TIDMSSIF
RNS Number : 5618B
Secured Income Fund PLC
09 October 2020
9 October 2020
Secured Income Fund plc
("SSIF" or the "Company")
Annual Financial Report
For the year ended 30 June 2020
A copy of the Company's Annual Report and Financial Statements for
the year ended 30 June 2020 will shortly be available to view and
download from the Company's website, https://kkvim.com/secured-income-fund/
. Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into or forms part of this
announcement.
Enquiries to:
Directors
David Stevenson (Chair) tel: +44 7973 873785
Susan Gaynor Coley tel: +44 7977 130673
Brett Miller tel: +44 7770 447338
KKV Investment Management Limited tel: +44 20 7429 2200
Catherine Halford Riera / Nicola
Bird
finnCap Ltd. tel: +44 20 7220 0500
Corporate Finance: William Marle
/ Giles Rolls
Sales: Mark Whitfeld
https://kkvim.com/secured-income-fund/
The contents of this preliminary announcement have been extracted
from the Company's Annual Report, which is currently in print and
will be distributed within the week. The information shown for the
years ended 30 June 2020 and 30 June 2019 does not constitute statutory
accounts and has been extracted from the full accounts for the years
ended 30 June 2020 and 30 June 2019. The reports of the auditors
on those accounts were unqualified and did not contain adverse statements
under sections 498(2) or (3) of the Companies Act 2006. The accounts
for the year ended 30 June 2019 have been filed with the Registrar
of Companies. The accounts for the year ended 30 June 2020 will be
delivered to the Registrar of Companies in due course.
Strategic Report
Key Points
30 June 2020 30 June 2019
Net assets ([1]) GBP45,532,000 GBP50,129,000
NAV per Ordinary Share 86.37p 95.10p
Share price at 30 June 2020 76.50p 92.00p
Discount to NAV 11.4% 3.3%
(Loss)/profit for the year GBP(913,000) GBP2,236,000
Dividend per share declared in respect of the
year 7.00p 7.00p
Dividend cover 0.44 0.79
Total return per Ordinary Share (based on
NAV)
([2]) -1.8% +4.4%
Total return per Ordinary Share (based on
share
price) ([2]) -9.2% +8.2%
Ordinary Shares in issue 52,660,350 52,660,350
[1] In addition to the Ordinary Shares in issue, 50,000 Management
Shares of GBP1 each are in issue (see note 21).
[2] Total return per Ordinary Share has been calculated by comparing
the NAV or share price, as applicable, at the start of the year
with the NAV or share price, as applicable, plus dividends paid,
at the year end.
Strategic Report
Overview and Investment Strategy
General information
Secured Income Fund plc (the "Company", "Fund" or "SIF") was incorporated
in England and Wales under the Companies Act 2006 on 13 July 2015
with registered number 09682883. It is an investment company, as
defined in s833 of the Companies Act 2006. Its shares were admitted
to trading on the London Stock Exchange Specialist Fund Segment on
23 September 2015 ("Admission").
Change of Investment Manager
On 5 June 2020, the Company novated the contract to manage the portfolio
to KKV Investment Management Limited (the "Investment Manager" or
"KKV"), following the management team into their new entity from
SQN Asset Management Limited ("SQN UK" or the "Former Investment
Manager").
Change of name
On 18 July 2020, the Company changed its name from SQN Secured Income
Fund plc to Secured Income Fund plc.
Continuation vote
On 19 June 2020, the Company held a continuation vote (the "Continuation
Vote") that, in line with the Directors' recommendation, did not
pass. This vote was required under the Articles as the Company did
not have a Net Asset Value of at least GBP250 million as at 31 December
2019. As the Continuation Vote did not pass, the Directors (as required
under the Articles) convened a further general meeting of the Company
on 17 September 2020 at which Shareholders approved the managed wind-down
of the Company.
Investment objective and policy
On 17 September 2020, the Shareholders approved the adoption of a
new investment objective and policy of the Company, as follows:
The Company will be managed with the intention of realising all remaining
assets in the Portfolio in a prudent manner consistent with the principles
of good investment management and with a view to returning cash to
Shareholders in an orderly manner.
The Company will pursue its investment objective by effecting an
orderly realisation of its assets in a manner that seeks to achieve
a balance between maximising the value received from those assets
and making timely returns of capital to Shareholders. This process
might include sales of individual assets, mainly structured as loans,
or running off the Portfolio in accordance with the existing terms
of the assets, or a combination of both.
As part of the realisation process, the Company may also exchange
existing debt instruments for equity securities where, in the opinion
of the Board, the Company is unlikely to be able to otherwise realise
such debt instruments or will only be able to realise them at a material
discount to the outstanding principal balance of that debt instrument.
The Company will cease to make any new investments or to undertake
capital expenditure except where, in the opinion of both the Board
and the Investment Manager (or, where relevant, the Investment Manager's
successors):
* the investment is a follow-on investment made in
connection with an existing asset in order to comply
with the Company's pre-existing obligations; or
* failure to make the follow-on investment may result
in a breach of contract or applicable law or
regulation by the Company; or
* the investment is considered necessary to protect or
enhance the value of any existing investments or to
facilitate orderly disposals.
Any cash received by the Company as part of the realisation process
prior to its distribution to Shareholders will be held by the Company
as cash on deposit and/or as cash equivalents.
The Company will not undertake new borrowing.
Any material change to the investment policy would require Shareholder
approval.
Prior to 17 September 2020, the investment objective and policy was
as follows:
Investment objective
The investment objective of the Company was to provide Shareholders
with attractive risk adjusted returns, principally in the form of
regular, sustainable dividends, through investment predominantly
in a range of secured loans and other secured loan-based instruments
originated through a variety of channels and diversified by way of
asset class, geography and duration.
Investment policy
The Company achieved its investment objective by investing in a range
of secured loan assets mainly through wholesale secured lending opportunities,
secured trade and receivable finance and other collateralised lending
opportunities. Loan assets included both direct loans as well as
other instruments with loan-based investment characteristics (for
example, but not limited to, bonds, loan participations, syndicated
loans, structured notes, collateralised obligations or hybrid securities)
and may have included (subject to the limit set out below) other
types of investment (for example, equity or revenue- or profit-linked
instruments). The Company may have made investments through alternative
lending platforms that present suitable investment opportunities
identified by the Investment Manager.
Chairman's Statement
Introduction
I am pleased to provide Shareholders with my first Chairman's statement,
covering the financial year from 1 July 2019 to 30 June 2020. Over
the reporting period, the Company has continued to reduce platform
and third party debt. Despite continued macro uncertainty caused
by Brexit, wider geopolitical issues and the onset of the Covid-19
pandemic, income has continued to be delivered for Shareholders.
Secured Income Fund plc (LSE: SSIF) is a UK-listed specialist investment
trust with a focus on secured investments that produce regular, collateralised
income from investments made in a portfolio of loans to lower middle
market companies in the UK and the rest of the world.
Performance
All loans underwritten since April 2017 are performing in line with
expectations however, the impact of Covid-19 has meant a requirement
to relax some covenants, with deferral of interest and the maturity
of some loans. The Investment Manager has continued to strive to
limit legacy third party exposure and as at 30 June 2020 this portion
of the overall portfolio had been reduced to GBP9.8 million (including
accrued interest) from GBP15.2 million at 30 June 2019. It is noted
that progress in reducing peer to peer loan exposure has slowed as
we approach the residual of this segment and aged positions have
now been impaired.
For the reporting period ended 30 June 2020, the Company has generated
a net loss of GBP0.9 million (2019: profit of GBP2.2 million), a
loss per Ordinary Share of 1.73p (2019: profit per Ordinary Share
of 4.25p). The Company's NAV at 30 June 2020 was GBP45.5 million
(86.37p (cum income) per Ordinary Share) compared to GBP50.1 million
(95.10p per Ordinary Share) as at 30 June 2019. The total return
for the reporting period was a loss of 1.8% (2019: total return of
4.4%).
Foreign exchange exposure on the 26.1% of non-Sterling loans has
continued to be fully hedged and any liquidity calls arising from
the hedging strategy are considered manageable within the Company's
cash flow even with increased volatility assigned to Covid-19 impact
and Brexit uncertainty.
Note that all returns are net of all fees and no gearing was applied
to the portfolio during the reporting period.
Corporate Activity
On 5 June 2020, the Company novated the contract to manage the portfolio
to KKV Investment Management Limited, following the management team
into their new entity. This provides continuity of management and
allows for the opportunity for a smooth run-off of the portfolio.
Detail on the new manager is provided in our accompanying Investment
Manager's Report.
Upon the recommendation of the Board, in June 2020, Shareholders
voted to wind the Company up. This decision was made after the Company
was unable to raise new capital and meet its original goal to increase
shareholder capital to GBP250 million by December 2019. The Board
of Directors and the Investment Manager have now begun work on an
orderly wind-down of the business and hope to return capital to investors
expeditiously, avoiding capital erosion. In anticipation of a vote
to wind-down the Company, the Board instructed the Investment Manager
to cease all new underwriting commitments from January 2020 and only
one commitment of EUR1.4 million to an existing counterparty, an
Irish SME and Leasing Fund, remains in place, although negotiation
will take place to consider withdrawing from this further investment.
We have also reviewed costs in recent months and have taken steps
to reduce ongoing expenses going forward. These measures have included
a mutually agreed reduction in investment management fees to 0.75%
for 12 months from 18 September 2020, and thereafter to 0.55%. Advisor
and PR costs have also been reduced post year-end to allow for better
value for money for Shareholders. The amendment date from which these
changes will take effect is 17 September 2020.
Dividends
The Company elected to designate all dividends for the period ended
30 June 2020 as interest distributions to its Shareholders. In doing
so, the Company took advantage of UK tax treatment by "streaming"
income from interest-bearing investments into dividends that will
be taxed in the hands of Shareholders as interest income.
As set out in the Prospectus, the Company intended to distribute
at least 85% of its distributable income by way of dividends on a
monthly basis, retaining some of the distributable income as a loss
reserve to smooth future dividend flows.
The Company has maintained its dividend of 7.00p for the reporting
period. During the reporting period, dividend cover has fluctuated
due to specific transaction flows, impairment of peer to peer and
venture debt positions and the decision not to apply leverage until
more platform and peer to peer investments had been removed from
the portfolio.
As a consequence of the decision to proceed with a managed wind-down,
the Board has reviewed the dividend policy going forward and has
decided to cease paying monthly dividends and intends to pay quarterly
dividends as well as returning excess capital as and when the Company
has excess cash reserves available for distribution.
Discount
During the reporting period, the Company traded at an average discount
to NAV of 7.74%.
Board of Directors
In May 2020, Ken Hillen resigned as Chairman of the Company and I
would like to thank him on behalf of the Board and Shareholders for
his work over his tenure in the role.
In order to maintain strong corporate governance, the remaining Directors
embarked on a recruitment exercise and in July 2020, appointed Brett
Miller as a Director of the Company. Brett brings significant experience
of closed end funds and the alternative lending sector and has experience
of working with companies that are in wind-down and so we welcome
him to the Board and look forward to his positive contribution over
the remainder of the life of the Company.
Outlook
During the reporting period impairments to aged legacy peer to peer
positions dampened NAV performance. Despite this, a healthy cash
balance has enabled the continued payment of dividends. In addition,
we anticipate to be able to commence some return of capital to Shareholders
in the first half of the next reporting period.
The Board expects the wind-down plan that will likely take two or
three years to execute with the objective of delivering investors
total proceeds as close to NAV as possible less the unavoidable expenses
required in the process. However, as stated, we have already taken
steps to reduce costs and will continue to do this over the coming
months. If we are able to identify a suitable buyer to purchase some
or all of the existing direct loan portfolio to expedite early capital
return, the Board will also consider these proposals. Our goal in
the managed wind-down is to achieve a balance between maximising
the value received from those assets and making timely returns of
capital to Shareholders.
Market conditions have been very challenging. The Investment Manager
has worked with borrowers to ensure that their businesses remain
"alive" since the onset of the pandemic and so far, no impairment
provisions have been considered necessary for this element of the
portfolio. These decisions have been taken after careful consideration
of PRA guidance and IFRS 9 treatment of such loans. Specific Covid-19
guidance has been issued by the PRA, details of which are outlined
further within the Investment Manager's Report. However, the Investment
Manager considers that the most challenging period is ahead of us,
as various furlough and bounce back assistance is withdrawn from
the economy with Q4 2020 and Q1 2021 presenting a risk to our borrowers.
We will keep investors informed of any developments as they occur,
in the months to come.
We thank investors for their continued support during this period
and hope that the consistent high level of income has provided at
least a degree of solace as the Board and the Investment Manager
now work on a constructive plan to return capital to Shareholders.
David Stevenson
Chairman
8 October 2020
Investment Manager's Report
Overview
KKV Investment Management Limited ("KKV") assumed investment management
responsibility for the Company on 5 June 2020.
Following the decision by Shareholders not to support continuation,
we are working hard on plans to return capital to Shareholders in
as expeditious a way as possible without damaging capital value.
We are again able to report continued steady progress in delivering
a 7.00p dividend despite having to impair aged legacy debt held within
the portfolio. The Company has continued to reduce peer to peer lending
to only 0.5% of the portfolio and has reduced legacy exposure overall
to 21.5%. IFRS 9 impairment provisions have been increased on legacy
investments and now stands at 8.88% of the total NAV value. The Company
has no debt.
Since our last report when we expressed concern regarding Brexit
impact on the UK economy, events have overtaken somewhat, and we
are now in the grips of a global pandemic. Despite both these challenges,
we have not had cause to impair our direct loan exposures to date
but we have applied a sensible and pragmatic approach to helping
our borrowers get through this unprecedented period with amortisation,
interest and covenant relief. We are mindful that businesses rarely
fail over a covenant breach and that in times of significant stress,
cash balances remain key. These measures have been taken having considered
guidance from the PRA on monitoring our borrowers in relation to
IFRS 9 provisioning, where the directive is to ensure appropriate
consideration of expected credit losses and risk of default etc.
It explains that Covid-19 related measures do not automatically lead
to direct increase in risk of default or increase in the stage of
the loans in the IFRS 9 categories. Management are still required
to assess the risk and particulars of each loan and consider whether
there is any increase in the probability of default when assessing
for impairment, and the Company has not had cause to credit impair
any of our direct loan exposures to date as the outlook has remained
reasonably comfortable. However, as the pandemic draws on into the
second half of the year, with heightened risk of a second wave, we
will keep this decision under regular review.
Since the Company's financial year end, we had observed an improvement
in the performance of our direct loan exposure with borrowers reporting
better performance in terms of sales and general business activity.
However, since the beginning of September we have noted a marked
increase in overall volatility and a generic uncertainty in the SME
sector which has a particular pertinence to the industries and types
of loan to wholesale providers that our loan book targets. We have
undergone a rigorous review of our processes and monitoring of these
loans with no cause for concern with regard to specific debt service,
but given the nature of the portfolio, it would be unwise of us to
ignore the elevated risk that this uncertainty represents to our
borrowers and to flag the loan loss provisions we may have to apply
in the future as the global economy braces itself for further economic
contraction.
