TIDMSSIF
RNS Number : 7068P
Secured Income Fund PLC
21 October 2021
21 October 2021
Secured Income Fund plc
("SSIF" or the "Company")
Annual Financial Report
For the year ended 30 June 2021
A copy of the Company's Annual Report and Financial Statements for
the year ended 30 June 2021 will shortly be available to view and
download from the Company's website, https://kkvim.com/secured-income-fund/
. Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into or forms part of this
announcement.
Enquiries to:
Directors
David Stevenson (Chair) tel: +44 7973 873785
Susan Gaynor Coley tel: +44 7977 130673
Brett Miller tel: +44 7770 447338
KKV Investment Management Limited Investor.communications@kkvim.com
finnCap Ltd. tel: +44 20 7220 0500
Corporate Finance: William Marle
/ Giles Rolls
Sales: Mark Whitfeld
https://kkvim.com/secured-income-fund/
The contents of this preliminary announcement have been extracted
from the Company's Annual Report, which is currently in print and
will be distributed within the week. The information shown for the
years ended 30 June 2021 and 30 June 2020 does not constitute statutory
accounts and has been extracted from the full accounts for the years
ended 30 June 2021 and 30 June 2020. The reports of the auditors
on those accounts were unqualified and did not contain adverse statements
under sections 498(2) or (3) of the Companies Act 2006. The accounts
for the year ended 30 June 2020 have been filed with the Registrar
of Companies. The accounts for the year ended 30 June 2021 will be
delivered to the Registrar of Companies in due course.
Strategic Report
Key Points
30 June 2021 30 June 2020
Net assets ([1]) GBP19,106,000 GBP45,532,000
NAV per Ordinary Share 36.28p 86.37p
Share price 42.50p 76.50p
Premium/(discount) to NAV 17.1% (11.4)%
Loss for the year GBP(11,017,000) GBP(913,000)
Dividend per share declared in respect of the
year 8.50p 7.00p
Dividend cover 0.002 0.44
B Share issue and redemption per Ordinary
Share
declared in respect of the year 19.50p -
Total return per Ordinary Share (based on NAV)
([2]) -25.6% -1.8%
Total return per Ordinary Share (based on
share
price) ([2]) -7.8% -9.2%
Ordinary Shares in issue 52,660,350 52,660,350
[1] In addition to the Ordinary Shares in issue, 1 Management Share
of GBP1 is in issue (2020: 50,000) (see note 21).
[2] Total return per Ordinary Share has been calculated by comparing
the NAV or share price, as applicable, at the start of the year
with the NAV or share price, as applicable, plus dividends and
B Share redemptions paid, at the year end.
Overview and Investment Strategy
General information
Secured Income Fund plc (the "Company", "Fund" or "SIF") was incorporated
in England and Wales under the Companies Act 2006 on 13 July 2015
with registered number 09682883. It is an investment company, as
defined in s833 of the Companies Act 2006. Its shares were admitted
to trading on the London Stock Exchange Specialist Fund Segment on
23 September 2015 ("Admission").
Change of name
On 18 July 2020, the Company changed its name from SQN Secured Income
Fund plc to Secured Income Fund plc.
Investment objective and policy
On 17 September 2020, the Shareholders approved the adoption of a
new investment objective and policy of the Company, as follows:
The Company will be managed with the intention of realising all remaining
assets in the Portfolio in a prudent manner consistent with the principles
of good investment management and with a view to returning cash to
Shareholders in an orderly manner.
The Company will pursue its investment objective by effecting an
orderly realisation of its assets in a manner that seeks to achieve
a balance between maximising the value received from those assets
and making timely returns of capital to Shareholders. This process
might include sales of individual assets, mainly structured as loans,
or running off the Portfolio in accordance with the existing terms
of the assets, or a combination of both.
As part of the realisation process, the Company may also exchange
existing debt instruments for equity securities where, in the opinion
of the Board, the Company is unlikely to be able to otherwise realise
such debt instruments or will only be able to realise them at a material
discount to the outstanding principal balance of that debt instrument.
The Company will cease to make any new investments or to undertake
capital expenditure except where, in the opinion of both the Board
and the Investment Manager (or, where relevant, the Investment Manager's
successors):
* the investment is a follow-on investment made in
connection with an existing asset in order to comply
with the Company's pre-existing obligations; or
* failure to make the follow-on investment may result
in a breach of contract or applicable law or
regulation by the Company; or
* the investment is considered necessary to protect or
enhance the value of any existing investments or to
facilitate orderly disposals.
Any cash received by the Company as part of the realisation process
prior to its distribution to Shareholders will be held by the Company
as cash on deposit and/or as cash equivalents.
The Company will not undertake new borrowing.
Any material change to the investment policy would require Shareholder
approval.
Although there was a change in the investment objective and policy,
there was no change in the business model in the year as the loans
continued to be held under a 'hold to collect' model.
Prior to 17 September 2020, the investment objective and policy were
as follows:
Investment objective
The investment objective of the Company was to provide Shareholders
with attractive risk adjusted returns, principally in the form of
regular, sustainable dividends, through investment predominantly
in a range of secured loans and other secured loan-based instruments
originated through a variety of channels and diversified by way of
asset class, geography and duration.
Investment policy
The Company achieved its investment objective by investing in a range
of secured loan assets mainly through wholesale secured lending opportunities,
secured trade and receivable finance and other collateralised lending
opportunities. Loan assets included both direct loans as well as
other instruments with loan-based investment characteristics (for
example, but not limited to, bonds, loan participations, syndicated
loans, structured notes, collateralised obligations or hybrid securities)
and may have included (subject to the limit set out below) other
types of investment (for example, equity or revenue- or profit-linked
instruments). The Company may have made investments through alternative
lending platforms that present suitable investment opportunities
identified by the Investment Manager.
Chairman's Statement
Introduction
I am pleased to provide Shareholders with my Chairman's statement,
covering the financial year from 1 July 2020 to 30 June 2021. Over
the reporting period, the Secured Income Fund plc (the "Company")
has focussed on returning capital to Shareholders efficiently and
in a timely manner. Since the wind down proposals were adopted in
September, the Company has returned 28p per Ordinary Share through
a combination of dividends and a B Share Scheme.
Furthermore, the Company has reduced platform and third-party debt
to 0.6% of NAV with the balance expected to settle in the upcoming
months.
Performance
For the reporting year ended 30 June 2021, the Company generated
a net loss of GBP11.0 million and loss per Ordinary Share of 20.92p
(compared to loss of GBP0.9 million and loss per Ordinary Share of
1.73p for the year ended 30 June 2020). The Company's NAV at 30 June
2021 was GBP19.1 million (36.28p (cum income) per Ordinary Share)
compared to GBP45.5 million (86.37p per Ordinary Share) as at 30
June 2020.
During the reporting period, there has been a significant increase
in the IFRS 9 provision across the direct loans. A large part of
this was due to the marked deterioration of the expected cash flows
of the film financings portfolio and the changed operating practices
across the film industry as a result of the Covid-19 pandemic. The
Board and Investment Manager also took the decision to increase the
provision against a US Health Care Services Company following the
sale of its core business assets which reduced the NAV further. Post-year
end, the Investment Manager was informed of a delay in the principal
repayment of the largest position in the portfolio, to the SME Loan
Company, and as a result the provision has been increased. The position
will be monitored closely over the next few weeks.
In addition to the direct loans, there have been some notable changes
across the remaining platform loans. The final real estate linked
loan from the UK Offshore platform has now been fully impaired following
continuous delays in receiving the outstanding balance including
accrued penalty interest. The Investment Manager remains in regular
dialogue with all the relevant parties to secure a positive resolution
where possible.
Moreover, during the period, we received the proceeds for most of
the outstanding loans within the UK venture debt portfolio. One final
loan remained within the portfolio, a broadband company, which has
since been fully impaired. This position has been restructured in
the past and any recovery is uncertain. We expect to receive an update
providing clarity on the company's future in the coming months.
Finally, with regards to the US promissory note, an agreement was
reached before the financial year end in which the position would
be settled for 25% of the outstanding principal balance. In September,
post-year end, the settlement amount was received.
Further information about the status of the remaining loans along
with the respective assigned provisions is provided within the Investment
Manager's Report.
The Board has maintained regular distributions to Shareholders throughout
the period, in the form of dividends during the first half of the
reporting period and then via the B Share Scheme. This has contributed
significantly to the decrease in the NAV with a total distribution
equivalent to 29.17p per Ordinary Share made during the reporting
period.
During the reporting period, the Company traded at an average discount
to NAV of 8.7%.
Foreign exchange hedging was removed in September 2020, with details
of USD and EUR exposure shown below. As a result of this investors
should be aware that there might be some impact on the Company if
FX markets move markedly.
The FX exposures at 30 June 2021 were as follows:
GBP 63.5%
EUR 22.4%
USD 14.1%
Note that all returns are net of all fees and no gearing was applied
to the portfolio during the reporting period.
The portfolio exposure by maturity, geography and type are presented
in the Company Analytics section in the Annual Report and Financial
Statements .
Corporate Activity
In June 2020, Shareholders voted against the continuation of the
Company as the Company did not manage to grow in the manner the Board,
the Manager and Shareholders had hoped as it was unable to raise
new capital and meet its original goal to increase shareholder capital
to GBP250 million by December 2019.
The Company entered a Managed Wind-Down on 17 September 2020 and
the Board of Directors and the Investment Manager have made a good
start on the return of capital to investors expeditiously. Costs
have been monitored carefully and no new underwriting commitments
have been made. In addition, as part of its ongoing management of
the Company's running costs, the Board intends to put proposals to
Shareholders to cancel the Company's admission to trading (the "Cancellation
of Trading"). The proposals will be put to Shareholders at general
meeting to be held immediately following the Company's annual general
meeting on 16 December 2021 and, if approved, will take effect once
the Company's NAV is reduced below GBP7 million. Full details of
the proposed Cancellation of Trading will be set out in a circular
that will shortly be sent to Shareholders.
The Board announced on 20 August 2021 that it has reached an agreement
with its Investment Manager, KKV Investment Management Ltd and its
AIFM, Kvika Securities Limited, to amend the investment management
agreement ("IMA"). The IMA will terminate with effect from midnight
on 31 December 2021.
The Board believes the revised Agreement allows for an orderly transition
of the management of the portfolio to the Company and provides the
Company with certainty over the level of future management fees payable
to the Investment Manager, with the added flexibility of facilitating
the Company becoming self-managed should the Board deem that appropriate,
whilst providing for the ongoing management of the portfolio to 31
December 2021.
Dividends
During the first six months of the period, the Company elected to
designate all dividends as interest distributions to its Shareholders.
In doing so, the Company took advantage of UK tax treatment by "streaming"
income from interest-bearing investments into dividends that will
be taxed in the hands of Shareholders as interest income. Over this
period, the Company made dividend distributions equivalent to 9.67p
per share.
Following the decision to proceed with a managed wind-down, the Board
reviewed the dividend policy and decided to cease paying monthly
dividends and is instead returning excess capital as and when the
Company has excess cash reserves available for distribution. However,
it is the Board's intention that the Company will pay sufficient
dividends each financial year to maintain investment trust status
for so long as the Company remains listed.
Capital Distributions
In order to make returns of capital more tax efficient for some shareholders,
the Company adopted a B Share scheme, whereby the Company is able
to issue redeemable B Shares to Shareholders which are subsequently
redeemed for cash. A General Meeting was held on 23 March 2021, where
the Board's proposal to adopt a B Share Scheme was accepted by Shareholders.
During the reporting period, the Board has distributed GBP10.27m
using the B Share Scheme, which is equivalent to 19.5p per Ordinary
Share. At the time of writing, a further GBP3.16m (equivalent to
6p per Ordinary Share) was returned to Shareholders post year end
via a third Return of Capital by the issue of B Shares.
The quantum and timing of a Return of Capital to Shareholders following
receipt by the Company of the net proceeds of realisations of investments
will be dependent on the Company's liabilities and general working
capital requirements. Accordingly, any future Return of Capital will
continue to be at the discretion of the Board, which will announce
details of each Return of Capital, including the relevant Record
Date, Redemption Price and Redemption Date, through an RNS Announcement,
a copy of which will be posted to Shareholders. The Board also intends
to continue to make dividend payments, where possible, in accordance
with the Company's dividend policy.
Board of Directors
Brett Miller joined the board as a director on 9 July 2020. Apart
from that there were no changes to the board composition during the
reporting period.
Change of Auditor
Following a thorough, competitive tender process, the Board appointed
Moore Kingston Smith LLP ("MKS") as auditor to the Company. MKS have
conducted their first audit of the Company's financial statements
for the financial year ended 30 June 2021.
Outlook
The Board's continued focus in the managed wind-down is to achieve
a balance between maximising the value received from the remaining
assets and making timely returns of capital to Shareholders, avoiding
capital erosion where possible.
During the reporting period, marked deterioration of some assets
has resulted in increased impairments and a reduced NAV. The Investment
Manager is working closely with the relevant borrowers to ensure
maximum returns for Shareholders in the circumstances. The Board
will ensure this approach is maintained whilst aiming for a smooth
transition of the portfolio to the Company at the end of December.
We thank investors for their continued support and hope to deliver
investors total proceeds as close as possible for the remaining NAV.
We shall keep investors informed of any developments as they occur.
David Stevenson
Chairman
20 October 2021
Investment Manager's Report
Overview
KKV Investment Management Limited ("KKV") assumed investment adviser
responsibility for the Company on 5 June 2020. However, an agreement
has been recently reached with the Board of the Secured Income Fund
plc and the AIFM, Kvika Securities Ltd whereby the investment management
agreement will be terminated with effect from midnight 31 December
2021. We therefore note that this is KKV's last report as Investment
Manager but we remain focussed to ensure a smooth transition of the
portfolio management responsibilities back to the Company over the
next few months.
