TIDMSCRF
RNS Number : 5039G
SME Credit Realisation Fund Limited
27 July 2021
NOT FOR RELEASE, DISTRIBUTION OR PUBLICATION, IN WHOLE OR IN
PART, IN OR INTO THE UNITED STATES OR TO US PERSONS
*****
27 July 2021
SME Credit Realisation Fund Limited
(the "Company")
Annual Financial Report
SME Credit Realisation Fund Limited (the "Company") has
published its results for the year ended 31 March 2021.
The Annual Report and Accounts are attached to this release and
are available on the Company's website (
www.smecreditrealisation.com ).
CONTACTS
Richard Boleat, Chairman
+44 (0) 1534 615 656
Richard.Boleat@smecreditrealisation.com
Secretary and Administrator
Sanne Group (Guernsey) Limited
+44 (0) 1481 739810
smecreditrealisation@sannegroup.com
Corporate Broker
Numis Securities
Nathan Brown
+44 (0) 207 260 1000
n.brown@numis.com
Investor Relations
IR@smecreditrealisation.com
Website
www.smecreditrealisation.com
The ISIN number of the Ordinary Shares is GG00BMD04Y22 , the
SEDOL code is BMD04Y2 and the TIDM is SCRF.
The LEI number of the Company is 549300ZQIYQVNIZGOW60.
ABOUT SME Credit Realisation Fund Limited
The Company is a registered closed-ended collective investment
scheme registered pursuant to the Protection of Investors
(Bailiwick of Guernsey) Law, 1987, as amended and the Registered
Collective Investment Scheme Rules 2018 issued by the Guernsey
Financial Services Commission ("GFSC").
*****
IMPORTANT NOTICES
This announcement contains "forward-looking" statements, beliefs
or opinions. These forward-looking statements involve known and
unknown risks and uncertainties, many of which are beyond the
control of the Company and all of which are based on its directors'
current beliefs and expectations about future events.
Forward-looking statements are sometimes identified by the use of
forward-looking terminology such as "believes", "expects", "may",
"will", "could", "should", "shall", "risk", "intends", "estimates",
"aims", "plans", "predicts", "projects", "continues", "assumes",
"positioned" or "anticipates" or the negative thereof, other
variations thereon or comparable terminology, or by discussions of
strategy, plans, objectives, goals, future events, assumptions or
intentions. These forward-looking statements include all matters
that are not historical facts. Forward-looking statements may and
often do differ materially from actual results. They appear in a
number of places throughout this announcement and include
statements regarding the intentions, beliefs or current
expectations of the Board or the Company with respect to future
events and are subject to risks relating to future events and other
risks, uncertainties and assumptions relating to the Company's
business concerning, amongst other things, the financial
performance, liquidity, prospects, growth and strategies of the
Company. These forward-looking statements and other statements
contained in this announcement regarding matters that are not
historical facts involve predictions. No assurance can be given
that such future results will be achieved; actual events or results
may differ materially as a result of risks and uncertainties facing
the Company. Such risks and uncertainties could cause actual
results to vary materially from the future results indicated,
expressed or implied in such forward-looking statements. The
forward-looking statements contained in this announcement speak
only as of the date of this announcement. Nothing in this
announcement is, or should be relied on as, a promise or
representation as to the future. The Company disclaims any
obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained in this
announcement to reflect any change in its expectations or any
change in events, conditions or circumstances on which such
statements are based unless required to do so by applicable law,
the Prospectus Rules, the Listing Rules or the Disclosure Rules and
Transparency Rules of the FCA. No statement in this announcement is
intended as a forecast or profit estimate.
Neither this announcement nor any copy of it may be made or
transmitted into the United States of America (including its
territories or possessions, any state of the United States of
America and the District of Columbia) (the "United States"), or
distributed, directly or indirectly, in the United States or to US
Persons (as such term is defined in Regulation S under the US
Securities Act of 1933, as amended (the "Securities Act"). Neither
this announcement nor any copy of it may be taken or transmitted
directly or indirectly into Australia, Canada, Japan or South
Africa or to any persons in any of those jurisdictions, except in
compliance with applicable securities laws. Any failure to comply
with this restriction may constitute a violation of United States,
Australian, Canadian, Japanese or South African securities laws.
The distribution of this announcement in other jurisdictions may be
restricted by law and persons into whose possession this
announcement comes should inform themselves about, and observe, any
such restrictions. This announcement does not constitute or form
part of any offer or invitation to sell or issue, or any
solicitation of any offer to purchase or subscribe for securities
in the United States, Australia, Canada, Japan or South Africa or
in any jurisdiction to whom or in which such offer or solicitation
is unlawful.
SME CREDIT REALISATION FUND LIMITED
ANNUAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 MARCH 2021
FORWARD-LOOKING STATEMENTS
This report includes statements that are, or may be considered,
"forward-looking statements". The forward-looking statements can be
identified by the use of forward-looking terminology, including the
terms "believes", "estimates", "anticipates", "expects", "intends",
"may", "will" or "should" or, in each case, their negative, or
other variations or comparable terminology. These statements are
made by the Directors in good faith based on the information
available to them up to the time of their approval of this report
and such statements should be treated with caution due to the
inherent uncertainties, including both economic and business risk
factors, underlying any such forward-looking information.
FINANCIAL HIGHLIGHTS
-- Total comprehensive income for the year amounted to GBP4.58
million (2020: comprehensive loss of GBP5.25 million) which
included an impairment loss on Credit Assets of GBP11.94 million
and a gain on the movement in fair value of the Credit Assets of
GBP2.50 million as presented in the consolidated statement of
comprehensive income.
-- Aggregate dividends of 5.25 pence per Ordinary share declared
for the year ended 31 March 2021 (2020: 5.25 pence).
-- The Company redeemed a total of 124,126,432 (2020: 32,245,772) shares for a total amount of GBP105,499,718 (2020: GBP30,499,833) during the year.
-- In October 2020, Basinghall received proceeds of GBP2,203,183
for the sale of a pool of UK non-performing loans advanced (or
"Credit Assets") to a third party at a recovery rate which is
consistent with historical recovery rates observed on the
portfolio.
-- All of the Group's leverage facilities have now been fully repaid.
-- It has been estimated that the Company will receive future
cashflows from its investment in the EIB transaction and as such
has resulted in a fair value gain of GBP5,141,217 being recognised
in the consolidated statement of comprehensive income for the year
(31 March 2020: loss of GBP6,195,281). The ending fair value
estimated as at 31 March 2021 is also GBP5,141,217 (2020: nil).
The information below is presented for the year ended 31 March
2021 or as at 31 March 2021 unless expressly stated to cover a
different period.
Description Performance
NAV per Ordinary Share 88.87p
---------------
Total Net Assets GBP119 million
---------------
Ordinary Share Price 63.0p
---------------
Market Capitalisation GBP85 million
---------------
Discount on Share Price (29.1%)
---------------
Annualised Dividends per Ordinary
share 5.25p
---------------
Earnings per Ordinary share 1.05p
---------------
Share Price Total Return (inception
to date) (12%)
---------------
NAV Total Return (inception to date) 19%
---------------
SUMMARY INFORMATION
About the Company
SME Credit Realisation Fund Limited (the "Company" or the
"Fund") is a closed-ended investment company incorporated with
liability limited by shares in Guernsey under The Companies
(Guernsey) Law, 2008 (as amended), on 22 July 2015.
