TIDMKKVL
RNS Number : 1037N
KKV Secured Loan Fund Limited
27 January 2021
27 January 2021
KKV Secured Loan Fund Limited
(the "Company")
Annual Report and Audited Consolidated Financial Statements
LEI: 2138007S3YRY3IUU4W39
The Board of Directors of KKV Secured Loan Fund Limited
announces the release of the Annual Report and audited Consolidated
Financial Statements for the year ended 30 June 2020 (the
"Accounts").
KKV SECURED LOAN FUND LIMITED (formerly known as SQN Asset
Finance Income Fund Limited)
Annual Report and Audited Consolidated Financial Statements for
the year ended 30 June 2020
GROUP METRICS FOR THE YEARED 30 JUNE 2020
As at 30 June 2020, the investment objective of KKV Secured Loan
Fund Limited (the "Company" and together with its subsidiaries, the
"Group") was to provide its shareholders with regular, sustainable
dividends and to generate capital appreciation through investment,
directly or indirectly, in business-essential, revenue-producing
(or cost saving) equipment and other physical assets. The Group's
base currency is Sterling.
The new investment objective of the Ordinary Shares and the 2016
C Shares is to realise all remaining assets in the portfolio of
both share classes in a prudent manner consistent with the
principles of good investment management and to return cash to
shareholders in an orderly manner.
(56.1)% per Ordinary 36.2p per Ordinary (11.9)% Ordinary
Share(1) Share Share(1)
(25.0)% per 2016 68.2p per 2016 C (16.4)% 2016 C
C Share(1) Share Share(1)
----------------------- -------------------- ---------------------
NAV total return per NAV per Share as at Share price discount
share for the year 30 June 2020 to NAV as at 30
ended 30 June 2020 June 2020
(dividends reinvested
at NAV)
GBP193 million
----------------------
Market capitalisation
of Ordinary Shares
and 2016 C Shares
as at
30 June 2020
(1) These are Alternative Performance Measures, refer to the
'Alternative Performance Measures' section for details.
The key drivers of the change in Net Asset Value (" NAV")
between 30 June 2019 and 30 June 2020 are highlighted in the graphs
below:
Ordinary Shares
Graphs are available in the Annual Report and Consolidated
Financial Statements for the year ended 30 June 2020, which is
available to shareholders on the Company's website.
2016 C Share
Graphs are available in the Annual Report and Consolidated
Financial Statements for the year ended 30 June 2020, which is
available to shareholders on the Company's website.
FINANCIAL METRICS AND PERFORMANCE SUMMARY
Financial Metrics
NAV Total Return
The NAV total return details the change in NAV from the start of
the relevant period and assumes that dividends paid to shareholders
are reinvested at NAV. The NAV total return achieved by the Group
is detailed in the table below:
Period Ordinary Shares 2016 C Shares
Year to 30 June 2020 (56.1)% (25.0)%
3 year(1) (43.7)% (16.3)%
Since inception (26.7)% (17.7)%
The NAV total return since inception is illustrated in the graph
below:
Graphs are available in the Annual Report and Consolidated
Financial Statements for the year ended 30 June 2020, which is
available to shareholders on the Company's website.
Ongoing Charges(2)
The ongoing charges for the year ended 30 June 2020 are 1.31%
(30 June 2019: 1.21%).
Dividend History
Dividends were suspended on 18 March 2020 on both the Ordinary
Shares and the 2016 C Shares until further notice . This was
intended to preserve cash while the Company and its borrowers
navigated through the challenging, unprecedented environment caused
by Covid-19. Please refer to note 14 for details on dividends paid
during the year and prior year.
Acquisition of Own Ordinary Shares
The Group repurchased 288,156 (30 June 2019: 321,316) Ordinary
Shares during the year for a total cost of GBP237,845 (30 June
2019: GBP295,529). The repurchased Ordinary Shares are being held
in treasury.
(1) NAV total return over a 3 year period from 1 July 2017 to 30
June 2020.
(2) Refer to the 'Alternative Performance Measures' section for
the calculation of these alternative performance measures.
Performance Summary
Sterling in millions, except 30 June 2020
per share data and number of 30 June 2019
shares in issue
Number of shares in issue
- Ordinary Shares(1) 355,975,669 356,263,825
- 2016 C Shares 138,924,222 138,924,222
NAV(1)
- Ordinary Shares GBP128.81 GBP338.14
- 2016 C Shares GBP94.71 GBP136.35
NAV per share(2)
- Ordinary Shares 36.19p 94.91p
- 2016 C Shares 68.17p 98.15p
Share price (3)
- Ordinary Shares 31.90p 91.00p
- 2016 C Shares 57.00p 91.00p
Market capitalisation (3)
- Ordinary Shares GBP113.56 GBP324.20
- 2016 C Shares GBP79.19 GBP126.42
(Loss)/earnings per share
- Ordinary Shares (53.28)p 4.06p
- 2016 C Shares (24.54)p 6.75p
Dividend paid per share(4)
- Ordinary Shares 5.44p 6.65p
- 2016 C Shares 5.44p 6.19p
Comprehensive (loss)/income before GBP(223.81) GBP23.85
dividends
Investments GBP213.16 GBP435.21
Cash and cash equivalents GBP9.00 GBP22.04(5)
Weighted average portfolio yield(6)
- Ordinary Shares - performing 9.61% 9.40%
- 2016 C Shares - performing 9.37% 9.62%
- Consolidated - performing 9.49% 9.47%
- Ordinary Shares - non performing 2.17% 0.00%
- 2016 C Shares - non performing 3.85% n/a
- Consolidated - non performing 2.5% 0.00%
- Ordinary Shares - combined 3.62% 9.50%
- 2016 C Shares - combined 6.54% 9.62%
- Consolidated - combined 4.42% 9.53%
Weighted average remaining term(6)
- Ordinary Shares - performing 78.33 months 115.29 months(7)
- 2016 C Shares - performing 57.57 months 64.47 months
- Consolidated - performing 68.23 months 98.61 months
- Ordinary Shares - non performing 215.95 months n/a
- 2016 C Shares - non performing 58.84 months n/a
- Consolidated - non performing 106.57 months n/a
- Ordinary Shares - combined 110.32 months 109.77 months
- 2016 C Shares - combined 58.22 months 64.47 months
- Consolidated - combined 95.99 months 97.16 months
(1) The number of Ordinary Shares in issue is presented after
deducting 1,731,838 (30 June 2019: 1,443,682) treasury shares.
(2) Refer to Note 19 for a reconciliation between the NAV
announced via the RNS and the NAV per the consolidated financial
statements.
(3) Source: Bloomberg
(4) Refer to note 14 for further details on the dividends paid
during the year and prior year. During the year ended 30 June 2020,
9 dividends were paid (30 June 2019: 11 dividends were paid).
(5) The comparative has been restated to disclose due from/to
broker separately from cash and cash equivalents.
(6) Of the invested portfolio. Calculated using performing, non
performing and both performing and non-performing assets combined.
These are Alternative Performance Measures, refer to the
'Alternative Performance Measures' section for details.
(7) This comparative has been restated to include performing
assets only.
COMPANY OVERVIEW
The investment objective and policy of the Company is set out in
the Executive Summary of this report.
Company KKV Secured Loan Fund Limited (formerly known as SQN
Asset Finance Income Fund Limited)
Incorporated in Guernsey on 28 May 2014.
Change of Name registered on 16 July 2020
Registered Guernsey Closed-ended Collective Investment
Scheme.
Admitted to the Premium Segment of the UK Listing Authority's
Official List and to trading on the
Main Market of the London Stock Exchange on 14 July 2014 for
Ordinary Shares, 9 November 2015
for the first issuance of C Shares (which were converted into
Ordinary Shares on the 25 October 2016)
and 12 December 2016 for the second issuance of C Shares (the
"2016 C Shares").
Registration number 58519.
Investment Managers SQN Capital Management, LLC (the "US Investment Manager")
and Alternative Investment
Fund Manager Incorporated in the United States of America on 7
December 2007.
(from inception A Registered Investment Adviser with the United
States Securities and
to 5 June 2020) Exchange Commission.
File number 4466472.
SQN Capital Management (UK) Limited (the "UK Investment
Manager")
Incorporated in England & Wales on 12 May 2014.
A wholly owned subsidiary of the US Investment Manager.
Registration number 09033846.
(together the "Investment Managers")
The US Investment Manager was the Alternative Investment Fund
Manager from inception to 5 June 2020
Portfolio Manager KKV Investment Management Limited
(from 6 June 2020 to date)
Incorporated in England and Wales on 20 February 2020.
A subsidiary of Kvika Securities Limited, the UK operation of
Kvika Banki hf, a Nordic bank listed on the NASDAQ Iceland main
market.
Registration number 12475228
(the "Portfolio Manager")
Alternative Investment International Fund Management Limited ("IFM")
Fund Manager
(from 6 June 2020 to date) Regulated by the Guernsey Financial
Services Commission under the Protection of Investors (Bailiwick of
Guernsey) Law 1989, as amended.
Incorporated in Guernsey with registration number 17484.
(the "AIFM")
Details of other service providers are provided below.
CHAIRMAN'S STATEMENT
Introduction
I present shareholders with my Chairman's Statement, covering
the financial year from 1 July 2019 to 30 June 2020.
In releasing these accounts, I realise that the sheer extent and
quantum of provisions taken by the Company will be of great concern
to shareholders. These have also been a huge disappointment to the
Board and the Portfolio Manager. As detailed elsewhere in my
report, following the Board's strategic review at the start of
2020, the Company appointed the Portfolio Manager and AIFM in June
2020, taking over from the Investment Managers who had been the
manager since inception in 2014. The Portfolio Manager, the AIFM
and the Board have conducted a very thorough, bottom-up analysis of
every credit in its portfolio. Each position has had a reassessment
of the credit quality of the underlying assets and a
reclassification of their inherent risk profile assisted, in some
instances, by independent reviews conducted by third parties, the
details of which are explained in the Portfolio Manager's Report.
Determining the exact level of provision to take on specific loans
has, for certain assets, proven to be very challenging given the
wide range of possible outcomes. Nonetheless, I am confident that
the analysis has been robust and is a fair reflection of the
position at the financial year-end, albeit there remains some
continued uncertainty about the amounts that will be realised
eventually.
In some cases, due to the continued disappointment and the
failure of favourable resolutions being found on certain assets
within a reasonable timescale, they have been provided for in full,
as it is difficult to confirm the amount and timing of any
recovery. That said, where contractual rights exist, the Board, the
AIFM and the Portfolio Manager will continue to pursue recovery of
value in the best interests of shareholders.
Whether the NAV performance improves or deteriorates from here I
cannot provide assurance because much will depend upon how
conditions develop in financial markets and the wider economy.
Further challenges remain, such as Brexit and Covid-19.
Performance
As I have noted, this financial year has been extremely
challenging and it is very disappointing that I report a NAV total
return per Ordinary Share of (56.1)% and a NAV total return per
2016 C Share of (25.0)% for the year to 30 June 2020. Other key
metrics were:
-- For the reporting period, the Company has reported a combined
net loss of GBP223.8 million (2019: profit of GBP23.9 million).
-- The Company's Ordinary Share NAV at 30 June 2020 was GBP128.8
million (36.19p per Ordinary Share) compared to GBP338.1 million
(94.91p per Ordinary Share) as at 30 June 2019.
-- The Company's 2016 C Share NAV at 30 June 2020 was GBP94.7
million (68.17p per 2016 C Share) compared to GBP136.4 million
(98.15p per C Share) as at 30 June 2019.
Strategic Review
As I noted in my report to you in April 2020, the Board
commenced a strategic review in January 2020 which involved
consideration of the future of the Company and the review of
investment management services together with the need to appoint an
independent third party to assist with the valuation of certain
Anaerobic Digestion ("AD") plants valuations. KPMG in Ireland was
appointed to assist with those valuations.
The review of investment management services saw the Board
follow a detailed and thorough process. The Company announced the
appointment the Portfolio Manager and the AIFM on 8 June 2020.
The Portfolio Manager represented the opportunity to bring new
management of the portfolios whilst retaining some continuity with
the prior Investment Managers through the transition of some
personnel. The former co-manager, Jeremiah Silkowski, was retained
under a consultancy arrangement with the Portfolio Manager to aid
with ongoing transitional queries, whilst Neil Roberts, the other
co-manager, having managed the fund since inception, retired from
his role in Q1, 2020 and retains his position as chairman of the
wider SQN Group. The investment team of the Portfolio Manager is
led by Dawn Kendall and her team includes Chris Greener and
Christian Holder, both have deep experience of the asset backed and
loan markets. Further details are provided in their Portfolio
Manager's Report.
Throughout the strategic review, the Board listened to the views
of major shareholders and, associated with the changes made, the
Board determined to bring forward the continuation votes that were
previously scheduled to be held at the annual general meeting
("AGM") on 31 December 2020. Accordingly, an extraordinary general
meeting ("EGM"), together with Ordinary and 2016 C Share Class
meetings were held on 16 July 2020 at which Ordinary Share
shareholders voted for continuation, with a further vote in 2021,
whilst 2016 C Share shareholders voted against continuation.
Subsequently, as the extent of issues with portfolio positions
became more apparent, and reflecting further feedback from
shareholders, the Board determined that the best course of action
was to propose that both the Ordinary Shares and the 2016 C Shares
be placed into an orderly managed wind down. At the EGM and
Ordinary and 2016 C Share Class meetings held on 4 December 2020,
shareholders approved the resolutions enabling the Company to
commence a managed wind down of the portfolios. As noted in the
Company's various announcements, there will be no fire sale of
assets and any wind down will be orderly and seek to extract
maximum shareholder value, balanced against a desire from
shareholders to see a return of capital in a more accelerated
fashion than allowing all loans to run to formal maturity, some of
which are lengthy. I am optimistic that we will be able to achieve
a good balance of these two objectives over the coming months and
years but, realistically, it is likely that any final wind down
will take at least 2 to 3 years. It is presently too early to
provide any timetable for distributions to shareholders.
In the middle of the strategic review, a number of events
conspired, leading to the Board and the previous Investment
Managers undertaking a review of the liquidity outlook for both
share classes. Given the very material uncertainty prevailing, the
decision was taken in March 2020 to preserve liquidity and to
suspend dividends; no further dividends have therefore been
declared on either the Ordinary Shares or 2016 C Shares since that
time. Given that subsequent events have placed the Company on a
path to managed wind down, the Board does not intend to declare any
further dividends, other than is necessary for regulatory
purposes.
The Board was also mindful of the potential impact on liquidity
from the hedging of US Dollars and Euros back into Sterling and so
this hedging programme was also cancelled. The Board and the
Portfolio Manager will keep this matter under review but there is
no intention, for the foreseeable future, to reinstate any currency
hedging. The Portfolio Manager will provide percentage foreign
exchange exposures in future factsheets in order that shareholders
may hedge their underlying currency exposures themselves should
they choose to do so.
Given the prevailing environment and the need to preserve
shareholder value in certain assets, in particular some of the AD
plants, a small number of follow-on investment and commitments were
made by the Ordinary Share Class. To ensure liquidity, there is an
inter-class loan from the 2016 C Shares to the Ordinary Shares, of
approximately GBP2m on commercial terms. Once liquidity is rebuilt
in the Ordinary Share Class, it will be repaid, most likely early
in 2021.
Share Price
During the year the share prices of both the Ordinary Shares and
the 2016 C Shares declined significantly and the discount of the
share price to NAV also widened materially, reflecting the
understandable disappointment of shareholders as events unfolded.
As at 30 June 2020, the Ordinary Share Class was at a discount to
NAV of 11.9% and the 2016 C Share Class was at discount of
16.4%
Board of Directors
Since the year end there have been changes to the composition of
the Board to reflect the change in strategy to one of managed wind
down.
On 16 September 2020, the board appointed Brett Miller as a
director of the Company. He is a Director of Secured Income Fund
plc which is also managed by the Portfolio Manager and, as such, is
considered non-independent. Alongside his appointment as a
director, Mr Miller has been tasked with extended responsibilities
and will be working closely with the Portfolio Manager to maximise
returns for shareholders and to help effect an orderly realisation
of 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. Brett brings significant
experience of closed ended funds and the alternative lending sector
and has experience of working with companies that are in wind-down.
We welcome him to the Board and look forward to his positive
contribution over the remainder of the life of the Company.
On 29 October 2020, Chris Spencer and Jacqueline Redmond stepped
down from the Board. Paul Meader and John Falla did not seek
re-election at the recent AGM. I extend my gratitude to them for
their contributions.
David Copperwaite was appointed to the Board as a Non-Executive
Director following the AGM and has taken over as Chairman of the
Audit and Risk Committee. I welcome him to the Board.
I will remain as Chairman until we have appointed an additional
director to assume the Chairman's role, expected to be no later
than February 2021. I will then step down from the Board as well. A
fourth director may also be appointed and this is under
consideration.
For the future, the composition of the Board will reflect the
wind down nature of the business going forward and the skills that
are needed to manage that ongoing process.
Change of Auditor
As detailed in the Report of the Audit Committee in October 2019
the Board appointed Deloitte LLP ("Deloitte") as auditor to the
Company replacing Baker Tilly CI Limited who had audited the
Company for the five years since inception in 2014. Deloitte
completed their first interim accounts review to 31 December 2019
in March 2020.
Shareholder engagement
This has been a very difficult year and there have been some
very unpalatable messages delivered by the Company to its
shareholders. The Board and the Portfolio Manager have both been
active in their engagement with shareholders. I can assure you that
the Board has always had the interests of shareholders at its core
and I would like to thank every shareholder with whom we have had
discussions for their constructive engagement and their help in
guiding the Board where possible. We have listened on every
occasion. In such a difficult period, it is inevitable that not all
shareholders will be as one. However, we have sought to balance the
differing views of shareholders and I would like to think that we
have been able to chart a course through rough seas to reach the
right destination.
In light of the current status of the Company's portfolio and
the analysis necessary in preparing a valuation statement, the
Board is of the view that the publication of a monthly NAV is no
longer appropriate. The Company therefore intends to publish its
NAV on a quarterly basis reflecting the Portfolio Manager's
detailed analysis of the Company's portfolio. It is expected that
the NAV will be published within six weeks of the quarter-end with
the exception of the half-year and full-year NAV which will be
published at the time of the half-year and full-year results. The
Board will continue to keep shareholders updated of any major
developments in the portfolio, including events that may have a
material impact on valuation and/or material asset
disposals/refinancings.
Outlook
The Board and the Portfolio Manager have now begun work on an
orderly wind down of the portfolios and hope to return capital to
investors expeditiously, avoiding capital erosion where possible.
In anticipation of this the Board had instructed the Portfolio
Manager to cease all new underwriting commitments from June 2020.
We have also reviewed costs in recent months and have taken steps
to reduce ongoing expenses going forward.
Market conditions have been, and continue to be, very
challenging. When I wrote to you last, in early April 2020, the UK
was locked down due to the Covid-19 pandemic and the path forward
for the world economies was very unclear. We now know that the
consequences have been very severe and protracted. It is heartening
that there is the glimmer of hope that a medical solution will be
available in 2021 but this has had an effect on a number of
borrowers. It has also made it more difficult to engage with
borrowers face-to-face and has worsened the environment in which we
are all working.
However, the Portfolio Manager considers that the most
challenging period may still be ahead of us, with Q1 and Q2 2021
presenting continued risks to our borrowers. We shall, of course,
keep investors informed of any developments as they occur.
Peter Niven
Chairman
26 January 2021
Most of the wording in the Chairman's Statement was drafted by
Peter Niven before he fell ill. In his absence, during his
recuperation, the Board has made amendments and consequential
adjustments, which for the avoidance of doubt, Mr Niven has not
seen.
STRATEGIC REPORT
EXECUTIVE SUMMARY
This executive summary is designed to provide information about
the Company's business and results for the year ended 30 June 2020.
It should be read in conjunction with the Chairman's Statement and
the Portfolio Manager's Report which give a detailed review of
investment activities for the year and an outlook for the future.
These include a review of the business of the Group and its core
activities, the principal risks and uncertainties it faces,
dividend policy and results for the year.
Corporate Summary
The Company is a non-cellular company limited by shares,
registered in Guernsey under the Companies (Guernsey) Law 2008 (as
amended) with registered number 58519. The registered office of the
Company is BNP Paribas House, St Julian's Avenue, St Peter Port,
Guernsey, GY1 1WA, Channel Islands.
The Company is an authorised collective investment scheme in
Guernsey, pursuant to the Protection of Investors (Bailiwick of
Guernsey) Law, 1987 (as amended). The Company's Ordinary Shares and
2016 C Shares are listed on the premium segment of the Official
List of the UK Listing Authority and are admitted to trading on the
Main Market of the London Stock Exchange.
The Company is a member of the Association of Investment
Companies (the "AIC") and is classified within the Specialist:
Leasing sector.
Significant Events During the Year Ended 30 June 2020
Appointment of New Director
On 4 December 2019 , Dr Jacqueline Redmond was appointed as a
non-executive Director.
AD Plant Valuation
In January 2020, the Company announced that three of the AD
plants had not reached targeted operational capacity and a further
three AD plants were performing at or above the targeted
operational capacity but feedstock costs have been higher than
originally anticipated.
Given the large number of variables and the high degree of
sensitivity of each of those variables when modelled over the more
than 20 year lives of the assets and the wide range of potential
values, and in the interests of prudent risk management, the Board
appointed KPMG in Ireland to provide an independent assessment of
the valuation of the six AD plants as at the period ended 31
December 2019. Refer below for further information on third party
valuation performed as at 30 June 2020.
Covid-19
The Portfolio Manager (previously the Investment Managers)
contacted the Company's borrowers to review and determine the
extent to which Covid-19 was impacting their businesses and their
ability to maintain their financial commitments to the Group. There
have been issues with a number of investments in the Group's
portfolio due to Covid-19.
The Group aims to keep sustainable businesses alive with support
and forbearance including maturity extensions and interest or
amortisation "holidays", so that they can resume trading and
servicing their loans as rapidly as possible. Please refer to the
Portfolio Manager's Report for further information regarding
Covid-19.
Hedging
During the period 1 July 2019 to 18 March 2020 (and for the
comparative period), the foreign currency risk assumed by the Group
in making and retaining investments denominated in foreign
currencies was hedged by placing contracts for the sale of the
future foreign currency payments anticipated to be received in
connection with such investments ("FX Receivables"). Due to the
limited availability, inflexibility and cost of placing a matched
forward contract for each foreign currency investment (which may
have a tenor of five years or longer), the FX Receivables in
respect of two or more underlying investments were aggregated and
forward contracts placed with short-term maturity (typically
between three and nine months). On maturity, the forward sale
contract was part-settled from actual foreign currency receipts and
a new forward contract was placed for the then applicable aggregate
FX Receivables, adjusted for payments received, contract variations
and new investments.
The Company was required to deposit initial cash collateral
against fluctuations in the applicable exchange rates and/or to
meet margin calls if the prevailing market rate varied from the
contract rate. The Portfolio Manager (previously the Investment
Managers) monitors the Group's currency risk, and the Directors
review it.
On 18 March 2020, the foreign exchange forward derivatives used
to hedge non-Sterling exposures back to Sterling were closed out.
This was to preserve liquidity and to avoid creating liquidity
pressures for the Group as Sterling had notably weakened due to
Covid-19.
Suspension of Dividends
On 18 March 2020, and in light of the ongoing uncertainty in the
market due to the Covid-19 pandemic, the Board announced the
suspension of dividend payments on both the Ordinary Share and 2016
C Share classes until further notice. It was noted that, in order
to conserve liquidity, no further dividends would be declared until
further clarity on the impact of Covid-19 was available and the
results of the Company's strategic review were determined.
The Company previously targeted a total annual dividend of 7.25
pence per Ordinary Share and 2016 C Share. The dividend target was
a target only and there was no guarantee that it would be achieved.
Dividends were declared and paid monthly for Ordinary Shares and
2016 C Shares. The last dividend declared was for January 2020 and
was paid on 26 April 2020.
As at the date of approving these consolidated financial
statements, dividend payments on both the Ordinary Share and 2016 C
Share classes continue to be suspended.
Refer to note 14 for details of dividends that the Company has
declared and paid to its shareholders during the year.
Appointment of new investment manager and AIFM
On 24 January 2020, the Board announced it would be carrying out
a strategic review of the Company's operations, which would include
the provision of investment management services.
On 30 April 2020, the Company announced the results of its
strategic review and, following a detailed and transparent
selection process, its intention to appoint the Portfolio Manager
and the Company's AIFM. These new appointments and the termination
of the previous contract with the Investment Managers were
confirmed in an RNS dated 8 June 2020.
Acquisition of Own Ordinary Shares
The Company repurchased 288,156 Ordinary Shares during the year
for a total cost of GBP237,845. The repurchased Ordinary Shares are
being held in treasury. As at 30 June 2020, 1,731,838 Ordinary
Shares are being held in treasury.
Share Capital and voting rights
The Company's issued share capital as at 30 June 2020 consisted
of 357,707,507 Ordinary Shares (including 1,731,838 treasury
shares) and 138,924,222 2016 C Shares of no par value. The share
capital of the Company is represented by an unlimited number of
shares of no par value. All shares hold equal voting rights with no
restrictions and no shares carry special rights with regard to the
control of the Company. There are no special rights attached to the
shares in the event that the Company is wound up.
Please refer to note 13 for further information.
Subsidiaries
The Company's subsidiaries are detailed in note 1.
As at 30 June 2020, the Directors of the subsidiaries were the
same as the Company. Brett Miller and David Copperwaite were
appointed as directors of the subsidiaries post year end.
Information of each Director is shown below.
Purpose
The Company is an investment company with wholly owned
subsidiaries incorporated in Guernsey and established for the
primary purpose of acting as investment holding companies. The
Company's purpose together with its subsidiaries is to provide its
shareholders with regular, sustainable dividends and to generate
capital appreciation through investment, directly or indirectly, in
business-essential, revenue-producing (or cost saving) equipment
and other physical assets. In fulfilling this purpose, the Board
seeks to consider the views of all stakeholders and is mindful of
the impact that the Company has on wider society.
Previous Investment Objective and Investment Policy
The investment objective and investment policy set out
immediately hereafter is that for the year ended 30 June 2020 which
had been followed by the Company. Refer below to significant events
after the reporting period which has resulted in a change to the
Company investment objective and policy and the purpose of the
Company.
Investment Objective
The investment objective of the Company is to provide its
shareholders with regular, sustainable dividends and to generate
capital appreciation through investment, directly or indirectly, in
business-essential, revenue producing (or cost-saving) equipment
and other physical assets.
Investment Policy
The Company will seek to invest in business-essential, revenue
producing (or cost-saving) equipment and other assets with high in
place value and long economic life relative to the investment
term.
The Company provides asset financing primarily by way of
equipment leases, loans, hire-purchase agreements, construction
finance, and residual participations. It is intended that each
investment made by the Company will generate returns either through
cash flow over the investment term or through the residual value of
the equipment or other assets at the end of the investment term.
When available, the Company targets investments in the specialist
segment of the leasing market where assets provide cash flow during
the base term of the leases as well as offering the potential for
additional proceeds through lease extensions or sales at the end of
the lease. The Company generally does not intend to invest in the
large single asset segment of the leasing market, such as wide-body
commercial aircraft leasing, which is heavily reliant on residual
value to meet its return targets, or the high volume, low margin
segment of the leasing market, such as photocopier and automobile
leasing, although it may do so, from time to time, if appropriate
opportunities are identified in these segments.
The Company may invest in assets in any industry. The Company,
however, generally expects to be invested in such industries where
the Portfolio Manager (previously the Investment Managers) sees the
potential to make the most attractive risk adjusted returns which
currently include, but are not limited to, Agriculture, Energy,
Environmental, Manufacturing, Material Handling, Medical, Modular
Accommodation, Technology and Transportation.
The Portfolio Manager (previously the Investment Managers) will
target transaction sizes below GBP20 million but, generally, the
average transaction size is expected to be GBP3 million to GBP6
million, although it may fluctuate based on the market
opportunities and portfolio composition that the Portfolio Manager
(previously the Investment Managers) believes will best achieve the
Company's investment objectives. Whilst there is no minimum lease
term, it is typical for the initial lease terms to be 3 to 10 years
depending on the asset. Where appropriate, however, the term of the
lease may vary significantly from this range reflecting the
opportunities available and the needs of the lessee.
It is intended that the Company will primarily acquire assets
directly and function as the lessor under equipment lease
contracts. In such situations, the Company will own all rights,
title, and interest in and to the assets and will lease them to the
end-user. In other situations, the Company may own assets and enter
into hire-purchase agreements where the Company will own the assets
until all payments are made under the agreement and a pre-agreed
nominal purchase price is paid to the Company.
The assets held by the Company will generally be leased to a
third party and will be subject to either a direct finance (cash
flow) lease or an operating lease. The Company intends to balance
the portfolio between direct finance leases, to provide regular
cash flow, and operating leases, to provide capital appreciation
opportunities. Many, but not all, investments will be structured to
provide return of capital and interest during the lease term with
an opportunity for additional realisation from the residual value
after the initial lease term. In certain jurisdictions, direct
finance leases will be structured as loans and provide the same
advantages to the Company.
The Portfolio Manager (previously the Investment Managers) will
generally seek to acquire investments and/or enter into lease
arrangements that require the lessee or other counterparty to bear
all tax, maintenance, insurance, and other costs related to the
lease or the operation of the underlying asset(s). Generally, as a
result, the Company will not be required to undertake maintenance
on assets but reserves the right to do so on an exceptional
basis.
Whilst the Company will typically seek direct ownership of the
assets under lease, the Company may also obtain exposure to such
investments through holding securities that have exposure to an
underlying asset or assets that meet the Company's investment
criteria where it is more advantageous for the Company to do so or
a direct investment is not possible. This includes, but is not
limited to, holding or entering into debt securities, loan
agreements, equity securities, participation agreements, hybrid
instruments, or other securities, whilst maintaining the desired
economic exposure and level of security.
The Company may invest in residual interests in assets or
equipment. When the Company invests in residual interests, it or
its subsidiaries will acquire the rights and/or title to equipment,
assets, income or proceeds in respect of the period after the end
of the initial lease term or other underlying contract term. Cash
flow from the residual interests generally will not commence until
all of the obligations under the initial term are satisfied. Once
those obligations are satisfied, rights and/or title to the
underlying equipment, assets, income or proceeds will be
transferred to the Company or its subsidiaries. Furthermore, the
Company may elect to sell all or part of the lease receivables to a
third party investor or bank and retain its exposure to the asset
by retaining ownership of the residual value (in addition to any
proportion of the lease receivables retained). Therefore, in
relation to certain investments, the Company may be reliant on the
residual value to obtain its return on that investment. It is not
expected that residual interests would represent more than 35 per
cent of the portfolio at the time of investment.
Investments will primarily be made in the United Kingdom, the
United States and Europe which is expected to represent at least 75
per cent of the portfolio. The Company may also invest in assets
and equipment located or subject to law in Canada and Australia and
other countries, regions, or jurisdictions where the Portfolio
Manager (previously the Investment Managers) believes they can
adequately secure the Company's interest in assets and equipment
whilst achieving an appropriate risk-adjusted return consistent
with the rest of the portfolio.
Diversification Strategy
The Group's portfolio is subject to diversification policies
limiting the maximum amount of capital that can be invested in a
single asset, in a single asset class, in assets held by a
corporation or group or held by companies in a specific industry
and as a percentage of NAV of the portfolio, measured at the time
of investment, as follows:
-- Maximum by asset: 15%
-- Maximum by asset class: 30%
-- Maximum by corporation or group: 15%
-- Maximum by industry: 30%
New Investment objective and Investment Policy
After receiving the required approval from shareholders at the
EGM held on 4 December 2020, the previous Investment Objective and
Investment Policy, were deleted in their entirety and replaced with
the new Ordinary Share and 2016 C Share Investment Objective and
Investment Policy. Each share class has its own Investment
Objective and Investment Policy, which are identical and are set
out below.
Investment Objective
The investment objective of the Ordinary Shares and the 2016 C
Shares is to realise all remaining assets in the portfolio of both
share classes in a prudent manner consistent with the principles of
good investment management and to return cash to shareholders in an
orderly manner.
Investment Policy
The Company will pursue the investment objective of the Ordinary
Share Class and the 2016 C Share Class by effecting an orderly
realisation of the 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 and leases, or running off the Ordinary Share and 2016 C
Share Portfolios in accordance with the existing terms of the
assets, or a combination of both.
As part of the realisation process, the Group may also exchange
existing debt instruments for equity or other securities where, in
the opinion of the Board, the Group 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, on behalf of the Ordinary Share Class or the 2016 C
Share Class, will cease to make any new investments or to undertake
capital expenditure except where, in the opinion of both the Board
and the Portfolio Manager:
-- the investment is a follow-on investment made in connection
with an existing asset held by the Ordinary Share Class or the 2016
C Share Class in order to comply with the Group'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 Group;
or
-- the investment is considered necessary by the Board to
protect or enhance the value of any existing investments of the
Ordinary Share Class or the 2016 C Share Class to facilitate
orderly disposals of assets held by the Ordinary Share Class or the
2016 C Share Class.
Any cash received by the Company as part of the realisation
process prior to its distribution to shareholders will be held by
the Company, on behalf of the Ordinary Share Class or the 2016 C
Share Class, as cash on deposit and/or as cash equivalents.
The Company does not intend to undertake any new borrowings on
behalf of the Ordinary Share Class or the 2016 C Share Class,
although the Company may borrow where, in the opinion of both the
Board and the Portfolio Manager, an investment is considered
necessary to protect or enhance the value of an existing investment
and the Company does not have the available equity capital to fund
the investment. Any such borrowings are expected to be short-term
and would be repaid following the realisation of assets.
Any material change to the new Investment Objective and
Investment Policy for the Ordinary Share Class or the 2016 C Share
Class would require Ordinary Shareholder or 2016 C Shareholder
approval in accordance with the Listing Rules.
For further details on the Investment Objective and Policy refer
to the Prospectus which can be viewed on the website
www.kkvim.com/kkv-secured-loan-fund/.
Significant Events after the Reporting Period
EGM held on 16 July 2020
A resolution to change the Company's name from SQN Asset Finance
Income Fund Limited to KKV Secured Loan Fund Limited was approved
by the requisite majority.
At the meeting of the Ordinary Share Class, the continuation
vote was passed by the requisite majority with a further
continuation vote to be held in 2021. The Company was to make no
new investments within the Ordinary Share Class prior to the 2021
continuation vote, except for further investment into existing
assets that require additional capital or existing undrawn
commitments, with any excess cash flow from the amortisation or
realisation of assets during the period being returned to
shareholders.
At the 2016 C Shares Class meeting, the continuation vote was
not passed. In accordance with the proposal set out in the circular
published by the Company, the Board committed to formulate
proposals for the managed wind-down of the 2016 C Share portfolio
and present these to shareholders no later than 6 months from the
date of the EGM.
Managed Wind-Down of the Company
While Ordinary shareholders as a whole supported continuation of
the Ordinary Share Class, a substantial proportion of the Ordinary
shareholders voted against continuation. In addition, since the EGM
held on 16 July 2020, (as detailed above), the Portfolio Manager
raised concerns over the valuation of certain assets held within
the Company's portfolios. In light of this and continuing feedback
from several major shareholders, the Board was of the view that
shareholder value was best maximised by placing the Ordinary Share
Class into managed wind-down alongside the 2016 C Share class. As a
result, on the 24 September 2020, the Board announced its intention
to put forward proposals for a managed wind-down of the
Company.
On 13 November 2020, the Company published a circular containing
recommended proposals, to be tabled at the EGM held on 4 December
2020. The proposals included changes, which would allow the Company
to go into managed wind down, including updates to the articles, to
the investment objective and investment policy, to allow a
realisation strategy and to return capital to investors.
At the EGM held on 4 December 2020, the amendments to the
articles and the adoption of the new investment objective and
investment policy were passed with the requisite majority and
subsequently the Company was placed into managed wind down.
Review of Assets
On 30 September 2020, the Company announced that the Board, AIFM
and the Portfolio Manager had identified concerns regarding the
valuation of certain assets in the portfolios of the Ordinary Share
and 2016 C Share Classes. The Board worked with the Portfolio
Manager and the AIFM to understand the nature of the Portfolio
Manager's concerns, to identify the full scope of the assets
affected and to better understand the impact on the respective NAV
per share calculations of the Ordinary Shares and 2016 C
Shares.
KPMG LLP was engaged to assist the Board with its ongoing review
of the underlying collateral of certain assets. Refer to the
Chairman's Statement and the Portfolio Manager's Report for further
information.
Suspension of NAVs
On the 30 September 2020, the Board announced that the
publication of the Company's July NAVs, and future NAVs, would be
delayed until the conclusion of a third-party valuation review.
Board Appointments and resignations
On 16 September 2020, Brett Miller was appointed as a
Non-Executive, Non-Independent Director.
Christopher Spencer and Jacqueline Redmond resigned from the
Board on 30 October 2020 and Paul Meader and John Falla did not
seek re-election at the AGM held on 31 December 2020.
On 31 December 2020, David Copperwaite was appointed as a
Non-Executive, Independent Director.
2020 AGM
The AGM was held in Guernsey on 31 December 2020. All
resolutions were passed with the exception of Resolution 1, 'to
receive and consider the Annual Report and Audited Consolidated
Financial Statements for the year ended 30 June 2020', which was
adjourned until further notice following the delay of publication
as detailed below.
The Board notes the votes against Resolution 5 (appointment of
the Company's auditors), which represented 20.94% of those shares
voting and 9.94% of the issued share capital of the Company. The
Board believes the level of votes against Resolution 5 was a
consequence of a proxy advisor recommending voting against this
resolution given the delay to the publication of the Annual Report
and audited consolidated financial statements for the year ended 30
June 2020 and therefore being unable to fully analyse the auditors'
fees. The Board believes that this will be resolved following the
publication of the Annual Report and audited consolidated financial
statements, however, the Company will consult with its shareholders
to understand and seek to address any concerns they may have with
regard to Resolution 5.
Temporary suspension
As the Company did not publish the Annual Report and audited
consolidated financial statements for the year ended 30 June 2020
before the 31 December 2020, the latest date permitted for
publication of the 2020 results under the Financial Conduct
Authority's (the "FCA") Disclosure Guidance and Transparency Rules
(as modified by the temporary relief granted to all listed
companies by the FCA on 26 March 2020). the listing of the
Company's Ordinary Shares and 2016 C Shares was temporarily
suspended with effect from 7.30 a.m. on 4 January 2021.
The Company intends to request a restoration of its listing on
publication of the 2020 results.
Financial risk management objectives and policies
The Board is responsible for the Company's system of risk
management and internal control and meets regularly in the form of
periodic Board meetings to receive reports from the Audit and Risk
Committee and to consider the effectiveness of such controls in
managing and mitigating risk. The Audit and Risk Committee
considers the detail of the Risk Management Framework, and the risk
reporting from the AIFM who has day-to-day responsibility for the
management of risk.
The Board confirms that it has reviewed the effectiveness of the
Company's system of risk management and internal control for the
year ended 30 June 2020, and to the date of approval of these
consolidated financial statements. The Board has taken into
consideration the Financial Reporting Council ("FRC")'s, "Guidance
on Risk Management, Internal Control and Related Financial and
Business Reporting" to ensure that the Company's system of risk
management and internal control is designed and operated
effectively, in line with best practice guidance provided by the
FRC.
Principal Risks and Uncertainties
The Principal Risks facing the Company are as set out below.
Please refer to note 17 for reference to financial risk management
disclosures, which explains in further detail the above risk
exposures and the policies and procedures in place to monitor and
mitigate these risks.
The approach of the Audit and Risk Committee to the
identification and management of risk is set out in more detail in
the Audit and Risk Committee Report. The Committee has, with the
assistance of the AIFM, and the Administrator established an
internal control framework to provide reasonable but not absolute
assurance on the effectiveness of the internal controls operated on
behalf of the Company by the service providers as the management
and administrative functions are outsourced to third parties. The
Risk Framework is kept under review.
When considering the total return of the Group, the Board takes
account of the risk which has been taken to achieve that return.
The Board looks at numerous risk factors, an overview of which is
set out below:
Principal Description Mitigating Factors
Risk
Counterparty The Company's Thorough due diligence that was performed
/Asset performance is at the outset by the Investment Managers
risk subject to risks and necessary advisors.
primarily inherent
to asset financing; Subsequent to the appointment of the Portfolio
in particular, Manager, no new investments have been
the quality of made other than follow on investments
the assets underpinning in existing assets. Recommendations are
the transaction processed by the Portfolio Manager and
and the risk of independently reviewed by the AIFM and
default by the Board.
counterparties,
may affect the Ongoing monitoring programs are in place
Company's ability at the Portfolio Manager. As a result
to operate profitably. this allows the Portfolio Manager to identify
and address risks at an early stage.
------------------------- ----------------------------------------------------
Valuation Reliability on The Portfolio Manager has experience in
Risk asset valuations the sector and as such, is familiar in
is considered the assessment and valuing of the portfolio.
a key risk.
Key reporting information is structured
Given the sector within the transactions, to ensure the
of investment, Portfolio Manager would usually able to
valuations of access all necessary borrower data where
the counterparties' required.
underlying businesses,
and assets over Valuation adjustments are based on recommendations
which security from the Portfolio Manager and are assessed
exists, are calculated by the AIFM and Board.
and rely upon
assumptions, using Following the appointment of the AIFM
inputs such as and the Portfolio Manager in June 2020,
cash flows, discounts, a review of the assets within the portfolio
security, profitability was carried out, with third party valuation
and going concern specialists engaged to assist with the
assumptions. valuation of specific assets.
Key estimates and assumptions applied
by the Board and Portfolio Manager when
considering expected credit losses provision
relate to the determination of the probability
of default and the loss given default.
As at 30 June 2020, the expected credit
loss was GBP230,468,999 (30 June 2019:
GBP4,407,824). Refer to note 2.3(d) for
further details on the expected credit
losses methodology applied when determining
financial assets expected credit losses.
Impairments of GBP9,574,836 (30 June 2019:
Nil) were recognised during the year ended
30 June 2020. Refer to note 7 for further
information.
------------------------- ----------------------------------------------------
Currency The Company is The Portfolio Manager, in conjunction
Risk invested in a with the Board, have determined currency
global portfolio hedging is not to be conducted at this
and investments time.
will not always
be in the base This is closely monitored by the Portfolio
currency of the Manger and if deemed appropriate, the
Company. Portfolio Manager will recommend re-establishing
the hedging transactions with the Board.
As a result, such
investments will
carry currency
risk, if the non-base
currency investments
are not hedged.
Liquidity The Company's The Company is a closed ended investment
risk investments are company and therefore not susceptible
not publicly traded to investor redemption requests.
or freely marketable.
As a result, there The Company monitors and assesses investment
is likely to be values via regular reports from its Portfolio
a limited or no Manager. In the event that investment
secondary market values need to be adjusted, this would
to transact in. be under recommendation from the Portfolio
Therefore investments Manager.
may be difficult
to value or sell,
with a risk of
any achievable
sale being at
a value that is
lower than the
current valuation
of such assets.
--------------------------- -----------------------------------------------------
Geopolitical The Company provides The Company is invested in a diversified
risk asset finance portfolio across a wide range of industry
to counterparties sectors and therefore the portfolio is
in several jurisdictions sufficiently diversified to assist in
exposing the Company the mitigation of such risk.
to potential economic,
social, legal Significant events causing market volatility
and political are closely monitored, as are the impacts/potential
risks, such as impacts on the positions and counterparties
Brexit. The Group the Company are invested in.
therefore faces
significant risks
as a result of
a financial crisis.
--------------------------- -----------------------------------------------------
Operational The Company is The Board conducts thorough due diligence
risk ultimately responsible and interviews each service provider prior
for all operations. to appointment.
As the Company
has no employees, Ongoing monitoring of service providers
it enters into is carried out through the regular reports
contracts with service providers supply, which include
its service providers ongoing updates on all operational and
to ensure operational regulatory matters.
performance and
regulatory requirements The Management Engagement Committee periodically
are met. The departure reviews all service providers aside from
of key employees the auditors.
from the Portfolio
Manager may adversely
affect the returns
available to the
Group .
--------------------------- -----------------------------------------------------
Pandemic The Company provides The Company and its service providers
Risk asset finance discuss such events at an early stage,
to counterparties ensuring that appropriate protocols have
in several jurisdictions, been taken to combat and isolate such
exposing the Company risks, with regular updates on operational
to localised or resilience received from all key service
global pandemic providers.
risks worldwide.
From a portfolio perspective, the Portfolio
With the significant Manager is in close contact with counterparties
widespread severity and work with them to identify and mitigate
of COVID-19, this the risk such a pandemic may pose.
is likely to impact
performance through
market volatility
and underlying
counterparties
unable to function
in a timely manner,
both from a financial
or staffing perspective.
