TIDMFCH
RNS Number : 8460F
Funding Circle Holdings PLC
12 March 2020
Funding Circle Holdings plc
Full Year 2019 Results
Embargoed until 7.00am, 12 March 2020
THIS ANNOUNCEMENT INCLUDES INSIDE INFORMATION AS DEFINED IN
ARTICLE 7 OF THE MARKET ABUSE REGULATION NO. 596/2014
Funding Circle Holdings plc ("Funding Circle"), the leading
small and medium enterprise ("SME") loans platform in the UK, US,
Germany and the Netherlands, today announces results for the year
ended 31 December 2019 ("2019").
Samir Desai CBE, CEO and Founder, said:
"In 2019 we grew loans under management to a record GBP3.7bn up
19% year on year. The actions we took in 2019, in response to the
uncertain economic outlook, reduced growth but improved investor
returns and were the right response for the long-term benefit of
the company and our customers.
We start the year in a stronger position as a business and
confident in delivering an accelerated pathway to profitability
targeting Adjusted EBITDA break-even for the whole business in the
second half of 2020.
Our UK business was profitable in the second half of 2019 and
loans under management in the US continues to follow a similar
growth trajectory to the UK. We are reorganising our Developing
Markets business, which represents c.8% of Group revenue but c.60%
of Group Adjusted EBITDA losses in 2019, to deliver a better and
more profitable model.
Our new instant decision lending platform in the UK and the US
has begun to roll out and will provide a step-change in the
borrowing experience for SMEs."
Financial Summary:
-- Revenue of GBP167.4 million (2018: GBP141.9 million) up 18%
despite a challenging economic environment.
-- Adjusted EBITDA(1) of negative GBP27.5 million (2018:
negative GBP23.4 million) with loss margin of 16% (2018: 16%).
-- UK business operating profit of GBP3.0 million in H2 2019 (H2
2018: negative GBP5.4 million). The UK business represents c.65% of
Group revenue.
-- Loss before taxation and exceptional costs of GBP49.9 million
(2018: GBP45.0 million)(2) . Loss before taxation of GBP84.2
million (2018: GBP50.9 million)(2) including a non-cash exceptional
write-down of GBP34.3 million of goodwill and intangible assets
related to the Developing Markets.
-- Basic loss per share of 24.4 pence (2018 loss: 18.2 pence)(2) .
-- Free cash outflow(3) of GBP49.4 million (2018 outflow: GBP40.9 million).
-- Net assets of GBP319.0 million, (2018: GBP401.0 million)(2) ,
including a mix of cash and short and long term investments.
Operating and Strategic Summary:
-- Leading SME loans platform
o Record loans under management of GBP3.73 billion (2018:
GBP3.15 billion), representing year-on-year growth of 19%.
o Originations of GBP2.35 billion (2018: GBP2.29 billion),
representing year-on-year growth of 3%.
o c.80,000 small businesses have accessed funding through the
Funding Circle platform as at the end of 2019.
o Net promoter score between 80-90 for borrowers in the UK and
US.
-- Improving returns attracting more funds to the platform
o Proactive actions taken in 2019 to reduce conversion
(loans/applications) show early signs of improving net returns for
investors. Investor returns are expected to deliver 5.0-7.8%(4) in
the UK and US for loans originated in 2019.
o New investor products launched in 2019 in line with strategy
to diversify funding sources:
-- Successfully launched the Funding Circle-sponsored ABS Bond
programme in 2019 with two securitisations completed and 30
institutional investors joining the Funding Circle platform.
-- Two new private funds launched in 2019 with UK Private Fund
raising an initial GBP30 million of lending commitments from the
Merseyside Pension Fund.
-- Completed initial build of Instant Decision lending platform
o New instant decision lending platform drives superior customer
experience and competitive advantage. The new platform includes
historical data on c.1 million loan applications from the last ten
years and is powered by Funding Circle's 8th generation of
AI-enabled credit models.
o Initial pilots rolled out in Q4 2019 in the UK and first loans
took on average 6 minutes from application to approval. On track to
roll out to c.50% of borrowers by the end of 2020.
-- Refining model in Developing Markets to better serve SMEs
o Reorganising German and Dutch businesses, which are developing
markets for Funding Circle, and represent 8% of revenue and 60% of
Adjusted EBITDA losses, to originate loans for local lenders within
each market compared to originating loans to institutional and
retail investors.
o New model accelerates Group path to profitability with lower
overall losses in both countries.
Outlook:
-- Focus on improving conversion across the platform, keeping
net returns attractive and delivering profitable growth.
-- Combined UK and US revenue to grow by c.15%, skewed to H2
2020 due to seasonality and lapping credit tightening actions taken
in H1 2019.
-- The reorganised Developing Markets(5) contributing c.GBP7m of
revenue in 2020, weighted to H1 2020 from the wind-down of the
existing model with H2 2020 seeing the scaling of the new model
from a low base.
-- Targeting Group Adjusted EBITDA break-even in H2 2020
reflecting operational leverage as the business scales.
-- Group Adjusted EBITDA losses for the year to halve benefiting
from the new approach in the Developing Markets and marketing spend
falling modestly as a percentage of revenue.
-- Trading for the year has started well. We continue to assess
the possible impact of COVID-19 on borrowers and investors. We have
not seen an impact of the virus on recent trading, but we are
monitoring the situation closely.
1 Adjusted EBITDA represents operating profit before
depreciation and amortisation, share based payments, foreign
exchange gains / (losses), associated social security costs and
exceptional items. A reconciliation between adjusted EBITDA and
operating profit is shown in the Business Review.
2 The year to 31 December 2018 has been restated for the impact
of IFRS16 - refer to note 11.
3 Free cash flow has been redefined in the year and represents
net cash flows from operating activities including the cash cost of
purchasing intangible assets, property plant and equipment,
interest received, IPO costs in operating activities and the
payment of lease liabilities. The 2018 numbers have been restated
for this definition. A reconciliation to the statutory measure can
be found in the Business Review.
4 For loans originated in 2019.
5 Developing Markets exceptional cash restructuring costs of c.GBP5 million.
Analyst presentation:
A presentation for analysts will be held today via webcast at
9:30am. Please contact fundingcircle@headlandconsultancy.com if you
wish to attend.
An on-demand replay will also be available on the Funding Circle
website following the presentation.
Media Enquiries:
Funding Circle
David de Koning - Director of Investor Relations and
Communications (0203 927 3893)
Headland Consultancy
Mike Smith / Stephen Malthouse (020 3805 4822)
About Funding Circle:
Funding Circle (LSE: FCH) is a global SME loans platform,
connecting SMEs who want to borrow with investors and lenders in
the UK, US, Germany and the Netherlands. Since launching in 2010,
investors and lenders across Funding Circle's geographies -
including retail investors, banks, specialty finance companies
asset management companies, insurance companies, government-backed
entities and funds - have lent more than GBP8.5 billion to 80,000
businesses globally.
Forward looking statements and other important information
This document contains forward looking statements, which are
statements that are not historical facts and that reflect Funding
Circle's beliefs and expectations with respect to future events and
financial and operational performance. These forward looking
statements involve known and unknown risks, uncertainties,
assumptions, estimates and other factors, which may be beyond the
control of Funding Circle and which may cause actual results or
performance to differ materially from those expressed or implied
from such forward-looking statements. Nothing contained within this
document is or should be relied upon as a warranty, promise or
representation, express or implied, as to the future performance of
Funding Circle or its business. Any historical information
contained in this statistical information is not indicative of
future performance.
The information contained in this document is provided as of the
dates shown. Nothing in this document should be construed as legal,
tax, investment, financial, or accounting advice, or solicitation
for or an offer to invest in Funding Circle.
Market Analysis and Strategy
As we highlighted in the Half Year 2019 results, last year we
saw higher risk band loans showing lower returns due to the macro
environment. In response to this trend, we proactively tightened
lending in these higher risk bands. This affected the overall
conversion of borrower applications and our revenue growth
expectations for the year, but protected net returns to investors.
The early signs have been positive. Investor returns are expected
to deliver 5.0-7.8% in the UK and US for loans originated in
2019.
In 2020, we have a number of initiatives we are focusing on to
improve conversion whilst keeping net returns attractive for
investors.
2020 strategy:
At Funding Circle our mission is to build the place where small
businesses get the funding they need to win.
Underpinning this mission is our three year strategic plan,
FC2020, which we launched at the start of 2018 and acts as the
foundation to achieving our long-term goals.
The FC2020 plan is based on four key pillars that focus on how
we service and delight our customers:
-- Drive a better borrower experience
o In 2019 we were pleased to complete the initial build of our
new instant decision lending platform and start rolling out initial
pilots for instant decision loans.
o We also began a trial adding other lenders to our platform to
fund loans outside of our core term loan product. This helps more
small businesses to access finance.
-- Invest in data, tech and analytics
o In 2019, we created a data lake repository for all Funding
Circle data that underpinned the build of our new instant decision
lending platform. The new data lake repository contains data on 26
million businesses and 2 billion data points.
-- Diversify funding sources
o As part of the Group's strategy to diversify its funding
sources, we launched new investor products in 2019.
-- Funding Circle-sponsored ABS bonds: This product provides
access to institutional investors who can only, or prefer to,
purchase asset-backed bonds. In 2019, the Group completed two
securitisations - one in the US and one in the UK - with a number
of new investors joining the Funding Circle platform, including:
asset managers; insurance companies; pension funds and sovereign
wealth funds.
-- Private funds: The Group launched private funds in both the
UK and Developing Markets allowing institutional investors to gain
access to loans through a regulated fund structure that lends
through the Funding Circle platform rather than lending directly to
SME borrowers.
o Together, these new products have given the Group two specific
benefits being: increased flexibility in its funding sources; and a
new revenue stream allowing for a higher return on the Group's
equity.
-- Build a highly scalable global business
o In 2019 we continued the process of unifying all of our
geographies onto a single ledger and loan management platform
globally. We also upgraded the US system to include automated
client money reconciliations. In 2020, we plan to begin
implementation of these global systems in the UK, which will
continue to strengthen our position with regulatory bodies and
investors.
Business Review
Overview
In 2019, the Group delivered revenue growth of 18% to GBP167.4
million. Loans under management grew 19% to reach a record GBP3,731
million with originations growing 3% to GBP2,350 million.
Loans under Management Originations
(as at 31 December) (year ended 31 December)
-------------------- --------------------------- ------------------------------
2019 2018 Change 2019 2018 Change
GBPm GBPm GBPm GBPm
-------------------- -------- ------- -------- --------- -------- ---------
United Kingdom 2,583 2,208 17% 1,556 1,531 2%
United States 882 736 20% 619 596 4%
Developing Markets 266 204 30% 175 165 6%
-------------------- -------- ------- -------- --------- -------- ---------
Total 3,731 3,148 19% 2,350 2,292 3%
-------------------- -------- ------- -------- --------- -------- ---------
Adjusted EBITDA loss of GBP27.5 million (2018: loss GBP23.4
million) represented a similar margin to the previous year of
negative 16.4% (2018: negative 16.5%). Before central costs of
GBP38.7 million (2018: GBP35.5 million) segment adjusted EBITDA was
GBP11.2 million (2018: GBP12.1 million) representing a margin of 7%
(2018: 9%).
The Group's loss before taxation and exceptional costs was
GBP49.9m (2018: GBP45.0m). Loss before taxation of GBP84.2m (2018
restated: GBP50.9m) including a non-cash exceptional write-down of
GBP34.3m of goodwill and intangible assets related to the
Developing Markets.
