TIDMFCH

RNS Number : 9380Z

Funding Circle Holdings PLC

24 September 2020

Funding Circle Holdings plc

Half Year 2020 Results

Embargoed until 7.00am, 24 September 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"), today announces results for the six months ended 30 June 2020.

Samir Desai CBE, CEO and Founder, said: "We started Funding Circle after the financial crisis to help small businesses access funding, and we are proud that since becoming accredited to SME government guarantee programmes in the UK and US, we have approved more than GBP2 billion of loans, and are the 5th largest CBILS lender with c.20% market share of loans approved.

"In H1, we grew total income 24% to GBP101.2m and improved free cash flow to negative GBP9.6m. AEBITDA was down, primarily due to the impact of Covid-19 on the investments we held for sale. We remain focused on profitable growth and are reinstating our target of close to AEBITDA break-even for the business in the second half of 2020."

"We believe that Covid-19 has led to an acceleration in the adoption of online small business lending and small businesses are increasingly drawn to the unique Funding Circle model, which provides access to finance in a fast and affordable way with excellent customer service. Our Instant Decision lending technology launched this year is already transforming the SME borrowing experience with average loan applications being completed in 6 minutes, and decisions in 9 seconds.

"Our advanced data driven credit assessment and the actions we have taken are protecting investor returns - after applying our central Covid-19 stress scenario, we expect all cohorts in the UK to deliver positive annualised returns to investors."

Financial Summary:

   --      Total Income of GBP101.2m (H1 2019: GBP81.7m) up 24% supported by investment income. 

-- Adjusted EBITDA(1) of negative GBP84.1m (H1 2019: negative GBP19.7m), primarily due to the impact of Covid-19 on the investments we held for sale; includes negative GBP59.7m AEBITDA from investment products.

   --      Free cash flow improves to negative GBP9.6m (H1 2019: negative GBP28.1m). 

-- Operating loss of GBP113.5m (H1 2019: negative GBP31.3m) affected by investment AEBITDA(2) , an exceptional non-cash write-down of GBP12.0m of US goodwill related to the US restructure, and GBP4.9m related to the restructure of the Developing Markets business, both of which were previously announced.

   --      Net assets of GBP216.9m (2019: GBP319.0m) including a mix of cash and investments. 
   --      Loss per share of 33.0 pence (H1 2019 loss: 8.9 pence). 

Operating and Strategic Summary:

   --      Leading SME loans platform: 

o GBP3.7bn loans under management (2019: GBP3.5bn), representing year-on-year growth of 5%.

o Originations of GBP1.1bn (H1 2019: GBP1.2bn), down 7% year-on-year as a result of lower levels of originations in March and April as the business adapted to the Covid-19 crisis and waited for accreditation to SME government guarantee programmes in the UK and US.

   --      Successfully rolled out SME government guarantee programmes in UK and US : 

o Accredited for the Coronavirus Business Interruption Loan Scheme (CBILS) in the UK and the Paycheck Protection Program (PPP) in the US in April.

o Since being accredited, Funding Circle has become the 5th largest CBILS lender in the UK with a market share of c.20% of loans approved. We have approved c.GBP1.2bn and originated c.GBP815m(3) of CBILS loans, with June to August lending volumes up more than 30% year-on-year.

o In the US, we were approved to offer PPP loans in April. Since launching, we have approved c.$1bn and originated c.$500m(3) of PPP loans.

o Additionally, we have closed more than GBP1.25bn in funding agreements with multiple institutional investors, including banks, asset managers and insurance companies to meet SME demand in both the UK and US.

   --      Launched Instant Decision lending technology: 

o Instant Decision lending is already transforming the SME borrowing experience and represents c.40% of CBILS applications.

o 6 min average application time with decision in 9 seconds.

   --      Effective management of loanbook during extreme period of stress: 

o Following an initial spike, the number of borrowers missing payments for the first time has fallen to below pre-Covid-19 levels and more than 90% of UK borrowers are making payments.

   --      Investor returns resilient after applying Covid-19 credit stress scenarios: 

o All UK cohorts expected to deliver positive annualised returns.

o All US cohorts (except 2019) expected to deliver positive annualised returns.

Covid-19 and Our Response:

The actions taken at the start of Covid-19 to protect investor returns and support businesses during the crisis are working. At the start of lockdown, we saw an initial spike in the number of borrowers who missed a payment for the first time. This has now fallen to below pre-Covid-19 levels with more than 90% of UK borrowers making payments. Investor returns have also remained resilient during Covid-19 and we expect all cohorts in the UK to deliver positive annualised returns and all cohorts in the US to deliver positive annualised returns, except the 2019 vintage.

Early Covid-19 trends suggest a permanent change in the SME borrowing market that we believe will benefit Funding Circle in the medium to long term. Government support has demonstrated the strategic importance of small businesses to economic growth. A higher proportion of SMEs are now accessing finance as a result and we believe this is likely to continue in the future. For those small businesses looking for finance, t here has been a significant acceleration in online adoption with searches related to business finance terms increasing 2x immediately following the introduction of a national lockdown in the UK. Finally, l ong term low interest rates are likely to continue to attract strong demand from institutional investors to fund SME loans.

Outlook:

The economic environment remains very uncertain. H2 expectations are predicated on there being no further prolonged national lockdowns across our geographies and includes the expectation of ongoing government support for SMEs in the UK.

We are reinstating previous guidance of close to AEBITDA break-even in H2.

We remain committed to delivering profitable growth and generating long-term value for shareholders.

Analyst presentation:

A presentation for analysts will be held today via webcast at 9:30am. Please contact ir@fundingcircle.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 small and medium enterprise ("SME") loans platform . 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 approximately GBP10 billion to 90,000 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.

Footnotes

(1) Adjusted EBITDA represents EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) excluding share-based payments, exceptional items and foreign exchange gains or losses.

(2) Investment AEBITDA refers to net investment income (being investment income, investment expense and fair value adjustments) as previously reported.

(3) UK and US originations up to 20(th) September.

(4) Investment AEBITDA refers to net investment income (being investment income, investment expense and fair value adjustments) as previously reported and operating AEBITDA represents AEBITDA excluding investment AEBITDA.

Business Review

Overview

2020 started strongly for the business with originations at the high end of expectations as we saw strong demand for SME loans in the UK, following Brexit and the General Election in 2019, and in the US where originations in January and February were the highest levels for 12 months.

Originations were impacted significantly during March and April as we waited for approval to SME government guarantee programmes in the UK and the US. Originations rebounded strongly in May and June, following accreditation to these programmes, and reached record levels. Overall, loans under management were GBP3,722m as at 30 June, in line with the year end 2019. Overall originations declined by 7% to GBP1,112m, driven by the lower levels of originations in March and April.

 
                               Loans under Management                 Originations 
                                              (as at)               (period ended) 
--------------------  -------------------------------  --------------------------- 
                       30 June   31 December   Change   30 June   30 June   Change 
                          2020          2019               2020      2019 
                          GBPm          GBPm               GBPm      GBPm 
--------------------  --------  ------------  -------  --------  --------  ------- 
 United Kingdom          2,566         2,583     (1%)       662       798    (17%) 
 United States             904           882       2%       410       311      32% 
 Developing Markets        252           266     (5%)        40        83    (52%) 
--------------------  --------  ------------  -------  --------  --------  ------- 
 Total                   3,722         3,731        -     1,112     1,192     (7%) 
--------------------  --------  ------------  -------  --------  --------  ------- 
 

For the six month period, this resulted in Group total income of GBP101.2m (H1 2019: GBP81.7m) up 24%. Total income excludes the volatility driven by the Fair Value movements on loans held on balance sheet.

Adjusted EBITDA loss of GBP84.1m (H1 2019: loss GBP19.7m) comprised of negative GBP24.4m of operating AEBITDA(4) and negative GBP59.7m of investment AEBITDA(4) .

Following the non-cash fair value movement on the Group's financial assets, the Group's loss before taxation was GBP115.1m (H1 2019: GBP30.8m). Before exceptional costs of GBP16.9m in 2020 for the restructuring of the European business (GBP4.9m) and the US goodwill write-off (GBP12.0m), the loss before tax was GBP98.2m (H1 2019: GBP30.8m).

At the end of 2019, the Group made certain organisational changes with greater ownership of costs within geographies from 2020. Accordingly, the central costs of product development and corporate costs from 2020 have been allocated to each of the segments. The 2019 segmental reporting has been restated for comparability.

Geographic highlights

United Kingdom

The UK continues to represent Funding Circle's largest and most mature business unit. As at the end of H1, loans under management remained flat on 31 December 2019, due to a combination of lower originations and higher levels of repayments and prepayments, in part reflecting the fact that borrowers may use the Government's CBILS and Bounce Back loan scheme to help refinance their existing loans. Originations totalled GBP662m, down 17% on H1 2019 reflecting the two month period where limited loans were originated.

The Government introduced the Coronavirus Business Interruption Loan Scheme (CBILS), an 80% government guarantee to UK small businesses, in March. Following accreditation to CBILS, we saw high demand from SMEs with June to August lending volumes up more than 30% year-on-year. As at 20 September, we had approved c.GBP1.2bn of loans and originated c.GBP815m. Following accreditation to CBILS we also paused all non-CBILS lending from retail and institutional investors to concentrate on supporting the Government's SME guarantee programme. CBILS loans have similar economics to our core lending product, but slightly lower transaction fee and slightly higher servicing fees.

Total income for the UK was GBP59.3m (H1 2019: GBP53.0m) benefitting from six months of investment income from the new ABS products which had only just launched in June 2019.

In March, we launched the first phase of our Instant Decision lending platform in the UK. At the end of June, c.40% of CBILS applications were serviced by new Instant Decision lending technology and we are ahead of our target for the end of the year for 50% of all loan applications to be automated. The average time taken to complete an application has been 6 minutes with decision time in 9 seconds.

United States

Similar to the UK, the US business had a strong beginning to the year with January and February our highest months for originations for 12 months.

The US Government introduced its Paycheck Protection Program ("PPP") through the Small Business Administration ("SBA") in April. This scheme has similar characteristics to the UK furlough scheme, where the SBA will forgive the loans if the funds are used to pay eligible expenses such as payroll costs of employees. The US business was approved by the SBA to originate PPP loans on 14 April.

Since then, the US business has approved over $1bn of PPP loans and originated c.$500m. The US funds these loans under two models; the core model and a referral model whereby it refers borrowers that meet their eligibility criteria to other institutions. PPP loans are 100% guaranteed and the average transaction fee across the two models was c.2.5%.

Loans under management increased by 2% to GBP904m with overall originations up 32% at GBP410m, however the referral fees are lower than under the funding model.

Total income for the US was GBP38.0m (H1 2019: GBP22.0m), again benefitting significantly from a full six months of investment income from the new investment products.

Developing Markets

In March, the Group announced the decision to restructure the Developing Markets business to a referral only model where loans would be referred to lenders rather than originating loans for institutional and retail investors. As part of the restructure, we centralised operations in London. Due to the impact of Covid-19, the company decided not to scale up the new model and headcount numbers in London, which resulted in a limited number of loans originated in Germany in H1, and in the Netherlands we are not currently originating loans.

Statement of Comprehensive Income

 
                                            Six months to 30 June  Six months to 30 
                                                             2020         June 2019 
                                   Before 
                              exceptional    Exceptional    Total             Total 
                                    items          items     GBPm              GBPm 
                                     GBPm           GBPm 
 
Transaction fees                     47.8              -     47.8              62.5 
Servicing fees                       13.8              -     13.8              15.2 
Other fees                            3.2              -      3.2               2.7 
---------------------------  ------------  -------------  -------  ---------------- 
Fee income                           64.8              -     64.8              80.4 
Investment income                    49.8              -     49.8               2.2 
Investment expense                 (13.4)              -   (13.4)             (0.9) 
---------------------------  ------------  -------------  -------  ---------------- 
Total income                        101.2              -    101.2              81.7 
Fair value (losses)/gains          (96.1)              -   (96.1)             (0.3) 
Net income                            5.1              -      5.1              81.4 
---------------------------  ------------  -------------  -------  ---------------- 
 
Operating expenses 
People costs                       (44.5)          (3.8)   (48.3)            (45.5) 
Marketing costs                    (22.4)              -   (22.4)            (35.2) 
Depreciation, amortisation 
 and impairment                     (8.2)         (12.4)   (20.6)             (7.1) 
Loan repurchase charge              (5.5)              -    (5.5)             (4.2) 
Other costs                        (21.1)          (0.7)   (21.8)            (20.7) 
---------------------------  ------------  -------------  -------  ---------------- 
                                  (101.7)         (16.9)  (118.6)           (112.7) 
---------------------------  ------------  -------------  -------  ---------------- 
Operating loss                     (96.6)         (16.9)  (113.5)            (31.3) 
---------------------------  ------------  -------------  -------  ---------------- 
 

Total income

For the six month period, the Group delivered total income of GBP101.2m (H1 2019: GBP81.7m) up 24%.