--------------------------- -----------------------------------------------------
Performance The performance The Board receives regular NAV information
risk of the Company and cash flows from the Portfolio Manager.
is largely determined
by the success Regular announcements are provided to
of the Portfolio investors to appraise them of company
Manager in meeting performance.
or exceeding performance
objectives and
the expectations
of investors,
in accordance
with the objectives
set out in the
prospectus.
Emerging Risks
Principal risks, including emerging risks, are mitigated and
managed by the Board through continual review, policy setting and
reviews of the Company's risk matrix by the Audit and Risk
Committee to ensure that procedures are in place with the intention
of minimising the impact of the above mentioned risks where
possible. The Board relies on periodic reports provided by the
Portfolio Manager, AIFM, and Administrator regarding risks that the
Company faces. When required, experts will be employed to gather
information, including legal advisers and third-party valuation
specialists.
With regards to the Covid-19 pandemic, and measures introduced
to combat its spread have been discussed in detail by the Board,
with updates on operational resilience received from all its key
service providers. The Board is satisfied that the key service
providers have the ability to continue their operations efficiently
in a remote or virtual working environment.
From a portfolio perspective, the Portfolio Manager is in close
contact with each investment counterparty and continues to work
with them to identify and mitigate the risk the Covid-19 pandemic
may pose. The Board has assessed other relevant areas of risk
(price and operational risks) and agreed that mitigants remain
appropriate, in light of the Covid-19 pandemic.
Whilst a post-Brexit trade deal has been agreed, uncertainty
around the outcome of Brexit remains for the financial services
sector. This has continued to place external economic pressures on
markets and our counterparties alike. Whilst the outcome and
therefore the full impact still remains uncertain, the Portfolio
Manager continues to monitor developments, together with assessing
the impact on the portfolio as a result. The Board have noted this
as a risk within its risk matrix and are comfortable with the
monitoring controls which are currently in place.
Going Concern
Under the AIC Code and applicable regulations, the Directors are
required to satisfy themselves that it is reasonable to assume that
the Company is a going concern from the date of approval of the
audited consolidated financial statements. Going concern refers to
the assumption that the Group has the resources and intention to
continue in operation for the foreseeable future.
At the EGM of the Company on 16 July 2020, shareholders voted
for the continuation of the Ordinary Share Class and against the
continuation of the 2016 C Share class, following which proposals
were to be put forward for the managed wind-down of the 2016 C
Share class only, with a further continuation vote to be held in
respect of the Ordinary Share Class in 2021.
While Ordinary shareholders as a whole supported continuation of
the Ordinary Share Class, a substantial proportion of the Ordinary
shareholders voted against continuation. In addition, since the EGM
held on 16 July 2020, the Portfolio Manager raised concerns over
the valuation of certain assets held within the Company's
portfolios. In light of this and continuing feedback from several
major shareholders, the Board were of the view that shareholder
value is best maximised by placing the Ordinary Share Class into
managed wind-down alongside the 2016 C Share class. As a result, on
the 24 September 2020, the Board announced its intention to put
forward proposals for a managed wind-down of the Company.
On 13 November 2020, the Company published a circular containing
recommended proposals, to be tabled at the EGM held on 4 December
2020. The proposals included changes, which would allow the Company
to go into managed wind down, including updates to the articles, to
the investment objective and investment policy, to allow a
realisation strategy and to return capital to investors.
At the EGM held on 4 December 2020, the amendments to the
articles and the adoption of the new investment objective and
investment policy were passed with the requisite majority and
subsequently the Company was placed into managed wind down.
As a consequence, the Directors consider it is appropriate to
adopt a basis other than going concern in preparing the
consolidated financial statements given the fact that the Company
is in managed wind down.
Viability Statement
Under the Association of Investment Companies (the "AIC") Code
of Corporate Governance published in February 2019 (the "AIC
Code"), the Directors are required to make a viability statement
which explains how they have assessed the prospects of the Company,
over what period they have done so and why they consider that
period to be appropriate, taking into account the Company's current
position and principal and emerging risks. The principal risks
faced by the Group are described above.
As detailed above, the Company is preparing the consolidated
financial statements using a basis other than going concern as the
Company is in managed wind down. Accordingly, the Directors have
not assessed the longer-term viability of the Company other than
for the managed wind down of the Company.
The Directors have assessed the wind down of the Company to be
within two to three years of the date of the approval of these
consolidated financial statements, although there is no guarantee
that it will be possible to realise the assets within that
timeframe.
Life of the Company
The Company has an indefinite life, however as outlined above
the Company is in managed wind-down.
Section 172(1) Statement
Through adopting the AIC Code, the Board acknowledges its duty
to comply with section 172 of the UK Companies Act 2006 to act for
the benefit of its shareholders as a whole, having regard to
(amongst other things):
a) consequences of any decision in the long-term;
b) the interests of the Company's employees;
c) need to foster business relationships with suppliers, customers and others;
d) impact on community and environment;
e) maintaining reputation; and
f) act fairly as between members of the Company.
The Board considers this duty to be inherent within the culture
the Company and a part of its decision-making process.
The Company's culture is one of openness, transparency and
inclusivity. Respect for the opinions of its diverse stakeholders
features foremost as does its desire to implement its operations in
a sustainable way.
Information on how the Board has engaged with its stakeholders
is outlined below.
The principal decisions section below outlines decisions taken
during the year which the Board believe have been taken to meet the
Company's investment objective and policy. The Board considers the
factors outlined under section 172 and the wider interests of
stakeholders as a whole in all decisions it takes on behalf of the
Company.
Stakeholder engagement
Stakeholder How the Board engages
Shareholders The Board recognises that it is important to
maintain appropriate contact with all shareholders
to understand their issues and concerns. There
is a programme of contact with major shareholders
and other shareholders are able to contact any
Director through the Company Secretary.
During the year, the Board engaged with its
shareholders by:
1) Publishing announcements.
2) Publishing fact sheets.
3) Publishing half yearly and annual reports
and accounts.
4) Making themselves available to meet major
shareholders as requested.
5) Obtaining shareholder feedback directly and
via the Portfolio Manager and Corporate Broker.
6) Making themselves available to be contacted
by shareholders.
Shareholders receive relevant information allowing
them to make informed decisions about their
investments. The Board receives the views of
shareholders allowing it to consider these views
throughout its deliberations .
During the year, considerable engagement with
shareholders took place regarding three main
issues - the strategic review conducted in early
2020, the valuation of investments and the consideration
of proposals to place the Company into managed
wind down. At appropriate instances, major shareholders'
views were canvassed in relation to all of these
issues and informed the decisions made by the
Board. Shareholders also then had the opportunity
to vote at two EGMs on these proposals.
---------------------------------------------------------------
Third party service As a Company with no employees the Board is
providers reliant on third party service providers to
help the Company operate in a compliant and
efficient manner.
During the year, the Board engaged with its
service providers by:
1) Receiving detailed written and verbal reports
at board meetings.
2) Regular communication with representatives
via telephone and email to discuss ad hoc matters.
3) Undertaking an annual review via the Management
Engagement Committee and providing feedback,
where appropriate, regarding service levels
to service providers.
In addition, and as noted further below, during
the year the Board undertook a strategic review
during early 2020 and this considered the provision
of investment management services. Detailed
discussions were held with all relevant parties
and the Board believes that the new appointments
of the current Portfolio Manager and AIFM, and
the termination process and provisions with
the Investment Managers, were fair, equitable
and suitable for all parties.
---------------------------------------------------------------
External Auditor The Board engages with the external auditor
to ensure that the annual audit process operates
effectively, efficiently and predictably.
The Audit Committee meets with the auditors
formally on a biannual basis and more frequently
where required. The auditors provide valuable
feedback on the Company and those of its service
providers that have a delegated responsibility
for areas of accounting and internal control.
These consolidated financial statements are
the first to be audited by Deloitte. As noted
further below and in the Audit and Risk Committee
Report, the Audit and Risk Committee has engaged
extensively with Deloitte to understand their
approach and requirements.
---------------------------------------------------------------
The wider community The Board supports fully the growing importance
and the environment placed on Environmental, Social and Corporate
Governance ("ESG") factors when asking the Company's
Portfolio Manager to deliver against the Company's
objectives. The Company has made significant
investments in investments which should have
a positive impact on the environment and the
Board, the AIFM and the Portfolio Manager in
managing the Company's assets are mindful of
social, ethical and environmental issues of
companies within the Group's portfolio, acknowledging
that companies failing to manage these issues
adequately run a long-term risk to the sustainability
of their businesses. Given that the Company
is expected to be in wind down, the Company
will not be making new investments but the Portfolio
Manager will continue to follow good practice
on ESG issues where applicable.
---------------------------------------------------------------
Principal decisions
Principal decision Stakeholder considerations / interests
Review of dividend When determining the dividend policy, the Board
policy considers market conditions and the interests
of shareholders in the short and medium term,
against the long-term interests of preserving
value created by the Portfolio Manager (previously
the Investment Manager).
The Board re-examines dividend policy on a periodic
basis to ensure that it is compatible with the
performance of underlying assets and is reflective
of cash flows from those assets and the solvency
of the Company.
The Board suspended dividends on 18 March 2020
on both the Ordinary Shares and the 2016 C Shares
until further notice, with the intention to
preserve cash.
-------------------------------------------------------
Change of investment During the year ended 30 June 2020, the Board
manager and appointment completed a strategic review, including a review
of alternative investment of the provision of investment management services
fund manager. to the Company. The Board consulted with a range
of major shareholders to gain their feedback
on the strategic review. While it was not possible
to speak with all shareholders, and there was
a range of views received, a decision was made
to put the investment management of the Company
out to tender. Proposals were sought, and fifteen
expressions of interest were received. An independent
consultant was used to facilitate the process
and to conduct due diligence on the six shortlisted
Managers, that presented to the Board.
Following the Strategic Review, the Company
appointed the Portfolio Manager and IFM on the
6 June 2020.
-------------------------------------------------------
Change of external As explained in more detail in the Audit Committee
auditor Report, the Audit of the Company was put out
to tender in the autumn of 2019, and the Company
appointed Deloitte as the Company's external
auditor. The audit of the consolidated financial
statements for the year ended 30 June 2020 is
the first audit of the Company conducted by
Deloitte.
-------------------------------------------------------
Managed wind down There was no change to the investment policy
of the Company and during the year ended 30 June 2020.
amendment to the investment
policy On the 24 September 2020, the Board announced
its intention to put forward proposals for a
managed wind-down of the Company. The Board
published a circular on 13 November 2020, proposing
a new investment objective and investment policy
for a managed and orderly wind-down of both
share classes and amendments to the articles.
At the EGM held on 4 December 2020, the adoption
of the amended articles, the new investment
objective and investment policy were passed
with the requisite majority and the Company
was placed into managed wind down.
The Board will now endeavour to realise all
of the investments in a manner that achieves
a balance between maximising the value received
from investments and making timely returns of
capital to shareholders.
-------------------------------------------------------
Changes to the Board On 16 September 2020, reflecting the change
in strategy of the Company, Brett Miller was
appointed to the Board.
Christopher Spencer and Jacqueline Redmond resigned
from the Board effective 30 October 2020. Paul
Meader and John Falla did not seek re-election
at the AGM held on 31 December 2020.
On 31 December 2020, David Copperwaite was appointed
to the Board.
-------------------------------------------------------
Employee engagement
The Company has no employees.
Business relationships
The Board considers its business relationships with stakeholders
to be important and is proactive in fostering these relationships.
For details on the nature of these relationships and how the
Company fosters relationships with its stakeholders, refer to the
stakeholder engagement section above. The Board also considers the
impact principal decisions have on its stakeholders, which is
detailed in the principal decisions section above.
Culture of the Company
The Board recognises that its tone and culture is important and
will greatly impact its interactions with shareholders and service
providers. The importance of sound ethical values and behaviours is
crucial to the ability of the Company to achieve its corporate
objectives successfully.
The Board individually and collectively seeks to act with
diligence, honesty and integrity. It encourages its members to
express differences of perspective and to challenge but always in a
respectful, open, cooperative and collegiate fashion. The Board
encourages diversity of thought and approach and chooses its
members with this approach in mind. The Corporate Governance
principles that the Board has adopted are designed to ensure that
the Company delivers value to its shareholders and treats all
shareholders equally. All shareholders are encouraged to have an
open dialogue with the Board.
The Board recognises that the Company will take investment and
other risks in order to achieve its objectives but these risks are
monitored and managed and the Company seeks to avoid excessive risk
taking in pursuit of returns.
During the year ended 30 June 2020, the Board completed a
strategic review, including a review of the provision of investment
management services to the Company. Following the Strategic Review,
the Company appointed the Portfolio Manager and IFM on the 6 June
2020.
Following the appointment of the AIFM and the Portfolio Manager,
a review of the assets within the portfolio was carried out, with
third party valuation specialists engaged to assist with the
valuation of specific assets. The Board, with the assistance of the
AIFM and the Portfolio Manager have applied significant estimates
and assumptions when considering the expected credits loss
provision and impairments. Refer to note 2.1(f) and 2.5
respectively for further detail.
A large part of the Board's activities are centred upon what is
necessarily an open and respectful dialogue with the Portfolio
Manager (formerly the Investment Managers). The Board strives to
maintain a constructive relationship with the Portfolio Manager
whilst holding them to account and questioning the choices and
decisions made by them.
The Board has adopted a code for Director dealings and a
procedure for matters reserved for the Board and matters delegated
to service providers to ensure an appropriate and effective
framework for implementation and oversight. The Board intends to
review its internal culture and that of its service providers on a
regular basis.
Environmental and Social Issues
The Company is a closed-ended investment company which has no
employees and therefore its own direct environmental impact is
minimal. The Board notes that the companies in which the Group
invests will have a social and environmental impact over which it
has no control.
The Board, the majority of which are based in Guernsey, holds
all its meetings in Guernsey and, whilst the Investment Managers
did travel to quarterly meetings, (before Covid-19 travel
restrictions), the Group's direct greenhouse gas emissions and
environmental footprint are believed to be negligible. However,
many of the companies and projects in which the Group invests have
a very positive environmental footprint. The numerous a naerobic
digestion plants the Group finances use waste of many types to
produce sustainable fertilisers and electricity or gas which are
provided to the respective National Grids. Additionally, our
support for other renewable energy sources likewise provide
alternative energy sources to fossil and/or nuclear fuels. In these
ways, the Board is pleased that the Group plays a positive part in
the environmental arena.
Modern slavery
The Company would not fall into the scope of the UK Modern
Slavery Act 2015 (as the Company does not have any turnover derived
from goods and services) if it was incorporated in the UK.
Furthermore, as a closed-ended investment company, the Company has
a non-complex structure, no employees and its supply chain is
considered to be low risk given that suppliers are typically
professional advisers based predominately in the Channel Islands or
the UK. Based on these factors, the Board have considered that it
is not necessary for the Company to make a slavery and human
trafficking statement.
Future strategy
At the EGM held on 4 December 2020, the adoption of the amended
articles, the new investment objective and investment policy were
passed with the requisite majority and the Company was placed into
managed wind down. The Board will seek to achieve the objectives
set out in the new Investment Objectives and Policies, to deliver a
realisation strategy and return capital to shareholders whilst also
protecting capital values.
The Directors have assessed the wind down of the Company to be
within two to three years of the date of the approval of these
consolidated financial statements, but there can be no guarantee
that this timetable will be achievable.
This Strategic Report was approved by the Board of Directors on
26 January 2021 and signed on its behalf by:
Brett Miller David Copperwaite
Director Director
PORTFOLIO MANAGER'S REPORT
Overview
KKV Investment Management Limited ("KKVIM") assumed the role of
Portfolio Manager for the Company on 5 June 2020. The business is
owned by Kvika Banki hf ("Kvika") and senior employees. Kvika is an
Icelandic bank specialising in asset management with a total of EUR
3 billion assets under management, with KKVIM representing 16% of
this total as at 30 June 2020.
After a competitive tender process commenced in January 2020 and
after a short transition period which included a review of KKVIM's
operational capability we began our tenure as Portfolio
Manager.
Despite opening for business during a pandemic, we are pleased
to report that the business was able to commence operational
management with few glitches. KKVIM initially had the use of three
offices in London and Surrey but all employees have been equipped
to work remotely throughout the current Covid-19 related
restrictions, with the majority choosing to do so. All processes
are functioning and business continuity has been maintained.
Initially we were aided by the previous investment staff,
responsible for the portfolio, who joined us under consultancy
arrangements with the previous portfolio managers. From July, we
increased our interaction with borrowers and met with them to make
our own assessment. This period of intense analysis has absorbed a
large amount of resource in a short period but has allowed us to
gain increasing confidence in our own evaluation of the Company's
investments. Furthermore, we requested that the Board seek an
independent review of some of the more challenging and complex
assets to provide increased comfort in the values, assigned by us,
to the loans.
There have been a number of changes to the investment team with
Dawn Kendall, Chris Greener and Christian Holder taking portfolio
management responsibility from 5 June 2020. We also employed two
highly experienced analysts with backgrounds in SME credit and
leveraged finance, bringing considerable experience to the team.
All decision making and management of the portfolio has now
transitioned entirely to this new team with the former General
Counsel/Chief Operating Officer and analysts leaving the business
in August and October respectively. We wish them all the best in
their future careers.
We have also employed a Compliance Manager who has commenced his
work in rolling out our KKVIM monitoring programme.
Max Zorza joined the business on 1 November 2020 assuming the
role of Chief Operating Officer. He previously held the role of
Global Chief Risk Officer for Architas MultiManager (part of the
AXA Group) and brings extensive operational experience to the firm.
He has joined the board of KKVIM and alongside colleagues from
Kvika and Kvika Securities Limited completes our management team
reporting to Ken Hillen, executive chairman.
A short transition period was requested by the Board in order
that we were in place ahead of the financial year end. This enabled
KKVIM to assist with the preparation of the year end accounts. In
addition, a continuation vote was brought forward to an EGM held on
16 July 2020. In advance of this, and to enable shareholders to
make an informed decision regarding continuation, the Board
requested that all positions were reviewed in detail to ensure that
guidance around valuations could be provided where necessary. With
the benefit of hindsight, this compressed timetable was
insufficient to allow the new team to assess the raw data
associated with the Company's loan book in any meaningful
detail.
At that EGM, shareholders voted for the continuation of the
Ordinary Share Class ("KKVL") and against the continuation of the
2016 C Share Class (KKVX). Initially, we were pleased to receive
the support of shareholders for continuation of the Ordinary Share
Class, although disappointed at the time with the decision by
shareholders to discontinue the 2016 C Share class. However, after
a deeper review of the portfolio, we were supportive of the Board
in recommending that both Ordinary and 2016 C share classes be
placed into managed wind down. Alongside the intense work
undertaken to review the portfolio, we have been working hard on
plans to achieve the objectives set out in the new Investment
Objectives and Policies, to deliver a realisation strategy and to
return capital to shareholders expeditiously whilst also protecting
capital values.
We are proud of the business we have launched during a pandemic,
our core team and the support of our parent, Kvika. Some of the
team, comprising administrative and legal personnel transferred
their employment from the former manager under Transfer of
Undertakings (Protection of Employment) regulations ("TUPE").
During the year, finance income of GBP35.7m was earned and
dividends of GBP26.9m paid. The amount of cash income received was
GBP22.1m, the remainder of income in the Consolidated Statement of
Comprehensive Income was accrued, but in pure cash terms had not
been received. Where appropriate, provisions have now been made
against income that is not expected to be received in full.
The NAV reported for the combined portfolios for 31 May 2020,
immediately prior to our appointment as Portfolio Manager, was
GBP356 million. Having reviewed the credits in detail and advised
the board on a revised credit provisioning policy combined with
additional external advice to support our findings, the audited NAV
at 30 June 2020 was GBP223.5 million. Lack of cash income was a
major contributor to the decision to cease the payment of dividends
and the hedging of non-Sterling exposures back into Sterling. In
the absence of available equity support, a further GBP7.3 million
was advanced to AD plants to preserve shareholder value by
supporting operating and capital expenses as required during the
year.
Since the last annual report, when concern regarding the impact
of Brexit on the UK economy was and still remains the primary
focus, other events have also emerged and we are now in the grips
of a pandemic. This has exacerbated problems that existed prior to
the onset of the pandemic for certain of the credits in the
portfolio. Where the impact has been solely related to Covid-19
rather than other credit weaknesses, we have applied a sensible and
pragmatic approach to helping our borrowers get through this
unprecedented period with amortisation, interest or covenant
relief. We are mindful that businesses rarely fail over a covenant
breach and that in times of significant stress, cash balances
remain key.
International Financial Reporting Standard ("IFRS") 9:
The International Accounting Standards Board ("IASB") set out
principles-based standards on how entities should recognise and
provide for credit losses for financial statement reporting
purposes. It should be noted that these standards are universal for
all lenders and some of the guidelines are more suited to large
bank-led loan books. The IASB issued IFRS 9 in July 2014 which
introduced an expected credit loss ("ECL"), framework for the
recognition of impairment. Under IFRS 9, ECL provisions are
required to be recognised at all times, regardless of the loan
performance. It is meant to be a forward-looking approach and
should result in the timely recognition of credit losses. We have
applied a rigorous approach to these standards that has resulted in
revised impairment provisions and reflects a suitably auditable
approach. Please note that where an external valuation has been
available this has been used as a basis to create a bespoke ECL to
take account of a lifetime ECL for the investment.
By way of a reminder, IFRS 9 recognises loan impairments in
three stages:
Stage 1 When a loan is originated, ECLs resulting from default events KKVIM Grades 1 to 6 correspond to Stage 1
that are probable within the
next 12 months are recognised and a loss allowance is
established. For existing loans with
no significant increase in credit risk since initial
recognition, a 12-month ECL continues
to apply.
Interest is calculated on the gross carrying amount of the
loan, without deductions for ECLs.
Stage 2 If the credit risk of a loan has increased significantly since KKVIM Grades 7 to 9 correspond to Stage 2
initial recognition, lifetime
ECLs are recognised.
Stage 3 If the credit risk of a loan has increased to the point where KKVIM Grade 10 corresponds to Stage 3
it is considered credit-impaired,
interest revenue is calculated based on the loan's amortised
cost, which is the gross carrying
amount less the loss allowance. Lifetime ECLs are recognised.
In relation to IFRS 9 provisioning, KKVIM have implemented a
revised and robust systematic grading system to reflect the need to
assess risk consistently, taking into account market conditions and
probability of default per credit. This uses a ten-stage
categorisation methodology. We have decided to increase disclosure
of our credit policy for shareholders to achieve a clear
understanding of our approach.
Our credit model is designed to put each asset into a risk
category based on the probability of default. Credits are then
individually assigned an expected loss given default ("LGD").
Inputs include specific data describing the characteristics and
attributes of each loan. Certain of those loan characteristics will
be used to generate the Probability of Default ("PD") and the LGD.
This provides a firm basis for comparisons across borrowers and
collateral types.
The calculation of ECL is a function of the PD, LGD (i.e. the
magnitude of the loss if there is a default) and credit exposure at
default.
Loans secured by realisable assets have an expected loss quantum
based on the underwriting criteria for the respective collateral
type.
An asset moves to stage 2 when its credit risk has increased
significantly since initial recognition. In assessing whether the
credit risk of an asset has significantly increased, the Group
takes into account qualitative and quantitative reasonable and
supportable forward-looking information.
Loans secured by realisable assets have an expected loss quantum
based on the underwriting criteria for the respective collateral
type. Loans that are more than 90 days in arrears will typically
become stage 2 assets unless this is for exceptional circumstances
along with loans that have unremedied covenant breaches or poor
performance of the underlying business that is likely to impact the
Group's facility.
Loans are categorised as in default, and hence stage 3, based on
several factors including when they are over 180 days in arrears
and have no credible plan to catch up, if material covenants have
been breached that will likely result in non-payment or the
underlying business has deteriorated materially.
KKVIM Probability of Default Grades:
Grade KKV PD (%)
1: Virtually no risk 0.01
-----------
2: Low risk 0.10
-----------
3. Moderate risk 0.50
-----------
4. Average risk 1.50
-----------
5. Acceptable risk 4
-----------
6. Borderline Risk 10
-----------
7. High Risk 20
-----------
8. Extremely High Risk 40
-----------
9. Doubtful 60
-----------
10. Loss 100
-----------
For LGD purposes if the assets supporting the loan are not
easily realisable e.g. fixed plant, we assume on default that the
business has failed and therefore the recovery will be equivalent
to an unsecured loan.
KKVIM LGD Approach:
Category LGD Approach Example credits
Easily Realisable Asset value less 10% haircut e.g., helicopter,
discounted at 10% IRR for yellow metal or
12 months to recovery other vehicle
Realisable Asset value less 20% discounted e.g., manufacturing
at 20% IRR for 2 years to equipment, specialised
recovery but re-marketable
Highly Specialised 70% LGD e.g., bespoke anaerobic
(Equivalent to unsecured) digestion equipment
Subordinated Debt 100% LGD
Where an external 3(rd)
party valuation is available
this is used to create a
bespoke LGD for that asset
in priority to the Highly
Specialised and Subordinated
Debt categories.
The percentage provision under IFRS 9 for a facility is this LGD
multiplied by the credit rating Probability of Default as allocated
above.
At the time of writing, the economic effects of the pandemic
seem likely to continue for some time and we will therefore keep
these provisions under regular review. However, it should be noted
that the categorisation of the loans in Stages 1, 2 and 3 have not
been exclusively changed due to the commencement of the pandemic.
Having observed some improvement in debt service on our Stage 1
loans from June 2020 onwards, since the beginning of September we
have noted a marked increase in overall volatility and a generic
uncertainty in the SME sector which is particularly pertinent to
some of the industries and types of loan that this loan book
targets.
Given the nature of the portfolio, it would be unwise for us to
ignore the elevated risk that this uncertainty represents to our
borrowers and to not flag the possibility of further loan loss
provisions we may have to apply in the future as the global economy
braces itself for further economic contraction. By way of contrast,
we may see some improvement in the valuations of the portfolio
positions that have been marked to nil value. The outlook and
volatility of the circumstances remains uncertain.
Market backdrop
Highly volatile pricing of all assets across the risk spectrum
and intermittent volatility spurts have been facets of all fixed
income sectors during the reporting period. All fixed income
products fell violently from March onwards and this was
particularly severe for higher yielding assets although even US
Treasury bonds were affected briefly by a liquidity squeeze. Since
the introduction of emergency market support packages from central
banks, these markets have settled but the economic picture remains
very uncertain.
As developed markets in the US, UK and Europe began to ease
lockdown measures, market commentators expected a so-called "V
shaped" recovery as businesses began to emerge from their forced
hibernation. Our appraisal was more circumspect and despite spread
tightening during the summer months for investment grade credits,
as companies shored up their balance sheets with additional
borrowing, we were particularly focussed on data relating to SME
performance and securitised products such as Collateralised Loan
Obligations ("CLOs") and lower sub investment grade markets where
the greatest pain had been observed. We expect coupon obligations
to be put under pressure and forbearance to be the watch word for
the next 9-12 months.
SME business confidence has fallen sharply and lower turnover
due to Covid-19 has caused severe cash flow difficulties for many
businesses, increasing demand for working capital finance. This has
been coupled with a sharp increase in demand for loans and the
uptake of government-backed schemes encouraging commercial banks to
lend into the sector. Easing of credit criteria for loans by these
banks has a second derivative effect of weakening capital adequacy
and it is our expectation that once market conditions begin to
normalise, lending patterns will revert to more conventional
levels, allowing alternative lenders to pick up the baton once
again.
The speed of recovery is, however, unclear at the present time.
By way of stark illustration, unemployment in the US increased by
14 million in six weeks at the height of the Covid-19 emergency,
whereas the total number of those losing jobs in the recession
between June 2008 and June 2009 was 3.5 million and it then took
four years for employment to return to pre-recession levels.
Reversal of lost jobs takes time for an economy to absorb and we
therefore expect this to impact consumption and consumer
confidence. For lenders and borrowers alike, the safest route to
normalisation is to keep sustainable businesses alive with support
and forbearance, including maturity extensions and interest or
amortisation "holidays", to enable them to resume trading and
servicing their loans as rapidly as possible. Where we have
identified a specific Covid-19 impact, this has been the approach
we have adopted across our portfolios and is relevant to KKVL/X
since our appointment in June 2020.
FX Hedging and Dividends
Until March 2020, non-Sterling capital had been hedged.
Fluctuations in the value of Sterling during the reporting period
had made for some significant moves. As Sterling fell sharply in
March and margin requirements increased, the Board became concerned
that the liquidity pressures could jeopardise the Company's
solvency and therefore instructed the previous Investment Managers
to close all FX hedging. Subsequently, and given the status of both
Share classes in wind down combined with uncertain valuations, the
decision was made not to reinstate FX hedges. We shall update our
FX exposures regularly in our factsheets allowing shareholders to
make their own FX hedging arrangements as appropriate if they wish
to do so.
FX exposures as at 30 June 2020 (net of ECL provisions) were as
follows:
(millions) Ordinary Share 2016 C Share Class Total
Class
GBP GBP GBP
GBP 60.1 93.4 153.5
EUR 38.7 0.2 38.9
USD 28.5 0.9 29.4
Due to highly volatile FX movements and diminishing cash
receipts from debt service on both classes, dividends had been
suspended from March 2020 and we had hoped to reinstate payment of
regular income by the end of calendar year 2020. Given that both
Share classes are now in managed wind down, a revised dividend
policy has been introduced and we are fully focussed on achieving
the revised Investment Policy and Objectives with a primary focus
on returning capital to our shareholders. The details of the method
for accomplishing this were published in a Circular sent to
shareholders on 13 November 2020 and voted for by shareholders at
an EGM and class meetings on 4 December 2020.
Inter-Company Loan
During the reporting period, an inter-company loan of GBP2.15m
was made from the 2016 C share to the Ordinary share portfolio at
an interest rate of 4.00%, approved by Board minute. This was part
of a regular arrangement dating back to 2016 and was initially
approved and documented by a Board minute. This facility was
considered an efficient method of delivering increased income to
the 2016 C share during periods when the portfolio had high levels
of undeployed cash. Loans of this nature were extended to the
Ordinary share Class are as follows:
Inter share class loans from 2016 C Share
to Ordinary Share
No. of Interest Total Interest
Loans Total GBP Rate Earned
2016 11 18,000,000 4% 87,452
2017 5 6,000,000 4% 41,425
2018/2019 2 2,500,000 4% 5,534
2019/2020 1 2,150,805 4% 20,330
28,650,805 154,741
----------- ---------------
Only the most recent loan amounting to GBP2.15m remains
outstanding and due to cash constraints has been rolled over until
such time that it may be repaid. It is intended this loan will be
repaid as soon as practicable and thereafter no further inter class
loans will be made unless in extremis.
In the 2016 C share portfolio, no leverage has been used
throughout the reporting period.
The Ordinary Share Class and 2016 C Share Class Portfolios
There are 61 lines of credit in the portfolio with an average of
GBP5.7 million deployed per loan, at an average rate of 9.1%. Each
loan has bespoke legal documentation and should be designed to fit
to the Company's and the borrower's requirements. Our review is
ongoing and we are making some amendments to agreements where we
consider it necessary. There are some equity and equity
participation exposures in the list. These have been clearly marked
as such in the narrative.
During the reporting period, six AD plant loans have been
independently valued twice by KPMG based in Belfast, Northern
Ireland, initially for the Interim Accounts leading to an
impairment provision of GBP34.1m as at 31 December 2019 and then
subsequently for 30 June 2020 when the impairment increased to
GBP93m. The choice of KPMG was appropriate given their expertise in
the sector and familiarity with some of the Company's specific
transactions. Their original appraisal was facilitated by the
former Investment Managers. The more recent valuations reflect the
amended energy pricing curves (generally lower) and also take into
account ongoing maintenance and running costs where plants are loss
making as well administration and legal expenses that were not
included in the December 2019 valuations. The impact of these costs
has meant a reduction in value but subsequently, overall pricing
has been largely neutral given certification post balance sheet on
one plant, significantly increasing its value. We have provided
extensive commentary on the status of these projects and are in the
process of looking for appropriate funders or buyers for these
businesses via trade sales.
We considered that thirteen other loans had considerable
valuation uncertainty and sought independent view of the
circumstances of each of these investments from KPMG LLP to provide
the Board and shareholders with additional comfort that we have
assigned appropriate risk ratings prior to providing an expected
credit loss for these investments. We have devoted the majority of
our commentary to these positions.
All loans have been reassessed and allocated into Stages 1, 2
and 3 for the purposes of IFRS 9 provisioning and provisions
against equity also considered where appropriate.
As the portfolio is now in wind-down, we have been focussed on
cash flows from our borrowers and anticipate being able to commence
returning capital to shareholders before the end of the first half
of 2021. We shall be encouraging borrowers, and assisting them, to
refinance early if possible at fair value, so we may return
available cash as soon as reasonably practicable.
The investment portfolio as at 30 June 2020 exhibited the
following characteristics:
Ordinary Share Class 2016 C Share Class
Largest Loan (GBPm) 41.38 18.65
Weighted Average Remaining Term ('WART') in months(1) 78.31 57.57
Investment Yield Range (%) 5.00% - 10.67% 8.75% - 10.75%
Weighted Average Portfolio Yield (%) (1) 9.62% 9.37%
(1) These are Alternative Performance Measures, refer to the
'Alternative Performance Measures' section for details.
Characteristics for the individual investments have been
outlined in the following tables for both the Ordinary shares and
the 2016 C shares:
Ordinary Share Class
Credit ECL Carrying
Exposure Provision Value
at 30 at 30 at 30 Amortisation
June June June / Bullet Term
2020 2020 2020 Repayment Remaining Gross
Borrower GBPm GBPm GBPm / Other (Years) Asset Type Currency Yield Stage
Initial
12-month
interest
only
period,
followed Finance
by interest Lease -
Borrower and Anaerobic
1 41.38 27.47 13.91 amortisation 11.46 Digestion GBP 9.80% 3
Finance
Interest Lease -
Borrower and Anaerobic
2 32.19 19.01 13.18 amortisation 0.59 Digestion GBP 10.0% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ ---------------------
Finance
Interest Lease -
Borrower and cash Anaerobic
3 29.20 17.59 11.61 sweep 16.72 Digestion GBP 10.0% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ ---------------------
Initial
12-month
interest
only
period,
followed
by interest Term Loan
Borrower and -
4 28.16 28.16 - amortisation 6.52 Manufacturing USD 11.0% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ ---------------------
Finance
Interest Lease -
Borrower and Anaerobic
5 24.86 18.71 6.15 amortisation 8.62 Digestion GBP 10.0% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ ---------------------
Interest
only, Term Loan
Borrower bullet -
6 22.00 0.62 21.39 at maturity 2.90 Manufacturing EUR 9.2% 1
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ ---------------------
Interest
Borrower and Term Loan
7 18.70 18.70 - amortisation 6.27 - Insurance USD 10.0% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ ---------------------
Interest
and
amortisation,
Borrower bullet Term Loan
8 15.58 8.98 6.61 at maturity 8.62 - Shipping USD 10.4% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ ---------------------
Interest
Borrower and Term Loan
9 14.57 14.57 - amortisation 6.27 - Insurance USD 10.4% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ ---------------------
Initial
12-month
interest
only
period,
followed
by interest Hire Purchase
Borrower and - Wholesale
10 10.79 7.55 3.24 amortisation 1.76 Portfolios GBP 9.5% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ ---------------------
Initial
interest
only
period,
followed
by interest Term Loan
Borrower and - IT &
11 9.66 9.66 - amortisation 0.02 Telecom EUR 6.9% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ ---------------------
Interest
and Finance
amortisation, Lease -
Borrower bullet Anaerobic
12 9.21 0.64 8.56 at maturity 11.46 Digestion EUR 10.8% 1
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest
and
amortisation
+ final
1/3 original Finance
principal Lease -
Borrower balloon Anaerobic
13 8.64 5.60 3.05 payment 3.01 Digestion GBP 9.3% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest
Borrower and Hire Purchase
14 8.48 0.24 8.24 amortisation 7.02 - CHP GBP 10.0% 1
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest
Borrower and Hire Purchase
15 7.70 0.22 7.49 amortisation 7.02 - CHP GBP 10.0% 1
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Term Loan
Borrower Interest - IT &
16 5.45 5.45 - only 0.59 Telecom USD 6.9% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest
only
and
pre-payments
when
Borrower asset Hire Purchase
17 5.41 0.15 5.26 delivered 6.52 - CHP GBP 10.0% 1
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Finance
Interest Lease -
Borrower and Anaerobic
18 4.63 4.63 - amortisation 3.01 Digestion GBP 10.0% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Initial
12-month
interest
only
period,
followed
by Interest Finance
Borrower and Lease -
19 3.99 0.96 3.03 amortisation 4.01 Manufacturing GBP 6.6% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Revolving
Interest Loan -
Borrower and Wholesale
20 3.99 0.03 3.96 amortisation 0.75 Portfolios GBP 9.5% 1
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interests
Borrower and Term Loan
21 3.51 2.46 1.05 amortisation 5.02 - Medical USD 5.0% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Finance
Interest Lease -
Borrower and Anaerobic
22 2.41 0.07 2.34 amortisation 12.55 Digestion GBP 10.5% 1
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest Finance
only, Lease -
Borrower bullet Anaerobic
23 2.17 0.15 2.02 at maturity 13.55 Digestion GBP 10.0% 1
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Finance
Interest Lease -
Borrower and Anaerobic
24 2.08 0.06 2.02 amortisation 12.29 Digestion GBP 10.0% 1
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest Term Loan
Borrower and - IT &
25 1.35 1.35 - amortisation 6.52 Telecom GBP 9.5% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Initial
12-month
interest
only
period,
followed
by interest Finance
Borrower and Lease -
26 1.22 0.17 1.05 amortisation 8.62 Wind Turbines GBP 10.3% 2
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest
and
amortisation, Finance
Borrower bullet Lease -
27 1.16 0.03 1.13 at maturity 11.21 Wind Turbines GBP 10.6% 1
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest
accrued
and
capitalised,
then
interest Finance
Borrower and Lease -
28 0.73 0.02 0.71 amortisation 8.44 Wind Turbines GBP 10.5% 1
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Hire
Payments Hire Purchase
-interest -
Borrower and Infrastructure
29 0.60 0.60 - amortisation 1.52 Equipment GBP 10.5% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest
accrued
and
capitalised,
then
interest Finance
Borrower and Lease -
30 0.36 0.36 - amortisation 0.59 Manufacturing GBP 10.1% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest
and
amortisation
+ final
1/3 original
principal Term loan
Borrower balloon - IT &
31 0.27 0.27 - payment 6.52 Telecom GBP 9.5% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest
Borrower and
32 0.26 0.26 - amortisation 16.72 Non-Applicable EUR 10.0% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest
Borrower and
33 0.14 0.14 - amortisation 16.72 Non-Applicable GBP 10.0% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Interest
only
and Operating
pre-payments Lease -
when Marine
Borrower asset Equipment
34 0.13 0.09 0.04 delivered 0.84 (ex. Vessels) GBP 9.9% 3
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Finance
Lease -
Borrower Interest Manufacturing
35 0.10 0.00 0.09 only 6.52 Equipment GBP 10.8% 1
--------- ---------- ---------
321.08 194.97 126.11
---------- --------- ---------- --------- -------------- ----------------------- --------------- --------- ------ -----------------------
Property, Plant and Equipment Investments
Carrying Net Realisable
value Impairment Value
at 30 at 30 at 30
June 2020 June 2020 June 2020 Investment
Borrower* GBPm GBPm GBPm Type Currency
Operating
Borrower Lease -
36 6.25 6.25 - Hotels GBP
----------- ----------- ----------- --------------- ------------------ ---------
Operating
Borrower Lease -
37 3.23 2.26 0.97 Equipment GBP
----------- ----------- ----------- --------------- ------------------ ---------
Operating
Lease -
Borrower Equipment
38 1.37 1.37 - for construction GBP
----------- ----------- ---------------
10.85 9.88 0.97
----------- ----------- ----------- --------------- ------------------ ---------
* Used Borrower terminology to be consistent throughout report,
however these are PPE assets.
Equity Holdings and other Investments
Fair Value
before Fair Value
Adjustment Adjustment Fair Value
at 30 at 30 at 30
June 2020 June 2020 June 2020 Investment
Borrower* GBPm GBPm GBPm Type Currency
Borrower Equity
39 6.73 6.73 - - Medical USD
Borrower Lease Participation-
40 2.52 2.52 - Helicopters USD
----------- ------------ ------------ ----------- --------------------- ---------
9.25 9.25 0.00
----------- ------------ ------------ ----------- --------------------- ---------
* Used Borrower terminology to be consistent throughout report,
however these are lease participation and equity investments.
We make no apology for the length of this report as we consider
investors deserve to assess the work we have undertaken since June
2020 in full. We have striven to keep the narrative simple and
where technical descriptions have been necessary, we have tried to
avoid too much jargon to allow for ease of reading by a layman
unaccustomed to fixed income terminology. Where it has been
necessary to describe complex structures, we have indented the text
and italicised the script.
AD Plants
We have separated our comment on AD Plants into two categories:
those subject to KPMG valuation review and other smaller
facilities.
The six plants revalued by KPMG are Borrowers 1, 2, 3, 5, 13 and
18.
Since June, we have actively built upon prior activities to exit
these investments and have engaged sales agents to consider the
best routes for achieving this in an orderly and expeditious
manner. Following additional work on the six AD plants we have
provided further information to KPMG and hence the valuation
outcomes are reflected more accurately using revised data. In the
period since the financial year end, we have had a number of
requests for additional funding to cover operating expenses. With
no viable equity funder for these projects, the Company has become
the primary source of cash for these businesses to remain going
concerns. Where there has been a valid case, we have provided
relief.
We anticipated placing one or more sites into administration.
However, we believe the best outcome is a swift sale of these sites
to avoid further capital injection. The sales agent has conviction
that buyers exist at or around the valuations provided but we are
also prepared to consider an administration route if this allows
for preservation of value for our shareholders. We have also noted
an improving outlook for our investments on the island of Ireland
given increased government support for green energy
initiatives.
For the sites migrating towards completion, a slower disposal
process is expected. Our initial focus has been on the larger
investments and we propose to dispose of our interests in these
while supporting others to completion and potential
consolidation.
Allowing for risks that may appear over the coming nine months
we see the need to provide some additional funding to preserve or
enhance shareholder value but are working on strategies to reduce
this requirement to the bare minimum. Without providing these
funding requests, administration or liquidation is likely.
Borrower 1 - AD Plant - NE England
Stage 3 Credit Exposure GBP41.38m ECL GBP27.47m Net Carrying
Value ("NCV") GBP13.91m
The plant faced cash flow issues due to delays experienced in
the grant of accreditation for subsidy via Renewable Obligation
Certificates ("ROCs"). Without these the plant would have had
uncertain value. Fortunately, in August 2020 accreditation was
achieved on a back-dated basis, and the first cash flows were
received in September. However, a backlog of creditors remained,
some of which have been long overdue and a lease remedy was
required due to a number of breaches predating our appointment.
Legal costs and fees associated with resolving disputes over land
rights are expected and these amounts which are overdue will strain
cash flow for the remainder of 2020. We intend to explore a sale of
this investment early this year.
Borrower 2 - AD Plant - NE England
Stage 3 Credit Exposure GBP32.19m ECL GBP19.01m NCV
GBP13.18m
After several years of struggling, the plant has now obtained
required regulatory permissions and maintained a broadly stable
bacterial state. Covid-19 has impacted feedstock availability and
hence revenues, but the plant is broadly cash flow neutral. We
intend to explore a sale of this investment early in 2021 as, given
the ramp-up status of the plant, we are hopeful it will be of
interest to potential purchasers.
Borrowers 3, 32 & 33 - AD Plant - Donegal (Borrowers 32
& 33 are the VAT reclaim positions)
Stage 3 Credit Exposure GBP29.60m ECL GBP17.99m NCV
GBP11.61m
The plant has required a significant upgrade for some time to
reach breakeven point. We reviewed options and found it appropriate
to seek another funder to provide the necessary capital injection
given our reduced appetite for risk in AD and the wind down of the
Company.
We have interest from an institutional buyer and are at an
advanced stage in the due diligence process. We expect some further
funding to be required to permit the plant to continue operating
through to completion of due diligence and are examining options to
suspend activities if we are unable to sell at a satisfactory
price.
We have been working on amendments to some contracts which have
slowed the sales process. However, good progress has been made to
remedy these and the agents hope that everything will be in place
for a transaction to be agreed this year, we make this statement
with the necessary caveats regarding any unforeseen issues
arising.
The Borrowers 32 and 33 reference VAT reclaims that have very
little probability of recovery and have been assigned zero value as
at June 2020. These were capitalised and formed part of the overall
NAV from February 2016.