Geographic highlights
United Kingdom
The UK represents Funding Circle's largest and most mature
business unit. In 2019, loans under management rose by 17% to
GBP2,583 million whilst originations grew by 2% to GBP1,556
million. Originations from existing customers, who require less
marketing investment and are therefore more profitable to the
business, grew by 4% to 42% of UK originations as the business
continued to build its reputation amongst small business owners as
the leading way to access finance in the UK. In total, the UK
delivered revenue growth of 16% to GBP108.5 million in 2019.
During the year, we commenced our new asset-backed bond
programme and sponsored the securitisation of GBP250 million of SME
loans in November 2019 in a joint transaction with Waterfall Asset
Management. This followed a separate transaction in April 2019
where we assisted an institution to securitise c. GBP180 million of
loans originated on Funding Circle's platform.
In June 2019 we launched a Private Fund raising initial lending
commitments from the Merseyside Pension Fund. The overall intention
is to raise more than GBP200 million over the next few years.
The year also saw the FCA introduce new rules and guidance for
our sector following consultation with platforms. We are fully
compliant with all of these changes and are supportive of these new
measures. We believe they will further protect retail investors and
raise standards across the wider industry.
United States
In the US, loans under management increased 20% to GBP882
million with origination growth of 4% to GBP619 million.
Revenue in the US grew 23% to GBP45.6 million, benefitting from
strong net investment income associated with the ABS programme that
launched in the year.
We sponsored the securitisation of $210 million of SME loans in
August 2019 with a further securitisation of c.$250 million
occurring in January 2020.
In April 2019, the US entered into a partnership with Lending
Club where they refer all borrowers looking for small business
loans to Funding Circle.
Developing Markets
The Developing Markets consists of Germany and the Netherlands.
Loans under Management in the Developing Markets increased by 30%
to GBP266 million with originations showing growth of 6% to GBP175
million.
Revenue for the year grew 19% to GBP13.3 million with repeat
loans to existing borrowers the main driver of business growth.
Following a strategic review of operations in Germany and the
Netherlands we are reorganising both businesses and centralising
operations in London. We will focus on originating loans for local
lenders we have partnered with in each market, as opposed to
originating loans on our platform for institutional and retail
investors.
We will continue to service the existing portfolio of loans of
c.EUR300m on behalf of our existing customers. Germany and the
Netherlands represent only 8% of Group revenue but c.60% of
adjusted EBITDA losses. By reorganising both businesses we move to
a more efficient model that better serves small businesses in these
markets whilst allowing the Group to accelerate its plans to
deliver profitable growth.
2019 2018 Change
(restated)
GBPm GBPm %
Net Income ("Revenue")
Transaction fees 121.2 112.9 7%
Servicing fees 30.4 24.9 22%
Net investment
income 10.5 - n/a
Other fees 5.3 4.1 29%
------------------------- ------- ------------ ------
167.4 141.9 18%
------------------------- ------- ------------ ------
Operating expenses
People costs (incl.
contractors) (90.3) (79.2) (14%)
Marketing costs (66.5) (57.8) (15%)
Depreciation and
amortisation (14.9) (12.5) (19%)
Loan repurchase
charge (6.5) (2.6) (150%)
Impairment (exceptional) (34.3) - n/a
IPO adviser costs
(exceptional) - (5.9) 100%
Other costs (39.6) (34.7) (14%)
------------------------- ------- ------------ ------
(252.1) (192.7) (31%)
------------------------- ------- ------------ ------
Operating loss (84.7) (50.8) (67%)
------------------------- ------- ------------ ------
Loss per share
(pence) (24.4p) (18.2p) (34%)
------------------------- ------- ------------ ------
Adoption of IFRS 16
From 1 January 2019, the Group adopted the new leasing standard
(IFRS 16) retrospectively. The adoption resulted in a restatement
of 2018 with a decrease in rental costs of GBP5.1 million and an
increase in depreciation of GBP4.3 million.
Revenue
Transaction fees, representing fees earned on originations, grew
7% to GBP121.2 million driven by origination increases of 3% and a
5% increase in transaction yields to 5.2% (2018: 4.9%) following
changes in loan mix and including the yield enhancing impact of a
policy change in the US whereby a borrower is no longer required to
refinance an existing loan when taking out a new loan.
Servicing fees, representing income for servicing loans under
management, grew 22% to GBP30.4 million being a function of loans
under management growth of 19% to GBP3,731 million. Servicing yield
remained flat year on year at 0.9%.
Servicing fees are not earned when Funding Circle is servicing
its own loans during the period that warehouses and securitisation
vehicles are on balance sheet.
Net investment income represents the income on loans invested
within the ABS warehouses, securitisation vehicles and the private
funds, together with fair value gains or losses on those loans and
the cost of servicing the debt incurred to finance the purchase of
SME loans. This new income stream generated GBP10.5 million of net
income in the year.
Other fees arise principally from a fee premium we received from
certain institutional investors during the year in respect of
buying back certain defaulted loans under a loan purchase
commitment.
Operating expenses
Total operating expenses increased during the year by 31% to
GBP252.1 million (2018 restated: GBP192.7 million) compared with
growth in revenues of 18%. These costs include the exceptional
impairment of goodwill and assets associated with the Developing
Markets business of GBP34.3 million. Excluding these items,
operating costs were GBP217.8 million, 17% higher than 2018.
People costs (including contractors) which represent the Group's
largest ongoing operating cost increased during the year by 16% to
GBP104.6 million, before the capitalisation of development spend.
This was driven by growth in average headcount of 16%. The share
based payment charge for the year, included in people costs,
remained relatively flat at GBP8.0 million (2018: GBP8.6
million).
2019 2018 Change
(restated)
GBPm GBPm %
People costs 104.6 90.0 16%
Less capitalised development
spend (CDS) (14.3) (10.8) (32%)
People costs net of CDS 90.3 79.2 14%
Average headcount (incl. contractors) 1,165 1,004 16%
Year end headcount (incl. contractors) 1,139 1,074 6%
--------------------------------------- ------ ----------- ------
Marketing costs are primarily directed at new customers rather
than existing customers. These costs increased in the year from
GBP57.8 million in 2018 to GBP66.5 million in 2019 as the Group
continued to drive growth in both originations and awareness in the
Funding Circle brand. Marketing spend overall was 40% of revenue
during the year compared with 41% in 2018.
Depreciation and amortisation costs of GBP14.9 million (2018:
GBP12.5 million) largely represent the amortisation of the cost of
the Group's capitalised technology development.
Loan repurchase charges relate to the buyback of certain
defaulted loans from certain institutional investors under a loan
purchase commitment in return for a fee premium (reflected in Other
fees). Under IFRS 9 this commitment is accounted for under the
expected credit loss model.
An exceptional impairment charge of GBP34.3 million was recorded
in respect of the Developing Markets (Germany and the Netherlands).
The Group concluded that the future cash flow projections of these
businesses were insufficient to support the carrying value of the
associated goodwill and assets.
Other costs principally includes cost of sales, data and
technology costs and property costs. These grew by GBP4.9 million
to GBP39.6 million, following growth in the business and greater
data consumption.
Operating loss grew to GBP84.7 million (2018 restated: loss
GBP50.8 million). This increase mainly related to the exceptional
impairment of goodwill and assets associated with the Developing
Markets business of GBP34.3 million. Excluding exceptional items,
operating loss was GBP50.4 million (2018: GBP44.9 million).
The loss per share was 24.4 pence (2018 restated: loss per share
18.2 pence) based on a weighted average number of ordinary shares
in issue of 347.6 million (2018: 271.3 million).
Segment adjusted EBITDA and adjusted EBITDA
The Group also reviews the results of the Group and segments
using segment adjusted EBITDA and adjusted EBITDA as alternative
performance measures. This is to remove the impact of items that
are not managed at a segment level including centralised product
development costs and corporate costs as well as the depreciation
and amortisation which arise principally on previously capitalised
development spend.
The table below sets out a reconciliation between these measures
and the statutory operating loss:
2019 2018 (restated)
----------------------------------------- -----------------------------------------
United United Developing Total United United Developing Total
Kingdom States Markets Kingdom States Markets
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- --------- -------- ----------- ------- --------- -------- ----------- -------
Revenue 108.5 45.6 13.3 167.4 93.6 37.1 11.2 141.9
Segment adjusted
EBITDA 34.0 (10.3) (12.5) 11.2 24.6 (5.7) (6.8) 12.1
Segment adjusted
EBITDA margin 31% (23%) (94%) 7% 26% (15%) (61%) 9%
Product development (26.4) (24.5)
Corporate costs (12.3) (11.0)
Adjusted EBITDA (27.5) (23.4)
Depreciation and
amortisation (14.9) (12.5)
Share-based payments
and social security
costs (8.0) (8.6)
Foreign exchange
loss - (0.4)
Exceptional items (34.3) (5.9)
---------------------- --------- -------- ----------- ------- --------- -------- ----------- -------
Operating loss (84.7) (50.8)
---------------------- --------- -------- ----------- ------- --------- -------- ----------- -------
On adoption of IFRS 16, 2018 was restated with a GBP5.1 million
increase in adjusted EBITDA and a GBP4.3 million increase in
depreciation.
United Kingdom
Segment adjusted EBITDA growth of 38% was achieved as the
business continues to scale and grow its higher margin existing
customer base. Compared to revenue growth of 16%, costs only grew
8% with marketing spend falling to 35% of revenue (2018: 40%).
Revenue benefitted from GBP4.9 million of net investment income on
new products for the first time but lower conversion of
applications to loans, following risk tightening, led to
origination growth of 2% and transaction revenue growth slightly
higher at 6%, with the difference a function of yield improvement.
If central costs of product development and corporate costs had
been allocated, the UK would still have reported an operating
profit for the first time in the second half of the year
demonstrating the profitable trajectory the business is on.
United States
Similar to the UK, conversion in the US declined following risk
tightening and price increases, with originations flat year on year
restricting transaction revenue improvement. However, net
investment income on new products helped overall revenue growth to
23%. Segment adjusted EBITDA losses grew to GBP10.3 million as the
US continued to invest for growth. Marketing spend rose 6
percentage points to reach 48% of revenue (2018: 42%), increasing
the adjusted EBITDA loss margin to 23% (2018: 15%).
Product development costs which relate to the people and
overhead costs of running and developing the Group's technology
platforms grew on a net basis by 8%. This was the result of
increased software engineering headcount as the Group invests in
its global platforms including the build of its new instant
decision lending platform.
Internal development costs capitalised as intangible fixed
assets in 2019 were GBP14.3 million, up from GBP10.8 million in
2018.
Corporate costs of GBP12.3 million (2018: GBP11.0 million)
included a full year's worth of operating costs associated with
being a public company compared to only six months of such costs in
2018.
Share based payments and the associated social security costs
totalled GBP8.0 million, a decrease of GBP0.6 million on 2018.
Social security costs are calculated with reference to the share
price at the time of vesting and therefore this cost fluctuates as
the share price moves.
Balance Sheet and Liquidity
Following the launch of the new funding products, the Group's
balance sheet now includes the assets and debt of the ABS
programmes. The table below breaks down the Group's balance sheet
into its constituent parts.
2019 2018
(restated)
--------------------- ------------------------- ------------- ------- ------- -----------
Warehouse Securitisation Private
SPVs SPVs Fund Other Total Total
GBPm GBPm GBPm GBPm GBPm GBPm
================== ===================== ========================= ============= ======= ======= ===========
Assets
SME loans 342.0 366.6 13.2 1.7 723.5 -
Cash 18.2 14.1 - 132.2 164.5 333.0
Other assets - 8.4 - 99.1 107.5 117.0
================== ===================== ========================= ============= ======= ======= ===========
360.2 389.1 13.2 233.0 995.5 450.0
================== ===================== ========================= ============= ======= ======= ===========
Liabilities
Bank debt 265.8 - - - 265.8 -
Bonds - 351.5 - (2.8) 348.7 -
Other liabilities - - - 62.0 62.0 49.0
================== ===================== ========================= ============= ======= ======= ===========
265.8 351.5 - 59.2 676.5 49.0
================== ===================== ========================= ============= ======= ======= ===========
Equity 94.4 37.6 13.2 173.8 319.0 401.0
================== ===================== ========================= ============= ======= ======= ===========
In the warehouse phase of each ABS programme, loans are
accumulated prior to a securitisation event. During this period the
Group controls and is exposed to the risks and rewards of the
warehouse special purpose vehicles (SPVs) and accordingly
recognises the SME loans and associated bank debt onto its balance
sheet.