Group Structure
The Company holds a number of its investments in loans through
Special Purpose Vehicles ("SPVs"). This annual report for the year
ended 31 March 2021 (the "Annual Report") includes the results of
Basinghall Lending Designated Activity Company ("Basinghall"),
Tallis Lending Designated Activity Company ("Tallis"), Lambeth
Lending Designated Activity Company ("Lambeth"), and Queenhithe
Lending Designated Activity Company ("Queenhithe"). The Company,
Basinghall, Tallis, Lambeth and Queenhithe are collectively
referred to in this report as the "Group".
Lambeth and Queenhithe both transferred their remaining
portfolio's of Credit Assets to Basinghall during the year and
liquidators were formally appointed and commenced proceedings to
wind up each of the entities in an orderly manner. On 1 July 2021,
the final meeting in relation to the liquidation of Lambeth took
place. All liabilities have been discharged and final payment made
to Basinghall under the class B note agreement. The entity is
expected to be fully liquidated within 3 months of the signing of
these consolidated financial statements. The proceedings for
Queenhithe are still ongoing at the time of signing of these
consolidated financial statements.
Refer to Business review on the Directors report for further
information.
Capital Management
As at 31 March 2021 the total number of shares in issue was
134,164,922 (2020: 258,301,354) excluding nil (2020: 586,243)
shares held in treasury.
The scrip dividend programme was discontinued by the Company in
line with the change in the Company's Investment Objective and
Policy as discussed below.
On 21 May 2019, the Company published a circular and notice of
an EGM which set out details of, and sought shareholder approval
for, certain Proposals. The Proposals involved modifying the
Company's Investment Objective and Policy to reflect a realisation
strategy, for the detailed reasons set out in that circular, and
amending its Articles to include a mechanism to enable the Company
to redeem shares in the Company compulsorily so as to return cash
to shareholders.
On 11 June 2019, the Proposals were approved at the EGM as
discussed in detail in the Strategic Report.
The Company is in the process of returning capital via a
combination of share buybacks, compulsory redemptions of shares and
distributions of dividends, as the Group's portfolio of Credit
Assets amortises. The directors resolved to suspend the programme
of repurchases of the Company's shares on 2 April 2020 until
further notice.
As at 31 March 2021, the Company has repurchased a total of
43,746,667 shares via share buyback (2020: 43,736,667) of which nil
(2020: 586,243) remain held in treasury. The 10,000 shares
repurchased during the year on 1 April 2020 were repurchased prior
to the directors resolving to suspend the programme of repurchases
of the Company's shares on 2 April 2020 until further notice.
During the year, a total of 10,000 (2020: 43,150,424 shares) shares
held in treasury were cancelled and formally discharged.
The Company has compulsorily redeemed a total of 124,126,432
(2020: 32,245,772) shares for a total amount of GBP105,499,718
(2020: GBP30,499,833) throughout the year. All shares redeemed
throughout the year were redeemed at the prevailing NAV per share
at the date of declaration.
CHAIRMAN'S STATEMENT
Dear Shareholder,
I am pleased to write to you to provide an update on the
Company's progress for the year ended 31 March 2021. The Company
continues to conduct a managed wind-down of its activities, with
the objective of returning capital to shareholders promptly whilst
seeking to maximise returns.
COVID-19 Pandemic
The world has now been affected by the Covid-19 pandemic for
some five quarters. When I last wrote to you, on 18 December 2020,
I expressed some mild optimism that, despite the wholesale economic
and human tragedies that continue to be felt on a day to day basis,
government financial support to business, the strenuous efforts of
the medical care community and the work of the vaccine designers
and manufacturers offered a way to exit from the pandemic's
impacts. Those views have been largely borne out, with varying
levels of effectiveness, such that it is now possible to see how
the pandemic can ultimately be defeated. Nonetheless, obvious risks
remain around variant emergence, breadth of vaccine rollout and
inconsistency of vaccine take-up, and uncertainty over timing of a
true normalisation of economic conditions remains.
Performance Review and Net Asset Value ("NAV")
This report presents the financial position of the Company as at
31 March 2021.
You will have noted the announcement made by the Company on 21
April 2021 disclosing the Company's NAV at 31 March 2021 at GBP119
million (31 December 2020: GBP139 million) and NAV per Share at
that date at 88.87 pence (31 December 2020: 84.77 pence). The
improvement in NAV per Share was driven principally by a better
than anticipated credit market environment compared to expectations
at the onset of the pandemic and the demonstrably resilient
performance of the Company's investments, which has also lead to an
upwards revaluation of the Company's interest in the EIB
transaction that was previously attributed no value.
An analysis of the performance of the Company for the 6 month
period to 31 March 2021 (with the 6 month period to 30 September
2020 for comparative purposes) is set out below:
Return Attribution
1 October 2020 1 April 2020
to 31 March to 30 September
2021 2020
Gross Income 3.15% 3.95%
Impairment (0.19%) (6.39%)
FVTPL Adjustment (1) 2.87% -
FVTOCI Adjustment (2) 0.62% 0.66%
Gain on sale of NPLs 0.34% -
Servicing Fees (0.29%) (0.34%)
--------------- -----------------
(6.50%) (2.12%)
--------------- -----------------
Operating Expenses (0.41%) (0.71%)
FX Hedging Costs 0.02% 0.11%
Loan Interest Expense - (0.03%)
Share Buybacks - 0.00%
Share Redemption 3.03% (0.12%)
--------------- -----------------
Net NAV Return 9.10% (2.87%)
----------------------- --------------- -----------------
(1) FVTPL Adjustment includes fair value movements on the Fund's
interest in the EIB transaction
(2) FVTOCI Adjustment includes fair value movements on the
portfolio of credit assets held by the Fund, which moved to fair
value accounting from 1 April 2020.
Performance Since 31 March 2021
The Board continues to closely monitor data points within the
Company's loan portfolio to assess the extent to which borrowers
continue to be impacted by the economic consequences of the
pandemic in their ability to satisfy their loan repayment
obligations.
Data shows a largely positive outcome, quarter to quarter,
compared to the expectations reflected in the Company's net asset
value at 31 March 2021. Despite this trend, there remain a number
of material risks to the downside:
-- economic reactivation stabilises at a "new normal" level
which is materially below that which existed at the time of loan
initiation, calling into question the viability of some business
plans in the medium term;
-- the impact of progressive withdrawal of governmental stimulus and support schemes; and
-- the potential for a resurgence in the scale of pandemic
activity and thus potential for further restrictions on social
mobility and levels of business activity.
It remains difficult to assess the likelihood or scale of impact
of any of the above risk factors at this time.
Return of Capital
You will note that the Company's net asset value has reduced
from GBP179 million at 30 September 2020 to GBP119 million at 31
March 2021, as the Company continues to make distributions to
shareholders. In the 6 month period to 31 March 2021, GBP67 million
was distributed to shareholders through compulsory share
redemptions and GBP4 million through dividend payments. The balance
of the movement between the two period ends is reconciled by
performance.