Fee income defined as transaction, servicing and other fees, declined 19% reflecting lower levels of origination in March and April prior to Funding Circle being accredited to join CBILS in the UK and approved to originate PPP loans in the US, and lower yields as a result of accessing these schemes. In the UK, yields were marginally lower than in the prior period on the CBILS loans; and in the US, yields across the funded and referred PPP loans were c.2.5%.

Investment income represents the interest income on loans invested within Funding Circle's investment vehicles. This is significantly higher than the six month period to 30 June 2019 as these programmes had only recently commenced by June 2019.

Net income, defined as total income after fair value loss, was GBP5.1m (H1 2019: GBP81.4m). The Group considers the large majority of this fair value movement is attributable to Covid-19. The fair value movement in the six months to 30 June 2019 was minimal as the Group had only just begun its ABS programmes which brought loans onto its balance sheet.

Operating expenses

Total operating expenses

Operating loss of GBP113.5m (H1 2019: GBP31.3m) was affected by investment AEBITDA, an exceptional non-cash write-down of GBP12.0m for US goodwill and GBP4.9m for the previously announced restructuring of the Developing Markets business. Excluding these costs, total expenses were GBP101.7m, 10% down on prior year principally driven by reducing discretional marketing spend following the Covid-19 outbreak. Operating expenses are expected to fall a further c.15% in H2.

People costs (including contractors) which represent the Group's largest ongoing operating cost increased during the period by GBP2.4m largely reflecting the restructuring costs of GBP3.8m for the Developing Markets business.

Excluding these items, people costs were down GBP1.4m driven by inflationary pay rises in March being more than offset by headcount control, recruitment freezes and redeployment of staff.

Following the headcount reduction in the Developing Markets through the period, headcount is now 19% lower than June 2019 and at its lowest level since June 2018.

 
                                        Six months to     Six months  Change 
                                         30 June 2020             to       % 
                                                 GBPm   30 June 2019 
                                                                GBPm 
People costs                                     53.7           51.3      5% 
Less capitalised development 
 spend (CDS)                                    (5.4)          (5.8)    (7%) 
People costs net of CDS                          48.3           45.5      6% 
Average headcount (incl. contractors)           1,076          1,140    (6%) 
Period end headcount (incl. 
 contractors)                                   1,004          1,227   (18%) 
--------------------------------------  -------------  -------------  ------ 
 

Marketing costs were reduced from GBP35.2m to GBP22.4m. This was particularly in the online, direct, brand and TV channels where reductions totalled GBP11.2m as discretionary spend was scaled back.

Depreciation, amortisation and impairment costs of GBP20.6m (H1 2019: GBP7.1m) include an impairment of GBP0.4m for the Developing Markets premises and an impairment of GBP12.0m for US goodwill. Excluding these, the charge is principally in relation to the amortisation of the Group's technology platform and the deprecation of leasehold improvements and office equipment.

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. The charge increased during the period as a result of Covid-19. Under IFRS 9 this commitment is accounted for under the expected credit loss model.

Other costs principally include cost of sales, data and technology costs and property costs. These remained relatively flat on 2019.

Segmental reporting

The Group also reviews the results of the Group using adjusted EBITDA as an alternative performance measure. The table below sets out a reconciliation between these measures and the statutory operating loss:

 
                                      30 June 2020                                      30 June 2019 
==========================  =================================  ============================================  ======= 
                               United    United    Developing    Total      United     United    Developing    Total 
                              Kingdom    States       Markets              Kingdom     States       Markets 
========================== 
                                 GBPm      GBPm          GBPm     GBPm        GBPm       GBPm          GBPm     GBPm 
==========================  =========  ========  ============  =======  ==========  =========  ============  ======= 
Total income                     59.3      38.0           3.9    101.2        53.0       22.2           6.5     81.7 
Fair value (losses)/gains      (34.8)    (61.3)             -   (96.1)           -      (0.3)             -    (0.3) 
--------------------------  ---------  --------  ------------  -------  ----------  ---------  ------------  ------- 
Net income                       24.5    (23.3)           3.9      5.1        53.0       21.9           6.5     81.4 
 
Segment profit                             30 June 2020                                 30 June 2019 
                            ------------------------------------------  -------------------------------------------- 
                               United    United    Developing    Total      United     United    Developing    Total 
                              Kingdom    States       Markets              Kingdom     States       Markets 
                                 GBPm      GBPm          GBPm     GBPm        GBPm       GBPm          GBPm     GBPm 
--------------------------  ---------  --------  ------------  -------  ----------  ---------  ------------  ------- 
Segment adjusted EBITDA        (10.5)    (48.4)         (6.7)   (65.6)        14.0      (6.7)         (6.1)      1.2 
Product development             (7.5)     (4.0)         (0.8)   (12.3)       (8.3)      (4.4)         (1.6)   (14.3) 
Corporate costs                 (4.1)     (1.7)         (0.4)    (6.2)       (4.2)      (1.9)         (0.5)    (6.6) 
==========================  =========  ========  ============  =======  ==========  =========  ============  ======= 
Adjusted EBITDA                (22.1)    (54.1)         (7.9)   (84.1)         1.5     (13.0)         (8.2)   (19.7) 
Depreciation and 
 amortisation                   (4.1)     (3.4)         (0.7)    (8.2)       (4.0)      (2.3)         (0.8)    (7.1) 
Share-based payments 
 and social security 
 costs                          (3.0)     (1.2)         (0.1)    (4.3)       (2.5)      (1.8)         (0.2)    (4.5) 
Exceptional items                   -    (12.0)         (4.9)   (16.9)           -          -             -        - 
Operating loss                 (29.2)    (70.7)        (13.6)  (113.5)       (5.0)     (17.1)         (9.2)   (31.3) 
==========================  =========  ========  ============  =======  ==========  =========  ============  ======= 
 
 

Balance Sheet and Investments

As previously reported, in 2019 the Group launched new funding products whereby it aggregates loans in warehouses for sale as ABS bonds to widen the universe of investors that access Funding Circle loans. The SME loans are held in bankruptcy remote warehouses and securitisation vehicles. The value of the investments are regularly assessed and have been impacted due to the stress of Covid-19 on SMEs.

Whilst total loans consolidated on balance sheet for accounting purposes is GBP759m, Funding Circle's exposure is limited to its investment of GBP110m (31 December 2019: GBP145m).

The investments are valued by discounting future cash flows and the Group may crystallise more than GBP110m in cash in future periods as the discounting unwinds.

The tables below breaks down the Group's balance sheet into its constituent parts:

 
                                                                                                    As at 30  As at 31 
                                                                                                        June  December 
                                                                                                        2020      2019 
                  --------------- 
                        Operating              Warehouse             Securitisation          Other     Total 
                         business                   SPVs                       SPVs    investments               Total 
                             GBPm                   GBPm                       GBPm           GBPm      GBPm      GBPm 
================  ===============  =====================  =========================  =============  ========  ======== 
Investment 
 in SME loans                 1.8                  321.8                      419.4           15.6     758.6     723.5 
Cash                         74.3                   22.9                       34.0              -     131.2     164.5 
Other assets                    -                      -                       13.3              -      13.3       8.4 
Borrowing/bonds             (0.3)                (279.1)                    (438.0)              -   (717.4)   (614.5) 
================  ===============  =====================  =========================  =============  ========  ======== 
Cash & 
 Investments                 75.8                   65.6                       28.7           15.6     185.7     281.9 
================  ===============  =====================  =========================  =============  ========  ======== 
Other assets                102.0                      -                          -              -     102.0      99.1 
Other 
 liabilities               (70.8)                      -                          -              -    (70.8)    (62.0) 
================  ===============  =====================  =========================  =============  ========  ======== 
Equity                      107.0                   65.6                       28.7           15.6     216.9     319.0 
================  ===============  =====================  =========================  =============  ========  ======== 
 

Funding Circle investment exposure

Funding Circle has various investment vehicles it uses to invest in SME loans. Given the different risk dynamics, each vehicle is affected by Covid-19 in different ways. The table below provides a further breakdown of Funding Circle's investment in these vehicles:

 
Investment type          Principal invested  Balance sheet valuation 
                            At 30 June 2020          At 30 June 2020 
                                       GBPm                     GBPm 
1. Securitisation 
 SPVs (vertical)                         18                       18 
2. Other investments                     16                       16 
3. Warehouse SPVs                        80                       66 
4. Securitisation 
 SPVs (horizontal)                       45                       10 
---------------------  --------------------  ----------------------- 
Total                                   159                      110 
---------------------  --------------------  ----------------------- 
 

1) Vertical securitisation retention: Funding Circle is required by regulation to retain a 5% equal participation in all classes of bonds issued (vertical). Covid-19 has had minimal impact on these investments.

2) Other Investments: There are a small amount of Other Investments, comprising seed investments in Private Funds and participation in investments in the UK CBILS programme. Covid-19 has had minimal impact on these investments.

3) Warehouses: In warehouses we deploy our equity and bank debt to aggregate loans temporarily prior to securitisation. The debt is senior which means the equity is more exposed to changes in valuation of loans. When Covid-19 hit, the Group had one UK warehouse at 100% of capacity and two US warehouses at a combined 30% capacity. The intention was to securitise the SME loans in the warehouses but this was not feasible due to Covid-19. In the six month period, the warehouses generated investment AEBITDA of negative GBP20m comprising GBP15m investment Income minus GBP35m fair value adjustments.

4) Horizontal securitisation: Once loans are securitised, we temporarily hold the residual horizontal tranches with the intention to sell once seasoned. These tranches have the potential to earn greatest returns, but they also absorb losses first. As at June 2020, we held horizontals in 3 securitisations which were securitised in H2 2019 (UK and US) and H1 2020 (US). The timing of the pandemic meant that it was not feasible to dispose of these horizontal tranches in H1 2020. In the six month period, the horizontal securitisation generated investment AEBITDA of negative GBP40m comprising GBP21m investment Income minus GBP61m fair value adjustments.

Cash flow

As at 30 June 2020, the Group held cash and cash equivalents of GBP131.2m (31 December 2019: GBP164.5m). The table below shows how the Group's overall cash has been utilised:

 
                                                    6 months   6 months 
                                                       ended      ended 
                                                30 June 2020    30 June 
                                                        GBPm       2019 
                                                                   GBPm 
--------------------------------------------  --------------  --------- 
 Net cash outflow from operating activities            (0.6)     (18.1) 
 Purchase of tangible and intangible 
  assets                                               (5.9)      (8.1) 
 Interest received                                       0.4        0.9 
 Payment of lease liabilities                          (3.5)      (2.8) 
--------------------------------------------  --------------  --------- 
 Free cash flow                                        (9.6)     (28.1) 
 Net cash outflow associated with 
  investor products                                   (26.1)     (35.6) 
 Net cash inflow from other financing 
  activities                                             0.1        0.5 
 Effect of foreign exchange                              2.3        0.2 
--------------------------------------------  --------------  --------- 
 Movement in the year                                 (33.3)     (63.0) 
 Cash and cash equivalents at the 
  beginning of the period                              164.5      333.0 
--------------------------------------------  --------------  --------- 
 Cash and cash equivalents at the 
  end of the period                                    131.2      270.0 
--------------------------------------------  --------------  --------- 
 

Subsequent events

In July 2020, the Group announced that it is restructuring the US business to accelerate its path to profitability. This included centralising the US technology team in the UK, moving the sales and marketing teams to the Denver office and workforce reductions in aggregate resulting in a net reduction of c.85 roles. The anticipated cash cost of this restructuring is c.GBP2m.

Going Concern

In considering the preparation of the interim report and financial statements on a going concern basis, the Directors considered and reviewed stress scenarios in relation to the impact and duration of Covid-19 and related restrictions. Covid-19 resulted in the Group adapting its business model to originate through UK and US SME government guarantee programmes( CBILS and PPP), and temporarily suspending lending under non-government-guaranteed programmes. In addition, forbearance measures were implemented to assist in easing the pressure on many of Funding Circle's existing borrowers with the aim of assisting them in remaining viable in the medium to long term while protecting investor returns.

The Group has prepared cash flow projections to 31 December 2021 which include stress scenarios including the timing of when the Group would expect to resume non-government guaranteed lending and the extent to which origination growth would increase. At 30 June 2020, the Group had net assets of GBP217m.

Under our central stress scenario, defaults accelerate to a peak of three and a half times pre-Covid-19 levels in the second half of 2020 before reducing in 2021 and resulting in cumulative net losses of two times pre-Covid-19 levels. At all times through the forecast period, the Group retains sufficient financial resources.