Throughout the Covid-19 pandemic, we have increased our interaction
with borrowers and received far more regular trading updates from
them than we would ordinarily request; our relationships with these
counterparties have remained strong and we have welcomed the transparency
and the open dialogue with which they have provided this information.
In some cases where required, we have awarded maturity extensions
and amortisation holidays to allow them time to adjust to the prevailing
operating conditions. We are pleased that there have been no defaults
which we consider testament to the strong active management deployed
by our team and would expect that under normal market conditions
to return the full capital value of the loans to our investors upon
maturity. However, in the shorter term, the impact of the macro economy
on trading conditions could be detrimental, meaning that loss provisioning
may need to increase and we consider this to be prudent risk management
under extenuating circumstances.
We have provided a thorough review of each of our investments in
the following commentary with a higher than usual level of disclosure
for investments in the private domain and of this nature. We will
continue to review and undertake ongoing due diligence in relation
to these loans to ensure that any future impairments caused by the
unprecedented economic circumstances are recognised appropriately.
Background
KKV assumed the role of portfolio manager for Secured Income Fund
plc on 5 June 2020 via a novation arrangement. This new business
is owned by Kvika banki, an Icelandic bank specialising in asset
management with a total of EUR 3 billion assets under management
with KKV representing 16% of this total.
Despite opening for business during a global pandemic, we are pleased
to report that the company was able to commence operational management
with few glitches. KKV has the use of three offices in London and
Surrey but all employees have been equipped to work remotely throughout
the current Covid-19 Emergency with the majority choosing to do so.
All processes are functioning and business continuity has been maintained
to a good level. The transition of employees under the TUPE scheme
has been completed and a good start has been made to their working
relationships with new colleagues.
The analyst team working on this fund has been reduced due to the
resignation of our former Head of Credit. We have recruited further
fund management personnel and credit analysts to replace and make
a considerable enhancement to our capability within the team.
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
by a general malaise and also suffered reduction in capital value.
Since the introduction of emergency market support packages from
central banks such as the US Federal Reserve (Fed), European Central
Bank and Bank of England these markets have settled but the economic
picture remains uncertain.
As developed markets in the US, UK and Europe begin to ease lockdown
measures, market commentators were expectant of a so-called V shaped
recovery as businesses begin to emerge from their forced hibernation.
Our appraisal is more circumspect and despite spread tightening in
recent weeks for investment grade credits, as companies shore up
their balance sheets with additional borrowing, we are particularly
focussed on data relating to SME performance and securitised products
such as CLO's and lower sub investment grade markets where the greatest
pain has 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 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 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 between June 2008 and June 2009 was 3.5 million
and it took four years for employment to return to pre-recession
levels. Reversal of lost jobs takes time for an economy to absorb
and so we expect this to impact consumption and consumer confidence.
For lenders and borrowers alike, the safest route to normalisation
is to keep sustainable business 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; an approach we have adopted across our portfolios since
March 2020.
For equity investors, the reduction in dividend and share buy-back
programmes across the equity market landscape, should, in our opinion,
focus attention on regular coupon paying fixed income strategies.
These are contractual and any missed coupons are rolled up, unlike
missed dividend payments. Once the current and immediate crisis subsides,
we believe regular income will be a highly valued commodity.
Portfolio
There are eleven (2019: 13) direct loans in the portfolio with an
average of GBP3.1 million (2019: GBP2.6 million) deployed per loan,
at an average rate of 11.1% (2019: 10.9%). Each loan has bespoke
legal documentation and is designed to fit to the Company's and the
borrower's requirements. There have been no defaults in this portion
of the portfolio underwritten by the portfolio management team although
we should caveat this statement with a warning that as the pandemic
continues we may see cause for future impairment. At present and
where required we have provided covenant and amortisation relief
or maturity extensions to our borrowers. To date, managements ongoing
monitoring has not identified write downs on these loans and we will
continue to monitor for this risk as the market continues to grapple
with the uncertainty that the Covid-19 pandemic and Brexit represents
to this segment.
As reported last year, we have changed the way in which we categorise
the legacy portfolio. With GBP9.8 million now held in this part of
the portfolio, we have differentiated between peer to peer loans
and those that are held in loan note structures with professional
counterparties. These loans are larger in quantum and we have a closer
relationship with the underlying companies (further details relating
to these investments is provided later in the report). The total
number of loans via third parties have been reduced from 213 to 17
(April 2017 to June 2020) with a small number of loans amortising
down each month. As mentioned above, peer to peer lending now represents
only 0.5% of the portfolio with the majority of the remaining exposure
impaired 100% as at the end of the reporting period.
No leverage has been used throughout the reporting period. Given
the nature of the investments and the less predictable nature of
repayments from legacy positions, we would continue to see this as
a challenge if reinvesting loan capital, however the Company ceased
new investments as at January 2020 ahead of the continuation vote
to allow for cash to build. Despite this, we have paid close attention
to delivering a covered monthly dividend and although dividend cover
has fluctuated over the year as we have impaired platform loans and
ceased accruing income, we have enough cash availability to maintain
a 7.00p per share dividend for the rest of the calendar year. The
Board intends to move to making quarterly dividend payments and ad-hoc
special dividends, when appropriate, during the course of the managed
wind-down process so that the Company is able to return available
cash as soon as reasonably practicable.
Apart from the concentration limit for film financing that had received
prior approval from the Board, there were no breaches of investment
guidelines during the reporting period and all non-Sterling capital
and income has been fully hedged. Fluctuations in the value of Sterling
during the reporting period has made for some significant moves and
margin requirements have increased. The Board has asked for a review
of FX hedging and it may decide to remove FX hedges as the portfolio
is wound down. If the hedges are removed we will update our FX exposures
regularly in the factsheets.
As the portfolio is now in wind-down, we have been focussed on urging
our third-party borrowers to repay debt and expect to begin return
of capital to shareholders early in the next reporting period. We
shall be encouraging them and assisting them to refinance early so
we may return capital to our shareholders. In line with this plan,
post 30 June, the Board were able to approve an increased dividend
payment of 3.5p in July.
The investment portfolio as at 30 June 2020 exhibited the following
characteristics:
30 June 2020 (1)
Largest Loan GBP 9,995,000
Weighted Average Remaining Term 2.9 years
("WART")
Investment Yield Range 8.0% - 13.0%
Weighted Average Portfolio Yield 10.0%
[1] Analysis based on post-impairment figures.
The largest individual investments have the following characteristics:
Total balance outstanding
(including accrued % of Net Asset Remaining Term
Borrower Industry interest) Value (years)
GBP
Wholesale Portfolio GBP 9,995,000 22.0% 1.3 years
UK Diversified GBP 7,405,035 16.3% 5.7 years
Portfolio
Healthcare GBP 4,853,641 10.7% 4.5 years
European Diversified GBP 4,316,605 9.5% 3.2 years
Portfolio
Media GBP 3,044,113 6.7% 2.0 years
Portfolio Activity
We sold two direct loans during the reporting period:
* Medical services provider in UK - as reported last
year, the business was in a sale process and we had
covenants requiring the loan to be repaid in the
event of a change of control with penalty costs
applied. The company requested a roll over of the
debt into the new entity but we were uncomfortable
with the balance sheet and domicile in Northern
Cyprus. So, after a period of intense negotiation, we
secured full repayment.
* Marine servicing company - a service company
specialising in renewable energy build and
maintenance contracts as well as bridge and oil field
service maintenance. The company expanded during the
reporting period acquiring a significant fleet in the
US as this was part of a strategic expansion plan
implemented in 2018. However, despite having equity
support from infrastructure investors, the level of
debt held by the group became significant and so we
made plans to sell the loan and this was achieved in
December 2019, leading to a gain for the Company of
c.GBP140k and an IRR upon exit of 12.7%.
Direct Loans
Loan Summary Table:
Carrying
Value
of Loans
at Amortised
Principal ECL Cost
Balance provision ([1])
Original Outstanding at 30 at 30 Amortisation/
Loan at 30 June June Bullet Term
Amount June 2020 2020 2020 repayment/ remaining Asset
Borrower GBP GBP GBP GBP other (years) Type Currency Yield
Interest
only during
availability
period,
Borrower then 1.3 Wholesale
1 GBP10,000,000 GBP10,000,000 GBP5,000 GBP9,995,000 amortisation years Lending GBP 10%
Interest
only for
12 months,
Borrower then 4.5 Medical
2 GBP4,838,319 GBP4,838,319 GBP2,419 GBP4,835,900 amortisation years Services USD 12%
Borrower GBP4,137,699 GBP4,137,699 GBP2,069 GBP4,135,630 Bullet 3.2 SME and EUR Variable
3 repayment years Leasing
Fund
Film
Borrower 2.0 Production
4 GBP2,458,950 GBP3,045,636 GBP1,523 GBP3,044,113 Cash sweep years Financing GBP 12%
Film
Borrower 2.9 Production
5 GBP2,504,341 GBP2,796,007 GBP1,398 GBP2,794,609 Cash sweep years Financing GBP 11%
Film
Borrower 2.8 Production
6 GBP2,556,790 GBP2,590,731 GBP1,295 GBP2,589,435 Cash sweep years Financing GBP 12%
Film
Borrower 2.9 Production
7 GBP2,314,769 GBP2,509,046 GBP1,255 GBP2,507,791 Cash sweep years Financing GBP 11%
Film
Borrower 2.4 Production
8 GBP1,703,435 GBP2,070,283 GBP1,035 GBP2,069,248 Cash sweep years Financing USD 12%
Interest
only during
availability
period,
Borrower then 1.0 Leasing
9 GBP1,500,000 GBP1,500,000 GBP750 GBP1,499,250 amortisation year Group GBP 9.5%
Film
Borrower 1.2 Production
10 GBP1,624,248 GBP502,945 GBP251 GBP502,693 Cash sweep years Financing GBP 12%
Laser
Borrower 2.5 and LED
11 GBP700,000 GBP428,138 GBP215 GBP427,923 Amortisation years Manufacturer GBP 10%
Direct GBP34,418,804 GBP17,210 GBP34,401,593
Loans
Total
([1]) The carrying values of loans at amortised cost disclosed in the
table above do not include capitalised transaction fees, which
totalled GBP90,000 at 30 June 2020.
The following provides a narrative relating to some of our direct
loan investments. Names of counterparties have been omitted for commercial
and business sensitive reasons for our borrowers.
SME loan company (Borrower 1) - 22.0% of NAV
This is the largest individual facility provided by the Company and
has been in place since May 2017. This is a long established lender
to the SME market. The loan is 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. It is secured
by receivables from a pool of diversified loans to small businesses
which is advanced at 90% against the security pool and borrower director
guarantees together with underlying security. Each underlying loan
is rated to a four stage system with our collateral only acceptable
for the highest category. If a loan slips into a lower category,
there is a requirement for it to be replaced by another better performing
credit. We receive a report from the company's auditors on a monthly
basis that provides detail on the performance and the entire loan
pool.
Loans within the portfolio have been affected at the start of the
Covid-19 pandemic but management have reported that things have steadily
started to improve with June at breakeven in terms of net new advances.
All loans are accompanied by a personal guarantee and any amount
over GBP50,000 has 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 collateralised 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
and are comfortable that the borrower is monitoring performance adequately,
all loans were considered "green" in terms of performance and overall
loan to value at 93% as at the end June, 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.
US healthcare services company (Borrower 2) - 10.7% of NAV
This credit replaced the loan to a remote operating vehicle business
in December which was sold over concerns regarding the overall indebtedness
of the company. This loan, by comparison, offered far greater comfort
by way of being guaranteed by its insurance company owner and the
seniority of the debt in the overall stack. Faced with the uncomfortable
choice of our first default on a direct loan and reduction in dividend
cover, we chose to invest. Subsequently, the remote vehicle business
had to be restructured during Q1/Q2, 2020 which would have led to
impairment for the Company.
This company specialises in ancillary medical services to a number
of hospitals in the American Midwest including optometry, audiology,
dentistry and podiatry. Security is provided by debenture over all
assets other than accounts receivable (although considered to be
of low value), pledge over equity that may not be diluted and a parental
guarantee over all scheduled interest and principal repayments. This
last element being the most important given the weaker balance sheet
of the underlying business.
This direct loan was considered of greatest risk of default when
the pandemic started given the nature of business and so we have
monitored interest receivables very tightly. We are pleased to report
that all interest payments have been made on time.
Irish SME and leasing fund investment (Borrower 3) - 9.5% of NAV
This portfolio of some 26 loans has continued to perform and in some
cases underlying credits have seen an increase in activity and therefore
performance. The majority of the loans are focused on technology
companies specialising in online educational software, online publishing
and PPE manufacture which has seen threefold increases in sales since
the beginning of the year. This has meant a higher than expected
distribution to the Company as at the end of the reporting period.
One loan extended to a cosmetic dental service representing 1.9%
of their portfolio, was due to be sold, this process has been put
on hold and the credit expectation reduced. The manager considered
this to be a temporary position and expects to recoup the value of
the loan.
Media financing (Borrowers 4 through to 8 and Borrower 10) - 29.7%
of NAV
Over the course of the last three years, SIF has funded 8 films,
two of which have been fully repaid and loan obligations met in full.
The remaining six are at various stages of filming and distribution.
At the beginning of the pandemic, as investment adviser to the lender
we recognised the risk that tax credits and distribution sales may
be delayed and noted the cancellation of a number of film festivals
when sales activity is at its most productive. We expected the shortfall
in airline and cinema sales to be somewhat compensated by online
content providers such as Sky and Netflix.
We duly offered three months extension to the timetables originally
set for these projects and monitored the progress of each films.
As at July, we have further extended and fully documented the maturity
dates for these loans by 12 months to allow for a longer period of
repayment.
All six loans are individual facilities and are ring-fenced as individual
risks. However, to mitigate the volatility of performance on individual
projects, we had allowed for a waterfall structure to allow for profit
share from higher performing assets to contribute to the overall
repayment of the whole portfolio. It is the managers view that this
mechanism will allow for all loans to be repaid in full over the
extended period granted. As at year end, we have not allowed any
further loss provision and will closely monitor for risk of lifetime
credit loss over the coming months as we attempt to emerge into more
normal conditions.
UK leasing company (Borrower 9) - 3.3% of NAV
This loan has been underwritten since July 2017 on a rolling twelve
month basis. It is a working capital facility to be used to warehouse
deals financed by block facilities already in place. The loan is
supported by a debenture and the company provides quarterly management
accounts and full year audited financials. The underlying portfolio
comprises of a basket of loans split between two types of lending;
85% asset finance/ leases with a typical deal size of GBP15,000 and
15% professional loans to white collar industry professionals supported
by personal guarantee.
