14 September 27 September
Interim dividend 2018 2018 1.312 4,384,014 120,417
24 January 31 January
Interim dividend 2019 2019 1.312 4,370,209 15,947
Total 4.249 14,183,000 206,187
------------------------------------------------------ ----- ------ ----------- -----------------
31 March 2018 Date declared Ex-dividend Per share Total Number of shares
date issued as
Pence GBP scrip dividend
------------------- --------------- ------- --------- ------------- ----------- -----------------
Ordinary shares
Interim dividend 15 June 2017 22 June 2017 1.625 2,690,707 606,999
14 September 21 September
Interim dividend 2017 2017 1.625 2,700,570 70,467
7 December 14 December
Interim dividend 2017 2017 1.625 2,701,699 663,896
Interim dividend* 14 March 2018 22 March 2018 1.625 5,000,864 1,403,711
C shares
20 November 30 November
Interim dividend 2017 2017 1.730 2,456,600 -
Total 8.230 15,550,440 2,745,073
-------------------------------------------------------- ----- ------ ----------- -----------------
*The scrip dividend shares were issued on 30 April 2018.
In prior year, the Board offered ordinary shareholders a choice
to receive dividends in cash or in shares via a scrip dividend
programme. Under the programme, the number of shares issued is
determined by using a Reference Share Price determined as the
higher of (i) the prevailing average of the middle market
quotations of the shares derived from the Daily Official List of
the London Stock Exchange for the ex-dividend date and the four
subsequent dealing days and (ii) the prevailing net asset value per
share.
The scrip offering programme has been discontinued as at 31
March 2019.
15. Directors' remuneration and expenses
31 March 2019 31 March 2018
GBP GBP
--------------------- -------------- --------------
Directors' fees 165,439 171,484
Directors' expenses 7,376 22,692
---------------------- -------------- --------------
172,815 194,176
--------------------- -------------- --------------
None of the Directors have any personal financial interest in
any of the Group's investments other than indirectly through their
shareholding in the Group.
16. FEES AND EXPENSES
Loan origination and servicing
Funding Circle UK has been appointed pursuant to the UK
Origination Agreement, UK Servicing Agreement and the Services
Agreement. Funding Circle US (as defined in the Prospectus) has
been appointed pursuant to the US Origination Agreement and the US
Servicing Agreement.
Funding Circle Nederlands B.V. ("Funding Circle Netherlands")
has been appointed pursuant to the Dutch Origination Agreement and
the Dutch Servicing Agreement. Funding Circle Espana SLU ("Funding
Circle Spain") has been appointed pursuant to the Spanish
Origination Agreement and the Spanish Servicing Agreement. Funding
Circle CE GmbH ("Funding Circle CE") has been appointed pursuant to
the German Origination Agreement and the German Servicing
Agreement. Each of Funding Circle Netherlands and Funding Circle
Spain has agreed to designate Funding Circle CE as sub-contracting
agent for the purposes of their respective Origination Agreements
and Servicing Agreements.
The Group does not pay Funding Circle any fees on the initial
origination of loans.
Funding Circle UK is entitled to receive loan servicing fees
equal to 1 per cent. per annum, calculated daily, on the aggregate
outstanding principal balance of the portfolio of loans held by
each of Basinghall and Lambeth excluding any loans which have been
charged off as defined in the Servicing Agreement. Servicing fees
to Funding Circle UK of GBP1,963,510 were incurred during the year
(2018: GBP1,341,481). Servicing fees outstanding as at 31 March
2019 were GBP190,281 (2018: GBP234,731).
FCGPL is also entitled to receive fees under the Services
Agreement at an annual rate of 0.1 per cent. of net asset value of
the Group. This fee accrued from the date on which the Group made
investments in respect of loans in an amount equal to 80 per cent.
of the gross IPO issue proceeds of GBP150 million. During the year
ended 31 March 2019, GBP323,643 (2018: GBP239,338) was incurred
under the Services Agreement. Corporate servicing fees outstanding
as at 31 March 2019 was GBP190,281 (2018: GBP26,453).
Funding Circle US is entitled to receive loan servicing fees
equal to 1 per cent. per annum, calculated daily, on the aggregate
outstanding principal balance of the portfolio of loans held by the
Company which have been originated in the US excluding any loans
which have been charged off as defined in the Servicing Agreement.
Servicing fees to Funding Circle US of GBP1,081,279 were incurred
during the year (2018: GBP749,060). Servicing fees outstanding as
at 31 March 2019 were GBP70,617 (2018: GBP90,639).
Funding Circle Netherlands is entitled to receive loan servicing
fees equal to 1 per cent. per annum, calculated daily, on the
aggregate outstanding principal balance of the portfolio of loans
held by Tallis excluding any loans which have been charged off as
defined in the Servicing Agreement.
Funding Circle Spain is entitled to receive loan servicing fees
equal to 1 per cent. per annum, calculated daily, on the aggregate
outstanding principal balance of the portfolio of loans held by
Tallis excluding any loans which have been charged off as defined
in the Servicing Agreement.
Funding Circle Deutschland GmbH is entitled to receive loan
servicing fees equal to 1 per cent. per annum, calculated daily, on
the aggregate outstanding principal balance of the portfolio of
loans held by Tallis excluding any loans which have been charged
off as defined in the Servicing Agreement.
Funding Circle CE receives servicing fees for Funding Circle
Netherlands, Funding Circle Spain and Funding Circle Deutschland
GmbH as per the sub-contracting agency agreement. Servicing fees to
Funding Circle CE during the year amounted to GBP406,348 (2018:
GBP123,302). Servicing fees outstanding as at 31 March 2019 were
GBP90,318 (2018: GBP15,978).