The Company will continue to return capital to investors
predominantly by way of compulsory redemption of shares as
liquidity arises through loan repayments or by other means. The
directors may also seek to apply free cash to on-market share
repurchases if such a strategy is deemed to be in the best
interests of shareholders as a whole.
Potential Portfolio Sales
The Company is not currently in active discussion with any
parties in relation to the disposal of its loan portfolios in whole
or in part, and the reducing size of these portfolios through
natural loan amortisation suggests that any such transaction, at
least in relation to performing assets, is now unlikely. That said,
the Company will continue to explore potential disposals where
pricing levels are attractive.
Conclusion
We are pleased at the progress of the Company's managed winddown
in the year, which has included robust cost management through fund
structure simplification and effective portfolio management despite
the challenging economic circumstances. I would like to express my
continuing thanks to the Funding Circle team for the support
provided to the Company, and would also like to thank my fellow
Board members and our advisors for their industry and wise counsel
in ensuring that the Company's response to the current environment
remains focussed and fully risk assessed.
RICHARD BOLÉAT
Chairman of the Board of Directors
26 July 2021
STRATEGIC REPORT
Strategy and Business Model
The Group was established to provide shareholders with a
sustainable and attractive level of dividend income, primarily by
way of investment in Credit Assets originated both directly through
the platform operated by Funding Circle and indirectly, in each
case as detailed in the Company's original investment policy. The
Group identified the Funding Circle platform as a leader in the
growing direct lending space to small and medium sized enterprises
("SMEs") with its established infrastructure, scale of origination
volumes and expertise in accurately assessing loan
applications.
On 11 June 2019, the Company changed its Investment Objective
and Policy to facilitate a managed wind-down of the Company in a
prudent manner consistent with the principles of good investment
management as required by the Listing Rules.
Investment Objective and Policy
In order to implement the managed wind-down, it was necessary to
amend the Company's Investment Objective and Policy to reflect the
objective of realising the Company's portfolio, as follows:
"The Company will be managed with the intention of realising all
remaining assets in the portfolio in a prudent manner which
achieves a balance between maximising the value from the
realisation of the Company's investments and making timely returns
of capital to shareholders."
The managed wind-down is being effected with a view to the
Company realising all of its investments in accordance with the
Investment Objective. Such realisations will comprise natural
amortisation of the Company's investments in Credit Assets as well
as potentially opportunistic portfolio sales.
During the prior financial year, the Company ran an auction
process as the Board explored a potential sale of a portion of the
Company's assets during which it received a high level of interest
from potential buyers. However, the Company is not in active
discussion with any parties in relation to the disposal of its loan
portfolios in whole or in part, and the reducing size of these
portfolios through natural loan amortisation suggests that any such
transaction, at least in relation to performing assets, is now
unlikely.
In October 2020, Basinghall received proceeds of GBP2,203,183
for the sale of a pool of UK non-performing loans to a third party
at a recovery rate which is consistent with historical recovery
rates observed on the portfolio.
As a result of the Company's change in investment objective and
policy, for the purposes of accounting, the Company's business
model changed from "hold to collect" to "hold to collect and sell"
during the prior financial year. The Company has therefore
reclassified the valuation of Credit Assets from amortised cost to
fair value through other comprehensive income ("FVTOCI") from 1
April 2020. This change in methodology is discussed further in
notes 3 and 17.
The Company no longer allocates capital to Credit Assets,
directly or indirectly via Leveraged Transactions or SPVs, or
undertake capital expenditure except where necessary in the
reasonable opinion of the Board in order to protect or enhance the
value of any existing investments or to facilitate orderly
disposals.
As at 31 March 2021, the Company held indirect investments in
Credit Assets through the following investing companies:
Investing Company Jurisdiction of Loans
------------------ -------------------------
Basinghall United Kingdom
Tallis Germany, the Netherlands
and Spain
EIB SPV United Kingdom
The following analyses of the Group's investments in Credit
Assets are provided as reference.
Loans by geographical region
UK Investment % US Investment % CE Investment %
South East 26 Other 38 Germany 54
--- -------------- --- ---------------- ---
London 16 California 14 The Netherlands 45
--- -------------- --- ---------------- ---
Midlands 12 Florida 10 Spain 1
--- -------------- --- ---------------- ---
North West 11 Texas 9
--- -------------- --- ---------------- ---
North East 10 Illinois 8
--- -------------- --- ---------------- ---
South West 8 New York 6
--- -------------- --- ---------------- ---
Scotland 6 Michigan 5
--- -------------- --- ---------------- ---
Wales 5 Georgia 4
--- -------------- --- ---------------- ---
East Anglia 4 Ohio 3
--- -------------- --- ---------------- ---
Norther Ireland 2 Virginia 3
--- -------------- --- ---------------- ---
Industry split
UK Investment % US Investment % CE Investment %
Professional,
Scientific and Wholesale and retail
Property and construction 20 Technical Services 17 trade 33
--- ------------------------ --- ------------------------- ---
Professional, Scientific
Wholesale and retail 19 Retail Trade 17 and Technical Services 13
--- ------------------------ --- ------------------------- ---
Professional and Accommodation
business support 11 and Food Services 11 Construction 11
--- ------------------------ --- ------------------------- ---
Manufacturing and Health Care and
engineering 10 Social Assistance 11 Manufacturing 8
--- ------------------------ --- ------------------------- ---
Administrative
IT and Telecommunications 7 Construction 9 and Support Activities 7
--- ------------------------ --- ------------------------- ---
Other Services
(except Public Transporting and
Leisure and Hospitality 7 Administration) 8 Storage 7
--- ------------------------ --- ------------------------- ---
Administrative Accommodation and
Healthcare 5 and Support Activities 8 Food Services 6
--- ------------------------ --- ------------------------- ---
Information and
Transport and Logistics 5 Wholesale Trade 3 Communication 4
--- ------------------------ --- ------------------------- ---
Arts, Entertainment
Automotive 4 Manufacturing 3 and Recreation 2
--- ------------------------ --- ------------------------- ---
Other 12 Other 13 Other 9
--- ------------------------ --- ------------------------- ---
Basinghall, Tallis, Lambeth, Queenhithe and the EIB SPV were
formed solely in connection with the implementation of the previous
investment policy of the Company.
Loans acquired by Basinghall, Tallis and the EIB SPV (subject to
the investment policy, any Portfolio Limits and Available Cash)
were funded, in whole or in part, by advances made by the Company
under the note programmes. The notes issued by Basinghall and
Tallis to the Company are listed on the Irish Stock Exchange. Loans
acquired by Lambeth and Queenhithe were funded in part by
Basinghall. All loans held by Lambeth and Queenhithe were
transferred to Basinghall during the year. Refer to the Directors
report for further information.
The assets held by each of Basinghall, Tallis and the EIB SPV
are ring-fenced from other entities or SPV's and there is no
cross-collateralisation between the SPV's in which the Company
invests.
Borrowing Limitation
In pursuit of the original investment objective, the Company was
able to borrow or use leverage, and also guarantee the borrowings
of its Affiliates and near Affiliates. The aggregate leverage or
borrowings of the Company, its Affiliates and any Near Affiliates
(including Basinghall, Tallis, Lambeth and/or Queenhithe) and
guarantees of such borrowing or leverage by such person(s), was not
permitted to exceed (at the time the relevant indebtedness is
incurred or guarantee given) 0.5 times the then current NAV.