Updates from the borrower through Q2 highlighted the increased number
of requests for forbearance. Overall to the end of May, they reported
25% delinquencies versus a comparison of 9% during the credit crunch.
However, 75% of all loans were being paid on time and in full and
they reported that they did not expect the position to be terminal
and reporting since the end of June 2020 has demonstrated a significant
improvement in rental payments to 102%, providing enough comfort
for the loan to remain unimpaired. Their team has been working well
with the underlying borrowers to achieve furlough for their staff
and to apply for CBIL loans. As the pandemic lockdown restrictions
have loosened, many of those businesses that asked for forbearance
have been able to resume the servicing of their debt, and the borrower
have set up amended payment plans to recoup outstanding balances.
This has led to payments for July and August exceeding expected amounts.
Even with this level of delinquency to the end of June, cash flow
analysis shows that they remain cash positive and have enough financial
headroom until Autumn 2020. The company has not needed to access
their block financing lines over the period.
LED manufacturer in Ireland (Borrower 11) - 0.9% of NAV
This is a secured term loan that has been in place since May 2017
and is secured by a guarantee from the parent company, a debenture
over the borrower and a charge over equipment purchased via Capex
portion of the facility.
Their business has operated on a business as usual basis throughout
the pandemic. They have changed some working practices to allow for
split shifts and those who are able to work from home are doing so.
The supply chain is working and customers continue to operate.
We had intended to extend a further EUR500,000 loan facility to the
company but withdrew from the commitment at the start of the pandemic
in March 2020. Since then, we have granted a three, then six month
amortisation deferral with an extension to the original loan. All
interest has been received during this time and the management of
the company have kept us abreast of developments.
Legacy portfolio
Loan Carrying
Value at
Principal Amortised
Original Balance Outstanding ECL provision Cost at
Loan Amount at 30 June at 30 June 30 June
Borrower GBP 2020 GBP 2020 GBP 2020 GBP Currency Yield
Borrower GBP14,800,664 GBP7,450,655 GBP1,059,756 GBP6,390,899 GBP Variable
12
Borrower
13 GBP1,000,000 GBP1,000,000 GBP1,000 GBP999,000 GBP 17.0%
Borrower
14 GBP524,151 GBP524,151 GBP524 GBP523,627 USD 8.0%
Borrower GBP500,000 GBP415,714 GBP415,714 GBP0 GBP -
15
Borrower
16 GBP1,565,297 GBP508,019 GBP279,822 GBP228,197 GBP 9.8%
Borrower GBP563,270 GBP345,239 GBP345,239 GBP0 GBP -
17
Borrower GBP2,317,199 GBP2,317,199 GBP2,317,199 GBP0 USD -
18
Legacy Loans GBP12,560,977 GBP4,419,254 GBP8,141,723
Total
Co-Investments
In line with our reclassification adopted in the last reporting period
we continue to separate pure peer to peer, technology platform based
lending and three investments that are characterised by professional
co-investment alongside other professional investors. After significant
corporate change for all three of these investments, we provide the
following narrative:
UK venture debt (Borrower 12) - 16.3% of NAV: after the turbulence
of two of the three principals leaving the company and triggering
a clause in the Loan Note agreement that allowed us to take closer
control of the process of managing the portfolio, the business has
stabilised and made very good progress in winding down the portfolio.
As the portfolio runs off, we have received GBP1.6 million cash shortly
after year end leaving a balance of GBP5.8 million.
The largest position in the portfolio, a broadband company, has been
restructured and is currently impaired by 59% representing 2.1% of
the Company's NAV. However, the reorganisation of the business has
progressed well and a new CEO employed. Their order book has increased
and they have been able to operate throughout the current pandemic
crisis. We therefore expect some improvement in recovery.
UK offshore platform (Borrower 13) - 3.3% of NAV
One loan remains in the portfolio and has been in place since early
2017 and is a real estate linked loan to a developer on the island
of Gibraltar. It is senior in a stack of other loans underwritten
by the platform itself. After two years of careful monitoring and
pressing for repayment, we have now been given notification that
this will be repaid in full with accrued and penalty interest. Throughout
the period of delinquency, we had not impaired the loan as to do
so would have encouraged the borrower to urge us to take a haircut
on final settlement. Our senior position ahead of the platform lender
also gave us comfort that the loan would be repaid in full but this
has required patience and perseverance.
US business promissory note (Borrower 14) - 1.4% of NAV
This loan is a working capital facility via a promissory note. It
has a maturity to July 2020 and had been due to be repaid early as
the business was due to be sold to a larger lending business based
in the Netherlands. This transaction failed in Q4 2019 and so an
outstanding loan is to be repaid.
The company specialises in Microsoft hardware and software sales
to SMEs via a global franchise. It has recently commenced a new product
line with X-Box to commence in Q4 2020. The borrower has been unable
to settle the loan and so we have agreed an extension by 6 months
to January 2021 to allow for the business to settle after the initial
pandemic and for the new business line to start over the Q4 holiday
season.
Small company bond platform (Borrower 15) - 0.0% of NAV
All three loans outstanding from this platform were repaid during
the reporting period including a car leasing business and a school,
both of which repaid in full. A third investment with a technology
company was settled at 50% of its net value (realising a loss of
GBP402,000) after it delisted from AIM and this is reflected in the
financial statements. The only outstanding debt from this platform
is a recruitment business that had undergone a protracted recovery
process through the courts. In Q1 2020, we took the decision to fully
impair the loan due to slow progress and the increased risk that
fees and expenses would erode any repayment to the Company.
Peer to Peer
During the reporting period, the Company has been able to reduce
the number of peer to peer loans in the portfolio from 40 to 14.
UK peer to peer loan platform (Borrower 16) - 0.5% of NAV
The platform is slowly amortising down and represents 0.5% of the
overall portfolio. Two of the largest loans are 50% and 80% impaired
respectively and represent 90.8% of the total outstanding balance.
Continuous requests for information and insistence that these loans
should be repaid have led to some progress in regard to a wind turbine
loan. So, despite these positions being aged, we still press for
repayment. Other loans that had already been 100% impaired, matured
and are reflected as realised losses of GBP223,000 in the financial
report and accounts.
Spanish peer to peer loan platform (Borrower 17) - 0.0% of NAV
We have assigned zero probability of any further collections on the
remaining 7 loans within the portfolio. We continued to push for
some return from these loans but after receiving a number of formal
liquidation confirmations, we concluded that there was very little
probability of recouping any further capital.
US peer to peer business (Borrower 18) - 0.0% of NAV
The final outstanding balance of this position has been fully impaired
and we have assigned no further ability to recoup funds from the
platform. At the beginning of the reporting period, we had impaired
25% of the total outstanding loan and taken the decision to try and
assume collections with a management agreement. It took longer than
expected to arrange the legal documentation to gain access to files
and we had believed it reasonable to expect some success but upon
review over the course of the year, we came to the conclusion that
there was little to gain from pursuing the outstanding balances and
so by end Q1 2020 and the start of the Covid-19 led difficulties,
we impaired the remaining balance.
Outlook
The reporting period has not been without its challenges due to external
economic pressures of Brexit and then the onset of the Covid-19 pandemic.
All things considered, the loan book has held up reasonably well
and we have made reasonable, albeit slower progress with the ongoing
cleanup of peer to peer exposures. However, it has been disappointing
that we were not able to recoup more capital from the US and European
positions and with the benefit of hindsight, our original expectation
was too optimistic.
Given the ongoing complexity of Covid-19 impact on the wider economy,
the probability of the impact was a lot lower but now there is increased
likelihood of deteriorating prospects in the medium term. However,
on the balance of probabilities it is likely that our direct loan
underwriting representing 76% of the portfolio can ultimately repay
at full value.
The Company is now in wind-down and we are working to deliver the
Company's new investment policy. Meanwhile, we shall monitor and
manage the assets within the portfolio as carefully as possible and
urge early repayment by borrowers if the occasion arises. All of
the 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.
We would like to thank Shareholders for their support and look forward
to sharing updates on the progress made on wind down in future months.
Dawn Kendall
Portfolio Manager
KKV Investment Management Ltd
8 October 2020
Principal Risks and Uncertainties
Risk is inherent in the Company's activities, but it is managed through
an ongoing process of identifying and assessing risks and ensuring
that appropriate controls are in place. The key risks faced by the
Company, along with controls employed to mitigate those risks, are
set out below.
Macroeconomic risk
Adverse macroeconomic conditions may have a material adverse effect
on the Company's yield on investments, default rate and cash flows.
The Board and the Investment Manager keep abreast of market trends
and information to try to prepare for any adverse impact.
The Company's assets are diversified by geography, asset class, and
duration, thereby reducing the impact that macroeconomic risk may
have on the overall portfolio.
Interest rate risk arises from the possibility that changes in interest
rates will affect future cash flows and/or fair values of the Company's
investments. Exposure to interest rate risk is limited by the use
of fixed rate interest on the majority of the Company's loans, thereby
giving security over future loan interest cash flows.
Currency risk is the risk that changes in foreign exchange rates
will impact future profits and net assets. Currency risk is mitigated
to a certain extent through the use of forward foreign exchange contracts
to hedge movements in foreign currency exchange rates.
Following the UK's exit from the EU on 31 January 2020, and until
trade agreements are signed, there may be some uncertainty in UK
and European markets as they adjust to the new relationship between
the UK and the EU and the rest of the world. Although the exact impact
of Brexit is not known, the Board believes that the Company is well
placed to deal with future impacts from it.
Covid-19
The Covid-19 outbreak is a risk to the global economy. Details of
the macroeconomic impact, as it may affect the Company, are provided
in the "Market Backdrop" section of the Investment Manager's Report.
The Investment Manager and Administrator invoked their business continuity
plans to help ensure the safety and well-being of their staff thereby
retaining the ability to maintain business operations. These actions
helped to ensure business resilience.
The situation is changing so rapidly that the full impact cannot
yet be understood, but future cashflows and valuations are more uncertain
at the current time, and may be more volatile than in recent years.
Indeed, the level of estimation uncertainty and judgement for the
calculation of expected credit losses has increased as a result of
the economic effects of the Covid-19 outbreak. However, the impact
of defaults that might occur in future under different economic scenarios
has been reflected in various models to enable the Board to evaluate
the Company's viability, and the Directors believe that the Company
is well placed to survive the impact of the Covid-19 outbreak, thereby
enabling the Company to realise its assets in an orderly manner.
Credit risk
The Company invests in a range of secured loan assets mainly through
wholesale secured lending opportunities, secured trade and receivable
finance and other collateralised lending opportunities. The Company
is also exposed to direct loans. Significant due diligence is undertaken
on the borrowers of these loans and security taken to cover the loans
and to mitigate the credit risk on such loans.
The key factor in underwriting secured loans is the predictability
of cash flows to allow the borrower to perform as per the terms of
the contract.
Following the change of investment objective on 17 September 2020,
the Company ceased to make any new investments or to undertake capital
expenditure except where, in the opinion of both the Board and the
Investment Manager (or, where relevant, the Investment Manager's
successors):
* the investment is a follow-on investment made in
connection with an existing asset in order to comply
with the Company's pre-existing obligations; or
* failure to make the follow-on investment may result
in a breach of contract or applicable law or
regulation by the Company; or
* the investment is considered necessary to protect or
enhance the value of any existing investments or to
facilitate orderly disposals.
The impact of the Covid-19 outbreak on general credit risk is provided
in the Investment Manager's Report.
The Company's assets are diversified by geography, asset class, and
duration, thereby reducing the impact that investment risk may have
on the overall portfolio. This diversification may reduce as assets
are realised, but is an acceptable, and to some extent unavoidable,
risk associated with the realisation process.
The credit risk associated with the investments is reduced not only
by diversification but also by the use of security. Despite the use
of security, credit risk is not reduced entirely and so the Investment
Manager monitors the recoverability of the loans (on an individual
loan basis) each month and impairs loans in accordance with IFRS
9 Financial Instruments.
Platform risk
The Company is dependent on platforms, albeit to a lesser extent
for that reducing part of the loan portfolio originated through platforms
than was the case prior to the change of Investment Manager in April
2017, to operate the loan portfolio (to effectively monitor loans;
and to pay and receive monies as necessary). If a platform were no
longer able to operate effectively this could put at risk loans made
with/through such a platform and increase credit risk.
The Investment Manager undertakes due diligence on all the platforms
and part of this work is to confirm that the platforms have disaster
recovery policies in place whereby a third party administrator would
step in to manage the loans in the event the platform could no longer
do so. If such an event were to occur, the Company's approach would
vary depending on the platform and the circumstances, and would be
determined by the Board after discussion with the Investment Manager
and other advisers.
The Company's exposure to platform risk is decreasing as it realises
platform loans and exits positions on certain platforms entirely.
Regulatory risk
The Company's operations are subject to wide ranging regulations,
which continue to evolve and change. Failure to comply with these
regulations could result in losses and damage to the Company's reputation.
The Company employs third party service providers to ensure that
regulations are complied with.
Reputational risk
Any adverse impact on the Company's reputation would likely result
in a fall in its share price, thereby adversely affecting Shareholders.
Environment, Employee, Social and Community Issues
As an investment company, the Company does not have any employees
or physical property, and most of its activities are performed by
other organisations. Therefore, the Company does not combust fuel
and does not have any greenhouse gas emissions to report from its
operations, nor does it have responsibility for any other emissions
producing sources under the Companies (Directors' Report) and Limited
Liability Partnerships (Energy and Carbon Report) Regulations 2018.
When making investment decisions, the Investment Manager has not,
historically, considered the impact that an entity in which the Company
invests may have on the community. However, whilst the Board believes
that all companies have a duty to consider their impact on the community
and the environment, the Company does not have a direct impact on
the community or environment and, as a result, does not maintain
policies in relation to these matters.
Going forward, the Investment Manager is committed to achieving the
best possible risk-adjusted returns through integrating Environmental,
Social and Governance ("ESG") considerations into its core investment
analysis and decision making process. The Investment Manager recognises
the value in considering ESG risks and has adopted the following
ESG approach in conducting its business:
* Taking into account the non-financial performance of
target companies, specifically related to governance,
social and environmental policy.
* Adopting responsible and ethical approach to
governance including:
* Remuneration of senior management and a policy on
bonuses that is compliant with international
standards;
* Implementation of compliance policies and procedures
and on-going monitoring of the firm's systems and
controls;
* Implementation of risk controls throughout the
business; and
* Consideration of our ethical obligations in all
business conduct (anti money laundering,
anti-corruption, reputational due diligence).
* Encouraging a human resource policy which values and
respects all staff members through:
* Objective criteria to measure performance and
competencies;
* Support programs requiring senior management
involvement in all staff members career progression;
and
* Equality across all staff irrespective of role,
gender, race, age, religious belief or sexual
orientation.
Gender Diversity
The Board of Directors of the Company currently comprises two male
Directors and one female Director. Further information in relation
to the Board's policy on diversity can be found in the Directors'
Remuneration Report in the Annual Report and Financial Statements.