Each of the Funding Circle entities is entitled to additional
fees of up to 40 per cent. of collections received on charged off
assets under each of the relevant Services Agreement in
reimbursement of costs incurred in respect of collection charges
and external legal fees. No such additional fees were charged to
the Group during the current year or the prior year.
Administration, company secretarial and cash management
Sanne Group (Guernsey) Limited ("Sanne Guernsey") has been
appointed as Administrator to the Company pursuant to the
Administration Agreement. The Administrator also acts as Company
Secretary and Cash Manager of the Company.
Sanne Guernsey is entitled to receive an annual fee equal to
five basis points of the net asset value of the Group subject to a
minimum amount of GBP85,000 (2018: GBP85,000). Administration fees
of GBP204,796 were incurred during the year (2018: GBP229,343).
There were no administration fees outstanding as at 31 March 2019
and 2018.
Sanne Capital Markets Ireland Limited ("Sanne Ireland") has been
appointed as Administrator to Basinghall, Tallis and Lambeth and is
entitled to receive an annual fee for each entity of GBP58,000
(2018: GBP45,000). Administration fees of GBP208,227 were incurred
during the year (2018: GBP87,470) (including fees for additional
work performed). There were no administration fees outstanding as
at 31 March 2019 and 31 March 2018.
Intertrust Management Ireland Limited ("Intertrust Ireland") has
been appointed as Administrator to Queenhithe and is entitled to
receive an annual fee of GBP23,000. Administration fees of
GBP35,865 were incurred during the year. The total administration
fees outstanding as at 31 March 2019 was GBP7,253 (2018:
GBPnil).
Registrar
Link Asset Services (the "Registrar") has been appointed as the
Company's Registrar to undertake maintenance of the statutory books
of the Company and to perform such related activities as are
required to carry out the registrar function. The Registrar is
entitled to an annual maintenance fee per shareholder subject to a
minimum charge of GBP4,500 (2018: GBP4,500) per annum. Registrar
service fees of GBP45,375 were incurred during the year (2018:
GBP57,336). Registrar service fees outstanding as at 31 March 2019
amounted to GBP2,565 (2018: GBPnil).
Currency management fee
Record Currency Management Limited has been appointed as
currency manager. The currency manager is entitled to fees
calculated based on the GBP equivalent amount of the US Dollar and
EUR denominated exposure being hedged within the Group's portfolio.
Fees of GBP123,283 were incurred during the year (2018: GBP74,657).
Fees outstanding as at 31 March 2019 amounted to GBP29,895 (2018:
GBPnil).
Audit, audit related and non-audit related services
Remuneration for all work carried out for the Group by the
statutory audit firm in each of the following categories of work is
disclosed below:
31 March 2019 31 March 2018
---------------------- ----------------------
Type of service PwC CI PwC Ireland PwC CI PwC Ireland
GBP GBP GBP GBP
----------------------------------- -------- ------------ -------- ------------
Audit of the financial statements 134,460 108,798 97,732 68,833
Review of half-yearly financial
statements 22,000 - 21,450 -
Tax related services - 21,601 - 12,424
Other non-audit services* 14,011 - 27,000 -
170,471 130,399 146,182 81,257
----------------------------------- -------- ------------ -------- ------------
*The 2018 figure includes GBP15,000 paid to PwC UK in 2018 for
assistance with the implementation of IFRS 9.
17. Financial risk management
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework. The Group's risk management policies are established to
identify and analyse the risks faced by the Group, to set
appropriate risk limits and controls and to monitor risks and
adherence to limits. Risk management policies are reviewed
regularly to reflect changes in market conditions and the Group's
activities. Below is a summary of the risks that the Group is
exposed to as a result of its use of financial instruments.
i) Operational risk
The Group is dependent on Funding Circle's resources and on the
ability and judgement of the employees of Funding Circle and its
professional advisers to originate and service the Credit Assets
purchased by the Group. Failure of Funding Circle's Platform or
inconsistent operational effectiveness of the internal controls at
Funding Circle may result in financial losses to the Group.
The Board manages this risk by performing a regular evaluation
of Funding Circle's performance against the terms and conditions of
the Group's agreements with Funding Circle.
ii) Market risk
Market risk is the risk of changes in market rates, such as
interest rates, foreign exchange rates and equity prices, affecting
the Group's income and/or the value of its holdings in financial
instruments.
The Board of Directors regularly reviews the Credit Assets
portfolio and industry developments to ensure that any events which
impact the Group are identified and considered in a timely
manner.
Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair value of
financial instruments.
The Group is exposed to risks associated with the effect of
fluctuations in the prevailing levels of market interest rates on
its cash balances and indirectly on the pricing of and returns from
Credit Assets. This may also impact on the disclosed fair values of
the investments into the EIB transaction.
Loans are held by the Group at amortised cost and bear fixed
interest rates. The Board has not performed an interest rate
sensitivity analysis on these loans as they are intended to be held
until maturity and bear fixed interest rates. Financial instruments
with floating interest rates that reset as market rates change are
exposed to cash flow interest rate risk. As at 31 March 2019, the
Group had GBP29.41 million (31 March 2018: GBP33.38 million) of the
total assets classified as cash and cash equivalents with floating
interest rates. At 31 March 2019, had interest rates increased or
decreased by 25 basis points with all other variables held
constant, the change in the value of future expected cash flows of
these assets would have been GBP73,521 (31 March 2018: GBP83,453).
The Board of Directors believes that a change in interest rate of
25 basis points is a reasonable measure of sensitivity in interest
rates based on their assessment of market interest rates at the
year end.