Following the approval of the resolution to execute a managed
wind-down of the Company in its EGM on 11 June 2019, the leverage
limit as described above no longer applies to the Company, its
Affiliates and any near Affiliates.
All of the Group's leverage facilities have been fully repaid as
of 31 March 2021.
Principal Risks and Risk Management
There are a number of actual and present and emerging risks and
uncertainties which could have a material impact on the Group's
actual results which may differ materially from expected and
historical results, particularly given the ongoing managed
wind-down of the Company and the impact of COVID-19.
The Board of Directors has overall responsibility for risk
management and internal control within the context of achieving the
Company's objectives. The Board agrees the strategy for the
Company, approves the Company's risk appetite and monitors the risk
profile of the Company. The Company also maintains a risk register
to identify, monitor and control risk concentration, which has been
updated to reflect the managed wind-down.
The Company maintains a risk matrix, consisting of the principal
and emerging risks and the controls in place to mitigate those
risks. The risk matrix provides a basis for the Audit Committee and
the Board to regularly monitor the effective operation of the
controls and to update the matrix when new risks are identified.
The Board's responsibility for conducting a robust risk assessment
are embedded in the Company's risk matrix and stress testing which
helps position the Company to ensure compliance with The
Association of Investment Companies Code of Corporate Governance's
("the AIC Code") requirements.
The Board continues to monitor the Company's systems of risk
management and internal control and will continue to receive
updates from the Company's external service providers to ensure
that the principal risks and emerging risks faced by the Group are
fully understood and managed appropriately. The Board did not
identify any significant weaknesses during the year and up to the
date of this Annual Report.
An overview of the principal risks and uncertainties that the
Board considers to be currently faced by the Company are provided
below, together with the mitigating actions being taken. The
Directors have also linked the key performance indicators to the
risks where relevant. Risks arising from the Group's use of
financial instruments are set out in note 17 of the consolidated
financial statements.
Principal risk Mitigation and update of Company's financial
risk assessment Alternative Performance
Measures ("APM") affected
by risk
COVID-19
The COVID-19 pandemic The Directors continue Total distributions
continues to have a significant to monitor delinquency to the shareholders.
economic and societal and default levels on each
impact across the world. of the separate loan portfolios Credit losses.
There remains elevated closely, as well as the
uncertainty around future impact of government initiatives
performance of the Company's and forbearance measures
portfolio but better than implemented by Funding
expected performance during Circle.
the financial year has
marginally lifted lifetime
performance expectations
relative to expectations
at the onset of the pandemic.
The ability of SME borrowers
to satisfy their loan
repayment obligations,
and therefore the performance
of the Company, will continue
to be affected by, inter
alia, the path of COVID-19,
the gradual re-opening
of economies following
local and national lockdowns
as well as fiscal and
monetary response, about
which uncertainty remains.
------------------------------------- ---------------------------
Default risk
Borrowers' ability to The Directors have limited Total distributions
comply with their payment options available to them to the shareholders.
obligations in respect that will minimise the
of loans may deteriorate impact of the risk as the Credit losses.
due to adverse changes measures and initiatives
in economic and political being put in place are
factors, including the outside of their control.
COVID-19 pandemic discussed
on the previous page.
Actual defaults may be Economic uncertainties
different than indicated or developments as well
by historical data and as unemployment may impact
the timing of defaults upon default rates. The
may vary significantly Board continues to monitor
from historical observations. default rates closely on
a monthly basis in line
with developments with
the pandemic and measures
and initiatives being implemented.
Wind-down risk
Below are the key risks
associated with the managed
wind-down of the Company,
beyond those inherent Total distributions
in the holding of amortising to the shareholders.
Credit Assets. Further
details are available NAV total return.
within the Circular published
on 21 May 2019: The Board continues to
monitor the impact of the
The Company conducted COVID-19 pandemic and changes
a price discovery process in the valuation of the
in 2019 for the purpose different loan portfolios
of determining whether before considering pursuing
it is in the interests further price discovery
of the Company and shareholders processes and opportunistic
as a whole to dispose portfolio sales. The board
of certain portions of actively monitor and controls
the Company's loan portfolios, price discovery processes Total distributions
"en bloc". The Company's to seek to ensure that to the shareholders.
price discovery process they are operationally
did not result in a material and economically optimised.
consummated transaction
or transactions. Following
the COVID-19 pandemic,
any price discovery process
undertaken again is likely
to be impacted by the Share price volatility.
pandemic and its effects The Board continues to
on the perceived value actively seek to "right
of the Company's loan size" the Company's overhead
portfolios. base as net asset value
reduces, through renegotiation
As the managed wind-down with counterparties and
proceeds, and capital potential restructuring
is returned to shareholders, of the Group to minimise
the Company's fixed and unnecessary costs.
variable costs, some of
which are not capable
of material mitigation
due to the publicly listed The Board seeks to manage
status of the Company, the use of various capital
are likely to rise as return techniques so as
a proportion of the Company's to seek to fairly balance
net asset value, prior the differing outcomes
to dissolution of the of those techniques.
Company.
The Company deploys surplus
liquidity arising from
portfolio amortisation
and, potentially, portfolio
sales, by way of capital
return to shareholders.
This capital return may
take the form of dividends,
share buybacks and compulsory
redemptions of shares
or any combination of
these techniques. The
balance of techniques
used may result in greater
or lesser share price
volatility and varied
tax treatments for investors.
------------------------------------- ---------------------------
As the size of the Company's The Board will seek to Total distributions
non-UK portfolios decrease maintain and enhance banking to the shareholders.
through amortisation (in counterparty relationships
the absence of portfolio to seek to retain access
sales), the Company's to institutional pricing.
ability to deploy foreign
currency hedges at appropriate
cost may be impaired. Share price volatility
The Board will review any and total distributions
As the Company moves through adjustment required to to shareholders.
the wind-down process, the values of the Group's
accounting standards will assets and liabilities
require the Company to when the basis of accounting
prepare its accounts on changes to non-going concern.
a basis other than going
concern in the future.
------------------------------------- ---------------------------
As part of the process of evaluating principal risks, the Board
also identifies emerging risks and how they impact on the Group's
managed wind down process. The likelihood of occurrence of each
risk and the extent of financial effect to the Group are considered
when the board makes economic decisions. Along with the update on
the principal risks to take into account the impact of the COVID-19
pandemic to the Group, the board identified the following as
emerging risks and other key operational risks:
Changes in the tax regulation in jurisdictions where the Group
operates could have an impact on the treatment of income generated
from loans held in subsidiaries
The Company holds assets indirectly through subsidiaries
established in Ireland.
There is currently no indication that this will become a
principal risk to the Group but the Board will continue to monitor
any changes made in tax regulation across all jurisdictions in
which the Group operates. Refer to note 12 for further information
on taxation payable by Basinghall due to a change in tax
regulation.
The Company has no employees and is reliant on the performance
of third party service providers
The Company's investment administration functions have been
outsourced to external service providers. Any failure by any
external service provider to carry out its obligations could have a
materially detrimental impact on the effective operation, reporting
and monitoring of the Company's financial position. This may have
an effect on the Company's ability to meet its investment objective
successfully. The Board receives and reviews quarterly reports from
its principal external service providers and also performs an
annual quality review on the services provided by the external
service providers. The results of the Board's review are reported
to the Audit Committee.