Additionally, the Group has financial covenants in relation to servicing agreements and the warehouse vehicles consisting of minimum cash and tangible net worth levels and tangible net worth to debt ratios. At all times through the forecast period, the Group remains within the required levels.

Following these forecasts, including the consideration of downside stress scenarios, the Directors are satisfied that the Group has sufficient financial resources such that it is appropriate to prepare the interim financial statements on a going concern basis.

Principal risks and uncertainties

The Group's principal risks and uncertainties were disclosed in the 2019 annual report and accounts after review and approval by the Board. In light of the onset of Covid-19 from March 2020, whilst the Group considers the overall principal risks and uncertainties remain the same in nature, a number of these risks have significantly heightened.

 
 Principal risk                General Impact                           Covid-19 Specific Impact 
----------------------------  ---------------------------------------  --------------------------------- 
 Strategic risk                Economic environment - Financial         The economic slowdown 
  - defined as the              risk that is associated with             due to Covid-19 creates 
  failure to build              macroeconomic or political               uncertainty in terms 
  a sustainable, diversified    factors that may affect Funding          of the credit risk associated 
  and profitable business       Circle's financial and/or                with unsecured lending 
  that can successfully         credit performance.                      to small businesses. 
  adapt to environment 
  changes due to the                                                     The current government 
  inefficient use                                                        backed lending programmes 
  of Funding Circle's                                                    are temporary in nature, 
  available resources.                                                   and may rapidly evolve. 
 
                                                                         These factors may hamper 
                                                                         our ability and the 
                                                                         timing for Funding Circle 
                                                                         to resume platform lending 
                                                                         of unsecured loans. 
 
                                                                         We are closely monitoring 
                                                                         the external environment 
                                                                         and continue to evolve 
                                                                         our business model, 
                                                                         credit strategy and 
                                                                         product offerings. 
----------------------------  ---------------------------------------  --------------------------------- 
 Funding and liquidity         Funding risk - The risk that             Given the low demand 
  risk - defined as             borrower loan demand cannot              for unsecured lending 
  the risks associated          be met when and where they               in the Covid-19 environment, 
  with platform funding         fall due or can only be met              Funding Circle placed 
  (matching borrower            at an uneconomic price. This             a temporary suspension 
  demand and investor           risk varies with the economic            on non-government backed 
  cash supply), capital         attractiveness of Funding                lending. 
  commitments and               Circle loans as an investment, 
  corporate liquidity           the level of diversification             We currently have a 
  through normal and            of funding sources and the               strong pipeline for 
  stress scenarios.             level of resilience of these             institutional funding 
                                funding sources through economic         of government-backed 
                                cycles.                                  loans and sufficient 
                                                                         liquidity to match borrower 
                                Liquidity risk - The risk                demand. However, the 
                                that Funding Circle liabilities          timing and ability to 
                                cannot be met when and where             resume unsecured lending 
                                they fall due or can only                to pre-Covid levels 
                                at an uneconomic price.                  is uncertain. 
----------------------------  ---------------------------------------  --------------------------------- 
 Credit risk - defined         Borrower acquisition - Credit            There is an increased 
  as the risk of financial      performance and returns of               credit risk of borrowers 
  loss to an investor           new loans can deviate from               not meeting their repayment 
  should any borrower           expectations due to several              obligations due to the 
  fail to fulfil their          factors: changes in credit               impact of lockdowns 
  contractual repayment         quality of incoming applications,        and continuing economic 
  obligations. Credit           calibration of risk models               slowdown. This can lead 
  risk management               or strategy parameters and               to an increase in credit 
  is the sum of activities      control gaps in processing               defaults and a decrease 
  necessary to deliver          loan applications.                       in investor net returns. 
  a risk profile at             Portfolio risk management 
  portfolio level               - Credit performance and returns         Investor net returns 
  in line with Funding          of existing portfolio can                are also contingent 
  Circle management's           deviate from expectations                on the continuous effectiveness 
  expectations, in              due to several factors: deterioration    of collections & recoveries 
  terms of net loss             of credit environment, increased         activities during the 
  rate, risk-adjusted           competition driving higher               crisis. 
  rate of return and            prepayment rates, effectiveness 
  its volatility through        of portfolio monitoring and              To mitigate these risks, 
  economic cycles.              collections and recoveries.              we have paused unsecured 
                                                                         lending for now. Given 
                                                                         the government guarantees, 
                                                                         credit risk significantly 
                                                                         reduces under the government 
                                                                         backed lending programs, 
                                                                         which have formed the 
                                                                         majority of our lending 
                                                                         in 2020. 
 
                                                                         We have also increased 
                                                                         staffing and adapted 
                                                                         our collections capabilities 
                                                                         and tools to help borrowers 
                                                                         in difficulty. 
----------------------------  ---------------------------------------  --------------------------------- 
 
 
 Principal risk             General Impact                               Covid-19 Specific Impact 
                           -------------------------------------------  ------------------------------ 
 Regulatory, reputation     Regulatory risk - The risk                   There is increased regulatory 
  and conduct risk           that Funding Circle's ability                scrutiny in the UK as 
  - defined as engaging      to effectively manage its                    a result of the economic 
  in activities that         regulatory relationships is                  uncertainty and the 
  detract from Funding       compromised or diminished,                   perceived increased 
  Circle's goal of           that the Group's governance                  risks to viability of 
  being a trusted            and controls framework is                    firms. 
  and reputable company      not satisfactory given business 
  with products, services    growth or that there is business             Conduct risk has also 
  and processes designed     interruption by reason of                    increased due to the 
  for customer success       non-compliance with regulation               challenges of oversight 
  and delivered in           or the introduction of business-impacting    and monitoring of employees 
  a way that will            regulation.                                  and controls in a remote 
  not cause customer                                                      environment. 
  detriment or regulatory 
  censure.                                                                The volume of collections 
                                                                          activity also poses 
                                                                          an increased regulatory 
                                                                          risk regarding the adequate 
                                                                          management of borrowers 
                                                                          in difficulty. 
 
                                                                          Proactive engagement 
                                                                          with the regulator continues 
                                                                          Enhanced first line 
                                                                          controls and ongoing 
                                                                          compliance monitoring 
                                                                          and testing is in place 
                                                                          to manage conduct risk. 
------------------------- 
                            Reputation risk - Operational                There is heightened 
                             or performance failures could                reputational risk from 
                             lead to negative publicity                   pursuing collections 
                             that could adversely affect                  from borrowers, who 
                             our brand, business, results,                have missed payments 
                             operations, financial condition 
                             or prospects.                                Forbearance measures 
                                                                          have been offered to 
                                                                          help borrowers in difficulty 
                                                                          in an empathetic way. 
                                                                          Quality monitoring has 
                                                                          also been enhanced in 
                                                                          our collections and 
                                                                          recoveries department. 
------------------------- 
 
 
 
 Principal risk               General Impact                           Covid-19 Specific Impact 
---------------------------  ---------------------------------------  ---------------------------------- 
 Operational risk             Process risk - Failure to                Funding Circle implemented 
  Operational risk             operate in accordance with               new processes to support 
  is the risk of loss          British Business Bank (BBB)              the government backed 
  resulting from inadequate    guidelines may invalidate                lending schemes. There 
  or failed internal           CBILS guarantee. This may                is a potential for operational 
  processes, people            result in Funding Circle repurchasing    errors that may result 
  and systems or from          loans from investors.                    in repurchasing loans 
  external events.                                                      from investors, and 
                                                                        this could have an impact 
                                                                        on Funding Circle's 
                                                                        financials. 
 
                                                                        We have implemented 
                                                                        robust controls, as 
                                                                        well as independent 
                                                                        quality checks to ensure 
                                                                        that all loans originated 
                                                                        under the government 
                                                                        scheme are fully compliant 
                                                                        with eligibility requirements. 
                                                                        Government programs 
                                                                        monitoring and oversight 
                                                                        is in place to ensure 
                                                                        ongoing program compliance. 
--------------------------- 
                              Information security - Failure           There is heightened 
                               to protect the confidential              risk driven from staff 
                               information of Funding Circle's          working from remote 
                               borrowers, investors and IT              locations and using 
                               systems may lead to financial            electronic communication 
                               loss, reputational damage                channels that may be 
                               and regulatory censure.                  susceptible to cyberattacks. 
 
                                                                        We are continuing to 
                                                                        evolve our workplace 
                                                                        and information security 
                                                                        policies in the Covid-19 
                                                                        environment, with enhanced 
                                                                        monitoring. 
--------------------------- 
                              Financial crime - Risk of                There is heightened 
                               regulatory breach, financial             risk due to the rapid 
                               loss or reputational damage              pace of change needed 
                               arising from a failure to                to adapt to government 
                               adequately manage or prevent             backed lending and to 
                               money laundering, terrorist              remote working. 
                               financing, bribery and corruption, 
                               or to comply with sanctions              We have focused on maintaining 
                               regulations.                             robust controls through 
                                                                        this period of changes, 
                                                                        with enhanced detections 
                                                                        to mitigate such risks. 
                              Technology risk - Failure                There is increased reliance 
                               of the technology platform               on technology with remote 
                               could have a material adverse            working. Rapidly launching 
                               impact on Funding Circle's               and adjusting systems 
                               business, results of operations,         to accommodate government-backed 
                               financial condition or prospects.        loans also heightened 
                                                                        this risk. 
 
                                                                        We have dedicated technical 
                                                                        resources to monitor 
                                                                        and rapidly fix potential 
                                                                        outages, operating within 
                                                                        clear disaster and recovery 
                                                                        contingency plans. 
                              Client money risk - Failure              New trust structures 
                               of Funding Circle to adequately          set up in the UK for 
                               protect and segregate client             CBILS and BBLS loans 
                               money may lead to financial              have required additional 
                               loss, reputational damage                controls to be implemented. 
                               and regulatory censure.                  Client money flows through 
                                                                        these schemes is protected 
                                                                        and segregated under 
                                                                        the same standards and 
                                                                        best practices applied 
                                                                        across the platform, 
                                                                        including performing 
                                                                        internal and external 
                                                                        reconciliations daily. 
 
                                                                        In addition, given the 
                                                                        temporary pause of retail 
                                                                        investment, we have 
                                                                        observed an increase 
                                                                        in retail money balances. 
                                                                        Retail money continues 
                                                                        to be segregated from 
                                                                        institutional and Funding 
                                                                        Circle money and additional 
                                                                        monitoring controls 
                                                                        have been put in place 
                                                                        to mitigate client money 
                                                                        risks. 
---------------------------  ---------------------------------------  ---------------------------------- 
 

Statement of Directors' Responsibilities

The Directors confirm that this condensed consolidated interim financial information has been prepared in accordance with IAS 34 ("Interim Financial Reporting") as adopted by the European Union and gives a true and fair view of the assets, liabilities, financial position and loss as required by DTR 4.2.4 and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

-- an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed consolidated interim financial information and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

-- material related party transactions in the first six months of the financial year and any material changes in the related party transactions described in the last Annual Report.

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors of Funding Circle Holdings plc are listed in the Company's Report and Accounts for the year to 31 December 2019. A list of current Directors is maintained on the Funding Circle Holdings plc website: www.corporate.fundingcircle.com.

By order of the Board

Samir Desai, Chief Executive Officer

Oliver White, Chief Financial Officer

24 September 2020

Condensed consolidated statement of comprehensive income

For the six months to 30 June 2020 (unaudited)

 
                                                                                    Unaudited   Unaudited 
                                                                                     6 months    6 months 
                                                                                           to          to 
                                                             Before                   30 June     30 June 
                                                        exceptional   Exceptional        2020        2019 
                                                              items     items (1)       Total       Total 
                                         Note                  GBPm          GBPm        GBPm        GBPm 
 Transaction fees                                              47.8             -        47.8        62.5 
 Servicing fees                                                13.8             -        13.8        15.2 
 Other fees                                                     3.2             -         3.2         2.7 
---------------------------------  ----------------  --------------  ------------  ----------  ---------- 
 Fee income                                                    64.8             -        64.8        80.4 
 Investment income                                             49.8             -        49.8         2.2 
 Investment expense                                          (13.4)             -      (13.4)       (0.9) 
---------------------------------  ----------------  --------------  ------------  ----------  ---------- 
 Total income                                                 101.2             -       101.2        81.7 
 Fair value (losses)/gains                                   (96.1)             -      (96.1)       (0.3) 
 Net income                                                     5.1             -         5.1        81.4 
 
 People costs                                                (44.5)         (3.8)      (48.3)      (45.5) 
 Marketing costs                                             (22.4)             -      (22.4)      (35.2) 
 Depreciation, amortisation 
  and impairment                                              (8.2)        (12.4)      (20.6)       (7.1) 
 Loan repurchase charge                                       (5.5)             -       (5.5)       (4.2) 
 Other costs                                                 (21.1)         (0.7)      (21.8)      (20.7) 
---------------------------------  ----------------  --------------  ------------  ----------  ---------- 
 Operating expenses                        5                (101.7)        (16.9)     (118.6)     (112.7) 
 
 Operating loss                                              (96.6)        (16.9)     (113.5)      (31.3) 
 Finance income                                                 0.3             -         0.3         1.0 
 Finance costs                                                (0.8)             -       (0.8)       (0.5) 
 Share of net loss of associates                              (1.1)             -       (1.1)           - 
---------------------------------  ----------------  --------------  ------------  ----------  ---------- 
 Loss before taxation                                        (98.2)        (16.9)     (115.1)      (30.8) 
 Income tax                                7                  (0.1)             -       (0.1)       (0.2) 
---------------------------------  ----------------  --------------  ------------  ----------  ---------- 
 Loss for the period                                         (98.3)        (16.9)     (115.2)      (31.0) 
---------------------------------  ----------------  --------------  ------------  ----------  ---------- 
 
 Other comprehensive income 
 Items that may be reclassified 
  subsequently to profit 
  and loss: 
 Exchange differences on 
  translation of foreign 
  operations                                                    8.7             -         8.7         1.0 
---------------------------------  ----------------  -------------- 
 Total comprehensive loss 
  for the period                                             (89.6)        (16.9)     (106.5)      (30.0) 
                                                     ==============  ============  ==========  ========== 
 Total comprehensive loss 
  attributable to: 
 Owners of the parent                                        (89.6)        (16.9)     (106.5)      (30.0) 
                                                     ==============  ============  ==========  ========== 
 
 Loss per share 
 Basic and diluted loss 
  per share                                       8         (28.2)p        (4.8)p     (33.0)p      (8.9)p 
                                                     ==============  ============  ==========  ========== 
 

(1) Exceptional items are detailed within note 6.