The Board has not performed an interest rate sensitivity
analysis on these loans as they are intended to be held until
maturity and bear fixed interest rates. However, the Group's
portfolio of Credit Assets is dynamic and the pricing of new loans
made from time to time to which the Group becomes exposed will take
account of prevailing risk-free rates at the time of the making of
a loan.
The relationship between changing risk-free rates and loan
pricing will not generally be linear and will be affected by other
factors, such as changes in demand for loans, credit conditions
generally and the action of other market participants with whom the
Platforms compete.
Currency risk
Currency risk is the risk that the value of the Group's net
assets will fluctuate due to changes in foreign exchange rates.
Aside from GBP, the Group invests in loans denominated in US
Dollars and Euro, and may invest in loans denominated in other
currencies. Accordingly, the value of such assets may be affected
favourably or unfavourably by fluctuations in currency rates. The
Board of Directors monitors the fluctuations in foreign currency
exchange rates and uses forward foreign exchange swaps to seek to
hedge the currency exposure of the Group arising from US Dollar and
Euro denominated investments.
The currency risk of the Group's non-GBP monetary financial
assets and liabilities as at 31 March 2019 including the effect of
a change in exchange rates by 5% is shown below. The effect of a 5%
change shown below apply as an increase (for favourable change in
currency rates) or a decrease (for unfavourable change in currency
rates) to the reported amounts of the assets and liabilities of the
Group. The Directors believe that a change of 5% in currency
exchange rates is a reasonable measure of sensitivity based on
available data on currency rates at the year end.
Carrying Effect Carrying Effect of
amount as of a 5% amount as a 5% change
at change at 31 March in currency
31 March in currency 2018 rate
2019 rate
GBP GBP GBP GBP
----------- ------------ ------------- ------------- -------------
US Dollar 74,327,466 3,716,373 112,932,690 5,646,634
Euro 62,516,717 3,125,836 21,799,227 1,089,961
Total 136,844,183 6,842,209 134,731,917 6,736,595
----------- ------------ ------------- ------------- -------------
The Group's exposure has been calculated as at the year end and
may not be representative of the year as a whole. Furthermore, the
above currency risk estimate does not take into account the effect
of the Group's foreign exchange hedging policy. The net foreign
exchange loss charged to the Consolidated Statement of
Comprehensive Income during the year was GBP 1,027,173 (2018: GBP
1,419,342) which represents:
31 March 2019 31 March 2018
GBP GBP
----------------------------------------- -------------- --------------
Unrealised foreign currency gains 7,983,419 6,873,352
Unrealised foreign currency losses (93,167) (15,560,477)
Realised gains on currency derivatives 3,182,697 7,988,617
Realised losses on currency derivatives (11,764,832) (1,808,984)
Unrealised fair value gains on currency
derivatives (335,290) 1,088,150
------------------------------------------ -------------- --------------
(1,027,173) (1,419,342)
----------------------------------------- -------------- --------------
iii) Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due. Substantially all
of the non-cash assets held by the Group are illiquid.
The Board of Directors manages liquidity risk through active
monitoring of amortising cash flows and reviewing the Group cash
flow forecast on a regular basis. Prior to the EGM on 11 June 2019,
the Group was allowed to borrow up to 0.5 times the then-current
net asset value of the Group at the time of borrowing.
Maturity profile
The following tables show the contractual maturity of the
financial assets and financial liabilities of the Group:
As at 31 March 2019
Within one One to five years Over five Total
year years
GBP GBP GBP GBP
--------------------------- ------------ ------------------ ---------- ------------
Financial assets
Cash and cash equivalents 29,408,480 - - 29,408,480
Loans advanced 119,704,182 257,075,033 - 376,779,215
Financial assets at
fair value through
profit or loss 7,495,244 8,070,133 - 15,565,377
Fair value of currency
derivatives 992,114 - - 992,114
Other receivables 495,078 - - 495,078
158,095,098 265,145,166 - 423,240,264
--------------------------- ------------ ------------------ ---------- ------------
Within one One to five Over five
year years years Total
GBP GBP GBP GBP
----------------------- ----------- ------------ ---------- -----------
Financial liabilities
Accrued expenses and
other liabilities 1,563,540 - - 1,563,540
Loans payable 96,220 73,555,400 - 73,651,620
----------------------- ----------- ------------ ---------- -----------
1,659,760 73,555,400 - 75,215,160
----------------------- ----------- ------------ ---------- -----------
As at 31 March 2018
Within one One to five Over five Total
year years years
GBP GBP GBP GBP
--------------------------- ------------ ------------ ---------- ------------
Financial assets
Cash and cash equivalents 33,381,211 - - 33,381,211
Loans advanced 99,350,712 231,256,332 - 330,607,044
Fair value of currency
derivatives 1,327,404 - - 1,327,404
Other receivables 191,338 - - 191,338
---------------------------
134,250,665 231,256,332 - 365,506,997
--------------------------- ------------ ------------ ---------- ------------
As at 31 March 2018
Within one One to five Over five Total
year years years
GBP GBP GBP GBP
----------------------- ----------- ------------ ---------- -----------
Financial liabilities
Accrued expenses and
other liabilities 7,215,942 - - 7,215,942
Loans payable - 50,000,000 - 50,000,000
----------------------- ----------- ------------ ---------- -----------
7,215,942 50,000,000 - 57,215,942
----------------------- ----------- ------------ ---------- -----------
iv) Credit risk and counterparty risk
Credit risk is the risk of financial loss to the Group if a
counterparty to a financial instrument fails to meet its
contractual obligations. The carrying amounts of financial assets
best represent the maximum credit risk exposure at the reporting
date. Impairment recognised on the loans advanced is disclosed in
note 4.