Key Performance Indicators
The Board uses the following key performance indicators ("KPIs")
to help to assess the Company's performance against its objectives.
Further information on the Company's performance is provided in the
Chairman's Statement and the Investment Manager's Report.
Dividend yield
The Company distributes at least 85% of its distributable income
by way of dividends on a monthly basis. During any year the Company
may retain some of the distributable income and use these to smooth
future dividend flows. The Company's annual dividend target for the
period under review was 7.00p per Share.
The Company has announced dividends of GBP3,684,000 (7.00p per Ordinary
Share) for the year ended 30 June 2020 (2019: GBP3,684,000 (7.00p
per Ordinary Share)), being 228.5% (2019: 128.9%) of distributable
income for the year (see notes 5 and 22 for further details). To
ensure the tax efficient streaming of qualifying interest income,
the Company may announce an additional dividend out of the profits
for the year ended 30 June 2020, once the tax advisers have finalised
the tax computations.
NAV and total return
The Directors regard the Company's NAV as a key component to delivering
value to Shareholders, but believe that total return (which includes
dividends) is the best measure for shareholder value.
Premium/discount of share price to NAV
Prior to the Continuation Vote, in the event that the Ordinary Shares
had been trading at a daily discount to NAV of greater than 10% for
three consecutive months (calculated on a rolling three monthly average
of daily numbers), the Board were required to convene a general meeting
to propose a continuation resolution.
Although this requirement is no longer applicable, the Board understand
the importance of minimising the discount to NAV at which the Company's
Ordinary Shares trade and the Board regularly monitors the premium/discount
of the price of the Ordinary Shares to the NAV per share. During
the year, the Company traded at an average discount to NAV of 7.74%.
In normal market conditions, stabilisation of dividend cover would
have resulted in a narrowing of discount to NAV. However, sector
volatility and some sales of shares by investors created a stock
overhang during most of the reporting period, and a t 30 June 2020
the shares were trading at 76.50p, an 11.4% discount to NAV (2019:
92.00p, a 3.26% discount to NAV). However, FinnCap, the Company's
corporate broker, has maintained a good job of matching sales to
purchases and retail interest in the stock has been ongoing.
Capital returned to Shareholders
Following the change in investment objective on 17 September 2020,
the Directors consider it important to measure the amount of capital
returned to Shareholders. In the six days since 17 September 2020,
no capital has been returned to Shareholders. However, on 26 August
2020, the Company announced a dividend of 3.50 pence per Ordinary
Share with a payment date of 25 September 2020.
This was not a KPI during the year ended 30 June 2020.
David Stevenson
Chairman
8 October 2020
Promoting the Success of the Company
The following disclosure outlines how the Directors have had regard
to the matters set out in Section 172(1)(a) to (f) of the Companies
Act 2006.
The Board considers the needs of a number of stakeholders when considering
the long-term future of the Company. The key stakeholders with which
the Board has liaised during the year ended 30 June 2020 were:
* Shareholders; and
* Key service providers.
Shareholders
The Company's significant Shareholders at the year end can be found
in the Directors' Report in the Annual Report and Financial Statements
.
When making principal decisions the Board consider it imperative
to analyse the views of the Company's investors to ensure that its
decisions are aligned with the wishes of Shareholders and that the
Company can achieve its Investment Policy. The key performance indicators
have been considered on an ongoing basis as part of the Board's decision
making process.
Details of how the Directors communicate with Shareholders can be
found in the Corporate Governance Report.
Other than the routine engagement with investors regarding strategy
and performance, the Company's continuation was discussed with investors.
A continuation vote was held on 19 June 2020 that, in line with the
Directors' recommendation, did not pass. A further general meeting
of the Company was held on 17 September 2020 at which a special resolution
approved the managed wind-down of the Company and the adoption of
the new investment policy of the Company.
Key service providers
Details of the Company's key service providers can be found in the
Directors' Report in the Annual Report and Financial Statements .
The key service providers are fundamental to the Company's ability
to continue in the same state as any changes could disrupt the expected
timeliness of information provided to the markets. In turn, this
would be likely to have a detrimental impact on the Company's reputation.
The Board has continuous access to the Company's key service providers
and has open two-way communication with them. Key aspects of discussion
with these service providers, other than those regarding Company
performance and strategy, were in respect of fees payable to these
providers.
Following these discussions, the Investment Manager's fees were amended
post year end as disclosed in note 7.
David Stevenson
Chairman
8 October 2020
Statement of Comprehensive Income
for the year ended 30 June 2020
Year ended Year ended
Note 30 June 2020 30 June 2019
GBP'000 GBP'000
Revenue
Interest income 3f 4,315 4,026
Other income - 30
------------ ------------
Total revenue 4,315 4,056
------------ ------------
Operating expenses
Management fees 7a (483) (513)
Broker fees (197) (79)
Other expenses 11 (164) (169)
Transaction fees 7a (147) (81)
Administration fees 7b (117) (117)
Legal and professional fees (97) (51)
Directors' remuneration 8 (94) (108)
------------ ------------
Total operating expenses (1,299) (1,118)
------------ ------------
Investment gains and losses
Movement in unrealised gains and losses
on loans due to movement in foreign exchange
on non-Sterling loans 14 410 110
Impairment losses on financial assets (or
loans) 14 (3,299) (415)
Movement in unrealised gain on investments
at fair value through profit or loss 15 19 1
Movement in unrealised gain/(loss) on derivative
financial instruments 17 345 (319)
Realised (loss)/gain on disposal of loans (536) 16
Realised gain on disposal of investments
at fair value through profit or loss 15 - 3
Realised loss on disposal of investments
held for sale - (51)
Realised loss on derivative financial instruments 17 (852) (206)
------------ ------------
Total investment gains and losses (3,913) (861)
------------ ------------
Net (loss)/profit from operating activities
before (loss)/gain on foreign currency exchange (897) 2,077
Net foreign exchange (loss)/gain (16) 159
------------ ------------
(Loss)/profit and total comprehensive income
for the year attributable to the owners
of the Company (913) 2,236
------------ ------------
(Loss)/earnings per Ordinary Share (basic
and diluted) 13 (1.73)p 4.25p
------------ ------------
There were no other comprehensive income items in the year.
Except for unrealised investment gains and losses, all of the Company's
profit and loss items are distributable.
The accompanying notes form an integral part of the financial statements
.
Statement of Changes in Equity
for the year ended 30 June 2020
Called up Special distributable Profit and
Note share capital reserve loss account Total
GBP'000 GBP'000 GBP'000 GBP'000
At 30 June 2018 577 50,942 20 51,539
Impact of transition to IFRS
9 - - (23) (23)
------------ ------------ ------------ ------------
At 1 July 2018 - revised for the
application of IFRS 9 577 50,942 (3) 51,516
Profit for the year 22 - - 2,236 2,236
Transactions with Owners in their capacity as owners:
Dividends paid 5,22 - (689) (2,934) (3,623)
------------ ------------ ------------ ------------
At 30 June 2019 577 50,253 (701) 50,129
Loss for the year 22 - - (913) (913)
Transactions with Owners in their capacity as owners:
Dividends paid 5,22 - (2,072) (1,612) (3,684)
------------ ------------ ------------ ------------
At 30 June 2020 577 48,181 (3,226) 45,532
------------ ------------ ------------ ------------
There were no other comprehensive income items in the year.
The above amounts are all attributable to the owners of the Company.
The accompanying notes form an integral part of the financial statements
.
Statement of Financial Position
as at 30 June 2020
30 June
Note 2020 30 June 2019
GBP'000 GBP'000
Non-current assets
Loans at amortised cost 14 31,942 36,614
Investments at fair value through profit
or loss 15,16 251 232
------------ ------------
Total non-current assets 32,193 36,846
------------ ------------
Current assets
Loans at amortised cost 14 10,691 10,642
Cash held on client accounts with platforms 14 - 48
Other receivables and prepayments 18 1,625 1,141
Cash and cash equivalents 1,193 1,987
------------ ------------
Total current assets 13,509 13,818
------------ ------------
Total assets 45,702 50,664
------------ ------------
Current liabilities
Other payables and accruals 19 (164) (184)
Derivative financial instruments 16,17 (6) (351)
------------ ------------
Total liabilities (170) (535)
------------ ------------
------------ ------------
Net assets 45,532 50,129
------------ ------------
Capital and reserves attributable to owners
of the Company
Called up share capital 21 577 577
Other reserves 22 44,955 49,552
------------ ------------
Equity attributable to the owners of the
Company 45,532 50,129
------------ ------------
Net asset value per Ordinary Share 23 86.37p 95.10p
------------ ------------
These financial statements of Secured Income Fund plc (registered
number 09682883) were approved by the Board of Directors on 8 October
2020 and were signed on its behalf by:
David Stevenson Gaynor Coley
Chairman Director
8 October 2020 8 October 2020
The accompanying notes form an integral part of the financial statements
.
Statement of Cash Flows
for the year ended 30 June 2020
Year ended Year ended
30 June 30 June 2019
2020
GBP'000 GBP'000
Cash flows from operating activities
Net (loss)/profit before taxation (913) 2,236
Adjustments for:
Movement in unrealised gains and losses on loans
due to movement in foreign exchange on non-Sterling
loans (410) (110)
Impairment losses on financial assets (or loans) 3,299 415
Movement in unrealised gain on investments at
fair value through profit or loss (19) (1)
Movement in unrealised (gain)/loss on derivative
financial instruments (345) 319
Realised loss/(gain) on disposal of loans 536 (16)
Realised gain on disposal of investments at fair
value through profit or loss - (3)
Realised loss on disposal of investments held
for sale - 51
Realised loss on derivative financial instruments 852 206
Amortisation of transaction fees 147 81
Interest received and reinvested by platforms (50) (287)
Capitalised interest (1,486) (915)
Decrease/(increase) in investments 1,783 (2,141)
------------ ------------
Net cash inflow/(outflow) from operating activities
before working capital changes 3,394 (165)
Increase in other receivables and prepayments (484) (369)
(Decrease)/increase in other payables and accruals (20) 19
------------ ------------
Net cash inflow/(outflow) from operating activities 2,890 (515)
Cash flows from financing activities
Dividends paid (3,684) (3,623)
------------ ------------
Net cash outflow from financing activities (3,684) (3,623)
------------ ------------
Decrease in cash and cash equivalents in the
year (794) (4,138)
Cash and cash equivalents at the beginning of
the year 1,987 6,125
------------ ------------
Cash and cash equivalents at the year end 1,193 1,987
------------ ------------
Supplemental cash flow information
Non-cash transaction - interest income 1,536 1,202
The accompanying notes form an integral part of the financial statements
.
Notes to the Financial Statements
for the year ended 30 June 2020
1. General information
The Company is a public company (limited by shares) and was incorporated
and registered in England and Wales under the Companies Act 2006 on
13 July 2015 with registered number 09682883. The Company's shares
were admitted to trading on the London Stock Exchange Specialist Fund
Segment on 23 September 2015 ("Admission"). The Company is domiciled
in England and Wales.
The Company is an investment company as defined in s833 of the Companies
Act 2006.
Change of name
On 18 July 2020, the Company changed its name from SQN Secured Income
Fund plc to Secured Income Fund plc.
2. Statement of compliance
a) Basis of preparation
These financial statements present the results of the Company for
the year ended 30 June 2020. These financial statements have been
prepared in accordance with International Financial Reporting Standards
("IFRS"), as adopted by the European Union.
These financial statements have not been prepared in full accordance
with the Statement of Recommended Practice ("SORP") for investment
trusts issued by the AIC in October 2019, as the main driver of the
SORP is to disclose the allocation of expenses between revenue and
capital, thereby enabling a user of the financial statements to determine
distributable reserves. However, with the exception of investment
gains and losses, all of the Company's profit and loss items are of
a revenue nature as it does not allocate any expenses to capital.
Therefore, the Directors believe that full compliance with the SORP
would not be of benefit to users of the financial statements. Further
details on the distributable reserves are provided in note 22.
T he Company's capital is raised in Sterling, expenses are paid in
Sterling, the majority of the Company's financial assets and liabilities
are Sterling based, and (until September 2020) the Company hedged
substantially all of its foreign currency risk back to Sterling, Therefore,
the Board of Directors consider that Sterling most faithfully represents
the economic effects of the underlying transactions of the Company,
events and conditions. T hese financial statements are presented in
Sterling, which is the Company's functional and presentation currency.
All amounts are rounded to the nearest thousand.
Non-Going Concern
On 19 June 2020, the Company held a continuation vote (the "Continuation
Vote") that, in line with the Directors' recommendation, did not pass.
This vote was required under the Articles as the Company did not have
a Net Asset Value of at least GBP250 million as at 31 December 2019.
As this vote did not pass, the Directors (as required under the Articles)
convened a further general meeting of the Company on 17 September
2020 at which a special resolution approved the managed wind-down
of the Company and the adoption of the new investment policy of the
Company, to carry out an orderly realisation of the Company's portfolio
of assets and distribution of cash to Shareholders .
This has had no significant impact on the accounting policies, judgements
or carrying value of assets and liabilities within the financial statements
as the loans are included net of their expected credit loss provision
("ECL") and are expected to be realised in an orderly manner, and
the estimated costs of winding up the Company are immaterial .
The Covid-19 outbreak is a risk to the global economy. Details of
the macroeconomic impact and the impact on credit risk are provided
in the Investment Manager's Report. The Investment Manager and Administrator
invoked their business continuity plans to help ensure the safety
and well-being of their staff thereby retaining the ability to maintain
business operations. These actions helped to ensure business resilience.
The situation is changing so rapidly that the full impact cannot yet
be understood, but the Company will continue to monitor the situation
closely.
b) Basis of measurement
The financial statements have been prepared on a historical cost basis,
except for investments at fair value through profit or loss and derivative
instruments, which are measured at fair value through profit or loss.
Given the Company's investment policy to carry out an orderly realisation
of the Company's portfolio of assets and distribution of cash to Shareholders,
the financial statements have been prepared on a non-going concern
basis.
c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a
single economic segment of business, being investment in a range of
SME loan assets.
d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect
the application of policies and the reported amounts of assets and
liabilities, income and expenses. The estimates and associated assumptions
are based on historical experience and various other factors that
are believed to be reasonable under the circumstances, the results
of which form the basis of making the judgements about carrying values
of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the period
in which the estimate is revised, if the revision affects only that
period, or in the period of the revision and future periods, if the
revision affects both current and future periods.
Judgements made by management in the application of IFRS that have
a significant effect on the financial statements and estimates with
a significant risk of material adjustment in the next year are discussed
in note 4.
3. Significant accounting policies
a) Foreign currency
Foreign currency transactions are translated into Sterling using the
exchange rates prevailing at the dates of the transactions. Foreign
exchange gains and losses resulting from the settlement of such transactions
and from the translation at period-end exchange rates of monetary
assets and liabilities denominated in foreign currencies are recognised
in the Statement of Comprehensive Income. Translation differences
on non-monetary financial assets and liabilities are recognised in
the Statement of Comprehensive Income.
b) Financial assets and liabilities
The financial assets and liabilities of the Company are defined as
loans, bonds with loan type characteristics, investments at fair value
through profit or loss, cash and cash equivalents, other receivables,
derivative instruments and other payables.