On securitisation a new SPV raises capital through the issuance
of rated senior and unrated junior bonds using the proceeds to
purchase SME loans from the warehouse SPV. In turn the warehouse
SPV repays both the bank debt and the monies that Funding Circle
has invested. Regulations in both the UK and US require Funding
Circle to invest alongside bondholders, retaining at least a 5%
interest in the issued bonds. In this circumstance, where the
interest is reduced to 5%, Funding Circle is no longer exposed to
the significant risks and rewards of the securitisation SPV and
derecognises both the underlying SME loans and bond debt from its
balance sheet.
In circumstances where the majority of the most junior unrated
bonds have been retained by the balance sheet date, Funding Circle
is required to recognise and consolidate onto its balance sheet all
the securitisation SPV's SME loans and bond liabilities. This is
because the junior bonds rank beneath the senior bonds and
therefore have the greatest risk and reward. As at 31 December
2019, in both the UK and the US, Funding Circle has retained a
significant interest in the junior tranches of each securitisation
SPV and has consolidated these vehicles in addition to the
warehouse SPVs.
Accordingly the Group balance sheet includes GBP708.6 million of
SME loans and GBP617.3 million of related bank and bond debt plus
other associated assets and liabilities from these SPVs.
Both the warehouse and securitisation SPVs are bankruptcy remote
such that the net exposure to the Group is the GBP94.4 million and
GBP37.6 million, respectively, of net equity invested in these
vehicles as opposed to the total value of either the SME loans or
the related bank or bond liabilities.
Cash flow
As at 31 December 2019, the Group held cash and cash equivalents
of GBP164.5 million, down from GBP333.0 million at the end of 2018.
Of the GBP168.5 million decrease, GBP117.7 million was due to the
introduction of the new investor products where Funding Circle has
injected seed capital into the Private Funds and working capital
into the warehouse phase of the ABS programmes as well as retaining
a residual investment in the rated and unrated bonds in the
securitisation vehicles. The table below shows how the Group's cash
has been utilised.
Free cash flow, which is an alternative performance measure, has
been redefined in the year following the new funding products,
implementation of IFRS 16 and restatement of IPO cost presentation
and therefore the comparatives have been restated (refer note 10).
It represents the net cash flows from operating activities plus the
cost of purchasing intangible assets, property plant and equipment,
lease payments, interest received and excluding IPO costs presented
in operating activities. It excludes the warehouse and
securitisation cash flows as well as the funding of these
investments.
2019 2018
(restated)
GBPm GBPm
------------------------------------------------- -------- ------------
Cash outflow from operations (27.0) (32.0)
Tax received - 1.4
------------------------------------------------- -------- ------------
Net cash outflow from operations (27.0) (30.6)
Purchase of tangible and intangible assets (17.2) (13.3)
IPO costs in operating activities - 5.9
Interest received 1.9 0.9
Payment of lease liabilities (7.1) (3.8)
------------------------------------------------- -------- ------------
Free cash flow (49.4) (40.9)
Net cash outflow associated with investor
products (117.7) (1.1)
Net cash inflow from other financing activities 0.7 285.6
Effect of foreign exchange (2.1) 0.5
------------------------------------------------- -------- ------------
Movement in the year (168.5) 244.1
Cash and cash equivalents at the beginning
of the year 333.0 88.9
------------------------------------------------- -------- ------------
Cash and cash equivalents at the end of
the year 164.5 333.0
------------------------------------------------- -------- ------------
Cash outflow from operations was GBP27.0 million in line with
the Group's adjusted EBITDA loss of GBP27.5 million.
Free cash flow has principally increased due to increased
capitalised development spend of GBP3.5 million to GBP14.3 million
(2018: GBP10.8 million) and increases in lease payments following
office moves.
Subsequent events
In March 2020, the Group announced that it is reorganising the
continental European businesses of Germany and the Netherlands (the
Developing Markets segment) and centralising the operations in
London. The anticipated restructuring costs of this reorganisation
are estimated at c.GBP5.0 million.
Statement of Directors' Responsibilities
The Funding Circle Report and Accounts for year end 31 December
2019 contains a responsibility statement in the following form:
Each of the Directors confirm that, to the best of their
knowledge:
-- the Group and Company financial statements, which have been
prepared in accordance with IFRSs as adopted by the European Union,
give a true and fair view of the assets, liabilities, financial
position and profit of the Group and profit of the Company; and
-- the Directors' Report includes a fair review of the
development and performance of the business and the position of the
Group and Company, together with a description of the principal
risks and uncertainties that it faces.
In the case of each of the Directors in office as at the date of
the approval of the Annual Report and Accounts:
-- so far as the Director is aware, there is no relevant audit
information of which the Company's auditors are unaware; and
-- the Director has taken all the steps that he/she ought to
have taken as a Director in order to make himself/herself aware of
any relevant audit information and to establish that the Company's
auditors are aware of that information.
By order of the Board
Samir Desai, Chief Executive Officer
Sean Glithero, Chief Financial Officer
12 March 2020
Consolidated statement of comprehensive income
for the year ended 31 December 2019
31 December 31 December
2019 2018
(restated)
Note GBPm GBPm
-------------------------------------- ---- ----------- -----------
Transaction fees 121.2 112.9
Servicing fees 30.4 24.9
Net investment income: 10.5 -
- Investment income 28.3 -
- Investment expense (7.9) -
- Fair value gains/(losses) (9.9) -
Other fees 5.3 4.1
-------------------------------------- ---- ----------- -----------
Net income 2 167.4 141.9
-------------------------------------- ---- ----------- -----------
People costs (90.3) (79.2)
Marketing costs 3 (66.5) (57.8)
Depreciation and amortisation 3 (14.9) (12.5)
Loan repurchase charge (6.5) (2.6)
Impairment (exceptional) 4 (34.3) -
IPO adviser costs (exceptional) 4 - (5.9)
Other costs (39.6) (34.7)
-------------------------------------- ---- ----------- -----------
Operating expenses 3 (252.1) (192.7)
-------------------------------------- ---- ----------- -----------
Operating loss (84.7) (50.8)
Finance income 1.8 0.9
Finance costs (1.2) (1.0)
Share of net loss of associates (0.1) -
-------------------------------------- ---- ----------- -----------
Loss before taxation (84.2) (50.9)
Income tax (0.5) 1.4
-------------------------------------- ---- ----------- -----------
Loss for the year (84.7) (49.5)
-------------------------------------- ---- ----------- -----------
Other comprehensive (loss)/income
Items that may be reclassified
subsequently to profit and loss:
Exchange differences on translation
of foreign operations (7.7) 2.4
-------------------------------------- ---- ----------- -----------
Total comprehensive loss for the
year (92.4) (47.1)
-------------------------------------- ---- ----------- -----------
Total comprehensive loss attributable
to:
Owners of the Parent (92.4) (47.1)
-------------------------------------- ---- ----------- -----------
Loss per share
Basic and diluted loss per share 5 (24.4)p (18.2)p
-------------------------------------- ---- ----------- -----------
All amounts relate to continuing activities.
The year to 31 December 2018 has been restated for the impact of
IFRS 16 Leases - refer to note 11.
Consolidated balance sheet
as at 31 December 2019
31 December 31 December
2019 2018
(restated)
Note GBPm GBPm
========================================== =========== ===========
Non-current assets
Goodwill 6 11.3 42.3
Intangible assets 7 23.6 21.5
Property, plant and equipment 8 39.0 25.2
Investments in associates 13.2 -
Investment in SME loans (other) 9 1.7 0.3
====================================== =========== ===========
88.8 89.3
========================================== =========== ===========
Current assets
Investment in SME loans (curing) 9 - 4.7
Investment in SME loans (warehouse) 9 342.0 -
Investment in SME loans (securitised) 9 366.6 -
Trade and other receivables 33.6 23.0
Cash and cash equivalents 10 164.5 333.0
====================================== =========== ===========
906.7 360.7
========================================== =========== ===========
Total assets 995.5 450.0
========================================== =========== ===========
Current liabilities
Trade and other payables 19.7 19.3
Bank borrowings 9 265.8 -
Bonds 9 348.7 -
Short-term provisions 3.1 3.8
Lease liabilities 8 8.5 5.0
====================================== =========== ===========
645.8 28.1
Non-current liabilities
Long-term provisions 0.9 0.8
Lease liabilities 8 29.8 20.1
====================================== =========== ===========
Total liabilities 676.5 49.0
========================================== =========== ===========
Equity
Share capital 0.3 0.3
Share premium account 292.3 291.8
Foreign exchange reserve 8.0 15.7
Share options reserve 11.9 6.0
Retained earnings 6.5 87.2
====================================== =========== ===========
Total equity 319.0 401.0
========================================== =========== ===========
Total equity and liabilities 995.5 450.0
========================================== =========== ===========
The year to 31 December 2018 has been restated for the impact of
IFRS 16 Leases - refer to note 11.
Consolidated statement of changes in equity
for the year ended 31 December 2019
Share Share Foreign Share (Accumulated Total
capital premium exchange options losses)/ equity
account reserve reserve retained
earnings
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------- -------- -------- --------- -------- ------------ -------
Balance at 1 January 2018 as
previously reported 0.2 278.0 13.3 13.9 (153.2) 152.2
Impact of adoption of IFRS 16
(note 11) - - - - (1.2) (1.2)
--------------------------------------- -------- -------- --------- -------- ------------ -------
Restated balance at 1 January
2018 0.2 278.0 13.3 13.9 (154.4) 151.0
Loss for the year - - - - (49.5) (49.5)
Other comprehensive income
Exchange differences on translation
of foreign operations - - 2.4 - - 2.4
Transactions with owners
Transfer of share option costs - - - (13.0) 13.0 -
Capital reduction - (278.1) - - 278.1 -
Issue of share capital 0.1 301.0 - - - 301.1
Equity issuance costs - (9.1) - - - (9.1)
Employee share schemes - value
of employee services - - - 5.1 - 5.1
--------------------------------------- -------- -------- --------- -------- ------------ -------
Balance at 31 December 2018 (restated) 0.3 291.8 15.7 6.0 87.2 401.0
Loss for the year - - - - (84.7) (84.7)
Other comprehensive loss
Exchange differences on translation
of foreign operations - - (7.7) - - (7.7)
Transactions with owners
Transfer of share option costs - - - (4.0) 4.0 -
Issue of share capital - 0.5 - - - 0.5
Employee share schemes - value
of employee services - - - 9.9 - 9.9
--------------------------------------- -------- -------- --------- -------- ------------ -------
Balance at 31 December 2019 0.3 292.3 8.0 11.9 6.5 319.0
--------------------------------------- -------- -------- --------- -------- ------------ -------
The year to 31 December 2018 has been restated for the impact of
IFRS 16 Leases - refer to note 11.