The Group's credit risks arise principally through exposures to
loans advanced by the Group, which are subject to the risk of
borrower default. As disclosed in note 4, the loans advanced by the
Group are predominantly unsecured, but the Group holds assets as
security for certain property-related loans.
Credit quality
The credit quality of loans is assessed on an ongoing basis
through evaluation of various factors, including credit scores,
payment data and other information related to counterparties. This
information is subject to stress testing on a regular basis.
Set out below is the analysis of the Group's loan investments by
internal grade rating:
% of Carrying
% of Carrying value
Carrying value value Carrying value 31 March
31 March 2019 31 March 2019 31 March 2018 2018
---------------
Internal grade GBP % GBP %
A+ 76,605,880 22.52 83,294,637 25.19
A 107,574,093 31.62 88,995,938 26.92
B 75,150,385 22.09 64,776,731 19.59
C 44,115,396 12.97 41,562,771 12.57
D 26,418,075 7.76 19,088,337 5.77
E 10,359,039 3.04 5,709,679 1.73
Not graded* - - 27,178,954 8.23
340,222,868 100.00 330,607,047 100.00
* - EIB Transaction. The investments of the EIB SPV are loans
originated in the UK.
The internal grade risk rating assigned to a borrower is based
on Funding Circle's proprietary credit scoring methodology to
evaluate each loan application. Analysis has regard to all the
relevant application data gathered so far as well as information
obtained from commercial and consumer credit bureaus. It also
includes analysis of the borrower's financial information.
Allocation limits
The Board of Directors implemented the following portfolio
limits to manage the concentration risk exposure of the Group:
The proportionate division between loans originated through the
various Platforms (as defined in the Prospectus) must fall within
the ranges set out below. The actual proportion within the ranges
will be determined by Funding Circle UK (and communicated by
Funding Circle UK to Funding Circle US, Funding Circle CE, and
other Funding Circle group entities, as appropriate) pursuant to
the Services Agreement:
-- originated through the UK Platform - between 50 per cent. and
100 per cent. of the gross asset value of the Group
-- originated through the US Platform - between 0 per cent. and
50 per cent. of the gross asset value of the Group
-- originated through the other Platforms - between 0 per cent.
and 15 per cent. of the gross asset value of the Group
Other limitations
In addition to the allocation limits described above, in no
circumstances will loans be acquired by the Group, nor will
indirect exposure to loans be acquired, if such acquisition or
exposure would result in:
-- in excess of 50 per cent. of the gross asset value being
represented by loans in respect of which the relevant borrower is
located in the US; or
-- the amount of the relevant loan or borrowing represented by
any one loan exceeding, or resulting in the Group's exposure to a
single borrower exceeding (at the time such investment is made)
0.75 per cent. of the net asset value.
The allocation limits and other limitations shown above no
longer apply after shareholders passed the resolutions at the EGM
on 11 June 2019.
Banking counterparties
The Group is also exposed to credit risk in relation to cash
placed with its banking counterparties. The Directors monitor the
credit quality of these banking counterparties on regular
basis.
The Group may invest cash held for working capital purposes and
pending investment or distribution in cash or cash equivalents,
government or public securities, money market instruments, bonds,
commercial paper or other debt obligations with banks or other
counterparties having a "BBB" (or equivalent) or higher credit
rating as determined by any internationally recognised rating
agency selected by the Board.
The Group held cash with the following financial
institutions:
Amount as Short term Amount as Short term
at 31 March credit rating at 31 March credit rating
2019 (S&P) 2018 (S&P)
GBP GBP
-------------
HSBC 4,460,256 A-1+ 5,432,698 A-1+
Santander 500,000 A-1 2,500,000 A-1
Barclays 22,991,463 A-1 25,448,513 A-2
Citibank 1,456,761 A-1 - A-1
-------------
Total 29,408,480 33,381,211
In addition, the Group uses forward foreign currency
transactions to seek to minimise the Group's exposure to changes in
foreign exchange rates. The Group is exposed to counterparty credit
risk in respect of these transactions. The Board of Directors
employs various techniques to limit actual counterparty credit
risk, including the requirement for cash margin payments or
receipts for foreign currency derivative transactions on a regular
basis. As at year end, the Group's derivative counterparties were
State Street and Northern Trust. The long term-credit rating of
State Street as at 31 March 2019 assigned by Moody's was Aa1 (31
March 2018: Aa1). The long term-credit rating of Northern Trust as
at 31 March 2019 assigned by Moody's was Aa2 (2018: Aa2). The
Directors monitor the credit quality of these banking
counterparties on a regular basis.
v) Fair value estimation
The Group classifies fair value measurements using a fair value
hierarchy that reflects the significance of the inputs used in
making the measurements. The fair value hierarchy has the following
levels:
-- Level 1 - quoted prices (unadjusted) in active markets for
identical assets or liabilities. Investments, whose values are
based on quoted market prices in active markets and are therefore
classified within Level 1, include active listed equities. The
quoted price for these instruments is not adjusted;
-- Level 2 - inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (that is, as prices) or indirectly (that is, derived from
prices). Financial instruments that trade in markets that are not
considered to be active but are valued based on quoted market
prices, dealer quotations or alternative pricing sources supported
by observable inputs are classified within Level 2. As Level 2
investments include positions that are not traded in active markets
and/or are subject to transfer restrictions, valuations may be
adjusted to reflect illiquidity and/or non-transferability, which
are generally based on available market information; and
-- Level 3 - inputs for the asset or liability that are not
based on observable market data (that is, unobservable inputs).