Cybersecurity breaches
The Company is reliant on the functionality of Funding Circle's
software and IT infrastructure to facilitate the process of
servicing the Company's remaining Credit Assets. The Company is
also reliant on the functionality of the IT infrastructure of its
other service providers. These systems may be prone to operational,
information security and related risks resulting from failures of,
or breaches in, cybersecurity.
Along with other holders of risk assets generally, the Group is
exposed to a range of macroeconomic, geopolitical and regulatory
factors which could, in certain circumstances either individually
or in combination have a negative effect on carrying values,
portfolio returns, delinquencies and operating costs. These factors
are kept under review by the Board and relevant Board committees as
appropriate.
Hedging
The Board's policy is to seek to fully hedge currency exposure
between Sterling and any other currency in which the Group's assets
are denominated. During the year, the Company entered into forward
foreign exchange contracts to minimise the risk of loss due to
fluctuation of the Sterling to US Dollar exchange rate and the
Sterling to Euro exchange rate in pursuance of this policy. There
were unavoidable costs incurred in the hedge related to the
interest rate differential between Sterling and US Dollars in the
Group's assets and liabilities.
Foreign currency hedging activity is carried out by a specialist
third party on behalf of the Company, in accordance with the
hedging policy that the Board maintains.
Financial Performance
The key transactions and events that had an impact on the
Group's performance are set out in the Directors' Report.
The Board continues to monitor the following which are
considered as the Group's alternative performance measures in the
context of the managed the wind down:
-- Share price total return
-- NAV total return
-- Share price premium or discount to NAV
-- Dividend per share
-- Credit losses
-- Fair value movements on Credit Assets
Refer to the definitions of each of the above included on the
Glossary.
The Board notes that some or all of the key performance
indicators used in the past are less relevant now that the Company
has started the process of the managed wind-down.
Total return and share price premium/(discount)
For the period from inception to 31 March 2021, the total return
on the ordinary share price was -12% and the NAV total return was
19%. The ordinary share was trading at a discount of 29.1% to NAV
per ordinary share as at 31 March 2021.
Dividend per share
The Board declared dividends during the year totalling 5.25
(2020: 5.25) pence per Ordinary share. In May 2019, the Company
published a circular and notice of EGM which set out details of,
and sought shareholder approval for, certain Proposals. Pursuant to
the Proposals, the Company has the power, under the New Articles,
to make Compulsory Redemptions of shares in volumes and on dates to
be determined at the Directors' sole discretion, with the amount
distributed in respect of the shares on each occasion representing
the cash available for distribution by the Company at the relevant
time.
On 11 June 2019, the Proposals were approved at the EGM as
discussed in detail in this Strategic Report. In addition to
distributions made by way of the Compulsory Redemption process, or
by means otherwise determined appropriate by the Directors, the
Company currently intends to maintain quarterly dividend payments
of 5.25 pence per Ordinary Share on an annualised basis, which may
be partially uncovered. The Directors will continue to periodically
review the Company's dividend policy in response to shareholder
feedback and the progression of the managed wind-down.
Credit losses
The Board carefully monitors the level of defaults arising
within the Group's portfolios. The credit loss provision prior to
any fair value adjustments as at 31 March 2021 was GBP61.2m against
outstanding principal and interest amounts of the loan portfolios
of GBP141.45m (31 March 2020: provision of GBP59.0m against
outstanding principal and interest amounts of the loan portfolio of
GBP259.1m).
During the current financial year, the downside scenario was
replaced by a macroeconomic scenario developed specifically for
COVID-19 and consistent with portfolio modelling. Additionally,
multipliers are applied to individual loan probability of defaults
("PD") such that overall gross losses for the portfolio are
anchored to portfolio model expectations.
For further information on the movement in credit losses, refer
to note 4 of the consolidated financial statements.
Viability Statement
The Directors consider that a period of 18 months is a
reasonable timeframe for making an assessment of the Company's
viability taking into account the process of achieving the managed
wind-down, which could be longer than 18 months when the following
considerations are taken into account:
-- The tail of loans to manage and/or dispose of including loans
that will not contractually mature until 2024 and also defaulted
loans;
-- Any cost management exercises completed which may aid
decisions made by the Directors regarding any future disposal of
remaining loan portfolio's; and
-- No firm wind-down plan is currently in place primarily as a
result of ongoing market uncertainty driven by the COVID-19
pandemic.
The Directors believe that the 18 month period of assessment
compared to the 3 year assessment used in the prior financial year
is reasonable given the above considerations, the remaining
weighted average life of 12 months on the portfolio of loans held,
and considering that there are a number of loans with a remaining
life longer than this period.
In their assessment of the viability of the Company, the
Directors have considered each of the principal and emerging risks
listed above and in particular the risks associated with the
managed wind-down and the ongoing COVID-19 pandemic.
The Board believes that the principal risks, other than tail
risks beyond its control, that may impact on the Company's ability
to continue as a viable business are:
-- Default risk; and
-- Future wind down risks detailed above on the Strategic
Risk.
The Directors have also considered the Company's income,
expenditure and cash flow projections and the fact that the
Company's investments held directly or through its subsidiaries do
not comprise readily realisable. The viability analysis includes a
review of higher-level defaults, lower realisable values and higher
expenses. The Company maintains a risk register to identify,
monitor and control risk concentration.
The Directors confirm that they believe the Company will be able
to continue in operation and pay its liabilities as they fall due
over the period of the managed wind-down.
Employees, Social, Human Rights and Environmental Issues
The Company has no employees and the Board comprises five
non-executive Directors, all of whom, except Sachin Patel, are
independent of Funding Circle. As an investment company, the
Company has no direct impact on the community and as a result does
not maintain specific policies in relation to these matters.
The Company operates by outsourcing significant parts of its
operations to reputable professional companies, who are required to
comply with all relevant laws and regulations and take account of
social, environmental, ethical and human rights factors, where
appropriate.
The Company has no greenhouse gas emissions to report from its
operations, nor does it have responsibility for any other
emissions-producing sources, including those within its underlying
investment portfolio.
In carrying out its investment activities and in relationships
with suppliers, the Company aims to conduct itself responsibly,
ethically and fairly.
Diversity and Inclusion
The Board of Directors of the Company comprises five male
directors.
The Remuneration and Nominations Committee and the Board are
committed to diversity at Board level and is supportive of
increased gender and ethnic diversity but recognises that it may
not always be in the best interest of shareholders to prioritise
this above other factors. The Remuneration and Nominations
Committee regularly reviews the structure, size and composition
required of the Board, taking into account the challenges and
opportunities facing the Company. In considering future candidates,
appointments will be made on merit, including taking account of the
specific skills, experience, independence, and knowledge needed to
ensure a rounded Board and the diversity benefits each candidate
can bring to the overall Board composition . The commencement of
the managed wind-down is inevitably limiting in the Board's ability
to implement enhanced diversity and inclusion strategies, given the
limited future life of the Company.