Borrower 5 - AD Plant - Scotland
Stage 3 Credit Exposure GBP24.86m ECL GBP18.71m NCV GBP6.15m
On initial review, a large funding need was identified to ensure
feedstock was procured for the site to maintain operations. This
was contractually committed by the Company but undrawn. The plant
operator reported that the tanks were failing, so operations have
been severely scaled back to a minimum while a sale process can be
executed. We are negotiating with an institutional buyer prepared
to undertake a series of remedial and upgrade actions that we are
unwilling to finance at this point and we are at an advanced stage
in the due diligence process.
Borrower 13 - AD Plant - England
Stage 3 Credit Exposure GBP8.64m ECL GBP5.60m NCV GBP3.05m
This plant is performing well and has been subject to a sale
process for most of the year. Due diligence by a prospective buyer
is expected to conclude by the year-end which should result in our
exit from this investment. We hold 50% of the facility shared with
another institutional investor.
Borrower 18 - AD Plant - NE England
Stage 3 Credit Exposure GBP4.63m ECL GBP4.63 m NCV GBP0.00m
This borrower is in administration and would require significant
additional capital investment to resume operations. We identified a
need to cover significant administration expenses, further remedial
costs post administration and a significant working capital
requirement. After negotiating with the administrator, it was
agreed that circa GBP1.1million was required to recover the plant.
Much of these costs related to legal action by the landlord /
original project sponsor. An additional cost stemmed from working
capital requirements as the plant is no longer registered for the
various government incentives. This is estimated at around
GBP500,000 to cover a twelve-month period.
Given the limited upside after taking these expenses into
account, we have agreed that the administrator should progress with
a sale to a third party. We expect no recovery on our position.
Remaining Ordinary Share Class Borrower Overview
Borrower 4 - Suniva
Stage 3 Credit Exposure GBP28.16m ECL GBP28.16m NCV GBP0.00m
Given the high profile, numerous RNS announcements and the long
period of time related to the ongoing narrative regarding this
loan, we have provided a useful preamble for shareholders as an
aide-memoire.
KKVL lent to a US solar panel manufacturer in September 2016.
The initial investment of $50m was made by a subsidiary, special
purpose vehicle of the former Investment Managers. The funding for
which came from a syndicate of investors including a North American
government investment vehicle and a further fund managed by the
former Investment Managers as well as the Company. KKVL invested
$30 million, and the other investors invested $10m each. In early
2017, the borrower entered Chapter 11 bankruptcy proceedings, due
to the influx of cheap Chinese imported product. At this point, the
debt was at risk of significant write off. To seek improvement in
the probability of recovery, the Company supported the introduction
of Tariffs to be imposed on imported competing goods and this was
successfully achieved as announced in RNS on 23 January 2018.
Meanwhile, the business exited Chapter 11 via new investment,
comprising a credit bid of the outstanding loans by the initial
investment syndicate (c$25m), Wanxiang America Corporation ("WX")
(c$10m), and an additional Debtor-in-Possession ("DIP") funded by
KKVL and a new hedge fund investor.
However, since leaving Chapter 11, the business has yet to
recommence trading. The rationale for taking the company out of
Chapter 11 is that it needs to remain in existence to benefit from
potential eligibility for a significant payment from US tariff
collections under section 201 of the Trade Act of 1974. The
business was set up for this purpose and makes capital repayments
on a 2-year 0% lease made to it by KKVL post Chapter 11. A
servicing company owned by the former manager, as agent for the
plaintiff in the claim (a fund managed by the former manager
representing the initial syndicate of investors), has engaged
lawyers to assist the claim for a release of tariff payments to the
borrower for a number of years. All legal expenses incurred on
behalf of the syndicate have been met by the Company to date.
Please refer to further details disclosed below.
On discussion with legal counsel acting for the company on
behalf of the syndicate, KKVIM believes that it is unlikely that
the borrower, and therefore KKVL, will benefit from any potential
tariff payments. It is our understanding that any previous action
of this nature has concluded with any monetary consideration being
split between the overseas corporations that suffered loss from the
tariff payments and the US Federal Government. Any deviation from
this outcome would require a change in federal law. Current
engagement with legal counsel is an exercise in lobbying US
politicians in Washington DC and is highly speculative. The view
has been corroborated by the legal counsel who considers this to be
a dormant claim and by the independent valuer in October 2020.
The owner of the debt, represented by the service company as
agent, is also pursuing the former majority shareholder of Suniva
for the shortfall on the original debt (calculated as $25.5 million
within the legal documents) via a parent company guarantee given by
Shunfeng International Clean Energy Ltd, ("SFCE"), a Hong Kong
listed Cayman domiciled company with operations largely based in
China.
Since 2017, the service company has engaged with lawyers to
validate and enforce this claim in the US courts, with a large
degree of success. However, it is our view that, given the
political/economic environment and US-Chinese relations, the
enforceability of a claim made in a US court against a Chinese
company with few assets of any value in the US or elsewhere outside
China, may be problematic and protracted.
SCFE has provisioned for the guarantee claim, which has been
disclosed in their financial statements. Although SFCE continues to
trade, its interim consolidated financial statements for the period
ended 30 June 2020 show net liabilities, and loans unpaid past due
and the auditors disclaim an opinion on the accounts due to
multiple uncertainties related to "going concern" and their
possible cumulative effect on the interim condensed consolidated
financial statements.
KKVL has incurred all legal costs since the business entered
Chapter 11, including legal action against the hedge fund investor
early in the process. Provision has been made for KKVL to recover
these legal expenses incurred on behalf of all parties, should
there be a cash settlement in the tariff and parental guarantee
recovery strategies, by deductions from cash apportioned to the
other syndicate participants.
Since May 2017, the Company has incurred $3,483,870.79 (circa
GBP2.6 million) legal costs to date. Of which, $254,459.40 had been
capitalised and formed part of the overall debt and was included in
the NAV of the Company prior to impairment made as at 30 June 2020,
the balance of these legal costs had been expensed.
Borrower 6 - International glassware manufacturer based in
France
Stage 1 Credit Exposure GBP22.0m ECL GBP0.62m NCV GBP21.39m
This borrower is a global manufacturer and distributor of
glassware based in France. The borrower used the funds to finance
furnaces via a sale and leaseback arrangement, with the Company and
co-investors owning the furnaces via an intermediate counterparty
to the transaction.
The investment was restructured and rescheduled in 2018. The
company entered into negotiations with its largest creditors this
year, having suffered heavily during the Covid pandemic. This
resulted in circa EUR230m of debt relief. The group also benefited
from reduced cost of capital and extension of certain facilities,
access to state funding at low rates and EUR20m of fresh equity
investment.
KKVL's position was unaffected by the significant debt
restructuring undertaken during the year as French government
conditions prohibited swap of non-bank lending for this cheaper
funding. Nonetheless, the balance sheet of the company has improved
and management, which we consider to be of very high calibre, are
confident of returning to pre-Covid-19 levels earnings within two
years. Within this timescale, if the business continues at its
current trajectory, we expect it to be able to access the deeper
and cheaper high-yield debt market, allowing for this facility to
be refinanced at a lower interest rate.
Borrowers 7 and 9 - US based reinsurance company
Stage 3 Credit Exposure GBP33.27m ECL GBP33.27m NCV GBP0.00m
KKVL's investment comprises a senior term loan to a small
insurance holding company (Borrower 7) and surplus note funding
(Borrower 9) to its reinsurance company subsidiary. For ease of
reference, this facility has previously been referred to as a
diversified book of investment grade loans and equipment leases.
Although these are two distinct loans within the portfolio, some of
the proceeds of the senior loan to the holding company were on-lent
to the subsidiary and so the overall risk associated with the whole
exposure should be viewed in this context.
These investments are highly complex, are leveraged and require
a high degree of actuarial assessment in order to gauge value at
risk. The nature of the facilities and US insurance regulatory
restrictions mean the lending has certain characteristics akin to
mezzanine debt / equity and this should therefore be considered a
high-risk lending structure. We have provided a brief narrative to
describe the structure and regulatory oversight.
Typically, issuers of surplus notes are very large municipal
insurers with no access to equity markets. Surplus notes are a form
of hybrid capital and are considered to be similar to an equity
capital investment, not debt, by the regulator. However, unlike
equity, there is limited upside to these types of investment
without warrants or convertible pay-out structures.
The business provides re-insurance services to life insurance
companies for Multi Year Guaranteed Annuity ("MYGA") policies sold
into the retail market. These are single premium annuity savings
policies and are sold at competitive rates of interest dependent on
the size and the credit quality of the underlying business. The
market is highly competitive and smaller insurers tend to offer
higher rates to attract retail investors for these policies. As a
rule of thumb, the higher the interest rate, the higher the level
of risk required to be covered by the reinsurance operations. On
researching this market, we have observed that this business offers
one of the highest annuity rates available. The annuities are
analogous to "super senior obligations", the premium paid by the
policy holders and interest earned are repayable as a priority to
all other obligations.
The insurance company relies on its ability to invest money
(assets) to earn a return in excess of the fixed rate annuity
guaranteed to policy holders (liabilities). In our opinion,
reduction in Treasury yields (risk free rate) and narrower credit
spreads in recent years has added to the risk associated with their
ability to match these assets and liabilities.
KKVL, any other funding and policy holders' premiums are
invested to generate a yield to service operating costs and to
cover policy holders' principal deposit and interest (on either
maturity, surrender or death). The company must maintain a minimum
regulatory-based capital ratio ("RBC"), a measure of financial
solvency, appropriate to support the entity's overall business
operations considering its size and risk profile. Should the RBC
ratio fall below a minimum level of 200%, the State regulator (in
this case Nebraska) shall not consent to the distribution of
capital (i.e. repay KKVL's interest and capital amortisation). The
RBC ratio is a complex calculation governed by National Association
of Insurance Commissioners ("NAIC") rules (adopted in the facility
documents). The facility specifies that the company should maintain
an RBC of greater than 350% as a trigger event for early
amortisation in the interest-only period. However, enforcement of
this covenant may lead to breach of its insurance RBC ratio, and
therefore restrict repayments of both principal and interest on our
contingent surplus notes. In summary, in managing our approach to
these types of borrowers, we have to consider a number of different
risk factors out of our control.
This business is part of a wider insurance group that provides
re-insurance services to manage portfolios to achieve the returns
required to fulfil the obligations of the MYGA policies. KKVL's
first investment was in September 2016, followed by an additional
facility in October 2017 and then a further seven loan amendments
and additional facilities in 2018 and 2019.
As at December 2019, prior to the onset of the pandemic,
management reporting stated the RBC to be close to its threshold
limit this was expected to fall to below that threshold during
2020. The portfolio of assets supporting the policies and debt
comprises inter alia first lien mortgages, private credit
facilities, fund investments and asset backed loans.
Previously, the loans benefitted from a parent company
guarantee; at the time of a follow-on investment in 2018, an
amendment to the legal documentation allowed for this to be
irrevocably cancelled conditional upon the surplus notes achieving
a BBB rating by at least one nationally (US) recognised ratings
agency. A rating was subsequently granted by Egan-Jones. Therefore,
this parental guarantee fell away.
Although the investment entities are servicing their debt,
KKVIM's concerns regarding long duration (when the Company is in
wind down), subordination of the Company's interests, the capital
structure, lack of security and the risk of write downs on the
underlying portfolio has caused KKVIM under our Risk Classification
to make a full provision against this investment. We have concluded
that the only viable buyer for this loan at a credible value for
our shareholders would be the insurance company itself. We have
been engaging actively with the borrower to seek a mutually
beneficial outcome by giving them an opportunity to buy back their
debt.
Borrower 8 - Shipping Vessels (Same borrower as Borrowers 47, 48
and 51 in 2016 C Share class)
Stage 3 Credit Exposure GBP15.58m ECL GBP8.98m NCV GBP6.61m
The Company provided a secured loan facility via an Irish
Special Purpose Vehicle ("SPV") to an international shipping
business to acquire shipping vessels in December 2014. This
comprised four individual loans and had a maximum drawdown of $42.0
million with GBP31.7m total exposure now outstanding across
Ordinary (Borrower 8) and 2016 C Share classes (Borrowers 47, 48
and 51). The loan facility is secured against ships in each of the
ship-owning guarantor entities, with further security granted in
the form of a corporate guarantee from the parent company, a
privately owned British Virgin Islands incorporated entity.
The borrower has the ability to sell and replace shipping
vessels with prior approval from the Company and a ship was sold
earlier in 2020 with a replacement vessel acquired, which improved
security.
Whilst the borrower is making regular monthly payments, the Loan
to Value ("LTV") covenant has been in breach since February 2020.
Under the loan documents, they were required to make additional
payments to reduce the LTV in this scenario but they have been
unable to do so. On exploring the validity of the corporate
guarantee we have been advised that the group has suffered
significant liquidity issues as a result of the majority of their
capital held in preference shares in a European bank investment in
distress. We have an open and constructive dialogue with the
borrower and guarantor.
The loans are due to mature in April 2021 and the assets have a
book value significantly lower than the KKVL exposure as
corroborated by independent valuations. Based on information
provided by the borrower, $7 million of costs are attached to the
vessels in priority to KKVL in the form of supplier loans
(including crew, fuel, servicing etc) that are payable immediately
upon sale.
Borrower 10 - Domestic Boiler Provider
Stage 3 Credit Exposure GBP10.79m ECL GBP7.55m NCV GBP3.24m
A domestic boiler portfolio located in over 4,000 UK properties.
This loan has underperformed as the sponsor has failed to grow its
business. The facility finances heating installations and is
recovered from service contracts typically around 10 years in
length.
We are currently waiving default interest and are in negotiation
with the borrower to consider an appropriate outcome suitable for
all parties.
Borrowers 11, 25 & 31 - Hotel Technology Provider
Stage 3 Credit Exposure GBP11.28m ECL GBP11.28m NCV GBP0.00m
This is a provider of technology platform services to
multinational hotel chains, with an emphasis on European clients.
The core business is the contracted provision of information
systems, for example, in-room television, entertainment and dining
interfaces. The borrower was formerly part of a larger business
focused on delivering guest-facing technology-based solutions to
clients worldwide.
EUR20 million in debt financing was originally advanced in 2015,
with principal and interest payments expected to repay by July
2020. In addition, a credit insurance policy was procured from the
same counterparty acting as insurer to Borrower 16 and premiums
paid from loan proceeds. As far as we are aware, no claim was made
on the policy on breach of covenant nor upon insolvency. This
insurance protection was removed from the transaction in 2019,
along with any obligations it would have had to KKVL despite having
a five-year maturity to April 2020.
From the outset, this investment struggled to deliver, breaching
financial covenants in December 2015. However, despite negative
EBITDA in 2015, 2016 and 2017, it serviced its debt until 2018. On
entering administration, the loan had two years to mature and was
circa GBP10m exposure for the Company.
The business exited administration in July 2019 funded by an
acquisition by a Swedish Private Equity firm, with a contractual
understanding between the new owners and KKVL that an agreement on
the debt position of the company would be reached within 45 days.
No agreement was reached, as we understand that the new owners
considered the company unviable with our legacy debt in place.
Under the guidance of the previous manager, the Company triggered a
call option available under the agreement with the PE firm. KKVL
invested a further GBP1.4 million based on a base case forecast for
trading in 2019, which assumed an EBITDA of EUR2.2m and with
aggressive growth forecasts to 2024. If met, this would enable all
of the debt to be repaid using an 85% free cash flow sweep
mechanism.
Along with restructuring expenses, and an invoice from 2018 for
$150,000, waiving the breaches of financial covenant for the years
2016 and 2017, the position now accounts for the total outstanding
of GBP11.28m. No debt service has been received since early
2018.
Since emerging from administration, the company performed
reasonably well recording unaudited 9 month EBITDA to February 2020
of EUR640k, (although well below the base and stress case assumed).
However, it has been significantly affected by the Covid-19
pandemic. At our first meeting with management in July, it became
apparent that the company needed circa EUR750k, to cover EUR350k
outstanding to the French courts for employment issues following
the previous year's bankruptcy proceedings, restructuring costs,
working capital, and capital expenditure necessary for growth.
Subsequently, further liabilities have emerged in lieu of
liabilities in Italy, Spain and the Netherlands.
With regard to security, under the original loan, this was
secured against telecom assets with a brief technological life
span. There is no charge against intellectual property or further
guarantees and so we consider this loan to be unsecured.
Given the current material uncertainties, we have recommended a
full provision against this investment in line with its Loss Given
Default matrix.
Borrower 12 - AD Plant
Stage 1 Credit Exposure GBP9.21m ECL GBP0.64m NCV GBP8.56m
This is an AD plant based in Ireland and is well run with a
strong management team . Prior to the Covid-19 pandemic it was
running at over 70% capacity but has been running at 30% since Q2,
2020. This is largely driven by a lower supply of high-yielding
feedstock (e.g., waste cooking oil from the hospitality
sector).
Consequently, they have missed two quarterly payments (June and
September 2020). Positive cash flow appears unlikely while
restrictions on leisure businesses exist. As of 30 June 2020, given
the plant was not hampered by major operational issues, we were
confident in the plant's ability to service the debt once feedstock
supply rebounded.
In the medium-long term it is considering alternative
high-yielding food waste feedstock supplies to increase energy
generating capacity up to and greater than 1 megawatt.
This sponsor intends to seek further investment to develop the
plant including (but not limited to) de-packaging equipment, animal
waste permits and a new pasteuriser. We have received a bid for the
debt from a connected party to the former investment manager acting
as agent at 50% of the total outstanding value and we have declined
the offer.
Borrowers 14 & 15 - Electricity Generation
Stage 1 Credit Exposure GBP16.18m ECL GBP0.46m NCV GBP15.73m
The project comprises two Combined Heat and Power ('CHP')
systems. Each generate electricity together with heat and CO(2) to
be consumed by the UK's largest tomato grower via two 20-year
Energy Services Agreements. These energy centres are a critical
part of the grower's business and the installed equipment has
allowed the grower to significantly reduce costs and increase crop
yields. Electricity not used on-site by the grower is exported to
the grid via a Power Purchase Agreement with a large energy
provider.
The two borrowers are separate SPVs and share the same sponsor.
This loan was originally underwritten alongside the equity sponsor
and all documentation is well structured with appropriate security.
Both assets are performing and we are working with the Borrower on
a potential refinance.
Borrower 16 - Brazilian Telecoms Towers
Stage 3 Credit Exposure GBP5.45m ECL GBP5.45m NCV GBP0.00m
The Company lent $5.4 million to a Brazilian telecommunications
tower company via a Cayman Islands SPV owned by a US based
specialist reinsurance company via an interest only loan in 2015
with a maturity of fourteen months. This was a co-investment with a
US insurance company who invested a further $2.0 million. The
direct borrower was a segregated account of a US reinsurance agent,
an insurer that had also been contracted to insure the principal
and interest on the $7.4m combined loan. Security is provided by
the telecom masts placed on greenfield sites in multiple regions of
Brazil.
The loan was an annually renewable revolving facility with a
maximum term of five years:
-- $5.4 million was advanced to the SPV in April 2015 at a rate of 6.75% pa plus 1M US LIBOR;
-- In turn, the SPV loaned $5.4 million to the borrower at a
rate of 9.75% pa plus 1M US LIBOR.
The difference in spread is premium for the US agent for their
credit insurance. In addition, part of the consideration of the
loan was used to pay accrued interest, credit insurance and
consultant fees. After foreign exchange conversion from US Dollars
to Brazilian Real, the amount received by the borrower was circa
$4.5m.
Repayment of the principal would be by way of a bullet repayment
or upon a sale of the operating company in Brazil. It is unclear if
the condition to repay within fourteen months was varied formally,
given no capital repayments have been made by the business to date.
The maximum five year-term governing the loan has also expired.
KKVL received interest payments until Jan 2018 totalling $1.225m,
at which point the company ceased debt service.
According to December 2019 accounts, the equipment formed of
telecom masts had a net book value of BRL 11.1m representing circa
GBP1.5 million. The group owns 67 towers, through two companies,
with 52 towers providing security for KKVL's lending. Based upon
the limited available financial information, it would appear each
tower has an average net book value - for accounting purposes - of
circa GBP22,000.
The Company's investment appears to have been made on the basis
that free cash generated by the Brazilian operating company would
be re-invested in order to increase its tower network and a key
consideration was the credit insurance purchased. Unfortunately, in
2017 the principal of the company died and the business has lacked
direction since. In was considered feasible that with circa 100
towers, a sale to a "blue chip" telecoms operator was possible,
allowing for the loan to be repaid. To date, the number of towers
has not increased beyond circa 60 and significant arrears of
interest have now accrued. There is limited evidence to suggest
that this potential exit route remains available without the
availability of further debt finance. We understand attempts to
raise debt finance in Brazil have been unsuccessful. Given the
costs associated with legal advice related to security and
enforcement, the complex SPV structures, absence of the original
credit insurance and costs associated with a detailed valuation of
the telecom masts in greenfield sites in Brazil, we have assigned a
remote chance of capital and accrued interest recovery.
Borrower 17 - Electricity Generation
Stage 1 Credit Exposure GBP5.41m ECL GBP0.15m NCV GBP5.26m
This is the sister investment to Borrowers 14 and 15, which also
has an Energy Services Agreement and a Power Purchase Agreement in
place with a large UK tomato grower and large energy providers
respectively. This farm-based CHP plant is performing well. Debt
service is well covered.
Borrowers 19 & 30 - Paper Manufacturer
Stage 3 Credit Exposure GBP4.35m ECL GBP1.32m NCV GBP3.03m
The business owns and operates a large pulp processing and paper
manufacturing mill in Scotland with a capacity to produce around
70,000 tonnes of finished fine papers each year, including a
globally recognised business stationary brand.
KKVL made an investment secured by heavy manufacturing equipment
which later underwent a management buyout following administration.
The Company's original investment was in excess of GBP21.6 million
which had been amortising with regular payments. As part of the
exit from the administration, the debt was restructured. In
December 2019, total debt outstanding was GBP9,403,074 divided
between two new tranches: GBP5.54 million (Borrower 19) and GBP3.87
million (Borrower 30) respectively. By June 2020, we received
additional cash proceeds with both facilities reducing to GBP3.99
million and GBP0.36 million respectively. The investment remains
secured by the same equipment.
Further restructure was required to avoid a second
administration due to Covid-19 in September 2020, resulting in KKVL
having a hire purchase agreed with a paper & textiles
manufacturer and also makes collections under an arrangement for
payment of deferred consideration of GBP750k under the original
insolvency. A payment holiday has been agreed with debt service due
to start in January 2021. This also included a further GBP3.5m debt
funding introduced by the two other investors.
This business continues to face significant trading challenges.
We understand that there are likely to be further need for cost
cutting as Earnings Before Interest, Taxes, Depreciation, and
Amortisation ("EBITDA") and cash losses continue during the
pandemic.
On the basis of the deterioration in trading outlook for the
business, KKVIM has analysed the potential recovery options in the
event of non-payment under the various agreements now in place.
An independent valuation has been obtained:
-- The assets are now valued between GBP2.7 million and GBP4.3
million, this range covers best and worst case scenarios for a
break-up sale.
-- The valuation assumes a 12 month sales period.
-- The valuer noted that there is no likelihood of being able to
sell the assets in situ. The current markets for these assets are
Africa, India and Russia.
-- The valuation agent indicated that the assets would be sold
as seen with buyers incurring the costs to disassembly /
transport.
-- It is likely that certain holding costs would need to be
incurred during the sales process (rent and staff costs for
maintenance / inspection). It would not be unreasonable to assume
that these could total GBP100k -GBP200k.
-- Sales agent costs would likely be 10%.
Given that the future of the business as a going concern is
questionable, we believe KKVL may recover GBP2.2 million to GBP3.7
million on the position, and we have provided against the position
accordingly.
Borrower 20 - Wholesale Lender (Same borrower as Borrower 45 in
2016 C Share class)
Stage 1 Credit Exposure GBP3.99m ECL GBP0.03m NCV GBP3.96m
Please refer to Borrower 45 in the 2016 C Shares commentary.
Borrowers 21 & 39 - US based medical facility (debt and
equity)
Stage 3 Credit Exposure GBP3.51m ECL GBP2.46m NCV GBP1.05m
Equity FV before Adj. GBP6.73m FV Adj. GBP6.73m FV GBP0.0m
Holdings
This is a loan to a medical facility specialising in elective
surgery and is based in Arizona, USA.
The lending comprised two term loans for circa $12.2 million and
was secured on the purchase of new equipment in 2015. It entered
Chapter 11 Bankruptcy in 2017. There was a dispute between the
counterparties to the bankruptcy in relation to equipment security/
ownership position which resulted, ultimately, in a series of
transactions between KKVL and the post-insolvency owner of the
hospital - a private equity firm based in San Mateo,
California.
Having interacted with the owner, we have ascertained that they
did not intend to be long term owners but to merely provide circa
$20m as the DIP lender until the hospital emerged from Chapter 11.
Unfortunately, no regional hospitals or financial buyers were
identified. Therefore, the original loan was converted allowing the
PE firm to acquire the hospital plus assets with a mortgage for
$17.5m. However, we understand that it has continued obligations to
fund EBITDA negative operations and by June 2020 it had invested a
further $13m in preferred equity.
Following Chapter 11, $6m of KKVL's original loan was converted
to 15% equity in the operating company, leaving $5m in a
rescheduled Promissory Note at 5% amortising over 7 years with a
final balloon payment in June 2025. The original security was
against medical equipment with a cost price of circa $13.8 million
and other fixtures, fittings and equipment with a total cost price
of circa $1.4 million. Ownership of the equipment had originally
remained with SQN until full repayment. Based upon the Promissory
Note and related agreements, the Company has relinquished its
ownership rights over specific items of equipment.
Under a revised Security Agreement the Company holds a "first
priority security interest" over "all furniture, trade fixtures and
equipment" owned by the hospital but we have been unable to source
reliable inventory for such items. From the available information,
it is not possible to estimate a net book value of this
security.
Therefore, the Company is reliant upon the performance of the
hospital operating company for repayment of its indebtedness.
Based upon the most recent management accounts, we have
undertaken a high-level review of the borrower's profit and loss
account for the 12-month period to 30 September 2020. Over the
course of the 12-month period, the material LBITDA (Loss Before
Interest Tax Debt and Amortisation) incurred by the hospital
indicates that its current trading performance is insufficient to
meet its ongoing debt-servicing commitments. The PE firm had
originally stated their intention to sell the unit due to a
competitor hospital under construction close by. However, since
year end, they have adjusted their strategy and await an
improvement in operating performance before Q2 2021. If no
improvement is made, insolvency is likely.
Our Risk Grading system and Loss Given Default Matrix has
resulted in a full provision against the equity holding and an
Expected Credit Loss as set out above.
Borrower 22 - AD Plant
Stage 1 Credit Exposure GBP2.41m ECL GBP0.07m NCV GBP2.34m
This is a facility for an AD plant in Northern Ireland. The
plant is performing within expectations and we expect the sponsor
to bring forward a plan to refinance our debt in the coming
year.
Borrower 23 - AD Plant
Stage 1 Credit Exposure GBP2.17m ECL GBP0.15m NCV GBP2.02m
This loan is a farm-based AD plant, performing satisfactorily.
The project has completed and is operating according to plan,
providing over 90% of capacity output. Financially there is a lag
as ROCs are three months behind production and Renewables
Obligation Certificates ("ROC") prices remain lower, while
electricity prices are increasing.
The sponsor appears unlikely to refinance our position. The
investment has minimal cash balances and unpaid invoices to manage
cash flow. It requires approval for a waste management permit to
cover the risk of the plant leaving digestate on site. In December
2020, we obtained information that put significant doubt that the
plant would catch up on missed payments quickly. Therefore, post
balance sheet, this position has been adjusted to Stage 3.
Borrower 24 - AD Plant
Stage 1 Credit Exposure GBP2.08m ECL GBP0.06m NCV GBP2.02m
This loan is to a farm-based AD plant with satisfactory
performance. The plant recently suffered a fire but the damage and
interim operational expenses were covered by insurance .
The company had cash on deposit in September from ROC payments
still flowing from the period prior to the fire. The plant is now
in the process of acquiring and installing a new engine. The plant
is aiming to be operational in Q2 2021 and it seems likely it will
recover and catch up with payments due. The sponsor (49% of equity)
is likely to examine refinancing our facility in 2021, once fully
operational.
Borrower 26 - Wind Turbines
Stage 2 Credit Exposure GBP1.22m ECL GBP0.17m NCV GBP1.05m
This is a facility funding two wind turbines in Northern Ireland
that supplies for largest power supplier in Northern Ireland. The
sponsor has overleveraged making refinance unlikely. One turbine
has no warranty as the original German manufacturer became bankrupt
and is not insured. In 2018, this turbine experienced some
technical difficulties limiting output to the grid due to gearbox
problems and has since failed to secure insurance. The other
turbine remains under warranty and is insured.
Borrower 27 - Wind Turbines
Stage 1 Credit Exposure GBP1.16m ECL GBP0.03m NCV GBP1.13m
This is a wind power facility based in the east of England. It
is repaying its debt obligations and would like to refinance to
consolidate its debt at a lower rate and for a longer maturity.
This may prove problematic for the borrower as there are issues
with legal easements and overly complicated legal structures
associated with the debt. We are working with the borrower to aid
them in simplifying their position but we do not expect to be able
to refinance the debt in the short term.
Borrower 28 - Wind Turbines
Stage 1 Credit Exposure GBP0.73m ECL GBP0.02m NCV GBP0.71m
Two wind turbines located in Wales. Repaid in July 2020.
Borrower 29 & 38 - Mining Equipment
Stage 3 Credit Exposure GBP0.60m ECL GBP0.60m NCV GBP0.00m
PPE Carrying Value GBP1.37m Impairment GBP1.37m NRV GBP0.00m
These are stranded yellow metal mining vehicles (for digging and
earth removal) located in Sierra Leone, West Africa. Assets from an
initial facility were recovered from insolvency and leased to a new
business in 2019. The residual assets from insolvency were recently
released but face significant costs to relocate. We currently
receive payments based on utilisation of the assets, which have
reduced due to diminishing mining activity in recent months.
Borrowers 34 & 37 - Remote Operating Vehicles (Same borrower
as Borrower 41 in C Share class)
Stage 3 Credit Exposure GBP0.13m ECL GBP0.09m NCV GBP0.04m
PPE Carrying Value GBP3.23m Impairment GBP2.26m NRV GBP0.97m
Please refer to Borrower 41 in the 2016 C Shares commentary.
Borrower 35 - Plastics Manufacturer
Stage 1 Credit Exposure GBP0.10m ECL GBP0.01m NCV GBP0.09m
A small facility to a thermo-plastics compounder owned by a UAE
business. The facility is amortising and close to maturity.
Borrower 36 - Portable Hotel Accommodation
PPE Carrying Value GBP6.25m Impairment GBP6.25m NRV GBP0.00m
Originally founded in 2011 as a new concept company it aimed to
provide pop-up hotels for recreational events by way of stackable
converted shipping containers. Within a short period of time, the
financial model proved uneconomic and the business made losses.
Management of the business has been restructured three times since
incorporation with little success and has continued to face
significant financial difficulties.
In 2015 the company entered into sale and leaseback of the
entire container stock with KKVL. As part of this transaction, KKVL
was granted a fixed charge over the company's revenue generating
contracts. In April 2016, November 2016 through to November 2017,
KKVL and management attempted to resolve the problems including
restructure of debt obligations, debt service holiday and cost
cutting exercises. The business entered administration in November
2017. The company continued to trade whilst 35 interested parties
considered a purchase. However, despite some interest in the
broken-up business the only offer to buy the business as a going
concern came from KKVL. A deal was structured to allow purchase of
the entire share capital of the company, conditional upon the
creditors agreeing to a Company Voluntary Arrangement, ("CVA")
enabling the balance sheet to be restructured, renegotiation of
finance terms and the company to continue as a going concern. Under
the terms of the CVA, the debt of circa GBP8 million due to KKVL
was released/waived. Concurrently, it was sold on to a new holding
company for a nominal sum and novated its original lease agreement.
Previously missed interest payments of GBP350k, penalty interest of
circa GBP10k and restructuring costs of circa GBP330k incurred
during administration were capitalised into the outstanding
balance. No valuation of the assets was obtained at this time.
Under the 2018 amended 10-year lease terms, the business is
obliged to pay a fixed rental of GBP106,000 per quarter until 2023,
whereupon it can exercise an option to buy the assets at market
value (as agreed by a 3(rd) party valuer), capped at the then
amortised cost of the lease on KKVLs balance sheet of GBP3.1m, or
extend for the remaining 5 years. There is also a variable rental
element based on profit.
The novated lease agreement refers to refurbishment costs
payable by KKVL for necessary refurbishments required to bring the
equipment into leasable condition to generate income. No requests
for payment had been made until November 2020, when an invoice for
over GBP650,000 costs dating from March 2018 to August 2020 was
received. We understand a further GBP700k of work in progress
refurbishment is expected to be billed. It is our view that the
company has evidently not satisfied the conditions precedent in the
contract and therefore no contingent liability is recognised. We
are vigorously contesting any claim for refurbishment costs.
The business made contractual lease payments of GBP1.04m since
the 2018 restructure and has missed one payment of GBP106,000
having struggled during Covid-19. It has never achieved the level
of profit allowing for collection under the profit mechanism. It is
our view that the probability of any profit receivable by KKVL is
low.
In October 2020, KKVIM and the independent valuer undertook a
site visit in Newark where the unutilised assets are stored. We
found the containers in poor condition, unfit for deployment and of
little value. Since CVA the business model was revised towards a
semi-permanent hotel model allowing the containers to be placed in
a given location for a few years before dismantlement.
-- 80 rooms (20 containers) were placed in Stratford and the hotel is currently operational.
-- 80 rooms were placed in Canary Wharf and are un-operational
with the project mothballed due to Covid-19.
-- Some containers were on location in Cornwall and this
contract has ended and as at the time of writing we are awaiting
confirmation whether this contract will be renewed.
-- Some containers have been rented to HM Prison Service.
-- The remaining rooms/containers are in Newark at a storage facility and not in use.
Borrower 40 - Helicopters
Equity Holdings FV before Adj. GBP2.52m FV Adj. GBP2.52m FV
GBP0.00m
This is a lease participation in the equity position attached to
a portfolio of helicopters located in various global locations. For
a relatively low value loan, the structure is complex. We have
taken the time to develop the description in plain language but
acknowledge that it is still quite confusing to follow.
At the time of underwriting in 2015, there were eight
helicopters, each with their own SPV. Initially, the $11.5m
financing was made solely by the insurance company linked to
Borrowers 7 and 9 but soon after, the position was split into
participations A and B tranches in the following shapes:
-- Participation A, $8.5m, was split $3m to the insurance
company, and $5.5m to KKVL, although it should be noted that KKVL
is also exposed to the insurance company's position, through its
investment in Borrowers 7 and 9.
-- Participation B was split into two $1.5m positions and held
by two investment vehicles managed by the former manager.
Several of the SPVs in the helicopter portfolio had senior bank
funding attached but we have been unable to ascertain the original
quantum. However, in late 2016, one of the lessors was financially
distressed. It appears that the senior lender moved to foreclose on
their collateral, which resulted in the former manager placing
these relevant SPVs into Chapter 11 bankruptcy. The SPVs were then
bought out of Chapter 11, by Participation B fund, with one of the
investment vehicles managed by the former manager paying off the
senior lender, for $3.3m, and assuming the role of senior
lender.
Following this event, the participation waterfall was amended
thus:
-- Participation B to allow 35% of the income on three of the
SPVs and the rest (after payment of costs including a management
fee) would go through the equity participation waterfall.
-- Participation A holders, (KKVL and the US insurance company)
agreed to reduce their yield on their rights on the entire
portfolio from 10.5% to 6%.
-- A management fee is payable to a third party specialist
helicopter lease company of 1% of income received, and it was
agreed that Participation A should pay for this service out of its
65% share of the waterfall payments.
There are now five helicopters remaining in the portfolio valued
at between $2-4m before selling costs against $2.6m senior debt and
$4.6m due to Participation A.
-- Four are on lease until March 2021.
-- One has not been leased for the entire period of the
investment and is for sale at a price far higher than the
valuation.
Recent valuations suggest that there will be little recovery for
Participation A if the helicopters are sold at the end of their
lease.
2016 C Share Class
ECL Carrying
Credit Provision Value
Exposure at at
at 30 30 30 Amortisation
June June June / Bullet Term
2020 2020 2020 Repayment Remaining Asset Asset Gross IFRS
Borrower GBPm GBPm GBPm / Other Years Type Class Currency Yield 9 Stage
Marine
Interest Equipment
Borrower and Term (ex:
41 18.65 11.37 7.27 amortisation 5.10 Loan Vessels) GBP 9.5% 3
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ --------
Initial
12 months
interest
only period,
followed
by interest
Borrower and Term Waste
42 18.48 0.19 18.29 amortisation 8.20 Loan Processing GBP 9.5% 1
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ --------
Interest
Borrower and cash Term Wholesale
43 12.05 2.78 9.27 sweep 3.01 Loan Portfolios USD 10.8% 3
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ --------
Initial
12 months
interest
only period,
followed
by interest
Borrower and Term
44 9.96 9.96 0.00 amortisation 12.79 Loan Insurance GBP 10.0% 3
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ --------
Interest
Borrower and Revolving Wholesale
45 8.43 0.07 8.37 amortisation 0.75 Loan Portfolios GBP 9.5% 1
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ --------
Interests
Borrower and Finance
46 6.90 5.91 0.98 amortisation - Lease Manufacturing EUR 9.2% 3
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ --------
Interest
Borrower and Term
47 6.05 3.40 2.65 amortisation 8.62 Loan Shipping USD 10.4% 3
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ --------
Interest
and
amortisation,
Borrower bullet Term
48 5.96 3.37 2.60 at maturity 8.62 Loan Shipping USD 10.4% 3
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ --------
Interests
Borrower only, bullet Term
49 5.96 0.44 5.51 at maturity 0.59 Loan Aviation EUR 9.6% 2
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ --------
Initial
12 months
interest
only period,
followed
by Interest
Borrower and Term Infrastructure
50 5.22 0.52 4.70 amortisation 8.86 Loan Equipment GBP 9.0% 1
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ --------
Interest
and
amortisation,
Borrower bullet Term
51 5.19 2.93 2.26 at maturity 8.62 Loan Shipping USD 10.4% 3
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ --------
Interest
accrued
and
capitalised
during
construction
period,
then switched
to Hire
Payments
(covering
interest
Borrower and Finance Waste
52 5.04 0.14 4.90 amortisation) 6.94 Lease Processing GBP 10.0% 1
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ ------
Hire Payments
-Interest
Borrower and Finance Waste
53 4.46 0.12 4.34 amortisation 5.19 Lease Processing GBP 9.8% 1
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ ------
Interest
and
amortisation
+ final
1/3 original
principal
Borrower balloon
54 4.11 0.12 4.00 payment 3.16 Term Loan Construction GBP 8.8% 1
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ ------
Interest
Borrower and Receivables Infrastructure
55 3.36 0.24 3.13 amortisation 3.24 Purchase Equipment GBP 9.9% 2
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ ------
Interest
accrued
and
capitalised
during
construction
period,
then switched
to Hire
Payments
(covering
interest
Borrower and Material
56 2.83 0.08 2.76 amortisation) 1.70 Term Loan Handling USD 10.0% 1
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ ------
Interest Marine
Borrower and Equipment
57 2.64 0.07 2.56 amortisation 2.92 Term Loan (ex. Vessels) GBP 9.5% 1
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ ------
Interests
only and
pre-payments
Borrower when asset
58 1.83 0.05 1.78 delivered 1.00 Term Loan Aviation EUR 8.8% 1
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ ------
Borrower Interest
59 1.53 1.53 0.00 only 12.79 Term Loan Insurance GBP 10.0% 3
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ ------
Interest Marine
Borrower and Finance Equipment
60 0.59 0.04 0.55 amortisation 2.37 Lease (ex. Vessels) GBP 10.3% 1
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ ------
Interest Marine
Borrower and Finance Equipment
61 0.18 0.00 0.17 amortisation 0.42 Lease (ex. Vessels) GBP 10.8% 1
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ ------
129.43 43.35 86.08
---------- --------- ---------- --------- -------------- ---------- ------------ --------------- --------- ------ ------
2016 C Share Class Borrower Overview
Borrower 41 - Remote Operating Vehicles (Same borrower as
Borrowers 34 & 37 in Ordinary Share Class)
Stage 3 Credit Exposure GBP18.65m ECL GBP11.37m NCV GBP7.27m
This suite of loans was restructured in July 2020.
The business operates as a provider of remotely operated
vehicles (ROVs) globally, principally serving the oil and gas
industry. It is ultimately owned by two private equity companies
with a small stake held by management.
KKV has first ranking security over asset owning SPVs and their
individual assets. The security would allow KKV to take possession
of individual assets and/or the shares in certain entities in the
event of default, although this could be problematic in achieving a
going concern sale of the assets which would be critical to
maximising their value.
The group has performed poorly in recent years and has been
substantially loss making, coming close to insolvency in May 2020,
following which a restructure was agreed. As part of that
restructure, KKV advanced further funds (post June 2020) of GBP2
million, which had a separate and strong security package, whilst
the shareholders injected a further GBP3 million on the same terms
(and provided an additional GBP1 million standby facility which can
be drawn down on 5 days' notice).
The recent restructure recognised that the business is heavily
reliant upon a recovery in the oil and gas market and has provided
a cash runway to allow for such a recovery. Such a recovery is
uncertain.
Borrower 42 - Waste Management
Stage 1 Credit Exposure GBP18.48m ECL GBP0.19m NCV GBP18.29m
This loan was underwritten to support the acquisition, by the
borrower, of an organic waste management and waste processing
business based in Belfast, Northern Ireland ("NI"). The acquisition
was followed by capital investment in four new composting tunnels
and a biomass boiler to expand the business operations. This
resulted in a fully integrated organic waste group. In 2015 the
company sold its general waste division to focus purely on the
organic waste division. It operated nine In Vessel Composting
Tunnels ("IVC"), across two sites in NI which gave them capacity to
process 176k tonnes p.a. The investment in four further IVCs
allowed the company to increase processing capacity to 226k tonnes
p.a. Since acquisition, the business has been well run and is
servicing its debt fully.
Borrower 43 - A Leasing portfolio based in Mexico
Stage 3 Credit Exposure GBP12.05m ECL GBP2.78m NCV GBP9.27m
The Company is a senior participant in a finance structure
designed to invest in leases to medium sized companies and their
industrial assets in Mexico. The structure is complex. The borrower
is a Delaware registered leasing company managed by the former
manager which on-lends through a Mexican trust structure to a
specialist finance company based in Mexico.
Initially the borrower was funded by two investment vehicles
managed by the former Investment Managers in 2016. In 2018, KKVX
entered the transaction with a c$6.1 million senior investment
increasing to $10 million, ahead of the other investment vehicles
that were subordinated. The financing was a senior/subordinated
structure with a covenant allowing the KKVX position to have
performing debt receivable coverage in excess of 180% (LTV of 55%).
The effect of the covenant was to restrict interest payments to the
subordinated lenders until the LTV had cured. However, this was
breached within a short period of KKVX's investment.
In 2019, the financing was amended and re-documented into
Participant A (A) and Participant B (B) tranches, whereby:
-- Tranche A (i.e. KKVX) receives interest ahead of B,
-- Tranche B receives their interest before A receives any capital repayments.
-- Simultaneously KKVX's participation increased to $16.25m
-- The loan was switched to a revolver structure.
These changes increased the risk for Tranche A principal through
a slower amortisation period and if there should be underlying
non-performing loans within the structure.
We are unaware of any non-performing facilities written off by
the borrower but there are long term non-performing leases in the
portfolio which would reduce the B participation interest payments.
As at June 2020:
-- KKVXs LTV against performing receivables had risen to 93%.
-- The combined LTV for Tranches A and B was 121%.
More recent management information suggests the KKVX LTV is
close to 100%, and the combined A and B LTV is over 130%. Despite
the deterioration in LTV, the asset is performing with payments
received on a timely monthly basis. KKVIM receives monthly reports
regarding the book's performance and in-depth quarterly reports on
the underlying credit quality of each lease within the
portfolio.
We note that the insurance company with close links to Borrowers
7 and 9, has used the platform to warehouse loans outside of the
Participation A & B structure, having placed and funded 3 loans
of a combined value of $1.4m with the borrower in October 2018.
These were cashed out in June 2019 and entered the borrower's loan
pool, after KKVX's amendment of the structure via Participation A.
One of these underlying loans, valued at c$600k, is now
non-performing, having ceased paying in March 2020. We shall pursue
further clarification on this matter with the insurance company and
the leasing company.