Following the decision by Shareholders to vote against continuation,
we have been working hard to return capital to Shareholders in as
expeditious a way as possible without damaging capital value. Since
the wind-down of the Company commenced in September 2020, we have
returned 8.5 pence to Shareholders via dividend distribution and
19.5 pence via a B Share Scheme which was adopted to ensure more
tax efficient capital distributions for Shareholders. A further 6
pence has been distributed post year end.
Business Update
During the reporting period, Dawn Kendall, Chief Investment Officer,
has taken a leave of absence which continues to date. Other members
of KKV's executive team have managed to progress realisation opportunities
in her absence under the oversight of Ken Hillen, Executive Chairman.
Portfolio
There are eleven direct loans in the portfolio with an average of
GBP1.3m balance outstanding per loan. During the reporting period,
there has been a significant increase in IFRS 9 impairment provisions
for some of the direct loans. In particular, the six film financings,
have suffered the effects of the pandemic with a marked deterioration
of the expected cash flows, through cancelled film festivals and
cinema screening to changes in operating practices whereby future
sales are expected to be made via longer tail earn outs instead of
the customary large upfront payments.
Legacy loans that formed part of the portfolio prior to April 2017
now make less than 1% of the NAV. Various factors such as continuous
delays in repayment, depleted borrower assets and uncertainties in
relation to a borrower's going concern have resulted in increased
provisioning across the remaining legacy loans.
As the portfolio is now in wind-down, we have focussed on returning
capital to Shareholders in a timely and efficient manner. On 23 March
2021, Shareholders voted in favour of the B Share Scheme. To date,
we have made distributions of 25.5 pence per Ordinary Share via the
B Share Scheme, which includes 6 pence per Share distributed post
year end.
No leverage has been used throughout the reporting period and all
assets are held in their base currency after a Board decision to
discontinue hedging of capital and interest in September 2020. Fluctuations
in the value of Sterling during the reporting period has meant that
these positions may be impacted and we have been providing a breakdown
of the FX exposures in the portfolio in the factsheet publications
in order to allow Shareholders the option to make their own hedging
arrangements.
There were no breaches of investment guidelines during the reporting
period.
Direct Loans
Loan Carrying
Principal Value at
Balance Amortised
Outstanding ECL provision Cost ([1]) Amortisation/
as at 30 at 30 at 30 June Bullet
June 2021 June 2021 2021 repayment/
Borrower GBP GBP GBP other Asset Type Currency Yield
Borrower Bullet Wholesale
1 GBP5,632,560 GBP450,605 GBP5,181,955 repayment Lending GBP 10%
Borrower GBP4,131,479 GBP12,394 GBP4,119,085 Pass-through SME and EUR Variable
2 amortisation Leasing
Fund
Interest
only for
12 months,
then
Borrower scheduled Medical
3 GBP3,782,082 GBP1,891,041 GBP1,891,041 amortisation Services USD 12%
Film
Borrower Production
4 GBP1,616,743 GBP913,237 GBP703,507 Cash sweep Financing USD 12%
Interest
only during
availability
period, then
Borrower scheduled Leasing
5 GBP511,874 GBP1,536 GBP510,338 amortisation Group GBP 9.5%
Film
Borrower Production
6 GBP1,743,243 GBP1,278,812 GBP464,431 Cash sweep Financing GBP 11%
Film
Borrower Production
7 GBP2,561,860 GBP2,102,049 GBP459,811 Cash sweep Financing GBP 12%
Film
Borrower Production
8 GBP1,673,510 GBP1,220,542 GBP452,968 Cash sweep Financing GBP 11%
Film
Borrower Production
9 GBP737,558 GBP422,636 GBP314,922 Cash sweep Financing GBP 12%
Laser and
Borrower Scheduled LED
10 GBP296,364 GBP889 GBP295,475 amortisation Manufacturer GBP 10%
Film
Borrower Production
11 GBP522,577 GBP400,189 GBP122,388 Cash sweep Financing GBP 12%
---------------- --------------- ----------------
Direct
Loans GBP23,209,850 GBP8,693,930 GBP14,515,920
Total
---------------- --------------- --------------------------------------------------------------
([1]) The carrying values of loans at amortised cost disclosed in
the table above do not include capitalised transaction fees, which
totalled GBP44,000 at 30 June 2021.
The following provides a narrative relating to our direct loan investments.
Names of counterparties have been omitted for commercial and business
sensitivity reasons.
SME Loan company (Borrower 1) - 27.1% of NAV
This is the largest individual facility provided by the Company and
has been in place since May 2017. This is a long-established lender
to the SME market. The borrower commenced capital repayment in January
2021 and has managed to repay 43.7% of the facility over the reporting
period. There has been a delay in the borrower obtaining refinance
and the Company has granted the borrower a three month extension,
to the end of 2021 to source new funding. If the refinance fails
to progress, then the underlying portfolio will enter run off and
require collections over the coming 12-18 months.
Irish SME and Leasing Fund investment (Borrower 2) - 22.5% of NAV
This portfolio of 26 loans has continued to perform well despite
the wider economic downturn due to significant exposure to technology
and education companies. Most of the underlying loans are delivering
income and the manager has been able to make healthy distributions
to the Company during the reporting period. The fund is in its harvest
phase and we expect capital distribution to accelerate as loans mature
or are refinanced.
US healthcare services company (Borrower 3) - 9.9% of NAV
This loan was made to a company specialising in ancillary medical
services to a number of hospitals in the American Midwest including
optometry, audiology, dentistry and podiatry. A key aspect of the
security package is that there is a parent company guarantee in place
over all scheduled interest and principal repayments.
Prior to the year end, we were informed that there has been a sale
of business assets, which has rendered the business economically
unviable and resulted in a default. We have engaged legal counsel
and a Reservations of Right letter has been issued.
All amortised payments have been made on time; however, given the
current situation we are monitoring the receivables very tightly.
Media financing (Borrowers 4, 6 through to 9 and Borrower 11) - 13.4%
of NAV
The Company funded eight films in total through the borrower, two
of which were repaid in full ahead of the reporting period. The final
six film financings have been heavily impacted by the Covid-19 pandemic.
The borrower has provided revised cashflow expectations based on
sales forecasts and updates on timing of receipts. The cashflow can
be split into two tranches: "contracted cashflow" (comprising Tax
Credit, Receipts and Presold Income) and "non-contractual Future
Sales" which are effectively mezzanine in nature and carry a higher
risk profile. We have noted a marked deterioration of the expected
cashflows across both tranches. There have been significant administration
delays in receiving the contracted element and changing operating
practises for future sales has meant that the customary large upfront
payments are now considered highly unlikely for the films in the
portfolio and would, at best, be replaced by longer tail earn outs.
Following the review and analysis, and recognising the limitations
on security, recovery and the mezzanine nature of a large part of
the expected cash flows, KKV recommended a substantial impairment
on the positions. The portfolio is held in two Special Purpose Vehicles
and the structure does allow for cross-subsidisation of performing
films to non-performing films which has occurred in the past. However,
this is only relevant when all principal and interest on an individual
film loan has been repaid, and given it is unlikely that any of the
films will now repay in full, this mechanism is considered redundant.
We are in regular dialogue with the borrower to closely monitor receipts,
expectations of future sales and assess any changes to the cashflows.
UK leasing company (Borrower 5) - 2.7% of NAV
This loan has been underwritten since July 2017 on a rolling twelve
month basis. It is a working capital facility to be used to warehouse
deals financed by block facilities already in place. The underlying
portfolio comprises a basket of loans split between two types of
lending; 85% asset finance/leases with a typical deal size of GBP15,000
and 15% professional loans to white collar industry professionals
supported by personal guarantee.
The borrower commenced amortisation in January 2021 and made all
payments on time. This loan matured at the end of September 2021.
LED manufacturer in Ireland (Borrower 10) - 1.6% of NAV
This is a secured term loan that has been in place since May 2017
and is secured by a guarantee from the parent company, a debenture
over the borrower and a charge over equipment purchased via Capex
portion of the facility.
Their business has operated on a business as usual basis throughout
the lockdowns. The supply chain is functional, and customers continue
to operate.
After granting a six month amortisation deferral, the borrower recommenced
repayment of capital in October 2020. The loan is now due to mature
in December 2022.
Legacy portfolio
Loan Carrying
Principal Value at
Balance Outstanding ECL provision Amortised
at 30 June at 30 June Cost at 30
2021 2021 June 2021
Borrower GBP GBP GBP Currency Yield
Borrower 12 GBP469,959 GBP361,507 GBP108,452 USD 8.0%
Borrower 13 GBP429 GBP110 GBP319 GBP 11.5%
Borrower 14 GBP1,218,063 GBP1,218,063 - GBP -
Borrower 15 GBP1,000,000 GBP1,000,000 - GBP -
Borrower 16 GBP415,714 GBP415,714 - GBP -
Borrower 17 GBP2,077,622 GBP2,077,622 - USD -
Borrower 18 GBP326,685 GBP326,685 - EUR -
---------------------- --------------- ---------------
Legacy Loans Total GBP5,508,472 GBP5,399,701 GBP108,771
---------------------- --------------- ---------------------------
The following provides a narrative relating to the legacy loans within
the portfolio.
US business promissory note (Borrower 12) - 0.6% of NAV
This loan is a working capital facility via a promissory note which
was due to mature in July 2020. The borrower has been unable to settle
the loan and we have since been in protracted negotiations to resolve
the situation in the best interest of Shareholders. We reached an
agreement to settle 25% of the principal balance outstanding; the
settlement amount was received post year end, in September.
UK peer to peer loan platform (Borrower 13) - 0.0% of NAV
At the end of the reporting period, there was one performing loan
remaining on the platform. This was fully repaid at the beginning
of August, post year end.
UK Venture Debt (Borrower 14) - 0.0% of NAV
The capital for three of the outstanding loan notes within the portfolio
was repaid in May 2021. The final position within the portfolio,
a broadband company, has transferred over to the existing fund manager's
new business. This has allowed for continuity in managing this complex
position which has previously been restructured. There continues
to be a number of uncertainties but we are hoping to have some clarity
in the upcoming months. Following which, we will be able to provide
Shareholders with an appropriate update. For now, given the complexities
and the high dependence on certain events taking place, we have taken
the prudent approach and fully provided for this position.
UK Offshore platform (Borrower 15) - 0.0% of NAV
The final credit from this platform has been in place since early
2017 and is a real estate linked loan to a developer on the island
of Gibraltar. Despite continued assurances, we have not been repaid
and took the decision to fully impair this position. We remain in
regular contact with the platform to monitor progress and will continue
to press for repayment. However, we remain uncertain of the balance
that will be recovered.
Small company bond platform (Borrower 16) - 0.0% of NAV
The only outstanding debt from this platform was a recruitment business
that had undergone a protracted recovery process through the courts.
This loan is fully impaired.
US peer to peer business (Borrower 17) - 0.0% of NAV
The outstanding balance of this position has been fully impaired
and we have assigned no further ability to recoup funds from the
platform.
Spanish peer to peer loan platform (Borrower 18) - 0.0% of NAV
We have assigned zero probability of any further collections on the
remaining 7 loans within the portfolio. We continued to push for
some return from these loans but after receiving a number of liquidation
confirmations, we concluded that there was very little probability
of recouping any further capital.
Outlook
We have made good progress with the realisation of the Company's
portfolio since appointment and are focussed on continuing this through
to the end of our term. We are confident that this approach will
be maintained going forward as the portfolio management responsibilities
transition back to the Company.
We would like to thank Shareholders for their support and as always
will continue to share any updates on the progress over the upcoming
months.
KKV Investment Management Ltd
20 October 2021
Principal Risks and Uncertainties
Risk is inherent in the Company's activities, but it is managed through
an ongoing process of identifying and assessing risks and ensuring
that appropriate controls are in place. The key risks faced by the
Company, along with controls employed to mitigate those risks, are
set out below.
Macroeconomic risk
Adverse macroeconomic conditions may have a material adverse effect
on the Company's yield on investments, default rate and cash flows.
The Board and the Investment Manager keep abreast of market trends
and information to try to prepare for any adverse impact.
The Company's assets are diversified by geography, asset class, and
duration, thereby reducing the impact that macroeconomic risk may
have on the overall portfolio.
Interest rate risk arises from the possibility that changes in interest
rates will affect future cash flows and/or fair values of the Company's
investments. Exposure to interest rate risk is limited by the use
of fixed rate interest on the majority of the Company's loans, thereby
giving security over future loan interest cash flows.
Currency risk is the risk that changes in foreign exchange rates
will impact future profits and net assets.
Following the UK's exit from the EU on 31 January 2020, there may
be some uncertainty in UK and European markets as they adjust to
the new relationship between the UK and the EU and the rest of the
world. Although the exact impact of Brexit is not known, the Board
believes that the Company is well placed to deal with future impacts
from it.
Covid-19
The Covid-19 pandemic is a risk to the global economy. The Investment
Manager and Administrator invoked their business continuity plans
to help ensure the safety and well-being of their staff thereby retaining
the ability to maintain business operations. These actions helped
to ensure business resilience.
The situation continues to change so the full impact cannot yet be
understood, but future cashflows and valuations are more uncertain
at the current time, and may be more volatile than in recent years.
Indeed, the level of estimation uncertainty and judgement for the
calculation of expected credit losses has increased as a result of
the economic effects of the Covid-19 pandemic (see notes 3b and 4
for further details). However, the impact of defaults that might
occur in future under different economic scenarios has been reflected
in various models to enable the Board to evaluate the Company's viability,
and the Directors believe that the Company is well placed to survive
the impact of the Covid-19 pandemic, thereby enabling the Company
to realise its assets in an orderly manner.