Classification
IFRS 9 requires the classification of financial assets to be determined
on both the business model used for managing the financial assets
and the contractual cash flow characteristics of the financial assets.
Loans have been classified at amortised cost as:
* they are held within a "hold to collect" business
model with the objective to hold the assets to
collect contractual cash flows; and
* the contractual terms of the loans give rise on
specified dates to cash flows that are solely
payments of principal and interest on the principal
amount outstanding.
The Company's unquoted investments have been classified as held at
fair value through profit or loss as they are held to realise cash
flows from the sale of the investments.
Recognition
The Company recognises a financial asset or a financial liability
when, and only when, it becomes a party to the contractual provisions
of the instrument. Purchases and sales of financial assets that require
delivery of assets within the time frame generally established by
regulation or convention in the marketplace are recognised on the
trade date, i.e. the date that the Company commits to purchase or
sell the asset.
Derecognition
A financial asset (or, where applicable, a part of a financial asset
or part of a group of similar assets) is derecognised where:
* The rights to receive cash flows from the asset have
expired; or
* The Company has transferred its rights to receive
cash flows from the asset or has assumed an
obligation to pay the received cash flows in full
without material delay to a third party under a
"pass-through" arrangement; and
* Either (a) the Company has transferred substantially
all the risks and rewards of the asset, or (b) the
Company has neither transferred nor retained
substantially all the risks and rewards of the asset,
but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows
from an asset (or has entered into a pass-through arrangement) and
has neither transferred nor retained substantially all the risks and
rewards of the asset nor transferred control of the asset, the asset
is recognised to the extent of the Company's continuing involvement
in the asset.
The Company derecognises a financial liability when the obligation
under the liability is discharged, cancelled or expires.
Initial measurement
Financial assets and financial liabilities at fair value through profit
or loss are recorded in the Statement of Financial Position at fair
value. All transaction costs for such instruments are recognised directly
in profit or loss.
Financial assets and financial liabilities not designated as at fair
value through profit or loss, such as loans, are initially recognised
at fair value, being the amount issued less transaction costs.
Subsequent measurement
After initial measurement, the Company measures financial assets and
financial liabilities not designated as at fair value through profit
or loss, at amortised cost using the effective interest rate method,
less impairment allowance. Gains and losses are recognised in the
Statement of Comprehensive Income when the asset or liability is derecognised
or impaired. Interest earned on these instruments is recorded separately
as investment income.
After initial measurement, the Company measures financial instruments
which are classified at fair value through profit or loss at fair
value. Subsequent changes in the fair value of those financial instruments
are recorded in net gain or loss on financial assets and liabilities
at fair value through profit or loss.
The carrying value of cash and cash equivalents and other receivables
and payables equals fair value due to their short-term nature.
Impairment
A financial asset is credit-impaired when one or more events that
have occurred have a significant impact on the expected future cash
flows of the financial asset. It includes observable data that has
come to the attention of the holder of a financial asset about the
following events:
* Significant financial difficulty of the issuer or
borrower;
* A breach of contract, such as a default or past-due
event;
* The lenders for economic or contractual reasons
relating to the borrower's financial difficulty
granted the borrower a concession that would not
otherwise be considered;
* It becoming probable that the borrower will enter
bankruptcy or other financial reorganisation;
* The disappearance of an active market for the
financial asset because of financial difficulties; or
* The purchase or origination of a financial asset at a
deep discount that reflects incurred credit losses.
Each direct loan is assessed on a continuous basis by the Investment
Manager's own underwriting team with peer review occurring on a regular
basis.
Each platform loan is monitored via the company originally deployed
to conduct underwriting and management of the borrower relationship.
When a potential impairment is identified, the Investment Manager
requests data and management information from the platform. The Investment
Manager will then actively pursue collections, giving guidance to
the platforms on acceptable levels of impairment. In some cases, the
Investment Manager will proactively take control of the process.
Impairment of financial assets is recognised on a loan-by-loan basis
in stages:
Stage As soon as a financial instrument is originated or purchased,
1: 12-month expected credit losses are recognised in profit or loss
and a loss allowance is established. This serves as a proxy for
the initial expectations of credit losses. For financial assets,
interest revenue is calculated on the gross carrying amount (i.e.
without deduction for expected credit losses).
Stage If the credit risk increases significantly and is not considered
2: low, full lifetime expected credit losses are recognised in profit
or loss. The calculation of interest revenue is the same as for
Stage 1. This stage is triggered by scrutiny of management accounts
and information gathered from regular updates from the borrower
by way of email exchange or face-to-face meetings. The Investment
Manager extends specific queries to borrowers if they acquire
market intelligence or channel-check the data received. A covenant
breach may be a temporary circumstance due to a one-off event
and will not trigger an immediate escalation in risk profile
to stage 2.
At all times, the Investment Manager considers the risk of impairment
relative to the cash flows and general trading conditions of
the company and the industry in which the borrower resides.
Stage If the credit risk of a financial asset increases to the point
3: that it is considered credit-impaired, interest revenue is calculated
based on the amortised cost (i.e. the gross carrying amount less
the loss allowance). Financial assets in this stage will generally
be assessed individually. Lifetime expected credit losses are
recognised on these financial assets. This stage is triggered
by a marked deterioration in the management information received
from the borrower and a view taken on the overall credit conditions
for the sector in which the company resides. A permanent breach
of covenants and a deterioration in the valuation of security
would also merit a move to stage 3.
The Investment Manager also takes into account the level of security
to support each loan and the ease with which this security can
be monetised. This has a meaningful impact of the way in which
impairments are assessed, particularly as the Investment Manager
has a very strong track record in managing write-downs and reclaim
of assets.
For more details in relation to judgements, estimates and uncertainty
see note 4.
c) Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits
and short-term, highly liquid investments readily convertible to known
amounts of cash and subject to insignificant risk of changes in value.
The carrying values of cash and cash equivalents are deemed to be
a reasonable approximation of their fair values.
d) Receivables and prepayments
Receivables are carried at the original invoice amount, less impairments,
as discussed above.
The carrying values of the accrued interest and other receivables
are deemed to be reasonable approximations of their fair values.
e) Transaction costs
Transaction costs incurred on the acquisition of loans are capitalised
upon recognition of the financial asset and amortised over the term
of the respective loan.
f) Income and expenses
Interest income and bank interest are recognised on a time-proportionate
basis using the effective interest rate method.
Dividend income is recognised when the right to receive payment is
established.
All expenses are recognised on an accruals basis. All of the Company's
expenses (with the exception of share issue costs, which are charged
directly to the distributable reserve) are charged through the Statement
of Comprehensive Income in the period in which they are incurred.
g) Taxation
The Company is exempt from UK corporation tax on its chargeable gains
as it satisfies the conditions for approval as an investment trust.
The Company is, however, liable to UK corporation tax on its income.
However, the Company has elected to take advantage of modified UK
tax treatment in respect of its "qualifying interest income" in order
to deduct all, or part, of the amount it distributes to Shareholders
as dividends as an "interest distribution".
h) Changes in accounting policy and disclosures
New and amended standards and interpretations
The Company adopted the following new and amended relevant IFRS in
the year:
IFRIC 23 Uncertainty over income tax treatment
The adoption of this accounting standard did not have any effect on
the Company's Statement of Comprehensive Income, Statement of Financial
Position or equity.
i) Accounting standards issued but not yet effective
The International Accounting Standards Board ("IASB") has issued/revised
a number of relevant standards with an effective date after the date
of these financial statements. Any standards that are not deemed relevant
to the operations of the Company have been excluded. The Directors
have chosen not to early adopt these standards and interpretations
and they do not anticipate that they would have a material impact
on the Company's financial statements in the period of initial application.
Effective date
IFRS Financial Instruments: Disclosures - amendments 1 January 2020
7 regarding pre-replacement issues in the context
of the IBOR reform
IFRS Financial Instruments - amendments regarding 1 January 2020
9 pre-replacement issues in the context of the
IBOR reform
IAS 1 Presentation of Financial Statements - amendments
regarding the definition of materiality 1 January 2020
IAS 1 Presentation of Financial Statements - amendments
regarding the classification of liabilities 1 January 2023
IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors - amendments regarding 1 January 2020
the definition of materiality
4. Use of judgements and estimates
The preparation of the Company's financial statements requires the
Directors to make judgements, estimates and assumptions that affect
the reported amounts recognised in the financial statements. However,
uncertainty about these assumptions and estimates could result in
outcomes that could require a material adjustment to the carrying
amount of the asset or liability in future periods.
Judgements
In the process of applying the Company's accounting policies, management
made the following judgement, which has had a significant effect on
the amounts recognised in the financial statements:
Covid-19
The Covid-19 outbreak is impacting virtually all businesses and the
Board expects that it will continue to impact economies over the coming
months. The Board and Investment Manager is monitoring any impact
this may have on the Company, its investments and income. The situation
continues to change rapidly so the full impact cannot yet be understood,
a result of which is that future cashflows and valuations are more
uncertain at the current time, and may be more volatile than in recent
years. Indeed, the level of estimation uncertainty and judgement for
the calculation of expected credit losses has increased as a result
of the economic effects of the Covid-19 outbreak. However, the impact
of defaults that might occur in future under different economic scenarios
has been reflected in various models to enable the Board to evaluate
the Company's viability, and the Directors believe that the Company
is well placed to survive the impact of the Covid-19 outbreak, thereby
enabling the Company to realise its assets in an orderly manner.
Estimates and assumptions
The Company based its assumptions and estimates on parameters available
when the financial statements were approved. However, existing circumstances
and assumptions about future developments may change due to market
changes or circumstances arising beyond the control of the Company.
Such changes are reflected in the assumptions when they occur.
The current economic uncertainty (and the frequent changes in outlook
for different economic sectors) has created increased volatility and
uncertainty (as mentioned above and in the Investment Manager's Report).
In such circumstances the level of estimation uncertainty and judgement
of expected credit losses has increased. As noted in the Investment
Manager's Report, there are uncertainties about the need for future
provisions that may need to be made against individual loans and receivables.
Notwithstanding the best endeavours of management to obtain full repayment
there is a material uncertainty in relation to the level of provisioning
made in these financial statements. Due to this material uncertainty
the Directors are unable to update the expected credit loss assessment
(as set out in note 3b) to reflect the likely impact on the Company's
loan portfolio.
i) Recoverability of loans and other receivables
In accordance with IFRS 9, the impairment of loans and other receivables
has been assessed as described in note 3b. When assessing the credit
loss on a loan, and the stage of impairment of that loan, the Company
considers whether there is an indicator of credit risk for a loan
when the borrower has failed to make a payment, either capital or
interest, when contractually due and upon assessment. The Company
assesses at each reporting date (and at least on a monthly basis)
whether there is objective evidence that a loan classified as a loan
at amortised cost is credit-impaired and whether a loan's credit risk
or the expected loss rate has changed significantly. As part of this
process:
* Platforms are contacted to determine default and
delinquency levels of individual loans; and
* Recovery rates are estimated.
The analysis of credit risk is based on a number of factors and a
degree of uncertainty is inherent in the estimation process. As mentioned
above, due to the Covid-19 pandemic future cashflows and valuations
are more uncertain at the current time, and may be more volatile than
in recent years. Indeed, the level of estimation uncertainty and judgement
for the calculation of expected credit losses has increased as a result
of the economic effects of the Covid-19 outbreak.
The determination of whether a specific factor is relevant and its
weight compared with other factors depends on the type of product,
the characteristics of the financial instrument and the borrower,
and the geographical region. It is not possible to provide a single
set of criteria that will determine what is considered to be a significant
increase in credit risk. Events that the Company will assess when
deciding if a financial asset is credit impaired include:
* significant financial difficulty of the borrower;
* a breach of contract, such as a default or past-due
event; and
* it becoming probable that the borrower will enter
bankruptcy or other financial reorganisation.
Although it may not always be the case (e.g. if discussions with a
borrower are ongoing), generally a loan is deemed to be in default
if the borrower has missed a payment of principal or interest by more
than 90 days, unless the Company has good reason not to apply this
rule. If the Company has evidence to the contrary, it may make an
exception to the 90 day rule to deem that a borrower is, or is not,
in default. Therefore, the definitions of credit impaired and default
are aligned as far as possible so that stage 3 represents all loans
that are considered defaulted or otherwise credit impaired.
At present no direct loans to SMEs fall within Stage 2 or Stage 3.
However, if a situation were to arise where a direct loan to an SME
were reclassified as Stage 2 or Stage 3, the probability of default
and lifetime expected credit loss would be assessed on a case by case
basis and would be pertinent to the probability of recovery.
IFRS 9 confirms that a Probability of Default ("PD") must never be
zero as everything is deemed to have a risk of default; this has been
incorporated by the Company. All PDs are assessed against historic
data as well as the prevailing economic conditions at the reporting
date, adjusted to account for estimates of future economic conditions
that are likely to impact the risk of default. 12-month PD is applied
across the collective as a cumulative in Stage 1, currently set at
2% in line with the Investment Manager's historic performance data,
market knowledge, and credit enhancements (this is equivalent to there
being 1 default for an average portfolio of 50 unique borrowers. Once
an investment moves to Stage 2 then PD will be calculated on an individual
basis (and adjusted for Stage 3 if appropriate). All assessment is
based on reasonable and supportive information available at the time.
12 month ECL is applied across the collective as a cumulative in Stage
1, split according to the investment's classification. For direct
loan investments this is calculated as 2% of the individual investment's
Contracted Cash Flows ("CCF"), and 2% of the investment's CCF for
platform investments. These Stage 1 12 month ECL amounts are taken
to be the investments' floor amounts - the Lifetime ECL for any investment
can never be less than its floor amount. Once an investment moves
to Stage 2, Lifetime ECL is calculated on an individual basis. Lifetime
ECL is reviewed at each reporting date based on reasonable and supportive
information available at the time.
The following borrower information should be read in conjunction with
the current economic environment and, in particular, the impact of
Covid-19.
US Peer to Peer business (Borrower 18) impairment
The Company's largest peer to peer investment is a junior position
and represents a risk of write-down. In March 2019, the Former Investment
Manager met with the owner/founder and agreed an incentive plan to
expedite collections of the underlying portfolio and agreed a three
month period to show improvement. They informed the Company that they
had written down a large proportion of this portfolio in their accounts
due to a sales process underway at the time. They were advised that
if no improvement was forthcoming, the Former Investment Manager would
take over collections and it was explained that the Former Investment
Manager had a good track record, together with its partners, in achieving
better recoveries.