The borrower is keen to continue to grow their book, however
given the status of the fund KKVL/VX are unwilling to commit any
additional capital. Therefore, we entered conversations regarding
an early refinance to put additional pressure on the borrower to
seek alternative finance. We believe the initial credit risk did
not accurately reflect the risk of the complex corporate and
amended deal structure, we therefore downgraded the credit rating.
This was further was supported by the deteriorating LTV of the
performing lease portfolio, which is now (post balance sheet) in
excess of 100%.
Borrower 44 & 59 - Reinsurance Company
Stage 3 Credit Exposure GBP11.49m ECL GBP11.49m NCV GBP0.00m
This investment comprises a term loan of $2m to an offshore
start-up holding company and contingent surplus note funding of
$13m to its offshore subsidiary and is a captive reinsurer, engaged
in reinsurance of MYGA policies. The nature of the facilities,
regulatory restrictions and terms of facility documentation are
broadly similar to those of Borrower 7 and 9 which means that the
lending is more akin to junior debt / equity in risk profile.
The first investment was made in March 2019, with KKVX agreeing
to a total investment facility of up to $20m. As at June 2020, the
facility was drawn to $15m. It is a 14-year financing, with an
initial 2-year interest only period, before amortising over the
remaining term.
This business does not own assets in its portfolio directly with
the economics and risk transferred using a "funds withheld" and
"modified co-insurance" reinsurance contract. The effect of this
arrangement is that the premiums are retained by the insurer, to be
invested in its name to satisfy its obligations to the policy
holders under the MYGAs but the risks and rewards of the
investments are transferred to the reinsurer. Direct access to the
assets is very restricted. In simplistic terms, this means that the
ability for recovery in the event of default is harder to
achieve.
The company is regulated in Barbados and has a Risk Based
Capital coverage restriction whereby distributions to lenders is
contingent to approval from the regulator, which can be assumed
providing Risk Based Capital is > 250% of the required minimum
(the "RBC Trigger").
In late June 2020, the business was in breach of its RBC
Trigger, with the ratio at 197% vs the 250% threshold. As a result,
the borrower was unable to pay interest on its loans from KKVX.
However, if we were able to advance the remaining $5m of the
facility, the RBC Trigger breach would be cured, and interest would
continue.
Having reviewed the Financing Proposal prepared by the former
manager several issues were apparent regarding security, covenants
and in particularly how the covenants appeared to be incongruent
with the structure. Of particular concern is the high concentration
of mezzanine CLOs (58%), it should be noted that these are
extremely high for an insurance portfolio. Furthermore, there is a
risk of exposure to changes made by the regulator National
Association of Insurance Commissioners ("NAIC") with regard to the
risk weighting applied to the use of CLO's and other financial
instruments which are largely out of the control of the
borrower.
Further analysis has led us to the conclusion that, given the
pass-through nature of the reinsurance agreements, the
subordination of the surplus notes to insurance liabilities and
other creditors, together with lack of tangible assets at holding
company level, recovery of principal and interest payments are
highly uncertain, and a full provision has been made against this
investment.
The business continues to trade and if it continues to do so
successfully over a fourteen-year period to maturity, there is
potential for recovery.
Borrower 45 - Wholesale Lender (Same borrower as Borrower 20 in
Ordinary Share Class)
Stage 1 Credit Exposure GBP8.43m ECL GBP0.07m NCV GBP8.37m
This is a long-established wholesale lender to micro SME
businesses in the UK. The loan is interest only and, upon maturity,
the debt amortises over nine months although a longer repayment
plan would need to be negotiated given the Covid-19 impact. Our
advance rate is 90% and is secured by receivables from a pool of
diversified loans to small businesses which act as our security
along with a borrower guarantee. The pool is greater than the
security posted as our collateral. Each underlying loan is rated
within a four-stage system with our collateral drawn only from the
highest category. If an individual loan's rating decreases, it is
substituted by another high rated loan. We receive a report from
the company's auditors on a quarterly basis that provides detail on
the performance and the entire loan pool.
Loans within the portfolio were affected at the start of the
Covid-19 pandemic but management have reported that the position
has steadily improved. All underlying loans are accompanied by a
personal guarantee and any amount over GBP50,000 is required to be
secured by a lien on property. They have also reported that they
had a reasonably small exposure to the retail sector which had been
the hardest hit.
We have allowed covenant breaches regarding the collateral pool
to 95% since April and we have relaxed the terms of the ratings
allowed within the pool whilst the period of economic uncertainty
remains. We are comfortable that the borrower is monitoring
performance adequately, all loans were considered satisfactory in
terms of performance, the overall loan to value was 93% as at the
end June and all interest payments have continued to be paid on
time. The company has now relaunched their lending activity in Q3
due to an increase in demand from performing SMEs.
Borrower 46 - French car parts manufacturer
Stage 3 Credit Exposure GBP6.90m ECL GBP5.91m NCV GBP0.98m
This borrower is a privately-owned company located in France
specialising in high-pressure die-casting, machining and assembly
of aluminium parts predominantly for the automotive industry. When
the loan was advanced in 2018, it was believed that the equipment
may be used in the production of hybrid engines for cars; sadly, it
has now been established that the equipment is only suitable for
diesel engines only, adversely affecting the potential for recovery
value of the collateral.
The financing was originally a EUR7.5m sale and leaseback
arrangement. The business commenced a moratorium period and was
restructured in June 2019. However, the business became distressed
soon afterwards and the loan has not achieved debt service since
September 2019. Limited management and other financial information
have been received since mid-2019 and there is no up-to-date
trading information.
However, we are aware that the firm is currently experiencing
severe financial difficulties, with significant arrears having
accumulated in relation to local and central Government taxes and
finance-related obligations - principally, in respect of funds
advanced by the Company and one other asset finance provider. In
early November 2020, the borrower filed for insolvency, and that
process is now underway in the French courts.
We are engaged with French lawyers to ensure the right steps are
taken, to outline potential outcomes and to advise on recovery
options. However, the process is hampered by the structuring of the
transaction. KKVX has a loan to an Irish SPV, and this SPV owns the
equipment together with the leasing arrangement with the
lessee.
Given the nature of the French insolvency process, the structure
of the investment and the independent valuation of the equipment,
we consider recovery on this position to be greatly reduced and
have allowed for an impairment provision accordingly.
Borrowers 47, 48 & 51 - Shipping Vessels (Same borrower as
Borrower 8 in Ordinary Share Class)
Stage 3 Credit Exposure GBP17.20m ECL GBP9.70m NCV GBP7.50m
Please refer to Borrower 8 in the Ordinary Shares
commentary.
Borrower 49 - Helicopter Finance
Stage 2 Credit Exposure GBP5.96m ECL GBP0.44m NCV GBP5.51m
The Company, via an Irish SPV, provided a secured loan facility
of EUR6 million to acquire an AgustaWestland 169 helicopter in June
2018. This facility was topped up by EUR0.5 million in November
2018 in order to fund missed payments of interest, provide some
working capital following a delay in registration of the aircraft
by the borrower and to fund off-shore specification customisation
to enhance the borrower's ability to lease it. The initial loan
facility was secured against the helicopter, with the additional
lending unsecured and on the same payment terms as the initial
loan.
This facility was expected to be a short-term bridge funding
arrangement, with monthly interest charged at 13% per annualised
for a period of 6 months (with an option to extend by 3 months) and
a bullet repayment at the end of the agreed term.
The original business plan intended for the helicopter to be
transferred onto a long-term lease with a higher quality lessee,
refinance the facility at a lower rate and repeat the process, in
order to build a fleet of helicopters. However, the plan was ill
thought out and problems occurred in relation to domicile of the
registration. The borrower had intended to register in Denmark but
since neither the helicopter nor the borrower nor lessee were based
in Denmark, registration was refused. This led to some delay,
whilst the business sought registration in Germany, where it is now
on lease. However, this means that our security is under German
Mortgage law, which creates uncertainty on foreclosure, relative to
most other more robust mortgage regimes.
This financing has subsequently been extended and amended, with
the finance cost reducing from 13% to 9% and, on 1 June 2020, the
repayment terms were altered to lower the fixed payments and
introduce a variable element, based on flying hours.
We have been working with the borrower on tightening the
documentation and hope to conclude this soon. The borrower is also
working on a longer-term, higher quality customer to lease this
aircraft, this should permit a restructure on a longer-term lease
with improved debt documentation.
Borrower 50 - Composting Facility
Stage 1 Credit Exposure GBP5.22m ECL GBP0.52m NCV GBP4.70m
KKVX provides a senior subordinated term loan to a composting
facility based in Northern Ireland. The entity that owns the
composting facility is owned by a cooperative of 27 farmers across
Ireland. This collaborative approach generates efficiencies for its
members and economies of scale for the composting facility. All 27
farmers are contracted to buy all their compost from the plant.
The facility was initially interest only during the construction
phase of the project and is now fully amortising to maturity in
August 2029 through quarterly debt repayments.
Borrower 52 - Recycling
Stage 1 Credit Exposure 5.04m ECL GBP0.14m NCV GBP4.90m
This is a project finance loan to a business recycling a broad
range of waste electrical & electronic equipment ("WEEE"),
which is a required practice by manufacturers of such products
under EU regulation. The borrowing is secured against
equipment.
The borrower overcame some initial teething problems experienced
during the construction and start-up phase when developing the WEEE
facility. However, unfortunately, their supply was significantly
impacted by the first Covid-19 lockdown, which interrupted cash
flows and resulted in the borrower and the Company agreeing a debt
payment holiday. Supply volumes swiftly rebounded in June. At the
time, management was confident that these numbers would be
sustained, allowing them to catch up on debt payments. They
recently confirmed that volumes have increased and they appear to
face only a limited impact during this second Covid-19 lockdown.
The borrower remains on track to catch-up on debt service.
Borrower 53 - Recycling
Stage 1 Credit Exposure GBP4.46m ECL GBP0.12m NCV GBP4.34m
This company has been in operation since 1986. The business is
focused on recycling in the Warwickshire area and has a commanding
regional market share.
They have seen a reduction in waste collections as a result of
Covid-19 and have utilised the Furlough and CBILS schemes. There
are no immediate debt servicing concerns. We have commenced regular
meetings with the borrower and have observed an improvement in
trading conditions in recent months.
Borrower 54 - Construction Company
Stage 1 Credit Exposure GBP4.11m ECL GBP0.12m NCV GBP4.00m
This is a secured term loan to a construction and property
development company based in Newry, County Down, Northern Ireland.
The company holds 33-50% shareholdings in seven SPVs, created as
project vehicles for Design, Build, Finance, Operate and Maintain
PPP contracts for educational institutions in Northern Ireland. All
debt is being serviced.
Borrower 55 - Battery storage
Stage 2 Credit Exposure GBP3.36m ECL GBP0.24m NCV GBP3.13m
The company is a rental company supplying Portable Battery Units
('PBPU') to work alongside site generators. The facility is
structured as a finance lease, and the PBPUs are hired from KKVX's
lessee by major site hire businesses in the UK.
The units reduce fuel spend allowing diesel generators to rest
overnight while retaining CCTV and other core infrastructure. The
current fleet of around 250 units was manufactured by a third-party
manufacturer, but which had some commonality of ownership. The
funding was used to fund new generator units from the manufacturing
company. The finance lease benefits from a guarantee from the
manufacturing company.
The company's balance sheet is stretched as the PBPU market is
rapidly growing, and both the manufacturing company and KKVX's
borrower are keen to aggressively grow their share of the market.
However, the product is considered strong, with demonstrable high
demand, which mitigates the risk at the corporate level.
Borrower 56 - Renewable Energy
Stage 1 Credit Exposure GBP2.83m ECL GBP0.08m NCV GBP2.76m
This loan represents a sale and lease back of four projects to
provide material handling services to Walmart's warehouse hubs
across the US. It has been performing well with no debt servicing
concerns. The loan is due to mature in March 2022.
Borrower 57 - Marine Services
Stage 1 Credit Exposure GBP2.64m ECL GBP0.07m NCV GBP2.56m
This loan is to a small marine services business based in the
UAE. The borrower provides a diversified range of subsea services
to the Oil and Gas, renewable, utility and construction industries.
The debt is being serviced.
Borrower 58 - Helicopters
Stage 1 Credit Exposure GBP1.83m ECL GBP0.05m NCV GBP1.78m
The company leases commercial helicopters for short to long-term
contracts. In June 2017, it ordered six Leonardo helicopters for
which it was required to place 20% of the total cost price as a
pre-delivery payment. The profile of the facility is interest only,
payable through the term of the loan, and principal repayable upon
delivery of the aircraft. The company cannot take ownership of the
asset without repaying first the principal of our loans, however
their plans have changed and they no longer wish to take delivery
of this model and therefore have deferred delivery for some
time.
We are currently negotiating a restructure to allow non-delivery
of this helicopter and increased flexibility, creating an
amortising structure whereby the loan will be repaid in the current
financial year.
Borrower 60 - Oil & Gas Services
Stage 1 Credit Exposure GBP0.59m ECL GBP0.04m NCV GBP0.55m
This loan provided capital to an innovative Oil & Gas
services company that was previously on an impressive trend of both
growth and profitability, since its founding in 2010, up until the
oil price collapse in the summer of 2014. The lessee is a
subsidiary of a larger, Dutch business which focuses on the
development of a number of 'next generation' well-intervention
technologies. The loan was a facility to cover an updated version
of its pipe-unblocking technology.
Although the sector has been badly impacted by the pandemic
which resulted in material a drop in oil price in March 2020, the
company has been able to pay its commitment as we are the only
senior lender at this part of the capital structure, with the
remaining debt being shareholders loans. The loan matures in
November 2022.
Borrower 61 - Oil & Gas Services
Stage 1 Credit Exposure GBP0.18m ECL GBP0.01m NCV GBP0.17m
This business was founded in 2010 to fill a specific gap in the
market to supply technology-based engineering solutions in subsea
pipeline installation, inspection and intervention to operators,
subsea contractors and oil field owners. The debt is being
serviced.
Conclusion
The reporting period has not been without its challenges due to
the external economic pressures of Brexit and then the onset of the
Covid-19 pandemic. This has been exacerbated by the intense amount
of work we have had to do in understanding the complexity of the
contracts and deriving a suitable plan of action to repair and
restructure them, in the case of troubled credits.
The Company is now in wind-down and we are working to deliver
the Company's new Investment Policy and Objectives. Meanwhile, we
shall monitor and manage the assets within the portfolio as
carefully as possible and urge early repayment or refinancing by
borrowers. All loans in the portfolio require care and diligence,
each borrower has specific needs and have to be carefully monitored
and indeed, on some occasions, helped through difficult periods. If
they are not managed with this level of due care and diligence,
there is a risk that the credit outlook for these loans may
deteriorate. It is as much about the manager as the borrower in
these circumstances.
I would like to note that the level of sustained work we have
had to undertake to reach this stage of the process has been
extremely heavy and would not have been possible without the expert
skills provided by my team during this time. When managing a high
yield portfolio or an SME loan book, one might expect two or three
credits to fall into distress at any one time. These tend to become
consuming from a resource perspective and take a disproportionate
time to set back on track by restructure or other measures.
Therefore, the first four months of our tenure as Portfolio
Manager have not been as we had originally envisaged. There is no
economic advantage to KKVIM in seeing the value of these loans
diminish and it also potentially carries reputational jeopardy.
However, our mission is clear. We have a duty to present the value
of this portfolio in a clear, unambiguous way and will do our
utmost to reclaim value and return cash to shareholders.
We regret having to present our findings on the portfolio in
such a manner and understand that shareholders may be perplexed at
the rapid change in the assessment of the quality of the portfolio
but we would like to give assurance that we are working hard to
wind down the fund in as efficient and effective way as possible.
During the period of wind down, we shall continue as we have begun
in providing investors with clarity and transparency.
We would like to thank shareholders for their continuing support
and after this short period of purdah whilst we have reviewed the
portfolio, we look forward to sharing updates on the progress made
on wind down in future months.
Dawn Kendall
Chief Investment Officer, KKV Investment Management Ltd
26 January 2021
DIRECTORS' REPORT
The Directors present the Annual Report and audited consolidated
financial statements of the Group for the year ended 30 June
2020.
Statement as to Disclosure of Information to the Auditor
The Directors who held office at the date of approval of this
Directors' Report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company's
auditors are unaware and that they have taken the steps that they
ought to have taken as Directors to make themselves aware of any
relevant audit information and to establish that the Company's
auditors are aware of that information.
Fair, Balanced and Understandable
In assessing the overall fairness, balance and understandability
of the Annual Report and audited consolidated financial statements
the Board has performed a comprehensive review to ensure
consistency and overall balance.
Board of Directors
The Directors of the Company who served during the year and/or
up to the date of approval of this report were:
Peter Niven (Chairman)
John Falla (did not stand for re-election at the AGM held on 31
December 2020)
Paul Meader (did not stand for re-election at the AGM held on 31
December 2020)
Christopher Spencer (resigned 30 October 2020)
Jacqueline Redmond (appointed 4 December 2019 and resigned 30
October 2020)
Brett Miller (appointed 16 September 2020)
David Copperwaite (appointed 31 December 2020)
The biographical details of the Directors in office at the
year-end are provided below.
Directors' Interests
The Directors of the Company who served during the year and/or
up to the date of approval of this report held the following
interests in the Company's share capital as at 30 June 2020:
Director Number of Ordinary Number of 2016 C
Shares Shares
Peter Niven 79,858 3,860
John Falla 19,637 3,829
Paul Meader 47,000 -
Christopher Spencer 19,929 3,845
Jacqueline Redmond - -
Brett Miller - -
David Copperwaite 210,000 -
Paul Meader's shares are held in the name of his spouse, Sarah
Kingwell.
On 28 July 2020, Mr Falla notified the Company that he had
purchased a further 60,363 Ordinary Shares and now holds 80,000
Ordinary Shares. There were no other changes to the Director's
share holdings post year-end.
David Copperwaite held 310,000 Ordinary Shares at the date of
approval of these consolidated financial statements.
Notifications of Shareholdings
As at 30 June 2020, the Company had been notified in accordance
with Chapter 5 of the Disclosure Guidance and Transparency Rules
(which covers the acquisition and disposal of major shareholdings
and voting rights), of the following shareholders that had an
interest of greater than 5% in the Company's issued share
capital:
Percentage of total
voting rights (%)
Investec Wealth & Investment
Limited 12.26
Schroders PLC 7.55
Foresight Group 6.73
Between 1 July 2020 and 26 January 2021, the Company received
notification that
-- CG Asset Management had an interest of 5.01%.
-- IntegraFin Holdings plc had an interest of 5.02%, which subsequently reduced to 4.01%.
Ordinary Share Buybacks
At the AGM held on 21 November 2019, the Directors were granted
authority to repurchase 53,360,753 Ordinary Shares and 20,824,741
2016 C Shares (being equal to 14.99% of the number of Ordinary
Shares and 2016 C Shares in issue) for cancellation or to be held
as treasury shares. This authority expired on the 31 December
2020.
At the AGM held on the 31 December 2020, the Directors were
granted authority to repurchase 53,360,753 Ordinary Shares and
20,824,741 2016 C Shares (being equal to 14.99% of the number of
Ordinary Shares and 2016 C Shares in issue) for cancellation or to
be held as treasury shares. This authority will expire at the next
AGM. The Directors intend to seek annual renewal of this authority
from the shareholders. Pursuant to this authority, and subject to
the Companies (Guernsey) Law, 2008, as amended ("Companies Law")
and the discretion of the Directors, the Company may purchase
Ordinary Shares and 2016 C Shares in the market if they believe it
to be in shareholders' interests.
Refer to note 13 for details of Ordinary Shares repurchased by
the Company.
Indemnities
To the extent permitted by Companies Law, the Company's Articles
provide an indemnity for the Directors against any liability except
such (if any) as they shall incur by or through their own breach of
trust, breach of duty or negligence.
During the year and up to the date of this Annual Report, the
Group has maintained insurance cover for its Directors under a
Directors' and Officers' liability insurance policy.
2020 AGM
The AGM was held in Guernsey on 31 December 2020. The notice for
the AGM set out the ordinary resolutions to be proposed at the
meeting. Separate resolutions were proposed for each substantive
issue.
Voting on all resolutions at the AGM was by poll. The proxy
votes cast, including details of votes withheld were disclosed to
those in attendance at the meeting and the results were published
on the website and announced via the Regulatory News Service on the
31 December 2020.
All resolutions were passed with the exception of Resolution 1,
'to receive and consider the Annual Report and Audited Consolidated
Financial Statements for the year ended 30 June 2020', which was
adjourned until further notice following the delay of publication.
Refer above further detail.
The Directors welcome communication with all shareholders and
can be contacted in writing at the Company's registered office,
which can be found below.
Borrowing
The Group does not have any external borrowings.
Events after the Reporting Date
Refer to the Strategic Report for details of "Events after the
Reporting Date" and note 18 - Significant Events after the
Reporting Period for further details.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report
and audited consolidated financial statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law they have
elected to prepare the financial statements in accordance with
International Financial Reporting Standards as adopted by the
European Union and applicable law.
The financial statements are required by law to give a true and
fair view of the state of affairs of the Company and of its profit
or loss for that period.
In preparing these consolidated financial statements, the
Directors are required to:
-- select suitable accounting policies and apply them consistently;
-- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements;
-- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and
-- use the going concern basis of accounting unless they either
intend to liquidate the Company or to cease operations, or have no
realistic alternative but to do so.
The Directors are responsible for keeping proper accounting
records that are sufficient to show and explain the Group's
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and enable them to ensure that its
consolidated financial statements comply with the Companies
(Guernsey) Law, 2008. They are responsible for such internal
control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement,
whether due to fraud or error, and have general responsibility for
taking such steps as are reasonably open to them to safeguard the
assets of the Group and to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the website
and for the preparation and dissemination of the consolidated
financial statements. Legislation in Guernsey governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the
Annual Report and audited consolidated financial statements
We confirm that to the best of our knowledge:
-- the consolidated financial statements, prepared in accordance
with the applicable set of accounting standards, give a true and
fair view of the assets, liabilities, financial position and profit
or loss of the Group; and
-- the Directors' Report includes a fair review of the
development and performance of the business and the position of the
issuer, together with a description of the principal risks and
uncertainties that they face.
We consider the Annual Report and audited consolidated financial
statements, taken as a whole, are fair, balanced and understandable
and provides the information necessary for shareholders to assess
the Group's position and performance, business model and
strategy.
By order of the Board
Brett Miller David Copperwaite
Director Director
26 January 2021 26 January 2021
DIRECTORS' BIOGRAPHIES
David Copperwaite (Non-Executive Director) - Appointed 31
December 2020
David Copperwaite, a resident of Guernsey, is on the board of
directors of a number of investment funds operated by various
financial groups. These investment funds include multi-functional
investment, venture capital, direct lending, distressed and
non-performing debt together with substantial private equity
investment entities, involving financial service companies,
insurance broking, banking and real estate development.
Mr Copperwaite has over 50 years' experience in the financial
services sector working for Standard Bank between 1965 and 1973
followed by Lloyds Bank International Limited between 1973 and
1997. In that time, Mr Copperwaite held a number of positions
including Principal Manager (Sterling European Region) between 1988
and 1997. In that role he was responsible for all international
private banking operations in Guernsey, Jersey, Gibraltar and
London (Mayfair) and these covered the areas of banking, investment
funds (open-ended, split capital and closed), cash and money
management, secured and unsecured lending, offshore trusts and
company management. Mr Copperwaite is a former Chairman of The
International Bankers Association.
John Martyn Falla (Non-Executive Director) - Did not stand for
re-election at the AGM held on 31 December 2020
John Falla, a Guernsey resident, is a Chartered Accountant and
has a BSc Hons degree in Property Valuation and Management from The
City University, London. He is a Chartered Fellow of the Chartered
Institute for Securities and Investment having been awarded their
diploma. He is a Non-Executive Director and consultant to a number
of companies, most of which are listed on the London Stock
Exchange.
John trained with Ernst & Young in London before moving to
their Corporate Finance Department. On returning to Guernsey he
worked for an International Bank, before joining the Channel
Islands Stock Exchange as a member of the Market Authority. In 2000
John joined the Edmond de Rothschild Group in Guernsey and provided
corporate finance advice to clients including open and closed-ended
investment funds, and institutions with significant property
interests. John was a director of a number of Edmond de Rothschild
group operating and investment companies.
Paul Meader (Non-Executive Director) - Did not stand for
re-election at the AGM held on 31 December 2020
Paul Meader, a resident of Guernsey, is an independent director
of investment companies, insurers and investment funds. He was
previously Head of Portfolio Management for Canaccord Genuity based
in Guernsey, prior to which he was Chief Executive of Corazon
Capital. He has over 30 years' experience in financial markets in
London, Dublin and Guernsey, holding senior positions in portfolio
management and trading. Prior to joining Corazon he was Managing
Director of Rothschild's Swiss private banking subsidiary in
Guernsey. Mr Meader is a Chartered Fellow of the Chartered
Institute of Securities & Investments and past Chairman of the
Guernsey International Business Association.
Brett Miller (Non-Executive Director) - Appointed 16 September
2020
Brett presently serves as a director of the following publicly
listed companies: RDL Realisation plc, Manchester & London
Investment Trust plc and Secured Income Fund plc, which is also
managed by the Portfolio Manager. He is also a director of a number
of unlisted and/or private companies.
Brett has wide ranging closed end fund and investment
trust/investment company experience both as an investor and in
managing or serving on boards of closed ended funds. He has been
involved (as executive and non-executive director) in the
management and in some cases, the running off and realisation, of
numerous LSE and AIM listed closed end funds across a wide range of
asset classes including (but not limited to) HWSI Realisation Fund
Limited, The Local Shopping REIT plc, China Growth Opportunities
Fund, Loudwater Trust plc, Rapid Realisations Fund Limited, Ranger
Direct Lending Fund plc, and EIH plc. He has considerable expertise
in restructuring and re-aligning management incentives and aligning
shareholder and managerial interests for both ongoing and
realisation situations.
Peter Niven (Non-Executive Chairman)
Peter Niven, is a resident of Guernsey. He has worked in the
financial services industry in the UK, offshore and internationally
for over 40 years, 30 of those with the Lloyds Banking Group from
which he retired in 2005 as the head of the Group's Offshore
Banking Division. Since then Peter has worked for the Guernsey
Government and the local financial services sector, through
Guernsey Finance, with the remit to develop and promote the island
on the world stage as a premier international finance centre. He
retired from that role in December 2012.
He now acts as a Non-Executive Director on a broad portfolio of
LSE listed and unlisted investment funds investing in asset classes
including leasing, property, emerging markets and private equity
with wide experience of chairing Boards and Audit and Management
Committees. He is also a director of ABTA's Guernsey captive
insurance entity. Peter is a Fellow of the Institute of Bankers, a
Fellow of the Institute of Directors and a Chartered Director.
Jacqueline Redmond (Non-Executive Director) - appointed 4
December 2019, resigned 30 October 2020
Jacqueline Redmond, a resident of Scotland, is an independent
director of a number of unlisted organisations with a focus on
energy-related activities, including the non-executive chair of
CENSIS, a Scottish Innovation Centre. She has recently been
appointed on a part-time basis as an Executive Director with
Strathclyde University with specific responsibility for the Power
Network Demonstration Centre. She was previously the Chief Risk
Officer for the Green Investment Bank and the appointed Risk
Officer for its regulated subsidiary. She has over 25 years'
experience overseeing investments and strategy implementation
through a variety of posts, such as the Vice President for
Technology Strategy with Royal Dutch Shell, and the Head of Risk
(UK) for ScottishPower. Jacqueline is a qualified Financial Risk
Manager and a Chartered Engineer registered with the Institution of
Engineering and Technology.
Christopher Paul Spencer (Non-Executive Director) - resigned 30
October 2020
Christopher Spencer, a resident of Guernsey, qualified as a
chartered accountant in London in 1975. Following two years in
Bermuda he moved to Guernsey. Christopher, who specialised in audit
and fiduciary work, was Managing Partner/Director of Pannell Kerr
Forster (Guernsey) Limited from 1990 until his retirement in May
2000. Christopher is a member of the AIC Offshore Committee, a past
President of the Guernsey Society of Chartered and Certified
Accountants and a past Chairman of the Guernsey Branch of the
Institute of Directors. Christopher sits on the Board of Directors
of JPEL Private Equity Limited, which is listed on the London Stock
Exchange and Summit Properties Limited, formerly known as Summit
Germany Ltd, which was an AIM listed company, delisted in March
2020.
CORPORATE GOVERNANCE REPORT
Introduction
The Board is committed to high standards of corporate governance
and has put in place a framework for corporate governance which it
believes is appropriate for an investment company.
Compliance with Corporate Governance Codes
The Company is a member of the AIC. The UK Corporate Governance
Code (the "UK Code") acknowledges that the AIC Code can assist
externally managed companies in meeting their obligations under the
UK Code in areas that are of specific relevance to investment
companies. The Guernsey Financial Services Commission has also
confirmed that companies that report against the UK Code or AIC
Code are deemed to meet the Guernsey Code of Corporate Governance
(the "Guernsey Code"). Copies of the AIC Code and the AIC Guide can
be found at www.theaic.co.uk . The UK Code is available from the
Financial Reporting Council (the "FRC") website ( www.frc.co.uk
).
Throughout the year ended 30 June 2020, the Company has complied
with the recommendations of the AIC Code and as such also meets the
requirements of the UK Code and by default the Guernsey Code,
except to the extent highlighted below:
-- New companies (provision 21)
For the reasons set out in the AIC Guide, and as explained in
the UK Code, the Board considers this provision as not relevant as
the Company was incorporated in 2014.
The Group complies with the corporate governance statement
requirements pursuant to the UK FCA Disclosure and Transparency
Rules by virtue of the information included in the Corporate
Governance section of the Annual Report.
The Board believes that this Annual Report and audited
consolidated financial statements presents a fair, balanced and
understandable assessment of the Group's position and prospects,
and provides the information necessary for shareholders to assess
the Group's performance, business model, strategy, principal risks
and uncertainties.
Board Independence, Composition and Diversity
The Board is chaired by Peter Niven who is responsible for its
leadership and for ensuring its effectiveness in all aspects of its
role. Paul Meader was appointed as the Senior Independent Director
on 25 February 2020. As at 30 June 2020, the Board consisted of
five Non-Executive Directors. Brett Miller was appointed as a
Non-Executive Director on 16 September 2020. Christopher Spencer
and Jacqueline Redmond resigned as Directors on 30 October 2020.
Paul Meader and John Falla d id not stand for re-election at the
AGM held on 31 December 2020. David Copperwaite was appointed as a
Non-Executive Director on 31 December 2020. The biographical
details of the Directors are listed above and demonstrate a breadth
of investment, accounting, banking and professional experience.
The Chairman and all Directors, except for Brett Miller, are
considered independent. Brett Miller is a Director of Secured
Income Fund Plc, which is also managed by the Portfolio Manager and
of RDL Realisation Plc, which also shares the same AIFM as the
Company and is therefore not considered independent. The Directors
consider that there are no factors, as set out in Principle 1 or 2
of the AIC Code, which compromise the Chairman's or other
Directors' independence and that they all contribute to the affairs
of the Company in an adequate manner. The Board reviews the
independence of all Directors annually.
The Board values the importance of diversity, including gender,
to the effective functioning of the Board.
Directors' Duties and Responsibilities
The Directors have adopted a set of reserved powers, which
establish the key purpose of the Board and detail its major duties.
These duties cover the following areas of responsibility:
-- statutory obligations and public disclosure;
-- approval of key investment decisions;
-- strategic matters and financial reporting;
-- Board composition and accountability to shareholders;
-- risk assessment and management, including reporting,
compliance, monitoring, governance and control; and
-- other matters having material effects on the Group.
These reserved powers of the Board have been adopted by the
Directors to demonstrate clearly the importance with which the
Board takes its fiduciary responsibilities and as an ongoing means
of measuring and monitoring the effectiveness of its actions.
The Board meets at least four times each year and monitors the
Group's share price and NAV and regularly considers ways in which
future share price performance can be enhanced. The Board is
responsible for the safeguarding of the assets of the Group and
taking reasonable steps for the prevention and detection of fraud
and other irregularities. The Portfolio Manager (previously the
Investment Managers) together with the Company Secretary also
ensure that all Directors receive, in a timely manner, all relevant
management, regulatory and financial information relating to the
Group and its portfolio of investments. Directors unable to attend
a Board meeting are provided with the Board papers and can discuss
issues arising in the meeting with the Chairman or another
Director.
Individual Directors may, at the expense of the Group, seek
independent professional advice on any matters that concerns them
in the furtherance of their duties.
Board and Committees
The Board has established three committees:
-- the Audit and Risk Committee;
-- the Management Engagement Committee, and
-- the Remuneration and Nomination Committee.
Due to the size and nature of the Company, as at 30 June 2020,
all Directors have been appointed to all Committees. With effect
from 30 October 2020, all committees consisted of three Directors,
Peter Niven, John Falla and Paul Meader, following the resignations
of Christopher Spencer and Jacqueline Redmond.
With effect from 31 December 2020, the Management Engagement
Committee and the Remuneration and Nomination Committee comprised
of one Director, Peter Niven following John Falla and Paul Meader
not standing for re-election at the AGM held on 31 December 2020.
Brett Miller and David Copperwaite are not a member of any of the
above committees, however may be asked to attend as deemed
applicable.
Following John Falla and Paul Meader not standing for
re-election at the AGM held on 31 December 2020, Brett Miller and
David Copperwaite were appointed as members of the Audit and Risk
Committee. With effect from 31 December 2020, the Audit and Risk
Committee comprised of three Directors, Peter Niven, Brett Miller
and David Copperwaite.
The responsibilities of these Committees are described below.
Each Committee reports to and is subject to the oversight of the
Board. Terms of reference for each Committee have been approved by
the Board and are available in full on the website.
Board
Responsibilities:
* Statutory obligations and public disclosure.
* Approval of key investment decisions.
* Strategic matters and financial reporting.
* Board composition and accountability to shareholders.
* Risk assessment and management, including reporting,
compliance, monitoring, governance and control.
* Responsible for consolidated financial statements.
* Other matters having material effects on the Group.
Audit and Risk Committee Management Engagement Committee
Delegated Responsibilities: Delegated Responsibilities:
* Review the consolidated financial statements, * Review on a regular basis the performance of the
including review of the accounting policies and Portfolio Manager and the Group's key advisers and
methods utilised. major service suppliers (other than the external
auditor) to ensure that performance is satisfactory
and in accordance with the terms and conditions of
* Review the effectiveness and internal control the respective appointments.
policies and procedures over financial reporting and
identification, assessment and reporting of risk.
* Make recommendations to the Board in relation to
appointment, re-appointment and removal of external
auditors, approving remuneration and terms of
engagement of external auditors and assess the
effectiveness of the audit process.
* To monitor risk management and internal control
systems on an ongoing basis, performing a review of
their effectiveness, and recommending actions to
remedy any failings or weaknesses identified.
----------------------------------------------------------------
Remuneration and Nomination Committee
Delegated Responsibilities:
* Review the structure, size and composition of the
Board.
* Give full consideration to succession planning
* Identify suitable Board candidates to fill Board
vacancies.
* Undertake performance evaluations of the Board and
the Chairman.
* Determine the framework and policy for the level of
remuneration of the Chairman and Directors
Audit and Risk Committee
John Falla was appointed as the Chairman of the Audit and Risk
Committee on 21 November 2019, replacing Christopher Spencer. Mr
Falla is a chartered accountant and also a fellow of the Chartered
Institute for Securities and Investment. The Board is satisfied
that Mr Falla has recent and relevant financial experience, as
required under the AIC Code. The qualifications of the members of
the Audit Committee are outlined in the Directors' Biographies
section. The duties of the Audit and Risk Committee in discharging
its responsibilities are outlined in the chart above. The report on
the role and activities of the Audit and Risk Committee and its
relationship with the external auditors is contained in the Audit
and Risk Committee Report.
David Copperwaite was appointed as Chairman of the Audit and
Risk Committee on 31 December 2020 replacing John Falla who did not
stand for re-election at the AGM held on the 31 December 2020.
Management Engagement Committee
At the end of 2019, Chris Spencer was the Chairman of the
Management Engagement Committee. Since his resignation on 30
October 2020, Peter Niven has acted as Chairman. The duties of the
Management Engagement Committee in discharging its responsibilities
are outlined in the chart above.
The Management Engagement Committee carries out its review of
the Group's key advisers and service providers through
consideration of a number of objective and subjective criteria and
through a review of the terms and conditions of their appointments
with the aim of evaluating performance, identifying any weaknesses
and ensuring value for money for the Company's shareholders.
On 24 January 2020, the Board announced it would be carrying out
a strategic review of the Company's operations, which would include
the provision of investment management services. The Company asked
for parties interested in providing investment management services
to contact the Company Secretary by no later than close of business
on 31 January 2020.
Following a tender process, on 30 April 2020, the Company
announced the results of its strategic review and its intention to
appoint the Portfolio Manager and the AIFM. Following the
completion of the due diligence and legal process surrounding these
new appointments, the termination of the contract with the
Investment Managers was confirmed in an RNS dated 8 June 2020.
The Management Engagement Committee reviewed the performance of
its other key service providers on 8 June 2020. During this review,
no material weaknesses were identified. Overall the Management
Engagement Committee confirmed its satisfaction with the services
and advice received.
Remuneration and Nomination Committee
Paul Meader was the Chairman of the Remuneration and Nomination
Committee until 31 December 2020. The duties of the Remuneration
and Nomination Committee in discharging its responsibilities are
outlined in the chart above. Paul Meader did not stand for
re-election at the AGM held on the 31 December 2020. No Director
has been appointed as Chairman of the Remuneration and Nomination
Committee at date of approval of these consolidated financial
statements, however the Board intend to elect a Chairman of this
Committee in due course.
The Remuneration and Nomination Committee undertakes an
evaluation of the Board on an annual basis. The performance of each
Director is considered as part of a formal review by the
Remuneration and Nomination Committee. The Remuneration and
Nomination Committee may also meet without the Chairman of the
Board present in order to review his performance.
Performance Evaluation
The performance of the Board and the Directors was reviewed by
the Remuneration and Nomination Committee on 8 June 2020. The
Committee discussed various areas, including the process and style
of meetings, investment matters, strategy, governance and
shareholder value. In addition, the Committee reviewed the
performance of the Chairman in his role and evaluated his
contributions. It was concluded that the Board have a good and
complementary range of skills and competency and that Board
meetings were effective and all relevant topics were fully
discussed. The Directors confirm that they have devoted sufficient
time, as considered necessary, to the matters of the Company. It
was agreed that all Directors were independent and that all
Directors felt well prepared and able to participate fully at Board
meetings and had a good understanding of the investments and
markets in which the Company operates .
Directors' Remuneration Report
The following report meets the relevant Listing Rules of the FCA
and the AIC Code and describes how the Board has applied the
principles relating to Directors' remuneration.
Annual Report on Remuneration
The Group paid the following fees to the Directors for the year
ended 30 June 2020:
Director Fees
GBP
Peter Niven 70,000
Christopher Spencer 51,386
John Falla 53,614
Paul Meader 50,117
Jacqueline Redmond 26,079
Brett Miller -
David Copperwaite -
Total 251,196
========
Brett Miller is entitled to a fee of GBP45,000 per annum in
respect of his appointment as a Director of the Company with effect
from 16 September 2020. He also receives GBP20,000 per month,
payable monthly in arrears, for an initial six-month period
commencing 1 October 2020, for his additional duties assigned by
the Board.
David Copperwaite is entitled to a fee of GBP45,000 per annum in
respect of his appointment as a Director of the Company with effect
from 31 December 2020. He is entitled to an additional GBP10,000
per annum as Chairman of the Audit and Risk Committee.
At a meeting of the Remuneration and Nomination Committee on 8
June 2020, consideration was given to the payment of an additional
fee for each Director for the additional work undertaken during the
strategic review and the appointment of the new AIFM and Portfolio
Manager. It was agreed that the following one-off payments would be
made on 30 June 2020:
Director Fees
GBP
Peter Niven 15,000
Paul Meader 15,000
Jacqueline Redmond 10,000
John Falla 5,000
Christopher Spencer 5,000
Total 50,000
=======
The Company's Articles limit the aggregation of fees payable to
the Directors to a total of GBP300,000 per annum. Extra services
are not included in the definition of fees as per the Company's
Articles.
Other than as shown above, no other remuneration or compensation
was paid or payable by the Company during the year to any of the
Directors.
Directors' Appointment, Retirement and Policy on Payment of Loss
of Office
The Articles of the Company require that all Directors submit
themselves for election by shareholders at the first opportunity
following their appointment. The Directors have elected to agency
for re-election on a yearly basis, so will all retire at each AGM
and be eligible for reappointment.
Any Director may resign in writing to the Board at any time.
Directors are not entitled to payment for loss of office.
No Director has a service contract with the Company. Directors
have agreed letters of appointment with the Company, copies of
which are available for review by shareholders at the registered
office and will be available at the AGM. The dates of their letters
of appointment and where applicable the date of their resignation,
are shown below:
Director Date Appointed Date Resigned
Peter Niven 28 May 2014 -
Christopher Spencer 28 May 2014 30 October 2020
John Falla(1) 28 May 2014 31 December 2020
Paul Meader(1) 18 August 2017 31 December 2020
Jacqueline Redmond(2) 23 January 2020 30 October 2020
Brett Miller 16 September 2020 -
David Copperwaite 31 December 2020 -
(1) Did not stand for re-election at the AGM held on 31 December
2020.
(2) Appointed 4 December 2019, however letter of appointment
signed 23 January 2020.
Tenure of Non-Executive Directors
The Board has adopted a policy on tenure that is considered
appropriate for an investment company.
The Board's tenure and succession policy seeks to ensure that
the Board is well balanced and will be refreshed from time to time
by the appointment of new Directors with the skills and experience
necessary to replace those lost by Directors' retirements and meet
future requirements. Directors must be able to demonstrate their
commitment and fiduciary responsibility to the Company. The Board
seeks to encompass relevant past and current experience of various
areas relevant to the Company's business.
The Board believe that the appointments of Brett Miller and
David Copperwaite is in the interest of all the Company
stakeholders as it further enhances the skills at the Board's
disposal. Consideration is being given to the appointment of a
fourth director.
For the future, the composition of the Board will reflect the
wind down nature of the business going forward and the skills that
are needed to manage that ongoing process.
Conflict of Interests
The Directors have a duty to avoid situations where they have,
or could have, a direct or indirect interest that conflicts, or
possibly could conflict, with the Company's interests. Only
Directors who have no material interest in the matter being
considered will be able to participate in the Board approval
process. Directors are required to disclose all actual and
potential conflicts of interest to the Chairman in advance of any
proposed external appointment.
In deciding whether to approve an individual Director's
participation, the other Directors will act in a way they consider
to be in good faith in assessing the materiality of the conflict in
accordance with the Company's Articles of Incorporation.
The Board believes that its procedures regarding conflicts of
interest have operated effectively. The Board also confirms that
its procedure for the approval of conflicts of interest, if any,
has been followed by the Directors. None of the Directors had a
material interest in any contract which is significant to the
Group's business. Directors' holdings in the Company's shares can
be found within the Directors' Report.
Induction/Information and Professional Development
Directors are provided, on a regular basis, with key information
on the Company's policies, regulatory requirements and its internal
controls. Regulatory and legislative changes affecting Directors'
responsibilities are advised to the Board as they arise along with
changes to best practice from, amongst others, the Company
Secretary and Deloitte. Advisers to the Group also prepare reports
for the Board from time to time on relevant topics and issues.
The Directors attend relevant seminars and events to allow them
to continually refresh their skills and knowledge and keep up with
changes within the investment management industry.
When a new Director is appointed to the Board, they are provided
with all relevant information regarding the Group and their duties
and responsibilities as a Director. In addition, a new Director
will also spend time with representatives of the Portfolio Manager
(previously the Investment Managers) in order to learn more about
the portfolio, its management, processes and procedures.
Attendance at scheduled meetings of the Board and its committees
for the year ended 30 June 2020
Quarterly NAV & Audit & Remuneration Management
Board Dividend Risk & Nomination Engagement
Meetings Committee Committee Committee
Number of
meetings during
the year 4 8 7 2 1
---------- ---------- ----------- -------------- ------------
Peter Niven 4/4 8/8 6/7 2/2 1/1
---------- ---------- ----------- -------------- ------------
John Falla 4/4 7/8 7/7 2/2 1/1
---------- ---------- ----------- -------------- ------------
Chris Spencer 4/4 6/8 6/7 2/2 1/1
---------- ---------- ----------- -------------- ------------
Paul Meader 4/4 7/8 7/7 2/2 1/1
---------- ---------- ----------- -------------- ------------
Jacqueline Redmond 2/2 6/6 3/4 1/1 1/1
---------- ---------- ----------- -------------- ------------
Brett Miller 0/0 0/0 0/0 0/0 0/0
---------- ---------- ----------- -------------- ------------
David Copperwaite 0/0 0/0 0/0 0/0 0/0
---------- ---------- ----------- -------------- ------------
In addition to these meetings, 16 ad-hoc board meetings and 5 ad
hoc committee meetings were held during the year covering various
Group matters.