The impact of the various vaccines has started to be seen, and there
is light at the end of the Covid-19 pandemic tunnel. It is expected
that (as vaccine programmes continue to be rolled out globally) the
risk to the Company from the pandemic will continue to decrease over
the next 12 months. H owever, the Board recognises the possibility
that there will be further future "waves" and variants of the Covid-19
virus and it will be some time before the pandemic can be declared
"over".
Credit risk
The Company invests in a range of secured loan assets mainly through
wholesale secured lending opportunities, secured trade and receivable
finance and other collateralised lending opportunities. The Company
is also exposed to direct loans. Significant due diligence is undertaken
on the borrowers of these loans and security taken to cover the loans
and to mitigate the credit risk on such loans.
The key factor in underwriting secured loans is the predictability
of cash flows to allow the borrower to perform as per the terms of
the contract.
Following the change of investment objective on 17 September 2020,
the Company ceased to make any new investments or to undertake capital
expenditure except where, in the opinion of both the Board and the
Investment Manager (or, where relevant, the Investment Manager's
successors):
* the investment is a follow-on investment made in
connection with an existing asset in order to comply
with the Company's pre-existing obligations; or
* failure to make the follow-on investment may result
in a breach of contract or applicable law or
regulation by the Company; or
* the investment is considered necessary to protect or
enhance the value of any existing investments or to
facilitate orderly disposals.
The Company's assets are diversified by geography, asset class, and
duration, thereby reducing the impact that investment risk may have
on the overall portfolio. This diversification may reduce as assets
are realised, but is an acceptable, and to some extent unavoidable,
risk associated with the realisation process.
The credit risk associated with the investments is reduced not only
by diversification but also by the use of security. Despite the use
of security, credit risk is not reduced entirely and so the Investment
Manager monitors the recoverability of the loans (on an individual
loan basis) each month and impairs loans in accordance with IFRS
9 Financial Instruments.
Platform risk
The Company is dependent on platforms, albeit to a lesser extent
for that reducing part of the loan portfolio originated through platforms
than was the case prior to the change of Investment Manager in April
2017, to operate the loan portfolio (to effectively monitor loans;
and to pay and receive monies as necessary). If a platform were no
longer able to operate effectively this could put at risk loans made
with/through such a platform and increase credit risk.
The Investment Manager undertakes due diligence on all the platforms
and part of this work is to confirm that the platforms have disaster
recovery policies in place whereby a third party administrator would
step in to manage the loans in the event the platform could no longer
do so. If such an event were to occur, the Company's approach would
vary depending on the platform and the circumstances, and would be
determined by the Board after discussion with the Investment Manager
and other advisers.
The Company's exposure to platform risk is decreasing as it realises
platform loans and exits positions on certain platforms entirely.
Regulatory risk
The Company's operations are subject to wide ranging regulations,
which continue to evolve and change. Failure to comply with these
regulations could result in losses and damage to the Company's reputation.
The Company employs third party service providers to ensure that
regulations are complied with.
Reputational risk
Any adverse impact on the Company's reputation would likely result
in a fall in its share price, thereby adversely affecting Shareholders.
Environment, Employee, Social and Community Issues
As an investment company, the Company does not have any employees
or physical property, and most of its activities are performed by
other organisations. Therefore, the Company does not combust fuel
and does not have any greenhouse gas emissions to report from its
operations, nor does it have responsibility for any other emissions
producing sources under the Companies (Directors' Report) and Limited
Liability Partnerships (Energy and Carbon Report) Regulations 2018.
When making investment decisions, the Investment Manager has not,
historically, considered the impact that an entity in which the Company
invests may have on the community. However, whilst the Board believes
that all companies have a duty to consider their impact on the community
and the environment, the Company does not have a direct impact on
the community or environment and, as a result, does not maintain
policies in relation to these matters.
The Investment Manager is committed to achieving the best possible
risk-adjusted returns through integrating Environmental, Social and
Governance ("ESG") considerations into its core investment analysis
and decision-making process, whilst being mindful of the managed
wind-down of the Company. The Investment Manager recognises the value
in considering ESG risks and has adopted the following ESG approach
in conducting its business:
* Taking into account the non-financial performance of
target companies, specifically related to governance,
social and environmental policy.
* Adopting responsible and ethical approach to
governance including:
* Remuneration of senior management and a policy on
bonuses that is compliant with international
standards;
* Implementation of compliance policies and procedures
and on-going monitoring of the firm's systems and
controls;
* Implementation of risk controls throughout the
business; and
* Consideration of our ethical obligations in all
business conduct (anti money laundering,
anti-corruption, reputational due diligence).
* Encouraging a human resource policy which values and
respects all staff members through:
* Objective criteria to measure performance and
competencies;
* Support programs requiring senior management
involvement in all staff members career progression;
and
* Equality across all staff irrespective of role,
gender, race, age, religious belief or sexual
orientation.
Gender Diversity
The Board of Directors of the Company currently comprises two male
Directors and one female Director. Further information in relation
to the Board's policy on diversity can be found in the Directors'
Remuneration Report in the Annual Report and Financial Statements.
Key Performance Indicators
The Board uses the following key performance indicators ("KPIs")
to help to assess the Company's performance against its objectives.
Further information on the Company's performance is provided in the
Chairman's Statement and the Investment Manager's Report.
Dividend yield
The Company distributes at least 85% of its distributable income
by way of dividends. During any year, the Company may retain some
of the distributable income and use these to smooth future dividend
flows.
The Company has announced dividends of GBP4,476,000 (8.50p per Ordinary
Share) for the year ended 30 June 2021 (2020: GBP3,684,000 (7.00p
per Ordinary Share)), being far in excess (2020: 228.5%) of distributable
income for the year (see notes 5 and 22 for further details). To
ensure the tax efficient streaming of qualifying interest income,
the Company may announce an additional dividend for the year ended
30 June 2021, once the tax advisers have finalised the tax computations.
Capital returned to Shareholders
Following the change in investment objective on 17 September 2020,
the Directors consider it important to measure the amount of capital
returned to Shareholders. During the year, GBP10,269,000 (see note
5) was returned to Shareholders by way of B Share redemptions and
GBP5,090,000 (see note 5) was paid to Shareholders by way of dividends,
which included two dividends of 0.583p per Ordinary Share each which
related to the prior year. In addition, during the year 49,999 Management
Shares were bought back for GBP49,999 and cancelled (see note 21).
NAV and total return
The Directors regard the Company's NAV as a key component to delivering
value to Shareholders, but believe that total return (which includes
dividends and B Share redemptions) is the best measure for shareholder
value.
Premium/discount of share price to NAV
The Board understand the importance of minimising the discount to
NAV at which the Company's Ordinary Shares trade and the Board regularly
monitors the premium/discount of the price of the Ordinary Shares
to the NAV per share. During the year, the Company traded at an average
discount to NAV of 8.7% (2020: 7.7%). A t 30 June 2021, the shares
were trading at 42.50p, a 17.1% premium to NAV (2020: 76.50p, an
11.4% discount to NAV).
David Stevenson
Chairman
20 October 2021
Promoting the Success of the Company
The following disclosure outlines how the Directors have had regard
to the matters set out in Section 172(1)(a) to (f) of the Companies
Act 2006.
The Board considers the needs of a number of stakeholders when considering
the long-term future of the Company. The key stakeholders with which
the Board has liaised during the year ended 30 June 2021 were:
* Shareholders; and
* Key service providers.
Shareholders
The Company's significant Shareholders at the year end can be found
in the Directors' Report in the Annual Report and Financial Statements
.
When making principal decisions the Board consider it imperative
to analyse the views of the Company's investors to ensure that its
decisions are aligned with the wishes of Shareholders and that the
Company can achieve its Investment Policy. The key performance indicators
have been considered on an ongoing basis as part of the Board's decision
making process.
Details of how the Directors communicate with Shareholders can be
found in the Corporate Governance Report in the Annual Report and
Financial Statements .
Other than the routine engagement with investors regarding strategy
and performance, the Company's continuation was discussed with investors.
A continuation vote was held on 19 June 2020 that, in line with the
Directors' recommendation, did not pass. A further general meeting
of the Company was held on 17 September 2020 at which a special resolution
approved the managed wind-down of the Company and the adoption of
the new investment policy of the Company.
Key service providers
Details of the Company's key service providers can be found in the
Directors' Report in the Annual Report and Financial Statements .
The key service providers are fundamental to the Company's ability
to continue in the same state as any changes could disrupt the expected
timeliness of information provided to the markets. In turn, this
would be likely to have a detrimental impact on the Company's reputation.
However, on 20 August 2021, the Company agreed with the Investment
Manager and its AIFM to amend the investment management agreement
and for the agreement to terminate with effect from midnight on 31
December 2021. The Board believes that the revised Agreement provides
the Company with certainty over the level of future management fees
payable to the Investment Manager with the added flexibility of facilitating
the Company becoming self-managed should the Board deem that appropriate,
whilst providing for the ongoing management of the portfolio to 31
December 2021. Overall, it allows for an orderly transition of the
management of the portfolio to the Company.
The Board has continuous access to the Company's key service providers
and has open two-way communication with them. Key aspects of discussion
with these service providers, other than those regarding Company
performance and strategy, were in respect of fees payable to these
providers.
Following these discussions, the Investment Manager's fees were amended
as disclosed in note 7.
David Stevenson
Chairman
20 October 2021
Statement of Comprehensive Income
for the year ended 30 June 2021
Year ended Year ended
Note 30 June 2021 30 June 2020
GBP'000 GBP'000
Revenue
Interest income 3f 4,010 4,315
Impairment of interest income 14 (877) -
------------ ------------
Net interest income 3,133 4,315
------------ ------------
Total revenue 3,133 4,315
------------ ------------
Operating expenses
Management fees 7a (309) (483)
Other expenses 11 (147) (164)
Legal and professional fees (139) (97)
Administration fees 7b (130) (117)
Directors' remuneration 8 (119) (94)
Broker fees (56) (197)
Transaction fees 7a (46) (147)
------------ ------------
Total operating expenses (946) (1,299)
------------ ------------
Investment gains and losses
Movement in unrealised gains and losses
on loans due to movement in foreign exchange
on non-Sterling loans 14, 24 (1,283) 410
Impairment losses on financial assets (or
loans) 14 (9,657) (3,299)
Movement in unrealised (loss)/gain on investments
at fair value through profit or loss 15 (92) 19
Movement in unrealised gain on derivative
financial instruments 17, 24 6 345
Realised loss on disposal of loans (2,544) (536)
Realised gain on disposal of investments
at fair value through profit or loss 15 94 -
Realised gain/(loss) on derivative financial
instruments 17, 24 269 (852)
------------ ------------
Total investment gains and losses (13,207) (3,913)
------------ ------------
Net loss from operating activities before
gain/(loss) on foreign currency exchange (11,020) (897)
Net foreign exchange gain/(loss) 24 3 (16)
------------ ------------
Loss and total comprehensive income for
the year attributable to the owners of the
Company (11,017) (913)
------------ ------------
Loss per Ordinary Share (basic and diluted) 13 (20.92)p (1.73)p
------------ ------------
There were no other comprehensive income items in the year.
Except for unrealised investment gains and losses, all of the Company's
profit and loss items are distributable.
The accompanying notes form an integral part of the financial statements
.
Statement of Changes in Equity
for the year ended 30 June 2021
Called Capital
up share redemption Special distributable Profit and
Note capital reserve reserve loss account Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2019 577 - 50,253 (701) 50,129
Loss for the year 22 - - - (913) (913)
Transactions with Owners in their capacity as owners:
Dividends paid 5,22 - - (2,072) (1,612) (3,684)
------------ ------------ ------------ ------------ ------------
At 30 June 2020 577 - 48,181 (3,226) 45,532
Loss for the year 22 - - - (11,017) (11,017)
Transactions with Owners in their capacity as owners:
Dividends paid 5,22 - - (4,324) (766) (5,090)
B Shares issued during 5, 21,
the year 22 10,269 - (10,269) - -
B Shares redeemed during 5, 21,
the year 22 (10,269) 10,269 (10,269) - (10,269)
Management Share buy
backs 21, 22 (50) 50 (50) - (50)
------------ ------------ ------------ ------------ ------------
At 30 June 2021 527 10,319 23,269 (15,009) 19,106
------------ ------------ ------------ ------------ ------------
There were no other comprehensive income items in the year.
The above amounts are all attributable to the owners of the Company.
The accompanying notes form an integral part of the financial statements
.
Statement of Financial Position
as at 30 June 2021
30 June
Note 2021 30 June 2020
GBP'000 GBP'000
Non-current assets
Loans at amortised cost 14 7,336 31,942
Investments at fair value through profit
or loss 15,16 - 251
------------ ------------
Total non-current assets 7,336 32,193
------------ ------------
Current assets
Loans at amortised cost 14 7,333 10,691
Other receivables and prepayments 18 189 1,625
Cash and cash equivalents 4,396 1,193
------------ ------------
Total current assets 11,918 13,509
------------ ------------
Total assets 19,254 45,702
------------ ------------
Current liabilities
Other payables and accruals 19 (148) (164)
Derivative financial instruments 16,17 - (6)
------------ ------------
Total liabilities (148) (170)
------------ ------------
------------ ------------
Net assets 19,106 45,532
------------ ------------
Capital and reserves attributable to owners
of the Company
Called up share capital 21 527 577
Other reserves 22 18,579 44,955
------------ ------------
Equity attributable to the owners of the
Company 19,106 45,532
------------ ------------
Net asset value per Ordinary Share 23 36.28p 86.37p
------------ ------------
These financial statements of Secured Income Fund plc (registered
number 09682883) were approved by the Board of Directors on 20 October
2021 and were signed on its behalf by:
David Stevenson Gaynor Coley
Chairman Director
20 October 2021 20 October 2021
The accompanying notes form an integral part of the financial statements
.