Consolidated statement of cash flows
for the year ended 31 December 2019
31 December 31 December
2019 2018
(restated)
Note GBPm GBPm
========================================================= =========== ========================
Net cash outflow from operating activities 10 (27.0) (30.6)
===================================================== =========== ========================
Investing activities
Purchase of intangible assets (14.5) (11.0)
Purchase of property, plant and equipment (2.7) (2.3)
Cash receipts from SME loans (curing) 4.7 0.2
Purchase of SME loans (other) (1.5) (1.3)
Purchase of SME loans (warehouse phase) (381.2) -
Purchase of SME loans (securitised) (414.5) -
Cash receipts from SME loans (warehouse phase) 32.5 -
Cash receipts from SME loans (securitised) 37.4 -
Investment in associates (13.9) -
Interest received 1.9 0.9
===================================================== =============== ========================
Net cash outflow from investing activities (751.8) (13.5)
===================================================== =============== ========================
Financing activities
Proceeds from bank borrowings 462.1 -
Repayment of bank borrowings (192.7) -
Proceeds from issuance of bonds 379.5 -
Payment of bond liabilities (30.1) -
Preferred dividend payment - (0.5)
Proceeds on the issue of ordinary
shares on IPO - 300.0
Payment of IPO adviser costs 4 - (9.1)
Proceeds from the exercise of share
options 0.7 1.1
Payment of lease liabilities (7.1) (3.8)
----------------------------------------------------- --------------- ------------------------
Net cash inflow from financing activities 612.4 287.7
----------------------------------------------------- --------------- ------------------------
Net (decrease)/increase in cash and cash equivalents (166.4) 243.6
Cash and cash equivalents at the beginning of
the year 333.0 88.9
Effect of foreign exchange rate changes (2.1) 0.5
===================================================== =============== ========================
Cash and cash equivalents at the end of the year 164.5 333.0
===================================================== =============== ========================
The year to 31 December 2018 has been restated for the impact of
IFRS 16 Leases - refer to note 11 and to re-present certain IPO
adviser costs within operating cash flows - refer to note 10.
The impact of exceptional items on the consolidated statement of
cash flows is detailed in note 4.
Notes
1. Basis of preparation
The results for the year ended 31 December 2019 have been
extracted from the audited financial statements of Funding Circle
Holdings plc. The financial statements have been prepared in
accordance with International Financial Reporting Standards (IFRSs)
and IFRIC interpretations as adopted by the European Union and with
those parts of the Companies Act 2006 applicable to companies
reporting under IFRS. The financial statements have been prepared
on a going concern basis.
The financial information in this statement does not constitute
statutory accounts within the meaning of s434 of the Companies Act
2006. The statutory accounts for the year ended 31 December 2019,
on which the auditors have given an unqualified audit report, have
not yet been filed with the Registrar of Companies.
Except as described below in Note 11, the principal accounting
policies applied in the preparation of the consolidated financial
statements are consistent with those of the annual financial
statements for the year ended 31 December 2018, as described in
those financial statements.
The preparation of financial statements in conformity with IFRS
requires the use of estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Although these estimates are
based on management's best knowledge of the amount, event or
actions, actual results ultimately may differ from those
estimates.
2. Segmental information
IFRS 8 Operating Segments requires the Group to determine its
operating segments based on information which is provided
internally. Based on the internal reporting information and
management structures within the Group, it has been determined that
there are three geographic operating segments supported by two
centralised cost segments. Reporting on this basis is reviewed by
the Global Leadership Team ("GLT"), which is the chief operating
decision maker ("CODM"). The GLT function is made up of the
Executive Directors and other senior management and is responsible
for the strategic decision making of the Group.
The five reportable segments consist of the three geographic
segments: the United Kingdom, the United States and Developing
Markets, plus the two centralised cost segments: global product
development and corporate costs. The Developing Markets segment
includes the Group's less mature marketplaces in Germany and the
Netherlands.
The GLT measures the performance of each segment by reference to
a non-GAAP measure, adjusted EBITDA, which is defined as
profit/loss before finance income and costs, taxation, depreciation
and amortisation ("EBITDA") and additionally excludes share-based
payment charges and associated social security costs, foreign
exchange and exceptional items (see note 4). Together with
operating profit/loss, adjusted EBITDA is a key measure of Group
performance as it allows better interpretation of the underlying
performance of the business.
Capital expenditure is predominantly managed centrally and
depreciation and amortisation are not allocated to individual
segments for decision making and accordingly have not been
allocated to segments.
31 December 2019 31 December 2018 (restated)
----------------------------------------- -----------------------------------------
United United Developing Total United United Developing Total
Kingdom States Markets Kingdom States Markets
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ --------- -------- ----------- ------- --------- -------- ----------- -------
Net income ("Revenue") 108.5 45.6 13.3 167.4 93.6 37.1 11.2 141.9
Segment adjusted
EBITDA 34.0 (10.3) (12.5) 11.2 24.6 (5.7) (6.8) 12.1
Product development (26.4) (24.5)
Corporate costs (12.3) (11.0)
------------------------ --------- -------- ----------- ------- --------- -------- ----------- -------
Adjusted EBITDA (27.5) (23.4)
Depreciation and
amortisation (14.9) (12.5)
Share-based payments
and social security
costs (8.0) (8.6)
Foreign exchange
loss - (0.4)
Exceptional items
(note 4) (34.3) (5.9)
------------------------ --------- -------- ----------- ------- --------- -------- ----------- -------
Operating loss (84.7) (50.8)
------------------------ --------- -------- ----------- ------- --------- -------- ----------- -------
Revenue by type
In addition to the segmental reporting of performance under
IFRS8, the table below sets out net income by its type:
31 December 31 December
2019 2018
GBPm GBPm
============================ =========== ===========
Transaction fees 121.2 112.9
Servicing fees 30.4 24.9
Net investment income: 10.5 -
- Investment income 28.3 -
- Investment expense (7.9) -
- Fair value gains/(losses) (9.9) -
Other fees 5.3 4.1
============================ =========== ===========
Revenue 167.4 141.9
============================ =========== ===========
3. Operating expenses
31 December 31 December
2019 2018
(restated)
GBPm GBPm
=========================================================== =========== ===========
Depreciation 7.8 6.4
Amortisation 7.1 6.1
Rental income and other recharges - (0.8)
Operating lease rentals:
- Other assets 0.1 0.1
- Land and buildings 0.1 0.1
Employment costs (including contractors) 90.3 79.2
Marketing costs (excluding employment costs) 66.5 57.8
Data and technology 9.4 9.2
Loan repurchase charge 6.5 2.6
Foreign exchange loss - 0.4
Impairment of goodwill (exceptional) 29.0 -
Impairment of intangible and tangible assets (exceptional) 5.3 -
IPO adviser costs (exceptional) - 5.9
Other expenses 30.0 25.7
=========================================================== =========== ===========
Total operating expenses 252.1 192.7
=========================================================== =========== ===========
4. Exceptional items
31 December 31 December
2019 2018
GBPm GBPm
===================================================== ================ ===========
34.3 -
Impairment of non-financial assets IPO adviser costs - 5.9
===================================================== ================ ===========
Total 34.3 5.9
===================================================== ================ ===========
Impairment of non-financial assets in Germany and the
Netherlands: In the year as part of the annual goodwill impairment
assessment it was identified that goodwill in relation to the
Developing Markets business was carried at a value higher than its
value in use driven by a reduction in the future discounted cash
flows of the business unit. As a result an impairment was
recognised of GBP29.0 million. Additionally the Group assessed the
tangible and intangible fixed assets of the German and Dutch
businesses as part of the cash-generating unit and an impairment of
GBP0.7 million and GBP4.6 million respectively was recognised.
There was no cash movement in relation to the impairment.
IPO adviser costs: In 2018 sponsor and adviser costs associated
with the IPO were recorded as exceptional items. The total costs
associated with the IPO were GBP15.0 million, of which GBP5.9
million was expensed to the income statement with the remaining
GBP9.1 million offset against share premium as is required for
costs directly associated with the primary offering.
Cash flows in relation to the exceptional IPO costs amounted to
GBP15.0 million in 2018 and there were no additional profit and
loss charges or cash outflows in 2019.
5. Loss per share
Basic loss per share amounts are calculated by dividing the loss
for the year attributable to ordinary equity holders of the Company
by the weighted average number of ordinary shares outstanding
during the year.
There is no difference in the weighted average number of shares
used in the calculation of basic and diluted loss per share as the
effect of all potentially dilutive shares outstanding was
anti-dilutive.
The following table reflects the income and share data used in
the basic and diluted loss per share computations:
31 December 31 December
2019 2018
(restated)
GBPm GBPm
==================================================== =========== ===========
Loss for the year (84.7) (49.5)
==================================================== =========== ===========
Weighted average number of ordinary shares in issue
(million) 347.6 271.3
Basic and diluted loss per share (24.4p) (18.2p)
==================================================== =========== ===========
Loss for the year before exceptional items (50.4) (43.6)
==================================================== =========== ===========
Weighted average number of ordinary shares in issue
(million) 347.6 271.3
Adjusted basic and diluted loss per share (14.5p) (16.1p)
==================================================== =========== ===========
6. Goodwill
Total
GBPm
=========================== =======
Cost and carrying amount
At 1 January 2018 41.3
Exchange differences 1.0
=========================== =======
At 31 December 2018 42.3
=========================== =======
At 1 January 2019 42.3
Impairment charge (note 4) (29.0)
Exchange differences (2.0)
=========================== =======
At 31 December 2019 11.3
=========================== =======
Goodwill is reviewed annually for impairment, or more frequently
when there are indications that impairment may have occurred.
Goodwill acquired in a business combination is allocated, at
acquisition, to the cash-generating units ("CGUs") that are
expected to benefit from that business combination. At the balance
sheet date, the Group had two CGUs, being Funding Circle USA
("FCUSA") and its subsidiaries and the German and Dutch businesses
(Funding Circle Continental Europe or "FCCE") and its subsidiaries
to which goodwill is attached. The goodwill associated with each
CGU is shown below.
31 December 31 December
2019 2018
GBPm GBPm
====== =========== ===========
FCUSA 11.3 11.7
FCCE - 30.6
====== =========== ===========
Total 11.3 42.3
====== =========== ===========
The Group performed its annual impairment test on the goodwill
arising on the acquisition of FCUSA and FCCE. The impairment test
involved comparing the carrying value of the assets held for use to
their recoverable amount. The recoverable amount represents the
higher of the entity's fair value net of selling costs and its
value in use.
The impairment was assessed under value in use calculations. The
fair value review also took into account the current market value
of the Group segmented against each CGU.
The Group prepares a five-year management plan for its
operations, which is used in the value in use calculations. The
cash flow projections are based on the following key
assumptions:
- income growth at a compound annual growth rate of 26.5% and
10.9% for FCUSA and FCCE respectively (2018: 45% and 73%);
- cost growth at a compound rate of 13.3% and (3.1%) for FCUSA
and FCCE respectively (2018: 27% and 54%);
- pre-tax discount rate of 12.0% and 11.9% for FCUSA and FCCE
respectively (2018: 11.8% and 13.3%); and
- revenues beyond the five-year period are extrapolated using an
estimated growth rate of 2.0% for both CGUs (2018: 2.0%).
The above assumptions are based on historical trends and future
market expectations.
The review identified impairment of GBP29.0 million to the
goodwill of FCCE as the value in use calculated was below the
carrying amount. There are no further CGUs for which management
considers a reasonably possible change in a key assumption would
give rise to an impairment.
The cumulative amount of impairment losses in relation to
goodwill is GBP29.0 million (2018: GBPnil).