In June 2019, having observed slow progress, the Former Investment
Manager began a series of meetings to agree interaction mooted in
the previous quarter. Two executives from the Former Investment Manager
visited Borrower 18 in New York in July 2019 and August 2019, to agree
a process for the way forward and to have an update on the sale of
the business. At the time, they were in the middle of a two stage
due diligence, which caused delays to the provision of information.
With effect from 30 June 2020, the Company has impaired this platform
exposure by 100% with a 100% expectation of write-down for this part
of the portfolio. This is a pre-emptive move and takes into account
a best estimate of loans that are now being managed out by attorneys.
The decision to use a 100% impairment rate is based upon the Investment
Manager's past experience of platform performance.
Whilst a 100% impairment is based on past experience, the amount finally
received may be higher than this. A 10% decrease in the impairment
on this loan would result in a GBP232,000 increase in the net asset
value of the Company.
UK Venture Debt (Borrower 12) impairment
In September 2019, this platform made the Company aware that a loan
was to be sold at a discount to the price originally expected, due
to a series of potential acquirers falling away. This resulted in
an impairment provision in the year. After the turbulence of two of
the three principals leaving the company and triggering a clause in
the Loan Note agreement that allowed us to take closer control of
the process of managing the portfolio, the business has stabilised
and made very good progress in winding down the portfolio. The Company
received GBP1.6 million shortly after year end, leaving a balance
of GBP5.8 million outstanding.
The largest position in the portfolio, a broadband company, has been
restructured and was impaired by 59% at the year end, which has been
informed by the guidance provided by the platform . However, the reorganisation
of the business has progressed well and a new CEO employed. Its order
book has increased and it has been able to operate throughout the
current pandemic crisis. The Investment Manager, therefore, expects
some improvement in recovery.
Small Company Bond Platform (Borrower 15) impairment
Two loans outstanding from this platform were repaid during the reporting
period and a further loan was sold to a third party. The only outstanding
debt from this platform had undergone a protracted recovery process
through the courts. In Q1 2020, the Investment Manager took the decision
to fully impair the loan due to slow progress and the increased risk
that fees and expenses would erode any repayment to the Company.
Further details of the judgements applied in assessing the recoverability
of loans can be found in the Investment Manager's Report.
Collateral
While the presence of collateral is not a key element in the assessment
of whether there has been a significant increase in credit risk, it
is of great importance in the measurement of ECL. IFRS 9 states that
estimates of cash shortfalls reflect the cash flows expected from
collateral and other credit enhancements that are integral to the
contractual terms. Due to the business nature of the Investment Manager,
this is a key component of its ECL measurement and interpretation
of IFRS 9, as any investment would include elements of (if not all):
a fully collateralised position, fixed and floating charges, a corporate
guarantee, a personal guarantee, coverage ratios between 130% to 150%,
and an average LTV of 85%.
Loans written off
Financial assets (and the related impairment allowances) are normally
written off, either partially or in full, when there is no realistic
prospect of recovery. Where loans are secured, this is generally after
receipt of any proceeds from the realisation of security. In circumstances
where the net realisable value of any collateral has been determined
and there is no reasonable expectation of further recovery, write-off
may be earlier. Platform loans of GBP268,000 were written off in the
year (2019: GBP126,000) .
Renegotiated loans
A loan is classed as renegotiated when the contractual payment terms
of the loan are modified because the Company has significant concerns
about a borrower's ability to meet payments when due. On renegotiation,
the loan will also be classified as credit impaired, if it is not
already. Renegotiated loans will continue to be considered to be credit
impaired until there is sufficient evidence to demonstrate a significant
reduction in the risk of non-payment of future payments.
All data calculated for IFRS 9 purposes is consistent with the overall
methodology employed by KKV across all of its UK public funds. In
addition to the methodology used, the Company has taken impairment
data from Platforms for the assessment of loans with third party exposure.
Again, this is consistent with the approach KKV would expect to take
in these circumstances.
There were no new assets originated during the year that were credit-impaired
at the point of initial recognition. There were no financial assets
that have been modified since initial recognition at a time when the
loss allowance was measured at an amount equal to lifetime expected
credit losses and for which the loss allowance changed during the
year to an amount equal to 12-month expected credit losses.
There were no financial assets for which cash flows were modified
in the year while they had a loss allowance measured at an amount
equal to the lifetime expected credit loss.
In April 2020, as a result of the impact of Covid-19 a Stage 1 direct
loan (gross value of GBP428,000 at the year end) was renegotiated
to allow the payment of interest only for three months, which was
subsequently extended to six months. No write-down has been applied
to this loan as the Investment Manager has determined, after extensive
discussion with the borrower and as the interest continues to be paid
in full, that there was not a significant increase in credit risk
and thus not necessary to reclassify the loan to Stage 2.
Please see note 3b, note 14 and note 24 for further information on
the loans at amortised cost and credit risk.
5. Dividends
The Company distributes at least 85% of its distributable income earned
in each financial year by way of dividends. Following discussions
with the Investment Manager regarding the anticipated returns from
the Company's portfolio (both in the shorter and longer terms), the
Company rebased its annual dividend target to 7.00p per Ordinary Share
with effect from July 2018, and a dividend of 0.583p per Ordinary
Share has been paid every month since then. The monthly dividend at
the new rate of 0.583p per Ordinary Share was first paid in September
2018.
T he Company elected to designate all of the dividends for the year
ended 30 June 2020 as interest distributions to its Shareholders.
In doing so, the Company took advantage of UK tax treatment by "streaming"
income from interest-bearing investments into dividends that will
be taxed in the hands of Shareholders as interest income.
To date, the Company has declared the following dividends in respect
of earnings for the year ended 30 June 2020:
Total dividend
declared in respect
of earnings in Amount per
Announcement date Pay date the year Ordinary Share
GBP'000
29 August 2019 27 September 2019 307 0.583p
25 September 2019 25 October 2019 307 0.583p
31 October 2019 29 November 2019 307 0.583p
27 November 2019 27 December 2019 307 0.583p
18 December 2019 24 January 2020 307 0.583p
30 January 2020 28 February 2020 307 0.583p
27 February 2020 27 March 2020 307 0.583p
25 March 2020 24 April 2020 307 0.583p
30 April 2020 29 May 2020 307 0.583p
28 May 2020 26 June 2020 307 0.583p
25 June 2020 24 July 2020 307 0.583p
30 July 2020 28 August 2020 307 0.583p
------------ ------------
Dividends declared (to date) for the
year 3,684 7.00p
Less, dividends paid after the year
end (614) (1.17)p
Add, dividends paid in the year in
respect of the prior year 614 1.17p
------------ ------------
Dividends paid in
the year 3,684 7.00p
------------ ------------
In accordance with IFRS, dividends are only provided for when they
become a contractual liability of the Company. Therefore, during the
year a total of GBP3,684,000 (2019: GBP3,623,000) was incurred in
respect of dividends, none of which was outstanding at the reporting
date (2019: none). The dividends of GBP307,010 each, which were declared
on 25 June 2020 and 30 July 2020, had not been provided for at 30
June 2020 as, in accordance with IFRS, they were not deemed to be
liabilities of the Company at that date.
All dividends in the year were paid out of revenue (and not capital)
profits.
On 26 August 2020, the Company declared a dividend of 3.50p per Share
for the period from 1 July 2020 to 31 July 2020. This dividend was
paid on 25 September 2020.
Mechanics for returning cash to Shareholders
The Board has carefully considered the potential mechanics for returning
cash to Shareholders and the Company's ability to do so. The Board
believes it is in the best interests of Shareholders as a whole to
make distributions to Shareholders without a significant delay following
realisations of a material part of the Portfolio (whether in a single
transaction or through multiple, smaller transactions concluded on
similar timing). In the Board's view, making distributions by way
of a declaration of dividends has the benefit of being faster, providing
a more regular return (as opposed to simply waiting to return all
available amounts on a liquidation) and being more cost effective
to administer than other mechanisms, such as a tender offer or B share
scheme, although the Board notes that returning investment principal
by way of a declaration of dividends may not be the most tax efficient
method of returning monies to investors who are UK tax resident individuals.
However, the Board may consider making tender offers for Shares in
the future although Shareholders should have no expectation that this
will be the case.
The Board intends to make quarterly dividend payments for the time
being (instead of the current monthly dividends) but will keep this
under review. It may become more appropriate in future as the size
of the Company declines to instead make payments by way of ad-hoc
special dividends, when appropriate, during the course of the managed
wind-down process so that the Company is able to return available
cash to Shareholders as soon as reasonably practicable after cash
becomes available in the Portfolio. The Company will also look to
structure its dividend payments to maintain investment trust status
for so long as it remains listed.
6. Related parties
As a matter of best practice and good corporate governance, the Company
has adopted a related party policy which applies to any transaction
which it may enter into with any Director, the Investment Manager,
or any of their affiliates which would constitute a "related party
transaction" as defined in, and to which would apply, Chapter 11 of
the Listing Rules. In accordance with its related party policy, the
Company obtained: (i) the approval of a majority of the Directors;
and (ii) a third-party valuation in respect of these transactions
from an appropriately qualified independent adviser.
Loan to Medical Equipment Solutions Limited ("MESL")
In June 2017, the Company loaned GBP1,380,000 to MESL, whose Chairman
was Neil Roberts, who was chairman of SQN Capital Management, LLC
at that time. The loan bore interest at 10.0% per annum and was for
a period of five years from the date of drawdown. The loan was to
be repaid via 60 monthly payments. The loan was repaid early in March
2020.
Loan interest of GBP57,000 was earned in the year (2019: GBP104,000),
none of which was outstanding at 30 June 2020 (2019: GBP2,000).
At 30 June 2020, the balance of the loan was GBPnil (2019: GBP909,000).
The Directors and the Investment Manager are also considered to be
related parties. See notes 7 and 8 for further details.
7. Key contracts
a) Investment Manager
On 5 June 2020, the Company novated the contract to manage the portfolio
to KKV Investment Management Limited, following the management team
into their new entity from the Former Investment Manager (SQN UK).
The Investment Manager has responsibility for managing the Company's
portfolio. For their services, the Investment Manager was entitled
to a management fee (on the same terms as the Former Investment Manager)
at a rate equivalent to the following schedule (expressed as a percentage
of NAV per annum, before deduction of accruals for unpaid management
fees for the current month):
* 1.0% per annum for NAV lower than or equal to GBP250
million;
* 0.9% per annum for NAV greater than GBP250 million
and lower than or equal to GBP500 million; and
* 0.8% per annum for NAV greater than GBP500 million.
The management fee is payable monthly in arrears on the last calendar
day of each month. No performance fee is payable by the Company to
the Investment Manager.
During the year, a total of GBP483,000 (SQN UK, GBP452,000 and KKV,
GBP31,000) (2019: GBP513,000 all SQN UK) was incurred in respect of
management fees, of which GBP37,000 was payable at the reporting date
(SQN UK, GBP6,000 and KKV, GBP31,000) (2019: GBP42,000 to SQN UK).
From 17 September 2020, the 1.0% per annum base management fee was
reduced as follows:
* for 12 months from 17 September 2020 to 16 September
2021, to 0.75% per annum of the Company's NAV; and
* from 17 September 2021, to 0.55% of the Company's
NAV.
Performance fee
From 17 September 2020, the Investment Manager is entitled to a performance
fee. The performance fee will be calculated using the most recent
NAV prior to the Company failing the June 2020 Continuation Vote (being
the NAV as at 31 May 2020) as the benchmark NAV (the "Benchmark NAV").
If 99% of the Benchmark NAV is returned to Shareholders by way of
dividend, share buy backs or other methods of return of capital within
12 months from 17 September 2020 then a performance fee of 0.6% of
the value returned to Shareholders would be payable to KKV. This will
be reduced by 0.1% for every 1% less than 99% of Benchmark NAV that
is returned to Shareholders.
Should the time taken to realise the Portfolio exceed 12 months from
17 September 2020, then for the period from 17 September 2021 to 17
September 2022, the incentive fee would reduce by 33% (so that, for
example if 99% of Benchmark NAV is returned by month 17, the performance
fee would be two-thirds of 0.6%).
The introduction of an outperformance fee, under the terms of the
amended Investment Management Agreement, states that KKV will be entitled
to 10% of all funds returned to Shareholders in excess of the Benchmark
NAV within 12 months from 17 September 2020, reducing to 5% within
12-24 months.
Effective from 17 September 2021, the notice period applicable to
termination of the Investment Management Agreement by either party
was reduced from 12 months to 4 months.
Transaction costs
Prior to the change in the investment policy, the Company incurred
transaction costs for the purposes of structuring investments for
the Company. These costs formed part of the overall transaction costs
that were capitalised at the point of recognition and were taken into
account by the Former Investment Manager when pricing a transaction.
When structuring services were provided by the Former Investment Manager
or an affiliate of them, they were entitled to charge an additional
fee to the Company equal to up to 1.0% of the cost of acquiring the
investment (ignoring gearing and transaction expenses). This cost
was not charged in respect of assets acquired from the Former Investment
Manager, the funds they managed or where they or their affiliates
did not provide such structuring advice.
The Former Investment Manager agreed to bear all the broken and abortive
transaction costs and expenses incurred on behalf of the Company.
Accordingly, the Company agreed that the Former Investment Manager
may retain any commitment commissions received by the Former Investment
Manager in respect of investments made by the Company, save that if
such commission on any transaction were to exceed 1.0% of the transaction
value, the excess would be paid to the Company.
During the year, transaction costs of GBP147,000 (2019: GBP81,000)
were amortised.
b) Administration fees
Elysium Fund Management Limited ("Elysium") is entitled to an administration
fee of GBP100,000 per annum in respect of the services provided in
relation to the administration of the Company, together with time
based fees in relation to work on investment transactions. During
the year, a total of GBP117,000 (2019: GBP117,000) was incurred in
respect of administration fees, of which GBP28,000 (2019: GBP30,000)
was payable at the reporting date.
8. Directors' remuneration
During the year, a total of GBP93,513 (2019: GBP108,044) was incurred
in respect of Directors' remuneration, none of which was payable at
the reporting date (2019: none). No bonus or pension contributions
were paid or payable on behalf of the Directors. Further details can
be found in the Directors' Remuneration Report in the Annual Report
and Financial Statements.
9. Key management and employees
The Company had no employees during the year (2019: none). Therefore,
there were no key management (except for the Directors) or employees
during the year.
The following dividends were paid to the Directors during the year
by virtue of their holdings of Ordinary Shares (these dividends were
not additional remuneration):
David Stevenson GBP1,417 (2019: GBP1,394)
Gaynor Coley GBP143 (2019: GBP12)
Ken Hillen (resigned 26 May GBP291 (2019: GBP344)
2020)
Richard Hills (resigned 18 GBP0 (2019: GBP428)
December 2018)
10. Auditor's remuneration
For the year ended 30 June 2020, total fees, plus VAT, charged by
RSM UK Audit LLP, together with amounts accrued at 30 June 2020, amounted
to GBP40,000 (2019: GBP42,000), all of which related to audit services
(2019: GBP42,000). As at 30 June 2020, GBP40,000 (2019: GBP40,000)
was due to RSM UK Audit LLP.