Statement of Cash Flows
for the year ended 30 June 2021
Year ended Year ended
30 June 30 June 2020
2021
GBP'000 GBP'000
Cash flows from operating activities
Net loss before taxation (11,017) (913)
Adjustments for:
Movement in unrealised gains and losses on loans
due to movement in foreign exchange on non-Sterling
loans 1,283 (410)
Impairment losses on financial assets (or loans) 9,657 3,299
Movement in unrealised loss/(gain) on investments
at fair value through profit or loss 92 (19)
Movement in unrealised gain on derivative financial
instruments (6) (345)
Realised loss on disposal of loans 2,544 536
Realised gain on disposal of investments at fair
value through profit or loss (94) -
Realised (gain)/loss on derivative financial
instruments (269) 852
Amortisation of transaction fees 46 147
Interest received and reinvested by platforms (1) (50)
Capitalised interest (1,174) (1,486)
Decrease in investments 16,131 1,783
------------ ------------
Net cash inflow from operating activities before
working capital changes 17,192 3,394
Decrease/(increase) in other receivables and
prepayments 1,436 (484)
Decrease in other payables and accruals (16) (20)
------------ ------------
Net cash inflow from operating activities 18,612 2,890
Cash flows from financing activities
Dividends paid (5,090) (3,684)
B Share scheme redemptions (10,269) -
Management share buy backs (50) -
------------ ------------
Net cash outflow from financing activities (15,409) (3,684)
------------ ------------
Increase/(decrease) in cash and cash equivalents
in the year 3,203 (794)
Cash and cash equivalents at the beginning of
the year 1,193 1,987
------------ ------------
Cash and cash equivalents at the year end 4,396 1,193
------------ ------------
Supplemental cash flow information
Non-cash transaction - interest income 1,175 1,536
The accompanying notes form an integral part of the financial statements
.
Notes to the Financial Statements
for the year ended 30 June 2021
1. General information
The Company is a public company (limited by shares) and was incorporated
and registered in England and Wales under the Companies Act 2006 on
13 July 2015 with registered number 09682883. The Company's shares
were admitted to trading on the London Stock Exchange Specialist Fund
Segment on 23 September 2015 ("Admission"). The Company is domiciled
in England and Wales.
The Company is an investment company as defined in s833 of the Companies
Act 2006.
Change of name
On 18 July 2020, the Company changed its name from SQN Secured Income
Fund plc to Secured Income Fund plc.
2. Statement of compliance
a) Basis of preparation
These financial statements present the results of the Company for
the year ended 30 June 2021. These financial statements have been
prepared in accordance with UK-adopted International Financial Reporting
Standards ("IFRS").
These financial statements have not been prepared in full accordance
with the Statement of Recommended Practice ("SORP") for investment
trusts issued by the AIC in October 2019, as the main driver of the
SORP is to disclose the allocation of expenses between revenue and
capital, thereby enabling a user of the financial statements to determine
distributable reserves. However, with the exception of investment
gains and losses, all of the Company's profit and loss items are of
a revenue nature as it does not allocate any expenses to capital.
Therefore, the Directors believe that full compliance with the SORP
would not be of benefit to users of the financial statements. Further
details on the distributable reserves are provided in note 22.
T he Company's capital is raised in Sterling, expenses are paid in
Sterling, the majority of the Company's financial assets and liabilities
are Sterling based, and (until September 2020) the Company hedged
substantially all of its foreign currency risk back to Sterling. Therefore,
the Board of Directors consider that Sterling most faithfully represents
the economic effects of the underlying transactions of the Company,
events and conditions. T hese financial statements are presented in
Sterling, which is the Company's functional and presentation currency.
All amounts are rounded to the nearest thousand.
Financial statements prepared on a non-going concern basis
On 19 June 2020, the Company held a continuation vote (the "Continuation
Vote") that, in line with the Directors' recommendation, did not pass.
This vote was required under the Articles as the Company did not have
a Net Asset Value of at least GBP250 million as at 31 December 2019.
As this vote did not pass, the Directors (as required under the Articles)
convened a further general meeting of the Company on 17 September
2020 at which a special resolution approved the managed wind-down
of the Company and the adoption of the new investment policy of the
Company to carry out an orderly realisation of the Company's portfolio
of assets and distribution of cash to Shareholders .
This has had no significant impact on the accounting policies, judgements
or recognition of and carrying value of assets and liabilities within
the financial statements as the loans are included net of their expected
credit loss provision ("ECL") and are expected to be realised in an
orderly manner, and the estimated costs of winding up the Company
are immaterial and therefore have not been provided for in the financial
statements .
The Covid-19 pandemic is a risk to the global economy. Details of
the macroeconomic impact and the impact on credit risk are provided
in the Investment Manager's Report. The Investment Manager and Administrator
invoked their business continuity plans to help ensure the safety
and well-being of their staff thereby retaining the ability to maintain
business operations. These actions helped to ensure business resilience.
The situation continues to change so the full impact cannot yet be
understood, but the Company will continue to monitor the situation.
b) Basis of measurement
The financial statements have been prepared on a historical cost basis,
except for investments at fair value through profit or loss and derivative
instruments, which are measured at fair value through profit or loss.
Given the Company's investment policy to carry out an orderly realisation
of the Company's portfolio of assets and distribution of cash to Shareholders,
the financial statements have been prepared on a non-going concern
basis.
c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a
single economic segment of business, being investment in a range of
SME loan assets. Consequently, no segmental analysis is required.
d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect
the application of policies and the reported amounts of assets and
liabilities, income and expenses. The estimates and associated assumptions
are based on historical experience and various other factors that
are believed to be reasonable under the circumstances, the results
of which form the basis of making the judgements about carrying values
of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the period
in which the estimate is revised, if the revision affects only that
period, or in the period of the revision and future periods, if the
revision affects both current and future periods.
Judgements made by management in the application of IFRS that have
a significant effect on the financial statements and estimates with
a significant risk of material adjustment in the next year are discussed
in note 4.
3. Significant accounting policies
a) Foreign currency
Foreign currency transactions are translated into Sterling using the
exchange rates prevailing at the dates of the transactions. Foreign
exchange gains and losses resulting from the settlement of such transactions
and from the translation at period-end exchange rates of monetary
assets and liabilities denominated in foreign currencies are recognised
in the Statement of Comprehensive Income. Translation differences
on non-monetary financial assets and liabilities are recognised in
the Statement of Comprehensive Income.
b) Financial assets and liabilities
The financial assets and liabilities of the Company are defined as
loans, bonds with loan type characteristics, investments at fair value
through profit or loss, cash and cash equivalents, other receivables,
derivative instruments and other payables.
Classification
IFRS 9 requires the classification of financial assets to be determined
on both the business model used for managing the financial assets
and the contractual cash flow characteristics of the financial assets.
Loans have been classified at amortised cost as:
* they are held within a "hold to collect" business
model with the objective to hold the assets to
collect contractual cash flows; and
* the contractual terms of the loans give rise on
specified dates to cash flows that are solely
payments of principal and interest on the principal
amount outstanding.
Although there was a change in the investment objective and policy,
there was no change in the business model in the year as the loans
continued to be held under a 'hold to collect' model.
The Company's unquoted investments have been classified as held at
fair value through profit or loss as they are held to realise cash
flows from the sale of the investments.
Recognition
The Company recognises a financial asset or a financial liability
when, and only when, it becomes a party to the contractual provisions
of the instrument. Purchases and sales of financial assets that require
delivery of assets within the time frame generally established by
regulation or convention in the marketplace are recognised on the
trade date, i.e. the date that the Company commits to purchase or
sell the asset.
Derecognition
A financial asset (or, where applicable, a part of a financial asset
or part of a group of similar assets) is derecognised where:
* The rights to receive cash flows from the asset have
expired; or
* The Company has transferred its rights to receive
cash flows from the asset or has assumed an
obligation to pay the received cash flows in full
without material delay to a third party under a
"pass-through" arrangement; and
* Either (a) the Company has transferred substantially
all the risks and rewards of the asset, or (b) the
Company has neither transferred nor retained
substantially all the risks and rewards of the asset,
but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows
from an asset (or has entered into a pass-through arrangement) and
has neither transferred nor retained substantially all the risks and
rewards of the asset nor transferred control of the asset, the asset
is recognised to the extent of the Company's continuing involvement
in the asset.
The Company derecognises a financial liability when the obligation
under the liability is discharged, cancelled or expires.
Initial measurement
Financial assets and financial liabilities at fair value through profit
or loss are recorded in the Statement of Financial Position at fair
value. All transaction costs for such instruments are recognised directly
in profit or loss.
Financial assets and financial liabilities not designated as at fair
value through profit or loss, such as loans, are initially recognised
at fair value, being the amount issued less transaction costs.
Subsequent measurement
After initial measurement, the Company measures financial assets and
financial liabilities not designated as at fair value through profit
or loss, at amortised cost using the effective interest rate method,
less impairment allowance. Gains and losses are recognised in the
Statement of Comprehensive Income when the asset or liability is derecognised
or impaired. Interest earned on these instruments is recorded separately
as investment income.
After initial measurement, the Company measures financial instruments
which are classified at fair value through profit or loss at fair
value. Subsequent changes in the fair value of those financial instruments
are recorded in net gain or loss on financial assets and liabilities
at fair value through profit or loss.
The carrying value of cash and cash equivalents and other receivables
and payables equals fair value due to their short-term nature.
Impairment
A financial asset is credit-impaired when one or more events that
have occurred have a significant impact on the expected future cash
flows of the financial asset. It includes observable data that has
come to the attention of the holder of a financial asset about the
following events:
* Significant financial difficulty of the issuer or
borrower;
* A breach of contract, such as a default or past-due
event;
* The lenders for economic or contractual reasons
relating to the borrower's financial difficulty
granted the borrower a concession that would not
otherwise be considered;
* It becoming probable that the borrower will enter
bankruptcy or other financial reorganisation;
* The disappearance of an active market for the
financial asset because of financial difficulties; or
* The purchase or origination of a financial asset at a
deep discount that reflects incurred credit losses.
Each direct loan is assessed on a continuous basis by the Investment
Manager's own underwriting team with peer review occurring on a regular
basis.
Each platform loan is monitored via the company originally deployed
to conduct underwriting and management of the borrower relationship.
When a potential impairment is identified, the Investment Manager
requests data and management information from the platform. The Investment
Manager will then actively pursue collections, giving guidance to
the platforms on acceptable levels of impairment. In some cases, the
Investment Manager will proactively take control of the process.
Impairment of financial assets is recognised on a loan-by-loan basis
in stages:
Stage As soon as a financial instrument is originated or purchased,
1: 12-month expected credit losses are recognised in profit or loss
and a loss allowance is established. This serves as a proxy for
the initial expectations of credit losses. For financial assets,
interest revenue is calculated on the gross carrying amount (i.e.
without deduction for expected credit losses).
Stage If the credit risk increases significantly and is not considered
2: low, full lifetime expected credit losses are recognised in profit
or loss. The calculation of interest revenue is the same as for
Stage 1. This stage is triggered by scrutiny of management accounts
and information gathered from regular updates from the borrower
by way of email exchange or face-to-face meetings. The Investment
Manager extends specific queries to borrowers if they acquire
market intelligence or channel-check the data received. A covenant
breach may be a temporary circumstance due to a one-off event
and will not trigger an immediate escalation in risk profile
to stage 2.
At all times, the Investment Manager considers the risk of impairment
relative to the cash flows and general trading conditions of
the company and the industry in which the borrower resides.
Stage If the credit risk of a financial asset increases to the point
3: that it is considered credit-impaired, interest revenue is calculated
based on the amortised cost (i.e. the gross carrying amount less
the loss allowance). Financial assets in this stage will generally
be assessed individually. Lifetime expected credit losses are
recognised on these financial assets. This stage is triggered
by a marked deterioration in the management information received
from the borrower and a view taken on the overall credit conditions
for the sector in which the company resides. A permanent breach
of covenants and a deterioration in the valuation of security
would also merit a move to stage 3.
The Investment Manager also takes into account the level of security
to support each loan and the ease with which this security can
be monetised. This has a meaningful impact of the way in which
impairments are assessed, particularly as the Investment Manager
has a very strong track record in managing write-downs and reclaim
of assets.
For more details in relation to judgements, estimates and uncertainty
see note 4.
c) Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits
and short-term, highly liquid investments readily convertible to known
amounts of cash and subject to insignificant risk of changes in value.
The carrying values of cash and cash equivalents are deemed to be
a reasonable approximation of their fair values.
d) Receivables and prepayments
Receivables are carried at the original invoice amount, less impairments,
as discussed above.
The carrying values of the accrued interest and other receivables
are deemed to be reasonable approximations of their fair values.
e) Transaction costs
Transaction costs incurred on the acquisition of loans are capitalised
upon recognition of the financial asset and amortised over the term
of the respective loan.
f) Income and expenses
Interest income and bank interest are recognised on a time-proportionate
basis using the effective interest rate method.
Dividend income is recognised when the right to receive payment is
established.
All expenses are recognised on an accruals basis. All of the Company's
expenses (with the exception of share issue costs, which are charged
directly to the distributable reserve) are charged through the Statement
of Comprehensive Income in the period in which they are incurred.
g) Taxation
The Company is exempt from UK corporation tax on its chargeable gains
as it satisfies the conditions for approval as an investment trust.
The Company is, however, liable to UK corporation tax on its income.
However, the Company has elected to take advantage of modified UK
tax treatment in respect of its "qualifying interest income" in order
to deduct all, or part, of the amount it distributes to Shareholders
as dividends as an "interest distribution".
h) B Shares
B Shares are redeemable at the Company's option and are classified
as equity as the potential indicator of a liability, being the fixed
rate cumulative dividend, is immaterial given the shares are allotted
and redeemed on the same day. B Shares, which are redeemed immediately
following issue, are measured at the redemption amount.
i) Reserves
Under the Company's articles of association, the Directors may, having
obtained the relevant authority of Shareholders pursuant to the implementation
of the B share scheme, capitalise any sum standing to the credit of
any reserve of the Company for the purposes of paying up, allotting
and issuing B Shares to Shareholders.