Condensed consolidated balance sheet

As at 30 June 2020 (unaudited)

 
                                                  Unaudited 
                                                    30 June     31 December 
                                                       2020            2019 
                                           Note        GBPm            GBPm 
 Non-current assets 
 Goodwill                                   9             -            11.3 
 Intangible assets                          10         26.1            23.6 
 Property, plant and equipment              11         36.1            39.0 
 Investments in associates                  12         11.7            13.2 
 Investment in trusts                                   3.9               - 
 Investment in SME loans (other)            13          1.8             1.7 
                                                 ----------  -------------- 
                                                       79.6            88.8 
 Current assets 
 Investment in SME loans (curing)           13            -               - 
 Investment in SME loans (warehouse)        13        321.8           342.0 
 Investment in SME loans (securitised)      13        419.4           366.6 
 Trade and other receivables                           54.0            33.6 
 Cash and cash equivalents                            131.2           164.5 
                                                 ----------  -------------- 
                                                      926.4           906.7 
                                                 ----------  -------------- 
 Total assets                                       1,006.0           995.5 
                                                 ==========  ============== 
 Current liabilities 
 Trade and other payables                              25.2            19.7 
 Bank borrowings                            14        279.4           265.8 
 Bonds                                                438.0           348.7 
 Lease liabilities                          11          7.5             8.5 
 Short-term provisions                      15          9.4             3.1 
                                                 ----------  -------------- 
                                                      759.5           645.8 
 Non-current liabilities 
 Long-term provisions                       15          0.9             0.9 
 Lease liabilities                          11         28.7            29.8 
                                                 ----------  -------------- 
 Total liabilities                                    789.1           676.5 
                                                 ==========  ============== 
 Equity 
 Share capital                                          0.4             0.3 
 Share premium account                                292.5           292.3 
 Foreign exchange reserve                              16.7             8.0 
 Share options reserve                                 14.7            11.9 
 (Accumulated losses)/retained earnings             (107.4)             6.5 
                                                 ----------  -------------- 
 Total equity                                         216.9           319.0 
                                                 ==========  ============== 
 Total equity and liabilities                       1,006.0           995.5 
                                                 ==========  ============== 
 

These condensed interim financial statements were approved by the Board on 24 September 2020. They were signed on behalf of the Board by:

O White

Director

Condensed consolidated statement of changes in equity

For the six months to 30 June 2020 (unaudited)

 
                                               Share       Foreign         Share 
                                 Share       premium      exchange       options    Retained earnings / 
                  Note         capital       account       reserve       reserve   (accumulated losses)   Total equity 
                                  GBPm          GBPm          GBPm          GBPm                   GBPm           GBPm 
 Balance as at 
  1 January 2020                   0.3         292.3           8.0          11.9                    6.5          319.0 
 Loss for the period                 -             -             -             -                (115.2)        (115.2) 
 Other 
 comprehensive 
 income: 
 Exchange differences 
  on translation of 
  foreign operations                 -             -           8.7             -                      -            8.7 
 Transactions 
 with owners 
 Issue of share capital            0.1           0.2             -             -                      -            0.3 
 Transfer of share 
  option costs                       -             -             -         (1.3)                    1.3              - 
 Employee share schemes 
  - value of employee 
  services                           -             -             -           4.1                      -            4.1 
                         -------------  ------------  ------------  ------------  ---------------------  ------------- 
 Unaudited balance at 
  30 June 2020                     0.4         292.5          16.7          14.7                (107.4)          216.9 
                         =============  ============  ============  ============  =====================  ============= 
 
 Balance as at 
  1 January 2019                   0.3         291.8          15.7           6.0                   87.2          401.0 
 Loss for the period                 -             -             -             -                 (31.0)         (31.0) 
 Other comprehensive income: 
 Exchange differences 
  on translation of 
  foreign operations                 -             -           1.0             -                      -            1.0 
 Transactions with owners 
 Issue of share capital            0.1           0.4             -             -                      -            0.5 
 Transfer of share 
  option costs                       -             -             -         (1.5)                    1.5              - 
 Employee share schemes 
  - value of employee 
  services                           -             -             -           5.6                      -            5.6 
                         -------------  ------------  ------------  ------------  ---------------------  ------------- 
 Unaudited balance at 
  30 June 2019                     0.4         292.2          16.7          10.1                   57.7          377.1 
                         =============  ============  ============  ============  =====================  ============= 
 
 

Condensed consolidated statement of cash flows

For the six months to 30 June 2020 (unaudited)

 
                                               Note       Unaudited       Unaudited 
                                                           6 months        6 months 
                                                                 to              to 
                                                       30 June 2020    30 June 2019 
                                                               GBPm            GBPm 
 Net cash outflow from operating activities     17            (0.6)          (18.1) 
 Investing activities 
 Purchase of intangible assets                                (5.5)           (5.9) 
 Purchase of property, plant and equipment                    (0.4)           (2.2) 
 Cash receipts from SME loans (curing)                            -             2.0 
 Purchase of SME loans (other)                                    -           (1.7) 
 Purchase of SME loans (warehouse phase)                    (289.6)         (179.7) 
 Cash receipts from SME loans (warehouse 
  phase)                                                       63.5             3.9 
 Cash receipts from SME loans (securitised)                   108.0               - 
 Investment in trusts                                         (3.9)               - 
 Redemption/(Investment) in private 
  funds                                                         0.3           (5.6) 
 Dividends received from private funds                          0.3               - 
 Finance income received                                        0.4             0.9 
 
 Net cash outflow from investing activities                 (126.9)         (188.3) 
                                                     --------------  -------------- 
 Financing activities 
 Proceeds from bank borrowings                                206.5           145.5 
 Repayment of bank borrowings                               (200.6)               - 
 Proceeds from issuance of bonds                              190.1               - 
 Payment of bond liabilities                                (100.7)               - 
 Proceeds from the exercise of share 
  options                                                       0.1             0.5 
 Payment of lease liabilities                                 (3.5)           (2.8) 
 
 Net cash inflow from financing activities                     91.9           143.2 
                                                     --------------  -------------- 
 
 Net decrease in cash and cash equivalents                   (35.6)          (63.2) 
 Cash and cash equivalents at the beginning 
  of the period                                               164.5           333.0 
 Effect of foreign exchange rate changes                        2.3             0.2 
 Cash and cash equivalents at the end 
  of the period                                               131.2           270.0 
                                                     ==============  ============== 
 

Notes to the condensed interim financial statements

For the six months to 30 June 2020 (unaudited)

1. Basis of preparation

General information

Funding Circle Holdings plc ('the Company') is a public limited company which is listed on the London Stock Exchange and is domiciled and incorporated in the United Kingdom under the Companies Act 2006. The Company's registered office is 71 Queen Victoria Street, London, EC4V 4AY.

These condensed interim financial statements have been prepared as at, and for the six months to, 30 June 2020. The comparative financial information presented has been prepared as at, and for the six months to 30 June 2019 and as at 31 December 2019.

The interim financial information presented as at, and for the six months to, 30 June 2020 comprise the Company and its subsidiaries (together referred to as the "Group"). The consolidated financial statements of the Group as at, and for the year to, 31 December 2019 are available on request from the Company's registered office and via the Company's website.

Going concern

The Group made a total comprehensive loss of GBP106.5 million during the six months to 30 June 2020 (30 June 2019: loss of GBP30.0 million). The cash and cash equivalent balance of the Group as at 30 June 2020 was GBP131.2 million (31 December 2019: GBP164.5 million).

The condensed interim financial statements are prepared on a going concern basis as the Directors are satisfied that the Group has the resources to continue in business for the foreseeable future (which has been taken as 12 months from the date of approval of the condensed interim financial statements).

After receiving accreditation for CBILS lending, the UK business has seen strong performance in originations and is well positioned to facilitate further lending depending on the duration and extent of ongoing government guarantee programmes, or with a view to resuming the facilitation of non-government guarantee lending if the government schemes end. As discussed in note 22, the Group has announced a reorganisation of the US business centralising technology roles within the UK and sales and marketing in Denver.

The Group has prepared detailed cash flow forecasts for the next 15 months and has updated the going concern assessment to factor in the potential impact and economic uncertainty caused by Covid-19.

The base case scenario assumes:

- The expectation of ongoing Government support for SMEs in the UK, or the resumption of non-government lending if government support schemes end;

- There is no extension to the PPP government scheme in the US;

- Non-government scheme lending on the platform resumes from January 2021;

- Lending in the US steadily increases; and

- Costs and headcount remain relatively flat with marketing at c.30% of income.

Management prepared a stress scenario in which:

- CBILS in the UK is not extended beyond end of September 2020;

- UK and US non-government lending does not meaningfully resume until January 2021; and

- A downside loss scenario is applied to F unding Circle 's on-balance sheet investment in SME loans resulting in higher initial fair value losses and lower cash flows to the subordinate tranches of investments it owns.

Even in the stress scenario, sufficient cash is forecast to be generated to meet liabilities as they fall due without the requirement to take significant mitigating actions or restructuring beyond that already announced. The Group does not currently rely on committed or uncommitted borrowing facilities with the exception of borrowings used to fund warehouse SME loan purchases, and does not have undrawn committed borrowing facilities available to the wider Group.

Management have reviewed financial covenants the Group must adhere to in relation to its servicing agreements. These are with institutional investors and debt facilities associated with borrowings used to fund SME loan originations in warehouses, which require minimum levels of unrestricted cash in the Group and maintaining maximum debt to tangible net worth ratios. Even in stressed scenarios there is not considered to be a material risk of a covenant breach despite a narrowing of headroom in the near term.

The Directors have made inquiries of management and considered budgets and cash flow forecasts for the Group and have, at the time of approving these interim financial statements, a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.

Basis of preparation

These condensed interim financial statements, which have been reviewed and not audited, have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, "Interim Financial Reporting" as adopted by the EU. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the year to 31 December 2019 which have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted for use in the EU, including International Accounting Standards (IAS) and interpretations issued by the International Financial Reporting Standard Interpretations Committee (IFRS-IC).

The financial information included in these condensed interim financial statements does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 (the 'Act'). The statutory accounts for the year to 31 December 2019 have been reported on by the Company's auditors and were delivered to the Registrar of Companies following the Company's Annual General Meeting. The auditor's report was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 of the Act.

Significant changes in the current reporting period

The financial position and performance of the Group was affected by the following events and transactions during the six months to 30 June 2020:

   i)          Covid-19 

As a result of the global Covid-19 pandemic and the related uncertainty and restrictions required in the geographies that Funding Circle operates within, lending fell considerably in the latter half of March 2020. SME government guarantee programmes introduced by the UK and US governments, and Funding Circle's subsequent accreditation resulted in originations restarting with new borrower products as detailed below and the temporary cessation of non-government guaranteed lending. The Group's exposure to ABS products resulted in significant fair value losses as detailed below. Additionally, forbearance measures were introduced in order to protect the best interests of both Funding Circle's borrowers and investors.

   ii)          The UK Government's Coronavirus Business Interruption Loan Scheme ("CBILS") funding 

During the period, due to the Covid-19 crisis, Funding Circle became an accredited lender under CBILS. Funding Circle is required to co-invest in loans originated through this scheme. The loans are beneficially owned by investors under trust structures in which Funding Circle retains a de minimis stake.