Stakeholder Engagement
The AIC Code requires that matters set out in section 172 of the
Companies Act, 2006 ("s172 of the Companies Act") are reported
notwithstanding the Company is incorporated in Guernsey. As an
investment company, the Company does not have any employees and
conducts its core activities through third-party service providers.
Each service provider is subjected to oversight and control, is
required to have in place suitable policies to ensure they maintain
high standards of business conduct, treat customers fairly, and
employ corporate governance best practice. The Board considers the
view of the Company's other key stakeholders as part of its
discussions and decision making process. The Board's commitment to
maintaining the high-standards of corporate governance recommended
in the AIC Code, combined with the directors' duties incorporated
into The Companies (Guernsey) Law, 2008, the constitutive
documents, the Disclosure Guidance and Transparency Rules, and
Market Abuse Regulation, ensures that shareholders are provided
with frequent and comprehensive information concerning the Company
and its activities. Whilst the primary duty of the Directors is
owed to the Company as a whole consideration being given, the Board
considers as part of its decision making process the interests of
all stakeholders. Particular to the continued alignment between the
activities of the Company and those that contribute to delivering
the Board's strategy, which include the Portfolio Manager and
Administrator. The Board respects and welcomes the views of all
stakeholders. Any queries or areas of concern regarding the
Company's operations can be raised with the Secretary.
DIRECTORS' REPORT
The Directors present their annual report and audited
consolidated financial statements for the year ended 31 March 2021.
In the opinion of the Directors, the annual report and audited
consolidated financial statements are fair, balanced and
understandable and provide the information necessary for
Shareholders to assess the Company's performance, business model
and strategy.
Incorporation
The Company is a limited liability company registered in
Guernsey under The Companies (Guernsey) Law, 2008 (as amended) with
registered number 60680.
Activities
The Company is a registered and closed-ended collective
investment scheme in Guernsey pursuant to The Protection of
Investors (Bailiwick of Guernsey) Law, 1987, as amended. Prior to
the amendment of the Company's Investment Objective and Policy, the
primary activity of the Company was investment in loans to small
and medium sized enterprises in the United Kingdom, the United
States and Continental Europe, in order to seek to provide
shareholders with a sustainable and attractive level of dividend
income. Following the result of the EGM on 11 June 2019, the
Company has ceased investment into Credit Assets as the Company's
Investment Objective and Policy were updated to facilitate the
managed wind-down of the Company .
Results and dividends
The total comprehensive income for the year, determined under
International Financial Reporting Standards ("IFRS"), amounted to
GBP4.58 million (2020: loss of GBP5.25 million). The payment of any
dividend by the Company is subject to the satisfaction of a
solvency test as required by The Companies (Guernsey) Law, 2008 (as
amended). Following the result of the EGM, the Directors expect to
maintain quarterly dividend payments of 5.25 pence per Ordinary
Share on an annualised basis, which may be partially uncovered by
income . Dividends declared during the year are disclosed in note
14.
Business review
The Strategic Report includes further information about the
Company's principal activities, financial performance during the
year and indications of likely future developments.
In December 2018, the Company commenced a programme of
repurchases of its shares in the secondary market. As at 31 March
2021, the Company has purchased a total of 43,746,667 shares (31
March 2020: 43,736,667) of which nil remained held in treasury at
31 March 2021 (31 March 2020: 586,243). During the year, a total of
10,000 shares which were being held in treasury were cancelled and
formally discharged (31 March 2020: 43,150,424). The directors
resolved to suspend the programme of repurchases of the Company's
shares on 2 April 2020 until further notice.
The Company also redeemed a total of 124,126,432 shares (2020:
32,245,772) for a total amount of GBP105,499,718 (2020:
GBP30,499,833) throughout the year.
On 11 April 2020, Lambeth fully repaid the remaining amount owed
on its senior loan to Citibank. The remaining portfolio of Credit
Assets held within Lambeth were transferred to Basinghall on 17
June 2020 for an amount equal to the principal and interest
outstanding at 31 May 2020 being the economic cut-off date for the
transaction. In October 2020, liquidators were formally appointed
and commenced proceedings to wind up Lambeth in an orderly manner.
On 1 July 2021, the final meeting in relation to the liquidation of
Lambeth took place. All liabilities have been discharged and final
payment made to Basinghall under the class B note agreement. The
entity is expected to be fully liquidated within 3 months of the
signing of these consolidated financial statements.
On 17 August 2020, Queenhithe fully repaid the remaining amount
owed on its loan with Fleetbank. The remaining portfolio of Credit
Assets held within Queenhithe were transferred to Basinghall on the
same date for an amount equal to the principal and interest
outstanding at 31 July 2020 being the economic cut-off date for the
transaction. In December 2020, liquidators were formally appointed
and commenced proceedings to wind up Queenhithe in an orderly
manner. The proceedings are still ongoing as at the date of signing
of these consolidated financial statements.
The World Health Organisation declared COVID-19 as a global
pandemic on 11 March 2020.
The Board continues to closely monitor the situation and the
impact on the performance of the loan portfolios held by the Group.
The Board receives updates on a regular basis from Funding Circle
on current delinquency and default trends by geographic exposure.
The Risk Committee also reviews a comprehensive range of other
risks that may be impacted by COVID-19.
During the year, the impact of COVID-19 led to the use of
forbearance measures for eligible borrowers, including short term
payment plans and payment holidays, to assist creditworthy
borrowers whose businesses suffered a short-term liquidity shock as
a result of the ongoing pandemic environment. As at 30 June 2020,
15% of the combined portfolio by outstanding principal was on
forbearance measures through either a partial payment plan or
payment holiday, with almost half of those on partial payment
plans. Forbearance measures continue to be offered for borrowers
directly impacted by COVID-19, with 2% of the combined portfolio by
outstanding principal on forbearance as at 31 March 2021.
Borrowers that went on forbearance measures implemented by
Funding Circle have demonstrated resilient performance since coming
off their plan, with 92% of the combined portfolio by outstanding
principal making full contractual repayments as of 31 March 2021.
The directors have seen a large proportion of borrowers returning
to making full contractual repayments which has assisted in the
stronger than expected performance by each of the portfolios in the
latter stages of the year.
The full impact of COVID-19 and the measures implemented on the
Group's portfolios of Credit Assets in the mid to long term still
remains uncertain, however the Directors continue to monitor the
delinquency and default data available to them closely.
In October 2020, Basinghall received proceeds of GBP2,203,183
for the sale of a pool of UK non-performing loans to a third party
at a recovery rate which is consistent with historical recovery
rates observed on the portfolio.
Going concern
The Directors have considered the financial performance of the
Group and the impact of market conditions at the financial year end
date and subsequently.
Whilst the managed wind-down of the Company continues to
progress, there is no definite and final plan in place for the
timing of liquidation of the Company's assets and the process of
returning capital to shareholders.
The Company will therefore continue to redeem shares and pay
dividends. The Company has prepared cashflow forecasts and
liquidity analysis reviewing likely scenarios to support further
distributions and to monitor the ongoing solvency of the Company.
This is reviewed on a regular basis in light of new information
received.
The Directors confirm that they have a reasonable expectation
that the Company will continue to be able to pay its liabilities as
they fall due over the period of the managed wind-down and as the
ongoing impacts of the COVID-19 pandemic progresses. As a result,
the Directors continue to present the consolidated financial
statements on a going concern basis.