(i) Capital Redemption Reserve
The nominal value of Ordinary Shares if bought back and cancelled
and the nominal value of B Shares redeemed and subsequently cancelled
are added to this reserve. This reserve is non-distributable.
(ii) Special Distributable Reserve
During the period ended 30 June 2016, and following the approval of
the Court, the Company cancelled the share premium account and transferred
GBP51,143,000 to a special distributable reserve, being premium on
issue of shares of GBP52,133,000 less share issue costs of GBP990,000.
The special distributable reserve is available for distribution to
Shareholders, including the payment of dividends, return capital to
shareholders, buy back of Ordinary Shares or redemption of B Shares.
(iii) Profit and loss account - distributable
The net profit/loss arising from realised revenue (income, expenses,
foreign exchange gains and losses and taxation) in the Statement of
Comprehensive Income is added to this reserve, along with realised
gains and losses on the disposal of financial assets and derivative
positions. Dividends paid during the year are deducted from this reserve,
where sufficient reserves are available.
(iv) Profit and loss accounts - non-distributable
Unrealised gains and losses on financial assets and derivative positions
are taken to this reserve.
j) Changes in accounting policy and disclosures
New and amended standards and interpretations
The Company adopted the following new and amended relevant IFRS in
the year:
IFRS 7 Financial Instruments: Disclosures - amendments regarding pre-replacement
issues in the context of the IBOR reform
IFRS 9 Financial Instruments - amendments regarding pre-replacement
issues in the context of the IBOR reform
IAS 1 Presentation of Financial Statements - amendments regarding
the definition of materiality
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
- amendments regarding the definition of materiality
The adoption of these accounting standards did not have any effect
on the Company's Statement of Comprehensive Income, Statement of Financial
Position or equity.
A number of other amendments and interpretations are applicable for
the year but are not relevant to the Company.
k) Accounting standards issued but not yet effective
The International Accounting Standards Board ("IASB") has issued/revised
a number of relevant standards with an effective date after the date
of these financial statements. Any standards that are not deemed relevant
to the operations of the Company have been excluded. The Directors
have chosen not to early adopt these standards and interpretations
and they do not anticipate that they would have a material impact
on the Company's financial statements in the period of initial application.
Effective date
IFRS Financial Instruments: Disclosures - amendments
7 regarding replacement issues in the context of the 1 January 2021
IBOR reform
IFRS Financial Instruments - amendments regarding
9 replacement 1 January 2021
issues in the context of the IBOR reform
IFRS Financial Instruments - a mendments resulting from
9 Annual Improvements to IFRS Standards 2018-2020 1 January 2022
(fees in the "10 per cent" test for derecognition
of financial liabilities)
IAS 1 Presentation of Financial Statements - amendments 1 January 2023
regarding the classification of liabilities
IAS 1 Presentation of Financial Statements - amendments
regarding the disclosure of accounting policies 1 January 2023
IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors - amendments regarding the definition 1 January 2023
of accounting estimates
IAS 37 Provisions, Contingent Liabilities and Contingent
Assets - amendments regarding the costs to include 1 January 2022
when assessing whether a contract is onerous
4. Use of judgements and estimates
The preparation of the Company's financial statements requires the
Directors to make judgements, estimates and assumptions that affect
the reported amounts recognised in the financial statements. However,
uncertainty about these assumptions and estimates could result in
outcomes that could require a material adjustment to the carrying
amount of the asset or liability in future periods.
Judgements
In the process of applying the Company's accounting policies, management
made the following judgement, which has had a significant effect on
the amounts recognised in the financial statements:
Covid-19
The Covid-19 pandemic is impacting virtually all businesses and the
Board expects that it will continue to impact economies over the coming
months. The Board and Investment Manager is monitoring any impact
this may have on the Company, its investments and income. The situation
continues to change rapidly so the full impact cannot yet be understood,
a result of which is that future cashflows and valuations are more
uncertain at the current time, and may be more volatile than in recent
years. Indeed, the level of estimation uncertainty and judgement for
the calculation of expected credit losses has increased as a result
of the economic effects of the Covid-19 pandemic. However, the impact
of defaults that might occur in future under different economic scenarios
has been reflected in various models to enable the Board to evaluate
the Company's viability, and the Directors believe that the Company
is well placed to survive the impact of the Covid-19 pandemic, thereby
enabling the Company to realise its assets in an orderly manner.
Classification of B Shares
The B Shares pay a fixed rate cumulative preferential cash dividend
of 1% per annum of the nominal value of GBP1, and have limited rights,
including that: the holders of the B Shares shall not be entitled
to any further right of participation in the profits or assets of
the Company; and the B Shares are redeemable at the Company's option.
However, as the potential indicator of a liability, being the fixed
rate cumulative dividend, is immaterial given the B Shares are allotted
and redeemed on the same day, the B Shares are classified as equity.
B Shares, which are redeemed immediately following issue, are measured
at the redemption amount.
Estimates and assumptions
The Company based its assumptions and estimates on parameters available
when the financial statements were approved. However, existing circumstances
and assumptions about future developments may change due to market
changes or circumstances arising beyond the control of the Company.
Such changes are reflected in the assumptions when they occur.
The current economic uncertainty (and the frequent changes in outlook
for different economic sectors) has created increased volatility and
uncertainty (as mentioned above and in the Investment Manager's Report).
In such circumstances the level of estimation uncertainty and judgement
of expected credit losses has increased. As noted in the Investment
Manager's Report, there are uncertainties about the need for future
provisions that may need to be made against individual loans and receivables.
Notwithstanding the best endeavours of management to obtain full repayment
there is a material uncertainty in relation to the level of provisioning
made in these financial statements. Due to this material uncertainty
the Directors are unable to update the expected credit loss assessment
(as set out in note 3b) to reflect the likely impact on the Company's
loan portfolio.
i) Recoverability of loans and other receivables
In accordance with IFRS 9, the impairment of loans and other receivables
has been assessed as described in note 3b. When assessing the credit
loss on a loan, and the stage of impairment of that loan, the Company
considers whether there is an indicator of credit risk for a loan
when the borrower has failed to make a payment, either capital or
interest, when contractually due and upon assessment. The Company
assesses at each reporting date (and at least on a monthly basis)
whether there is objective evidence that a loan classified as a loan
at amortised cost is credit-impaired and whether a loan's credit risk
or the expected loss rate has changed significantly. As part of this
process:
* Platforms are contacted to determine default and
delinquency levels of individual loans; and
* Recovery rates are estimated.
The analysis of credit risk is based on a number of factors and a
degree of uncertainty is inherent in the estimation process.
As mentioned above, due to the Covid-19 pandemic future cashflows
and valuations are more uncertain at the current time, and may be
more volatile than in recent years. Indeed, the level of estimation
uncertainty and judgement for the calculation of expected credit losses
has increased as a result of the economic effects of the Covid-19
pandemic.
The determination of whether a specific factor is relevant and its
weight compared with other factors depends on the type of product,
the characteristics of the financial instrument and the borrower,
and the geographical region. It is not possible to provide a single
set of criteria that will determine what is considered to be a significant
increase in credit risk. Events that the Company will assess when
deciding if a financial asset is credit impaired include:
* significant financial difficulty of the borrower;
* a breach of contract, such as a default or past-due
event; and
* it becoming probable that the borrower will enter
bankruptcy or other financial reorganisation.
Although it may not always be the case (e.g. if discussions with a
borrower are ongoing), generally a loan is deemed to be in default
if the borrower has missed a payment of principal or interest by more
than 180 days, unless the Company has good reason not to apply this
rule. If the Company has evidence to the contrary, it may make an
exception to the 180 day rule to deem that a borrower is, or is not,
in default. Therefore, the definitions of credit impaired and default
are aligned as far as possible so that stage 3 represents all loans
that are considered defaulted or otherwise credit impaired.
IFRS 9 confirms that a Probability of Default ("PD") must never be
zero as everything is deemed to have a risk of default; this has been
incorporated into the assessment of expected credit losses . All PDs
are assessed against historic data as well as the prevailing economic
conditions at the reporting date, adjusted to account for estimates
of future economic conditions that are likely to impact the risk of
default.
Since November 2020, 12-month PD has been calculated based on the
Investment Manager's 10 level grading system, where:
* levels 1 to 6 fall into Stage 1, with 12-month PD
ranging from 0.01% to 10%;
* levels 7 to 9 fall into Stage 2, with 12-month PD
ranging from 20% to 60%, and
* level 10 falls into Stage 3, with a 12-month PD of
100%.
Prior to November 2020, 12-month PD was applied across the collective
as a cumulative in Stage 1, set at 2% in line with the Investment
Manager's historic performance data, market knowledge, and credit
enhancements (that was equivalent to there being 1 default for an
average portfolio of 50 unique borrowers). Once an investment moved
to Stage 2 then PD was calculated on an individual basis (and adjusted
for Stage 3 if appropriate).
All assessment is based on reasonable and supportive information available
at the time.
Since November 2020, 12-month ECL has been calculated based on the
Investment Manager's categorisation, as follows:
Category KKV loss given default ("LGD") approach
Easily Realisable Asset value less 10% haircut discounted at 10%
IRR for 12 months to recovery
Realisable Asset value less 20% discounted at 20% IRR for
2 years to recovery
Highly Specialised/Unsecured 70% LGD
Subordinated Debt 100% LGD
Prior to November 2020, 12-month ECL was applied across the collective
as a cumulative in Stage 1, split according to the investment's classification.
For direct loan investments this was calculated as 2% of the individual
investment's Contracted Cash Flows ("CCF"), and 2% of the investment's
CCF for platform investments. Those Stage 1 12-month ECL amounts were
taken to be the investments' floor amounts - the Lifetime ECL for
any investment could never be less than its floor amount. Once an
investment moved to Stage 2, Lifetime ECL was calculated on an individual
basis.
Lifetime ECL is reviewed at each reporting date based on reasonable
and supportive information available at the time.
Details of the judgements applied in assessing the recoverability
of loans can be found in the Investment Manager's Report and should
be read in conjunction with the current economic environment and,
in particular, the impact of Covid-19.
Collateral
While the presence of collateral is not a key element in the assessment
of whether there has been a significant increase in credit risk, it
is of great importance in the measurement of ECL. IFRS 9 states that
estimates of cash shortfalls reflect the cash flows expected from
collateral and other credit enhancements that are integral to the
contractual terms. Due to the business nature of the Investment Manager,
this is a key component of its ECL measurement and interpretation
of IFRS 9, as any investment would include elements of (if not all):
a fully collateralised position, fixed and floating charges, a corporate
guarantee, a personal guarantee, coverage ratios between 130% to 150%,
and an average LTV of 85%.
Loans written off
Financial assets (and the related impairment allowances) are normally
written off, either partially or in full, when there is no realistic
prospect of recovery. Where loans are secured, this is generally after
receipt of any proceeds from the realisation of security. In circumstances
where the net realisable value of any collateral has been determined
and there is no reasonable expectation of further recovery, write-off
may be earlier. Platform loans of GBP1,887,000 were written off in
the year (2020: GBP268,000) .
Renegotiated loans
A loan is classed as renegotiated when the contractual payment terms
of the loan are modified because the Company has significant concerns
about a borrower's ability to meet payments when due. On renegotiation,
the loan will also be classified as credit impaired, if it is not
already. Renegotiated loans will continue to be considered to be credit
impaired until there is sufficient evidence to demonstrate a significant
reduction in the risk of non-payment of future payments.
All data calculated for IFRS 9 purposes is consistent with the overall
methodology employed by KKV and its parent company, Kvika Securities
Ltd, across all of their UK public funds. In addition to the methodology
used, the Company has taken impairment data from Platforms for the
assessment of loans with third party exposure. Again, this is consistent
with the approach KKV would expect to take in these circumstances.
There were no new assets originated during the year that were credit-impaired
at the point of initial recognition. There were no financial assets
that have been modified since initial recognition at a time when the
loss allowance was measured at an amount equal to lifetime expected
credit losses and for which the loss allowance changed during the
year to an amount equal to 12-month expected credit losses.
There were no financial assets for which cash flows were modified
in the year while they had a loss allowance measured at an amount
equal to the lifetime expected credit loss.
Please see note 3b, note 14 and note 24 for further information on
the loans at amortised cost and credit risk.
5. Dividends
The Company distributes at least 85% of its distributable income earned
in each financial year by way of dividends.
T he Company elected to designate all of the dividends for the year
ended 30 June 2021 as interest distributions to its Shareholders.
In doing so, the Company took advantage of UK tax treatment by "streaming"
income from interest-bearing investments into dividends that will
be taxed in the hands of Shareholders as interest income.
To date, the Company has declared the following dividends in respect
of earnings for the year ended 30 June 2021:
Total dividend
declared in respect
of earnings in Amount per
Announcement date Pay date the year Ordinary Share
GBP'000
26 August 2020 25 September 2020 1,843 3.50p
26 November 2020 23 December 2020 2,633 5.00p
------------ ------------
Dividends declared (to date) for the
year 4,476 8.50p
Less, dividends paid after the year - -
end
Add, dividends paid in the year in
respect of the prior year 614 1.17p
------------ ------------
Dividends paid in
the year 5,090 9.67p
------------ ------------
In accordance with IFRS, dividends are only provided for when they
become a contractual liability of the Company. Therefore, during the
year a total of GBP5,090,000 (2020: GBP3,684,000) was incurred in
respect of dividends, none of which was outstanding at the reporting
date (2020: none).