The Group does not consolidate the trusts or the loans held within the trusts, recognising its interest in the loans instead as an investment in trust assets on the balance sheet. This investment is held at fair value through profit and loss 'FVTPL'.

   iii)         Paycheck protection programme ("PPP") loan funding 

During the period, due to the Covid-19 crisis, the US business was approved to originate loans under the US government's PPP scheme. Funding Circle funded PPP loans via its lending platform by partnering with financial institutions and institutional investors, for which it earns a referral fee or origination fee. It has no ongoing retention in the PPP loans.

   iv)         Asset-backed securities ("ABS") 

The Group continued its bond programmes which commenced in the prior year in the UK and US, continuing to invest in SME loans during the "warehousing phase" of the programme using both its own cash and amounts borrowed under credit facilities with lending institutions. An additional credit facility and warehouse vehicle in the US was utilised in the period to 30 June 2020. The loans are held within bankruptcy remote special purpose warehouse vehicles which are consolidated on 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. During the period to 30 June 2020 a further GBP221.9 million of SME loans have been sold to SPVs (30 June 2019: GBPnil).

The bonds are split into senior rated bonds (referred to as "rated") and junior unrated bonds (referred to as "unrated") and Funding Circle is required by regulation to retain a 5% equal participation in all classes of bonds issued.

Additionally, once loans are securitised, Funding Circle temporarily holds the residual horizontal tranches with the intention to sell once seasoned. These tranches have the potential to earn greatest returns, but they also absorb losses first. As at June 2020, Funding Circle held horizontals in 3 securitisations which were securitised in H2 2019 (UK and US) and H1 2020 (US). The timing of the pandemic meant that it was not feasible to dispose of these horizontal tranches in H1 2020.

2. Changes in significant accounting policies

The accounting policies, methods of computation and presentation adopted in the preparation of the condensed interim financial statements are consistent with those followed in the preparation of the consolidated financial statements for the year to 31 December 2019. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

A number of new or amended standards became applicable for the current reporting period, however, the Group did not have to change its accounting policies or make retrospective adjustments as a result of adoption.

Summary of new accounting policies

Investment in trusts

The Group holds a de minimis beneficial ownership in trusts set up to fund CBILS loans with the remaining beneficial ownership held by institutional investors. Whilst SME loans are originated by a Group subsidiary, Funding Circle Focal Point Lending Ltd, which retains legal title to the loans, it holds this legal title of trust on behalf of the investors and therefore the SME loans are not consolidated.

The Group assesses whether it controls the trust structure under the criteria of IFRS 10. Control is determined to exist if the Group has the power to direct the activities of entity's and structures and uses this control to obtain a variable return. As the Group's de minimis holding is pari passu, the Group is not exposed to the majority of the variability in the cash flows of the trust, and it is not considered to control the trust structures, so they are not consolidated by the Group.

Investments in trusts are classified at fair value through profit and loss. 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.

The Group recognises transaction fee income on origination of loans within the trust and service fee income on the assets within the trust, eliminating its proportional ownership share of the service fees. A scheme lender fee is charged in relation to the origination of CBILS loans and investment income is recognised in relation to returns on the investment.

3. Critical accounting estimates and judgments

The preparation of the condensed interim 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 current period. The significant estimates and judgements 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 2019.

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.

a) Loan repurchase provision (note 15)

In certain circumstances, in the less mature markets, predominantly in Germany and the Netherlands, 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 estimate the expected credit loss ("ECL") for these commitments at each reporting date.

In order to quantify the ECL, IFRS 9 is followed. 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 in each market together with the impact on loan defaults. It is estimated that in both the European markets defaults will accelerate to a peak in H2 2020 and then de-stress gradually afterwards, with Germany expected to fair more favourably than Netherlands as a result of government stimulus programme. The most significant estimation is with default rates on performing loans. For the period ended 30 June 2020 the weighted average lifetime default rate is estimated at 24.1% under stress assumptions (31 December 2019: 12.9% without Covid-19 stress). If the weighted average default rate estimate were to change by +/-25% the provision would change by GBP2.2 million for the period ended 30 June 2020 (31 December 2019: GBP1.5 million). 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 provision in future could materially diverge from management's estimate.

b) Fair value of financial instruments (note 16)

At 30 June 2020, the carrying value of the Group's financial instrument assets held at fair value was GBP779.5 million (31 December 2019: GBP754.8 million) and the carrying value of financial liabilities carried at fair value was GBP5.3 million (31 December 2019: GBP20.0 million).

In accordance with IFRS 13 Fair Value Measurement, the Group categorises financial instruments carried on the consolidated balance sheet 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 estimation 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 and default rates. In light of Covid-19, a range of stress scenarios were used incorporating different default and recovery stresses.

For the UK Portfolio the Group applied different stress levels to different segments of the portfolio depending on the borrower behaviour observed to date. 1) borrowers that weathered the lockdown without missing payments or needing plans are performing better than pre-crisis average in the short term, with moderate stress possible in the medium term due to a weak economy, 2) borrowers late and not on a plan are expected to incur standard high default rates for such populations, 3) borrowers that took payment plans or holidays are expected to exhibit a credit performance in-between the two segments above. The resultant impact on the portfolios is a peak in defaults in H2 2020 with a tail normalising over 2021 into 2022.

Similarly in the US the loss scenario involved splitting the loan book by borrower segment based on their observed behaviour since the start of the crisis. This also produces an expectation of a peak in defaults in H2 2020 with a tail normalising over 2021 into 2022. Overall, it is estimated that a similar level of stress will occur in the US and UK over the coming years.

A sensitivity to the default rates and discount rate are illustrated below.

 
 Description         Fair value      Unobservable           Inputs       Relationship of unobservable 
                       (GBPm)            input                               inputs to fair value 
 Investment            321.8      Lifetime cumulative       US 18.6        A change in the lifetime 
  in SME loans                        default rate        and 21.7%(1)      cumulative default rate 
  - (warehouse)                     as % of original        UK 15.7%       would have the following 
                                                                                    impact: 
                                                                             US: +/- 200 bps would 
                                                                            decrease/increase fair 
                                                                           value by GBP2.4 million. 
                                                                             UK: +/- 160 bps would 
                                                                            decrease/increase fair 
                                                                           value by GBP3.3 million. 
------------------               --------------------  ---------------  ----------------------------- 
 Investment            419.4      Lifetime cumulative      US 23.4         A change in the lifetime 
  in SME loans                        default rate       and 26.2%(1)       cumulative default rate 
  - (securitised)                   as % of original       UK 17.4%        would have the following 
                                                                                    impact: 
                                                                             US: +/- 250 bps would 
                                                                            decrease/increase fair 
                                                                           value by GBP9.0 million. 
                                                                             UK: +/- 170 bps would 
                                                                            decrease/increase fair 
                                                                           value by GBP2.3 million. 
------------------               --------------------  ---------------  ----------------------------- 
                                                                           A change in the lifetime 
                                  Lifetime cumulative                       cumulative default rate 
                                      default rate                           by +/- 170 bps would 
                                     of associated                          increase/decrease fair 
 Bonds (Unrated)       (5.3)            assets.             17.4%          value by GBP0.4 million. 
------------------               --------------------  ---------------  ----------------------------- 
 

(1) Two cumulative default rates are presented for the US representing the portfolios in each of the two respective warehouses and two respective securitisation vehicles.

For the illustration of sensitivity a 10% change in cumulative lifetime loss rates has been applied above. However given ongoing uncertainty in relation to the impact of Covid-19 in the future, the reasonably possible range of outcomes could be wider than those illustrated. In Particular a more severe impact from Covid-19 in future than that estimated by management could result in the fair value of the assets materially diverging from management's estimate, while a less severe impact from Covid-19 in future would be estimated to produce a more limited range of reasonably possible outcomes.

 
 Description         Fair value   Unobservable input    Inputs    Relationship of unobservable 
                       (GBPm)                                         inputs to fair value 
 Investment            321.8        Risk-adjusted      US 7.9%      A change in the discount 
  in SME loans                       discount rate      UK 7.7%     rate by +/-100 bps would 
  - (warehouse)                                                      decrease/increase fair 
                                                                     value by GBP4.7 million 
------------------               -------------------  ---------  ----------------------------- 
 Investment            419.4        Risk-adjusted      US 7.9%      A change in the discount 
  in SME loans                       discount rate      UK 7.7%     rate by +/-100 bps would 
  - (securitised)                                                    decrease/increase fair 
                                                                     value by GBP5.7 million 
------------------               -------------------  ---------  ----------------------------- 
                                                                    A change in the discount 
                                                                    rate by +/-100 bps would 
                                    Risk-adjusted                    decrease/increase fair 
 Bonds (Unrated)       (5.3)         discount rate      27.1%        value by GBP0.2 million 
------------------               -------------------  ---------  ----------------------------- 
 

It is considered that the range of reasonably possible outcomes in relation to the discount rate used could be +/-100 bps and as a result the fair value of the assets could materially diverge from management's estimate.

As the discount rate is risk-adjusted, it should be noted that the sensitivities to discount rate and to lifetime cumulative default rate contain a level of overlap regarding credit risk. The sensitivity in expected lifetime cumulative defaults should not also be applied to the sensitivity of the credit risk element of the risk-adjusted discount rate and the sensitivities are most meaningful viewed independently of each other.

c) Estimated impairment of non-financial assets (notes 9 and 10)

Non-financial assets (primarily goodwill, intangible assets and property plant and equipment) are held within the Group within cash generating units ("CGUs") which are expected to benefit from the assets. The Group has three CGUs, being Funding Circle USA ("FCUSA") and its subsidiaries, Funding Circle Limited ("FCUK") and its subsidiaries and the German and Dutch businesses (Funding Circle Continental Europe or "FCCE"). These assets are assessed annually for impairment or when indicators of impairment are identified. Following the impact of Covid-19 and a change in the Group's income and cost forecasts, an event indicating the possibility of impairment was identified and the Group has undertaken an interim impairment review of non-financial assets in CGUs.

The impairment test involved comparing the carrying value of the net assets held for use to their recoverable amount for each CGU. The recoverable amount represents the higher of the entity's fair value net of selling costs and its value in use, which were determined using discounted cash flow methodology. In undertaking the impairment assessment it was noted that FCUK was not sensitive to estimation uncertainty, nor was FCCE as the non-financial assets were impaired in the previous assessment for the year ended 31 December 2019.

The review identified impairment to the goodwill in FCUSA as the fair value less cost to sell calculated was below the carrying amount and the goodwill was fully impaired by GBP12.0m. IAS 36 allocates impairment losses first to goodwill followed by other non-financial assets, however it prohibits the reversal of goodwill impairment. As a result the impairment assessment is not sensitive to a higher estimation of the recoverable amount, however a lower estimated recoverable amount could lead to impairment of intangible assets within the CGU which are held at a carrying value of GBP11.3m and property, plant and equipment totalling GBP1.7m (excluding right of use assets).

The Group prepared a five-year forecast for the FCUS CGU for which the majority of the sensitivity is in the growth rate applied to the fifth year which is forecast out into perpetuity. The cash flow projections are based on the following key assumptions presented along with the sensitivity to a reduction in the recoverable amount for each key assumption:

- income growth at a compound growth rate of 23.9%. A 500bps reduction in projected 5(th) year income growth rate with no cost reduction would decrease the recoverable amount by GBP13.2 million.

- cost growth at a compound rate of 12.5%. A 500bps increase in projected 5(th) year cost growth rate with no income increase would decrease the recoverable amount by GBP11.2 million.

- pre-tax discount rate of 15%. A 1% increase in discount rate would decrease the recoverable amount by GBP3.6 million.

- income beyond the five-year period extrapolated using an estimated growth rate of 1.5%. A reduction in the growth rate to 1.0% would reduce the recoverable amount by GBP1.1 million.

4. Segmental information

IFRS 8 Operating segments requires the Group to determine its operating segments based on information which is used internally for decision making. 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 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 previously consisted 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 businesses 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-base payment charges and associated social security costs, foreign exchange, and exceptional items (see note 6). 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.

During the period to 30 June 2020 organisational changes led to greater ownership of costs being managed within geographies. As a result the way the operating segment performance is reported to and reviewed by the GLT was modified to allocate product development, corporate costs, depreciation and amortisation, share based payments and exceptional items across the geographical segments. The comparatives of 30 June 2019 have been restated to reflect the revised segmental presentation.