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined on
the basis of the lowest level input that is significant to the fair
value measurement in its entirety. For this purpose, the
significance of an input is assessed against the fair value
measurement in its entirety. If a fair value measurement uses
observable inputs that require significant adjustment based on
unobservable inputs, that measurement is a Level 3 measurement.
Assessing the significance of a particular input to the fair value
measurement in its entirety requires judgement, considering factors
specific to the asset or liability. The determination of what
constitutes "observable" requires significant judgement by the
Group. The Group considers observable data to be that market data
that is readily available, regularly distributed or updated,
reliable and verifiable, not proprietary and provided by
independent sources that are actively involved in the relevant
market.
The Group's only financial instruments measured at fair value as
at 31 March 2019 are its currency derivatives and the investment in
the EIB transaction.
The fair value of the currency derivatives held by RBSI was
estimated by RBSI based on the GBP-USD forward exchange rate, the
GBP-EUR forward exchange rate, the GBP-USD spot rate and the
GBP-EUR spot rate as at 31 March 2019. The fair value of the
currency derivatives held by Northern Trust was estimated by
Northern Trust based on the GBP-EUR forward exchange rate and the
GBP-EUR spot rate as at 31 March 2019.
The fair value of the EIB transaction has been estimated by
discounting future cash flows of the assets and liabilities 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 EIB transaction was
GBP12,349,178 at 31 March 2019 (2018: GBP28,155,693 and
GBP27,178,954 respectively).
A 2% change as a decrease (for favourable change in discount
rate) or an increase (for unfavourable change in discount rate)
creates a GBP321,725 increase or GBP300,763 decrease to the
reported amounts of the assets and liabilities of the Group. The
Directors believe that a change of 2% in discount rate is a
reasonable measure of sensitivity based on historic market
movements.
The Board of Directors believe that the fair value of the
currency derivatives falls within Level 2 in the fair value
hierarchy described above. The fair value of the EIB transaction
falls within Level 3 in the fair value hierarchy due to the
unobservable inputs used in the valuation which include discount
rate and timing and amounts of cash flows.
The following table presents the fair value of the Group's
assets and liabilities not measured at fair value as at 31 March
2019 but for which fair value is disclosed:
31 March 2019
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Loans advanced - - 332,038,427 332,038,427
Cash and cash equivalents 29,408,480 - - 29,408,480
Other receivables and prepayments - 590,648 - 590,648
Loans payable - - (73,651,620) (73,651,620)
Accrued expenses and other
liabilities - (1,563,540) - (1,563,540)
29,408,480 (972,892) 258,386,807 286,822,395
31 March 2018
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
----------- -------------
Loans advanced - - 331,583,786 331,583,786
Cash and cash equivalents 33,381,211 - - 33,381,211
Other receivables and prepayments - 220,715 - 220,715
Loans payable - - (50,000,000) (50,000,000)
Accrued expenses and other
liabilities - (7,215,942) - (7,215,942)
33,381,211 (6,995,227) 281,583,786 307,969,770
The fair value of loans advanced above has been estimated by
discounting expected future cash flows from the investments using a
discount rate equal to the expected net yield at origination,
adjusted to reflect changes in market interest rates. The
methodology used, as explained above, does not enable meaningful
comparison with the value derived from the application of the
Company's accounting policies as disclosed in note 2.
The Board of Directors believe that the carrying values for cash
and cash equivalents, other receivables and prepayments, loans
payable and accrued expenses and other liabilities approximate
their fair values.
In the case of cash and cash equivalents, other receivables and
prepayments, and accrued expenses and other liabilities the amount
estimated to be realised in cash are equal to their value shown in
the Consolidated Statement of Financial Position due to their short
term nature.
There were no transfers between levels during the year or the
prior year.
Capital risk management
The Board's policy is to maintain a strong capital base so as to
maintain investor, creditor and market confidence and to sustain
future development of the Group. The Group's capital is represented
by the Ordinary shares and retained earnings. The capital of the
Group is managed in accordance with its investment policy, in
pursuit of its investment objectives. The Board issued treasury
shares during the year in accordance with its capital management
policy (note 11).
The Group is not subject to externally imposed capital
requirements. However, certain calculations on the employment of
leverage are required under the AIFMD. This directive requires more
information to be reported if the Group's leverage exceeds three
times its net asset value. As at 31 March 2019, the Group used
leverage through the Queenhithe, EIB and Citibank transactions but
did not exceed the threshold within the directive and therefore did
result in a change of the reporting requirements as prescribed by
AIFMD.
18. Related party disclosure
The Directors, who are the key management personnel of the
Group, are remunerated per annum as follow:
GBP
-------
Chairman 50,000
Audit Committee Chairman 40,000
Risk Committee Chairman 40,000
Other Directors 45,000
175,000
Sachin Patel has waived his fees as a director of the
Company.
Richard Burwood is also a director of Basinghall, Tallis and
Queenhithe and is entitled to receive GBP5,000 (2018: GBP5,000) per
annum as Director's fees from each of the companies.
The Directors held the following number of shares as at 31 March
2019 and 31 March 2018:
As at 31 March 2019 As at 31 March 2018
Number of % of total Number of % of total
shares shares in shares shares in
issue issue
Richard Boléat 5,000 0.0015 5,000 0.0024
Jonathan Bridel 5,000 0.0015 5,000 0.0024
Richard Burwood 5,000 0.0015 5,000 0.0024
Frederic Hervouet 107,000 0.0330 107,000 0.0522
Sachin Patel - - - -
122,000 0.0375 122,000 0.0594
The Group had no employees during the year or the prior
year.