Alternative Investment Fund Managers Directive ("AIFMD")
The AIFMD requires Alternative Investment Fund Managers ("AIFM")
to comply with certain disclosure, reporting and transparency
obligations for Alternative Investment Funds ("AIF") that it
markets in the EU. The Company is a self-managed AlF for the
purposes of the AIFMD and therefore has to comply with the
disclosure requirements of the AIFMD.
The Company regularly publishes updates on the website in the
form of factsheets. These, along with the regular announcements
made through the Regulatory News Service ("RNS") of the FCA, cover
the disclosures required by AIFMD.
The Directors consider that any change in respect of which a
reasonable investor, becoming aware of such information, would
reconsider its investment in the Company, including because the
information could impact on the investor's ability to exercise its
rights in relation to its investment, or otherwise prejudice that
investor's (or any other investor's) interest in the Company should
be considered material. In setting this threshold, the Directors
have had regard to the current risk profile of the Company which
outlines the relevant measures to assess the Company's exposure or
potential exposure to those risks. As required by the Listing
Rules, any material change to the investment policy of the Company
will be made only with the approval of the shareholders and as
such, shareholders' approval was sought at the EGM on 11 June 2019
to implement the modification of the Company's Investment Objective
and Policy as noted in the Strategic Report.
The AIFMD also requires the Company to disclose the remuneration
of its investment manager (if any) providing analysis between fixed
and variable fees along with the information of how much of such
remuneration was paid to senior management at the investment
manager and how much was paid to members of staff. As a
self-managed AIF, the Company has no investment manager and thus
has no information to report.
United States of America Foreign Account Tax Compliance Act
("FATCA")
Guernsey has entered into an Intergovernmental Agreement ("IGA")
with the US Treasury in order to comply with FATCA and has also
entered into an IGA with the UK in order to comply with the UK's
requirements for enhanced reporting of tax information in
accordance with FATCA principles. Under such IGAs, the Company is
regarded as a Foreign Financial Institution ("FFI") resident in
Guernsey. The Board continues to monitor developments in the rules
and regulations arising from the implementation of FATCA in
conjunction with its tax advisors.
Common Reporting Standard ("CRS")
On 13 February 2014, the Organisation for Economic Co-operation
and Development released the Common Reporting Standard ("CRS")
designed to create a global standard for the automatic exchange of
financial account information, similar to the information to be
reported under FATCA. On 29 October 2014, 51 jurisdictions signed
the multilateral competent authority agreement ("Multilateral
Agreement") that activates this automatic exchange of FATCA-like
information in line with the CRS.
Pursuant to the Multilateral Agreement, certain disclosure
requirements may be imposed in respect of certain investors in the
Company who are, or are entities that are controlled by one or
more, residents of any of the signatory jurisdictions. It is
expected that, where applicable, information that would need to be
disclosed will include certain information about investors, their
ultimate beneficial owners and/or controllers, and their investment
in and returns from the Company and its subsidiaries. Guernsey,
along with 60 other jurisdictions, including some EU Member States,
has adopted the CRS with effect from 1 January 2016, with the first
reporting completed in 2017. The Group continues to comply with the
requirements of CRS.
Corporate governance
The Company has been fully compliant with the AIC code of
corporate governance throughout the year which is
publicly available at https://www.theaic.co.uk/aic-code-of-corporate-governance .
Refer to the corporate governance report for further
information.
Directors
The Directors who held office during the financial year end and
up to the date of approval of this report were:
Date of appointment
-------------------- --------------------
Frederic Hervouet 12 August
2015
Jonathan Bridel 19 August
2015
Richard Boléat 19 August
2015
Richard Burwood 12 August
2015
Sachin Patel 18 May 2017
Tom Parachini, Global Head of Legal and Regulatory at Funding
Circle, is appointed as Alternate Director for Sachin Patel.
Directors' shares and interests
A list of all Directors who served during the year and up to the
date of this report and their biographies are included in a
separate section of this report.
The appointment and replacement of Directors is governed by the
Company's Articles of Incorporation, The Companies (Guernsey) Law
2008 (as amended) and related legislation. The Articles of
Incorporation themselves may be amended by special resolution of
the Shareholders.
As at 31 March 2021, the Directors and/or their connected
parties held the following Ordinary shares of the Company:
Number of shares
2021 2020
--------------------- ----------------- ----------------
Frederic Hervouet 92,041 95,176
Jonathan Bridel 65,552 4,448
Richard Boléat 13,554 4,448
Richard Burwood 24,784 4,448
Sachin Patel - -
195,931 108,520
--------------------- ----------------- ----------------
During the year, no Director had a material interest in a
contract to which the Company was a party (other than his own
letter of appointment). Mr. Patel is an employee of Funding Circle
Ltd.
Movement in the number of shares held by each of the directors
and/or connected parties during the year relates to the redemptions
paid by the Company and the purchase of further shares.
Substantial shareholdings
As at 31 March 2021, the Company had been informed of the
following notifiable interests of 5% or more in the Company's
voting rights in accordance with Disclosure and Transparency Rule
5.1.2:
Shareholder Number of Ordinary Percentage
shares holding %
---------------------------------- ------------------- -----------
Railways Pension Trustee Company
Limited 38,119,570 28.41
Rocket Internet 33,053,567 24.64
BlackRock Investment Management
(UK) Limited 29,053,217 21.65
Amiral Gestion 15,717,263 11.71
Significant agreements
The Company is not party to any significant agreements which
take effect after or terminate upon a change of control of the
Company, nor has the Company entered into any agreements with its
Directors to provide for compensation for loss of office as a
result of a takeover bid.
Information to be disclosed in accordance with UK Listing Rule
9.8.4
A statement of the amount of interest The Company has not capitalised
capitalised by the Company during any interest in the year under
the period under review with an review.
indication of the amount and treatment
of any related tax relief.
Any information required in relation Not applicable.
to the publication of unaudited
financial information.
----------------------------------------
Details of any long-term incentive Not applicable.
schemes.
----------------------------------------
Details of any arrangements under Sachin Patel has waived his right
which a director of the Company to remuneration.
has waived or agreed to waive
any emoluments from the Company.
----------------------------------------
Details of any pre-emptive issues Not applicable.
of equity not for cash.
----------------------------------------
Details of any non-pre-emptive Not applicable.
issues of equity for cash by any
unlisted major subsidiary undertaking.
----------------------------------------
Details of parent participation Not applicable.
in a placing by a listed subsidiary.
----------------------------------------
Details of any contract of significance Richard Burwood was a Director
in which a director is or was of Lambeth and Queenhithe until
materially interested. resigning from Lambeth on 15 September
2020 and resigning from Queenhithe
on 3 December 2020. Richard Burwood
was a director of Basinghall and
Tallis until resigning on 13 July
2020.
Sachin Patel and Tom Parachini
are both employees of Funding
Circle Ltd.
Sachin Patel and Tom Parachini
are both Directors of Funding
Circle Global Partners Limited
("FCGPL").
----------------------------------------
Details of any contract of significance Not applicable.
between the Company (or one of
its subsidiaries) and a controlling
shareholder.
----------------------------------------
Details of waiver of dividends Not applicable.
by a shareholder.