 
Net income/(loss)                     30 June 2020                       30 June 2019 (restated) 
==========================  =================================  ============================================  ======= 
                               United    United    Developing    Total      United     United    Developing    Total 
                              Kingdom    States       Markets              Kingdom     States       Markets 
========================== 
                                 GBPm      GBPm          GBPm     GBPm        GBPm       GBPm          GBPm     GBPm 
==========================  =========  ========  ============  =======  ==========  =========  ============  ======= 
Total income                     59.3      38.0           3.9    101.2        53.0       22.2           6.5     81.7 
Fair value (losses)/gains      (34.8)    (61.3)             -   (96.1)           -      (0.3)             -    (0.3) 
--------------------------  ---------  --------  ------------  -------  ----------  ---------  ------------  ------- 
Net income/(loss)                24.5    (23.3)           3.9      5.1        53.0       21.9           6.5     81.4 
 
Segment profit                             30 June 2020                           30 June 2019 (restated) 
                            ------------------------------------------  -------------------------------------------- 
                               United    United    Developing    Total      United     United    Developing    Total 
                              Kingdom    States       Markets              Kingdom     States       Markets 
                                 GBPm      GBPm          GBPm     GBPm        GBPm       GBPm          GBPm     GBPm 
--------------------------  ---------  --------  ------------  -------  ----------  ---------  ------------  ------- 
Segment adjusted EBITDA        (10.5)    (48.4)         (6.7)   (65.6)        14.0      (6.7)         (6.1)      1.2 
Product development             (7.5)     (4.0)         (0.8)   (12.3)       (8.3)      (4.4)         (1.6)   (14.3) 
Corporate costs                 (4.1)     (1.7)         (0.4)    (6.2)       (4.2)      (1.9)         (0.5)    (6.6) 
==========================  =========  ========  ============  =======  ==========  =========  ============  ======= 
Adjusted EBITDA                (22.1)    (54.1)         (7.9)   (84.1)         1.5     (13.0)         (8.2)   (19.7) 
Depreciation and 
 amortisation                   (4.1)     (3.4)         (0.7)    (8.2)       (4.0)      (2.3)         (0.8)    (7.1) 
Share-based payments 
 and social security 
 costs                          (3.0)     (1.2)         (0.1)    (4.3)       (2.5)      (1.8)         (0.2)    (4.5) 
Exceptional items                   -    (12.0)         (4.9)   (16.9)           -          -             -        - 
Operating loss                 (29.2)    (70.7)        (13.6)  (113.5)       (5.0)     (17.1)         (9.2)   (31.3) 
==========================  =========  ========  ============  =======  ==========  =========  ============  ======= 
 
 

5. Operating expenses

 
                                           30 June       30 June   30 June   30 June 
                                              2020          2020      2020      2019 
                                Before exceptional   Exceptional     Total     Total 
                                             items         items 
                                              GBPm          GBPm      GBPm      GBPm 
 Depreciation, amortisation 
  and impairment                               8.2          12.4      20.6       7.1 
 Rental income and other 
  recharges                                  (0.4)             -     (0.4)     (0.1) 
 Employment costs (including 
  contractors)                                44.5           3.8      48.3      45.5 
 Marketing costs (excluding 
  employee costs)                             22.4             -      22.4      35.2 
 Data and technology costs                     5.7             -       5.7       4.9 
 Loan repurchase charge                        5.5             -       5.5       4.2 
 Other expenses                               15.8           0.7      16.5      15.9 
                                                                  --------  -------- 
 Total operating expenses                    101.7          16.9     118.6     112.7 
                               -------------------  ------------  --------  -------- 
 
   6.   Exceptional items 

The Group reflects its underlying financial results in the Before Exceptional Items column of the consolidated income statement in order to provide a clear and consistent view of trading performance.

As announced in March 2020, the Group is restructuring the German and Dutch (Developing Markets) businesses to focus on referring loans it originates to local lenders. This restructuring has resulted in one-off costs totaling GBP4.9 million. These comprised redundancy costs of GBP3.8 million, accelerated depreciation on the right of use assets of GBP0.4 million and other costs of GBP0.7 million. Cash payments associated with these items totaled GBP2.4 million to 30 June 2020.

Following a change in the Group's income and cost forecasts, an event indicating the possibility of impairment was identified and the Group has undertaken an interim goodwill impairment review as a result in which it was identified that goodwill in relation to Funding Circle USA business was carried at a value higher than the business unit's fair value less cost to sell driven by a reduction in the future discounted cash flows of the Business Unit. As a result, an impairment was recognised of GBP12.0 million. There was no cash movement in relation to the impairment.

7. Taxation

The Group calculates the period income tax expense using the tax rate that would be applicable to the expected total annual earnings. The estimated average annual tax rate used for the six months to 30 June 2020 (excluding the tax charge on Research and Development Expenditure Credits (RDEC)) is nil%, compared to nil% for the six months to 30 June 2019. The major components of income tax expense in the condensed consolidated statement of comprehensive income are:

 
                            30 June   30 June 
                               2020      2019 
                               GBPm      GBPm 
 Current tax 
 UK corporation taxation        0.1       0.2 
 Total current tax              0.1       0.2 
 
 Total tax charge               0.1       0.2 
                           --------  -------- 
 

The Group continues to be in a loss making position, however, credits receivable in respect of RDEC are subject to UK corporation tax. The above tax charge represents the amount of tax deducted from the gross RDEC credit receivable for 2020.

The Group has unrelieved tax losses that are available for offset against future taxable profits. The Group has not recognised a deferred tax asset in respect of these losses as there is not sufficient evidence of suitable profits being generated to utilise these losses.

8. Losses per share

 
                                            30 June   30 June 
                                               2020      2019 
                                               GBPm      GBPm 
 
 Loss for the period                        (115.2)    (31.0) 
 Weighted average number of ordinary 
  shares in issue (million)                   348.8     346.7 
 Basic and diluted loss per share           (33.0)p    (8.9)p 
                                           --------  -------- 
 Loss for the year before exceptional        (98.3)       n/a 
  items 
 Weighted average number of ordinary          348.8       n/a 
  shares in issue (million) 
                                           --------  -------- 
 Basic and diluted loss per share before    (28.2)p       n/a 
  exceptional items 
                                           --------  -------- 
 

9. Goodwill

 
                                GBPm 
 Cost and carrying amount 
 At 1 January 2020              11.3 
 Exchange differences            0.7 
 Impairment charge            (12.0) 
                             ------- 
 At 30 June 2020                   - 
                             ------- 
 

The annual goodwill impairment assessment was performed at 31 December 2019. Following the impact of Covid-19 and a change in the Group's income and cost forecasts, an event indicating the possibility of impairment was identified and the Group has undertaken an interim goodwill impairment review for all CGUs as a result.

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 one CGU to which remaining goodwill is attached, being Funding Circle USA ("FCUSA") and its subsidiaries.

 
           30 June   31 December 
              2020          2019 
              GBPm          GBPm 
 FCUSA           -          11.3 
 FCCE            -             - 
         ---------  ------------ 
 Total           -          11.3 
         ---------  ------------ 
 

The impairment test involved comparing the carrying value of the net assets held for use to their recoverable amount. The recoverable amount represents the higher of the entity's fair value less costs to sell and its value in use. The recoverable amount was determined using fair value less cost to sell calculations utilising discounted cash flows.

Further details of the impairment assessment are detailed within note 3. The review identified impairment to the goodwill in FCUSA as the fair value less cost to sell calculated was below the carrying amount. The cumulative amount of impairment losses in relation to goodwill recognised in the period was GBP12.0 million (31 December 2019: GBP29.0 million).

10. Intangible assets

 
                    Capitalised development    Computer   Other intangibles   Total 
                                      costs    software 
                                       GBPm        GBPm                GBPm    GBPm 
 Net book value 
 At 31 December 
  2019                                 23.3         0.2                 0.1    23.6 
 
 At 30 June 2020                       25.7         0.3                 0.1    26.1 
                   ------------------------  ----------  ------------------  ------ 
 

11. Property, plant and equipment, right-of-use assets and lease liabilities

Analysis of property, plant and equipment between owned and leased assets

 
                                          30 June   31 December 
                                             2020          2019 
                                             GBPm          GBPm 
 Property, plant and equipment (owned)        4.9           5.1 
 Right-of-use assets                         31.2          33.9 
                                         --------  ------------ 
                                             36.1          39.0 
                                         --------  ------------ 
 

Lease liabilities - maturity analysis

 
                                               30 June   31 December 
                                                  2020          2019 
                                                  GBPm          GBPm 
 No later than one year                            7.5           8.5 
 Later than one year and no later than five 
  years                                           24.5          24.5 
 Later than five years                             4.2           5.3 
                                              --------  ------------ 
 Total                                            36.2          38.3 
                                              --------  ------------ 
 

Lease liabilities

 
                30 June   31 December 
                   2020          2019 
                   GBPm          GBPm 
 Current            7.5           8.5 
 Non-current       28.7          29.8 
               --------  ------------ 
 Total             36.2          38.3 
               --------  ------------ 
 

12. Interest in associates

During the six month period to June 2020, Funding Circle UK SME Direct Lending Fund I received additional committed capital from external investors of GBP30.0 million. This increased the committed capital in the fund to GBP65.0 million of which the Group provided GBP5.0 million, reducing its holding from 14.3% to 7.7%. In April 2020, the Group injected a further GBP0.4 million into the fund. This increased the committed capital in the fund to GBP65.4 million of which the Group provided a total of GBP5.4 million, increasing its holding to 8.3%.

The Group holds 23.6% of Funding Circle European SME Direct Lending Fund I and 8.3% of Funding Circle UK SME Direct Lending Fund I at 30 June 2020.

The Group's share of losses from associates in the period was GBP1.1 million (30 June 2019: GBPnil).

13. Investments in SME loans

 
                                            30 June   31 December 
                                               2020          2019 
                                               GBPm          GBPm 
 Non-current 
 Investment in loans (other) - amortised 
  cost                                          1.8           1.7 
 Current 
 Investment in loans (curing) - FVTPL             -             - 
 Investment in loans (warehouse) - FVTPL      321.8         342.0 
 Investment in SME loans (securitised) 
  - FVTPL                                     419.4         366.6 
                                           --------  ------------ 
                                              743.0         710.3 
                                           --------  ------------ 
 

14. Borrowings

During 2020, the Group maintained revolving credit facility agreements of up to GBP220 million and $180 million for the Group's UK and US ABS programmes respectively, including a new facility in the US of up to $175 million in the period. The facilities are drawn down in order to fund the purchase of SME loans for the warehouses.

Due to the impact of Covid-19 and the refocus towards CBILS and PPP loan originations, the warehouses have ceased reinvestment of proceeds from SME loans and commenced paying down the outstanding facility balances. As at 30 June 2020, the amounts drawn in the UK and US totalled GBP192.4 million (2019: GBP71.5 million) and $107.1 million (2019: $95.8 million) respectively. Interest is payable on the borrowings in the UK at 1.50% plus 1 month LIBOR and in the US at 2.5% plus the 3 month commercial paper rate on the initial facility and at 3 month USD LIBOR + 2% on the new facility respectively.

Additionally in the US the Group has drawn $0.3m (2019: $nil) on the PPP Liquidity Facility available from the Federal Reserve Bank at a fixed interest rate of 0.35%.

15. Provisions

 
                        Dilapidation         Loan  Restructuring(1)   Other   Total 
                                       repurchase 
                                GBPm         GBPm              GBPm    GBPm    GBPm 
 At 1 January 2019               0.8          3.1                 -     0.7     4.6 
 Additional provision            0.1          4.2                 -       -     4.3 
 Amount utilised                   -        (4.4)                 -   (0.1)   (4.5) 
                        ------------  -----------  ----------------  ------  ------ 
 At 30 June 2019                 0.9          2.9                 -     0.6     4.4 
 Additional provision              -          2.3                 -     0.7     3.0 
 Reclassification                  -          0.5                 -   (0.5)       - 
 Amount utilised                   -        (2.8)                 -   (0.6)   (3.4) 
                        ------------  -----------  ----------------  ------  ------ 
 At 31 December 2019             0.9          2.9                 -     0.2     4.0 
 Additional provision              -          5.5               4.5     0.9    10.9 
 Amount utilised                   -        (2.0)             (2.4)   (0.2)   (4.6) 
                        ------------  -----------  ----------------  ------  ------ 
 At 30 June 2020                 0.9          6.4               2.1     0.9    10.3 
                        ------------  -----------  ----------------  ------  ------ 
 

(1) Restructuring provision is in relation to reorganisation of the German and Dutch businesses, see note 6.

Current and non-current

 
                           30 June   31 December 
                              2020          2019 
                              GBPm          GBPm 
 Current provisions            9.4           3.1 
 Non-current provisions        0.9           0.9 
                          --------  ------------ 
 Total                        10.3           4.0 
                          --------  ------------ 
 

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. Under the terms of the agreements, the Group is required either to make payments when the underlying borrower fails to meet its obligation under the loan contract or buy the defaulted loan from the investors at its carrying value. In return for these commitments, the Group is entitled to the excess returns or additional income which is recorded as other income.