Relationship with the Portfolio Manager (previously the
Investment Managers), Company Secretary and the Administrator
The Board has delegated various duties to external parties
including the management of the investment portfolio, the custodial
services (including the safeguarding of assets), the registration
services and the day-to-day company secretarial, administration and
accounting services. Each of these contracts were entered into
after full and proper consideration by the Board of the quality and
cost of services offered, including the control systems in
operation in so far as they relate to the affairs of the Group.
The Board receives and considers reports regularly from the AIFM
and the Portfolio Manager (previously the Investment Managers),
with ad hoc reports and information supplied to the Board as
required. The Portfolio Manager (formerly the Investment Managers)
takes decisions as to the purchase and sale of individual
investments, within the delegated authority established by the
Board. The Board meets with the AIFM and the Portfolio Manager
(formerly the Investment Managers) on an ad-hoc basis to discuss
and approve investment decisions as necessary. The Portfolio
Manager complies with the risk limits as determined by the Board
and have systems in place to monitor cash flow and the liquidity
risk of the Group.
The Portfolio Manager (previously the Investment Managers) and
the Administrator also ensure that all Directors receive, in a
timely manner, all relevant management, regulatory and financial
information. Representatives of the Portfolio Manager (previously
the Investment Managers) and Administrator attend each Board
meeting as required, enabling the Directors to probe further on
matters of concern. The Directors have access to the advice and
service of the Company Secretary who is responsible to the Board
for ensuring that Board procedures are followed and that applicable
rules and regulations are complied with. The Board, the Portfolio
Manager (previously the Investment Managers) and the Administrator
operate in a supportive, co-operative and open environment.
AIFMD
The Company is classed as an externally managed Alternative
Investment Fund under the Alternative Investment Fund Managers
Directive ("AIFMD").
The US Investment Manager (from inception to 5 June 2020)
The US Investment Manager was the authorised Alternative
Investment Fund Manager for the purposes of AIFMD, from inception
to 5 June 2020. The US Investment Manager was responsible for
managing the Company's investments and the risks it faced in
accordance with AIFMD, subject to the overall scrutiny of the
Board. The US Investment Manager was registered with the FCA as a
"third country AIFM". The requirements of AIFMD were applied
accordingly.
US Investment Manager Remuneration
The total fees paid to the Investment Managers during the year
by the Company are disclosed in note 3.
IFM (from 6 June 2020)
Following the strategic review and the announcement in June 2020
of the appointment of the Portfolio Manager, IFM was appointed as
the authorised AIFM for the Company from 6 June 2020. The AIFM is
responsible for managing the Company's investments and the risks it
faces in accordance with AIFMD, subject to the overall scrutiny of
the Board. IFM is part of the PraxisIFM Group, which is listed on
The International Stock Exchange. IFM has over US$6 billion of
assets under management with experience across all major asset
classes, including credit, and provides services to multiple
investment trust and investment company clients listed on the main
market of the London Stock Exchange. IFM as AIFM, is responsible to
the Company for risk management and portfolio management and has
delegate the provision of portfolio management services to the
Portfolio Manager.
AIFM Remuneration
As announced to the market on 8 June 2020, the fees associated
with the on-going appointment of IFM as AIFM for the Company will
be met by the Portfolio Manager.
AUDIT AND RISK COMMITTEE REPORT
I set out the report of the Audit and Risk Committee after what
has been a very busy and challenging year for the Company with the
Committee heavily involved in obtaining greater clarity on the
underlying portfolio, and matters relevant to the preparation of
the Annual Report and Accounts. As at 30 June 2020, the Audit and
Risk Committee comprised all of the Directors each of whom has
recent and relevant financial experience. John Falla was appointed
Chairman of the Audit and Risk Committee, on 21 November 2019,
replacing Christopher Spencer (who had been the Chairman since the
formation of the Company) and I was appointed on 31 December
replacing John Falla. I would like to thank Mr Spencer and Mr Falla
for their leadership of the Audit and Risk Committee.
In the year ended 30 June 2020, the Audit Committee convened
formally on seven occasions, with additional formal and informal
meetings subsequently dealing with the review of these financial
statements, including matters arising therefrom. The members'
attendance record can be found above.
Before describing the more regular work of the Committee, I
highlight the additional work streams the Committee has undertaken
since the start of the financial year under review which will be
explained in more detail later in the report.
-- The completion of a transparent audit tender process
-- Review of income recognition
-- Engagement of external valuers and consultants
-- Considering the impact of Covid-19 on the Company's Portfolio
and the impact on the financial statements
-- The Expected Credit Losses provisioning exercise
-- Review of the viability of the Company and the appropriate basis for preparing the accounts
Committee Meetings
The Audit and Risk Committee usually meets at least three times
a year. Only members of the Audit and Risk Committee have the right
to attend Audit and Risk Committee meetings. Representatives of the
Portfolio Manager, AIFM and Administrator are invited to attend
Audit and Risk Committee meetings on a regular basis and other
non-members may be invited to attend all or part of the meeting as
and when appropriate and necessary. The auditor is also invited
whenever it is appropriate. The Audit and Risk Committee is also
able to meet separately with the auditor without the Portfolio
Manager (previously the Investment Managers), AIFM or Administrator
being present.
Main Activities
The Audit and Risk Committee assists the Board in carrying out
its overall responsibility in relation to financial reporting
requirements, risk management and the assessment of internal
financial and operating controls. It also manages the Group's
relationship with the auditor. Meetings of the Committee generally
take place prior to a Company Board meeting. The Audit and Risk
Committee reports to the Board as part of a separate agenda item,
on the activity of the Audit and Risk Committee and matters of
particular relevance to the Board in the conduct of their work.
The Audit and Risk Committee reviews and monitors reports on the
internal control and risk management systems on which the Company
is reliant.
Financial Reporting
The primary role of the Audit and Risk Committee in relation to
financial reporting is to review in conjunction with the AIFM,
Portfolio Manager and the Administrator, the appropriateness of the
Annual Report and audited consolidated financial statements and the
Interim Report and consolidated financial statements concentrating
on, amongst other matters:
-- the quality and acceptability of accounting policies and practices;
-- the clarity of the disclosures and compliance with financial
reporting standards and relevant financial and governance reporting
requirements;
-- material areas in which significant judgements have been
applied or there has been discussion with the auditor;
-- in relation to the UK Corporate Governance Code and AIC Code,
whether the Annual Report and audited consolidated financial
statements, taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to assess
the Group's performance, business model and strategy; and
-- any correspondence from regulators in relation to the quality
of the Group's financial reporting.
To aid its review, the Audit and Risk Committee seeks the
appropriate input from the Portfolio Manager, AIFM, Administrator
and also reports from the auditor.
As discussed in more detail in the Strategic Report, the Company
has been put into managed wind-down. As a consequence, the accounts
for the year ended 30 June 2020 are prepared on a basis other than
a going concern. The Committee has reviewed the accounts taking
this change into account, including its impact on the Viability
Statement, and the modelling to support it and are satisfied that
the Viability Statement has been properly prepared.
Significant Risks
For the year ended 30 June 2020, the following significant
issues were considered by the Audit and Risk Committee:
(i) Revenue Recognition
The risk that revenue (classified as 'income' in the
consolidated financial statements and primarily comprising interest
income or finance charges receivable under loans, leases and hire
purchase agreements) may be materially misstated.
The Committee has reviewed, with the assistance of the AIFM, the
Portfolio Manager, and the Administrator, the income recognition
undertaken by the Company, including that required under IFRS 9,
which was implemented for the first time in the year ended 30 June
2019. Instances were identified where income had been suspended on
the grounds of prudence and had then ceased to be recognised.
However, the correct treatment for stage 3 assets is to accrue
income on the net carrying amount after the deduction of the
expected credit loss (the "ECL") and, if necessary, write the
amount off. This adjustment does not have a material impact on the
NAV, but income and provisions for ECL were both adjusted upwards
in the Annual Report and consolidated financial statements. The
Committee is now satisfied that a robust transaction reporting
system is in place between the Portfolio Manager, AIFM and
Administrator to ensure that transactions and the revenue received
are reflected correctly.
(ii) Investment Portfolio
The investment portfolio primarily comprises loans, hire
purchase contracts and finance leases. Most investments/assets were
held at amortised cost, but subject to an ECL review under IFRS 9.
The carrying value of these assets is key to the financial
performance of the Group and drives returns to shareholders.
In the second year of reporting under IFRS 9, the Committee has
reviewed how IFRS 9 has been implemented and adjusted the stage at
which some of the assets are held. In addition, the Committee has
challenged the ECL methodology utilised in the first year and the
ECLs adopted by the Company given the experience to date and the
prevailing economic turmoil. The Committee has been vigilant as to
the likelihood of any material adverse changes due to the impact of
Covid-19 on the business models and the viability of investments
within the portfolio that might lead to a material adverse change
in value.
Where a valuation model is utilised, such a model relies upon on
a number of inputs, such as underlying assumptions and estimates,
including in some instances asset valuations provided by third
party asset valuers, and inherent within any such matter of
judgement is the risk that the eventual outcome will differ from
that contained within these consolidated financial statements. At
the start of 2020, the Investment Managers' aggregate range of
values of six AD plants widened with the entire range being below
the prior carrying value. Accordingly, it was agreed that an
independent review and valuation of the plants should be undertaken
by KPMG in Ireland. The Audit Committee appointed KPMG in Ireland
to provide a further review and valuation as at 30 June 2020 for
the year end accounts.
Following the appointment of the AIFM and the Portfolio Manager
in June 2020, they have looked afresh at the assets within the
portfolio. In several instances, they have asked for assistance in
reviewing a number of those assets, and KPMG LLP was been engaged
to assist. In some instances, third party valuation agents have
also been engaged to value specific assets. Again, the Committee
was involved in the engagement of KPMG LLP, and the relevant assets
valuers.
The reviews by the AIFM, Portfolio Manager and KPMG LLP
identified issues with a number of investments, as detailed
elsewhere in the financial statements. In some situations,
producing a precise point valuation at 30 June 2020 was very
challenging given the wide range of possible outcomes for the
borrowers and the exercise of security. The Committee was actively
involved in reviewing and challenging each asset in detail, the
judgments and estimates used and the recommendations received
regarding impairment provisions, ECL or impairment of PPE.
Although these estimates and assumptions are based on best
knowledge of current facts, circumstances and, to some extent,
future events and actions, the actual results may ultimately differ
from those estimates, possibly significantly. Material uncertainty
over these provisions exist as at 30 June 2020 and also as at 30
June 2019 due to the broad range of possible valuations arising
from the quality and accessibility of underlying collateral as well
as its specialist nature, volatile market conditions, the binary
nature of certain positions, the outcomes of ongoing negotiations
and the assumptions used in determining the valuations.
The Audit and Risk Committee reviews and challenges the regular
reports regarding the valuation of the investments from the AIFM,
the Portfolio Manager (previously the Investment Managers), and the
Administrator including, where relevant, the external reviews
and/or valuations received and, with the Board, reviews the NAV of
the Group, together with the value of investments on a regular
basis.
(iii) Fraud Risk
The risk of fraud due to management override of controls.
The Audit and Risk Committee also reviews the reports from the
Portfolio Manager (previously the Investment Managers) and
Administrator on the system of checks in place to combat fraud.
(iv) Related Parties and Consolidation
The Company has a number of subsidiaries and affiliated
entities.
Consideration is given to financial reporting requirements -
primarily around consolidation (and control), basis of preparation
and classification and related party disclosure.
The Administrator, the AIFM and the Portfolio Manager
(previously the Investment Managers) have a number of worksheets
and documents to ensure that all subsidiaries and affiliated
entities are correctly reflected in the monthly valuations and fed
through to the consolidated financial statements. The related party
disclosure is reviewed by all parties.
Risk Management and Internal Controls
The Board is responsible for ensuring that suitable systems of
risk management and internal control are implemented by third-party
service providers and have carried out a robust assessment as
outlined below.
The Directors have reviewed BNP Paribas Securities Services'
ISAE 3402 report (Report on the description of controls placed in
operation, their design and operating effectiveness for the period
from 1 October 2019 to 30 September 2020) on Fund Administration
and are pleased to note that no significant issues were
identified.
On 24 January 2020, the Board announced it would be carrying out
a strategic review of the Company's operations, which would include
the provision of investment management services. The robust
assessment was concluded in April 2020, the Company announced the
results of its strategic review and, following a detailed and
transparent selection process, its intention to appoint the
Portfolio Manager and the Company's AIFM, which was confirmed on
the 8 June 2020.
At the Management Engagement Meeting on 8 June 2020, the Board
noted that they would not need to visit the retiring Investment
Managers and that a visit to the new Portfolio Manager should be
carried out to assess their position in September 2020, however due
to Covid-19 travel restrictions this has not been possible. The
Boards intention is to carry out a robust assessment of the
Portfolio Manager and the AIFM in 2021, once Covid-19 travel
restrictions have been lifted.
Prior to termination, the US Investment Manager was also the
AIFM and had, under AIFMD, certain specific responsibilities for
risk management, subject to the oversight of the Board. The Board
in turn delegates this to the Audit and Risk Committee. The Audit
and Risk Committee reports its work and findings to the Board for
approval. IFM was appointed as the new AIFM in June 2020.
The Company continues to review and develop a comprehensive risk
management framework, with implementation outsourced to the AIFM
and the Portfolio Manager (previously the Investment Managers) and
the Administrator, with a risk register that is reviewed and
updated as necessary by the Board and Audit and Risk Committee. The
Audit and Risk Committee considers the risks facing the Group and
the controls and other measures in place to mitigate the impact of
those risks.
The work of the Audit Committee is primarily driven by the
Company's assessment of the principal risks and uncertainties as
set out in the Strategic Report and in note 17, the reports
received from the AIFM, the Portfolio Manager (previously the
Investment Managers) and the Company's risk evaluation process.
Risk Framework and Systems of Internal Control
The Board recognises the importance of identifying, actively
monitoring and, where possible, mitigating the financial and
non-financial risks facing the business. Whilst responsibility for
risk management rests with the Board, the management of risk is
embedded as part of the everyday business and culture of the
Company and its principal advisers.
The Board has considered the need for an internal audit function
but because of the internal controls systems in place at the key
service providers and the independent controls process performed it
has decided instead to place reliance on those controls and
assurance processes.
Risk Identification
The Board and Audit and Risk Committee identify risks with input
from the Group's AIFM, the Portfolio Manager (previously the
Investment Managers) and the Administrator. The Board also receives
detailed quarterly asset management reports highlighting
performance and potential risk issues on an
investment-by-investment basis.
Risk Assessment
Each identified risk is assessed in terms of probability of
occurrence, potential impact on financial performance and movements
in the relative significance of each risk from period to
period.
Action Plans to Mitigate Risk
Where new risks are identified or existing risks increase in
terms of likelihood or impact, the Audit and Risk Committee assists
the Group in developing, where possible, an action plan to mitigate
the risk and put in place enhanced monitoring and reporting.
Re-assessment and Reporting of Risk
Such risk mitigation plans are reassessed by the Audit and Risk
Committee with the relevant key service providers where applicable,
and reported to the Board on a quarterly basis. The direct
communication between the Group and its Portfolio Manager and the
AIFM is regarded as a key element in the effective management of
risk (and performance) at the underlying investment level.
Emerging Risks
Refer to the Emerging Risks section for details on emerging
risks.
External Audit
The effectiveness of the external audit process is dependent on
appropriate audit risk identification at the start of the audit
cycle. The Audit and Risk Committee received a detailed audit plan
from the auditor identifying its assessment of the significant
audit risks. For the year ended 30 June 2020, the significant audit
risks identified are shown above. The significant risks were
tracked through the year and the Audit and Risk Committee
challenged the work performed by the Auditor to test management
override of controls and in addition the audit work undertaken in
respect of valuations of unlisted investments.
The Audit and Risk Committee assesses the effectiveness of the
audit process in addressing these matters through the reporting
received from the Auditor in relation to the year end. In addition,
the Audit and Risk Committee seeks feedback from the Portfolio
Manager, the AIFM and the Administrator on the effectiveness of the
audit process. For the year ended 30 June 2020, the Audit and Risk
Committee was satisfied that there had been appropriate focus and
challenge on the significant and other key areas of audit risk and
assessed the quality of the audit process to be good.
Appointment and Independence
At the recommendation of the Audit and Risk Committee and with
the agreement of the Board, the audit was put out for tender during
the year. A request for proposal was sent to four audit firms,
including the existing auditor, Baker Tilly . One firm declined to
respond because of a perceived conflict. The remaining three firms
provided written submissions to the committee and, on the basis of
these submissions, all three firms were asked to present to the
Audit and Risk Committee on 16 September 2019. The Committee
considered the audit approach offered by each firm, its experience
in auditing listed companies in the same sector and the resources
it had to conduct the audit. Based upon their presentations within
this competitive tender process, the Audit and Risk Committee
recommended and the Board resolved that Deloitte be appointed as
the Company's auditor.
Deloitte was appointed as the external Auditor of the Company at
the AGM held on 21 November 2019, replacing Baker Tilly.
Appointment and Independence
In its assessment of the independence of the auditor, the Audit
and Risk Committee receives details of any relationships between
the Group and the auditor that may have a bearing on their
independence and receives confirmation that they are independent of
the Group.
The Audit and Risk Committee considers the reappointment of the
auditor, including the rotation of the audit engagement partner,
and assesses their independence on an annual basis. The auditor is
required to consider rotation of the engagement partner responsible
for the audit every five years. This is the first year that the
current audit engagement partner, David Becker, has overseen the
audit of the Company.
Non-Audit Services
To safeguard the objectivity and independence of the auditor
from becoming compromised, the Committee has a formal policy
governing the engagement of the auditor to provide non-audit
services. The auditor and the Directors have agreed that all
non-audit services require the pre-approval of the Audit and Risk
Committee prior to commencing any work. The auditor will only be
appointed to provide non-audit services if it is in the best
interests of the Company. Fees for non-audit services will be
tabled annually so that the Audit and Risk Committee can consider
the impact on the auditor's objectivity.
Deloitte is remunerated as follows for their services rendered
during the year ended 30 June 2020:
GBP
Audit of the Group's consolidated financial statements 60,000
-------
Total audit fee 60,000
-------
Interim review of the Group's consolidated financial
statements 18,000
Total audit and non-audit related services fee 78,000
-------
During the year ended 30 June 2020, the only non-audit service
provided by Deloitte was the interim review, therefore the ratio of
non-audit related services to audit-related and audit services for
the year is 30%.
Conclusion
Whilst this has undoubtedly been a very demanding and difficult
year for the Audit and Risk Committee, the sheer volume of work
that the Audit and Risk Committee has completed to ensure that the
Company completed these consolidated financial statements. The
Group starts 2021, and the agreed wind down of its operations, with
a clearer perspective on its assets, their issues and their values,
we are sure will better enable the Board going forward to realise
those assets in a timely and appropriate manner for the benefit of
all shareholders.
My thanks to the Committee, the Portfolio Manager, the AIFM and
all the other parties we assembled to complete this work, for their
professionalism and diligence throughout.
David Copperwaite
Chairman of the Audit and Risk Committee
26 January 2021
Statement of Compliance with the AIC Code of Corporate
Governance
The Directors place a large degree of importance on ensuring
that high standards of corporate governance are maintained and have
therefore chosen to comply with the provisions of the AIC Code.
The Board has considered the principles and provisions of the
AIC Code. The AIC Code addresses all the principles and provisions
set out in the UK Code, as well as setting out additional
provisions on issues that are of specific relevance to the
Company.
The Board considers that reporting against the principles and
provisions of the AIC Code provides more relevant information to
stakeholders. The AIC Code is available on the AIC website
www.theaic.co.uk .
The Company has complied with all the principles and provisions
of the AIC Code during the year ended 30 June 2020 except as set
out below:
New companies (provision 21)
This provision relates to the appointment of the chair and the
board of a new company. As the Company was incorporated during
2014, this provision is not applicable to the Company.
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF KKV SECURED LOAN
FUND LIMITED (FORMERLY SQN ASSET FINANCE INCOME FUND LIMITED)
Report on the audit of the financial statements
1. Opinion
In our opinion the financial statements of KKV Secured Loan Fund
Limited (the 'company') together with its subsidiaries (the
'group'):
-- give a true and fair view of the state of the group's affairs
as at 30 June 2020 and of the group's loss for the year then
ended;
-- have been properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European
Union; and
-- have been prepared in accordance with the requirements of the
Companies (Guernsey) Law, 2008.
We have audited the consolidated financial statements which
comprise:
-- the consolidated statement of comprehensive income;
-- the consolidated statement of financial position;
-- the consolidated statement of changes in equity;
-- the consolidated statement of cash flows; and
-- the related notes 1 to 21.
The financial reporting framework that has been applied in their
preparation is applicable law and IFRSs as adopted by the European
Union.
2. Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
auditor's responsibilities for the audit of the consolidated
financial statements section of our report.
We are independent of the group in accordance with the ethical
requirements that are relevant to our audit of the consolidated
financial statements in the UK, including the Financial Reporting
Council's (the 'FRC's') Ethical Standard as applied to listed
entities, and we have fulfilled our other ethical responsibilities
in accordance with these requirements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
3. Emphasis of matter - Financial statements prepared other than on a going concern basis
We draw attention to note 2.1 (b) of the consolidated financial
statements, which indicates that the consolidated financial
statements have been prepared on a basis other than that of a going
concern. Our opinion is not modified in respect of this matter.
4. Summary of our audit approach
Key audit matters The key audit matters that we identified in the current
year were:
* Loan loss provisioning; and
* Revenue recognition.
----------------- ------------------------------------------------------------
Materiality The materiality that we used for the group consolidated
financial statements in the current year was GBP4.47m
which was determined on the basis of 2% of the net
asset value.
----------------- ------------------------------------------------------------
Scoping We performed a full scope audit of the group entities.
Audit work to respond to the risks of material misstatement
was performed directly by the group audit engagement
team.
----------------- ------------------------------------------------------------
5. Conclusions relating to principal risks and viability statement
5.1 Principal risks and viability statement Aside from the impact of the matters disclosed in
Based solely on reading the directors' statements and the emphasis of matter paragraph, we confirm
considering whether they were consistent that we have nothing material to report, add or
with the knowledge we obtained in the course of the audit, draw attention to in respect of these matters.
including the knowledge obtained
in the evaluation of the directors' assessment of the
group's and the company's ability to
continue as a going concern, we are required to state
whether we have anything material to
add or draw attention to in relation to:
* the disclosures on pages 20 - 22 that describe the
principal risks, procedures to identify emerging
risks, and an explanation of how these are being
managed or mitigated;
* the directors' confirmation on page 82 that they have
carried out a robust assessment of the principal and
emerging risks facing the group, including those that
would threaten its business model, future performance
,
solvency or liquidity; or
* the directors' explanation on page 23 as to how they
have assessed the prospects of the group, over what
period they have done so and why they consider that
period to be appropriate, and their statement as to
whether they have a reasonable expectation that the
group will be able to continue in operation and meet
its liabilities as they fall due over the period of
their assessment, including any related disclosures
drawing attention to any necessary qualifications or
assumptions.
We are also required to report whether the directors'
statement relating to the prospects
of the group required by Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge
obtained in the audit.
6. Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the
consolidated financial statements of the current period and include
the most significant assessed risks of material misstatement
(whether or not due to fraud) that we identified. These matters
included those which had the greatest effect on: the overall audit
strategy, the allocation of resources in the audit; and directing
the efforts of the engagement team.
These matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters.
6.1. Loan loss provisioning
Key audit matter The group's principal business is to make debt investments,
description directly or indirectly, in business-essential, revenue-producing
(or cost saving) equipment and other physical assets.
As at 30 June 2020, the aggregate value of the debt
portfolio amounted to GBP212.07 million (2019: GBP426.84
million) representing 95% of total assets (2019:
89%). The expected credit loss ("ECL") provision
increased from GBP7.8m as at 30 June 2019 to GBP238.3m.
The group's debt portfolio is the key value driver
in the statement of financial position and the main
economic resource for revenue generation. As a result,
estimates to determine the level of loan loss provision
recorded against the value of the positions held
in the portfolio - including the application of the
ECL model under IFRS 9, taking into account the current
stressed market due to Covid-19, and recoverability
of their returns - have been identified as a key
audit matter. Uncertainty over these provisions exist
due to the broad range of possible valuations arising
from the quality and accessibility of underlying
collateral as well as its specialist nature, volatile
market conditions, the binary nature of certain positions,
the outcomes of ongoing negotiations and the assumptions
used in determining the valuations.
The Company engaged a third party expert, to independently
value six Anaerobic Digestion ("AD") businesses to
determine the loss severity on the related debt investments
made by the group. Furthermore, the external expert
has been asked to verify information on other investments
and to gather additional information to assist management
and the board in setting appropriate provisions.
In total, the external expert's scope included an
additional 12 investments over and above the six
AD plants.
The key areas of judgement and estimation uncertainty
include the determination of appropriate assumptions
for calculating the loss allowance under IFRS 9 (including
the probability of default ('PD'), the loss given
default ('LGD'), exposure at default ('EAD') and
the categorisation of loans into the various credit
stages in light of qualitative and quantitative factors
against management's definition of significant increase
in credit risk ('SICR') and default), as well as
considering the impact of loan-specific matters such
as cash flow forecasts and covenant compliance. The
key judgment on the AD plants valuation is the determination
of the discount rates used in the directors' expert
valuation models which is used in estimating the
LGD.
This matter is explained further in the audit and
risk committee report at page 81. Note 2.1 (f), note
2.3, note 2.4 set out the associated accounting policy
and disclosure in respect of critical judgements
and key sources of estimation uncertainty, notes
8 and 9 set out the composition of the debt portfolio,
with note 17 setting out details of the associated
risk factors, including credit risk.
How the scope We have:
of our audit responded
to the key audit * Obtained an understanding of the relevant controls
matter related to the loan loss provisioning review process;
* Tested the data inputs used in the ECL assessment for
accuracy and completeness;
* Assessed compliance of the group's accounting policy
and ECL methodology with IFRS 9 requirements;
* Challenged the judgements taken by management related
to the categorisation of loans into the various
credit stages required under IFRS 9. We considered
this in the context of management's definition of
significant increase in credit risk ('SICR') and
definition of default;
* Evaluated the reasonableness of estimates applied to
determine the probability of default (PD), loss given
default (LGD) and exposure at default (EAD) for each
stage within which loans are classified and their
compliance with IFRS 9 requirements;
* For stage 1 assets under the IFRS 9 classification,
we reviewed the performance of the underlying
businesses through discussions with management to
assess whether they are correctly classified under
stage 1;
* For stage 2 and stage 3 assets under the IFRS 9
classification, we challenged the assumptions made by
management in respect of the PD and LGD used, as well
as the change in the ECL provision during the year.
We challenged how the impact of Covid-19 had been
reflected in these assumptions by considering the
quality and valuation of the underlying security. We
have also assessed whether the group has access to
the underlying collateral by reviewing the collateral
ownership documents.
* Assessed the competence, capabilities and objectivity
of the directors' external expert;
* In respect of the determination of LGD for loans made
to AD plant businesses, where the directors' expert
has been involved, we have assessed the
appropriateness of the valuation approach and the
used discount rates with the assistance of our
valuation specialists. We have also challenged the
other key inputs and assumptions of these models by
agreeing them to the related supporting documents,
where appropriate;
* Tested the clerical accuracy of the expected credit
loss model and the AD plants valuation models; and
* Evaluated the adequacy of disclosures made in the
financial statements in light of the requirements of
IFRS 7 and IFRS 9.
Key observations Whilst we have concluded that the assumptions made
by management in arriving at the ECL provisions appear
reasonable, as described in note 2.1 (f) to the consolidated
financial statements, there is a broad range of possible
outcomes particularly where recovery is reliant on
realisation of underlying collateral.
In addition, we provided management with recommendations
to improve the ECL model and the underlying process
in order for the group to appropriately deal with
ECL requirements as economic circumstances develop
in the coming period.
6.2. Revenue recognition
Key audit matter Finance income from the debt portfolio totalled GBP35.7
description million for the current year (2019: GBP37.4 million).
Management applies the effective interest rate ('EIR')
method to amortise any premium/discount over the
debt asset life with further assumptions on these
debt assets' future cash flows.
There is a risk that revenue may be recognised in
the incorrect period due to differences in timing
between cash receipts of interest and investment
principal repayments and the application of the EIR
method. Incorrect treatment of any upfront fees and
exit fees and the impact of loan loss provisioning
on the EIR calculation may significantly affect the
level of income recorded in the period. In addition
the existence of prepayments and exits arising from
early repayments in the period will have an impact
on the recorded income and may not be correctly recorded
in accordance with the EIR requirements set out in
IFRS 9.
The key accounting policies related to this key audit
matter can be found in note 2.6 and this matter is
also described on page 80 of the Audit and risk committee
report.
How the scope We have:
of our audit responded
to the key audit * Obtained an understanding of and tested controls
matter related directly to this key audit matter;
* Assessed management's judgements in respect of the
inclusion of the upfront fees and exit fees in the
EIR calculation;
* On a sample basis, recalculated the finance income
which is accrued under the EIR method, taking into
account any prepayments on the investments and the
impact on income recognised;
* On the selected sample, evaluated the impact of any
loan loss provisioning on the recognition and
valuation of income recorded in the period;
* On the selected sample, evaluated the impact of any
prepayments or exit fees from early repayments on the
income recorded in the period; and
* Agreed a sample of cash receipts in the year to and
from the bank statements.
Key observations Based on our audit work, we are satisfied that the
key assumptions applied by management in calculating
finance income from the debt portfolio are appropriate.
7. Our application of materiality
7.1. Materiality
We define materiality as the magnitude of misstatement in the
consolidated financial statements that makes it probable that the
economic decisions of a reasonably knowledgeable person would be
changed or influenced. We use materiality both in planning the
scope of our audit work and in evaluating the results of our
work.
Based on our professional judgement, we determined materiality
for the consolidated financial statements as a whole as
follows:
Group Materiality GBP4.47 million.
----------------------------------- ---------------------------------------------------------------------------------
Basis for determining materiality 2% of net asset value.
----------------------------------- ---------------------------------------------------------------------------------
Rationale for the benchmark applied We believe net asset value is the most appropriate benchmark as it is considered
to be a principal
consideration for shareholders of the group in assessing financial performance.
----------------------------------- ---------------------------------------------------------------------------------
Graphs are available in the Annual Report and Consolidated
Financial Statements for the year ended 30 June 2020, which is
available to shareholders on the Company's website.
7.2. Performance materiality
We set performance materiality at a level lower than materiality
to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the
consolidated financial statements as a whole. Group performance
materiality was set at 70% of group materiality for the 2020 audit.
In determining performance materiality, we considered the following
factors:
- Our first year audit on the group;
- Our risk assessment, including our assessment of the group's
overall control environment and that we consider it appropriate to
rely on controls on the revenue recognition process; and
- Our review of prior year uncorrected misstatements identified by the predecessor auditor.
7.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of GBP223,500, as well as
differences below that threshold that, in our view, warranted
reporting on qualitative grounds. We also report to the Audit
Committee on disclosure matters that we identified when assessing
the overall presentation of the consolidated financial
statements.
8. An overview of the scope of our audit
Our audit was scoped by obtaining an understanding of the group
and its environment, including internal control, and assessing the
risks of material misstatement for the company and its
subsidiaries. In assessing the control environment, we also
considered the control environments of the key service providers,
including the administrators and the Portfolio manager of the
group, to whom the board have delegated certain functions for the
company and its subsidiary entities. Audit work to respond to the
risks of material misstatement was performed directly by the group
audit team.
9. Other information
The directors are responsible for the other information. The
other information comprises the information included in the annual
report, other than the consolidated financial statements and our
auditor's report thereon.
Our opinion on the consolidated financial statements does not
cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is
materially inconsistent with the consolidated financial statements
or our knowledge obtained in the audit or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent
material misstatements, we are required to determine whether there
is a material misstatement in the consolidated financial statements
or a material misstatement of the other information. If, based on
the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report
that fact.
In this context, matters that we are specifically required to
report to you as uncorrected material misstatements of the other
information include where we conclude that:
-- Fair, balanced and understandable - the statement given by
the directors that they consider the annual report and financial
statements taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to assess
the group's position and performance, business model and strategy,
is materially inconsistent with our knowledge obtained in the
audit; or
-- Audit committee reporting - the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or
-- Directors' statement of compliance with the UK Corporate
Governance Code - the parts of the directors' statement required
under the Listing Rules relating to the company's compliance with
the UK Corporate Governance Code containing provisions specified
for review by the auditor in accordance with Listing Rule
9.8.10R(2) do not properly disclose a departure from a relevant
provision of the UK Corporate Governance Code.
We have nothing to report in respect of these matters.
10. Responsibilities of directors
As explained more fully in the statement of directors'
responsibilities, the directors are responsible for the preparation
of the consolidated financial statements and for being satisfied
that they give a true and fair view, and for such internal control
as the directors determine is necessary to enable the preparation
of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the
directors are responsible for assessing the group's ability to
continue as a going concern, disclosing as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but
to do so.
11. Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditor's report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these
consolidated financial statements.
A further description of our responsibilities for the audit of
the consolidated financial statements is located on the FRC's
website at: www.frc.org.uk/auditorsresponsibilities . This
description forms part of our auditor's report.
Report on other legal and regulatory requirements
12. Matters on which we are required to report by exception
12.1. Adequacy of explanations received and accounting records
Under the Companies (Guernsey) Law, 2008 we are required to
report to you if, in our opinion:
-- we have not received all the information and explanations we require for our audit; or
-- proper accounting records have not been kept by the company; or
-- the consolidated financial statements are not in agreement with the accounting records.
We have nothing to report in respect of these matters.
13. Use of our report
This report is made solely to the company's members, as a body,
in accordance with Section 262 of the Companies (Guernsey) Law,
2008. Our audit work has been undertaken so that we might state to
the company's members those matters we are required to state to
them in an auditor's report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the company's
members as a body, for our audit work, for this report, or for the
opinions we have formed.
David Becker (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Recognised Auditor
Guernsey, Channel Islands
26 January 2021
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 June 2020
Notes Year ended Year ended
30 June 2020 30 June 2019
GBP GBP
Income
Finance income 35,749,983 37,377,741
Interest on cash and cash equivalents 47,091 116,646
Other income 1,182,963 2,207,135
-------------- --------------
Total income 2.6 36,980,037 39,701,522
-------------- --------------
Net unrealised loss on revaluation
of investments 8.2 (8,559,304) (1,045,607)
Net unrealised foreign exchange gain/(loss)
on investments 8,9 4,121,207 (5,569,828)
Net unrealised foreign exchange gain
on forward contracts - 5,297,285
Net realised gain on investments 7,8,9 407,329 653,423
Net realised foreign exchange gain
on investments 8,9 324,014 10,244,783
Net realised foreign exchange loss
on forward contracts 17.4 (8,015,592) (11,514,905)
--------------
Net realised and unrealised loss (11,722,346) (1,934,849)
-------------- --------------
Expenses
Investment management fees 3(a) (4,088,036) (4,642,340)
Directors' fees (301,197) (254,375)
Other operating expenses 4 (2,382,442) (2,877,025)
Depreciation 7 (2,256,921) (1,734,573)
Impairment 7 (9,574,836) -
Expected credit loss provision 8,9 (230,468,999) (4,407,824)
-------------- --------------
Total operating expenses (249,072,431) (13,916,137)
-------------- --------------
(Loss)/profit before tax (223,814,740) 23,850,536
--------------
Taxation 2.11 - -
-------------- --------------
Profit after tax (223,814,740) 23,850,536
--------------
Total comprehensive (loss)/income
for the year analysed as follows:
Attributable to Ordinary shareholders (189,722,378) 14,479,333
Attributable to 2016 C shareholders (34,092,362) 9,371,203
Total (223,814,740) 23,850,536
-------------- --------------
Basic and diluted (loss)/earnings
per Ordinary Share 5 (53.28)p 4.06p
Basic and diluted (loss)/earnings
per 2016 C Share 5 (24.54)p 6.75p
The year ended 30 June 2020 has been presented on a basis other
than going concern. No operations were acquired or discontinued
during the year.
The Group has no items of other comprehensive income, and
therefore the loss for the year is also the total comprehensive
loss.
The accompanying notes form an integral part of these
consolidated financial statements.
CONSOLIDATED Statement of Financial Position
As at 30 June 2020
Notes 30 June 2020 30 June 2019
Restated
GBP GBP
Non-current assets
Residual value of finance lease
investments 2.4,8.2 127,557 404,618
Property, plant and equipment 7 967,509 14,352,680
Loans and other investments (1) 8.1 81,845,596 324,960,467
Investments designated at fair value
through profit or loss 8.2 - 2,790,263
Finance lease and hire-purchase
investments (1) 9 51,720,665 101,884,354
Equity holdings 8.2 - 5,581,419
134,661,327 449,973,801
Current assets
Loans and other investments 8.1 58,831,596 -
Finance lease and hire-purchase
investments 9 19,669,682 -
Cash and cash equivalents (2) 2.10 8,997,906 22,039,165
Due from broker (2) - 2,630,000
Interest receivables (1) 10 1,073,111 1,371,182
Investment receivables (1) - 146,955
Other receivables and prepayments
(1) 10 745,557 1,627,373
89,317,852 27,814,675
Total assets 223,979,179 477,788,476
-------------- -------------
Current liabilities
Derivative financial liabilities 8.2,17 - (2,477,541)
Other payables and accrued expenses
(1) 11 (460,349) (818,465)
-------------- -------------
(460,349) (3,296,006)
Net assets 223,518,830 474,492,470
============== =============
Equity
Share capital 13 488,655,945 488,893,790
Retained reserves (265,137,115) (14,401,320)
-------------- -------------
223,518,830 474,492,470
============== =============
NAV per Share
* Ordinary Shares 6 36.19p 94.91p
* 2016 C Shares 6 68.17p 98.15p
These consolidated financial statements were approved and
authorised for issue by the Board of Directors on 26 January 2021,
and signed on its behalf by:
Brett Miller David Copperwaite Director Director
(1) The comparatives have been restated as other receivables,
interest receivable, investment receivables and other payables have
been reclassified to loans and other investments and finance lease
and hire purchase investments. Refer to note 21 for further
information.
(2) The comparatives have been restated to disclose due from
broker (broker balances have a restricted nature) separately from
cash and cash equivalents. Refer to note 21 for further
information.
The accompanying notes form an integral part of these
consolidated financial statements.
CONSOLIDATED Statement of Changes in Equity
For the year ended 30 June 2020
Notes Share Retained
Capital Reserves Total
GBP GBP GBP
As at 1 July 2019 488,893,790 (14,401,320) 474,492,470
Total comprehensive loss
for the year - (223,814,740) (223,814,740)
Transactions with shareholders
Ordinary Shares repurchased 13 (237,845) - (237,845)
Dividends paid 14 (26,921,055) (26,921,055)
Total transactions with shareholders (237,845) (26,921,055) (27,158,900)
------------ -------------- --------------
As at 30 June 2020 488,655,945 (265,137,115) 223,518,830
============ ============== ==============
For the year ended 30 June 2019
Notes Share Retained
Capital Reserves Total
GBP GBP GBP
As at 1 July 2018 489,189,319 (5,977,497) 483,211,822
Total comprehensive income
for the year - 23,850,536 23,850,536
Transactions with shareholders
Ordinary Shares repurchased 13 (295,529) - (295,529)
Dividends paid 14 - (32,274,359) (32,274,359)
Total transactions with shareholders (295,529) (32,274,359) (32,569,888)
------------ ------------- -------------
As at 30 June 2019 488,893,790 (14,401,320) 474,492,470
============ ============= =============
The accompanying notes form an integral part of these
consolidated financial statements.
CONSOLIDATED Statement of Cash Flows
For the year ended 30 June 2020
Notes Year ended Year ended
30 June 30 June 2019
2020
Restated
GBP GBP
Cash flow from operating activities:
Total comprehensive (loss)/income for
the year (223,814,740) 23,850,536
Adjustments for:
Finance income (35,749,983) (37,377,741)
Net unrealised loss on revaluation of
investments 8,559,304 1,045,607
Net unrealised foreign exchange (gain)/loss (7,082,842) 272,543
Net realised foreign exchange gain on
investments (324,014) (10,244,783)
Net realised gain on investments (407,329) (653,423)
Depreciation 7 2,256,921 1,734,573
Impairment 7 9,574,836 -
Decrease in investment receivables(1) 146,955 684,758
Decrease in other receivables and prepayments(1) 881,816 1,190,221
Decrease in due from broker(2) 2,630,000 2,300,000
Decrease in investment payables(1) - (154,312)
Decrease in other payables and accrued
expenses(1) 11 (358,116) (2,835,648)
Acquisition of investments 7,8,9 (33,401,522) (92,537,796)
Amortisation of investment principal(3) 8.1,9 35,892,871 62,620,369
Additions of investments designated
at fair value through profit or loss 8.2 - (73,991)
Sale of investments designated at fair
value through profit or loss(3) 8.2 667,763 1,089,737
Additions of PPE 7 - (27,271)
Disposal of PPE 7 1,575,000 -
Expected credit loss provision 8,9 230,468,999 4,510,604
Collective interest income received 22,117,628 25,759,443
Net cash outflow provided by/(used in)
operating activities 13,633,547 (18,846,574)
Cash flow from financing activities
Ordinary Shares repurchased 13 (237,845) (295,529)
Dividends paid 14 (26,921,055) (32,274,359)
Net cash used in financing activities (27,158,900) (32,569,888)
Net decrease in cash and cash equivalents (13,525,353) (51,416,462)
Cash and cash equivalents at start of
the year 22,039,165 71,865,524
Effect of exchange rate changes on cash
and cash equivalents 484,094 1,590,103
-------------- ---------------
Cash and cash equivalents at end of
the year 8,997,906 22,039,165
============== ===============
(1) The comparatives have been restated as other receivables,
interest receivable, investment receivable and other payables have
been reclassified to loans and other investments and finance lease
and hire purchase investments. Refer to note 21 for further
information.
(2) The comparatives have been restated to disclose due from
broker (broker balances have a restricted nature) separately from
cash and cash equivalents. Refer to note 21 for further
information.
(3) The comparatives have been restated to disclose the sale of
investments designated at fair value through profit or loss
separately from amortisation of investment principal. Refer to note
21 for further information.
The accompanying notes form an integral part of these
consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. General Information
The Company was incorporated on 28 May 2014 and registered in
Guernsey as a Closed-ended Collective Investment Scheme. The
Company 's registered office is BNP Paribas House, St Julian's
Avenue, St Peter Port, Guernsey, GY1 1WA. The Company 's Ordinary
Shares were admitted to the FCA's Official List and to trading on
the Main Market of the London Stock Exchange on 14 July 2014.
The 2016 C Shares are listed separately on the Main Market of
the London Stock Exchange and were admitted on 12 December 2016.
The investments held by the 2016 C Shares are accounted for and
managed as a separate pool of assets in accordance with the
Company's investment policy. Expenses are split between Ordinary
Shares and 2016 C Shares in proportion to their respective NAV.
During the year, 288,156 (30 June 2019: 321,316) Ordinary Shares
were repurchased and are being held in treasury. In total 1,731,838
(30 June 2019: 1,443,682) Ordinary Shares are held in treasury.
On 17 July 2020 the name of the Company was changed from the SQN
Asset Finance Income Fund Limited to the KKV Secured Loan Fund
Limited.
The Company's subsidiaries, KKV (Guernsey) Limited, KKV (Amber)
Limited, KKV (Bronze) Limited, KKV (Cobalt) Limited and KKV
(Diamond) Limited (the "Subsidiaries") are wholly owned
subsidiaries incorporated in Guernsey and established for the
primary purpose of acting as investment holding companies (refer to
note 2.1(e) for further details).
The names of the Subsidiaries were changed on 20 July 2020 and
were previously called SQN Asset Finance (Guernsey) Limited, SQN
AFIF (AMBER) Limited, SQN AFIF (BRONZE) Limited SQN AFIF (Cobalt)
Limited and SQN AFIF (Diamond) Limited. The Subsidiaries'
registered office is BNP Paribas House, St Julian's Avenue, St
Peter Port, Guernsey, GY1 1WA.
2. Accounting Policies
The principal accounting policies applied in the preparation of
these consolidated financial statements are set out below. These
policies have been consistently applied throughout all the years
presented, unless otherwise stated.
2.1 Basis of Preparation
(a) Statement of Compliance
The audited consolidated financial statements for the year ended
30 June 2020 have been prepared in accordance with IFRS as adopted
by the European Union. They give a true and fair view of the
Group's affairs and comply with the Company (Guernsey) Law 2008, as
amended.