7. Intangible assets
Capitalised
development Computer Other
costs software intangibles Total
GBPm GBPm GBPm GBPm
========================= ========================================= ============== ======================= =======
Cost
At 1 January 2018 23.0 0.6 1.3 24.9
Exchange differences 0.8 - - 0.8
Additions 10.8 0.2 - 11.0
Reclassification 0.5 - - 0.5
Disposals (0.9) - - (0.9)
========================= ========================================= ============== ======================= =======
At 31 December 2018 34.2 0.8 1.3 36.3
========================= ========================================= ============== ======================= =======
At 1 January 2019 34.2 0.8 1.3 36.3
Exchange differences (0.5) - (0.2) (0.7)
Additions 14.3 0.2 - 14.5
Reclassification - - - -
Disposals (0.7) - - (0.7)
========================= ========================================= ============== ======================= =======
At 31 December 2019 47.3 1.0 1.1 49.4
========================= ========================================= ============== ======================= =======
Accumulated amortisation
At 1 January 2018 7.3 0.3 1.1 8.7
Exchange differences 0.4 - - 0.4
Reclassification 0.5 - - 0.5
Charge for the year 6.1 - - 6.1
Disposals (0.9) - - (0.9)
========================= ========================================= ============== ======================= =======
At 31 December 2018 13.4 0.3 1.1 14.8
========================= ========================================= ============== ======================= =======
At 1 January 2019 13.4 0.3 1.1 14.8
Exchange differences (0.1) - (0.1) (0.2)
Reclassification (0.3) 0.3 - -
Charge for the year 6.9 0.2 - 7.1
Impairment 4.6 - - 4.6
Disposals (0.5) - - (0.5)
========================= ========================================= ============== ======================= =======
At 31 December 2019 24.0 0.8 1.0 25.8
========================= ========================================= ============== ======================= =======
Carrying amount
At 31 December 2019 23.3 0.2 0.1 23.6
========================= ========================================= ============== ======================= =======
At 31 December 2018 20.8 0.5 0.2 21.5
========================= ========================================= ============== ======================= =======
8. Property, plant and equipment, right-of-use assets and lease
liabilities
As disclosed in note 11, the Group has adopted IFRS 16,
effective from 1 January 2019, using the fully retrospective
approach and comparative information has therefore been restated.
The Group has right-of-use assets which comprise property leases
held by the Group. Information about leases for which the Group is
a lessee is presented below.
Analysis of property, plant and equipment between owned and
leased assets:
31 December 31 December
2019 2018
(restated)
GBPm GBPm
=================================================== ================ ================
Property, plant and equipment (owned) Right-of-use 5.1 5.3
assets
33.9 19.9
=================================================== ================ ================
39.0 25.2
=================================================== ================ ================
Reconciliation of amount recognised in the balance sheet
Right-of-use
Leasehold assets
improvements Computer Furniture (property)
equipment and
fixtures Total
GBPm GBPm GBPm GBPm GBPm
======================================================================================= ============= =============== ================ ======
Cost
At 1 January 2018 (restated) 4.3 2.9 1.6 32.1 40.9
Additions 1.0 1.1 0.6 1.3 4.0
Exchange differences - - - 0.4 0.4
======================================================================================= ============= =============== ================ ======
At 31 December 2018 (restated) 5.3 4.0 2.2 33.8 45.3
======================================================================================= ============= =============== ================ ======
At 1 January 2019 5.3 4.0 2.2 33.8 45.3
Reclassification (0.2) - - 0.2 -
Disposals (0.5) - (0.4) (5.3) (6.2)
Additions 1.4 0.9 1.2 21.1 24.6
Exchange differences (0.2) (0.1) - (0.4) (0.7)
======================================================================================= ============= =============== ================ ======
At 31 December 2019 5.8 4.8 3.0 49.4 63.0
======================================================================================= ============= =============== ================ ======
Accumulated depreciation
At 1 January 2018 (restated) 1.0 2.0 1.1 9.4 13.5
Charge for the year 0.7 1.0 0.4 4.3 6.4
Exchange differences - - - 0.2 0.2
======================================================================================= ============= =============== ================ ======
At 31 December 2018 (restated) 1.7 3.0 1.5 13.9 20.1
======================================================================================= ============= =============== ================ ======
At 1 January 2019 1.7 3.0 1.5 13.9 20.1
Disposals (0.3) - (0.4) (3.7) (4.4)
Charge for the year 1.0 0.9 0.4 5.5 7.8
Impairment 0.6 0.1 - - 0.7
Exchange differences - - - (0.2) (0.2)
======================================================================================= ============= =============== ================ ======
At 31 December 2019 3.0 4.0 1.5 15.5 24.0
======================================================================================= ============= =============== ================ ======
Carrying amount
At 31 December 2019 2.8 0.8 1.5 33.9 39.0
======================================================================================= ============= =============== ================ ======
At 31 December 2018 (restated) 3.6 1.0 0.7 19.9 25.2
======================================================================================= ============= =============== ================ ======
Lease liabilities
Amounts recognised on the balance sheet
were as follows:
31 December 31 December
2019 2018
(restated)
GBPm GBPm
========================================== ============ ===========
Current 8.5 5.0
Non-current 29.8 20.1
========================================== ============ ===========
Total 38.3 25.1
========================================== ============ ===========
Amounts recognised in the statement of comprehensive income were
as follows:
31 December 31 December
2019 2018
(restated)
GBPm GBPm
===================================================== =========== ===========
Depreciation charge of right-of-use assets (property) 5.5 4.3
Interest expense (included in finance costs)
Expense relating to short-term leases and leases 1.2 1.0
of low-value assets
0.2 0.2
===================================================== =========== ===========
The total cash outflow for leases (excluding short-term and
low-value leases) in 2019 was GBP7.1 million (2018: GBP3.8
million).
As at 31 December 2019 the potential future undiscounted cash
outflows that have not been included in the lease liability due to
lack of reasonable certainty the lease extension options might be
exercised amounted to GBPnil (2018: GBPnil).
9. Financial risk management
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework.
The risk management policies are established to identify and
analyse the risks faced by the Group, to set appropriate risk
limits and controls and to monitor risks and ensure any limits are
adhered to. The Group's activities are reviewed regularly and
potential risks are considered.
Risk factors
The Group has exposure to the following risks from its use of
financial instruments:
- credit risk;
- liquidity risk; and
- market risk (including foreign exchange risk, interest rate
risk and other price risk).
Principal financial instruments
The principal financial instruments used by the Group, from
which financial instrument risk arises, are as follows:
- investments;
- trade and other receivables;
- cash and cash equivalents;
- trade and other payables;
- bank borrowings;
- bonds; and
- lease liabilities.
Categorisation of financial assets and financial liabilities
The tables show the carrying amounts of financial assets and
financial liabilities by category of financial instrument as at 31
December 2019:
Fair value
through
Assets profit Amortised Total
and loss cost GBPm
GBPm GBPm
====================================== ======================= ========================= =======
Investment in SME loans (other) - 1.7 1.7
Investment in SME loans (curing) - - -
Investment in SME loans (warehouse) 342.0 - 342.0
Investment in SME loans (securitised) 366.6 - 366.6
Trade and other receivables 0.2 21.9 22.1
Cash and cash equivalents 46.0 118.5 164.5
====================================== ======================= ========================= =======
754.8 142.1 896.9
====================================== ======================= ========================= =======
Fair value
through
Liabilities profit Amortised Total
and loss cost GBPm
GBPm GBPm
========================= ======================= ======================== =======
Trade and other payables - (4.9) (4.9)
Bank borrowings - (265.8) (265.8)
Bonds (16.0) (332.7) (348.7)
Lease liabilities - (38.3) (38.3)
========================= ======================= ======================== =======
(16.0) (641.7) (657.7)
========================= ======================= ======================== =======
The tables show the carrying amounts and fair values of
financial assets and financial liabilities by category of financial
instrument as at 31 December 2018:
Fair
value Amortised Total
Assets through cost GBPm
profit GBPm
and
loss
GBPm
================================ =================================================== ====================== =======
Investment in SME loans (other) - 0.3 0.3
Investment in SME loans (curing) 4.7 - 4.7
Trade and other receivables - 13.4 13.4
Cash and cash equivalents 150.0 183.0 333.0
================================ =================================================== ====================== =======
154.7 196.7 351.4
================================ =================================================== ====================== =======
Fair
value Amortised
through
profit and loss cost Total
Liabilities GBPm GBPm GBPm
================================ =================================================== ====================== =======
Trade and other payables - (3.7) (3.7)
Lease liabilities - (25.1) (25.1)
================================ =================================================== ====================== =======
- (28.8) (28.8)
================================ =================================================== ====================== =======
Financial instruments measured at amortised cost
Financial instruments measured at amortised cost, rather than
fair value, include cash and cash equivalents, trade and other
receivables, investments in SME loans (Other) and trade and other
payables. Due to their short-term nature, the carrying value of
each of the above financial instruments approximates to their fair
value.
Financial instruments measured at fair value
IFRS 13 requires certain disclosures which require the
classification of financial assets and financial liabilities
measured at fair value using a fair value hierarchy that reflects
the significance of the inputs used in making the fair value
measurement.
Disclosure of fair value measurements by level is according to
the following fair value measurement hierarchy:
- level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities that the entity can
access at the measurement date;
- level 2 inputs are inputs other than quoted prices included
within level 1 that are observable for the asset or liabilities,
either directly or indirectly; and
- level 3 inputs are unobservable inputs for the asset or liability.
The fair value of financial instruments that are not traded in
an active market (for example, investments in SME loans) is
determined by using valuation techniques. These valuation
techniques maximise the use of observable market data where it is
available and rely as little as possible on entity-specific
estimates. If all significant inputs required to fair value an
instrument are observable, the instrument is included in level 2.
The investments categorised as level 2 all relate to investments in
SME loans (curing). These are typically held for two to three days
before being transferred to independent investors at the principal
amount. If one or more of the significant inputs is not based on
observable market data, the instrument is included in level 3.
Fair value measurement using
======================================== =======================================================================================
Quoted Significant Significant
prices observable unobservable
in active inputs inputs
markets (level (level Total
(level 1) 2) 3) GBPm
31 December 2019 GBPm GBPm GBPm
======================================== ======================= =================== ========================= ==============
Financial assets
Trade and other receivables Investment
in SME loans (warehouse) Investment
in SME loans (securitised) Cash and
cash equivalents - 0.2 - 342.0 0.2
- - 366.6 342.0
- 46.0 - - 366.6
- 46.0
======================================== ======================= =================== ========================= ==============
46.0 0.2 708.6 754.8
======================================== ======================= =================== ========================= ==============
Financial liabilities
Bonds - - (16.0) (16.0)
======================================== ======================= =================== ========================= ==============
- - (16.0) (16.0)
======================================== ======================= =================== ========================= ==============
Fair value measurement using
Quoted prices Significant Significant
in active observable unobservable
markets inputs inputs (level Total
(level 1) (level 3)
2)
31 December 2018 GBPm GBPm GBPm GBPm
================================== ====================== =================== ======================= =======
Financial assets
Investment in SME loans (curing) - 4.7 - 4.7
Cash and cash equivalents 150.0 - - 150.0
================================== ====================== =================== ======================= =======
150.0 4.7 - 154.7
================================== ====================== =================== ======================= =======
Loan investments held under cure period were originated during
the last week of the respective reporting periods. As a result fair
value is assumed to be equal to the outstanding principal
amount.
The fair value of investment in SME loans (warehouse) has been
estimated by discounting future cash flows of the loans using
discount rates that reflect the changes in market interest rates
and observed market conditions at the reporting date. The estimated
fair value and carrying amount of the investment in SME loans
(warehouse) was GBP342.0 million at 31 December 2019 (2018:
GBPnil).
The fair value of investment in SME loans (securitised)
represents loan assets in the securitisation vehicles and has been
estimated by discounting future cash flows of the loans using
discount rates that reflect the changes in market interest rates
and observed market conditions at the reporting date. The estimated
fair value and carrying amount of the investment in SME loans
(securitised) was GBP366.6 million at 31 December 2019 (2018:
GBPnil).