Under IFRS 9, the Group is required to provide for these loan repurchases under the expected credit loss ("ECL") model.

The provision related to each loan arranged is based on the ECLs associated with the probability of default of that loan in the next 12 months unless there has been a significant increase in credit risk of that loan since origination. The Group assumes there has been a significant increase in credit risk if outstanding amounts on the loan investment exceed 30 days, in line with the rebuttable presumption per IFRS 9.

The Group previously defined a default, classified within non-performing, as a loan investment with any outstanding amounts exceeding a 90-day due date. Under the loan repurchase contracts, this was the point at which there is an obligation for the Group to make a payment under the contract or buy back the loan. However while the buyback agreement is contractually defined as 90 days past-due, due to the impact of Covid-19, a consent letter was signed with the institutional investors in April 2020 to accommodate loans on forbearance plans whereby loans on such plans will be repurchased at 180 days past-due. As a result the 90 day overdue definition of default applies to loans in the portfolio not on forbearance, and 180 days overdue is applied for those on forbearance plans.

If the loan is bought back by the Group, at the point of buy back, the financial asset associated with the purchase meets the definition of purchased or originated credit impaired ("POCI"); this element of the reserve is therefore based on lifetime ECLs.

The Group bands each loan investment using an internal risk rating and assesses credit losses on a collective basis.

 
                                        Performing:   Underperforming:   Non-performing:              Total 
                                                                                            loan repurchase 
                                                                                                  provision 
                                           12-month           Lifetime          Lifetime 
                                                ECL                ECL               ECL 
                                               GBPm               GBPm              GBPm               GBPm 
 At 1 January 2019                              2.1                0.8               0.2                3.1 
 Provision against new loans 
  originated                                    2.8                  -                 -                2.8 
 Provision against loans transferred 
  from performing                             (3.6)              (0.1)               7.4                3.7 
 Amounts utilised                                 -                  -             (7.2)              (7.2) 
 Loans repaid                                 (0.5)                  -                 -              (0.5) 
 Change in probability of default               1.3                0.1             (0.4)                1.0 
                                       ------------  -----------------  ----------------  ----------------- 
 At 31 December 2019                            2.1                0.8                 -                2.9 
                                       ------------  -----------------  ----------------  ----------------- 
 Provision against new loans                      -                  -                 -                  - 
  originated 
 Provision against loans transferred 
  from performing                             (0.3)                3.1               2.0                4.8 
 Amounts utilised                                 -                  -             (2.0)              (2.0) 
 Loans repaid                                 (0.4)                  -                 -              (0.4) 
 Change in probability of default               1.1                  -                 -                1.1 
                                       ------------  -----------------  ----------------  ----------------- 
 At 30 June 2020                                2.5                3.9                 -                6.4 
                                       ------------  -----------------  ----------------  ----------------- 
 
 
                                                                            Gross assets 
                                                                             of external 
                                  Expected                               parties subject 
                               credit loss   Basis for recognition    to loan repurchase   Loan repurchase 
                                  coverage      of loan repurchase            provisions         provision 
                                       (%)               provision                (GBPm)            (GBPm) 
 As at 31 December 2019 
 Performing (due in 30 
  days or less)                          5            12 month ECL                  40.6               2.1 
 Underperforming (31-90 
  days overdue)                       81.3            Lifetime ECL                   0.9               0.8 
 Non-performing (90+                   100            Lifetime ECL                     -                 - 
  days overdue) 
                                                                    --------------------  ---------------- 
                                                             Total                  41.5               2.9 
                                                                    --------------------  ---------------- 
 
 As at 30 June 2020 
 Performing (due in 30 
  days or less)                        8.6            12 month ECL                  28.5               2.5 
 Underperforming (31-90 
  days overdue)                       69.9            Lifetime ECL                   5.6               3.9 
 Non-performing (90+                   100            Lifetime ECL                     -                 - 
  days overdue & 180 days+ 
  overdue in forbearance) 
                                                                    --------------------  ---------------- 
                                                             Total                  34.1               6.4 
                                                                    --------------------  ---------------- 
 

The percentages applied above are based on the Group's past experience of delinquencies and loss trends, as well as forward-looking information in the form of macroeconomic scenarios governed by an impairment committee, which considers macroeconomic forecasts such as changes in interest rates, GDP and inflation.

Macroeconomic scenarios are probability weighted within the model and include stress scenarios of: i) low losses, a high GDP, market confidence and political stability; ii) normal losses based on baseline economic conditions; iii) high losses with manufacturing and political instability; iv) Very high losses reflecting Covid-19 stress scenarios with an acceleration of defaults to a peak in H2 2020 and then de-stress gradually afterwards.

The stress scenario used was a geography-weighted scenario reflecting higher losses on the Netherlands book than that of the German portion of the loan book. This reflects the impact of the German government's stimulus programme, resulting in a blended stress of defaults peaking in H2 2020 and de-stressing gradually afterwards.

The expected credit loss model includes actual defaults determined by monthly cohort, adjusted for forecasted lifetime cumulative default rates. It applies the latest default curve and lifetime default rates tailored to each cohort based on the expected lifetime default rate. When actual defaults trend higher than the curve, the forecast default curve is shifted upwards to align with actual performance. The items that the model is most sensitive to are delinquencies and default rates. Management has applied an estimated weighted average lifetime default rate across cohorts of 24.1% (31 December 2019: 12.9%). See note 3 for a sensitivity analysis on the impact of a change in default rates. At 30 June 2020, there is only one portfolio of loans.

The maximum exposure the Group might have to pay at the balance sheet date if 100% of eligible loans were required to be bought back would be GBP34.1 million (31 December 2019: GBP41.5 million). This would be dependent on the timing of any eligible loans defaulting. Repayments of eligible loans are no longer reinvested and therefore the final loan is due to expire in December 2024, along with the associated financial guarantees.

16. Fair value measurement of financial instruments

Financial risks arising from financial instruments are analysed into credit risk, liquidity risk, market risk (including currency risk, interest rate risk and other price risk) and foreign exchange risk. These condensed interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements. Details of how these risks are managed are discussed in the Funding Circle Holdings plc's financial statements for the year to 31 December 2019.

There has not been a significant change in the Group's financial risk management processes or policies since the year end.

The definitions, details of the inputs and the valuation techniques in determining the fair values of the Group's financial instruments are shown in the Funding Circle Holdings plc financial statements for the year to 31 December 2019.

The Group's finance department performs the valuations of financial assets and liabilities required for financial reporting purposes, including Level 3 fair values.

There have been no changes in the valuation techniques for any of the Group's financial instruments held at fair value in each of the periods presented. 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 investment in SME loans (curing). These are typically held for two to three days before being transferred to independent investors at the principal amount.

There were no transfers between Level 1, Level 2 and Level 3 fair value measurements (year to 31 December 2019: none).

The fair value of the following financial assets and liabilities approximate their carrying amount:

   --      Investments in loans (other) and (curing) 
   --      Trade and other receivables 
   --      Cash and cash equivalents 
   --      Trade and other payables 
   --      Bank borrowings; and 
   --      Lease liabilities 

Categorisation of financial assets and financial liabilities

The table shows the carrying amounts of financial assets and financial liabilities by category of financial instrument:

 
                                       30 June 2020                                  31 December 2019 
 
                           Assets at fair   Amortised cost     Total       Assets at fair   Amortised cost     Total 
                            value through                                   value through 
                                   profit                                 profit and loss 
                                 and loss 
 
                                     GBPm             GBPm      GBPm                 GBPm             GBPm      GBPm 
 Assets 
 Investments in SME 
  loans (other)                         -              1.8       1.8                    -              1.7       1.7 
 Investment in SME 
  loans (warehouse)                 321.8                -     321.8                342.0                -     342.0 
 Investment in SME 
  loans 
  (securitised)                     419.4                -     419.4                366.6                -     366.6 
 Investment in 
  trusts                              3.9                -       3.9                    -                -         - 
 Trade and other 
  receivables                         0.5             20.8      21.3                  0.2             21.9      22.1 
 Cash and cash 
  equivalents                        33.9             97.3     131.2                 46.0            118.5     164.5 
                      -------------------  ---------------  --------  -------------------  ---------------  -------- 
                                    779.5            119.9     899.4                754.8            142.1     896.9 
                      -------------------  ---------------  --------  -------------------  ---------------  -------- 
 
 Liabilities 
 Trade and other 
  payables                              -            (4.8)     (4.8)                    -            (4.9)     (4.9) 
 Bank borrowings                        -          (279.4)   (279.4)                    -          (265.8)   (265.8) 
 Bonds                              (5.3)          (432.7)   (438.0)               (20.0)          (328.7)   (348.7) 
 Lease liabilities                      -           (36.2)    (36.2)                    -           (38.3)    (38.3) 
                                    (5.3)          (753.1)   (758.4)               (20.0)          (637.7)   (657.7) 
                      -------------------  ---------------            -------------------  --------------- 
 

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, investment in SME loans (other), bonds, bank borrowings, lease liabilities 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:

The fair value hierarchy has the following levels:

-- 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. 
 
                                                     Fair value measurement using 
                                   30 June 2020                                     31 December 2019 
 
                  Quoted prices      Significant      Significant    Quoted prices      Significant      Significant 
                      in active       observable     unobservable        in active       observable     unobservable 
                        markets           inputs           inputs          markets           Inputs           inputs 
                      (level 1)                                          (level 1) 
                                       (level 2)        (level 3)                         (level 2)        (level 3) 
 
                           GBPm             GBPm             GBPm             GBPm             GBPm             GBPm 
 Financial 
 assets 
 Trade and 
  other 
  receivables                 -              0.2              0.3                -              0.2                - 
 Investment in 
  SME loans 
  (warehouse)                 -                -            321.8                -                -            342.0 
 Investment in 
  SME loans 
  (securitised)               -                -            419.4                -                -            366.6 
 Investment in                -                -              3.9                -                -                - 
 trusts 
 Cash and cash 
  equivalents              33.9                -                -             46.0                -                - 
                 --------------  ---------------  ---------------  ---------------  ---------------  --------------- 
                           33.9              0.2            745.4             46.0              0.2            708.6 
                 --------------  ---------------  ---------------  ---------------  ---------------  --------------- 
 
 Financial 
 liabilities 
 Bonds                        -                -            (5.3)                -                -           (20.0) 
                 --------------  ---------------  ---------------  ---------------  ---------------  --------------- 
                              -                -            (5.3)                -                -           (20.0) 
                 --------------  ---------------  ---------------  ---------------  ---------------  --------------- 
 

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 GBP321.8 million at 30 June 2020 (31 December 2019: GBP342.0 million).

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 GBP419.4 million at 30 June 2020 (31 December 2019: GBP366.6 million).

Bonds represent 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 GBP5.3 million at 30 June 2020 (31 December 2019: GBP20.0 million).

Investment in trusts represent the Group's investment in the trusts used to fund CBILS loans and is measured at fair value through profit and loss. The fair value has been estimated by discounting future cash flows in relation to the trusts 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 trusts was GBP3.9 million at 30 June 2020 (31 December 2019: GBPnil).

Fair value movements on investment in SME loans (warehouse), investment in SME loans (securitised), investments in trusts, and bonds (unrated) are recognised through the profit and loss as part of net income.