The Company applied, for the first time IFRS 16 - Leases ("IFRS
16"), and IFRIC 23 - Uncertainty over Income Tax Treatments ("IFRIC
23"), which became effective on 1 July 2019.
IFRS 16 superseded IAS 17 - Leases and specifies how to
recognise, measure, present and disclose leases. As a lessor, the
Group will continue to classify leases as operating leases or
finance leases. IFRS 16's approach to lessor accounting is
substantially unchanged from IAS 17.
In regard to IFRIC 23, the Directors have determined that the
Company has no uncertain tax positions as at 30 June 2020 and that
this interpretation does not have an impact on the Company's
consolidated financial statements.
(b) Going Concern
At the EGM of the Company held on 16 July 2020, shareholders
voted for the continuation of the Ordinary Share Class and against
the continuation of the 2016 C Share class, following which
proposals were to be put forward for the managed wind-down of the
2016 C Share class only, with a further continuation vote to be
held in respect of the Ordinary Share Class in 2021.
While Ordinary shareholders as a whole supported continuation of
the Ordinary Share Class, a substantial proportion of the Ordinary
shareholders voted against continuation. In addition, since the EGM
held on 16 July 2020, the Portfolio Manager raised concerns over
the valuation of certain assets held within the Company's
portfolios. In light of this and continuing feedback from several
major shareholders, both the Board and the Portfolio Manager were
of the view that shareholder value was best maximised by placing
the Ordinary Share Class into a managed wind-down alongside the
2016 C Share class.
On 13 November 2020, the Company published a circular containing
recommended proposals, to be tabled at the EGM held on 4 December
2020. The proposals included changes, which would allow the Company
to go into managed wind down, including updates to the articles, to
the investment objective and investment policy, to allow a
realisation strategy and to return capital to investors.
At the EGM held on 4 December 2020, the adoption of the new
articles, the new investment objective and investment policy were
passed with the requisite majority and subsequently the Company was
placed into managed wind down.
As a consequence of the above, the Directors consider it is
appropriate to adopt a basis other than going concern in preparing
the consolidated financial statements given the fact they intend to
wind down the Company.
With the consolidated financial statements being prepared on a
basis other than going concern, IFRS 9 requires financial assets to
be measured at fair value through profit or loss (" FVTPL") with
the change in measurement to be effective in the financial period
following the wind down decision, which occurred post year end. As
such, this change in fair value recognition will only be effective
from the period beginning 1 January 2021. During the year ended 30
June 2020, Property, Plant and Equipment has been measured at net
realisable value given that the consolidated financial statements
are prepared on a basis other than going concern. The Board are not
aware of any additional impact on the consolidated financial
statements in regard to the Company going into a managed wind down.
These consolidated financial statements do not include provisions
for the wind down of the Company that have not been contractually
committed. The Board expects the wind down of the Company to be
over a two to three year period.
(c) Standards, amendments and interpretations issued but not yet
effective
Detailed below are new standards, amendments and interpretations
to existing standards that become effective in future accounting
periods which have not been early adopted by the Group:
Effective for periods
beginning on or
after
------------------------------ ---------------------------
IFRS 17 - Insurance contracts 1 January 2023
The Board has undertaken an assessment of the impact of IFRS 17
on the Group's consolidated financial statements and concluded that
there will be no material impact as the Company does not have any
insurance contracts.
(d) Functional and Presentation Currency
Items included in the consolidated financial statements are
measured using Sterling as the currency of the primary economic
environment in which the Group operates (the "Functional
Currency"). The consolidated financial statements are presented in
Sterling, which is the Group's presentation currency.
(e) Consolidation
The Subsidiaries are all entities (including special purpose
entities) which the Company controls as it is exposed, or has
rights, to variable returns from its involvement with the
Subsidiaries and has the ability to affect those returns through
its power over the Subsidiaries. The principal place of business of
the Subsidiaries is Guernsey.
In accordance with IFRS 10 - Consolidated Financial Statements
("IFRS 10"), if the Company meets the definition of an investment
entity ("IE") it qualifies for a consolidation exemption. The
relevant provisions for an IE under IFRS 10 are set out below:
IFRS 10.27 - An IE is an entity that:
a. obtains funds from one or more investors for the purpose of
providing those investor(s) with investment management
services;
b. commits to its investor(s) that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income, or both; and
c. measures and evaluates the performance of substantially all
of its investments on a fair value basis.
IFRS 10.28 - An entity shall consider whether it has the
following characteristics of an IE:
a. it has more than one investment;
b. it has more than one investor;
c. it has investors that are not related parties of the entity; and
d. it has ownership interests in the form of equity or similar interests.
The Board considered all the above factors and noted that whilst
the Company might meet many of the IE criteria, as it does not
measure and evaluate the performance of substantially all of its
investments on a fair value basis , the Board have concluded that
the Company does not meet the definition of an IE and does not
qualify for the IFRS 10 consolidation exemption. The Subsidiaries
have therefore been consolidated into these consolidated financial
statements. The Subsidiaries, which are listed in note 1, are
incorporated in Guernsey and established for the primary purpose of
acting as investment holding companies.
(f) Critical Accounting Judgements and Key Sources of Estimation
Uncertainty
The preparation of the consolidated financial statements in
accordance with IFRS requires management to make judgements,
estimates and assumptions that affect the application of policies
and the reported amounts of assets and liabilities, income and
expenses. It also requires management to exercise its judgement in
the process of applying the Company's accounting policies.
Uncertainty about these assumptions and estimates could result in
outcomes that require a material adjustment to the carrying amount
of assets and liabilities affected in future periods.
The estimates and associated assumptions are based on various
factors that are believed to be reasonable under the circumstances,
the results of which form the basis of making judgements about
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates.
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.
Key Sources of Estimation Uncertainty
Fair value
For the fair value of all financial instruments held, the
Company determines fair values using appropriate techniques.
Refer to note 2.3(c) and note 8.2 for further details on the
significant estimates applied in the valuation of the Company's
financial instruments measured at fair value. The inputs applied to
these estimations are subject to significant material uncertainty,
see note 17.1 Credit Risk for sensitivity analysis.
Expected credit losses provision
Key estimates and assumptions applied by the Board and Portfolio
Manager when considering expected credit losses provision relate to
the determination of the probability of default and the loss given
default. As at 30 June 2020, the ECL was GBP230,468,999 (30 June
2019: GBP4,407,824).
Refer to note 2.3(d) for further details on the expected credit
losses methodology applied when determining financial assets
expected credit losses.
Although these estimates and assumptions are based on best
knowledge of current facts, circumstances and, to some extent,
future events and actions, the actual results may ultimately differ
from those estimates, possibly significantly. Uncertainty over
these provisions exist due to the broad range of possible
valuations arising from the quality and accessibility of underlying
collateral as well as its specialist nature, volatile market
conditions, the binary nature of certain positions, the outcomes of
ongoing negotiations and the assumptions used in determining the
valuations.
The judgements which have the biggest impact on the level of
provisioning in the current and prior year relate principally to
the determination of the loss given default for loan positions in
stage 3. In making these judgements, management have relied on
independent valuations for assets held as collateral (gross loan
positions of GBP44.0 million, or GBP18.1 million net of ECL
provisions), discounted cash flow forecasts for positions where the
Group's security is held over the borrower's business (gross loan
positions of GBP141.3 million, or GBP47.9 million net of ECL
provisions) or have made assumption on recoverability based on
available information where security is more complex (gross loan
positions of GBP45.1 million, or GBP20.9 million net of ECL
provisions). The portfolio includes a number of positions with a
gross value of GBP90.2 million where there are limited enforcement
options, and hence recoverable value, and as a consequence these
positions have been fully provided for. The Group is engaged in
negotiations in respect of some of these facilities which if
successful could lead to material recoveries to the Group. In
addition, the Group's ability to recover the notes held with the
DAC are dependent on the tax structuring of the DAC and the correct
implementation of that structuring, which is outside the control of
the Group. If the DAC was required to withhold Irish tax on
interest payments it has made on the notes since inception this
could lead to a further material impairment of those notes in the
region of GBP6.7m as at the reporting date.
Refer to note 17.1 Credit Risk for sensitivity analysis. The
fair value and expected credit losses provision is monitored by the
Board to ensure that judgements, estimates and assumptions made and
methodologies applied are appropriate and in accordance with IFRS 9
and 13 respectively.
Critical accounting judgements
Going concern
The Board, with the agreement of the Portfolio Manager, believed
that following feedback from several major shareholders, that
shareholder value was best maximised by placing the Company into
managed wind down. At the EGM held on 4 December 2020, the adoption
of the amended articles and the new investment objective and
investment policy were passed with the requisite majority and the
Company was placed into managed wind down.
The Board believe that is appropriate to prepare these
consolidated financial statements on a basis other than going
concern as the Company is now in managed wind down and expected to
be wound down within two to three years of the date of the approval
of these consolidated financial statements . Preparation on a basis
other than going concern requires management to make judgements and
assumptions that have an impact on the presentation of the primary
statements and the measurement of the assets and liabilities in the
statement of financial position.
Refer to the Going Concern note 2.1(b) for further
information.
SQN Asset Finance (Ireland) DAC
The Group holds bonds issued by SQN Asset Finance (Ireland) DAC
("SQN Ireland"), an unconsolidated structured entity in the
Republic of Ireland. The Portfolio Manager acts as investment
manager to SQN Ireland (previously the UK Asset Manager, the wholly
owned subsidiary of the US Investment Manager, which was the
authorised investment fund manager).
The Board has determined that the Group does not have all the
elements of control as prescribed by IFRS 10 - 'Consolidated
Financial Statements' over SQN Ireland and therefore is not
required to consolidate SQN Ireland into these consolidated
financial statements. This was determined as the Group is not able
to exercise control over SQN Ireland as the latter is managed by
independent directors.
2.2 Foreign Currency Translation
Transactions in currencies other than the Functional Currency
are recorded using the exchange rate prevailing at the transaction
date. Foreign exchange gains and losses resulting from the
settlement of such transactions and those from the translation at
year end exchange rates of monetary and non-monetary assets and
liabilities denominated in foreign currencies are recognised in
profit or loss in the Consolidated Statement of Comprehensive
Income .
2.3 Financial Assets
a) Classification and Measurement
Financial assets are classified into the following specified
categories: financial assets at fair value through profit or loss
and amortised cost.
Classification and measurement of financial assets depends on
the results of the 'solely payments of principal and interest' and
the business model test. The Group determines the business model at
a level that reflects how groups of financial assets are managed
together to achieve a particular business objective. This
assessment includes judgement reflecting all relevant evidence
including how the performance of the assets is evaluated and their
performance measured, the risks that affect the performance of the
assets and how these are managed and how the managers of the assets
are compensated. Monitoring is part of the Group's continuous
assessment of whether the business model for which the remaining
financial assets are held continues to be appropriate and if it is
not appropriate whether there has been a change in business model
and so a prospective change to the classification of those
assets.
With the consolidated financial statements being prepared on a
basis other than going concern, IFRS 9 requires financial assets to
be measured at fair value through profit or loss (" FVTPL") with
the change in measurement to be reflected on the reporting date
following the wind down decision, which occurred post year end. As
such this change in fair value recognition will only be effective
from the period beginning 1 January 2021.
The classification of financial assets and financial liabilities
between non-current and current is based on the contractual
maturity or in reference to investments, the earlier of the
contractual maturity or realisation of the financial asset. There
is no guarantee that financial assets classified as current will be
repaid within the 12 months period post the date of the statement
of financial position.
Financial assets designated at fair value through profit or loss
at inception
Financial assets designated at fair value, can be designated at
FVTPL or through other comprehensive income. The Group's fair value
financial assets are designated at FVTPL at inception.
The Group 's policy requires the Portfolio Manager, AIFM and the
Directors to evaluate the information about these financial assets
on a fair value basis together with other related financial
information. C hanges in fair value of financial assets at FVTPL
are recorded in profit or loss in the Consolidated Statement of
Comprehensive Income.
Amortised cost
Trade receivables, loans and other investments, finance lease
and hire purchase investments, due from broker and other
receivables that have fixed or determinable payments that are not
quoted in an active market are classified at amortised cost using
the effective interest method, less any expected credit losses.
Income is recognised on an effective interest basis for debt
instruments, other than those financial assets classified at FVTPL.
Gains and losses are recognised in profit or loss in the
Consolidated Statement of Comprehensive Income when they are
derecognised or impaired, as well as through the amortisation
process.
b) Recognition and De-Recognition
Financial assets are initially recognised on the trade date,
when the Company becomes a party to the arrangement.
The Group derecognises a financial asset when the contractual
rights to the cash flows from the asset expire, or it transfers the
rights to receive the contractual cash flows in a transaction in
which substantially all the risk and rewards of ownership of the
financial asset are transferred, or it neither transfers nor
retains substantially all the risk and rewards of ownership and
does not retain control over the transferred asset. Any interest in
such derecognised financial assets that is created or retained by
the Group is recognised as a separate asset or liability.
Financial assets are offset and the net amount presented in the
Consolidated Statement of Financial Position when, and only when,
the Group has a legal right to offset the amounts and intends
either to settle them on a net basis or to realise the asset.
The Group derecognises a financial liability when its
contractual obligations are discharged, cancelled or expired.
c) Fair Value Estimation
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
The fair value measurement is based on the presumption that the
transaction to sell the asset or transfer the liability is
conducted in either:
-- the principal market for the asset or liability; or
-- in the absence of a principal market, the most advantageous
market for the asset or liability.
The fair value of an asset or liability is measured using the
assumption that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
A fair value measurement of a non-financial asset takes into
account a market participant's ability to generate economic
benefits by using the asset in its highest and best use capacity or
by selling it to another market participant that would use the
asset in its highest and best use capacity.
d) ECL Requirements
The Group applies the ECL requirements in IFRS 9 and utilises
the ECL model. The expected credit loss model applies to financial
assets that are debt instruments (such as bank deposits, loans,
debt securities and trade receivables) recorded at amortised cost,
plus lease receivables under IFRS 16, contract assets and loan
commitments and financial guarantee contracts that are not measured
at FVTPL .
The ECL of financial assets is recognised in 3 stages (refer to
note 17.1 for more information).
Stage 1 recognises 12 months expected credit losses.
Stage 2 recognises full lifetime expected credit losses. An
asset moves to stage 2 when its credit risk has increased
significantly since initial recognition. In assessing whether the
credit risk of an asset has significantly increased, the Group
takes into account qualitative and quantitative reasonable and
supportable forward-looking information.
Loans secured by realisable assets have an expected loss quantum
based on the underwriting criteria for the respective collateral
type. Loans that are more than 90 days in arrears will typically
become stage 2 assets unless this is for exceptional circumstances
along with loans that have unremedied covenant breaches or poor
performance of the underlying business that is likely to impact the
Group's facility.
Stage 3 recognises full lifetime expected credit losses and the
financial asset is credit-impaired and in default.
The Group will assess the following events when deciding if a
financial asset is credit impaired:
Loans are categorised as in default, and hence stage 3, based on
several factors including when they are over 180 days in arrears
and have no credible plan to catch up, if material covenants have
been breached that will likely result in non-payment or the
underlying business has deteriorated materially.
Where an external third party valuation is available this is
used to create a bespoke LGD for that asset in priority to the
highly specialised and subordinated debt categories.
The Board assesses at each reporting period whether a financial
asset or group of financial assets is credit impaired.
If a financial asset is impaired or has ECL, the carrying amount
of the asset is reduced and the amount of the loss is recognised in
profit or loss in the Consolidated Statement of Comprehensive
Income.
If, in a subsequent period, the amount of the ECL decreases and
the decrease can be related objectively to an event occurring after
the expected loss was recognised, the previously recognised ECL is
reversed. Any subsequent reversal of an ECL is recognised in profit
or loss in the Consolidated Statement of Comprehensive Income to
the extent that the carrying value of the asset does not exceed its
amortised cost at the reversal date.
ECL Methodology
The calculation of ECL is a function of the Probability of
Default ("PD"), Loss Given Default ("LGD") (i.e. the magnitude of
the loss if there is a default) and credit exposure at default.
The Portfolio Manager PD, as detailed below, is assessed by
considering credit rating of large US bank issuers and historic
corporate default rates alongside global credit rating agency data.
The Portfolio Manager PD grade for each credit exposure is based on
an internal rating system of 10 grades, ranging from grade 1 -
virtually no risk - 0.01% PD, to grade 10 - loss - 100% PD. The PD
grade is assigned by the Portfolio Manager based on embedded risks
within the loan provided and therefore the probability of a
default. The Portfolio Manager monitors incoming information on a
monthly and quarterly basis adjusting the PD grade as appropriate,
should credit risk change over time.
The LGD has been assessed by considering historic average
corporate debt recovery rates and adjusted, where applicable, by
forward-looking information. The individual asset LGD shall
reference the following schedule unless a more appropriate asset
specific approach is identified:
Category LGD Approach
Easily Realisable Asset value less 10% haircut discounted
at 10% IRR for 12 months to recovery
-------------------------------------------
Realisable Asset value less 20% discounted at 20% IRR
for 2 years to recovery
-------------------------------------------
Highly Specialised 70% LGD (equivalent to unsecured)
-------------------------------------------
Subordinated 100% LGD
Debt
-------------------------------------------
The discount rate of 10% is used for easily realisable assets.
This rate is based on the target return of fund investments and
reflects the relatively low risk to asset disposal. For assets that
have a limited marketability, a 20% rate is used as appropriate as
the upper bound of typical non-performing loan transaction IRRs
observed in the market reflecting the higher risk of sale
valuation. For highly specialised assets, the Portfolio Manager has
approximated these to unsecured recovery rates where a 30% recovery
is normal in the bank lending industry (or 70% LGD).
Where an external third party valuation is available this is
used to create a bespoke LGD for that asset in priority to the
highly specialised and subordinated debt categories.
Any loan which is subjectively down-graded will have an assigned
expected loss equal to the revised PD multiplied by the position's
LGD. Where the LGD has become uncertain and therefore further work
is required to ascertain the value a prudent increase in LGD
appropriate for the loan will be taken until a revised LGD is
available.
Refer to note 17.1 for details of the Portfolio Manager Credit
Score applied, which details the different risk categories and the
associated PDs, LGDs and ECL provisions in relation to unsecured
loans .
2.4 Finance Lease and Hire-Purchase Investments
The Group, as lessor, categorises finance leases and hire
purchase investments as lease arrangements where the terms of the
lease transfer substantially all risks and rewards of ownership to
the lessee (in accordance with the requirements of IFRS 16 -
Leases). Hire-purchase investments include a purchase option
exercisable by the lessee upon fulfilment of specified conditions.
Under such arrangements, at the commencement of the lease term, the
Group records finance lease and hire-purchase investments in the
Statement of Financial Position as a receivable, at an amount equal
to the net investment in the lease.
The net investment in the lease is equal to the gross investment
in the lease (minimum lease payments receivable by the Group under
finance lease and hire-purchase investments plus any unguaranteed
residual value accruing to the Group ) discounted by the interest
rate implicit in the lease.
On subsequent measurement, the Group splits the minimum payments
received under the lease between finance income and reduction of
the lease receivable.
The Group applies the principles of IFRS 9 to lease receivables
with respect to the derecognition and ECL provisions.
Residual Value on Finance Leases
The unguaranteed residual value on finance leases is calculated
by estimating the fair market value of the leased assets less the
lease payments from the lessee.
Estimates of market value are based on a number of assumptions
including, but not limited to, the in-place value of the equipment
or assets to the end-user, the secondary market value of similar
assets and equipment, the replacement cost of the asset or
equipment including the cost of de-installation and re-delivery,
and the Portfolio Manager's and AIFM's own assumptions based on
historical experience.
2.5 Property, Plant and Equipment
Property, Plant and Equipment comprises operating leases, which
the Group categorises as a lease arrangement in which a significant
portion of the risks and rewards of ownership are retained by the
lessor (in accordance with the requirements of IFRS 16 -
Leases).
Assets held for use under operating leases are measured at cost
less depreciation and impairment and are depreciated on a straight
line basis over the remaining useful life.
An impairment loss is recognised if the carrying amount of an
asset exceeds its recoverable amount.
Estimates of the useful life of equipment are based on
manufacturers' recommendations, the age of similar products in the
market, the intended use and utilisation of the equipment, and the
Portfolio Manager's and AIFM's own assumptions based on historical
experience.
As at 30 June 2020, Property, Plant and Equipment is measured at
net realisable value given that the consolidated financial
statements are now prepared on a basis other than going concern.
Net realisable value represents the estimated selling price less
all estimated costs of disposal. In these consolidated financial
statements, measuring these assets at net realisable value has
resulted in an impairment during the year.
The Board consider Property, Plant and Equipment to be part of
the operating activities of the Group inline with the previous
investment objective and investment policy.
2.6 Income
Income is recognised to the extent that it is probable that
economic benefits will flow to the Group and can be reliably
measured.
Interest income is recognised using the effective interest rate
method for debt instruments measured subsequently at amortised
cost. For financial assets other than purchased or originated
credit-impaired financial assets, interest income is calculated by
applying the effective interest rate to the gross carrying amount
of a financial asset, except for financial assets that have
subsequently become credit-impaired (see below). For financial
assets that have subsequently become credit-impaired, interest
income is recognised by applying the effective interest rate to the
net carrying amount of the financial asset after deducting the
related ECL provision. If, in subsequent reporting periods, the
credit risk on the credit-impaired financial instrument improves so
that the financial asset is no longer credit-impaired, interest
income is recognised by applying the effective interest rate to the
gross carrying amount of the financial asset.
For purchased or originated credit-impaired financial assets,
the Group recognises interest income by applying the
credit-adjusted effective interest rate to the amortised cost of
the financial asset from initial recognition. The calculation does
not revert to the gross basis even if the credit risk of the
financial asset subsequently improves so that the financial asset
is no longer credit-impaired.
2.7 Expenses
Expenses are recognised in profit or loss in the Consolidated
Statement of Comprehensive Income on an accruals basis.
2.8 Issue Costs
Costs directly incurred on share issues are netted off against
the share issue proceeds.
2.9 Dividends Payable
The Group pays dividends to shareholders subject to the solvency
test prescribed by Guernsey Law. The Company recognises a liability
for dividends payable after a dividend has been approved by the
Directors and there is an obligation on the Company to make the
payment. Refer to note 14 for details of dividend activity during
the year.
2.10 Cash and Cash Equivalents
Cash and cash equivalents comprise cash at bank, and deposits
held at call with banks. Cash equivalents are short-term, highly
liquid investments that are readily convertible to known amounts of
cash and are subject to insignificant risk of changes in value.
2.11 Taxation
Profits arising in the Company and the S ubsidiaries are subject
to tax in Guernsey at the standard rate of 0% .
2.12 Derivative Financial Instruments
Derivative Financial Instruments are measured at fair value
through profit or loss with the changes in fair value being
recorded in the consolidated statement of comprehensive income. The
Group may make use of derivative financial instruments to manage
its exposure to foreign exchange rate risk including, but not
restricted to the use of foreign exchange forward contracts. A
derivative with a positive fair value is recognised as a financial
asset and a derivative with a negative fair value is recognised as
a financial liability. Further details on derivative financial
instruments are disclosed in notes 8.2 and 17 .4.
2.13 Equity Holdings
Equity holdings are measured at fair value which is the same as
the net realisable value given that the consolidated financial
statements are now prepared on a basis other than going
concern.
For the year ended 30 June 2019, In accordance with IFRS 9,
investment in the shares was measured initially at cost and
subsequently at fair value through profit or loss , taking into
account all information available including possible future cash
flows, progress of the projects and any call options available to
the developer.
Refer to note 8.2 for further information.
3. Material Agreements and Related Party Transactions
a) Investment Management Agreement
The Company's investments were managed by the Investment
Managers from 1 July 2019 to 5 June 2020. Under the terms of the
Investment Management Agreement dated 16 June 2014, the Company
appointed the Investment Managers to provide discretionary
investment management services to the Company.
The Company's investments are now managed by the Portfolio
Manager, which was appointed on 6 June 2020. Under the terms of the
Investment Management Agreement dated 6 June 2020, the Company
appointed the Portfolio Manager to provide discretionary investment
management services to the Company, subject to the oversight of the
AIFM.
The Company did not incur any duplication of investment or
portfolio management fees as a result of the transition to the
Portfolio Manager. The previous Investment Managers agreed to waive
fees due for the remainder of their notice period based on the
Portfolio Manager assuming certain fee liabilities to the
Investment Managers. Whilst the agreement with the Portfolio
Manager is subject to a minimum notice period of 12 months, in the
event that the Company terminated the agreement with the Portfolio
Manager within the first 36 months of the date of the agreement,
the Company would be required to reimburse, on a tapering basis
over time, the Portfolio Manager for certain costs that the Company
would otherwise have incurred in connection with the termination of
the previous investment management contract.
For the period 1 July 2019 to 5 June 2020, the Investment
Managers were entitled to a management fee which was calculated and
accrued monthly and payable monthly in arrears at the following
rate per annum of the Group's NAV:
On first GBP300 million of the NAV 1.00%
On GBP300 million - GBP500 million of the NAV 0.90%
Any amount greater than GBP500 million of the NAV 0.80%
Total investment management fees for the year amounted to
GBP4,088,036, of which GBP234,575 due to the Portfolio Manager and
GBP3,853,461 due to the Investment Managers (30 June 2019:
GBP4,642,340 due to the Investment Managers). At 30 June 2020,
GBP281,489 (30 June 2019: GBP378,308) of the management fees was
payable, GBP234,575 to the Portfolio Manager and GBP46,914 to the
Investment Managers.
In addition to the above fee, for the period 1 July 2019 to 5
June 2020, the Investment Managers were entitled to receive an
additional fee where it or its affiliates provide structuring
advice and/or services in connection with the acquisition (but not
the disposal) of any investment. The fee was equal to 1% of the
transaction amount. During the year, structuring fees of GBP188,845
(30 June 2019: GBP170,761) were received by the Investment
Managers. The Portfolio Manager received no structuring fees during
the year.
The Investment Managers also received commitment fees, that are
paid by investees directly (these are not paid by the Group).
During the year, commitment fees of GBP109,292 (30 June 2019:
GBP594,726) were received by the Investment Managers. The Portfolio
Manager received no commitment fees during the year.
The Portfolio Manager was entitled to the same management fee as
the Investment Managers for the period 6 June 2020 to 30 June 2020.
The Portfolio Manager fee changed post year-end due to both share
classes going into managed wind down. Refer to note 18 for further
details.
During the year, the Portfolio Manager and the Investment
Managers were not entitled to any incentive or performance based
fees.
b) Administration Agreement
The Company has engaged the services of the designated
Administrator to provide administration and custodian services. The
Administrator is entitled to receive:
-- an annual administration fee based on the Group's gross issue
proceeds on a tiered percentage basis;
-- an annual fee of GBP36,000 for performing the function of
Company Secretary plus fees for ad-hoc Board meetings;
-- an annual fee of GBP10,000 for the provision of compliance services; and
-- an annual fixed fee of GBP5,000 for each Guernsey Subsidiary
(up to seven Guernsey subsidiaries).
c) Registrar Agreement
Link Market Services (Guernsey) Limited are registrar of the
Company pursuant to the Registrar Agreement dated 14 December 2018.
There is a fixed fee of GBP46,500 per annum, plus
disbursements.
d) Broker Agreements
Winterflood Securities Limited are entitled to an annual
brokerage and advisory fee of GBP45,000 and commission fees of 1%
and 0.1% of the gross value of any share issues and repurchases
respectively.
Share Interest
The table below details the Ordinary Shares and 2016 C Shares
held by the Directors in the Company:
30 June 2020 30 June 2019
Director Number of Number of Number of Ordinary Number of
Ordinary Shares 2016 C Shares Shares 2016 C Shares
Peter Niven 79,858 3,860 79,858 3,860
John Falla 19,637 3,829 19,637 3,829
Christopher
Spencer 19,929 3,845 19,929 3,845
Paul Meader 47,000 - 47,000 -
Jacqueline Redmond - - - -
Paul Meader's shares are held in the name of his spouse Sarah
Kingwell.
Brett Miller does not hold any Ordinary Shares or 2016 C Shares.
As at 30 June 2020, David Copperwaite held 210,000 Ordinary Shares
(30 June 2019: 100,000 Ordinary Shares). David Copperwaite held
310,000 Ordinary Shares at the date of approval of these
consolidated financial statements.
Christopher Spencer and Jacqueline Redmond resigned from the
Board on 30 October 2020. Paul Meader and John Falla did not stand
for re-election at the AGM held on 31 December 2020.
The table below details the Ordinary Shares and 2016 C Shares
held by a Director on the Board of the Portfolio Manager in the
Company:
30 June 2020 30 June 2019
Director Number of Number of Number of Ordinary Number of
Ordinary Shares 2016 C Shares Shares 2016 C Shares
Dawn Kendall - 22,959 - 21,431
The table below details the Ordinary Shares and 2016 C Shares
held in the Company by Tim Spring a Director of the UK Investment
Manager and Neil Roberts the Chairman of the US Investment
Manager:
30 June 2020 30 June 2019
Director Number of Number of Number of Ordinary Number of
Ordinary Shares 2016 C Shares Shares 2016 C Shares
Neil Roberts 149,645 45,734 149,645 45,734
Tim Spring 62,816 103,145 162,816 61,802
Neil Roberts resigned as a Director of the UK Investment Manager
on 24 February 2020.
Entities related to the Portfolio Manager/Investment
Managers
Senior members of the Portfolio Manager (formerly the Investment
Managers) are also sitting in the board of some of the Company's
investments to preserve the Company's invested amount and work with
the borrowers for the best interest of the Company.
SQN Helo, LLC
SQN Helo is a special purpose company owned by SQN Portfolio
Acquisition Company, LLC and SQN AIF IV, L.P., both being
investment funds managed by the US Investment Manager. SQN Helo was
established to purchase and hold legal ownership of a portfolio of
leases and related assets. The carrying value of the investment is
GBPnil (30 June 2019: GBP2,790,263) and further details can be
found in note 8.2.
SQN Ireland
Certain investments in the loans and construction finance
investment categories as disclosed in note 8.1, have been invested
through SQN Ireland. SQN Ireland purchases investments by issuing
bonds to the Group. The Group has the following amounts invested
through SQN Ireland:
30 June 30 June
2020 2019
Maturity Principal ECL Carrying Principal ECL Carrying
date of balance Value balance Value
Investment
GBP GBP GBP GBP GBP GBP
28/12/2020 6,895,020 (5,910,810) 984,210 6,637,786 (3,319) 6,634,467
31/12/2020 18,479,163 (194,031) 18,285,132 18,294,831 (9,699) 18,285,132
31/12/2020 8,644,788 (5,596,787) 3,048,001 8,329,114 (2,078,639) 6,250,475
31/12/2020 18,645,283 (11,370,978) 7,274,305 16,658,710 (8,329) 16,650,381
31/12/2020 3,988,949 (31,912) 3,957,037 3,985,000 (1,993) 3,983,007
31/12/2020 5,955,120 (441,950) 5,513,170 5,995,884 (2,998) 5,992,886
31/12/2020 1,826,497 (51,142) 1,775,355 3,014,053 (1,507) 3,012,546
23/02/2021 22,001,881 (616,053) 21,385,828 24,419,522 (11,079) 24,408,443
31/03/2021 8,434,569 (67,477) 8,367,092 8,416,900 (4,208) 8,412,692
17/04/2021 15,582,965 (8,975,915) 6,607,050 15,333,854 (7,667) 15,326,187
20/04/2021 5,961,978 (3,366,546) 2,595,432 5,748,849 (2,874) 5,745,975
20/04/2021 5,189,598 (2,930,382) 2,259,216 5,003,458 (2,502) 5,000,956
20/04/2021 6,049,640 (3,401,102) 2,648,538 5,821,705 (2,911) 5,818,794
31/12/2022 4,113,492 (115,178) 3,998,314 4,684,930 (2,342) 4,682,588
30/04/2029 5,220,590 (522,059) 4,698,531 5,298,464 (5,298) 5,293,166
-------------- ------------- ------------- -------------- ------------ -------------
136,989,533 (43,592,322) 93,397,211 137,643,060 (2,145,365) 135,497,695
============== ============= ============= ============== ============ =============
From the inception of SQN Ireland to 5 June 2020, the UK Asset
Manager, the wholly owned subsidiary of the US Investment Manager
was the authorised investment fund manager, and acted as investment
manager to SQN Ireland.
From 6 June 2020, the Portfolio Manager has acted as investment
manager to SQN Ireland.
4. Other Operating Expenses
Year ended Year ended
30 June 2020 30 June 2019
GBP GBP
Administration and secretarial fees
(refer to note 3(b)) 504,059 471,415
Audit fees 60,000 48,561
Non audit related services fee 18,000 9,657
Brokerage fees (refer to note 3(d)) 50,934 47,654
Public relation fees 82,722 56,265
Registrar fees (refer to note 3(c)) 55,997 74,689
Legal fees 854,449 1,808,634
Professional fees 499,821 128,662
Transaction fees 135,594 36,427
Other expenses 120,866 195,061
Total 2,382,442 2,877,025
============== ==============
Non-audit related services for the years ended 30 June 2020 and
30 June 2019 relate to the review of the Half-Yearly Report and
unaudited condensed consolidated financial statements performed by
Deloitte and Baker Tilly respectively.
Legal fees in the sum of GBP599,486 (30 June 2019: GBP1,522,948)
relate to the Suniva investment.
5. Basic and Diluted (Loss)/Earnings per Share
30 June 2020 Ordinary Shares 2016 C Share
Total comprehensive loss for the
year GBP(189,722,378) GBP(34,092,362)
Weighted average number of shares
in issue during the year 356,100,007 138,924,222
Basic and diluted loss per share (53.28)p (24.54)p
30 June 2019 Ordinary Shares 2016 C Share
Total comprehensive income for the
year GBP14,479,333 GBP9,371,203
Weighted average number of shares
in issue during the year 356,267,014 138,924,222
Basic and diluted earnings per share 4.06p 6.75p
6. NAV per Share
30 June 2020 Ordinary Shares 2016 C Shares
NAV GBP128,812,045 GBP94,706,785
Number of shares
in issue at year
end 355,975,669 138,924,222
NAV per share 36.19p 68.17p
30 June 2019 Ordinary Shares 2016 C Shares
NAV GBP338,138,895 GBP136,353,575
Number of shares
in issue at year
end 356,263,825 138,924,222
NAV per share 94.91p 98.15p
The number of Ordinary Shares in issue is presented after
deduction of 1,731,838 (30 June 2019: 1,443,682) treasury
shares
7. Property, Plant and Equipment
Property, Plant and Equipment ("PPE") comprises plant and
machinery originally subject to:
a) a hire purchase investment which was re-leased to an
alternative third party under an operating lease. The asset has a
remaining useful life of 9.5 years (30 June 2019: 10.5 years).
b) a finance lease which was re-leased to an alternative third
party under an operating lease. The asset has a remaining useful
life of 6 years (30 June 2019: 7 years).
c) a hire purchase investment which was re-leased to an
alternative third party under an operating lease during the year
ended 30 June 2019. The asset has a remaining useful life of 3
years (30 June 2019: 4 years).
A PPE investment was disposed of during the year. It was
originally subject to a finance lease which was re-leased to an
alternative third party under an operating lease.
The carrying amount is detailed in the table below:
30 June 2020 30 June 2019
Cost GBP GBP
Opening balance 17,748,326 15,422,228
Additions during the year - 27,271
Disposals during the year(1) (1,973,054) -
Reclassified investments(2) - 2,298,827
Closing balance 15,775,272 17,748,326
------------- -------------
Accumulated depreciation
and impairment
Opening balance (3,395,646) (1,661,073)
Disposals during the year 419,640 -
Depreciation during the year (2,256,921) (1,734,573)
Impairment during the year (9,574,836) -
------------- -------------
Closing balance (14,807,763) (3,395,646)
------------- -------------
Net realisable value
(30 June 2019: net book value) 967,509 14,352,680
---------- -------------
(1) GBP1,575,000 was received and accumulated depreciation was
GBP419,640, which resulted in a realised gain on disposal of
GBP21,586.
(2) This item relates to an investment that has been
reclassified from the hire-purchase investment category (as
detailed in note 7(c)). Refer to note 9 for additional
information.
During the year, as a result of a variety of negative factors,
the Group reviewed likely recoverable values on its property, plant
and equipment based on valuations of similar equipment and
assessment of the expected realisable value from leasing these
assets. The review led to a recognition of an impairment loss of
GBP9.6 million. The Group estimated likely costs of disposal and
recovery when calculating the impairment.
8. Financial Instruments
8.1 Loans and Other Investments
The Group holds construction finance investments, which comprise
initial drawings or advances made under loan agreements, finance
leases or hire-purchase agreements during a period of procurement
or construction of underlying assets (the "Construction Period").
During the Construction Period, interest or similar service
payments on the advances may be paid or (more usually) rolled-up
and capitalised on expiry of the Construction Period, typically
when the assets have been commissioned and (if applicable)
commercial operations have commenced. Following the expiry of the
Construction Period, construction finance investments are converted
into either loans, finance leases or hire purchase and reclassified
in the consolidated financial statements to the loans, finance
lease and hire-purchase investment categories.
The following table summarises the changes in investments
measured at amortised cost using the effective interest rate
method:
30 June 2020 Loans Construction Total
Finance
GBP GBP GBP
Opening balance 188,193,139 144,009,107 332,202,246
Advances and purchases
during the year 2,665,085 15,995,267 18,660,352
Principal amortisation
during the year (7,310,904) (583,599) (7,894,503)
Reclassified investments(1) - (9,372,536) (9,372,536)
Reclassified investments(2) (775,443) - (775,443)
Realised foreign exchange
gain/(loss) on investments 505,416 (360,460) 144,956
Unrealised foreign exchange
gain on revaluation 2,419,266 957,571 3,376,837
Capitalised interest(3) 8,213,193 3,141,090 11,354,283
Closing balance 193,909,752 153,786,440 347,696,192
------------ ------------- -------------
ECL provision(4)
Opening balance (2,676,787) (4,564,992) (7,241,779)
Movement in ECL provision
during the year (85,243,265) (114,533,956) (199,777,221)
--------------- ---------------- ----------------
Closing balance (87,920,052) (119,098,948) (207,019,000)
--------------- ---------------- ----------------
Closing balance 105,989,700 34,687,492 140,677,192
=============== ================ ================
(1) This item relates to advances in the construction finance
investment category that were converted to finance leases and hire
purchase following the expiry of the Construction Period and have
been reclassified as additions in the finance lease and
hire-purchase investment categories in the sum of GBP8,681,411 and
GBP691,125 respectively, as detailed in note 9.
(2) This item relates to an investment that has been
reclassified to the finance lease investment category following a
restructuring. Refer to note 9 for additional information.
(3) Capitalised interest represents interest on investments due
to the Group which has not been received and is past due.
Capitalised interest on investments has been included in the
principal balance and has been fully provided for as part of the
ECL.
(4) Refer to note 17.1 and the Portfolio Manager report for
further details regarding the ECL provision.
In the above table, loans and construction finance investments
with a carrying value of GBP93,397,211 (net of GBP43,592,322 ECL)
have been invested through SQN Ireland. Refer to note 3 for further
information.
30 June 2019 Loans Construction Receivables Total
Restated Finance
GBP GBP GBP GBP
Opening balance 155,259,686 125,483,865 466,491 281,210,042
Reallocation of other
receivables(1) 13,611,545 - - 13,611,545
--------------- -------------- ------------ ---------------
Restated opening balance 168,871,231 125,483,865 466,491 294,821,587
--------------- -------------- ------------ ---------------
Advances and purchases
during the year 46,532,239 41,786,316 - 88,318,555
Principal amortisation
during the year (45,157,372) (3,948,248) (391,446) (49,497,066)
Reclassified investments(2) 12,726,000 (21,011,527) - (8,285,527)
Reclassified investments(3) (6,244,482) - - (6,244,482)
Realised foreign exchange
gain on investments 6,956,513 3,189,580 - 10,146,093
Realised loss on investments (107,267) - (75,045) (182,312)
Unrealised foreign exchange
loss on revaluation (3,870,970) (1,925,992) - (5,796,962)
Capitalised interest(4) 8,487,247 435,113 - 8,922,360
Restated closing balance 188,193,139 144,009,107 - 332,202,246
--------------- -------------- ------------ ---------------
ECL provision(5)
Opening balance (2,561,961) (531,045) (233) (3,093,239)
Movement in ECL provision
during the year (114,826) (4,033,947) 233 (4,148,540)
------------ -------------- ------ --------------
Closing balance (2,676,787) (4,564,992) - (7,241,779)
------------ -------------- ------ --------------
Restated Closing balance 185,516,352 139,444,115 - 324,960,467
============ ============== ====== ==============
(1) Interest and other receivables opening balance as at 1 July
2018 have been reclassified in these consolidated financial
statements to the loans and construction finance investment
categories. Refer to note 21 for further information.
(2) This item relates to advances in the construction finance
investment category that were reclassified as additions in the
loans, finance lease and hire-purchase investment categories in the
sum of GBP12,726,000, 4,958,954 and GBP3,326,573 respectively, as
detailed in the above table and note 9.
(3) This item relates to an investment that has been
reclassified to the equity holding category following a
restructuring. Refer to note 8.2 for additional information.
(4) Capitalised interest represents interest on investments due
to the Group which has not been received and is past due.
Capitalised interest on investments has been included in the
principal balance and has been provided for as part of the ECL.
(5) Refer to note 17.1 and the Portfolio Manager report for
further details on the ECL provision.
In the above table, loans and construction finance investments
with a carrying value of GBP135,497,695 (after the deduction of an
ECL in the sum of GBP2,145,365) have been invested through SQN
Ireland. Refer to note 3 for further information.
The amortisation period (in the case of a loan) or lease/hire
term (in the case of a finance lease or hire-purchase) commences at
the end of the Construction Period and the service payments or
lease/hire payments rentals are calculated by reference to the
total advances during the Construction Period plus interest accrued
(if not paid). In the case of a finance lease, the advances (and
accrued interest) are repayable in full if a default or insolvency
event occurs or if the Construction Period has not ended by a
specified long-stop date.
Receivables comprise the legal right to streams of contracted
payments arising under lease, hire, licence or similar agreements
made between an end-user, lessee or licensee and lessor, owner or
licensor of goods or other assets, in respect of which the right to
receive payment has been sold or assigned absolutely to the Group
by a third party, but legal title to the goods or other assets lies
with that third party.
The Group has provided debtor-in-possession financing for a US
solar manufacturing company, in order to protect the Group's
interest in the equipment that secures its loan. US$2.18 million
remained outstanding as at 30 June 2020 (equivalent to GBP1.77
million) (30 June 2019: US$2.18 million (equivalent to GBP1.72
million)). This amount has been reclassified in these consolidated
financial statements to the loan investment category from other
receivables and a prudent 100% ECL provision applied given the
material uncertain timing and quantum of outcomes possible.
8.2 Fair Value Investments
The Group's accounting policy on fair value measurements is
discussed in note 2.3(c).
The Group measures fair values using the following fair value
hierarchy that reflects the significance of the inputs used in
making the measurements:
Level 1: Inputs that reflect unadjusted price quotes in active
markets for identical assets or liabilities that the Group has the
ability to access at the measurement date;
Level 2: Inputs that reflect price quotes of similar assets and
liabilities in active markets, and price quotes of identical assets
and liabilities in markets that are considered to be less than
active as well as inputs other than price quotes that are
observable for the asset or liability either directly or
indirectly; and
Level 3: Inputs that are unobservable for the asset or liability
and reflect the Portfolio Manager's (previously the Investment
Managers) own assumptions based upon experience of similar assets
and/or on third party appraised values. This category includes
instruments that are valued based on price quotes for which the
inputs are unobservable or price quotes for similar instruments for
which significant unobservable adjustments or assumptions are
required to reflect differences between the instruments.
The fair values of derivative instruments are calculated using
quoted prices. Foreign currency forward contracts are measured
using quoted forward exchange rates and yield curves derived from
quoted interest rates matching maturities of the contracts.
For financial assets not carried at amortised cost, the
Portfolio Manager determines fair value using valuation techniques
approved by the Directors.
An assessment is made at each reporting date for any events or
changes in circumstances that caused a transfer. Transfers between
levels are deemed to have occurred at the reporting date. There
were no transfers of investments between the Levels during the
year.
The following table details the Company's fair value
hierarchy.