Bonds represents the unrated tranches of bond liabilities
measured at fair value through profit and loss (the rated tranches
of bonds are measured at amortised cost). The fair value has been
estimated by discounting future cash flows in relation to the bonds
using discount rates that reflect the changes in market interest
rates and observed market conditions at the reporting date. The
estimated fair value and carrying amount of the bonds was GBP16.0
million at 31 December 2019 (2018: GBPnil).
The Group has undrawn committed borrowing facilities available
at 31 December 2019 of GBP90.5 million (2018: GBPnil) which are due
to expire in March 2021 in the US and in the UK no further
drawdowns can be made under this facility from May 2020 and must be
repaid by June 2028. The use of the facilities is restricted to the
purchase of loans for the purpose of securitisation.
10. Notes to the consolidated statement of cash flows
Cash outflow from operations
31 December 31 December
2019 2018
(restated)
GBPm GBPm
================================================= =========== ===========
Loss before taxation (84.2) (50.9)
Adjustments for
Depreciation of property, plant and equipment 7.8 6.4
Amortisation of intangible assets 7.1 6.1
Impairment of goodwill 29.0 -
Impairment of intangible and tangible assets 5.3 -
Interest receivable (1.8) (0.9)
Interest payable 1.2 1.0
Non-cash employee benefits expense - share-based
payments and associated social security costs 7.7 8.1
Fair value and other non-cash adjustments 9.9 -
Tax credit cash received - 1.4
Movement in provisions (0.4) 0.2
Other non-cash movements (0.2) -
Changes in working capital
Movement in trade and other receivables (9.1) (8.1)
Movement in trade and other payables 0.7 6.1
================================================= =========== ===========
Net cash outflow from operating activities (27.0) (30.6)
================================================= =========== ===========
In 2018, total IPO adviser costs were GBP15.0 million, of which
GBP5.9 million related to the secondary shares traded on admission
and other costs attributable to the listing and GBP9.1 million
related to the issuance of new shares. Both cash out flows were
presented in net cash flow from financing activities but in recent
discussions, the Financial Reporting Council have highlighted that
the cash flow presentation of the GBP5.9 million in respect of the
secondary shares and other costs did not satisfy the requirements
of IAS 7 "Statement of Cash Flows". Accordingly, these have been
re-presented within net cash flow from operating activities.
In addition to the above, the cash flow statement was restated
for IFRS 16, refer to note 11.
Cash and cash equivalents
31 December 31 December
2019 2018
GBPm GBPm
========================== =============== ===============
Cash and cash equivalents 164.5 333.0
========================== =============== ===============
The cash and cash equivalents balance is made up of cash, money
market funds and bank deposits. The carrying amount of these assets
is approximately equal to their fair value. Included within cash
and cash equivalents above is cash of GBP1.2 million (2018: GBP0.4
million) which is restricted in use in the event of rental payment
defaults and cash held in the securitisation SPVs of GBP14.2
million (2018: GBPnil) which has been collected for on payment to
bond holders and is therefore restricted in its use. At 31 December
2019, money market funds totalled GBP46.0 million (2018: GBP150.0
million).
11. Significant changes in the current reporting year
The financial position and performance of the Group was affected
by the following events and transactions during the year ended 31
December 2019:
i) Asset backed securities ("ABS")
During the year, the Group commenced ABS bond programmes in the
UK and US. In the initial "warehousing phase" of the programmes the
Group invested in SME loans using both its own cash and amounts
borrowed under a credit facility with lending institutions. The
loans are held within a bankruptcy remote special purpose warehouse
vehicle which is consolidated in the Group's balance sheet. Once
the warehouse vehicle reaches sufficient scale, the SME loans are
sold into another bankruptcy remote special purpose vehicle ("SPV")
financed through the issuance of bonds to third party investors and
the amounts borrowed under the credit facility are repaid. As at 31
December 2019, GBP292.2 million SME loans have been sold to
SPVs.
The bonds are split into senior rated bonds (referred to as
"rated") and junior unrated bonds (referred to as "unrated") and
under risk retention regulations the Group is required to retain at
least 5% of the bonds issued by the SPV (referred to as the
"retention holding").
Whilst the Group is required to retain 5% of the overall bond
issuance, in the UK and the US, as at 31 December 2019 the Group
holds 51% and 100% respectively of the unrated bonds (referred to
as the "residual"). The residual is similar to equity and, given
that the risks and rewards of ownership and majority of the
variability in cash flows continue to reside with the Group, the
securitisation SPVs in both the UK and US are currently
consolidated. As a result the underlying SME loan book held in the
securitisation SPVs remain on balance sheet along with the bond
liabilities to third parties.
Warehousing phase
During the warehousing phase the Group earns interest income on
the SME loans and incurs interest expense on the drawn credit
facility as well as gains/losses from changes in the fair value of
the SME loans retained on its balance sheet. As the SME loans and
bank borrowings under the credit facility are held within a
bankruptcy remote vehicle, the Group's credit exposure is limited
to its loan funding to the vehicle.
Securitisation phase
As the securitisation vehicles currently remain on balance
sheet, the Group continues to earn interest income on SME loans
securitised and incurs interest expense on the bond liabilities, as
well as gains/losses from changes in the fair value of both the SME
loans and unrated bond liabilities held at fair value. Again, as
the SME loans and bonds are held within bankruptcy remote vehicles,
the Group's credit exposure is limited to its net residual and
retention holding in the vehicles.
If the residuals were to be substantively sold in the future
which is the Group's intention, it is expected that the
securitisation SPVs would be deconsolidated.
ii) Private funds
During the year, the Group established a European private fund
for its Developing Markets and a UK private fund, which are used to
acquire loans originated on the Funding Circle platform. In order
to establish the funds the Group provided seed capital. Further
institutional investors have subsequently invested in these
vehicles. As at 31 December 2019, the Group's interest in the
European fund was 24% and in the UK fund was 14% and these
investments have been accounted for as associates. The Group's
interest is expected to decline over time as further institutions
invest in the funds.
Changes in accounting policy and disclosures
The Group has adopted the following new and amended IFRSs and
interpretations from 1 January 2019 on a full retrospective
basis.
Applicable for financial
Standard/interpretation Content years beginning on/after
----------------------------------- --------------------------- -------------------------
IFRS 16 Leases 1 January 2019
----------------------------------- --------------------------- -------------------------
Prepayment Features with
Negative Compensation - Amendments
to IFRS 9 Financial instruments 1 January 2019
----------------------------------- --------------------------- -------------------------
Long-term Interests in Associates
and Joint Ventures - Amendments Associates and joint
to IAS 28 ventures 1 January 2019
----------------------------------- --------------------------- -------------------------
Business combinations,
joint arrangements,
Annual Improvements to IFRS income taxes and borrowing
Standards 2015 - 2017 Cycle costs 1 January 2019
----------------------------------- --------------------------- -------------------------
Plan Amendment, Curtailment
or Settlement - Amendments
to IAS 19 Employee benefits 1 January 2019
----------------------------------- --------------------------- -------------------------
Interpretation 23 Uncertainty
over Income Tax Treatments. Income taxes 1 January 2019
----------------------------------- --------------------------- -------------------------
Aside from IFRS 16 detailed below, the other amendments and
interpretations listed above did not significantly affect the
current year and are not expected to significantly affect future
years.
Certain new accounting standards and interpretations have been
published that are not mandatory for 31 December 2019 reporting
years, have not yet been endorsed by the EU and have not been early
adopted by the Group as follows:
Applicable for financial
Standard/interpretation Content years beginning on/after
-------------------------------- ---------------------- -------------------------
Amendments to IFRS 3 Business
Combinations, definition
of a business Business combinations 1 January 2020
-------------------------------- ---------------------- -------------------------
Amendments to IAS 1 Presentation
of Financial Statements,
and IAS 8 Accounting Policies,
Changes in Accounting Estimates
and Errors, definition of
material Definition of material 1 January 2020
-------------------------------- ---------------------- -------------------------
Revised Conceptual Framework
for Financial Reporting &
Sale or contribution of assets
between an investor and its
associate or joint venture
- Amendments to IFRS 10 and Associates and joint
IAS 28 ventures 1 January 2020
-------------------------------- ---------------------- -------------------------
These standards are not expected to have a material impact on
the Group in the current or future reporting years and on
foreseeable future transactions. IFRS 16 Leases was issued in
January 2016 and was endorsed by the EU in 2017. The standard is
effective for annual periods beginning on or after 1 January 2019
and sets out the principles for the recognition, measurement,
presentation and disclosure of leases and requires lessees to
account for most leases under a single on-balance sheet model.
The Group adopted IFRS 16 using the full retrospective method of
adoption with the date of initial application of 1 January
2019.
The Group elected to use the transition practical expedient
allowing the standard to be applied only to contracts that were
previously identified as leases applying IAS 17 and IFRIC 4 at the
date of initial application.
The Group also elected to use the recognition exemptions for
lease contracts that, at the commencement date, have a lease term
of 12 months or less and do not contain a purchase option
("short-term leases"), and lease contracts for which the underlying
asset is of low value ("low-value assets").
The impact of IFRS 16 Leases has resulted in the Group recording
its current property leases on the balance sheet as a right-of-use
asset and a corresponding lease obligation. The leases impacted
were previously treated as operating leases. The change in
recognition has resulted in increased depreciation charges, a
reduction in lease costs in the income statement and an increase in
finance costs.
Lessor accounting under IFRS 16 is substantially unchanged from
IAS 17. Lessors will continue to classify leases as either
operating or finance leases using similar principles as in IAS
17.
Upon recognition, the weighted average incremental borrowing
rate used in measuring lease liabilities across the Group was
4%.
The following tables summarise the impact of adopting IFRS 16 on
the Group's consolidated statement of comprehensive income,
consolidated statement of cash flows and consolidated balance sheet
for the year ended and as at 31 December 2019. The tables below
show the adjustments recognised for each individual line item. Line
items that were not affected by the changes have not been included.
As a result, the sub-totals and totals disclosed cannot be
recalculated from the numbers provided.