A reconciliation of the movement in level 3 financial instruments is shown as follows:

 
                                                            Investment           Bonds   Investment in       Trade and 
                                                                in SME       (unrated)          trusts           other 
                               Investment in SME loans           loans                                     receivables 
                                           (warehouse)   (Securitised) 
                                                  GBPm            GBPm            GBPm            GBPm            GBPm 
 Balance as at 1                                     - 
 January 2019                                                        -               -               -               - 
 Additions                                       673.4               -          (17.1)               -               - 
 Securitisations                               (292.2)           414.5               -               -               - 
 Repayments                                     (32.5)          (37.4)             0.7               -               - 
 Net loss on the 
  change in fair 
  value of 
  financial 
  assets and 
  liabilities at 
  fair value 
  through 
  profit or loss 
  during the 
  period                                         (0.5)           (5.8)           (3.6)               -               - 
 Foreign exchange 
  gain                                           (6.2)           (4.7)               -               -               - 
                   -----------------------------------  --------------  --------------  --------------  -------------- 
 Balance as at 31 
  December 2019                                  342.0           366.6          (20.0)               -               - 
                   -----------------------------------  --------------  --------------  --------------  -------------- 
 Additions                                       289.6               -               -             3.9               - 
 Securitisations                               (221.9)           221.9               -               -               - 
 Transfers                                       (0.3)               -               -               -             0.3 
 Repayments                                     (63.5)         (108.0)             2.4               -               - 
 Net (loss)/gain 
  on the change 
  in fair value 
  of financial 
  assets and 
  liabilities at 
  fair value 
  through profit 
  or loss during 
  the period                                    (35.7)          (72.7)            12.3               -               - 
 Foreign exchange 
  gain                                            11.6            11.6               -               -               - 
                   -----------------------------------  --------------  --------------  --------------  -------------- 
 Balance as at 30 
  June 2020                                      321.8           419.4           (5.3)             3.9             0.3 
                   -----------------------------------  --------------  --------------  --------------  -------------- 
 

Financial risk factors

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's receivables from customers and cash and cash equivalents held at banks. The Group's maximum exposure to credit risk by class of financial asset is as follows:

 
                                              30 June   31 December 
                                                 2020          2019 
                                                 GBPm          GBPm 
 Non-current 
 Investment in SME loans (other)                  1.8           1.7 
 Current 
 Investment in SME loans (warehouse)            321.8         342.0 
 Investment in SME loans (securitised)          419.4         366.6 
 Investment in trusts                             3.8             - 
 Trade and other receivables 
 - Trade receivables                              0.8           0.9 
 - Other receivables                             17.5          17.3 
 - Rent and other deposits                        2.9           3.9 
 Cash and cash equivalent                       131.2         164.5 
-------------------------------------------  --------  ------------ 
 Total gross credit risk exposure               899.2         896.9 
 Less bank borrowings and bond liabilities    (717.4)       (614.5) 
-------------------------------------------  --------  ------------ 
 Total net credit risk exposure                 181.8         282.4 
-------------------------------------------  --------  ------------ 
 

In addition the Group is subject to financial guarantees it has issued to buy back loans detailed in the loan repayment provision in note 15. The Group's maximum exposure to credit risk on this financial guarantee were every eligible loan required to be bought back would be GBP34.1 million (31 December 2019: GBP41.5 million). Investment in SME loans (warehouse) and investment in SME loans (securitised) relate to the underlying pool of SME loans in both the warehouse and securitisation vehicles. Whilst there is credit risk from the loans defaulting, these SME loans and the associated bank debt or third party bonds are held within bankruptcy remote vehicles. If the SME loans were to all default, then the bank debt or third party bonds would not receive their money back. Therefore the overall exposure to the Group for these investments is the Group's net investment in the SME loans which is after taking account of the bank debt and third party bonds.

Trade receivables represent invoiced amount in respect of servicing fees due from institutional investors. The risk of financial loss is deemed minimal because the counterparties are well established financial institutions.

Ongoing credit evaluation is performed on the financial condition of other receivables and, where appropriate, a provision for impairment is recorded in the financial statements.

Other receivables includes amounts receivable in respect of credit impaired debts acquired by the Group. The carrying amount of these loans are stated net of impairment charges, represents the Group's maximum exposure to credit risk as no collateral or other credit enhancements are held.

The credit risk on cash and cash equivalents is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies.

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's position.

The Group's liquidity position is monitored and reviewed on an ongoing basis by the Directors. As the investments in loan securities held within the ABS warehouses are planned to be securitised within a short time horizon these are classified as current assets.

Interest rate risk

   a)    Interest rate risk sensitivity analysis - non trading interest (fixed rate) 

Interest on investments in SME loans is fixed until the maturity of the investment.

   b)    Interest rate risk sensitivity analysis - non trading interest (floating rate) 

Interest on cash and cash deposit balances are subject to movements in Libor. The Directors monitors interest rate risk and note that interest rates remain at historical low. The Directors believe that any reasonable increase in the Libor rate would not significantly impact the Group.

Interest on borrowings are subject to movements in Libor and the 3 month commercial paper rate, 1 month GBP LIBOR and 3 month USD Libor. However, the Group has taken out interest rate caps to mitigate the risk of interest rate rises.

17. Cash outflow from operations

 
                                                     30 June   30 June 
                                                        2020      2019 
                                                        GBPm      GBPm 
 Loss before taxation                                (115.1)    (30.8) 
 Adjustments for: 
 Depreciation of property, plant and equipment           4.6       3.5 
 Amortisation of intangible assets                       3.6       3.6 
 Impairment of goodwill (exceptional item)              12.0         - 
 Impairment of tangible assets (exceptional item)        0.4         - 
 Interest receivable                                   (0.3)     (1.0) 
 Interest payable                                        0.8       0.5 
 Non-cash employee benefits expense - share based 
  payments and associated social security costs          4.3       4.4 
 Fair value adjustments                                 96.1       0.3 
 Movement in restructuring provision (exceptional        2.1         - 
  item) 
 Movement in other provisions                            4.2     (0.2) 
 Share of losses of associates                           1.1         - 
 Other non-cash movements                              (0.4)     (0.2) 
 Changes in working capital: 
 Movement in trade and other receivables              (18.8)     (4.4) 
 Movement in trade and other payables                    4.8       6.2 
 
 Net cash outflow from operating activities            (0.6)    (18.1) 
                                                    --------  -------- 
 

Analysis of changes in liabilities from financing activities

 
                               1 January   Cash flows     Exchange        Other   30 June 
                                    2019                 movements     non-cash      2019 
                                                                      movements 
                                    GBPm         GBPm         GBPm         GBPm      GBPm 
 Bank borrowings                       -      (145.5)        (1.3)            -   (146.8) 
 Lease liabilities                (25.1)          2.8        (1.2)        (0.5)    (24.0) 
----------------------------  ----------  -----------  -----------  -----------  -------- 
 Liabilities from financing 
  activities                      (25.1)      (142.7)        (2.5)        (0.5)   (170.8) 
 
 
                               1 January   Cash flows     Exchange        Other   30 June 
                                    2020                 movements     non-cash      2020 
                                                                      movements 
                                    GBPm         GBPm         GBPm         GBPm      GBPm 
 Bank borrowings                 (265.8)        (5.9)        (7.7)            -   (279.4) 
 Bonds                           (348.7)       (89.4)       (11.8)         11.9   (438.0) 
 Lease liabilities                (38.3)          3.5        (1.5)          0.1    (36.2) 
----------------------------  ----------  -----------  -----------  -----------  -------- 
 Liabilities from financing 
  activities                     (652.8)       (91.8)       (21.0)         12.0   (753.6) 
 

18. Cash and cash equivalents

 
                              30 June   31 December 
                                 2020          2019 
                                 GBPm          GBPm 
 Cash and cash equivalents      131.2         164.5 
                             --------  ------------ 
 

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 the fair value.

Included within cash and cash equivalents above is a total of GBP58.8 million (31 December 2019: GBP15.4 million) in cash which is restricted in use. Of this: i) GBP1.1 million (31 December 2019: GBP1.2 million) is held in the event of rental payment defaults; ii) GBP34.0 million (31 December 2019: GBP14.2 million) is held in the securitisation SPVs which has been collected for payment to bond holders; iii) GBP22.9 million (31 December 2019: GBP nil) is held in the warehouse entities and is for use to repay the loan facilities; iv) GBP0.8m (31 December 2019: GBP nil) is held within Funding Circle Focal Point Limited and is for use to meet operational cash flows related to the trust structures facilitating CBILS funding.

At 30 June 2020, cash equivalents relating to money market funds totalled GBP33.9 million (31 December 2019: GBP46.0 million).

19. Related party transactions

The basis of remuneration of key management personnel remains consistent with that disclosed in the 2019 Annual Report and Accounts. There were no other related party transactions which had a material impact on these condensed interim financial statements.

20. Contingent liabilities

There are currently no contingent liabilities expected to have a material adverse financial impact on the Group's consolidated and condensed results or net assets.

21. Financial risk management

The Group's financial risks and risk management objectives and policies are consistent with those disclosed in the consolidated financial statements as at and for the year to 31 December 2019.

22. Subsequent events

In July 2020, the Group sold 95% of its investment of one of the subordinated unrated tranches in the UK Securitisation vehicle, SBOLT 2019-3, for GBP4.0 million. As the vehicle is consolidated, the Group's holding is eliminated on consolidation. The sale did not result in deconsolidation of the securitisation vehicle, as the variability in cash flows continues to be concentrated in the Group's remaining holding in unrated tranches of the vehicle.

In July, the Group announced that it is reorganising the US business centralising the US technology team in the UK, and moving sales and marketing to Denver, resulting in net reduction of c.85 roles to accelerate its path to profitability. The anticipated cash cost of this reorganisation is anticipated to be c.GBP2 million.

Glossary

Alternative performance measures

The Group uses a number of alternative performance measures ("APMs") within its financial reporting. These measures are not defined under the requirements of IFRS and may not be comparable with the APMs of other companies. The Group believes these APMs provide stakeholders with additional useful information in providing alternative interpretations of the underlying performance of the business and how it is managed and are used by the Directors and management for performance analysis and reporting. These APMs should be viewed as supplemental to, but not as a substitute for, measures presented in the financial statements which are prepared in accordance with IFRS.

 
  APM                        Closest equivalent       Definition and adjustments to reconcile 
                              IFRS measure             to IFRS measure 
--------------------------  --------------------  ---------------------------------------------- 
    Income statement 
------------------------------------------------------------------------------------------------ 
    Adjusted                 EBITDA, while            Profit/loss before finance income 
     EBITDA                   not defined under        and costs, taxation, depreciation 
                              IFRS, is a widely        and amortisation ("EBITDA") and 
                              accepted profit          additionally excludes share-based 
                              measure                  payment charges and associated social 
                                                       security costs, foreign exchange 
                                                       and exceptional items 
--------------------------  --------------------  ---------------------------------------------- 
    Segment adjusted         EBITDA, while            Adjusted EBITDA before product development 
     EBITDA                   not defined under        and central costs. 
                              IFRS, is a widely 
                              accepted profit 
                              measure. 
--------------------------  --------------------  ---------------------------------------------- 
    Exceptional              None.                    Items which the Group excludes from 
     items                                             adjusted EBITDA in order to present 
                                                       a measure of the Group's performance. 
                                                       Each item is considered to be significant 
                                                       in nature or size and is treated 
                                                       consistently between periods. Excluding 
                                                       these items from profit metrics 
                                                       provides the reader with additional 
                                                       performance information on the business 
                                                       across the business as it is consistent 
                                                       with how information is reported 
                                                       to the Board and GLT. 
--------------------------  --------------------  ---------------------------------------------- 
    Investment               EBITDA, while            Investment AEBITDA refers to net 
     AEBITDA                  not defined under        investment income (being investment 
                              IFRS, is a widely        income, investment expense and fair 
                              accepted profit          value adjustments) as previously 
                              measure                  reported. 
--------------------------  --------------------  ---------------------------------------------- 
    Operating                EBITDA, while            Operating AEBITDA represents AEBITDA 
     AEBITDA                  not defined under        excluding investment AEBITDA 
                              IFRS, is a widely 
                              accepted profit 
                              measure 
--------------------------  --------------------  ---------------------------------------------- 
    Adjusted                 Earnings per share.      Profit/loss after tax attributable 
     earnings/                                         to owners of the Parent and before 
     loss per                                          the impact of exceptional items, 
     share                                             divided by the weighted average 
                                                       number of ordinary shares in issue 
                                                       during the year 
--------------------------  --------------------  ---------------------------------------------- 
    Adjusted                 Diluted earnings         Profit/loss after tax attributable 
     diluted earnings/loss    per share.               to owners of the Parent and before 
     per share                                         the impact of exceptional items, 
                                                       divided by the weighted average 
                                                       number of ordinary shares in issue 
                                                       during the year adjusted for the 
                                                       effects of any potentially dilutive 
                                                       options. 
--------------------------  --------------------  ---------------------------------------------- 
 
    Cash flow 
------------------------------------------------------------------------------------------------ 
  Free cash                  Cash generated           Net cash flows from operating activities 
   flow                       from operating           including the cash cost of purchasing 
                              activities.              intangible assets, property, plant 
                                                       and equipment, interest received, 
                                                       IPO costs in operating activities 
                                                       and the payment of lease liabilities, 
                                                       i.e. the cash flows excluding the 
                                                       investment and funding of SME loan 
                                                       purchases and capital raising. 
--------------------------  --------------------  ---------------------------------------------- 
 

Independent review report to Funding Circle Holdings plc

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed Funding Circle Holdings plc's condensed consolidated interim financial statements (the "interim financial statements") in the 2020 Half Year Results of Funding Circle Holdings plc for the 6 month period ended 30 June 2020. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

   --       the condensed consolidated balance sheet as at 30 June 2020; 
   --       the condensed consolidated statement of comprehensive income for the period then ended; 
   --       the condensed consolidated statement of cash flows for the period then ended; 
   --       the condensed consolidated statement of changes in equity for the period then ended; and 
   --       the explanatory notes to the interim financial statements. 

The interim financial statements included in the 2020 Half Year Results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The 2020 Half Year Results, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the 2020 Half Year Results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the 2020 Half Year Results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the 2020 Half Year Results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

London

24 September 2020

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