All dividends in the year were paid out of revenue (and not capital)
profits.
Mechanics for returning cash to Shareholders
The Board carefully considered the potential mechanics for returning
cash to Shareholders and the Company's ability to do so. The Board
believes it is in the best interests of Shareholders as a whole to
make distributions to Shareholders without a significant delay following
realisations of a material part of the Portfolio (whether in a single
transaction or through multiple, smaller transactions concluded on
similar timing), whether by dividend or other method.
After careful consideration and discussions with a number of Shareholders,
the Board believes that one of the fairest and most cost-efficient
ways of returning substantial amounts of cash to Shareholders is by
adopting a B Share Scheme, whereby the Company will be able to issue
redeemable B Shares to Shareholders. These are then redeemed on a
Redemption Date without further action being required by Shareholders.
The B Shares are issued out of the special distributable reserve,
then the special distributable reserve is utilised again when the
B Shares are redeemed - the B Share capital is cancelled and an equal
amount credited to the capital redemption reserve.
Notice of a General Meeting of Shareholders was published on 26 February
2021 and these arrangements were accepted by Shareholders at the General
Meeting held on 23 March 2021.
The Company made two B Share Scheme redemptions between 23 March 2021
and 30 June 2021, totalling GBP10,269,000, equivalent to 19.50p per
Ordinary Share. A further B Share Scheme redemption of GBP3,160,000
(6.00p per Ordinary Share) was made on 23 July 2021.
The Board also intends to make quarterly dividend payments, where
possible, in accordance with the Company's dividend policy and to
maintain investment trust status for so long as the Company remains
listed.
6. Related parties
As a matter of best practice and good corporate governance, the Company
has adopted a related party policy which applies to any transaction
which it may enter into with any Director, the Investment Manager,
or any of their affiliates which would constitute a "related party
transaction" as defined in, and to which would apply, Chapter 11 of
the Listing Rules. In accordance with its related party policy, the
Company obtained: (i) the approval of a majority of the Directors;
and (ii) a third-party valuation in respect of these transactions
from an appropriately qualified independent adviser.
Loan to Medical Equipment Solutions Limited ("MESL")
In June 2017, the Company loaned GBP1,380,000 to MESL, whose Chairman
was Neil Roberts, who was chairman of SQN Capital Management, LLC
at that time. The loan bore interest at 10.0% per annum and was for
a period of five years from the date of drawdown. The loan was to
be repaid via 60 monthly payments. The loan was repaid early in March
2020.
No loan interest was earned in the year (2020: GBP57,000), and no
loan interest was outstanding at 30 June 2021 (2020: GBPnil).
At 30 June 2021, the balance of the loan was GBPnil (2020: GBPnil).
The Directors and the Investment Manager are also considered to be
related parties. See notes 7 and 8 for further details.
7. Key contracts
a) Investment Manager
On 5 June 2020, the Company novated the contract to manage the portfolio
to KKV Investment Management Limited, following the management team
into their new entity from the Former Investment Manager (SQN UK).
The Investment Manager has responsibility for managing the Company's
portfolio. For their services, until 16 September 2020, the Investment
Manager was entitled to a management fee (on the same terms as the
Former Investment Manager) at a rate equivalent to the following schedule
(expressed as a percentage of NAV per annum, before deduction of accruals
for unpaid management fees for the current month):
* 1.0% per annum for NAV lower than or equal to GBP250
million;
* 0.9% per annum for NAV greater than GBP250 million
and lower than or equal to GBP500 million; and
* 0.8% per annum for NAV greater than GBP500 million.
From 17 September 2020, the 1.0% per annum base management fee was
reduced as follows:
* for 12 months from 17 September 2020 to 16 September
2021, to 0.75% per annum of the Company's NAV; and
* from 17 September 2021, to 0.55% of the Company's
NAV.
The management fee is payable monthly in arrears on the last calendar
day of each month.
During the year, a total of GBP309,000 (all KKV) (2020: GBP483,000
(SQN UK, GBP452,000 and KKV, GBP31,000)) was incurred in respect of
management fees, of which GBP25,000 was payable at the reporting date
(all KKV) (2020: GBP37,000 (SQN UK, GBP6,000 and KKV, GBP31,000)).
Performance fee
From 17 September 2020, the Investment Manager is entitled to a performance
fee. The performance fee is calculated using the most recent NAV prior
to the Company failing the June 2020 Continuation Vote (being the
NAV as at 31 May 2020) as the benchmark NAV (the "Benchmark NAV").
If 99% of the Benchmark NAV is returned to Shareholders by way of
dividend, share buy backs or other methods of return of capital within
12 months from 17 September 2020 then a performance fee of 0.6% of
the value returned to Shareholders would be payable to KKV. This will
be reduced by 0.1% for every 1% less than 99% of Benchmark NAV that
is returned to Shareholders.
Should the time taken to realise the Portfolio exceed 12 months from
17 September 2020, then for the period from 17 September 2021 to 17
September 2022, the incentive fee reduces by 33% (so that, for example
if 99% of Benchmark NAV is returned by month 17, the performance fee
would be two-thirds of 0.6%).
The introduction of an outperformance fee, under the terms of the
amended Investment Management Agreement, states that KKV will be entitled
to 10% of all funds returned to Shareholders in excess of the Benchmark
NAV within 12 months from 17 September 2020, reducing to 5% within
12-24 months.
During the year, no performance fee was paid, or payable, to the Investment
Manager (2020: GBPnil).
Termination of Investment Management Agreement
On 20 August 2021, the Company agreed with the Investment Manager
and its AIFM to amend the investment management agreement and for
the agreement to terminate with effect from midnight on 31 December
2021.
The key terms of the revised agreement are set out below:
* Management fees payable by the Company to the
Investment Manager of GBP20,500 per month from 1
August 2021 to 31 December 2021;
* A payment of GBP20,000 in total payable by the
Company to the Investment Manager, but conditional on
a senior employee providing continued services to the
Company to 31 December 2021; and
* The agreement will terminate with effect from
midnight on 31 December 2021. No party has the right
to terminate the agreement prior to this date without
cause. No fees shall be payable by either party on
termination other than the amount referred to above.
The Board believes that the revised Agreement provides the Company
with certainty over the level of future management fees payable to
the Investment Manager with the added flexibility of facilitating
the Company becoming self-managed should the Board deem that appropriate,
whilst providing for the ongoing management of the portfolio to 31
December 2021. Overall, it allows for an orderly transition of the
management of the portfolio to the Company.
Transaction costs
Prior to the change in the investment policy, the Company incurred
transaction costs for the purposes of structuring investments for
the Company. These costs formed part of the overall transaction costs
that were capitalised at the point of recognition and were taken into
account by the Former Investment Manager when pricing a transaction.
When structuring services were provided by the Former Investment Manager
or an affiliate of them, they were entitled to charge an additional
fee to the Company equal to up to 1.0% of the cost of acquiring the
investment (ignoring gearing and transaction expenses). This cost
was not charged in respect of assets acquired from the Former Investment
Manager, the funds they managed or where they or their affiliates
did not provide such structuring advice.
The Former Investment Manager agreed to bear all the broken and abortive
transaction costs and expenses incurred on behalf of the Company.
Accordingly, the Company agreed that the Former Investment Manager
may retain any commitment commissions received by the Former Investment
Manager in respect of investments made by the Company, save that if
such commission on any transaction were to exceed 1.0% of the transaction
value, the excess would be paid to the Company.
During the year, transaction costs of GBP46,000 (2020: GBP147,000)
were amortised.
b) Administration fees
Elysium Fund Management Limited ("Elysium") is entitled to an administration
fee of GBP100,000 per annum in respect of the services provided in
relation to the administration of the Company, together with time-based
fees in relation to work on investment transactions. During the year,
a total of GBP130,000 (2020: GBP117,000) was incurred in respect of
administration fees, of which GBP37,000 (2020: GBP28,000) was payable
at the reporting date.
8. Directors' remuneration
During the year, a total of GBP119,000 (2020: GBP94,000) was incurred
in respect of Directors' remuneration, none of which was payable at
the reporting date (2020: none). No bonus or pension contributions
were paid or payable on behalf of the Directors. Further details can
be found in the Directors' Remuneration Report in the Annual Report
and Financial Statements.
9. Key management and employees
The Company had no employees during the year (2020: none). Therefore,
there were no key management (except for the Directors) or employees
during the year.
The following dividends were paid to the Directors during the year
by virtue of their holdings of Ordinary Shares (these dividends were
not additional remuneration):
David Stevenson GBP1,958 (2020: GBP1,417)
Gaynor Coley GBP206 (2020: GBP143)
Ken Hillen (resigned 26 May n/a (2020: GBP291)
2020)
10. Auditor's remuneration
For the year ended 30 June 2021, total fees, plus VAT, charged by
MKS, together with amounts accrued at 30 June 2021, amounted to GBP46,000
(2020: GBP40,000 to RSM UK Audit LLP), all of which related to audit
services (2020: GBP40,000).
As at 30 June 2021, GBP46,000 was due to MKS and GBP16,000 was due
to RSM UK Audit LLP (2020: GBP40,000 due to RSM UK Audit LLP).
11. Other expenses
Year ended Year ended
30 June 2021 30 June 2020
GBP'000 GBP'000
Registrar fees 49 36
Audit fees (note 10) 46 40
Listing fees 16 18
Other expenses 15 33
Directors' national insurance 12 26
Accountancy and taxation fees 9 11
------------ ------------
147 164
------------ ------------
12. Taxation
The Company has received confirmation from HMRC that it satisfied
the conditions for approval as an investment trust, subject to the
Company continuing to meet the eligibility conditions in s.1158 of
the Corporation Tax Act 2010 and the ongoing requirements for approved
investment trust companies in Chapter 3 of Part 2 of the Investment
Trust (approved Company) Tax Regulations 2011 (Statutory Instrument
2011.2999). The Company intends to retain this approval and self-assesses
compliance with the relevant conditions and requirements.
As an investment trust the Company is exempt from UK corporation tax
on its chargeable gains. The Company is, however, liable to UK corporation
tax on its income. However, the Company has elected to take advantage
of modified UK tax treatment in respect of its "qualifying interest
income" in order to deduct all, or part, of the amount it distributes
to Shareholders as dividends as an "interest distribution".
Year ended Year ended
30 June 2021 30 June 2020
GBP'000 GBP'000
Reconciliation of tax charge:
Loss before taxation (11,017) (913)
------------ ------------
Tax at the standard UK corporation tax rate
of 19% (2020: 19%) (2,093) (173)
Effects of:
* Non-taxable investment gains and losses 2,509 743
* Interest distributions (416) (570)
------------ ------------
Total tax expense - -
------------ ------------
Domestic corporation tax rates in the jurisdictions in which the Company
operated were as follows:
Year ended Year ended
30 June 2021 30 June 2020
United Kingdom 19% 19%
Guernsey nil nil
Due to the Company's status as an investment trust and the intention
to continue to meet the required conditions, the Company has not provided
for deferred tax on any capital gains and losses.
13. Loss per Ordinary Share
The loss per Ordinary Share of 20.92p (2020: loss per Ordinary Share
of 1.73p) is based on a loss attributable to the owners of the Company
of GBP11,017,000 (2020: Loss of GBP913,000) and on a weighted average
number of 52,660,350 (2020: 52,660,350) Ordinary Shares in issue since
Admission . There is no difference between the basic and diluted earnings
per share.
14. Loans at amortised cost
Year ended Year ended
30 June 2021 30 June 2020
GBP'000 GBP'000
Loans 28,920 45,944
Unrealised loss* (14,251) (3,311)
------------ ------------
Balance at year end 14,669 42,633
------------ ------------
Loans: Non-current 7,336 31,942
Current 7,333 10,691
------------ ------------
Loans at amortised cost and cash held on client
accounts with platforms 14,669 42,633
------------ ------------
*Unrealised loss
Foreign exchange on non-Sterling loans (158) 1,125
Impairments of financial assets (14,093) (4,436)
------------ ------------
Unrealised loss (14,251) (3,311)
------------ ------------
The movement in unrealised gains/losses on loans comprised:
Year ended Year ended
30 June 2021 30 June 2020
GBP'000 GBP'000
Movement in foreign exchange on non-Sterling
loans (1,283) 410
Movement in i mpairment losses on financial
assets (or loans) (9,657) (3,299)
------------ ------------
Movement in unrealised gains and losses on
loans (10,940) (2,889)
------------ ------------
The movement in the impairment for the year comprised:
Year ended Year ended
30 June 2021 30 June 2020
GBP'000 GBP'000
Impairment of interest income (877) -
Impairment losses on financial assets (or loans) (9,657) (3,299)
------------ ------------
Total movement in impairment in the year (10,534) (3,299)
------------ ------------
The weighted average interest rate of the loans as at 30 June 2021
was 6.48% (2020: 10.44%).
The table below details expected credit loss provision ("ECL") of
financial assets in each stage at 30 June 2021:
30 June 2021 30 June 2020
Stage Stage Stage Total Stage 1 Stage Stage Total
1 2 3 2 3
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Direct
loans
([1]) 4,940 5,633 12,637 23,210 34,419 - - 34,419
ECL on
direct
loans (14) (451) (8,228) (8,693) (17) - - (17)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Direct
loans net
of
the ECL 4,926 5,182 4,409 14,517 34,402 - - 34,402
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Platform
loans
([1]) - - 5,508 5,508 7,214 - 5,346 12,560
ECL on
platform
loans - - (5,400) (5,400) (7) - (4,412) (4,419)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Platform
loans net
of the
ECL - - 108 108 7,207 - 934 8,141
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Accrued
interest 175 - 7 182 1,585 - - 1,585
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total
loans
([1]) 4,940 5,633 18,145 28,718 41,633 - 5,346 46,979
Total ECL (14) (451) (13,628) (14,093) (24) - (4,412) (4,436)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total net
of the
ECL 4,926 5,182 4,517 14,625 41,609 - 934 42,543
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
([1]) These are the principal amounts outstanding at 30 June 2021 and
do not include the capitalised transaction fees, which are not
subject to credit risk. At 30 June 2021, the amortised cost of
the capitalised transaction fees totalled GBP44,000 (2020: GBP90,000).