30 June 2020 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Financial assets
Investments designated at - - - -
fair value through profit
or loss (Lease Participation)
Finance lease residual value - - 127,557 127,557
Equity holding - - - -
Total financial assets - - 127,557 127,557
--------- --------- -------- --------
30 June 2019 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Financial assets
Investments designated at
fair value through profit
or loss (Lease Participation) - - 2,790,263 2,790,263
Finance lease residual value - - 404,618 404,618
Equity holding - - 5,581,419 5,581,419
--------- ------------ ------------ ------------
Total financial assets - - 8,776,300 8,776,300
--------- ------------ ------------ ------------
Financial liabilities
Derivative liabilities - (2,477,541) - (2,477,541)
--------- ------------ ------------ ------------
Total financial liabilities - (2,477,541) - (2,477,541)
--------- ------------ ------------ ------------
Lease Participation
The participation agreement entitles the Group to receive
interest on the principal balance at the rate of 10.5%. Payment
amounts are not fixed and are dependent on the actual proceeds
received on the Lease Portfolio each month. Any shortfall in
interest payments is added to the principal balance and accrues
interest at the same rate. The Group does not have any rights to
any amounts received on the portfolio over and above the repayment
of their principal plus any interest accrued at the rates stated
above.
The Lease Participation investment represents a single
participation investment in a portfolio of leases. The investment
is held in a special purpose vehicle ("SPV") company that owns a
number of aging helicopter assets. As at 30 June 2020, the priority
debt exceeded the value of the underlying assets and the carrying
amount of the investment held by the Group was reduced to zero.
For the year ended 30 June 2019, the carrying value was
GBP2,790,263, which represented the value attributable to the
'principal' element of the participation interest, determined in
accordance with the participation agreement. The Directors and the
Investment Managers believed that this was a reasonable
approximation of the fair value.
Equity Holdings
Refer below for the Company's shareholding in each equity
holding held as at 30 June 2020 and 30 June 2019:
30 June 2020 30 June 2019
Equity
Holding
1 15% 15%
2 10.7% 10.7%
3 25.5% 25.5%
4 25.5% 25.5%
5 40% -
6 45% 45%
7 45% 45%
8 51% 51%
9 100% 100%
The Board have reviewed each equity holding position and do not
believe that any of the equity holding positons held by the Group
qualify for equity method accounting under IAS 28 - Investments in
Associates and Joint Ventures ("IAS 28"). The Board have judged
that the Group does not have significant influence, being where the
Company has the power to participate in the financial and operating
policy decisions of the equity holdings, but not control them.
Details of each equity holding are outlined below.
The Board are in ongoing communications with the Portfolio
Manager (formerly the Investment Managers) and the AIFM in regard
to the fair value of the equity holdings and discuss and review the
relevant information available. As at 30 June 2020, the companies
the Group holds equity in are not meeting expected operating or
financial performance levels and the Board believe that the net
realisable value of all the above detailed equity holdings
throughout the period and as at 30 June 2020 is GBPnil (30 June
2019: fair value of GBP5,581,419) .
Equity Holding 1
Following a review of the capital position in one of its
investments held by the Group, it received an equity holding in the
underlying company. The Group holds junior equity, based on the
sale price of the underlying asset and after senior debt has been
repaid, any remaining value will go to senior equity. The equity
holding has therefore been written down to zero.
The Group has not accounted for this equity holding using IAS 28
as it holds less than 20% of the equity and does not have
significant influence. The fair value of the equity as at 30 June
20 was GBPnil (30 June 2019: GBP5,581,419).
Equity Holding 2
The Group holds a minority shareholding in an investee company
in consideration for a facility increase. The Group has not
accounted for this equity holding using IAS 28 as it holds less
than 20% of the equity and does not have significant influence.
Equity Holding 3, 4 and 8
The Group has provided (or committed to provide) asset finance
facilities in the form of construction finance and hire purchase
investments to three anaerobic digestion plants.
In addition to these finance arrangements, the Group acquired an
equity holding in each investee company. The terms of the
shareholder agreement included an option (the "Call Option"),
exercisable by the developer upon or following full repayment of
the asset finance/loan, to purchase the Group's shares at a price
that will produce a maximum 12% per annum return on capital to the
Group, taking account of both interest paid under the debt
facilities and (if applicable) any dividends, assuming each project
is fully delivered.
The equity holdings do not qualify for equity method accounting
under IAS 28 as although the Group holds greater than 20% of the
voting power in each of the investees, the Board judge that the
Group does not have significant influence due to the following
factors for each investment:
-- The equity holdings can be bought back at the developer's
discretion once conditions per the shareholder agreement are
satisfied.
-- The return is fixed at a maximum of 12% per annum across the
entire investment (loan and shares). If the investment performs
better than expected, the developer will exercise the option to
purchase the shares at the agreed price and therefore the Group has
no realistic chance of participating in residual value.
During the year, no Call Option was exercised by the developers
(30 June 2019: one Call Option was exercised by the developers
which resulted in a gain of GBP160,586).
Equity Holding 5
The Group holds an effective 40% shareholding in a holding
company. The Group has not accounted for these equities using IAS
28 as the Board have judged the Group does not have significant
influence.
Equity Holding 6 and 7
The Group holds an effective 45% shareholding in two holding
companies. The Group has not accounted for these equities using IAS
28 as the Board have judged the Group does not have significant
influence.
Equity Holding 9
The Group holds an effective 100% shareholding in a holding
company. The Group has not accounted for these equities using IAS
28 as does not have beneficial ownership of the shares and they are
held for security only. In addition, the Board have judged the
Group does not have significant influence.
The following table summarises the changes in the fair value of
the Group's Level 3 investments:
30 June 2020 30 June 2019
GBP GBP
Opening balance 8,776,300 3,920,248
Additions during the year - 73,991
Sales during the year (667,763) (1,089,737)
Reclassified investments(1) - 6,244,482
Unrealised loss on revaluation (8,559,304) (1,045,607)
Unrealised foreign exchange gain on revaluation 214,649 227,134
Realised gain on investments 304,710 347,099
Realised foreign exchange gain on investments 58,965 98,690
------------- -------------
Closing balance 127,557 8,776,300
============= =============
(1) This item relates to an investment that has been
reclassified from the Loans investments category following a
restructuring. Please refer to note 8.1 for additional
information.
The GBP8,559,304 unrealised loss on revaluation is due to a fair
value adjustment on the lease participation and on an equity
holding. The lease participation and equity holding have both been
written down to zero and are discussed above.
Information about the Secondary Market for Level 3
Investments
The Portfolio Manager makes assumptions about the residual value
of certain assets and equipment. As determined by the Portfolio
Manager, the residual value is a function of the in-place value
and/or the secondary market value of the equipment or assets.
The in-place value is an assessment of the value of the
equipment or assets if the equipment or assets were to continue to
operate and provide value to the end-user. This takes into account
the marginal cost of keeping the asset in place as well as the cost
to the end-user of decommissioning, redelivering, and replacing the
equipment. In some cases, this amount (or a maximum value) is
negotiated in advance with the end-user.
The secondary market value is determined utilising the Portfolio
Manager's historical experience, quotes from dealers, third party
appraisals and recent sales. The secondary market value also takes
into account the geography of the equipment or assets, the
timeframe required to conduct a sale, and the associated costs that
are not passed on to the end-user.
8.3 Valuation Process
The following table provides information about fair value
measurements using significant unobservable inputs:
30 June 2020
Description Fair Value Valuation Techniques Unobservable Inputs
GBP
Discounted cash
Lease participation - flow Future cash flows
Future cash flows resulted
Finance lease residual Discounted cash from leases modifications
value 127,557 flow and discount rate
Discounted cash Discount rate and EBITDA
Equity holdings - flow growth rate
30 June 2019
Description Fair Value Valuation Techniques Unobservable Inputs
GBP
Discounted cash
Lease participation 2,790,263 flow Future cash flows
Future cash flows resulted
Finance lease residual Discounted cash from leases modifications
value 404,618 flow and discount rate
Discounted cash Discount rate and EBITDA
Equity holdings 5,581,419 flow growth rate
Discounted cash Discount rate and EBITDA
Equity holdings - flow growth rate
Sensitivity Analysis
Equity Holdings 30 June 2020 30 June 2019
GBP GBP GBP GBP
Increase Decrease Increase Decrease of
of 2% of 2% of 2% 2%
Discount rate - - (839,739) 919,730
EBITDA growth
rate - - 212,880 (212,880)
---------- ---------- ---------- ------------
Total - - (626,859) 706,850
========== ========== ========== ============
No sensitivity analysis is provided on the lease participation
and the finance lease residual value as these amounts are not
material.
9. Finance Lease and Hire-Purchase Investments
The Group's investments include a portfolio of leases of plant
and machinery leased under finance lease agreements that transfer
substantially all the risks and rewards incidental to ownership to
the lessee and in hire-purchase agreements that include a purchase
option exercisable by the lessee upon fulfilment of specified
conditions. Under these agreements, the lessee pays periodic rent
for the use of the assets for a fixed or minimum initial term of
typically 3 to 10 years. At the end of the fixed or minimum term,
the lessee can typically elect to:
-- return the asset to the Group;
-- in the case of hire-purchase, exercise an option to purchase
the assets, typically at a 'bargain' price;
-- extend the lease for a further minimum term or from year to
year on payment of a pre-agreed rent (which is typically
substantially lower than the rent paid during the initial term);
or
-- arrange a sale of the asset to a third party and (typically)
receive all or the majority of the proceeds of sale. Legal title to
the leased assets remains with the Group at all times prior to such
sale.
The following tables summarise the changes in finance lease and
hire-purchase investments:
30 June 2020 Finance Lease Hire-Purchase Total
GBP GBP GBP
Opening balance 51,916,033 50,551,340 102,467,373
Additions during the year 9,089,307 5,651,863 14,741,170
Reclassified Construction Finance
investments(1) 8,681,411 691,125 9,372,536
Reclassified Lease investment(2) 775,443 - 775,443
Realised gain on investment 81,033 - 81,033
Principal amortisation during
the year (12,691,176) (15,307,192) (27,998,368)
Realised foreign exchange gain
on investments 120,093 - 120,093
Unrealised foreign exchange gain
on investments 529,721 - 529,721
Capitalised interest(3) 2,579,173 (3,030) 2,576,143
-------------- -------------- -------------
Closing balance 61,081,038 41,584,106 102,665,144
-------------- -------------- -------------
ECL provision(4)
Opening balance (208,512) (374,507) (583,019)
Movement in ECL provision during
the year (20,772,178) (9,919,600) (30,691,778)
-------------- -------------- -------------
Closing balance (20,980,690) (10,294,107) (31,274,797)
-------------- -------------- -------------
Closing balance 40,100,348 31,289,999 71,390,347
============== ============== =============
(1) This item relates to advances that previously appeared in
the Construction Finance investment category in note 8.1 and have
been reclassified as Finance Lease or Hire-Purchase Investments.
The item has been reclassified as construction was completed during
the year.
(2) This item relates to an investment that has been
reclassified from the Loans investments category. Please refer to
note 8.1 for additional information.
(3) Capitalised interest represents interest on investments due
to the Group which has not been received and is past due.
Capitalised interest on investments has been included in the
principal balance and has been fully provided for as part of the
ECL.
(4) Refer to note 17.1 and the Portfolio Manager report for
further details on the ECL provision.
30 June 2019
Restated(1) Finance Lease Hire-Purchase Total
GBP GBP GBP
Opening balance 48,306,606 53,708,822 102,015,428
Additions during the year 3,965,305 253,936 4,219,241
Reclassified Construction Finance
investments(2) 4,958,954 3,326,573 8,285,527
Reclassified to Property, Plant
and Equipment(3) - (2,298,827) (2,298,827)
Realised gain/(loss) on investment 496,573 (7,937) 488,636
Principal amortisation during
the year (8,043,626) (5,079,677) (13,123,303)
Capitalised interest(4) 2,232,221 648,450 2,880,671
-------------- -------------- -------------
Restated closing balance 51,916,033 50,551,340 102,467,373
-------------- -------------- -------------
ECL provision(5)
Opening balance (188,860) (32,095) (220,955)
Movement in ECL provision during
the year (19,652) (342,412) (362,064)
-------------- -------------- -------------
Closing balance (208,512) (374,507) (583,019)
-------------- -------------- -------------
Restated closing balance 51,707,521 50,176,833 101,884,354
============== ============== =============
(1) Refer to note 21 for further information.
(2) This item relates to advances that previously appeared in
the construction finance investment category in note 8.1 and have
been reclassified as finance lease or hire-purchase investments.
The item has been reclassified as construction was completed during
the year.
(3) This item relates to an investment that has been
reclassified to the property, plant and equipment investment
category. Please refer to note 7 for additional information.
(4) Capitalised interest represents interest on investments due
to the Group which has not been received and is past due.
Capitalised interest on investments has been included in the
principal balance and has been provided for as part of the ECL.
(5) Refer to note 17.1 for further details on the ECL
provision.
Residual Value
Assets leased to third parties under finance leases had an
unguaranteed residual value at the end of the year of GBP127,557
(30 June 2019: GBP404,618).
During the year ended 30 June 2020, two residual investments
were sold for GBP304,712. During the year ended 30 June 2019, seven
residual investments were sold for GBP178,376.
The following table summarises the changes in finance lease
investments:
30 June 2020 30 June 2019
Restated
GBP GBP
Net receivables from finance
leases
No later than 1 year 6,004,861 6,885,215
Later than 1 year and no later than 5 years 19,697,508 16,303,029
Later than 5 years 29,452,930 26,187,350
Reallocation of capital receivables(3) 1,114,345 308,218
Capitalised accrued interest 4,811,394 2,232,221
ECL (20,980,690) (208,512)
-------------
Total net receivables from finance
leases(1, 3) 40,100,348 51,707,521
------------- -------------
Unearned future income on finance
leases(2) 30,981,611 26,826,571
Total investment in finance leases
including unearned future income(2,
3) 71,081,959 78,534,092
------------- -------------
Non-current receivables
Finance leases - net receivables 49,150,438 42,490,379
Unearned future finance income(2) 25,827,594 22,380,566
Reallocation of capital receivables(3) 1,114,345 308,218
Capitalised accrued interest 4,811,394 2,232,221
ECL (20,980,690) (208,512)
------------- -------------
59,923,081 67,202,872
------------- -------------
Current receivables
Finance leases - net receivables 6,004,861 6,885,215
Unearned future finance income(2) 5,154,017 4,446,005
------------- -------------
11,158,878 11,331,220
------------- -------------
Total investment in finance leases
including unearned future income(2,
3) 71,081,959 78,534,092
Reconciliation
No later than 1 year 11,158,878 11,331,220
Later than 1 year and no later
than 5 years 35,593,753 29,993,154
Later than 5 years 39,384,279 34,877,791
Reallocation of capital receivables(3) 1,114,345 308,218
Capitalised accrued interest 4,811,394 2,232,221
ECL (20,980,690) (208,512)
------------- -------------
Total investment in finance leases
including unearned future income(2,
3) 71,081,959 78,534,092
------------- -------------
(1) The net receivables from finance leases are recognised in
the consolidated statement of financial position.
(2) Unearned future income on finance leases is not recognised
in the consolidated statement of financial position as it is a
future asset.
(3) The comparatives have been restated for the prior year.
Refer to note 21 for further information.
The following table summarises the changes in hire purchase
investments:
30 June 2020 30 June 2019
Restated
GBP GBP
Net receivables from hire purchase
No later than 1 year 4,134,530 6,345,805
Later than 1 year and no later
than 5 years 16,794,015 21,162,392
Later than 5 years 19,433,877 21,704,485
Reallocation of capital receivables(3) 576,264 690,208
Capitalised accrued interest 645,420 648,450
ECL (10,294,107) (374,507)
------------- -------------
Total net receivables from finance
leases(1, 3) 31,289,999 50,176,833
------------- -------------
Unearned future income on hire
purchase(2) 19,701,929 22,761,264
Total investment in hire-purchase
including unearned future income(2,
3) 50,991,928 72,938,097
------------- -------------
Non-current receivables
Hire purchase - net receivables 36,227,891 42,866,877
Unearned future income(2) 16,069,878 18,367,364
Reallocation of capital receivables(3) 576,264 690,208
Capitalised accrued interest 645,420 648,450
ECL (10,294,107) (374,507)
------------- -------------
43,225,346 62,198,392
------------- -------------
Current receivables
Hire purchase - net receivables 4,134,531 6,345,805
Unearned future income(2) 3,632,051 4,393,900
7,766,582 10,739,705
------------- -------------
Total investment in hire-purchase
including unearned future income(2,
3) 50,991,928 72,938,097
Reconciliation
No later than 1 year 7,766,582 10,739,705
Later than 1 year and no later
than 5 years 27,552,107 33,314,362
Later than 5 years 24,745,662 27,919,879
Reallocation of capital receivables(3) 576,264 690,208
Capitalised accrued interest 645,420 648,450
ECL (10,294,107) (374,507)
------------- -------------
Total investment in hire-purchase
including unearned future income(2,
3) 50,991,928 72,938,097
------------- -------------
(1) The net receivables from finance leases are recognised in
the consolidated statement of financial position.
(2) Unearned future income on finance leases is not recognised
in the consolidated statement of financial position as it is a
future asset.
(3) The comparatives have been restated for the prior year.
Refer to note 21 for further information.
10. Receivables
Interest Receivables
Interest receivables represent accrued interest receivable on
leases and loans.
The Group has financial risk management policies in place to
monitor that all receivables are received within the credit time
frame. The Directors considers that the carrying amount of all
receivables approximates to their fair value.
Other Receivables and Prepayments
30 June 2020 30 June 2019
Restated
GBP GBP
UK VAT - 79,429
Prepaid transaction fees 745,557 784,564
Other receivables - 763,380
745,557 1,627,373
============= =============
Refer to note 21 for further information.
11. Other Payables and Accrued Expenses
30 June 2020 30 June 2019
Restated
GBP GBP
Investment management fees - due to Investment
Manger 46,914 378,308
Investment management fees - due to Portfolio 234,575 -
Manager
Administration and secretarial fees 74,500 74,499
Audit fees 30,000 50,000
Printing fees 17,438 20,000
Brokerage fees 7,980 7,755
Other payables 48,942 287,903
460,349 818,465
============= =============
The Group has financial risk management policies in place to
ensure that all payables are paid within the credit time frame.
The Directors consider that the carrying amount of all payables
approximates to their fair value.
Refer to note 21 for further information.
12. Commitments and Contingent Liabilities
As at 30 June 2020, the Group had committed to invest a further
GBP925,500 (30 June 2019: GBP22,170,760). These commitments are
classified as 'hard commitments' of GBP925,500 (30 June 2019:
GBP15,836,289) which represent investments for which the
documentation is finalised and 'soft commitments' of GBPnil (30
June 2019: GBP6,334,471) which represent investments at varying
stages of documentation.
The GBP925,500 was advanced by the Group post year-end. The ECL
provision for this investment has incorporated this amount as at 30
June 2020.
The Group did not have any contingent liabilities as at 30 June
2020 and 30 June 2019.
13. Share Capital
The authorised share capital of the Company is represented by an
unlimited number of shares of no par value which may be designated
as Ordinary Shares, C Shares or otherwise as the Directors may from
time to time determine. All shares hold equal rights with no
restrictions and no shares carry special rights with regard to the
control of the Company . There are no special rights attached to
the shares in the event that the Company is wound up. In accordance
with the Company's articles, the Company holds separate share class
meetings, for both the Ordinary Shares and the 2016 C Shares, at
which shareholders vote on resolutions specific to each share
class.
The 2016 C Share investments are accounted for and managed as a
separate pool of assets in accordance with the Company's investment
policy. Shared expenses which relate to both classes are split
between Ordinary Shares and 2016 C Shares based on their respective
NAV.
The Company's share capital is denominated in Sterling.
30 June 2020 30 June 2019
Number of Shares Stated Capital Number of Shares Stated Capital
in Issue in Issue
GBP GBP
Ordinary Shares 355,975,669 352,151,873 356,263,825 352,389,718
2016 C Shares 138,924,222 136,504,072 138,924,222 136,504,072
Total 494,899,891 488,655,945 495,188,047 488,893,790
----------------- --------------- ----------------- ---------------
The number of Ordinary Shares in issue is presented after
deduction of 1,731,838 (30 June 2019: 1,443,682) treasury
shares.
Share Buybacks
On 21 November 2019 the Directors were granted authority to
repurchase 53,360,753 Ordinary Shares and 20,824,741 2016 C Shares
(being equal to 14.99% of the number of Ordinary Shares and 2016 C
Shares in issue) for cancellation or to be held as treasury shares.
This authority will expire at the forthcoming AGM. The Directors
intend to seek annual renewal of this authority from shareholders.
Pursuant to this authority, and subject to Companies Law and the
discretion of the Directors, the Company may purchase Ordinary
Shares and 2016 C Shares in the market if they believe it to be in
shareholders' interests.
During the year, 288,156 (30 June 2019: 321,316) Ordinary Shares
were repurchased and are being held in treasury at a total cost of
GBP237,845 (30 June 2019: GBP295,529). As at 30 June 2020,
1,731,838 (30 June 2019: 1,443,682) shares are held in treasury. No
2016 C Shares were repurchased during the year or the prior
year.
Managed Wind Down of the Company
Refer to note 18 for further details on the managed wind down of
the Company.
Issued Share Movements
30 June 2020 30 June 2019
Number Stated Capital Number Stated Capital
GBP GBP
Balance at the start
of the year 495,188,047 488,893,790 495,509,363 489,189,319
Ordinary Shares repurchased (288,156) (237,845) (321,316) (295,529)
Balance at the end of
the year 494,899,891 488,655,945 495,188,047 488,893,790
------------ --------------- ------------ ---------------
14. Dividends
On 18 March 2020, dividend payments on both the Ordinary and
2016 C share classes were suspended, the last dividend paid was for
January 2020. Up to 17 March 2020, the Company targeted a dividend
of 7.25 pence per Ordinary Share and 2016 C Share. Dividend
payments to shareholders were subject to the Company being able to
satisfy the solvency test immediately after payment of such
dividend.
The table below details the dividends declared and paid by the
Company to its shareholders during the year:
Period Announcement Payment Date Amount Amount
Date per Share
Ordinary Shares GBP
1 to 31 May 2019 24 June 2019 26 July 2019 0.6042p 2,152,546
1 to 30 June 2019 23 July 2019 23 August 2019 0.6042p 2,152,546
27 September
1 to 31 July 2019 27 August 2019 2019 0.6042p 2,152,546
30 September 25 October
1 to 31 August 2019 2019 2019 0.6042p 2,152,546
1 to 30 September 29 November
2019 28 October 2019 2019 0.6042p 2,152,546
22 November 27 December
1 to 31 October 2019 2019 2019 0.6042p 2,151,490
20 December 24 January
1 to 30 November 2019 2019 2020 0.6042p 2,150,805
28 February
1 to 31 December 2019 24 January 2020 2020 0.6042p 2,150,805
21 February
1 to 31 January 2020 2020 27 March 2020 0.6042p 2,150,805
Total 19,366,635
-----------
2016 C Shares GBP
1 to 31 May 2019 24 June 2019 26 July 2019 0.6042p 839,380
1 to 30 June 2019 23 July 2019 23 August 2019 0.6042p 839,380
27 September
1 to 31 July 2019 27 August 2019 2019 0.6042p 839,380
30 September 25 October
1 to 31 August 2019 2019 2019 0.6042p 839,380
1 to 30 September 29 November
2019 28 October 2019 2019 0.6042p 839,380
22 November 27 December
1 to 31 October 2019 2019 2019 0.6042p 839,380
20 December 24 January
1 to 30 November 2019 2019 2020 0.6042p 839,380
28 February
1 to 31 December 2019 24 January 2020 2020 0.6042p 839,380
21 February
1 to 31 January 2020 2020 27 March 2020 0.6042p 839,380
Total 7,554,420
----------
Grand Total 26,921,055
===========
The Company declared and paid the following dividends to its
shareholders during the prior year:
Period Announcement Payment Date Amount per Amount
Date Share
Ordinary Shares GBP
1 to 30 June 2018 23 July 2018 16 August 2018 0.6042p 2,152,546
17 September
1 to 31 July 2018 21 August 2018 2018 0.6042p 2,152,546
21 September 17 October
1 to 31 August 2018 2018 2018 0.6042p 2,152,546
19 October 19 November
1 to 30 September 2018 2018 2018 0.6042p 2,152,546
21 November 17 December
1 to 31 October 2018 2018 2018 0.6042p 2,152,546
21 December 21 January
1 to 30 November 2018 2018 2019 0.6042p 2,152,546
28 January
1 to 31 December 2018 2019 1 March 2019 0.6042p 2,152,546
25 February
1 to 31 January 2019 2019 29 March 2019 0.6042p 2,152,546
1 to 28 February 2019 21 March 2019 26 April 2019 0.6042p 2,152,546
1 to 31 March 2019 23 April 2019 24 May 2019 0.6042p 2,152,546
1 to 30 April 2019 24 May 2019 28 June 2019 0.6042p 2,152,546
Total 23,678,006
-----------
2016 C Shares GBP
1 to 30 June 2018 23 July 2018 16 August 2018 0.3333p 463,036
17 September
1 to 31 July 2018 21 August 2018 2018 0.4167p 578,897
21 September 17 October
1 to 31 August 2018 2018 2018 0.6042p 839,380
19 October 19 November
1 to 30 September 2018 2018 2018 0.6042p 839,380
21 November 17 December
1 to 31 October 2018 2018 2018 0.6042p 839,380
21 December 21 January
1 to 30 November 2018 2018 2019 0.6042p 839,380
28 January
1 to 31 December 2018 2019 1 March 2019 0.6042p 839,380
25 February
1 to 31 January 2019 2019 29 March 2019 0.6042p 839,380
1 to 28 February 2019 21 March 2019 26 April 2019 0.6042p 839,380
1 to 31 March 2019 23 April 2019 24 May 2019 0.6042p 839,380
1 to 30 April 2019 24 May 2019 28 June 2019 0.6042p 839,380
Total 8,596,353
----------
Grand Total 32,274,359
===========
15. Capital Management Policies and Procedures
The Board defines capital as financial resources available to
the Group.
The Group's total capital at 30 June 2020 was GBP223,518,830 (30
June 2019: GBP474,492,470) and comprised equity share capital and
reserves. The Group was ungeared at the year end.
The Group's capital management objective is to provide returns
to shareholders.
In accordance with the Group's investment policy, the Group's
principal use of cash has been to fund investments sourced by the
Portfolio Manager (previously the Investment Managers), as well as
initial expenses related to the issue, ongoing operational
expenses, currency hedging and payment of dividends and other
distributions to shareholders in accordance with the Group's
dividend policy.
The Board, with the assistance of the Portfolio Manager,
monitors and reviews the broad structure of the Group's capital on
an ongoing basis.
The Group has no externally imposed capital requirements.
16. Segmental Reporting
There are two reportable segments as at 30 June 2020 : Ordinary
Shares and 2016 C Shares. Each Share Class has its own portfolio,
is listed separately on the Main Market of the London Stock
Exchange and the Directors review internal management reports for
each segment separately on a quarterly basis.
The Directors view the operations of the two reportable segments
as one operating segment, being investment business and both
segments have the same investment objectives as at 30 June 2020.
All significant operating decisions are based upon analysis of the
Group 's investments as one segment. The financial results from
this segment are equivalent to the financial results of the Group
as a whole.
The Directors do not view the classification of investments held
in the Company's portfolio (as detailed on the consolidated
statement of financial position) to be reportable segments.
Additional information is included in notes 7, 8 and 9, to assist
users with their understanding of these consolidated financial
statements.
The tables below provide a breakdown of the condensed
consolidated statement of comprehensive income between the
reportable segments:
For the year ended 30 June Ordinary Shares 2016 C Shares Total
2020
GBP GBP GBP
Total income 24,691,338 12,288,699 36,980,037
Net realised and unrealised
loss (10,549,430) (1,172,916) (11,722,346)
Total operating expenses
(excluding ECL) (16,660,426) (1,943,006) (18,603,432)
ECL (187,203,860) (43,265,139) (230,468,999)
Total comprehensive loss
for the year (189,722,378) (34,092,362) (223,814,740)
================ =============== ================
For the year ended 30 June Ordinary Shares 2016 C Shares Total
2019
GBP GBP GBP
Total income 28,655,655 11,045,867 39,701,522
Net realised and unrealised
(loss)/gain (1,953,748) 18,899 (1,934,849)
Total operating expenses
(excluding ECL) (7,886,574) (1,621,739) (9,508,313)
ECL (4,336,000) (71,824) (4,407,824)
Total comprehensive income
for the year 14,479,333 9,371,203 23,850,536
================ ============== ==============
The tables below provide a breakdown of the condensed
consolidated statement of financial position between the reportable
segments:
30 June 2020 Ordinary Share 2016 C Share Total
GBP GBP GBP
Non-current assets 66,290,597 68,370,730 134,661,327
Current assets 62,819,871 26,497,981 89,317,852
Total assets 129,110,468 94,868,711 223,979,179
--------------- ------------- ------------
Current liabilities (298,423) (161,926) (460,349)
Net assets 128,812,045 94,706,785 223,518,830
=============== ============= ============
Equity 128,812,045 94,706,785 223,518,830
=============== ============= ============
30 June 2019 Ordinary Share 2016 C Share Total
GBP GBP GBP
Non-current assets 324,416,973 125,556,828 449,973,801
Current assets 16,795,759 11,018,916 27,814,675
Total assets 341,212,732 136,575,744 477,788,476
--------------- ------------- ------------
Current liabilities (3,073,837) (222,169) (3,296,006)
Net assets 338,138,895 136,353,575 474,492,470
=============== ============= ============
Equity 338,138,895 136,353,575 474,492,470
=============== ============= ============
17. Financial Risk Management
The Group's financial assets mainly comprise investments and
cash balances. Note 2 sets out the accounting policies, including
criteria for recognition and the basis for measurement, applied to
significant financial assets and liabilities. Note 2 also includes
the basis on which income and expenses arising from financial
assets and liabilities are recognised.
The Group finances its investment activities through the Group's
Ordinary Share and 2016 C Share capital and reserves.
Principal risks and uncertainties are detailed in the Strategic
Report. The Directors, the AIFM and the Portfolio Manager work
together to mitigate these risks by employing the following risk
mitigation strategies:
(i) Credit Management - sound credit management is a
prerequisite for an entity's stability and profitability. Prudent
management of credit risk can minimise both operational and credit
risks. The Board and the Portfolio Manager (previously the
Investment Managers) pre-emptively begin to manage risk through the
comprehensive underwriting process to ensure that there is not more
than an acceptable amount of risk within the transaction. The risk
is continually managed throughout the term of the lease (or other
finance agreement) until the ultimate disposition of the asset(s).
Stringent underwriting procedures are applied to mitigate risk.
(ii) Due Diligence - the Portfolio Manager perform comprehensive
due diligence on all counter parties, individuals and businesses
relevant to the investment strategy of the Group.
(iii) On-going Portfolio Management - ensures that if a problem
starts to arise, it is identified giving the capability to address
it and put into action whatever remediation steps are necessary to
help mitigate a potentially larger risk down the line.
(iv) Legal Review - the Portfolio Manager engages legal
professionals in order to ensure, on an on-going basis, that all
rights, title and interests, held as security for the Company's
investments are being protected and preserved.
(vi) Records Management - the Portfolio Manager's internal
systems are utilised to ensure the Group is not exposed from a
record maintenance standpoint. The Portfolio Manager has a
comprehensive electronic documentation system that is subject to
their internal/external backup procedure, maintaining information
access and retrieval 24/7 with offsite redundant backup in case of
a disaster when recovery would need to be deployed.
The AIFM, in close cooperation with the Directors and the
Portfolio Manager, coordinate the Group's risk management.
Additional risks arising from the Group's activities listed in
order of severity and likelihood and the policies for managing each
of these risks are summarised in this note and have been applied
throughout the year.
17.1. Credit Risk
This is the risk of the failure of a lessee to make lease
payments, the failure of the issuer of a security or borrower to
pay interest or principal in a timely manner, or that the effect of
negative perceptions of the issuer's ability to make such payments
causing the value of the investment to decline. Counterparties with
debt securities rated below investment-grade (or unrated) are
especially susceptible to this risk. The Group looks to source
investments that can provide various credit and structural
enhancements to attempt to mitigate credit exposure to any single
counterparty or asset class.
Credit concentration risk
Under the previous investment objective and policy, the Company
had diversification policies in place to mitigate concentration
risk. The Company's portfolio was subject to diversification
policies limiting the maximum amount of capital that could be
invested in a single asset, in a single asset class, in assets held
by a corporation or group or held by companies in a specific
industry, as a percentage of NAV of the portfolio, measured at the
time of investment:
Maximum by asset: 15 per cent.
Maximum by asset class: 30 per cent.
Maximum by corporation or group: 15 per cent.
Maximum by industry: 30 per cent.
As the Company is in managed wind down, the Company will not be
making any new investments. The Board will monitor concentration
risk of the investment portfolio as the portfolio is liquidated as
part of the new investment objective and policy approved by
shareholders at the EGM held on 4 December 2020.
BNP Paribas Securities Services S.C.A., Guernsey Branch is the
bank used by the Group to hold cash balances and there is a risk
that it could fail or that there may be fraud or theft by employees
and that the Group's assets may not be returned. BNP Paribas
Securities Services S.C.A., Guernsey Branch, is a branch of BNP
Paribas whose credit rating is A+ with Standard & Poor's.
Credit risk of cash and custodian is mitigated by the Company's
policy to only undertake significant transactions with leading
commercial counterparties.
The IFRS 9 ECL requirements are based on the ECL model and
financial assets are recognised in stages:
Stage 1 - as soon as a financial instrument is originated or
purchased, 12-month expected credit losses are recognised in profit
or loss and a loss allowance is established. This serves as a proxy
for the initial expectations of credit losses. For financial
assets, interest revenue is calculated on the gross carrying amount
(i.e. without deduction for expected credit losses).
Stage 2 - if the credit risk increases significantly since
initial recognition, lifetime expected credit losses are recognised
in profit or loss. The calculation of interest revenue is the same
as for Stage 1.
Stage 3 - if the credit risk of a financial asset increases to
the point that it is considered credit-impaired, interest revenue
is calculated based on the amortised cost (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.
The Directors after taking advice from and consulting with the
Portfolio Manager have applied an ECL to each of the investments in
the portfolio.
Exposure to Credit Risk
The following tables detail the Company's financial assets
maximum exposure to credit risk:
Gross carrying Net carrying
30 June 2020 amount ECL amount
GBP GBP GBP
Residual value of finance
lease investments 127,557 - 127,557
Loans and other investments 347,696,192 (207,019,000) 140,677,192
Finance Lease and Hire Purchase
investments 102,665,144 (31,274,797) 71,390,347
Cash and cash equivalents 8,997,906 - 8,997,906
Other receivables (excludes
prepayments) 1,073,111 - 1,073,111
---------------
Total assets 460,559,910 (238,293,797) 222,266,113
--------------- -------------- -------------
Gross carrying Net carrying
30 June 2019 amount ECL amount
GBP GBP GBP
Residual value of finance
lease investments 404,618 - 404,618
Loans and other investments 332,202,246 (7,241,779) 324,960,467
Finance Lease and Hire Purchase
investments 102,467,373 (583,019) 101,884,354
Cash and cash equivalents 22,039,165 - 22,039,165
Due from broker 2,630,000 - 2,630,000
Other receivables (excludes
prepayments) 2,360,946 - 2,360,946
--------------- ------------
Total assets 462,104,348 (7,824,798) 454,279,550
--------------- ------------ -------------
Gross exposure reconciliation
The following tables below detail the gross exposure of loans
and other investments and finance lease and hire purchase
investments:
30 June 2020 Stage 1 Stage 2 Stage 3 Total
GBP GBP GBP GBP
Gross balance
at 1 July 2019 245,045,796 159,655,750 29,968,073 434,669,619
New loans advanced 29,451,904 3,949,619 - 33,401,523
Transfers between
stages (140,992,213) (151,683,643) 292,675,856 -
Change in foreign
exchange movement 901,315 91,588 2,913,662 3,906,565
Realised gain 127,660 (247) 218,665 346,078
Change in capitalised
interest 429,347 (16,465) 13,517,538 13,930,420
Loans repayments (15,791,887) (1,482,555) (18,618,427) (35,892,869)
Gross balance
at 30 June 2020 119,171,922 10,514,047 320,675,367 450,361,336
-------------- --------------- --------------------- -------------
30 June 2019 Stage 1 Stage 2 Stage 3 Total
GBP GBP GBP GBP
Gross balance
at 1 July 2018
- Restated(3) 239,738,387 157,098,628 - 396,837,015
New loans advanced 85,655,692 6,882,104 - 92,537,796
Transfers between
stages (33,663,627) 6,166,328 27,497,299 -
Change in foreign
exchange movement (4,771,859) (1,025,103) - (5,796,962)
Reclassification
of investments (6,244,482)(1) (2,298,827)(2) - (8,543,309)
Realised gain 8,098,995 2,353,422 - 10,452,417
Change in capitalised
interest 1,977,457 7,354,801 2,470,774 11,803,032
Loans repayments (45,744,767) (16,875,603) - (62,620,370)
--------------- --------------- ----------- --------------
Gross balance
at 30 June 2019 245,045,796 159,655,750 29,968,073 434,669,619
--------------- --------------- ----------- --------------
(1) This item relates to an investment that has been
reclassified to the equity holding category following a
restructuring. Please refer to note 8.2 for additional
information.
(2) This item relates to an investment that has been
reclassified to the property, plant and equipment investment
category. Please refer to note 7 for additional information.
(3) Refer to note 21 for further information. Provision of
GBP3,314,194 recognised as at 1 July 2018.
ECL Reconciliation
The following tables show the movement in expected credit losses
recognised for the respective financial assets:
30 June 2020 Stage 1 Stage 2 Stage 3 Total
GBP GBP GBP GBP
ECL at 1 July 2019 (147,684) (3,586,776) (4,090,338) (7,824,798)
Increase in loss allowance
arising from new loans - - - -
advanced
Transfers between stages 58,340 3,582,779 (3,641,119) -
Loans repayments 4,336 - - 4,336
Change in credit risk
parameters (3,561,008) (843,740) (226,068,587) (230,473,335)
ECL at 30 June 2020 (3,646,016) (847,737) (233,800,044) (238,293,797)
------------ ------------ -------------- --------------
Change in credit risk parameters
During the year, the Portfolio Manager, with the oversight of
the Board and the AIFM, conducted a thorough review of the
investments held in the Group's portfolio. This review resulted in
an additional ECL of GBP230.5 million during the year. The changes
in the ECL were caused predominantly by a reassessment of the
valuation and risk profiling of debt held within the portfolio
attributing appropriate PD and LGD expectations to the positions
held. The Portfolio Manager, with the oversight of the Board and
the AIFM, have impaired distressed and aged debtors and made some
provision for Covid-19 related events that occurred in the final
quarter of the year. Refer to the Portfolio Manager's Report for
further details.
30 June 2019 Stage 1 Stage 2 Stage 3 Total
GBP GBP GBP GBP
ECL at 1 July 2018 (130,227) (3,183,967) - (3,314,194)
Increase in loss allowance
arising from new loans
advanced (46,378) (4,049) - (50,427)
Transfers between stages 15,925 144,598 (160,523) -
Loans repayments 21,239 32,709 - 53,948
Change in credit risk
parameters (8,243) (576,067) (3,929,815) (4,514,125)
ECL at 30 June 2019 (147,684) (3,586,776) (4,090,338) (7,824,798)
----------- ------------ ------------ ------------
Change in credit risk parameters
During the year, the Investment Managers, with the oversight of
the Board, conducted an ECL review of all investments. Following
the review, there was an ECL of GBP7.8 million, GBP6.6 million
related to three investments, two stage 3 AD Plants and a Stage 2
investment in the manufacturing industry. In regard to the AD
Plants, one suffered from high feedstock costs which has reduced
its profitability and therefore its value and one had delays in
reaching the manufacturer's warranted level, which required
modifications to the plant and additional capital investment. The
ECL for the investment in the manufacturing industry accounted for
the risk adjusted time value of money and the minimum expected
recovery under the lease, supported by amounts receivable under
tariffs, amounts received under a guarantee or sale of the
investee's equipment, taking account of the potential time required
to realise the recovery.
ECL Sensitivity analysis
The key inputs of the in the ECL model are PD and LGD. The
following are the sensitivity analysis of these key inputs.
PD Rates
30 June 2020 30 June 2019
Increase Decrease Increase in Decrease in
in PD rates in PD rates PD rates of PD rates of
of 10% of 10% 10% 10%
GBP GBP GBP GBP
Increase/(decrease)
in ECL 8,277,713 (27,420,345) 1,347,935 (1,448,589)
Total 8,227,713 (27,420,345) 1,347,935 (1,448,589)
------------- --------------- ------------- --------------
By reviewing their internal data and migration of PD, the
Portfolio Manager reviewed the lifetime average migration in PD and
assumed that these transitions occurred over a five year life of
the Company. The Group has taken the average migrations in PD and
divided by five to give an appropriate stress PD rounding to the
nearest percentage point and have provided stress scenarios of +/-
10%.
LGD Rates
30 June 2020 30 June 2019
Increase Decrease Increase Decrease in
in LGD rates in LGD rates in LGD rates LGD rates
of 10% of 10% of 10% of 10%
GBP GBP GBP GBP
Increase/(decrease)
in ECL 23,403,561 (33,018,897) 7,768,118 (6,300,949)
Total 23,403,561 (33,018,897) 7,768,118 (6,300,949)
-------------- -------------- -------------- --------------
The underlying collateral valuation volatility in a given year
is typically range bound by +/- 10% given the nature of the assets.
We have presented this as +/- 10% LGD stress scenarios.
Collateral held as security
The carrying value of assets that have defaulted as at 30 June
2020 is GBP86,875,317 (30 June 2019: GBP25,877,735). In line with
the previous investment strategy, the Company has invested in
assets that hold multiple levels of credit enhancements or
collateral including guarantees to mitigate the credit risk
associated to the Company assets held. The value of the underlying
collateral held for stage 3 assets as at 30 June 2020 is
GBP86,875,317 (30 June 2019: GBP25,877,735).
The table below details the net amount of loans and other
investments and finance lease and hire purchase investments in each
stage:
30 June 2020
Stage 1 Stage 2 Stage 3 Total
Finance Lease and Hire
Purchase investments 49,635,787 4,558,933 48,470,424 102,665,144
ECL (1,894,976) (405,787) (28,974,034) (31,274,797)
------------ ----------- -------------- --------------
Total (net of the ECL) 47,740,811 4,153,146 19,496,390 71,390,347
------------ ----------- -------------- --------------
Loans and other investment 69,536,135 5,955,120 272,204,937 347,696,192
ECL (1,751,040) (441,950) (204,826,010) (207,019,000)
------------ ----------- -------------- --------------
Total (net of the ECL) 67,785,095 5,513,170 67,378,927 140,677,192
------------ ----------- -------------- --------------
Total ECL (3,646,016) (847,737) (233,800,044) (238,293,797)
------------ ---------- -------------- --------------
30 June 2019
Stage 1 Stage 2 Stage 3 Total
Finance Lease and Hire
Purchase 48,324,904 54,142,469 - 102,467,373
ECL (35,098) (547,921) - (583,019)
------------ ------------ ------------ ------------
Total (net of the ECL) 48,289,806 53,594,548 - 101,884,354
------------ ------------ ------------ ------------
Loans and other investment 196,720,892 105,513,281 29,968,073 332,202,246
ECL (112,586) (3,038,855) (4,090,338) (7,241,779)
------------ ------------ ------------ ------------
Total (net of the ECL) 196,608,306 102,474,426 25,877,735 324,960,467
------------ ------------ ------------ ------------
Total ECL (147,684) (3,586,776) (4,090,338) (7,824,798)
---------- ------------ ------------ ------------
Financial assets credit quality summary
The Group uses a credit model which grades each asset into a
common risk category (the "Portfolio Manager Credit Score") based
on the PD, LGD" and loan exposure at default. This allows for all
exposures to be placed on the same analytical basis with an
expected loss model. The model also creates the framework for
assigning ECL provisions. The purpose of the model is to establish
a consistent framework for grading exposures risk and an input into
the underwriting decision. Pre-determined loan characteristics will
be used to generate the PD and the LGD. The Portfolio Manager
Credit Score provides a basis for comparing across borrowers and
collateral types. The table below shows the different risk
categories and the associated PDs and ECL provisions in relation to
unsecured loans:
Grade Portfolio Manager Nominal Rating Expected
PD Equivalent loss by rating
% %
1: Virtually no
risk 0.01 AAA 0.007
2: Low risk 0.10 AA 0.07
3: Moderate risk 0.50 A 0.35
4: Average risk 1.50 BBB 1.05
5: Acceptable
risk 4 BB 2.80
6: Borderline
risk 10 B 7.00
7: High risk 20 CCC 14.0
8: Extremely high
risk 40 CC 28.0
9: Doubtful 60 D 42.0
10: Loss 100 D 70.0
For LGD purposes if the assets supporting a loan are not easily
realisable e.g. fixed plant, the Portfolio Manager assumes on
default that the business has failed and therefore the recovery
will be equivalent to an unsecured loan.