Impact of the change in accounting policies on the consolidated
statement of comprehensive income:
Year ended 31 December Year ended 31 December
2019 2018
------------------------------------- ------------------------------------
Amounts
Amounts without
without adoption
adoption IFRS As reported of IFRS16 IFRS As reported
of IFRS16 16 GBPm GBPm 16 GBPm
GBPm GBPm GBPm
------------------------------- ------------ ------- -------------- ----------- ------- --------------
Depreciation and amortisation (9.4) (5.5) (14.9) (8.2) (4.3) (12.5)
Other costs (46.2) 6.6 (39.6) (39.8) 5.1 (34.7)
------------------------------- ------------ ------- -------------- ----------- ------- --------------
Operating expenses (253.2) 1.1 (252.1) (193.5) 0.8 (192.7)
Operating loss (85.8) 1.1 (84.7) (51.6) 0.8 (50.8)
Finance costs - (1.2) (1.2) - (1.0) (1.0)
------------------------------- ------------ ------- -------------- ----------- ------- --------------
Loss before taxation (84.1) (0.1) (84.2) (50.7) (0.2) (50.9)
------------------------------- ------------ ------- -------------- ----------- ------- --------------
Loss for the year (84.6) (0.1) (84.7) (49.3) (0.2) (49.5)
------------------------------- ------------ ------- -------------- ----------- ------- --------------
Other comprehensive
income:
Total comprehensive
loss for the year (92.3) (0.1) (92.4) (46.9) (0.2) (47.1)
------------------------------- ------------ ------- -------------- ----------- ------- --------------
Total comprehensive
loss attributable
to
------------------------------- ------------ ------- -------------- ----------- ------- --------------
Owners of the Parent (92.3) (0.1) (92.4) (46.9) (0.2) (47.1)
------------------------------- ------------ ------- -------------- ----------- ------- --------------
Impact of the change in accounting policies on the consolidated
balance sheet
Year ended 31 December Year ended 31 December
2019 2018
--------------------------------------- ---------------------------------------
Amounts Amounts
without without
adoption adoption
of IFRS16 IFRS 16 As reported of IFRS16 IFRS 16 As reported
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
Non-current assets
Property, plant and
equipment 5.0 34.0 39.0 5.3 19.9 25.2
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
Total assets 961.5 34.0 995.5 430.1 19.9 450.0
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
Current liabilities
Trade and other payables 22.7 (3.0) 19.7 23.1 (3.8) 19.3
Lease liabilities - 8.5 8.5 - 5.0 5.0
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
640.3 5.5 645.8 26.9 1.2 28.1
Non-current liabilities
Lease liabilities - 29.8 29.8 - 20.1 20.1
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
Total liabilities 641.2 35.3 676.5 27.7 21.3 49.0
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
Equity
Retained earnings 7.8 (1.3) 6.5 88.6 (1.4) 87.2
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
Total equity 320.3 (1.3) 319.0 402.4 (1.4) 401.0
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
Total equity and liabilities 961.5 34.0 995.5 430.1 19.9 450.0
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
Impact of the change in accounting policies on the consolidated
statement of cash flows
Year ended 31 December Year ended 31 December
2019 2018
--------------------------------------- ---------------------------------------
Amounts Amounts
without without
adoption adoption
of IFRS16 IFRS 16 As reported of IFRS16 IFRS 16 As reported
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
Net cash outflow from
operating activities (34.1) 7.1 (27.0) (34.4) 3.8 (30.6)
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
Financing activities
Payment of lease liabilities - (7.1) (7.1) - (3.8) (3.8)
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
Net cash inflow from
financing activities 619.5 (7.1) 612.4 291.5 (3.8) 287.7
------------------------------ ----------- ---------- -------------- ----------- ---------- --------------
Impact of the change in accounting policies on segmental
Year ended 31 December Year ended 31 December
2019 2018
--------------------------------------- ---------------------------------------
Amounts Amounts
without without
adoption adoption
of IFRS16 IFRS 16 As reported of IFRS16 IFRS 16 As reported
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ----------- ---------- -------------- ----------- ---------- --------------
United Kingdom 31.2 2.8 34.0 21.8 2.8 24.6
United States (13.1) 2.8 (10.3) (7.4) 1.7 (5.7)
Developing Markets (13.5) 1.0 (12.5) (7.4) 0.6 (6.8)
Segment adjusted EBITDA 4.6 6.6 11.2 7.0 5.1 12.1
Adjusted EBITDA (34.1) 6.6 (27.5) (28.5) 5.1 (23.4)
Depreciation and amortisation (9.4) (5.5) (14.9) (8.2) (4.3) (12.5)
------------------------------- ----------- ---------- -------------- ----------- ---------- --------------
Operating loss (85.8) 1.1 (84.7) (51.6) 0.8 (50.8)
------------------------------- ----------- ---------- -------------- ----------- ---------- --------------
Summary of new and amended accounting policies
Consolidation of special purpose entities ("SPEs")
Subsidiaries are those entities, including structured entities,
over which the Group has control. The Group controls an entity when
it is exposed, or has rights, to variable returns from its
involvement with the entity and has the ability to affect those
returns through its power over the investee. The Group has power
over an entity when it has existing rights that give it the current
ability to direct the activities that most significantly affect the
entity's returns. Power may be determined on the basis of voting
rights or, in the case of structured entities, other contractual
arrangements.
The Group assesses whether it controls special purpose entities
("SPEs") and the requirement to consolidate them under the criteria
of IFRS 10. Control is determined to exist if the Group has the
power to direct the activities of each entity (for example,
managing the performance of the underlying assets and raising debt
on those assets which is used to fund the Group) and uses this
control to obtain a variable return (for example, retaining the
residual risk on the assets). Structures that do not meet these
criteria are not treated as subsidiaries and the assets are
derecognised when they are sold.
Where the Group manages the administration of its securitised
assets and is exposed to the risks and rewards of the underlying
assets through its continued investment or where the Group does not
retain a direct ownership interest in an SPE, but the Directors
have determined that the Group controls those entities, they are
treated as subsidiaries and are consolidated.
Net investment income
Net investment income from financial instruments measured at
fair value through profit or loss includes:
- interest income from investments in SME loans that the Group
holds on balance sheet ("investment income");
- interest payable on funds borrowed to finance the acquisition
of underlying loan investments ("investment expense");
- interest payable on bond liabilities held on balance sheet;
- gains/losses from changes in the fair value of financial assets held on balance sheet;
- gains/losses from changes in fair value of hedging instruments; and
- amortisation of costs associated with the issuing of bonds and the credit facility.
Leases
At inception of a contract, the Group assesses whether or not a
contract is, or contains, a lease. A contract is, or contains, a
lease if the contract conveys the right to control the use of an
identified asset for a period of time in exchange for
consideration. When a lease is recognised in a contract the Group
recognises a right-of-use asset and a lease liability at the lease
commencement date.
Right-of-use assets are initially measured at cost, comprising
the initial measurement of the lease liability, less any lease
incentives. Subsequently, right-of-use assets are measured at cost,
less any accumulated depreciation and any accumulated impairment
losses, and are adjusted for certain remeasurements of the lease
liability. Depreciation is calculated on a straight-line basis over
the length of the lease.
Liabilities arising from a lease are initially measured on a
present value basis. Lease liabilities include the net present
value of the following lease payments:
-fixed payments less any lease incentives receivable;
-variable lease payment based on an index or a rate, initially
measured using the index or rate at the commencement date; and
-amounts expected to be payable by the Group under residual
value guarantee.
The lease payments are discounted using the interest rate
implicit in the lease. If that rate cannot be readily determined,
the Group's incremental borrowing rate is used, which is the rate
that the Group would have to pay to borrow the funds necessary to
obtain an asset of similar value to the right-of-use asset in a
similar economic environment with similar terms, security and
conditions.
To determine the incremental borrowing rate, the Group:
- where possible, uses recent third party financing received by
the individual lessee as a starting point, adjusted to reflect
changes in financing conditions since third party financing was
received;
- uses an approach taking the risk-free interest rate adjusted
for credit risk for leases held by Funding Circle Holdings plc;
and
- makes adjustments specific to the lease for term, country and
currency.
Subsequently, the lease liability is measured by increasing the
carrying amount to reflect interest on the lease liability and
reducing it by the lease payments made. The lease liability is
remeasured when there is a lease modification.
Lease payments are allocated between principal and finance cost.
The finance cost is charged to profit or loss over the lease period
so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period.
The Group is exposed to potential future increases in variable
lease payments based on an index or rate, which are not included in
the lease liability until they take effect. When adjustments to
lease payments based on an index or rate take effect, the lease
liability is reassessed and adjusted against the right-of-use
asset.
Extension and termination options are included in a number of
property leases in the Group. Management considers the facts and
circumstances that may create an economic incentive to exercise an
extension or termination option in order to determine whether the
lease term should include or exclude such options. Extension or
termination options are only included within the lease term if they
are reasonably certain to be exercised in the case of extension
options and not exercised in the case of termination options.
Considerations include:
-if leasehold improvements are expected to have significant
value at the end of the lease term;
-expected costs or business disruption as a result of replacing
a lease; and
-significant penalties incurred in order to terminate.
Lease terms are reassessed if the option is exercised or if a
significant event occurs which impacts the assessment of reasonable
certainty.
The Group applies the short-term lease recognition exemption to
its short-term leases of machinery and equipment (i.e. those leases
that have a lease term of 12 months or less from the commencement
date and do not contain a purchase option). It also applies the
lease of low-value assets recognition exemption to leases of office
equipment that are considered of low value.
Lease payments on short-term leases and leases of low-value
assets are recognised as expenses on a straight-line basis over the
lease term.
When the Group is an intermediate lessor, entering into a
sublease, it accounts for the head lease and the sublease
separately. The sublease is classified as a finance or operating
lease by reference to the right-of-use asset arising from the head
lease. Rental income from operating leases is recognised on a
straight-line basis over the lease term and the Group retains the
right-of-use asset deriving from the head lease and the lease
liability on the balance sheet.
Amounts due from lessees under finance leases are recognised as
receivables equivalent to the Group's net investment in the lease
and the right-of-use asset from the head lease is derecognised. Any
difference resulting from the derecognition of the right-of-use
asset and recognition of the net investment in the sublease is
recognised in the consolidated statement of comprehensive income.
The head lease liability remains on the balance sheet and interest
expense continues to be recognised, while interest income is
recognised from the sublease.
Investment in associates
An associate is an entity over which the Group has significant
influence. Significant influence is the power to participate in the
financial and operating policy decisions of the investee, but is
not control or joint control over those policies. The
considerations made in determining significant influence or joint
control are similar to those necessary to determine control over
subsidiaries. The Group's investment in its associate is accounted
for using the equity method.
Under the equity method of accounting, the investments are
initially recognised at cost. This is adjusted thereafter to
recognise the Group's share of the post-acquisition profits or
losses of the investee in the consolidated statement of
comprehensive income. The Group's share of movements in other
comprehensive income of the investee is recognised in other
comprehensive income. Dividends received or receivable from
associates are recognised as a reduction in the carrying amount of
the investment.
When the Group's share of losses in an equity-accounted
investment equals or exceeds its interest in the entity, including
any other unsecured long-term receivables, the Group does not
recognise further losses, unless it has incurred obligations or
made payments on behalf of the other entity.
Unrealised gains on transactions between the Group and its
associates are eliminated to the extent of the Group's interest in
these entities. Unrealised losses are also eliminated unless the
transaction provides evidence of an impairment of the asset
transferred.
After application of the equity method, the Group determines
whether it is necessary to recognise an impairment loss on its
investment in its associate. At each reporting date, the Group
determines whether there is objective evidence that the investment
in the associate is impaired. If there is such evidence, the Group
calculates the amount of impairment as the difference between the
recoverable amount of the associate and its carrying value, and
then recognises the loss within the statement of comprehensive
income.
Upon loss of significant influence over the associate, the Group
measures and recognises any retained investment at its fair value.
Any difference between the carrying amount of the associate upon
loss of significant influence or joint control and the fair value
of the retained investment and proceeds from disposal is recognised
in profit or loss.
Financial assets
The Group determines the classification of its financial assets
at initial recognition. The requirements of IFRS 9 for
classification and subsequent measurement are applied which require
financial assets to be classified based on the Group's business
model for managing the asset and the contractual cash flow
characteristics of the asset:
- Financial assets are measured at amortised cost if they are
held within a business model, the objective of which is to hold
financial assets in order to collect contractual cash flows, and
their contractual cash flows represent solely payments of principal
and interest.
- Financial assets are measured at fair value through other
comprehensive income ("FVOCI") if they are held within the business
model defined as "held to collect and sell", the objective of which
is achieved by both collecting contractual cash flows and selling
financial assets, and their contractual cash flows represent solely
payments of principal and interest.
- Financial assets that do not meet the criteria to be amortised cost or fair value through other comprehensive income are measured at fair value through profit or loss ("FVTPL"). In addition, the Group may, at initial recognition, designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces an accounting mismatch.
When financial assets are recognised initially, they are
measured at fair value, plus, in the case of investments not at
fair value through profit or loss, directly attributable
transaction costs. The purchase of any credit impaired assets is
also at fair value after any impairment.
Except for certain investments in SME loans as described below,
the Group does not recognise on its balance sheet loans arranged
between borrowers and investors as it is not a principal party to
the contracts and is not exposed to the risks and rewards of these
loans.
With the exception of investments in SME loans under cure
period, investment in SME loans (warehouse) and investments in SME
loans (securitised), all financial assets are held to collect
contractual cash flows.