The Directors delegate certain functions to other parties. In
particular, the Directors have appointed Funding Circle UK, Funding
Circle US, Funding Circle Netherlands and Funding Circle CE to
originate and service the Group's investments in loans and FCGPL to
provide corporate services. Notwithstanding these delegations, the
Directors have responsibility for exercising overall control and
supervision of the services provided by the Funding Circle
entities, for risk management of the Group and otherwise for the
Group's management and operations.
The transaction amounts incurred during the year and amounts
payable to each of Funding Circle UK, FCGPL, Funding Circle US and
Funding Circle CE are disclosed below.
Expense during Payable as Expense during Payable
the year at 31 March the year as at 31
ended 31 2019 ended 31 March 2018
March 2019 March 2018
Transaction GBP GBP GBP GBP
--------------------
Funding Circle
UK Servicing fee 1,963,510 217,052 1,341,486 151,071
Corporate services
FCGPL fee 323,643 26,771 239,338 26,453
Funding Circle Reimbursement
UK of expenses 90,838 4,026 198,010 7,193
Funding Circle
US Servicing fee 1,081,279 70,617 749,060 90,639
Funding Circle
CE Servicing fee 406,348 90,318 123,302 15,978
19. INVESTMENT IN SUBSIDIARIES
The Company accounts for its interest in the following entities
as subsidiaries, in accordance with the definition of subsidiaries
and control set out in IFRS 10:
Country Principal Transactions Outstanding Outstanding
of incorporation activity amount amount
as as at 31
at 31 March March 2018
2019 GBP
GBP
Investing
Basinghall Lending in Credit
Designated Activity Assets originated Subscription
Company Ireland in the UK of notes issued 144,497,863 128,438,860
Investing
in Credit
Assets originated
Tallis Lending in Germany,
Designated Activity the Netherlands Subscription
Company Ireland and Spain* of notes issued 60,481,924 20,674,883
Investing
Lambeth Lending in Credit Subscription
Designated Activity Assets originated of notes issued
Company Ireland in UK (through Basinghall) 64,773,753 53,086,822
Queenhithe Lending Ireland Investing Subscription 31,197,518 n/a
Designated Activity in Credit of notes issued
Company Assets originate (through Basinghall)
in the UK
300,951,058 202,200,565
*The Group ceased originating loans in Spain from January
2017.
20. Subsequent events
On 5 April 2019, the Company announced that following
consultation with shareholders accounting for over two thirds of
the register, the Board acknowledged their preference to cease
investment in new Credit Assets and commence a process to return
capital in an orderly and expeditious manner with the objective of
optimising returns to shareholders.
On 21 May 2019, the Company published a circular and notice of
extraordinary general meeting ("EGM") which set out details of, and
sought shareholder approval for, certain Proposals. The Proposals
involved modifying the Company's Investment Objective and Policy to
reflect a realisation strategy and amending its Articles of
Incorporation (the "Articles") to include a mechanism to enable the
Company to redeem shares in the Company compulsorily so as to
return cash to shareholders.
The Proposals also included the appointment of FCGPL to
facilitate potential portfolio sales on behalf of the Company and
the change of the name of the Company into SCRF consistent to the
proposed modification of the Company's Investment Objective and
Policy.
On 11 June 2019, these Proposals were approved at the EGM as
discussed in detail in the Strategic Report above.
At the time of signing, the total number of shares repurchased
by the Company and held in treasury since the inception of the
share buyback programme was 27,759,152.
BOARD OF DIRECTORS
Richard Boléat
Chairman, Remuneration and Nominations Committee Chairman,
Non-executive Director
Richard Boléat was born in Jersey in 1963. He is a Fellow of the
Institute of Chartered Accountants in England & Wales, having
trained with Coopers & Lybrand in Jersey and the United
Kingdom. After qualifying in 1986, he subsequently worked in the
Middle East, Africa and the UK for a number of commercial and
financial services groups before returning to Jersey in 1991. He
was formerly a Principal of Channel House Financial Services Group
from 1996 until its acquisition by Capita Group plc ("Capita") in
September 2005. Mr Boléat led Capita's financial services client
practice in Jersey until September 2007, when he left to establish
Governance Partners, L.P., an independent corporate governance
practice. He currently acts as Chairman of CVC Credit Partners
European Opportunities Limited, and Audit Committee Chairman of
M&G Credit Income Investment Trust plc and Aseana Properties
Limited, all of which are listed on the London Stock Exchange, and
Yatra Capital Limited, listed on Euronext, along with a number of
other substantial collective investment and investment management
entities established in Jersey, the Cayman Islands and Luxembourg.
He is regulated in his personal capacity by the Jersey Financial
Services Commission and is a member of AIMA.
Jonathan Bridel
Audit Committee Chairman, Non-executive Director
Mr Bridel is currently a non-executive Chairman or director of
various listed and unlisted investment funds and private equity
investment managers. Listings include Starwood European Real Estate
Finance Limited, The Renewables Infrastructure Group Limited and
Sequoia Economic Infrastructure Income Fund Limited which are
listed on the premium segment of the London Stock Exchange. He is
also Chairman of DP Aircraft 1 Limited and a director of Fair Oaks
Income Fund Limited. He was until 2011 Managing Director of Royal
Bank of Canada's investment businesses in Guernsey and Jersey. This
role had a strong focus on corporate governance, oversight,
regulatory and technical matters and risk management. He is a
Chartered Accountant and has specialised in Corporate Finance and
Credit. After qualifying as a Chartered Accountant in 1987, Mr
Bridel worked with Price Waterhouse Corporate Finance in London and
subsequently served in a number of senior management positions in
Australia and Guernsey in corporate and offshore banking and
specialised in credit. This included heading up an SME Lending
business for a major bank in South Australia. He was also chief
financial officer of two private multi-national businesses, one of
which raised private equity. He holds qualifications from the
Institute of Chartered Accountants in England and Wales where he is
a Fellow, the Chartered Institute of Marketing and the Australian
Institute of Company Directors. He graduated with an MBA from
Durham University in 1988. Mr Bridel is a Chartered Marketer and a
member of the Chartered Institute of Marketing, a Chartered
Director and a Fellow of the Institute of Directors and is a
Chartered Fellow of the Chartered Institute for Securities and
Investment.