11. Other expenses
Year ended Year ended
30 June 2020 30 June 2019
GBP'000 GBP'000
Audit fees (note 10) 40 42
Registrar fees 36 37
Other expenses 33 34
Directors' national insurance 26 28
Listing fees 18 17
Accountancy and taxation fees 11 11
------------ ------------
164 169
------------ ------------
12. Taxation
The Company has received confirmation from HMRC that it satisfied
the conditions for approval as an investment trust, subject to the
Company continuing to meet the eligibility conditions in s.1158 of
the Corporation Tax Act 2010 and the ongoing requirements for approved
investment trust companies in Chapter 3 of Part 2 of the Investment
Trust (approved Company) Tax Regulations 2011 (Statutory Instrument
2011.2999). The Company intends to retain this approval and self-assesses
compliance with the relevant conditions and requirements.
As an investment trust the Company is exempt from UK corporation tax
on its chargeable gains. The Company is, however, liable to UK corporation
tax on its income. However, the Company has elected to take advantage
of modified UK tax treatment in respect of its "qualifying interest
income" in order to deduct all, or part, of the amount it distributes
to Shareholders as dividends as an "interest distribution".
Year ended Year ended
30 June 2020 30 June 2019
GBP'000 GBP'000
Reconciliation of tax charge:
(Loss)/profit before taxation (913) 2,236
------------ ------------
Tax at the standard UK corporation tax rate
of 19% (2019: 19%) (173) 425
Effects of:
* Non-taxable investment gains and losses 743 164
* Interest distributions (570) (589)
------------ ------------
Total tax expense - -
------------ ------------
Domestic corporation tax rates in the jurisdictions in which the Company
operated were as follows:
Year ended Year ended
30 June 2020 30 June 2019
United Kingdom 19% 19%
Guernsey nil nil
Due to the Company's status as an investment trust and the intention
to continue to meet the required conditions, the Company has not provided
for deferred tax on any capital gains and losses.
13. (Loss)/earnings per Ordinary Share
The (loss)/earnings per Ordinary Share of (1.73)p (2019: 4.25p) is
based on a (loss)/profit attributable to the owners of the Company
of GBP(913,000) (2019: GBP2,236,000) and on a weighted average number
of 52,660,350 (2019: 52,660,350) Ordinary Shares in issue since Admission
. There is no difference between the basic and diluted earnings per
share.
14. Loans at amortised cost
Year ended Year ended
30 June 2020 30 June 2019
GBP'000 GBP'000
Loans 45,944 47,726
Unrealised loss* (3,311) (422)
------------ ------------
Balance at year end 42,633 47,304
------------ ------------
Loans: Non-current 31,942 36,614
Current 10,691 10,642
Cash held on client accounts with platforms - 48
------------ ------------
Loans at amortised cost and cash held on client
accounts with platforms 42,633 47,304
------------ ------------
*Unrealised loss
Foreign exchange on non-Sterling loans 1,125 715
Impairments of financial assets (4,436) (1,137)
------------ ------------
Unrealised loss (3,311) (422)
------------ ------------
The movement in unrealised gains/losses on loans comprises:
Year ended Year ended
30 June 2020 30 June 2019
GBP'000 GBP'000
Movement in foreign exchange on non-Sterling
loans 410 110
Movement in impairments (3,299) (415)
------------ ------------
Movement in unrealised gains and losses on
loans (2,889) (305)
Impact of transition to IFRS 9 - (23)
------------ ------------
Total movement in unrealised gains and losses
on loans (2,889) (328)
------------ ------------
The weighted average interest rate of the loans as at 30 June 2020
was 10.44% (2019: 10.31%).
The table below details expected credit loss provision ("ECL") of
financial assets in each stage at 30 June 2020:
30 June 2020 30 June 2019
Stage Stage 2 Stage Total Stage 1 Stage Stage Total
1 3 2 3
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Direct
loans
([1]) 34,419 - - 34,419 33,032 - - 33,032
ECL on
direct
loans (17) - - (17) (16) - - (16)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Direct
loans
net of
the ECL 34,402 - - 34,402 33,016 - - 33,016
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Platform
loans
([1]) 7,214 - 5,346 12,560 11,585 3,117 426 15,127
ECL on
platform
loans (7) - (4,412) (4,419) (12) (735) (374) (1,121)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Platform
loans
net of
the ECL 7,207 - 934 8,141 11,573 2,382 52 14,007
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Accrued
interest 1,585 - - 1,585 799 288 3 1,090
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total
loans
([1]) 41,633 - 5,346 46,979 44,617 3,117 426 48,160
Total ECL (24) - (4,412) (4,436) (28) (735) (374) (1,137)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total net
of
the ECL 41,609 - 934 42,543 44,589 2,382 52 47,023
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
([1]) These are the principal amounts outstanding at 30 June 2020 and
do not include the capitalised transaction fees, which are not
subject to credit risk. At 30 June 2020, the amortised cost of
the capitalised transaction fees totalled GBP90,000 (2019: GBP233,000).
The table below details the movements in the year ended 30 June 2020
of the principal amounts outstanding and the ECL on those loans:
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 Total
Principal Principal Principal Principal
outstanding Allowance outstanding Allowance outstanding Allowance outstanding Allowance
([1]) for ECL ([1]) for ECL ([1]) for ECL ([1]) for ECL
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2019 44,617 (28) 3,117 (735) 426 (374) 48,160 (1,137)
Transfers from:
* stage 1 to stage 3 (2,066) 2 - - 2,066 (2) - -
* stage 2 to stage 3 - - (3,117) 735 3,117 (735) - -
Net re-measurement
of ECL arising
from transfer
of stage - - - - - (3,584) - (3,584)
Net new and further
lending/repayments,
and foreign exchange
movements (918) 2 - - 5 15 (913) 17
Loans written-off
in the year - - - - (268) 268 (268) 268
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 June 2020 41,633 (24) - - 5,346 (4,412) 46,979 (4,436)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
([1]) These are the principal amounts outstanding at 30 June 2020 and
do not include the capitalised transaction fees, which are not
subject to credit risk. At 30 June 2020, the amortised cost of
the capitalised transaction fees totalled GBP90,000.
The table below details the movements in the year ended 30 June 2019
of the principal amounts outstanding and the ECL on those loans:
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 Total
Principal Principal Principal Principal
outstanding Allowance outstanding Allowance outstanding Allowance outstanding Allowance
([1]) for ECL ([1]) for ECL ([1]) for ECL ([1]) for ECL
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2018 28,735 (19) 15,679 (310) 535 (393) 44,949 (722)
Transfers from:
* stage 1 to stage 2 (2,176) 2 2,176 (2) - - - -
* stage 2 to stage 1 14,801 (52) (14,801) 52 - - - -
Net re-measurement
of ECL arising
from transfer
of stage - 41 - (564) - - - (523)
Net new and further
lending/repayments,
and foreign exchange
movements 3,257 - 68 89 12 (9) 3,337 80
Loans written-off
in the year - - (5) - (121) 28 (126) 28
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 June 2019 44,617 (28) 3,117 (735) 426 (374) 48,160 (1,137)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
([1]) These are the principal amounts outstanding at 30 June 2019 and
do not include the capitalised transaction fees, which are not
subject to credit risk. At 30 June 2019, the amortised cost of
the capitalised transaction fees totalled GBP233,000.
An increase of 1% of total gross exposure into stage 2 (from stage
1) would result in an increase in ECL impairment allowance of GBP11,000
(2019: GBP12,000) based on applying the difference in average impairment
coverage ratios to the movement in gross exposure.
At 30 June 2020, the Board considered GBP4,436,000 (2019: GBP1,137,000)
of loans to be impaired:
30 June 2020 30 June 2019
GBP'000 GBP'000
Borrowers 14 and 18 2,318 566
Borrower 12 1,060 8
Borrower 15 416 17
Borrower 17 345 62
Borrower 16 280 466
Direct SME loans 17 15
Other - 3
------------ ------------
Total impairment 4,436 1,137
------------ ------------
During the year, GBP268,000 (2019: GBP126,000) of loans were written
off and included within realised (loss)/gain on disposal of loans
in the Statement of Comprehensive Income.
See note 3b and note 4i regarding the process of assessment of loan
impairment.
The carrying values of the loans at amortised cost (excluding capitalised
transaction costs) are deemed to be a reasonable approximation of
their fair values.
15. Investments at fair value through profit or loss
Year ended 30 Year ended 30 June
June 2020 2019
GBP'000 GBP'000
Balance brought forward 232 280
Disposals in the year - (52)
Realised gain on disposal of investments
at fair value through profit or loss - 3
Movement in unrealised gain on investments
at fair value through profit or loss 19 1
------------ ------------
Balance at year end 251 232
------------ ------------
Cost at year end 159 159
------------ ------------
The GBP251,000 (2019: GBP232,000) investment at fair value through
profit or loss relates to an investment in a Luxembourg fund. For
further information on the investments at fair value through profit
or loss, see note 16.
16. Fair value of financial instruments at fair value through profit
or loss
The following table shows financial instruments recognised at fair
value, analysed between those whose fair value is based on:
* Quoted prices in active markets for identical assets
or liabilities (Level 1);
* Those involving inputs other than quoted prices
included in Level 1 that are observable for the asset
or liability, either directly (as prices) or
indirectly (derived from prices) (Level 2); and
* Those with inputs for the asset or liability that are
not based on observable market data (unobservable
inputs) (Level 3).
Financial assets and liabilities designated as at fair value through
profit or loss
At 30 June 2020, the financial instruments designated at fair value
through profit or loss were as follows:
30 June 2020 30 June 2019
Level Level Level Total Level Level Level Total
1 2 3 1 2 3
Financial GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
assets/(liabilities)
Unlisted equity shares - - 251 251 - - 232 232
Derivative financial
instruments
(note 17) - (6) - (6) - (351) - (351)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total financial
assets/(liabilities)
designated as at fair
value
through profit or
loss - (6) 251 245 - (351) 232 (119)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Level 2 financial instruments include foreign currency forward contracts.
They are valued using observable inputs (in this case foreign currency
spot rates).
Level 3 financial instruments include unlisted equity shares. Net
asset value is considered to be an appropriate approximation of fair
value as, if the Company were to dispose of these holdings, it would
expect to do so at, or around, net asset value.
Transfers between levels
There were no transfers between levels in the year (2019: none).
Financial assets and liabilities not designated as at fair value through
profit or loss
The carrying values of the loans at amortised cost (excluding capitalised
transaction costs) are deemed to be a reasonable approximation of
their fair values. The carrying values of all other assets and liabilities
not designated as at fair value through profit or loss are deemed
to be a reasonable approximation of their fair values due to their
short duration.
17. Derivative financial instruments
During the year, the Company entered into foreign currency forward
contracts to hedge against foreign exchange fluctuations. The Company
realised a loss of GBP852,000 (2019: loss of GBP206,000) on forward
foreign exchange contracts that settled during the year.
As at 30 June 2020, the open forward foreign exchange contracts were
valued at GBP(6,000) (2019: GBP(351,000)).
18. Other receivables and prepayments
30 June 2020 30 June 2019
GBP'000 GBP'000
Accrued interest 1,585 1,090
Prepayments 27 27
Other receivables 13 24
------------ ------------
1,625 1,141
------------ ------------
The carrying values of the accrued interest and other receivables
are deemed to be reasonable approximations of their fair values.
19. Other payables and accruals
30 June 2020 30 June 2019
GBP'000 GBP'000
Audit fee 40 40
Management fee 37 42
Legal fees 36 25
Administration fee 28 30
Other payables and accruals 21 24
Directors' national insurance 2 23
------------ ------------
164 184
------------ ------------
The carrying values of the other payables and accruals are deemed
to be reasonable approximations of their fair values.
20. Reconciliation of liabilities arising from financing activities
IAS 7 requires the Company to detail the changes in liabilities arising
from financing activities, including both cash and non-cash changes.
Liabilities arising from financing activities are those for which
cash flows were, or future cash flows will be, classified in the Company's
statement of cash flows as cash flows from financing activities.
As at 30 June 2020, the Company had no liabilities that would give
rise to cash flows from financing activities (2019: none).
21 . Share capital
30 June 2020 30 June 2019
GBP'000 GBP'000
Authorised share capital:
Unlimited number of Ordinary Shares - -
of 1 pence each
Unlimited C Shares of 10 pence each - -
Unlimited Deferred Shares of 1 pence - -
each
50,000 Management Shares of GBP1 each 50 50
------------ ------------
30 June 2020 30 June 2019
GBP'000 GBP'000
Called up share capital:
52,660,350 Ordinary Shares of 1 pence
each 527 527
50,000 Management Shares of GBP1 each 50 50
------------ ------------
577 577
------------ ------------
The Management Shares are entitled (in priority to any payment of
dividend of any other class of share) to a fixed cumulative preferential
dividend of 0.01% per annum on the nominal amount of the Management
Shares.
The Management Shares do not carry any right to receive notice of,
nor to attend or vote at, any general meeting of the Company unless
no other shares are in issue at that time. The Management Shares
do not confer the right to participate in any surplus of assets of
the Company on winding-up, other than the repayment of the nominal
amount of capital.
22. Other reserves
Special Profit and loss
distributable account ([2])
reserve
([1])
Non-distributable
Distributable Total
GBP'000 GBP'000 GBP'000 GBP'000
At 30 June 2018 50,942 75 (55) 50,962
Impact of transition to IFRS 9
(see note 3h) - - (23) (23)
------------ ------------ ------------ ------------
At 30 June 2018 - revised for the
application of IFRS 9 50,942 75 (78) 50,939
Realised revenue profit - 3,097 - 3,097
Realised investment gains and losses - (238) - (238)
Unrealised investment gains and
losses - - (623) (623)
Dividends paid (689) (2,934) - (3,623)
------------ ------------ ------------ ------------
At 30 June 2019 50,253 - (701) 49,552
Realised revenue profit - 3,000 - 3,000
Realised investment gains and losses - (1,388) - (1,388)
Unrealised investment gains and
losses - - (2,525) (2,525)
Dividends paid (2,072) (1,612) - (3,684)
------------ ------------ ------------ ------------
At 30 June 2020 48,181 - (3,226) 44,955
------------ ------------ ------------ ------------
([1]) During the period ended 30 June 2016, and following the approval
of the Court, the Company cancelled the share premium account and
transferred GBP51,143,000 to a special distributable reserve, being
premium on issue of shares of GBP52,133,000 less share issue costs
of GBP990,000. The special distributable reserve is available for
distribution to Shareholders.
([2]) The profit and loss account comprises both distributable and non-distributable
elements, as defined by Company Law. Realised elements of the Company's
profit and loss account are classified as "distributable", whilst
unrealised investment gains and losses are classified as "non-distributable".
With the exception of investment gains and losses, all of the Company's
profit and loss items are of a revenue nature as it does not allocate
any expenses to capital.