The table below details the movements in the year ended 30 June 2021
of the principal amounts outstanding and the ECL on those loans:
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 Total
Principal Principal Principal Principal
outstanding Allowance outstanding Allowance outstanding Allowance outstanding Allowance
([1]) for ECL ([1]) for ECL ([1]) for ECL ([1]) for ECL
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2020 41,633 (24) - - 5,346 (4,412) 46,979 (4,436)
Transfers from:
* stage 1 to stage 2
(10,000) 5 10,000 (5) - - - -
* stage 1 to stage 3 (19,552) 11 - - 19,552 (11) - -
Net re-measurement
of ECL arising
from transfer
of stage - - - (795) - (9,579) - (10,374)
Net new and further
lending/repayments,
and foreign exchange
movements (5,736) (1,411) (4,367) 349 (6,271) (108) (16,374) (1,170)
Loans written-off
in the year (1,405) 1,405 - - (482) 482 (1,887) 1,887
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 June 2021 4,940 (14) 5,633 (451) 18,145 (13,628) 28,718 (14,093)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
([1]) These are the principal amounts outstanding at 30 June 2021 and
do not include the capitalised transaction fees, which are not
subject to credit risk. At 30 June 2021, the amortised cost of
the capitalised transaction fees totalled GBP44,000.
The table below details the movements in the year ended 30 June 2020
of the principal amounts outstanding and the ECL on those loans:
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 Total
Principal Principal Principal Principal
outstanding Allowance outstanding Allowance outstanding Allowance outstanding Allowance
([1]) for ECL ([1]) for ECL ([1]) for ECL ([1]) for ECL
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2019 44,617 (28) 3,117 (735) 426 (374) 48,160 (1,137)
Transfers from:
* stage 1 to stage 3 (2,066) 2 - - 2,066 (2) - -
* stage 2 to stage 3 - - (3,117) 735 3,117 (735) - -
Net re-measurement
of ECL arising
from transfer
of stage - - - - - (3,584) - (3,584)
Net new and further
lending/repayments,
and foreign exchange
movements (918) 2 - - 5 15 (913) 17
Loans written-off
in the year - - - - (268) 268 (268) 268
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 June 2020 41,633 (24) - - 5,346 (4,412) 46,979 (4,436)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
([1]) These are the principal amounts outstanding at 30 June 2020 and
do not include the capitalised transaction fees, which are not
subject to credit risk. At 30 June 2020, the amortised cost of
the capitalised transaction fees totalled GBP90,000.
An increase of 1% of total gross exposure into stage 3 (from stage
1) would result in an increase in ECL impairment allowance of GBP43,000
(2020: An increase of 1% of total gross exposure into stage 2 (from
stage 1) would result in an increase in ECL impairment allowance of
GBP11,000) based on applying the difference in average impairment
coverage ratios to the movement in gross exposure.
At 30 June 2021, the Board considered GBP14,093,000 (2020: GBP4,436,000)
of loans to be impaired:
30 June 2021 30 June 2020
GBP'000 GBP'000
Direct SME loans 8,693 17
Platform loans 5,400 4,419
------------ ------------
Total impairment 14,093 4,436
------------ ------------
During the year, GBP1,887,000 (2020: GBP268,000) of loans were written
off and included within realised (loss)/gain on disposal of loans
in the Statement of Comprehensive Income.
See note 3b and note 4i regarding the process of assessment of loan
impairment.
The carrying values of the loans at amortised cost (excluding capitalised
transaction costs) are deemed to be a reasonable approximation of
their fair values.
15. Investments at fair value through profit or loss
Year ended 30 Year ended 30 June
June 2021 2020
GBP'000 GBP'000
Balance brought forward 251 232
Disposals in the year (253) -
Realised gain on disposal of investments
at fair value through profit or loss 94 -
Movement in unrealised gain on investments
at fair value through profit or loss (92) 19
------------ ------------
Balance at year end - 251
------------ ------------
Cost at year end - 159
------------ ------------
The investment at fair value through profit or loss related to an
investment in a Luxembourg fund which was sold during the year. For
further information on the investments at fair value through profit
or loss, see note 16.
16. Fair value of financial instruments
The following table shows financial instruments recognised at fair
value, analysed between those whose fair value is based on:
* Quoted prices in active markets for identical assets
or liabilities (Level 1);
* Those involving inputs other than quoted prices
included in Level 1 that are observable for the asset
or liability, either directly (as prices) or
indirectly (derived from prices) (Level 2); and
* Those with inputs for the asset or liability that are
not based on observable market data (unobservable
inputs) (Level 3).
Financial assets and liabilities designated as at fair value through
profit or loss
At 30 June 2021, the financial instruments designated at fair value
through profit or loss were as follows:
30 June 2021 30 June 2020
Level Level Level Total Level Level Level Total
1 2 3 1 2 3
Financial GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
assets/(liabilities)
Unlisted equity shares - - - - - - 251 251
Derivative financial
instruments
(note 17) - - - - - (6) - (6)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total financial
assets/(liabilities)
designated as at fair
value
through profit or
loss - - - - - (6) 251 245
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Level 2 financial instruments included foreign currency forward contracts.
They were valued using observable inputs (in this case foreign currency
spot rates).
Level 3 financial instruments included unlisted equity shares. Net
asset value was considered to be an appropriate approximation of fair
value as, if the Company were to dispose of the holdings, it would
expect to do so at, or around, net asset value.
Transfers between levels
There were no transfers between levels in the year (2020: none).
Financial assets and liabilities not designated as at fair value through
profit or loss
The carrying values of the loans at amortised cost (excluding capitalised
transaction costs) are deemed to be a reasonable approximation of
their fair values. The carrying values of all other assets and liabilities
not designated as at fair value through profit or loss are deemed
to be a reasonable approximation of their fair values due to their
short duration.
17. Derivative financial instruments
In order to limit the exposure to foreign currency risk, the Company
had previously entered into hedging contracts. However, in September
2020, the Company closed out its foreign currency forward contracts
and it is not intended to enter into foreign exchange hedging contracts
in the future. The Company realised a gain of GBP269,000 (2020: loss
of GBP852,000) on forward foreign exchange contracts that settled
during the year.
As at 30 June 2021, there were no open forward foreign exchange contracts
(2020: GBP(6,000)).
18. Other receivables and prepayments
30 June 2021 30 June 2020
GBP'000 GBP'000
Accrued interest 182 1,585
Prepayments 6 27
Other receivables 1 13
------------ ------------
189 1,625
------------ ------------
The carrying values of the accrued interest and other receivables
are deemed to be reasonable approximations of their fair values.
19. Other payables and accruals
30 June 2021 30 June 2020
GBP'000 GBP'000
Audit fee 62 40
Administration fee 37 28
Management fee 25 37
Other payables and accruals 20 21
Directors' national insurance 4 2
Legal fees - 36
------------ ------------
148 164
------------ ------------
The carrying values of the other payables and accruals are deemed
to be reasonable approximations of their fair values.
20. Reconciliation of liabilities arising from financing activities
IAS 7 requires the Company to detail the changes in liabilities arising
from financing activities, including both cash and non-cash changes.
Liabilities arising from financing activities are those for which
cash flows were, or future cash flows will be, classified in the Company's
statement of cash flows as cash flows from financing activities.
As at 30 June 2021, the Company had no liabilities that would give
rise to cash flows from financing activities (2020: none).
21 . Share capital
30 June 2021 30 June 2020
GBP'000 GBP'000
Authorised share capital:
Unlimited number of Ordinary Shares - -
of 1 pence each
43,857,133 B Shares of GBP1 each (2020: 43,857 -
nil)
Unlimited C Shares of 10 pence each - -
Unlimited Deferred Shares of 1 pence - -
each
50,000 Management Share of GBP1 (2020:
50,000 of GBP1 each) 50 50
------------ ------------
30 June 2021 30 June 2020
GBP'000 GBP'000
Called up share capital:
52,660,350 Ordinary Shares of 1 pence
each 527 527
1 Management Share of GBP1 (2020:
50,000 of GBP1 each) - 50
------------ ------------
527 577
------------ ------------
Management Shares
The Management Shares are entitled (in priority to any payment of
dividend of any other class of share) to a fixed cumulative preferential
dividend of 0.01% per annum on the nominal amount of the Management
Shares.
The Management Shares do not carry any right to receive notice of,
nor to attend or vote at, any general meeting of the Company unless
no other shares are in issue at that time. The Management Shares do
not confer the right to participate in any surplus of assets of the
Company on winding-up, other than the repayment of the nominal amount
of capital.
During the year, 49,999 Management Shares were bought back for GBP49,999
and cancelled.
B Shares
The B Shares are entitled (in priority to any payment of dividend
of any other class of share, with the exception of the Management
Shares) to a fixed cumulative preferential dividend of 1% per annum
on the nominal amount of the B Shares, such dividend to be paid annually
on the date falling six months after the date on which the B Shares
are issued and thereafter on each anniversary. The B Shares do not
confer the right to participate in any surplus of assets of the Company
on winding-up, other than the repayment of the nominal amount of capital.
During the year 10,269,000 B Shares of GBP1 each were issued and immediately
redeemed by the Company in accordance with the B Share Scheme approved
by Shareholders at a General Meeting held on 23 March 2021 (see note
5 for further details). As the B Shares were redeemed immediately
upon issue, no cumulative preferential dividend was earned on those
shares.
22. Other reserves
Special Profit and loss
distributable account ([2])
reserve
([1] /
[3])
Capital Non-distributable
redemption Distributable Total
reserve
([3])
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 30 June 2019 50,253 - - (701) 49,552
Realised revenue
profit - - 3,000 - 3,000
Realised investment
gains and
losses - - (1,388) - (1,388)
Unrealised
investment gains
and losses - - - (2,525) (2,525)
Dividends paid (2,072) - (1,612) - (3,684)
------------ ------------ ------------ ------------ ------------
At 30 June 2020 48,181 - - (3,226) 44,955
Realised revenue
profit - - 2,190 - 2,190
Realised investment
gains and
losses - - (2,181) - (2,181)
Unrealised
investment gains
and losses - - - (11,026) (11,026)
Dividends paid (4,324) - (766) (5,090)
B Shares issued
during the year
(notes 5 and 21) (10,269) - - - (10,269)
B Shares redeemed
during the
year (notes 5 and
21) ([3]) (10,269) 10,269 - - -
Management Share buy
backs (50) 50 - - -
------------ ------------ ------------ ------------ ------------
At 30 June 2021 23,269 10,319 (757) (14,252) 18,579
------------ ------------ ------------ ------------ ------------
During the period ended 30 June 2016, and following the approval
([1]) of the Court, the Company cancelled the share premium account
and transferred GBP51,143,000 to a special distributable reserve,
being premium on issue of shares of GBP52,133,000 less share issue
costs of GBP990,000. The special distributable reserve is available
for distribution to Shareholders.
The profit and loss account comprises both distributable and
([2]) non-distributable
elements, as defined by Company Law. Realised elements of the
Company's profit and loss account are classified as "distributable",
whilst unrealised investment gains and losses are classified as
"non-distributable".
The B Shares were issued out of the special distributable reserve,
([3]) then the special distributable reserve was utilised again when
the B Shares were redeemed, the B Share capital cancelled and
an equal amount credited to the capital redemption reserve (see
notes 5 and 21)
With the exception of investment gains and losses, all of the Company's
profit and loss items are of a revenue nature as it does not allocate
any expenses to capital.
23. Net asset value per Ordinary Share
The net asset value per Ordinary Share is based on the net assets
attributable to the owners of the Company of GBP19,106,000 (2020:
GBP45,532,000), less GBP1 (2020: GBP50,000), being amounts owed in
respect of Management Shares, and on 52,660,350 (2020: 52,660,350)
Ordinary Shares in issue at the year end.
Reconciliation to NAV announced on 11 August 2021
Subsequent to the year end, the Company was informed that a borrower
had not finalised refinancing ahead of the 30 September 2021 repayment
date and, consequently, repayment of the loan was to be delayed. As
a result, the expected credit loss as at 30 June 2021 for the loan
has been amended, resulting in a difference in the net asset value
disclosed in these financial statements from that announced on 11
August 2021, as follows:
30 June 2021 30 June 2021
GBP'000 pence per share
Net asset value announced on 11 August
2021 19,539 37.10
Increase in expected credit loss (433) (0.82)
------------ ------------
19,106 36.28
------------ ------------
24. Financial Instruments and Risk Management
The Investment Manager manages the Company's portfolio to provide
Shareholders with attractive risk adjusted returns, principally in
the form of regular, sustainable dividends, through investment predominantly
in a range of secured loans and other secured loan-based instruments
originated through a variety of channels and diversified by way of
asset class, geography and duration.
Prior to the change in investment policy on 17 September 2020, the
Company sought to ensure that diversification of its portfolio was
maintained, with the aim of spreading investment risk.
Risk is inherent in the Company's activities, but it is managed through
a process of ongoing identification, measurement and monitoring. The
Company is exposed to market risk (which includes currency risk, interest
rate risk and price risk), credit risk and liquidity risk from the
financial instruments it holds. Risk management procedures are in
place to minimise the Company's exposure to these financial risks,
in order to create and protect Shareholder value.
Risk management structure
The Investment Manager is responsible for identifying and controlling
risks. The Board of Directors supervises the Investment Manager and
is ultimately responsible for the overall risk management approach
within the Company.