Richard Burwood
Management Engagement Committee Chairman, Non-executive
Director
Mr Burwood is a resident of Guernsey with 25 years' experience
in banking and investment management. During 18 years with Citibank
London Mr Burwood spent 4 years as a Treasury Dealer and 11 years
as a Fixed Income portfolio manager covering banks & finance
investments, corporate bonds and asset backed securities.
Mr Burwood moved to Guernsey in 2010, initially working as a
portfolio manager for EFG Financial Products (Guernsey) Ltd
managing the treasury department's ALCO Fixed Income portfolio.
From 2011 to 2013 Mr Burwood worked as the Business and Investment
manager for the Guernsey branch of Man Investments (CH) AG. This
role involved overseeing all aspects of the business including
operations and management of proprietary investments.
Mr Burwood serves as Non-Executive Director on the boards of the
Roundshield Fund, Guernsey (a European asset backed special
opportunities fund providing finance to small and mid-cap
businesses) since January 2014 and TwentyFour Income Fund (a UK and
European asset backed investments) since January 2013.
Frederic Hervouet
Risk Committee Chairman, Non-executive Director
Fred Hervouet (45) is a resident of Guernsey and has dual
nationality with both British and French citizenship. He has more
than 20 years of experience in Hedge Funds and Capital Markets
roles.
Until end of 2013, Fred was Managing Director and Head of
Commodity Derivatives Asia for BNP Paribas including Trading,
Structuring and Sales. Prior to BNP Paribas, he also worked for two
multi-billion, multi- strategy hedge funds including Quantitative
strategies (CTAs), Convertible Arbitrage, Event Driven, Fixed
Income Relative Value, Equity & Commodity Long-short, Global
Macro, Emerging Markets Debt Fund. In the last 20 years, Fred has
worked in different aspects of the Financial Markets and Asset
Management Industry. His experience includes Derivatives Markets,
Structured Finance, Structured Products and Hedge Funds, Trading
and Risk Management.
Fred has worked in Singapore, Switzerland, United Kingdom and
France. Most recently, Mr Hervouet was a member of BNP Paribas
Commodity Group Executive Committee and BNP Paribas Credit
Executive Committees on Structured Finance projects (structured
debt and Trade Finance).
Fred now acts as a full time dedicated Non-executive Director of
a number of listed and non-listed companies. He is the Chairman of
Chenavari Toro Income Fund listed on the SFM of the LSE and a
director of Crystal Amber Fund Limited. He is also a GP on a number
of Guernsey Private Equity Funds (Terra Firma, Lakestar, Telstra
Ventures, LCH Partners).
Fred graduated from the University of Paris Dauphine, France
achieving a Masters (DESS 203) in Financial Markets, Commodity
Markets and Risk Management and an MSc in Applied Mathematics and
International Finance.
Fred has provided investment and risk management services to
corporations and institutions worldwide and worked with CEOs, CFOs
and Head of Investment Divisions. Appearances on financial programs
include CNBC, Bloomberg and other networks. He is a member of
various financial services interest Groups including the UK
Institute of Directors, the UK Association of Investment Companies,
the Guernsey Chamber of Commerce and of the Guernsey Investment
Fund Association ("GIFA").
Sachin Patel
Non-executive Director
Sachin Patel is the Chief Capital Officer at Funding Circle,
leads the Global Capital Markets group and is responsible for
investor strategy. Previously, Sachin was Vice President in the
cross-asset structured products and solutions businesses at
Barclays Capital and, prior to this, at J.P. Morgan, advising a
wide variety of investors including insurance companies, pension
funds, discretionary asset managers and private banks.
By virtue of Sachin's role at Funding Circle Limited, Sachin is
not an independent Director. Notwithstanding this, Sachin has
undertaken in his service contract with the Company to communicate
to the Board any actual or potential conflict of interest arising
out of his position as a Director and the other Directors have
satisfied themselves that procedures are in place to address
potential conflicts of interest.
Sachin is not entitled to any fee for the services provided and
to be provided in relation to his directorship, although the
Company shall, during the course of his appointment, reimburse all
properly incurred out-of-pocket expenses incurred in the execution
of his duties as a Director.
AGENTS AND ADVISORS
SME Credit Realisation
Fund Limited
Company registration
number: 60680 (Guernsey,
Channel Islands)
Registered office Portfolio Administrator
De Catapan House Funding Circle Ltd
Grange Road 71 Queen Victoria Street
St Peter Port London EC4V 4AY
Guernsey GY1 2QG United Kingdom
Channel Islands
E-mail: ir@smecreditrealisation.com
Website: smecreditrealisation.com
Corporate broker and Bookrunner
Company Secretary and and Sponsor
Administrator Numis Securities Limited
Sanne Group (Guernsey) The London Stock Exchange
Limited Building
De Catapan House 10 Paternoster Square
Grange Road London EC4M 7LT
St Peter Port United Kingdom
Guernsey GY1 2QG
Channel Islands
Legal advisors as to UK Transfer Agent and
Guernsey Law Receiving Agent
Mourant Ozannes Link Market Services Limited
1 Le Marchant Street The Registry
St Peter Port 34 Beckenham Road
Guernsey GY1 4HP Beckenham
Channel Islands Kent BR3 4TU
United Kingdom
Registrar
Herbert Smith Freehills Link Market Services (Guernsey)
LLP (London) (appointed Limited
on 4 May 2018) Mont Crevelt House
Exchange House, Primrose Bulwer Avenue
Street, St Sampson
London EC2A, 2EG Guernsey GY2 4LH
United Kingdom Channel Islands
Legal advisors as to Independent Auditor
Irish Law PricewaterhouseCoopers
Matheson CI LLP
70 Sir John Rogerson's Royal Bank Place
Quay 1 Glategny Esplanade
Dublin 2 St Peter Port
Ireland Guernsey GY1 4ND
Channel Islands
GLOSSARY
Definitions and explanations of methodologies used are shown
below. The Company's prospectus contains a more comprehensive list
of defined terms.