Under certain circumstances the Group does hold investments in
SME loans. The four types of investment in SME loans are as
follows:
i) Investment in SME loans (curing)
In the US, investors commit to provide funding to Funding Circle
Marketplace LLC (the originator of the borrower loans) in advance
of the physical transfer of monies. Funding Circle, USA Inc.
initially funds these committed loans to the borrowers and recovers
the monies from the investors after the two to three-day cure
period and therefore retains the credit risk during this short
period.
Investments in SME loans (curing) have been classified as
financial assets at fair value through profit or loss.
The above classification is mainly because all such loans are
acquired principally for selling in the short term. They are
initially recognised at fair value on the balance sheet with the
subsequent measurement at fair value with all gains and losses
being recognised in the consolidated statement of comprehensive
income.
ii) Investment in SME loans (warehouse)
During the warehouse phase of the securitisation programme, the
SME loans purchased using both the Group's cash and amounts
borrowed under credit facilities are held on the Group's balance
sheet. These investments in SME loans have been classified as
financial assets at fair value through profit or losses. The above
classification is because all such loans are acquired principally
for selling in the short term and the collection of interest is
incidental. They are initially measured at fair value on the
balance sheet with the subsequent measurement at fair value with
all gains and losses being recognised in the consolidated statement
of comprehensive income.
iii) Investment in SME loans (securitised)
Under risk retention regulations the Group is required to retain
at least 5% of the bonds issued by the securitisation SPV.
Retaining a significant proportion of the residual
Whilst the Group is required to retain 5% of the overall bond
issuance, where the Group holds a significant proportion of the
unrated bonds (referred to as the "residual"), the Group continues
to consolidate the securitisation SPV as it considers that the
risks and rewards of ownership continue to reside with the Group.
As a result the underlying SME loan book held in the SPV remains on
balance sheet along with the bond liabilities to third parties.
They continue to be measured at fair value on the balance sheet
with the subsequent measurement at fair value with all gains and
losses being recognised in the consolidated statement of
comprehensive income.
Selling a significant portion of the residual
Where the Group sells a significant portion of the residual, the
Group may no longer deemed to retain the majority of the risks and
rewards of ownership and the Group deconsolidates the
securitisation SPV. The Group would still need to apply the
derecognition rules of IFRS 9 to the investment in SME loan
assets.
iv) Investment in SME loans (other)
The Group holds investments in certain SME business loans as a
result of a commercial arrangement with institutional investors in
the marketplace (see note 9).
These investments in other SME loans are classified as amortised
cost (as they are held solely to collect principal and interest
payments) and are initially recognised at fair value and
subsequently measured at amortised cost less provision for
impairment.
Other financial assets
Financial assets recognised in the balance sheet as trade and
other receivables are classified as amortised cost. They are
recognised at fair value and subsequently measured at amortised
cost less provision for impairment.
Cash and cash equivalents are classified as amortised cost with
the exception of money market funds that are classified as FVTPL.
Cash and cash equivalents include cash in hand, deposits held at
call with banks, money market funds and other short-term highly
liquid investments with original maturities of three months or
less. The carrying amount of these assets approximates to their
fair value.
Impairment of financial assets
The Group applies the impairment requirements of IFRS 9. The
IFRS 9 impairment model requires a three-stage approach:
- Stage 1 includes financial instruments that have not had a
significant increase in credit risk since initial recognition or
that have low credit risk at the reporting date. For these assets,
12-month expected credit losses ("ECLs") (that is, expected losses
arising from the risk of default in the next 12 months) are
recognised and interest income is calculated on the gross carrying
amount of the asset (that is, without deduction for credit
allowance).
- Stage 2 includes financial instruments that have had a
significant increase in credit risk since initial recognition
(unless they have low credit risk at the reporting date) but are
not credit impaired. For these assets, lifetime ECLs (that is,
expected losses arising from the risk of default over the life of
the financial instrument) are recognised, and interest income is
still calculated on the gross carrying amount of the asset.
- Stage 3 consists of financial assets that are credit impaired,
which is when one or more events that have a detrimental impact on
the estimated future cash flows of the financial asset have
occurred. For these assets, lifetime ECLs are also recognised, but
interest revenue is calculated on the net carrying amount (that is,
net of the ECL allowance).
The Group assesses on a forward-looking basis the expected
credit losses associated with its financial assets carried at
amortised cost and recognises a loss allowance for such losses at
each reporting date. The measurement of ECLs reflects:
- an unbiased and probability-weighted amount that is determined
by evaluating a range of possible outcomes;
- the time value of money; and
- reasonable and supportable information that is available
without undue cost or effort at the reporting date about past
events, current conditions and forecasts of future economic
conditions.
If in a subsequent period the amount of the impairment loss
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised, the previously
recognised impairment loss is reversed, to the extent that the
carrying value of the asset does not exceed its amortised cost at
the reversal date. Any subsequent reversal of an impairment loss is
recognised in the statement of comprehensive income.
Derecognition of financial assets
Financial assets are derecognised only when the contractual
rights to the cash flows from the financial assets expire or the
Group has either transferred the contractual right to receive the
cash flows from that asset, or has assumed an obligation to pay
those cash flows to one or more recipients.
The Group derecognises a transferred financial asset if it
transfers substantially all the risks and rewards of ownership.
Financial liabilities
Financial liabilities included in trade and other payables are
recognised initially at fair value and subsequently at amortised
cost. The fair value of a non-interest-bearing liability is its
discounted repayment amount. If the due date of the liability is
less than one year, discounting is omitted.
A financial liability is derecognised when the obligation under
the liability is discharged or cancelled or expires.
Bank borrowings
Bank borrowings (drawdowns under the credit facilities) are
recognised initially at fair value, being their issue proceeds net
of transaction costs incurred. These instruments are subsequently
stated at amortised cost using the effective interest rate
method.
Derivative financial instruments
Interest rate caps are in place to partially mitigate the
floating rate interest rate risk associated with drawn amounts from
borrowing facilities and risk associated with floating rate ABS
bond liabilities consolidated into the Group. The derivatives are
recognised initially at fair value reflecting the time value
implicit in the premium paid and are subsequently recognised at
fair value with gains and losses recognised in profit or loss.
Bonds
Bonds represent the bond liabilities which the Group must pay to
the bond holders from the cash flows generated from the SME loans
(securitised) held on balance sheet. The liability excludes any
amount of bonds that the Group has retained as these are eliminated
upon consolidation.
IFRS 9 permits a company to elect to fair value the bond
liabilities where there is an accounting mismatch. In the Group's
case the associated assets generating the cash flows to pay the
bonds are the SME loans (securitised) which are measured at fair
value through profit and loss.
As the cash flows from the SME loans are used to repay the rated
bond tranches in advance of the unrated bonds, the Group does not
consider there to be a significant accounting mismatch as default
levels impact the unrated bonds first. Therefore the rated bonds
are measured at amortised cost. However, as the unrated bonds are
most affected by fair value movements in the SME loans, the Group
has elected to measure the unrated tranches of bonds at fair value
through profit and loss to eliminate the accounting mismatch.
See note 9 for details of the fair value methodology.
Transaction costs associated with the issuance of bonds are
deferred to the balance sheet and recognised over the lifetime of
the bonds using the effective interest rate method.
12. Critical accounting judgements and sources of estimation
uncertainty
The preparation of the consolidated financial statements
requires the Group to make estimates and judgements that affect the
application of policies and reported amounts. Critical judgements
represent key decisions made by management in the application of
the Group accounting policies. Where a significant risk of
materially different outcomes exists due to management assumptions
or sources of estimation uncertainty, this will represent a key
source of estimation uncertainty.
Estimates and judgements are continually evaluated and are based
on experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
Although these estimates are based on management's best knowledge
of the amount, event or actions, actual results ultimately may
differ from those estimates.
There were no critical judgements in the year ended 31 December
2019. The significant estimates applied by the Group in the
financial statements have been applied on a consistent basis with
the financial statements for the year to 31 December 2018.
Key sources of estimation uncertainty
The following are the key sources of estimation uncertainty that
the Directors have made in the process of applying the Group's
accounting policies and have the most significant effect on the
amounts recognised in the financial statements.
i) Estimated impairment of assets
The Group tests annually whether goodwill has suffered any
impairment. All other assets are tested for impairment where there
are indicators of impairment. The recoverable amount of
cash-generating units ("CGUs") has been determined based on value
in use calculations. The use of this method requires the estimate
of future cash flows expected to arise from the continuing
operation of the cash-generating unit and the choice of a suitable
discount rate in order to calculate the present value. Actual
outcomes could vary significantly from these estimates. During the
year, impairment was identified in relation to the goodwill and
tangible and intangible assets of the German and Dutch businesses
within the Developing Markets segment. Based on the performance of
the German and Dutch businesses and changes to the medium-term
outlook for the non-financial assets included within the associated
CGU it was determined that the carrying value exceeded the
recoverable amount. Goodwill was fully impaired by GBP29.0 million,
tangible fixed assets by GBP0.7 million and intangible assets by
GBP4.6 million. There was not considered to be a recoverable amount
in relation to these assets.
ii) Loan repurchase provision
In certain circumstances, in the less mature markets, Funding
Circle has entered into arrangements with institutional investors
to assume the credit risk on the loan investments made by the
institutional investors. The Group must make its best estimate for
the expected credit loss ("ECL") for these commitments at each
reporting date.
Significant estimation is required in assessing individual loans
and when applying statistical models for collective assessments,
using historical trends from past performance as well as
forward-looking information including macroeconomic forecasts such
as changes in interest rates, GDP and inflation. The most
significant estimation is with delinquencies and default rates on
performing loans. For the year ended 31 December 2019 the weighted
average lifetime default rate was 12.9%. If the weighted average
default rate were to change by 25%, the provision would change by
GBP1.5 million for the year ended 31 December 2019. It is
considered that the range of reasonably possible outcomes in annual
default rates used might be +/-25% and as a result it is possible
that the actual loan repurchases in future could materially diverge
from management's estimate.
iii) Fair value of financial instruments
At 31 December 2019, the carrying value of the Group's financial
instrument assets held at fair value was GBP754.8 million (31
December 2018: GBP154.7 million) and the carrying value of
financial liabilities carried at fair value was GBP16.0 million
(2018: GBPnil million).
In accordance with IFRS 13 Fair Value Measurement, the Group
categorises financial instruments carried on the consolidated
statement of financial position at fair value using a three-level
hierarchy. Financial instruments categorised as level 1 are valued
using quoted market prices and therefore there is minimal judgement
applied in determining fair value. However, the fair value of
financial instruments categorised as level 2 and, in particular,
level 3 is determined using valuation estimation techniques
including discounted cash flow analysis and valuation models. The
most significant estimation is with respect to discount rates. A
sensitivity to the discount rate is illustrated below.
Description Fair value Unobservable input Inputs Relationship of unobservable
(GBPm) inputs to fair value
=================== ============== ========================== =========== ==================================
Investment 342.0 Risk-adjusted discount US 7.8% A change in the discount
in SME rate rate by 50
loans (warehouse) UK 6.3% bps would increase/decrease
fair
value by GBP2.8 million.
=================== ============== ========================== =========== ==================================
Investment 366.6 Risk-adjusted discount US 6.8% A change in the discount
in SME rate rate by 50
loans (securitised) UK 5.9% bps would increase/decrease
fair
value by GBP2.7 million.
=================== ============== ========================== =========== ==================================
Bonds (unrated) (16.0) Risk-adjusted discount UK 11.6% A change in the discount
rate rate by 50
bps would increase
decrease fair
value by GBP0.3 million.
=================== ============== ========================== =========== ==================================
It is considered that the range of reasonably possible outcomes
in relation to the discount rate used could be +/- 50 bps and as a
result the fair value of the assets could materially diverge from
management's estimate.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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