The two GBP307,010 dividends (see note 5), which were declared on
25 June 2020 and 30 July 2020, were paid out of the special distributable
reserve.
23. Net asset value per Ordinary Share
The net asset value per Ordinary Share is based on the net assets
attributable to the owners of the Company of GBP45,532,000 (2019:
GBP50,129,000), less GBP50,000 (2019: GBP50,000), being amounts owed
in respect of Management Shares, and on 52,660,350 (2019: 52,660,350)
Ordinary Shares in issue at the year end.
24. Financial Instruments and Risk Management
The Investment Manager manages the Company's portfolio to provide
Shareholders with attractive risk adjusted returns, principally in
the form of regular, sustainable dividends, through investment predominantly
in a range of secured loans and other secured loan-based instruments
originated through a variety of channels and diversified by way of
asset class, geography and duration.
Prior to the change in investment policy on 17 September 2020, the
Company sought to ensure that diversification of its portfolio was
maintained, with the aim of spreading investment risk.
Risk is inherent in the Company's activities, but it is managed through
a process of ongoing identification, measurement and monitoring. The
Company is exposed to market risk (which includes currency risk, interest
rate risk and price risk), credit risk and liquidity risk from the
financial instruments it holds. Risk management procedures are in
place to minimise the Company's exposure to these financial risks,
in order to create and protect Shareholder value.
Risk management structure
The Investment Manager is responsible for identifying and controlling
risks. The Board of Directors supervises the Investment Manager and
is ultimately responsible for the overall risk management approach
within the Company.
The Company has no employees and is reliant on the performance of
third party service providers. Failure by the Investment Manager,
Administrator, Broker, Registrar or any other third party service
provider to perform in accordance with the terms of its appointment
could have a significant detrimental impact on the operation of the
Company.
The market in which the Company participates is competitive and rapidly
changing. The risks have not changed from those detailed on pages
20 to 30 in the Company's Prospectus, which is available on the Company's
website, and as updated in the circular of 20 August 2020.
Risk concentration
Concentration indicates the relative sensitivity of the Company's
performance to developments affecting a particular industry or geographical
location. Concentrations of risk arise when a number of financial
instruments or contracts are entered into with the same counterparty,
or where a number of counterparties are engaged in similar business
activities, or activities in the same geographic region, or have similar
economic features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic, political
or other conditions. Concentrations of liquidity risk may arise from
the repayment terms of financial liabilities, sources of borrowing
facilities or reliance on a particular market in which to realise
liquid assets. Concentrations of foreign exchange risk may arise if
the Company has a significant net open position in a single foreign
currency, or aggregate net open positions in several currencies that
tend to move together.
In a Managed Wind-Down, the value of the Portfolio will be reduced
as investments are realised and concentrated in fewer holdings, and
the mix of asset exposure will be affected accordingly.
With the aim of maintaining a diversified investment portfolio, and
thus mitigating concentration risks, the Company had established (prior
to the change in the investment policy on 17 September 2020) the following
investment restrictions in respect of the general deployment of assets:
Investment Restriction Investment Policy
Geography
* Exposure to UK loan assets
Minimum of 60%
* Minimum exposure to non-UK loan assets 20%
Duration to maturity
* Minimum exposure to loan assets with duration of less
than 6 months
* Maximum exposure to loan assets with duration of 6 -
18 months and 18 - 36 months
None
* Maximum exposure to loan assets with duration of more None
than 36 months 50%
Maximum single investment 10%
Maximum exposure to single borrower or group 10%
Maximum exposure to loan assets sourced through single alternative lending platform or other
third party originator 25%
Maximum exposure to any individual wholesale loan arrangement 25%
Maximum exposure to loan assets which are neither sterling-denominated nor hedged back to
sterling 15%
Maximum exposure to unsecured loan assets 25%
Maximum exposure to assets (excluding cash and cash-equivalent investments) which are not
loans or investments with loan-based investment characteristics 10%
The Company complied with the investment restrictions throughout the
year and up to the change in investment policy on 17 September 2020,
except that, on 9 September 2020, in preparation for the upcoming
change in investment policy, additional foreign currency forward contracts
were entered into in order to equally and oppositely match the open
contracts at that date.
Market risk
(i) Price risk
Price risk exposure arises from the uncertainty about future prices
of financial instruments held. It represents the potential loss that
the Company may suffer through holding market positions in the face
of price movements. The investments at fair value through profit or
loss (see notes 15 and 16) are exposed to price risk and it is not
the intention to mitigate the price risk.
At 30 June 2020, if the valuation of the investments at fair value
through profit or loss had moved by 5% with all other variables remaining
constant, the change in net assets and profit/(loss) would amount
to approximately +/- GBP13,000 (2019: +/- GBP12,000). The maximum
price risk resulting from financial instruments is equal to the GBP251,000
(2019: GBP232,000) carrying value of the investments at fair value
through profit or loss.
(ii) Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument
will fluctuate because of changes in foreign currency exchange rates.
Currency risk arises when future commercial transactions and recognised
assets and liabilities are denominated in a currency that is not the
Company's functional currency. The Company invests in securities and
other investments that are denominated in currencies other than Sterling.
Accordingly, the value of the Company's assets may be affected favourably
or unfavourably by fluctuations in currency rates and therefore the
Company will necessarily be subject to foreign exchange risks.
As at 30 June 2020, a proportion of the net financial assets of the
Company, excluding the foreign currency forward contracts, were denominated
in currencies other than Sterling as follows:
Investments
at fair Foreign
value through Cash and currency
profit or Loans and cash Other payables forward
loss receivables equivalents and accruals Exposure contracts Net exposure
30 June GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2020
US
Dollars - 7,552 - - 7,552 (7,531) 21
Euros - 4,316 1 - 4,317 (4,121) 196
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
- 11,868 1 - 11,869 (11,652) 217
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
30 June
2019
US
Dollars - 4,359 32 - 4,391 (4,625) (234)
Euros - 3,658 1 - 3,659 (3,583) 76
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
- 8,017 33 - 8,050 (8,208) (158)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
In order to limit the exposure to foreign currency risk, the Company
entered into hedging contracts during the year. At 30 June 2020, the
Company held foreign currency forward contracts to sell US$9,340,000
and EUR4,550,000 (2019: sell US$11,480,000 and EUR4,110,000 and buy
US$5,610,000 and EUR120,000) with a settlement date of 30 September
2020.
Other future foreign exchange hedging contracts may be employed, such
as currency swap agreements, futures contracts and options. There
can be no certainty as to the efficacy of any hedging transactions
. In September 2020, the Company closed out its foreign currency forward
contracts and it is not intended to enter into foreign exchange hedging
contracts in the future.
At 30 June 2020, if the exchange rates for US Dollars and Euros had
strengthened/weakened by 5% against Sterling with all other variables
remaining constant, net assets at 30 June 2020 and profit/(loss) for
the year ended 30 June 2020 would have increased/(decreased) by GBP11,000/GBP(10,000)
(2019: (decreased)/increased by GBP(8,000)/GBP7,000), after accounting
for the effects of the hedging contracts mentioned above.
(iii) Interest rate risk
Interest rate risk arises from the possibility that changes in interest
rates will affect future cash flows or the fair values of financial
instruments. The Company is exposed to risks associated with the effects
of fluctuations in the prevailing levels of market interest rates
on its financial instruments and cash flow. However, due to the fixed
rate nature of the majority of the loans, cash and cash equivalents
of GBP1,193,000 (2019: GBP1,987,000) were the only interest bearing
financial instruments subject to variable interest rates at 30 June
2020. Therefore, if interest rates had increased/decreased by 50 basis
points, with all other variables held constant, the change in value
of interest cash flows of these assets in the year would have been
GBP6,000 (2019: GBP10,000).
Non-interest
Fixed interest Variable interest bearing Total
30 June 2020 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Loans ([1]) 42,633 - - 42,633
Investments at fair value through
profit or loss - - 251 251
Other receivables - - 1,598 1,598
Cash and cash equivalents - 1,193 - 1,193
------------ ------------ ------------ ------------
Total financial assets 42,633 1,193 1,849 45,675
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (164) (164)
Derivative financial instruments - - (6) (6)
------------ ------------ ------------ ------------
Total financial liabilities - - (170) (170)
------------ ------------ ------------ ------------
Total interest sensitivity
gap 42,633 1,193 1,679 45,505
------------ ------------ ------------ ------------
30 June 2019
Financial assets
Loans ([1]) 47,256 - - 47,256
Cash held on client accounts
with platforms - - 48 48
Investments at fair value through
profit or loss - - 232 232
Other receivables - - 1,114 1,114
Cash and cash equivalents - 1,987 - 1,987
------------ ------------ ------------ ------------
Total financial assets 47,256 1,987 1,394 50,637
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (184) (184)
Derivative financial instruments - - (351) (351)
------------ ------------ ------------ ------------
Total financial liabilities - - (535) (535)
------------ ------------ ------------ ------------
Total interest sensitivity
gap 47,256 1,987 859 50,102
------------ ------------ ------------ ------------
([1]) Of the loans of GBP42,633,000 (2019: GBP47,256,000), two loans amounting
to GBP10,527,000 (2019: GBP11,499,000) included both fixed elements
and variable elements, based on the performance of the borrowers'
portfolios of loans.
The Investment Manager manages the Company's exposure to interest
rate risk, paying heed to prevailing interest rates and economic conditions,
market expectations and its own views as to likely moves in interest
rates.
Although it has not done so to date, t he Company may implement hedging
and derivative strategies designed to protect investment performance
against material movements in interest rates. Such strategies may
include (but are not limited to) interest rate swaps and will only
be entered into when they are available in a timely manner and on
terms acceptable to the Company. The Company may also bear risks that
could otherwise be hedged where it is considered appropriate. There
can be no certainty as to the efficacy of any hedging transactions
.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument
will fail to discharge an obligation or commitment that it has entered
into with the Company, resulting in a financial loss to the Company.
At 30 June 2020, credit risk arose principally from cash and cash
equivalents of GBP1,193,000 (2019: GBP1,987,000) and balances due
from the platforms and SMEs of GBP42,633,000 (2019: GBP47,304,000).
The Company seeks to trade only with reputable counterparties that
the Investment Manager believes to be creditworthy.
The Company's credit risks principally arise through exposure to loans
provided by the Company, either directly or through platforms. These
loans are subject to the risk of borrower default. Where a loan has
been made by the Company through a platform, the Company will only
receive payments on those loans if the corresponding borrower through
that platform makes payments on that loan. The Investment Manager
has sought to reduce the credit risk by obtaining security on the
majority of the loans and by investing across various platforms, geographic
areas and asset classes, thereby ensuring diversification and seeking
to mitigate concentration risks, a s stated in the "risk concentration"
section earlier in this note.
The cash pending investment or held on deposit under the terms of
an investment instrument may be held without limit with a financial
institution with a credit rating of "single A" (or equivalent) or
higher to protect against counterparty failure.
The Company may implement hedging and derivative strategies designed
to protect against credit risk. Such strategies may include (but are
not limited to) credit default swaps and will only be entered into
when they are available in a timely manner and on terms acceptable
to the Company. The Company may also bear risks that could otherwise
be hedged where it is considered appropriate. There can be no certainty
as to the efficacy of any hedging transactions.
Please see note 3b and note 4 for further information on credit risk
and note 14 for information on the loans at amortised cost.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to meet
financial commitments. The principal liquidity risk is contained in
unmatched liabilities. The liquidity risk at 30 June 2020 was low
since the ratio of cash and cash equivalents to unmatched liabilities
was 7:1 (2019: 4:1).
The Investment Manager manages the Company's liquidity risk by investing
primarily in a diverse portfolio of loans, in line with the Prospectus
and as stated in the "risk concentration" section earlier in this
note. The maturity profile of the portfolio is as follows:
30 June 2020 30 June 2019
Percentage Percentage
0 to 6 months 5.4 11.6
6 months to 18 months 30.1 31.2
18 months to 3 years 35.5 24.8
Greater than 3 years 29.0 32.4
------------ ------------
100.0 100.0
------------ ------------
Capital management
During the year, the Board's policy was to maintain a strong capital
base so as to maintain investor, creditor and market confidence and
to sustain future development of the Company. The Company's capital
comprises issued share capital, retained earnings and a distributable
reserve created from the cancellation of the Company's share premium
account. To maintain or adjust the capital structure, the Company
could issue new Ordinary and/or C Shares, buy back shares for cancellation
or buy back shares to be held in treasury. During the year ended 30
June 2020, the Company did not issue any new Ordinary or C shares,
nor did it buy back any shares for cancellation or to be held in treasury
(2019: none).
The Company is subject to externally imposed capital requirements
in relation to its statutory requirement relating to dividend distributions
to Shareholders. The Company meets the requirement by ensuring it
distributes at least 85% of its distributable income by way of dividend.
Following the Shareholder's approval of the change to investment policy
and the managed wind-down of the Company, the Board intends to manage
the Company's capital to enable it to make quarterly dividend payments
for the time being (instead of the current monthly dividends), although
this will be kept under review. It may become more appropriate in
future as the size of the Company declines to instead make payments
by way of ad-hoc special dividends, when appropriate, during the course
of the managed wind-down process so that the Company is able to return
available cash to Shareholders as soon as reasonably practicable after
cash becomes available in the Portfolio. The Company will also look
to structure its dividend payments to maintain investment trust status
for so long as it remains listed.
25. Contingent assets and contingent liabilities
There were no contingent assets or contingent liabilities in existence
at the year end (2019: none).
26. Events after the reporting period
Change of name
On 18 July 2020, the Company changed its name from SQN Secured Income
Fund plc to Secured Income Fund plc.
Appointment of Director
On 8 July 2020, Brett Miller was appointed as a Director of the Company.
Change of investment policy
On 19 June 2020, the Company held the Continuation Vote that, in line
with the Directors' recommendation, did not pass. This vote was required
under the Articles as the Company did not have a Net Asset Value of
at least GBP250 million as at 31 December 2019. As this vote did not
pass, the Directors (as required under the Articles) convened a further
general meeting of the Company on 17 September 2020 at which a special
resolution approved the managed wind-down of the Company and the adoption
of the new investment policy of the Company.
Change of Investment Management fees
On 17 September 2020, the Company agreed to amend the terms of the
Investment Management Agreement such that the base investment management
fee was reduced and a performance fee added (see note 7a).
Dividends
Two dividends of 0.583p per Ordinary Share, which (in accordance with
IFRS) were not provided for at 30 June 2020, have been declared out
of the profits for the year ended 30 June 2020 (see note 5).
On 26 August 2020, the Company declared a dividend of 3.50p per Ordinary
Share for the period from 1 July 2020 to 31 July 2020. This dividend
will be paid on 25 September 2020.
There were no other significant events after the reporting period.
27. Parent and Ultimate Parent
The Directors do not believe that the Company has an individual Parent
or Ultimate Parent.
--- ENDS ---
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