"Administrator" Sanne Group (Guernsey) Limited
"Affiliates" with respect to any specified person means:
(a) any person that directly or indirectly controls,
is directly or indirectly controlled by or is directly
or indirectly under common control with such specified
person;
(b) any person that serves as a director or officer
(or in any similar capacity) of such specified
person;
(c) any person with respect to which such specified
person serves as a general partner or trustee (or
in any similar capacity).
For the purposes of this definition, "control"
(including "controlling", "controlled by" and
"under common control with") means the possession,
direct or indirect, of the power to direct or cause
the direction of the management and policies of
a person, whether through the ownership of voting
securities, by contract or otherwise.
"AGM" Annual General Meeting
"AIC Code" the AIC Code of Corporate Governance
"AIC" the Association of Investment Companies, of which
the Company is a member
AIFM" Alternative Investment Fund Manager, appointed
in accordance with the AIFMD
"AIFMD" the Alternative Investment Fund Managers Directive
"Available Cash" cash determined by the Board as being available
for use by the Company in accordance with the Investment
Objective, and, in respect of Basinghall and Tallis,
cash determined by the Board of each of Basinghall
and Tallis Board (having regard to the terms of
the Origination Agreement and the Note) for use
by Basinghall and Tallis and excluding (without
limitation) amounts held as reserves or pending
distribution
"CE" Continental Europe
"Company Secretary" Sanne Group (Guernsey) Limited
"Credit Assets" loans or debt or credit instruments of any type
originated through any of the Platforms
"EGM" the Extraordinary General Meeting on 11 June 2019
"Funding Circle" FCGPL, Funding Circle UK, Funding Circle US, Funding
Circle CE or either of their respective Affiliates
(as defined in the Prospectus of the Company),
or any or all of them as the context may require
"Funding Circle Funding Circle CE GmbH and Funding Circle Deutschland
CE" GmbH
"Funding Circle Funding Circle Nederlands B.V.
Netherlands"
"Funding Circle Funding Circle Espa a SLU
Spain"
"FCGPL" Funding Circle Global Partners Limited
"Funding Circle Funding Circle Limited
UK"
"Funding Circle FC Platform, LLC
US"
"NAV Total Return" A measure of performance showing how the NAV per
Ordinary share has performed over a period of time,
taking into account both capital returns and dividends
paid to shareholders. It assumes that dividends
paid to shareholders are reinvested at NAV at the
time the shares are quoted ex-dividend. Opening
NAV in November 2015 was 98.00p, after initial
costs.
"Near Affiliates" the relevant Irish subsidiary of the Company and
any other SPV or entity which, not being an Affiliate
of the Company, has been or will be formed in connection
with the Company's direct or indirect investment
in Credit Assets and which (save in respect of
any nominal amounts of equity capital) is or will
be financed solely by the Company or any Affiliate
of the Company
"Note" or "Profit notes issued by Basinghall Lending Designated Activity
Participating Note" Company and Tallis Lending Designated Activity
Company under their separate note programmes
"Origination Agreements" the German Origination Agreement, the Dutch Origination
Agreement, the Spanish Origination Agreement, the
UK Origination Agreement, the US Origination Agreement,
and the CE Origination Agreements
"Platforms" the platforms operated in the UK, US and CE by
Funding Circle, together with any similar or equivalent
platform established or operated by Funding Circle
in any jurisdiction
"Proposals" The proposals contained in the circular issued
on 21 May 2019 which were subsequently approved
at the EGM on 11 June 2019.
These included the proposals to (1) modify the
Company's Investment Objective and Policy to reflect
a realisation strategy; (2) amend its Articles
of Incorporation (the "Articles") to include a
mechanism to enable the Company to redeem shares
in the Company compulsorily so as to return cash
to shareholders; (3) appoint Funding Circle Global
Partners Limited ("FCGPL") to facilitate potential
portfolio sales on behalf of the Company and to
(4) change the name of the Company into SME Credit
Realisation Fund Limited ("SCRF") consistent to
the proposed modification of the Company's Investment
Objective and Policy.
"Prospectus" The prospectus issued on the initial IPO on 30
November 2015 and subsequently revised in February
2017 and in August 2018
"PwC" PricewaterhouseCoopers CI LLP, PricewaterhouseCoopers
Ireland
"PwC CI" PricewaterhouseCoopers CI LLP
"PwC Ireland" PricewaterhouseCoopers Ireland
"PwC UK" PricewaterhouseCoopers LLP
"Share Price Total A measure of performance showing how the share
Return" price has performed over a period of time, taking
into account both capital returns and dividends
paid to shareholders. It assumes that dividends
paid to shareholders are reinvested in the shares
at the time the shares are quoted ex-dividend.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR LLFEDDAIVFIA
(END) Dow Jones Newswires
July 24, 2019 02:00 ET (06:00 GMT)
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