The Company has no employees and is reliant on the performance of
third party service providers. Failure by the Investment Manager,
Administrator, Broker, Registrar or any other third party service
provider to perform in accordance with the terms of its appointment
could have a significant detrimental impact on the operation of the
Company.
The market in which the Company participates is competitive and rapidly
changing. The risks have not changed from those detailed on pages
20 to 30 in the Company's Prospectus, which is available on the Company's
website, and as updated in the circular of 20 August 2020.
Risk concentration
Concentration indicates the relative sensitivity of the Company's
performance to developments affecting a particular industry or geographical
location. Concentrations of risk arise when a number of financial
instruments or contracts are entered into with the same counterparty,
or where a number of counterparties are engaged in similar business
activities, or activities in the same geographic region, or have similar
economic features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic, political
or other conditions. Concentrations of liquidity risk may arise from
the repayment terms of financial liabilities, sources of borrowing
facilities or reliance on a particular market in which to realise
liquid assets. Concentrations of foreign exchange risk may arise if
the Company has a significant net open position in a single foreign
currency, or aggregate net open positions in several currencies that
tend to move together.
In a Managed Wind-Down, the value of the Portfolio will be reduced
as investments are realised and concentrated in fewer holdings, and
the mix of asset exposure will be affected accordingly.
With the aim of maintaining a diversified investment portfolio, and
thus mitigating concentration risks, the Company had established (prior
to the change in the investment policy on 17 September 2020) the following
investment restrictions in respect of the general deployment of assets:
Investment Restriction Investment Policy
Geography
* Exposure to UK loan assets
Minimum of 60%
* Minimum exposure to non-UK loan assets 20%
Duration to maturity
* Minimum exposure to loan assets with duration of less
than 6 months
* Maximum exposure to loan assets with duration of 6 -
18 months and 18 - 36 months
None
* Maximum exposure to loan assets with duration of more None
than 36 months 50%
Maximum single investment 10%
Maximum exposure to single borrower or group 10%
Maximum exposure to loan assets sourced through single alternative lending platform or other
third party originator 25%
Maximum exposure to any individual wholesale loan arrangement 25%
Maximum exposure to loan assets which are neither sterling-denominated nor hedged back to
sterling 15%
Maximum exposure to unsecured loan assets 25%
Maximum exposure to assets (excluding cash and cash-equivalent investments) which are not
loans or investments with loan-based investment characteristics 10%
The Company complied with the investment restrictions up to the change
in investment policy on 17 September 2020, except that, on 9 September
2020, in preparation for the upcoming change in investment policy,
additional foreign currency forward contracts were entered into in
order to equally and oppositely match the open contracts at that date.
Market risk
(i) Price risk
Price risk exposure arises from the uncertainty about future prices
of financial instruments held. It represents the potential loss that
the Company may suffer through holding market positions in the face
of price movements. The investments at fair value through profit or
loss (see notes 15 and 16) are exposed to price risk and it is not
the intention to mitigate the price risk.
At 30 June 2021, if the valuation of the investments at fair value
through profit or loss had moved by 5% with all other variables remaining
constant, the change in net assets and profit/(loss) would amount
to approximately +/- GBPnil (2020: +/- GBP13,000). The maximum price
risk resulting from financial instruments is equal to the GBPnil (2020:
GBP251,000) carrying value of the investments at fair value through
profit or loss.
(ii) Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument
will fluctuate because of changes in foreign currency exchange rates.
Currency risk arises when future commercial transactions and recognised
assets and liabilities are denominated in a currency that is not the
Company's functional currency. The Company invests in securities and
other investments that are denominated in currencies other than Sterling.
Accordingly, the value of the Company's assets may be affected favourably
or unfavourably by fluctuations in currency rates and therefore the
Company will necessarily be subject to foreign exchange risks.
The impact of foreign currency fluctuations during the year comprised:
Year ended Year ended
30 June 2021 30 June 2020
GBP'000 GBP'000
Movement in unrealised gains and losses on
loans due to movement in foreign exchange on
non-Sterling loans (1,283) 410
Net foreign exchange gain/(loss) 3 (16)
------------ ------------
Foreign currency (loss)/gain in the year excluding
the effect of foreign currency hedging (1,280) 394
Movement in unrealised gain on foreign currency
derivative financial instruments 6 345
Realised gain/(loss) on foreign currency derivative
financial instruments 269 (852)
------------ ------------
Foreign currency loss in the year including
the effect of foreign currency hedging (1,005) (113)
------------ ------------
As at 30 June 2021, a proportion of the net financial assets of the
Company, excluding the foreign currency forward contracts (where applicable
for 30 June 2020), were denominated in currencies other than Sterling
as follows:
Investments
at fair Foreign
value through Cash and currency
profit or Loans and cash Other payables forward
loss receivables equivalents and accruals Exposure contracts Net exposure
30 June GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2021
US
Dollars - 2,713 1 - 2,714 - 2,714
Euros - 4,293 - - 4,293 - 4,293
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
- 7,006 1 - 7,007 - 7,007
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
30 June
2020
US
Dollars - 7,552 - - 7,552 (7,531) 21
Euros - 4,316 1 - 4,317 (4,121) 196
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
- 11,868 1 - 11,869 (11,652) 217
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
In order to limit the exposure to foreign currency risk, the Company
had previously entered into hedging contracts. However, in September
2020, the Company closed out its foreign currency forward contracts
and it is not intended to enter into foreign exchange hedging contracts
in the future.
At 30 June 2021, the Company held no open foreign currency forward
contracts (30 June 2020: foreign currency forward contracts to sell
US$9,340,000 and EUR4,550,000).
At 30 June 2021, if the exchange rates for US Dollars and Euros had
strengthened/weakened by 5% against Sterling with all other variables
remaining constant, net assets at 30 June 2021 and the profit/(loss)
for the year ended 30 June 2021 would have increased/(decreased) by
GBP369,000/GBP(334,000) (2020: increased/(decreased) by GBP11,000/GBP(10,000)),
after accounting for the effects of the hedging contracts mentioned
above, where applicable.
(iii) Interest rate risk
Interest rate risk arises from the possibility that changes in interest
rates will affect future cash flows or the fair values of financial
instruments. The Company is exposed to risks associated with the effects
of fluctuations in the prevailing levels of market interest rates
on its financial instruments and cash flow. However, due to the fixed
rate nature of the majority of the loans, cash and cash equivalents
of GBP4,396,000 (2020: GBP1,193,000) were the only interest bearing
financial instruments subject to variable interest rates at 30 June
2021. Therefore, if interest rates had increased/decreased by 50 basis
points, with all other variables held constant, the change in value
of interest cash flows of these assets in the year would have been
GBP22,000 (2020: GBP6,000).
Non-interest
Fixed interest Variable interest bearing Total
30 June 2021 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Loans ([1]) 14,669 - - 14,669
Other receivables - - 183 183
Cash and cash equivalents - 4,396 - 4,396
------------ ------------ ------------ ------------
Total financial assets 14,669 4,396 183 19,248
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (148) (148)
------------ ------------ ------------ ------------
Total financial liabilities - - (148) (148)
------------ ------------ ------------ ------------
Total interest sensitivity
gap 14,669 4,396 35 19,100
------------ ------------ ------------ ------------
30 June 2020
Financial assets
Loans ([1]) 42,633 - - 42,633
Investments at fair value through
profit or loss - - 251 251
Other receivables - - 1,598 1,598
Cash and cash equivalents - 1,193 - 1,193
------------ ------------ ------------ ------------
Total financial assets 42,633 1,193 1,849 45,675
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (164) (164)
Derivative financial instruments - - (6) (6)
------------ ------------ ------------ ------------
Total financial liabilities - - (170) (170)
------------ ------------ ------------ ------------
Total interest sensitivity
gap 42,633 1,193 1,679 45,505
------------ ------------ ------------ ------------
([1]) Of the loans of GBP14,669,000 (2020: GBP42,633,000), one loan amounting
to GBP4,119,000 (2020: GBP10,527,000) included both fixed elements
and variable elements, based on the performance of the borrowers'
underlying portfolios of loans.
The Investment Manager manages the Company's exposure to interest
rate risk, paying heed to prevailing interest rates and economic conditions,
market expectations and its own views as to likely moves in interest
rates.
Although it has not done so to date, t he Company may implement hedging
and derivative strategies designed to protect investment performance
against material movements in interest rates. Such strategies may
include (but are not limited to) interest rate swaps and will only
be entered into when they are available in a timely manner and on
terms acceptable to the Company. The Company may also bear risks that
could otherwise be hedged where it is considered appropriate. There
can be no certainty as to the efficacy of any hedging transactions
.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument
will fail to discharge an obligation or commitment that it has entered
into with the Company, resulting in a financial loss to the Company.
At 30 June 2021, credit risk arose principally from cash and cash
equivalents of GBP4,396,000 (2020: GBP1,193,000) and balances due
from the platforms and SMEs of GBP14,669,000 (2020: GBP42,633,000).
The Company seeks to trade only with reputable counterparties that
the Investment Manager believes to be creditworthy.
The Company's credit risks principally arise through exposure to loans
provided by the Company, either directly or through platforms. These
loans are subject to the risk of borrower default. Where a loan has
been made by the Company through a platform, the Company will only
receive payments on those loans if the corresponding borrower through
that platform makes payments on that loan. The Investment Manager
has sought to reduce the credit risk by obtaining security on the
majority of the loans and by investing across various platforms, geographic
areas and asset classes, thereby ensuring diversification and seeking
to mitigate concentration risks, a s stated in the "risk concentration"
section earlier in this note.
The cash pending investment or held on deposit under the terms of
an investment instrument may be held without limit with a financial
institution with a credit rating of "single A" (or equivalent) or
higher to protect against counterparty failure.
The Company may implement hedging and derivative strategies designed
to protect against credit risk. Such strategies may include (but are
not limited to) credit default swaps and will only be entered into
when they are available in a timely manner and on terms acceptable
to the Company. The Company may also bear risks that could otherwise
be hedged where it is considered appropriate. There can be no certainty
as to the efficacy of any hedging transactions .
Please see note 3b and note 4 for further information on credit risk
and note 14 for information on the loans at amortised cost.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to meet
financial commitments. The principal liquidity risk is contained in
unmatched liabilities. The liquidity risk at 30 June 2021 was low
since the ratio of cash and cash equivalents to unmatched liabilities
was 30:1 (2020: 7:1).
The Investment Manager managed the Company's liquidity risk by investing
primarily in a diverse portfolio of loans, in line with the Prospectus
and as stated in the "risk concentration" section earlier in this
note. However, i n a Managed Wind-Down, the value of the Portfolio
will be reduced as investments are realised and concentrated in fewer
holdings, and the mix of asset exposure and liquidity will be affected
accordingly.
The maturity profile of the portfolio is as follows:
30 June 2021 30 June 2020
Percentage Percentage
0 to 6 months 54.7 5.4
6 months to 18 months 7.6 30.1
18 months to 3 years 27.9 35.5
Greater than 3 years 9.8 29.0
------------ ------------
100.0 100.0
------------ ------------
Capital management
During the year, the Board's policy was to maintain a strong capital
base so as to maintain investor, creditor and market confidence and
to sustain future operation of the Company. The Company's capital
comprises issued share capital, retained earnings, a capital redemption
reserve (see note 3(i)) and a distributable reserve created from the
cancellation of the Company's share premium account. To maintain or
adjust the capital structure, the Company could issue new Ordinary
Shares, B Shares and/or C Shares, buy back shares for cancellation,
buy back shares to be held in treasury or redeem B Shares. The Company
returned capital to Shareholders through the use of a B Share Scheme,
which was approved by Shareholders on 23 March 2021 (see note 5).
During the year ended 30 June 2021, the Company did not issue any
new Ordinary or C shares, nor did it buy back any Ordinary Shares
for cancellation or to be held in treasury (2020: none). 49,999 Management
Shares were bought back for GBP49,999 and cancelled (see note 22).
During the year ended 30 June 2021, 10,269,000 B Shares were issued
and bought back for GBP10,269,000 (see note 5), and a further B Share
Scheme redemption of GBP3,160,000 (6.00p per Ordinary Share) was made
on 23 July 2021.
The Company is subject to externally imposed capital requirements
in relation to its statutory requirement relating to dividend distributions
to Shareholders. The Company meets the requirement by ensuring it
distributes at least 85% of its distributable income by way of dividend.
Following the Shareholder's approval of the change to investment policy
and the managed wind-down of the Company, the Board manages the Company's
capital to enable it to make quarterly dividend payments for the time
being (instead of the previous monthly dividends), although this will
be kept under review, and the return of capital via the B Share Scheme.
The Company will also look to structure its dividend payments to maintain
investment trust status for so long as it remains listed.
25. Contingent assets and contingent liabilities
There were no contingent assets or contingent liabilities in existence
at the year end (2020: none).
26. Events after the reporting period
A B Share Scheme redemption of GBP3,160,000 (6.00p per Ordinary Share)
was made on 23 July 2021.
On 20 August 2021, the Company agreed with the Investment Manager
and its AIFM to amend the investment management agreement and for
the agreement to terminate with effect from midnight on 31 December
2021 (see note 7a).
Subsequent to the year end, the Company was informed that a borrower
had not finalised refinancing ahead of the 30 September 2021 repayment
date and, consequently, repayment of the loan was to be delayed. As
a result, the expected credit loss as at 30 June 2021 for the loan
has been amended, resulting in a difference in the net asset value
disclosed in these financial statements from that announced on 11
August 2021 (see the reconciliation in note 23).
There were no other significant events after the reporting period.
27. Parent and Ultimate Parent
The Directors do not believe that the Company has an individual Parent
or Ultimate Parent, or an ultimate controlling party.
--- ENDS ---
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FR URSORAUURUAA
(END) Dow Jones Newswires
October 21, 2021 02:00 ET (06:00 GMT)
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