Portfolio Manager LGD Approach:
Category LGD Approach Example credits
Easily Realisable Asset value less 10% e.g., helicopter,
haircut discounted yellow metal or other
at 10% IRR for 12 months vehicle
to recovery
Realisable Asset value less 20% e.g., manufacturing
discounted at 20% IRR equipment, specialised
for 2 years to recovery but remarketable
Highly Specialised 70% LGD e.g., bespoke anaerobic
(Equivalent to unsecured) digestion equipment
Subordinated Debt 100% LGD
Where an external 3(rd)
party valuation is
available this is used
to create a bespoke
LGD for that asset
in priority to the
Highly Specialised
and Subordinated Debt
categories.
The percentage provision under IFRS 9 for a facility is this LGD
multiplied by the credit rating PD as allocated above.
Refer to note 2.3 for further detail on ECL methodology.
Broadly, the Portfolio Manager grades 1 to 6 correspond to stage
1, grades 7 to 9 correspond to stage 2 and grade 10 corresponds to
stage 3.
The table below details the credit quality of the Group's
financial assets as well as the Group's maximum exposure to credit
risk by credit risk rating grades for the years ended 30 June 2020
and 30 June 2019:
30 June 2020
Internal Nominal 12-month Investment Category Gross carrying ECL Net carrying
credit Rating or Lifetime amount amount
rating Equivalent ECL
GBP GBP GBP
N/A A+(1) N/A Cash and cash equivalents 8,997,906 - 8,997,906
12 month Loans and other
4 BBB ECL Investments 18,479,164 (194,031) 18,285,133
12 month Loans and other
5 BB ECL Investments 45,836,358 (1,034,950) 44,801,408
12 month Finance Lease and
5 BB ECL Hire-Purchase 37,664,292 (1,056,971) 36,607,321
Residual value
12 month of finance lease
5 BB ECL investments 84,627 - 84,627
5 BB N/A Interest receivables 1,073,111 - 1,073,111
12 month Loans and other
6 B ECL Investments 5,220,590 (522,059) 4,698,531
12 month Finance Lease and
6 B ECL Hire-Purchase 11,971,496 (838,005) 11,133,491
Life time Finance Lease and
7 CCC ECL Hire-Purchase 4,558,933 (405,787) 4,153,146
Residual value
Life time of finance lease
7 CCC ECL investments 21,972 - 21,972
Life time Loans and other
9 D ECL Investments 5,955,120 (441,950) 5,513,170
Life time Loans and other
10 D ECL Investments 272,204,960 (204,826,010) 67,378,950
Life time Finance Lease and
10 D ECL Hire-Purchase 48,470,423 (28,974,034) 19,496,389
Residual value
Life time of finance lease
10 D ECL investments 20,958 - 20,958
Total 460,559,910 (238,293,797) 222,266,113
--------------- -------------- -------------
(1) - Bloomberg - Standard and Poor's rating
30 June 2019
Internal External 12-month Investment Gross carrying ECL Net carrying
credit credit or Lifetime Category amount amount
rating(1) rating(2) ECL
GBP GBP GBP
Residual
value of
finance lease
n/a n/a n/a investments 404,618 n/a 404,618
12 month Loans and
n/a n/a ECL other investments 196,720,890 (112,585) 196,608,305
Life time Loans and
n/a n/a ECL other investments 135,481,356 (7,129,194) 128,352,162
Finance Lease
12 month and Hire
n/a n/a ECL Purchase 48,324,904 (35,098) 48,289,806
Finance Lease
Life time and Hire
n/a n/a ECL Purchase 54,142,469 (547,921) 53,594,548
Cash and
n/a A1 n/a cash equivalents 22,039,165 n/a 22,039,165
Due from
n/a n/a n/a broker 2,630,000 n/a 2,630,000
Interest
n/a n/a n/a receivables 1,371,182 n/a 1,371,182
Investment
n/a n/a n/a receivables 146,955 n/a 146,955
Other receivables
(excludes
n/a n/a n/a prepayments) 842,809 n/a 842,809
--------------- ------------ -------------
462,104,348 (7,824,798) 454,279,550
--------------- ------------ -------------
(1) - No internal credit ratings were applied by the Investment
Managers for the year ended 30 June 2019
(2) - Bloomberg - Standard and Poor's rating
17.2. Liquidity Risk
This is the risk that the Group will encounter difficulty in
meeting obligations associated with financial liabilities or
funding commitments.
The Group's investments (excluding cash deposits) are
asset-backed loan or finance transactions with commercial entities.
The investments are substantially less liquid than traded
securities and will have a highly limited (if any) secondary
market. Some transactions may incorporate provisions that restrict
transfer or disposal of the investment.
The Group will be required to satisfy margin calls in respect of
a foreign exchange forward if Sterling subsequently depreciates
relative to the agreed contractual rate of the forward
contract.
As at 30 June 2020, the Group did not have any foreign exchange
forward contracts, refer to note 17.4 Market Risk for more
information.
In accordance with the Group's policy, the Portfolio Manager
manages the Group's liquidity risk, and the Directors monitor
it.
The table below shows the residual contractual maturity of the
Company's financial assets and liabilities as at 30 June 2020:
Less than 1 to 5 More than No maturity Total
1 year years 5 years date
GBP GBP GBP GBP GBP
Financial assets
Residual value of
finance lease investments - 127,557 - - 127,557
Loans and other investments 58,831,596 81,845,596 - - 140,677,192
Finance lease and
hire-purchase investments 19,669,682 51,720,665 - - 71,390,347
Cash and cash equivalents 8,997,906 - - - 8,997,906
Interest receivables 1,073,111 - - - 1,073,111
----------- ------------ ---------- ------------ ------------
Total undiscounted
financial assets 88,572,295 133,693,818 - - 222,266,113
----------- ------------ ---------- ------------ ------------
Financial liabilities
Other payables and
accrued expenses (460,349) - - - (460,349)
----------- ------------ ---------- ------------ ------------
Total undiscounted
financial liabilities (460,349) - - - (460,349)
----------- ------------ ---------- ------------ ------------
The table below shows the residual contractual maturity of the
Company's financial assets and liabilities as at 30 June 2019:
Less than 1 to 5 years More than No maturity Total
1 year 5 years date
GBP GBP GBP GBP GBP
Financial assets
Investments at
FVTPL - - - 2,790,263 2,790,263
Equity holdings - - - 5,581,419 5,581,419
Residual value
of finance lease
investments - 404,618 - - 404,618
Loans and other
investments - 324,960,467 - - 324,960,467
Finance lease and
hire-purchase investments - 101,884,354 - - 101,884,354
Cash and cash equivalents 22,039,165 - - - 22,039,165
Due from broker 2,630,000 - - - 2,630,000
Interest receivables 1,371,182 - - - 1,371,182
Investment receivables 146,955 - - - 146,955
Other receivables
(excluding prepayments) 842,809 - - - 842,809
------------ ------------- ---------- ------------ ------------
Total undiscounted
financial assets 27,030,111 427,249,439 - 8,371,682 462,651,232
------------ ------------- ---------- ------------ ------------
Financial liabilities
Derivative financial
liabilities (2,477,541) - - - (2,477,541)
Other payables
and accrued expenses (818,465) - - - (818,465)
------------ ------------- ---------- ------------ ------------
Total undiscounted
financial liabilities (3,296,006) - - - (3,296,006)
------------ ------------- ---------- ------------ ------------
17.3. Operational Risk
Operational risk is the risk of direct or indirect loss arising
from a wide variety of causes associated with the processes,
technology and infrastructure supporting the Group's activities
with financial instruments either internally within the Group or
externally at the Group's service providers, and from external
factors other than credit, market and liquidity risks such as those
arising from legal and regulatory requirements and generally
accepted standards of investment management behaviour.
The Group's objective is to manage operational risk so as to
balance limiting of financial losses and damage to its reputation
with achieving its investment objective. The Group manages this
risk by having regular Board meetings to ensure oversight of the
Portfolio Manager (formerly the Investment Managers) and the
Administrator.
17.4. Market Risk
The fair value of future cash flows of a financial instrument
held by the Group may fluctuate. This market risk comprises
currency risk, interest rate risk and price risk. The Board reviews
and agrees policies for managing these risks.
Currency Risk
The functional and presentation currency of the Group is
Sterling and, therefore, the Group's principal exposure to foreign
currency risk comprises investments denominated in other
currencies, principally US Dollars and Euros. The Portfolio Manager
monitors the Group's exposure to foreign currencies and reports to
the Board on a regular basis. The Portfolio Manager measures the
risk to the Group of the foreign currency exposure by considering
the effect on the NAV and income of a movement in the rates of
exchange to which the Group's assets, liabilities, income and
expenses are exposed. The Investment Managers were mandated to
undertake a hedging strategy and to report its effectiveness and
costs to the Board on an on-going basis, before the foreign
exchange forward derivatives used to hedge non-Sterling exposures
back to Sterling were closed out on 18 March 2020.
The table below details the carrying amounts of the Company's
assets and liabilities that have foreign currency risk
exposure:
30 June 2020 GBP USD EUR Total
GBP GBP GBP GBP
Investments 146,784,363 27,187,972 38,222,761 212,195,096
Cash and
cash
equivalents 6,070,056 2,249,717 678,133 8,997,906
Interest
receivables 1,073,111 - - 1,073,111
Investment
payables, (460,349) - - (460,349)
other
payables and
accrued
expenses
Total net
foreign
currency
exposure 153,467,181 29,437,689 38,900,894 221,805,764
-------------------------------------------------- ------------------------------------------------- ------------------------------------------------- --------------------------------------------------
Percentage
of total 69.19% 13.27% 17.54% 100.00%
-------------------------------------------------- ------------------------------------------------- ------------------------------------------------- --------------------------------------------------
30 June 2019 GBP USD EUR Total
GBP GBP GBP GBP
Investments 260,268,426 119,419,407 55,933,288 435,621,121
Cash and cash
equivalents 17,741,486 3,320,324 977,355 22,039,165
Due from
broker 2,630,000 - - 2,630,000
Interest
receivables 1,371,182 - - 1,371,182
Investment
receivables 146,955 - - 146,955
Other 842,809 - - 842,809
receivables
Other
payables and (818,465) - - (818,465)
accrued
expenses
Derivative
financial
liabilities (2,477,541) - - (2,477,541)
Total net
foreign
currency
exposure 279,704,852 122,739,731 56,910,643 459,355,226
-------------------------------------------------- -------------------------------------------------- ------------------------------------------------- --------------------------------------------------
Percentage of
total 60.89% 26.72% 12.39% 100.00%
-------------------------------------------------- -------------------------------------------------- ------------------------------------------------- --------------------------------------------------
Currency sensitivity analysis
Should the value of Sterling against the Euro and the US Dollar
increase or decrease by 5% with all other variables held constant
and excluding the impact of currency hedging described below, the
impact on the net assets of the Company would be as follows:
Currency 30 June 2020 30 June 2019
GBP GBP GBP GBP
Increase of Decrease of Increase of Decrease of
5% 5% 5% 5%
USD (1,471,884) 1,471,884 (6,104,193) 6,104,193
EUR (1,945,045) 1,945,045 (2,840,798) 2,840,798
The Board believe that a 500 basis point movement in the value
of Sterling against the Euro and the US Dollar is reasonable given
the historic volatility in these currency rates during the years
ended 30 June 2020 and 2019.
During the period 1 July 2019 to 18 March 2020 (and for the
comparative period), the foreign currency risk assumed by the Group
in making and retaining investments denominated in foreign
currencies was hedged by placing contracts for the sale of the
future foreign currency payments anticipated to be received in
connection with such investments ("FX Receivables"). Due to the
limited availability, inflexibility and cost of placing a matched
forward contract for each foreign currency investment (which may
have a tenor of five years or longer), the FX Receivables in
respect of two or more underlying investments were aggregated and a
single forward contract placed with short-term maturity (typically
between three and nine months). On maturity, the forward sale
contract was part-settled from actual foreign currency receipts and
a new forward contract was placed for the then applicable aggregate
FX Receivables, adjusted for payments received, contract variations
and new investments.
The Company was required to deposit initial cash collateral
against fluctuations in the applicable exchange rates and/or to
meet margin calls if the prevailing market rate varied from the
contract rate. The Portfolio Manager (previously the Investment
Managers) monitors the Group's currency risk, and the Directors
review it.
On 18 March 2020, the foreign exchange forward derivatives used
to hedge non Sterling exposures back to Sterling were closed out.
This was to preserve liquidity and to avoid creating liquidity
pressures for the Group as Sterling had notably weakened due to
Covid-19.
As at 30 June 2020, the Group did not have any open forward
foreign exchange contracts. Net realised foreign exchange loss on
forward contracts for the year ended 30 June 2020 was
GBP8,015,592.
As at 30 June 2019, the Group had the following open forward
foreign exchange contracts:
Notional
Buy/Sell Fair Value / GBP Settlement Date
Currency Foreign Currency GBP Equivalent Month/Year
GBP/EUR 9,940,000 8,581,435 (317,128) July 2019
GBP/EUR 9,731,217 8,431,126 (285,374) August 2019
GBP/USD 3,612,931 2,845,903 11,353 August 2019
GBP/USD 58,525,358 45,925,389 102,867 September 2019
GBP/USD 43,000,847 32,704,693 (948,055) October 2019
GBP/EUR 40,644,401 35,318,582 (1,178,771) October 2019
GBP/USD 49,712,762 38,941,229 137,567 December 2019
(2,477,541)
-----------------
Net realised foreign exchange loss on forward contracts for the
year ended 30 June 2019 was GBP11,514,905.
Interest Rate Risk
Most of the Group's investments receive a fixed rate of
interest. The value of fixed income securities usually rise and
fall in response to changes in market interest rates. Declining
interest rates generally increase the fair value of existing
instruments, and rising interest rates generally decrease the fair
value of existing instruments. Changes in value usually will not
affect the amount of interest income or final principal repayments,
but could affect the market value of the investment prior to
maturity. Interest rate risk is generally greater for investments
with longer maturities.
Certain income generating securities pay interest at variable or
floating rates. Variable rate securities reset at specified
intervals, while floating rate securities reset whenever there is a
change in a specified index rate. The market prices of these
securities may fluctuate significantly when interest rates
change.
As explained in note 2.3(a), most of the Group's investments are
carried at amortised cost, not fair value, and changes in the
theoretical market value (there is no liquid market for such
investments) will not be reflected in the carrying value of the
investments unless the investments are considered to be impaired.
The amortised cost of the debt assets is approximate to the fair
value.
The possible effects on fair value and cash flows that could
arise as a result of changes in interest rates are taken into
account when making investment decisions. The Board reviews on a
regular basis the values of the financial instruments.
The following table details the Group's exposure to interest
rate risks. It includes the financial assets designated at fair
value through profit or loss and at amortised costs and financial
liabilities at amortised cost as at 30 June 2020 and 30 June
2019.
Interest bearing Non-interest
bearing
Variable Fixed interest Total
At 30 June 2020 GBP GBP GBP GBP
Assets designated at fair value through profit or loss:
Residual value
of finance lease
investments - - 127,557 127,557
Equity holding - - - -
Financial assets at amortised
cost:
Loans and other
investments - 140,677,192 - 140,677,192
Finance lease and
hire-purchase investments - 71,390,347 - 71,390,347
Cash and cash
equivalents 8,997,906 - - 8,997,906
Interest receivable - - 1,073,111 1,073,111
---------- --------------- ------------- ------------
Total assets 8,997,906 212,067,539 1,200,668 222,266,113
---------- --------------- ------------- ------------
Liabilities
Financial liabilities at
amortised cost:
Other payables
and accrued expenses - - (460,349) (460,349)
---------- --------------- ------------- ------------
Total liabilities - - (460,349) (460,349)
---------- --------------- ------------- ------------
Total interest
sensitivity gap 8,997,906 212,067,539 740,319 221,805,764
---------- --------------- ------------- ------------
Interest bearing Non-interest
bearing
Variable Fixed interest Total
At 30 June GBP GBP GBP GBP
2019
Assets designated at fair value through profit or loss:
Investments
at FVTPL 2,790,263 2,790,263
Equity holdings 5,581,419 5,581,419
Residual value
of finance
lease investments - - 404,618 404,618
Financial assets at amortised
cost:
Loans and other
investments - 324,960,467 - 324,960,467
Finance lease
and hire-purchase
investments - 101,884,354 - 101,884,354
Cash and cash
equivalents 22,039,165 - - 22,039,165
Due from broker - - 2,630,000 2,630,000
Interest receivables - - 1,371,182 1,371,182
Investment
receivables - - 146,955 146,955
Other receivables - - 842,809 842,809
----------------------------- --------------- ------------- ------------
Total assets 22,039,165 426,844,821 13,767,246 462,651,232
----------------------------- --------------- ------------- ------------
Liabilities
Designated at fair
value through profit
or loss:
Derivative
financial liabilities - - (2,477,541) (2,477,541)
Financial liabilities
at amortised cost:
Other payables
and accrued
expenses - - (818,465) (818,465)
----------------------------- --------------- ------------- ------------
Total liabilities - - (3,296,006) (3,296,006)
----------------------------- --------------- ------------- ------------
Total interest
sensitivity
gap 22,039,165 426,844,821 10,471,240 459,355,226
----------------------------- --------------- ------------- ------------
Interest rate sensitivity
An increase of 50 basis points in interest rates as at the
reporting date would increase NAV by GBP1,105,327 (30 June 2019:
GBP2,244,420). A decrease of 50 basis points would have had an
equal but opposite effect.
The Board believe that a 50 basis point movement in interest
rates is reasonable given that the Bank of England base rate has
decreased from 0.75% in August 2018 to 0.25% on the 11 March 2020
and 0.1% on 19 March 2020.
Price risk
Price risk is the risk that the Company's performance will be
adversely affected by changes in the markets it invests (other than
those arising from currency risk and interest rate risk) whether
caused by factor specific to an individual investment or all
factors affecting all investments traded in the market.
As at 30 June 2020, the Company is exposed to price risk on its
residual value of finance lease investments (30 June 2019: lease
participation investments, equity holdings and residual value of
finance lease investments).
The Portfolio Manager makes assumptions about the residual value
of certain assets and equipment. As determined by the Portfolio
Manager, the residual value is a function of the in-place value
and/or the secondary market value of the equipment or assets.
Equity holdings are valued on a market approach, taking into
consideration NAV information of the investee, call options
exercisable on the holdings and external pricing of recent
transactions (if available). Lease participation investments are
valued based on the principal balance of the participation interest
adjusted for information provided by third party appraisals.
The Company attempts to mitigate asset pricing risk by using
comparable recent market transactions and other
valuation/information sources, however, these investments may be
extremely difficult to value accurately, and the valuations
provided may differ, sometimes significantly. Third-party pricing
information may not be available for certain positions held.
The estimated fair values of lease participation investments,
equity holdings and residual value of finance lease investments are
monitored and reassessed on an ongoing basis by the Board.
Refer below for sensitivity analysis on the impact on the
Statement of Comprehensive Income and NAV of the Company, if the
fair value the investments exposed to price risk increased or
decreased by 15% (30 June 2019: 5%).
30 June 2020 Increase by 15% Decrease by
15%
Financial assets GBP GBP GBP
Finance lease residual value 127,557 19,134 (19,134)
------------- ---------------- ------------
Total 127,557 19,134 (19,134)
------------- ---------------- ------------
No sensitivity analysis has been provided for lease
participation and equity holdings as these investments have been
written down to nil during the year ended 30 June 2020.
30 June 2019 Increase by 5% Decrease by
5%
Financial assets GBP GBP GBP
Investments designated at
fair value through profit
or loss (Lease participation) 2,790,263 139,513 (139,513)
Finance lease residual value 404,618 20,231 (20,231)
Equity holdings 5,581,419 279,071 (279,071)
------------- --------------- ------------
Total 8,776,300 438,815 (438,815)
------------- --------------- ------------
The Board believe that a 15% (year ended 30 June 2019: 5%)
movement is reasonable based on market movements of the investments
held during the financial year.
18. Events after the Reporting Period
Adjusting events
Subsequent to the year end, the Group conducted a valuation
review of certain assets in the portfolio which required a further
ECL provision as at 30 June 2020.
Refer to note 19 - Reconciliation of NAV to Published NAV for
further details on the additional ECL Provision amount and a
reconciliation to the published NAVs.
Non adjusting events
Continuation Resolutions
On 16 July 2020, the Board announced the results of the EGM, for
the Ordinary Share Class meeting and the 2016 C Share Class
meeting.
At the Ordinary Share Class meeting, resolution 1 in connection
with the continuation of the Ordinary Share Class passed with the
requisite majority. The Ordinary Share Class will therefore
continue for at least 12 months from the date of the EGM, with a
further Ordinary Share Continuation Vote being held in 2021. The
Company will make no new investments within the Ordinary Share
Class prior to the 2021 Continuation Vote (save for further
investment in existing assets that require additional capital or
existing undrawn commitments), with any excess cash flow from the
amortisation, repayment or realisation of assets during this period
being returned to shareholders.
At the 2016 C Share Class meeting, resolution 1 in connection
with the continuation of the C Share Class did not pass with the
requisite majority. In accordance with the proposals set out in the
circular published by the Company on 16 June 2020 (the "Circular"),
the Board will formulate proposals to be put to 2016 C shareholders
as soon as is reasonably practicable but, in any event, by no later
than six months after the EGM, for the 2016 C Share Portfolio to be
placed into managed wind-down with the aim of enabling 2016 C
shareholders to realise their holdings in the Company.
The Portfolio Manager Fee
Subsequent to the Continuation Votes, the Portfolio Manager fee
is unchanged for the Ordinary Share Class and will be calculated
separately from the 2016 C Share class.
The Portfolio Manager fee for the 2016 C Share is calculated by
segregating the relevant class portfolios into performing and
non-performing assets.
The performing assets will be subject to a management fee of
1.0% of NAV per annum. The non-performing assets will be subject to
a lower management fee of 0.75% of NAV per annum plus a performance
fee calculated on the realised capital value of the non-performing
assets. The performance fee will be calculated as 10% of any net
gains on realisations during each financial year in excess of the
carrying value of those assets as at 31 March 2020.
The total fees payable will be capped at 1.0% of the average NAV
for the financial year of that class, with any excess performance
fee being carried forward to the following years and which may be
offset by the Company against any net negative realisations, with
any final balance outstanding becoming payable on the conclusion of
the wind-down for the relevant class.
Non-Executive Director Shareholding
On 28 July 2020, it was announced that John Falla had purchased
an additional 60,363 Ordinary Shares for GBP14,538.
Appointment of New Director
On 16 September 2020, Brett Miller was appointed as a
Non-Executive, Non-Independent Director.
Managed Wind-Down of the Company
On 24 September 2020, the Board announced its intention to put
forward proposals for a managed wind-down of the Company, both the
Ordinary Share Class and the 2016 C Share class.
At the EGM of the Company on 16 July 2020, shareholders voted
for the continuation of the Ordinary Share Class and against the
continuation of the 2016 C Share class, following which proposals
were to be put forward for the managed wind-down of the C Share
class only, with a further continuation vote to be held in respect
of the Ordinary Share Class in 2021.
While ordinary shareholders as a whole supported continuation of
the Ordinary Share Class, a substantial proportion of the ordinary
shareholders voted against continuation. In addition, since the EGM
the Portfolio Manager raised concerns over the valuation of certain
assets held within the Company's portfolios. In light of this and
continuing feedback from several major shareholders, both the Board
and the Portfolio Manager were of the view that shareholder value
is best maximised by placing the Ordinary Share Class into managed
wind-down alongside the 2016 C Share class.
On 13 November 2020, the Board published a circular proposing a
new investment objective and investment policy for a managed and
orderly wind-down of both share classes and amendments to the
articles. If approved by shareholders, the Board will then
endeavour to realise all of the investments in a manner that
achieves a balance between maximising the value received from
investments and making timely returns of capital to
shareholders.
At the EGM held on 4 December 2020, the adoption of the amended
articles and the new investment objective and investment policy
were passed with the requisite majority and subsequently the
Company was placed into managed wind down.
The Board will continue to treat the Ordinary Share Class and
the 2016 C Share class as separate pools of capital during the
managed wind-down of the Company and there will not be a
combination of the two share classes.
Board Changes
Christopher Spencer and Jacqueline Redmond resigned from the
Board on 30 October 2020.
Paul Meader and John Falla did not stand for re-election at the
AGM held on 31 December 2020.
On 31 December 2020, David Copperwaite was appointed as a
Non-Executive, Independent Director.
2020 AGM
The AGM was held in Guernsey on 31 December 2020. All
resolutions were passed with the exception of Resolution 1, 'to
receive and consider the Annual Report and audited consolidated
financial statements for the year ended 30 June 2020', which was
adjourned until further notice following the delay of
publication.
The Board notes the votes against Resolution 5 (appointment of
the Company's auditors), which represented 20.94% of those shares
voting and 9.94% of the issued share capital of the Company. The
Board believes the level of votes against Resolution 5 was a
consequence of a proxy advisor recommending voting against this
resolution given the delay to the publication of the Annual Report
and audited consolidated financial statements for the year ended 30
June 2020 and therefore being unable to fully analyse the auditors'
fees. The Board believes that this will be resolved following the
publication of the Annual Report and audited consolidated financial
statements, however, the Company will consult with its shareholders
to understand and seek to address any concerns they may have with
regard to Resolution 5.
Temporary suspension
As the Company did not publish the 2020 Annual Report and
Audited Consolidated Financial Statements before the 31 December
2020, the latest date permitted for publication of the 2020 results
under the Financial Conduct Authority's (the "FCA") Disclosure
Guidance and Transparency Rules (as modified by the temporary
relief granted to all listed companies by the FCA on 26 March
2020), the Company has requested that the listing of the Company's
Ordinary Shares and 2016 C Shares be temporarily suspended with
effect from 7.30 a.m. on 4 January 2021 until the publication of
the 2020 results.
The Company intends to request a restoration of its listing on
publication of the 2020 results.
19. Reconciliation of NAV to Published NAV
The following table details the change in the NAVs to the ones
announced via the Regulatory News Service on 24 July 2020:
30 June 2020 Ordinary Ordinary Shares 2016 C Shares 2016 C Shares
Shares per share per share
GBP GBP
Published NAV 219,623,786 61.70p 128,336,297 92.38p
ECL (90,527,865) (25.43)p (34,035,994) (24.50)p
Impairment (4,800,519) (1.35)p - -
Fair value adjustment (2,021,995) (0.57)p - -
Accrued income adjustment 6,538,638 1.84p 406,482 0.29p
------------- ---------------- -------------- --------------
NAV attributable to shareholders 128,812,045 36.19p 94,706,785 68.17p
============= ================ ============== ==============
30 June 2019 Ordinary Ordinary Shares 2016 C Shares 2016 C Shares
Shares per share per share
GBP GBP
Published NAV 341,350,966 95.81p 136,353,575 98.15p
ECL (3,212,071) (0.90)p - -
NAV attributable to shareholders 338,138,895 94.91p 136,353,575 98.15p
============ ================ ============== ==============
20. Ultimate Controlling Party
In the opinion of the Directors, there is no single ultimate
controlling party.
21. Comparative Figures Reclassifications
The amounts outstanding as receivable in the prior year (year
ended 30 June 2019) have been restated to re-allocate receivable
and payable balances to the specific asset balance, where an
appropriate ECL has been applied (see note 17.1 for further
details).
Detailed below are the amounts that have been reallocated as at
30 June 2019 on the Consolidated Statement of Financial Position
and the Consolidated Statement of Cash Flows:
1. The cash and cash equivalents balance included an amount in
the sum of GBP2,630,000 relating to amounts that were due from
broker. This has now been disclosed separately as due from broker
as broker balances have a restricted nature and should therefore be
disclosed separately to cash and cash equivalents. The decrease in
due from broker during the year ended 30 June 2019 was GBP2,300,000
on the Consolidated Statement of Cash Flows, with GBP330,000
movement in due from broker being reflected in prior to 30 June
2019 period.
Opening cash and cash equivalents balance of 2019 has been
restated in the Statement of Cash Flows to exclude amount of
GBP4,930,000 relating to amounts that were due from broker in line
with above treatment.
2. Interest receivables of GBP5,215,378 have been reallocated to
loans and other investments and finance lease and hire-purchase
investments.
3. Investment receivables of GBP7,607,629 have been reallocated
to loans and other investments and finance lease and hire-purchase
investments.
4. Other receivables and prepayments of GBP2,106,941 have been
reallocated to loans and other investments and finance lease and
hire-purchase investments.
5. Other payables and accrued expenses of GBP131,885 have been
reallocated to loans and other investments and finance lease and
hire-purchase investments.
6. Investment payables of GBP39,055 have been reallocated to loans and other investments.
7. GBP1,089,737 sale of investments designated at fair value
through profit or loss has been disclosed separately, previously
included in 'amortisation of investment principal'.
8. Per the Consolidated Statement of Cash Flows, GBP1,133,670 of
interest receivables, investment receivables and other receivables
has been reallocated between investment payables, other payables
and accrued expenses, acquisition of investments, amortisation of
investment principal, additions of investments designated at profit
or loss, sale of investments designated at fair value through
profit or loss, additions of PPE and collective invested
received.
Consolidated Statement of Financial Position
As at 30 June 2019 As previously Restatement As restated Ref
stated adjustment
Non-current assets
Residual value of finance
lease investments 404,618 - 404,618
Property, plant and
equipment 14,352,680 - 14,352,680
Loans and other
investments 314,080,556 10,879,911 324,960,467 2-6
Investments designated
at fair value through
profit or loss 2,790,263 - 2,790,263
Finance lease and
hire-purchase
investments 98,005,257 3,879,097 101,884,354 2-5
Equity holdings 5,581,419 - 5,581,419
--------------------------- --------------------------------- -----------------
435,214,793 14,759,008 449,973,801
Current assets
Cash and cash equivalents 24,669,165 (2,630,000) 22,039,165 1
Due from broker - 2,630,000 2,630,000 1
Interest receivables 6,586,560 (5,215,378) 1,371,182 2
Investment receivables 7,754,584 (7,607,629) 146,955 3
Other receivables and
prepayments 3,734,314 (2,106,941) 1,627,373 4
--------------------------- --------------------------------- -----------------
42,744,623 (14,929,948) 27,814,675
Total assets 477,959,416 (170,940) 477,788,476
--------------------------- --------------------------------- -----------------
Current liabilities
Derivative financial
liabilities (2,477,541) - (2,477,541)
Other payables and accrued
expenses (950,350) 131,885 (818,465) 5
Investment payables (39,055) 39,055 - 6
--------------------------- --------------------------------- -----------------
(3,466,946) 170,940 (3,296,006)
Net assets 474,492,470 - 474,492,470
===========================
Equity
Share capital 488,893,790 - 488,893,790
Retained reserves (14,401,320) - (14,401,320)
--------------------------- --------------------------------- -----------------
474,492,470 - 474,492,470
===========================
Consolidated Statement of Cash Flows
For the year ended 30 June 2019
As previously Restatement
stated adjustment As restated Ref
Cash flow from operating
activities:
Total comprehensive income
for the year 23,850,536 - 23,850,536
Adjustments for:
Finance income - (37,377,741) (37,377,741) 8
Net unrealised loss on revaluation
of investments 1,045,607 - 1,045,607
Net unrealised foreign exchange
loss 272,543 - 272,543
Net realised foreign exchange
gain on investments (10,244,783) - (10,244,783)
Net realised gain on investments
and PPE disposal (653,423) - (653,423)
Depreciation 1,734,573 - 1,734,573
Decrease in interest receivable (2,097,579) 2,097,579 - 8
(Increase)/decrease in investment
receivables (5,551,830) 6,236,588 684,758 8
Decrease in other receivables
and prepayments 8,390,718 (7,200,497) 1,190,221 8
Decrease in due from broker - 2,300,000 2,300,000 1
Decrease in investment payables (115,257) (39,055) (154,312) 6/8
Decrease in other payables
and accrued expenses (2,703,763) (131,885) (2,835,648) 5/8
Acquisition of investments (102,028,039) 9,490,243 (92,537,796) 8
Amortisation of investment
principal 62,443,519 176,850 62,620,369 8
Additions of investments
designated at fair value
through profit or loss - (73,991) (73,991) 8
Sale of investments designated
at fair value through profit
or loss - 1,089,737 1,089,737 7/8
Additions of PPE - (27,271) (27,271) 8
Expected credit loss provision 4,510,604 - 4,510,604
Collected interest income
received - 25,759,443 25,759,443 8
-----------------
Net cash outflow provided
by/(used in) operating activities (21,146,574) 2,300,000 (18,846,574)
Cash flow from financing
activities
Ordinary Shares repurchased (295,529) - (295,529)
Dividends paid (32,274,359) - (32,274,359)
-----------------
Net cash used in financing
activities (32,569,888) - (32,569,888)
Net decrease in cash and
cash equivalents (53,716,462) 2,300,000 (51,416,462)
Cash and cash equivalents
at start of the year 76,795,524 (4,930,000) 71,865,524 1
Effect of exchange rate
changes on cash and cash
equivalents 1,590,103 - 1,590,103
-----------------
Cash and cash equivalents
at end of the year 24,669,165 (2,630,000) 22,039,165
Consolidated Statement of Financial Position
Detailed below are the amounts that have been reallocated as at
1 July 2018 (opening balances of 2019 financial year) on the
Consolidated Statement of Financial Position:
9. The cash and cash equivalents balance included an amount in
the sum of GBP4,930,000 relating to amounts that were due from
broker. This has now been disclosed separately as due from broker
as broker balances have a restricted nature and should therefore be
disclosed separately to cash and cash equivalents.
10. Interest receivables of GBP2,933,066 have been reallocated
to loans and other investments.
11. Investment receivables of GBP1,371,041 have been reallocated
to loans and other investments.
12. Other receivables and prepayments of GBP9,307,438 have been
reallocated to loans and other investments.
As at 1 July 2018 As previously Restatement adjustment As restated Ref
stated
Non-current assets
Residual value of finance
lease investments 517,558 - 517,558
Property, plant and
equipment 13,761,155 - 13,761,155
Loans and other investments 278,116,803 13,611,545 291,728,348
Investments designated
at fair value through
profit or loss 3,402,690 - 3,402,690
Finance lease and hire-purchase
investments 101,794,473 - 101,794,473
397,592,679 13,611,545 411,204,224
Current assets
Cash and cash equivalents 76,795,524 (4,930,000) 71,865,524 9
Due from broker - 4,930,000 4,930,000 9
Interest receivables 4,488,981 (2,933,066) 1,555,915 10
Investment receivables 2,202,754 (1,371,041) 831,713 11
Other receivables and
prepayments 12,125,032 (9,307,438) 2,817,594 12
95,612,291 (13,611,545) 82,000,746
Total assets 493,204,970 - 493,204,970
Current liabilities
Derivative financial
liabilities (6,184,723) - (6,184,723)
Other payables and accrued
expenses (3,654,113) - (3,654,113)
Investment payables (154,312) - (154,312)
(9,993,148) - (9,993,148)
Net assets 483,211,822 - 483,211,822
Equity
Share capital 489,189,319 - 489,189,319
Retained reserves (5,977,497) - (5,977,497)
483,211,822 - 483,211,822
Alternative Performance Measures (Unaudited)
1. Share Price Discount
The share price discount to NAV has been calculated as the
percentage difference between the NAV per share and the closing
share price of the Ordinary Shares and 2016 C Shares on the same
date (source: Bloomberg).
Reason for use
To provide transparency in the difference between the NAV and
the Ordinary Share and 2016 C Share price and to help investors
identify and monitor the performance of the Group.
Ordinary Shares 2016 C Shares
30 June 2020 30 June 2019 30 June 2020 30 June 2019
NAV per share (A) GBP0.3619 GBP0.9491 GBP0.6817 GBP0.9815
Closing share price
per
Bloomberg (B) GBP0.3190 GBP0.9100 GBP0.5700 GBP0.9100
Discount to NAV per
share ((B-A)/A) (11.85)% (4.12)% (16.39)% (7.28)%
2. NAV Total Return
NAV total return per share is calculated as the movement in the
NAV per share plus the total dividends paid per share during the
period, with such dividends paid being re-invested at the
prevailing NAV on a monthly basis.
Total return since inception is for the period 31 July 2014 to
30 June 2020 for Ordinary Shares and 31 December 2016 to 30 June
2020 for 2016 C Shares.
Reason for use
To provide transparency in the Company's performance and to help
investors identify and monitor the compounded total returns of the
Company.
Annualised return
The 3 year annualised return is calculated as the geometric
average amount of monthly total returns over the past 3 years.
Reason for use
To provide transparency of the Company's performance and to help
investors identify and monitor their total return over a 3 year
period if the annual return was compounded.
Ordinary Shares Year to 3 year Since Inception
30 June 2020
Opening NAV per share GBP1.0000
(A) GBP0.9491 GBP0.9963
Closing NAV per share
(B) GBP0.3619 GBP0.3619 GBP0.3619
Dividends paid (C) GBP0.0544 GBP0.1994 GBP0.3716
NAV total return
per share (D=(B-A+C)/A) (56.1)% (43.7)% (26.7)%
----------
2016 C Shares Year to 3 year Since Inception
30 June 2020
Opening NAV per share GBP1.0000
(A) GBP0.9815 GBP0.9806
Closing NAV per share
(B) GBP0.6817 GBP0.6817 GBP0.6817
Dividends paid r GBP0.1413
(C) GBP0.0544 GBP0.1393
NAV total return
per share (D=(B-A+C)/A) (25.0)% (16.3)% (17.7)%
----------
3. Weighted Average Portfolio Yield
The weighted average portfolio yield on the Group's assets to
maturity is based on the interest rate applicable to each asset,
giving effect to all upfront or similar fees or original issue
discount payable with respect to each asset.
Weighted average portfolio yield has been calculated using
performing assets only and before any ECL or impairment provisions
and cash adjustments for accrued income.
Reason for use
To illustrate the expected return on the Group's assets to
maturity.
4. Weighted Average Remaining Term
The weighted average remaining term ("WART") is the money
weighted average amount of time until the maturity of the Group's
investments. The higher the WART, the longer it takes for all of
the investments in a portfolio to be realised.
WART has been calculated using performing assets only.
Reason for use
To provide transparency of the Group's performance and to help
investors identify whether the WART matches their investing time
frame.
5. Ongoing charges
Ongoing charges reflect those expenses of a type which are
likely to recur in the foreseeable future and which relate to the
operation of the Company, excluding the costs of acquisition or
disposal of investments, finance charges, gains or losses arising
on investments and Ordinary Shares.
Ongoing charges is a measure, expressed as a percentage of NAV,
based on actual costs incurred in the year as being the best
estimate of future costs excluding any non-recurring fees divided
by the average NAV of the Company during the year, in accordance
with the AIC methodology.
The ongoing charges ratio for the year ended 30 June 2020 was
1.31% (30 June 2019: 1.21%). The AIC's methodology for calculating
an ongoing charges figure is based on annualised ongoing charges,
as calculated overleaf, of GBP5,358,519 (30 June 2020:
GBP5,849,853) divided by average NAV in the period of
GBP409,536,969 (30 June 2019: GBP482,081,817).
Reason for use
Ongoing Charges details the annual percentage reduction in
shareholder returns as a result of recurring operational expenses
assuming markets remain static and the portfolio is not traded.
The ongoing charges are based on actual costs incurred in the
year excluding any non-recurring fees in accordance with the AIC
methodology. Expense items have been excluded in the calculation of
the ongoing charges figure when they are not deemed to meet the
following AIC definition:
"Ongoing charges are those expenses of a type which are likely
to recur in the foreseeable future, whether charged to capital or
revenue, and which relate to the operation of the investment
company as a collective fund, excluding the costs of
acquisition/disposal of investments, financing charges and
gains/losses arising on investments. Ongoing charges are based on
costs incurred in the year as being the best estimate of future
costs."
Please refer below for ongoing charges reconciliation for the
years ended 30 June 2020 and 30 June 2019:
30 June 2020 30 June 2019
GBP GBP
Total operating expenses for the year: (6,771,675) (7,773,740)
Expenses included in the calculation of
ongoing charges figures, in accordance
with AIC's methodology:
Professional and Administration fees (969,286) (953,138)
Management fees (4,088,036) (4,642,340)
Directors' fees (301,197) (254,375)
Total ongoing charges for the year (5,358,519) (5,849,853)
COMPANY INFORMATION
Non-Executive, Independent Directors
Peter Niven John Falla
(Chairman of the Board) (Chairman of Audit and Risk Committee
to 31 December 2020)
(Did not stand for re-election at
the AGM held on 31 December 2020)
Christopher Spencer Paul Meader
(Chairman of Management Engagement (Senior Independent Director and
Committee) Chairman of Remuneration and Nomination
(Resigned 30 October 2020) Committee)
(Did not stand for re-election at
the AGM held on 31 December 2020)
Dr Jacqueline Redmond David Copperwaite
( Appointed 4 December 2019 ) (Appointed 31 December 2020)
(Resigned 30 October 2020) (Chairman of Audit and Risk Committee
with effect from 31 December 2020)
Non-Executive, Non-Independent Director
Brett Miller
( Appointed 16 September 2020 )
Registered Office
BNP Paribas House, St Julian's Avenue, St Peter Port, Guernsey,
GY1 1WA
Portfolio Manager from 6 June 2020
KKV Investment Management Limited, 25 Upper Brook Street,
Mayfair, London, W1K 7QD
Alternative Fund Investment Manager (AIFM) from 6 June 2020
International Fund Management Limited, Sarnia House, Le Truchot,
St Peter Port, Guernsey, GY1 4NA
US Investment Manager and Alternative Investment Fund Manager to
5 June 2020
SQN Capital Management, LLC, 100 Wall Street, 11(th) Floor, New
York, New York, 10005, USA
UK Investment Manager to 5 June 2020
SQN Capital Management (UK) Limited, Melita House, 124 Bridge
Road, Chertsey, Surrey, KT16 8LA
Financial Adviser and Broker
Winterflood Securities Limited, The Atrium Building, Cannon
Bridge House, 25 Dowgate, Hill, London, EC4R 2GA
Auditor from 21 November 2019
Deloitte LLP, PO Box 137, Regency Court, Glategny Esplanade, St
Peter Port, Guernsey
Auditor to 20 November 2019
Baker Tilly CI Audit Limited, Mont Crevelt House, Bulwer Avenue,
St Sampsons, Guernsey, GY2 4LH
Registrar
Link Market Services (Guernsey) Limited, Mont Crevelt House,
Bulwer Avenue, St Sampson, Guernsey GY2 4LH
Principal Bankers
BNP Paribas Securities Services S.C.A., BNP Paribas House, St
Julian's Avenue, St Peter Port, Guernsey, GY1 1WA
Designated Administrator, Custodian and Secretary
BNP Paribas Securities Services S.C.A., Guernsey Branch, BNP
Paribas House, St Julian's Avenue, St. Peter Port, Guernsey, GY1
1WA
Receiving Agent
Link Market Services Limited, The Registry, 34 Beckenham Road,
Beckenham, Kent BR3 4TU
Legal Advisers to the Group (English Law)
CMS Cameron McKenna Nabarro Olswang LLP, Cannon Place, 78 Cannon
Street, London, EC4N 6AF
Legal Advisers to the Group (Guernsey Law)
Mourant Ozannes, Royal Chambers, St Julian's Avenue, St Peter
Port, Guernsey, GY1 4HP
Website www.kkvim.com/kkv-secured-loan-fund/
LIST OF ACRONYMS
Terms Definition
AD Anaerobic Digestion
AGM Annual General Meeting
AIFM Alternative Fund Investment Manager
Alternative Fund Investment Manager
AIFMD Directive
CLO Collateralised Loan Obligation
CVA Company Voluntary Arrangement
DIP Debtor in Possession
Earnings Before Interest, Tax, Depreciation
EBITDA & Amortisation
EGM Extraordinary General Meeting
ECL Expected Credit Loss
FCA Financial Conduct Authority
FX Foreign Exchange
IFRS International Financial Reporting Standards
IASB International Accounting Standards Board
KKVIM KKV Investment Management Limited
KKVL Ordinary Shares
KKVLX or
KKVX 2016 C Class Shares
KVIKA Kvika Bank hf
LGD Loss Given Default
LTV Loan to Value
NAV Net Asset Value
NCV Net Carrying Value
RNS Regulatory News Service
PD Probability of Default
SME Small & Medium Enterprise
SPV Special Purpose Vehicle
For further information please contact:
KKV Investment Management Ltd
Catherine Halford Riera
Investor.communications@kkvim.com 020 7429 2200
BNP Paribas Securities Services S.C.A., Guernsey
Branch
Company Secretary 01481 750 853
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END
FR DKOBPQBKDKDB
(END) Dow Jones Newswires
January 27, 2021 10:48 ET (15:48 GMT)
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