----------------------------------------
Board statement in respect of Not applicable.
relationship agreement with the
controlling shareholder.
----------------------------------------
Disclosure of information to the Auditor
The Directors who held office at the date of approval of this
Directors' Report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company's
Auditor is unaware and each Director has taken all the steps that
he ought to have taken as a Director to make himself aware of any
relevant audit information and to establish that the Company's
Auditor is aware of that information.
Independent Auditor
PricewaterhouseCoopers CI LLP ("PwC") served as independent
auditor during the financial year and has expressed its willingness
to continue in office. A resolution to re-appoint PwC as
independent auditor was approved in the Annual General Meeting.
The maintenance and integrity of the Group and Company's website
is the responsibility of the Directors. The work carried out by the
independent auditor does not involve consideration of these matters
and accordingly, the auditor accepts no responsibility for any
changes that may have occurred to the consolidated financial
statements since they were initially presented on the website.
Legislation in Guernsey governing the preparation and dissemination
of financial statements may differ from legislation in other
jurisdictions.
Company Secretary
The Company Secretary is Sanne Group (Guernsey) Limited of De
Catapan House, Grange Road, St Peter Port, Guernsey GY1 2QG.
Taxation
The Company is subject to taxation under The Income Tax (Exempt
Bodies) (Guernsey) Ordinance 1989 act and the investing companies
are subject to taxation in Ireland under the Irish Finance Act
2019. There has been no updates to these acts during the year that
have had any impact on the taxation payable by the Group. See note
12 for further information.
On behalf of the Board
RICHARD BOLÉAT
Chairman of the Board of Directors
CORPORATE GOVERNANCE REPORT
The Financial Reporting Council ("FRC"), the UK's independent
regulator for corporate reporting and governance responsible for
the Corporate Governance Code, has endorsed the AIC Code meaning
that companies who report in accordance with the AIC Code fully
meet their obligations under the UK Corporate Governance Code (the
"Code") and the related disclosure requirements contained in the
Listing Rules.
Statement of how the principles of the AIC Code are applied
Throughout the financial year ended 31 March 2021 the Company
has been in compliance with the relevant provisions set out in the
AIC Code and the relevant provisions of the Code. The Code includes
provisions relating to: the roles of the chief executive, executive
directors' remuneration; and the need for an internal audit
function, each of which is not considered by the Board to be
relevant to the Company. The Company has therefore not reported
further in respect of these provisions.
Board of Directors
The Board is comprised of five Directors, all of whom are
non-executive. All the Directors are independent except for Sachin
Patel who is an employee of Funding Circle Ltd. Richard Boléat is
the Chairman of the Board and Jonathan Bridel is the Senior
Independent Director. The Company did not use an external search
consultancy nor any open advertising in the selection of the
Chairman and the non-executive Directors. The Company was satisfied
that the formal selection process from a pool of candidates with
the relevant expertise and skills was appropriate for the needs of
the Company. Biographies of the Directors are shown in a separate
section of this report and demonstrate the range and depth of
skills and experience each brings to the Board.
The Directors ensure that, at all times, the Board is composed
of members who, as a whole, have the required knowledge, abilities
and expert experience to properly complete their tasks and are
sufficiently independent. A Board member is considered independent
if he has no business or personal relations which cause a conflict
of interest with those of the Company. Every member of the Board
ensures that he has sufficient time to perform his mandate. The
Board considers the skills, competence and independence of
candidates in the context of the overall board composition. The
Board has put in place appropriate insurance cover in respect of
any legal action against the Directors.
The Board has not stipulated a maximum term of any directorship,
including the tenure of the Chairman given the annual
election/re-election process discussed below and commencement of
the managed wind-down.
Copies of the letters of appointment are available on request
from the Company Secretary.
Independence of Directors
In accordance with the AIC Code, the Board has reviewed the
independence of the individual directors and the Board as a whole.
Each of the Directors except Sachin Patel is considered
independent.
Board evaluation
A formal Board evaluation process has been put in place in line
with the Board's policy to monitor and improve performance of the
Directors. The Board carried out a formal evaluation process on an
annual basis. The Directors completed self-assessment forms which
were reviewed and discussed with the Chairman. The Senior
Independent Director performed an annual review of the Chairman's
performance. The Directors carried out an annual review of the
Board as a whole discussing its composition, size and structure and
ensuring that there is a good balance of skills and experience. The
answers to these questionnaires were discussed by the Remuneration
and Nominations Committee. However, given the Company's change in
investment objective, managed wind-down and the limited future life
of the Company, the annual board evaluations are no longer taking
place or being discussed by the Remuneration and Nominations
Committee.
The Board shall offer induction training to new Directors about
the Company, its key service providers, the Directors' duties and
obligations and other matters as may be relevant from time to time.
A regular review will be undertaken by the Board to ensure that the
Directors' ongoing training and development needs are met.
Election/Re-election of Directors
It is the Company's policy that at each Annual General Meeting
of the Company all Directors shall retire from office, but, subject
to the Articles, shall be eligible for re-appointment.
Committees of the Board
Audit, Risk, Management Engagement and Remuneration and
Nominations Committees have been established by the Board and each
Committee has formally delegated duties, responsibilities and terms
of reference, which are available from the Company Secretary upon
request.
An outline of the responsibilities of each of the Committees is
set out below.
Audit Committee
The Board has established the Audit Committee comprising of all
the Directors except for Sachin Patel and is chaired by Jonathan
Bridel. The Audit Committee meets at least three times a year and
is responsible for ensuring, inter alia, that the financial
performance of the Company is properly reported on and monitored
and provides a forum through which the Company's external auditor
may report to the Board. The Audit Committee reviews and recommends
to the Board the adoption and approval of the annual and half
yearly consolidated financial statements, results, internal control
systems and procedures and accounting policies of the Company.
Risk Committee
The Company has established a risk committee, which comprises of
all of the Directors, with Frederic Hervouet as chairman. The risk
committee meets four times a year or more often if required. The
risk committee takes responsibility for the risk management
policies of the Company's operations and oversight of the operation
of the Company's risk management framework as well as completing
all risk reporting for regulatory purposes.
Management Engagement Committee
The Company has established a Management Engagement Committee
which is chaired by Richard Burwood and comprises of all the
Directors except for Sachin Patel. The Management Engagement
Committee meets at least once a year or more often if required. The
principal duties of the Committee are to review the actions and
judgments of Funding Circle UK, Funding Circle US and Funding
Circle CE and also the terms of agreements appointing each of them.
The Committee is also responsible for monitoring the compliance of
other service providers with the terms of their respective
agreements.
Remuneration and Nominations Committee
The Company has established a Remuneration and Nominations
Committee which is chaired by Richard Boléat and comprises all of
the Directors. The Directors believe that the appointment of the
chairman of the Remuneration and Nominations Committee does not
affect his independence.
The Board believes it is appropriate for all Directors to be a
member of the Remuneration and Nominations Committee as Sachin
Patel has waived his right to remuneration from the Company and all
other Directors are independent non-executive Directors.
The Remuneration and Nominations Committee meets at least once a
year or more often if required. The duties of the Committee
include:
-- determining and agreeing with the Board the framework or
broad policy for the remuneration of the Company's Chairman and
non-executive Directors pursuant to the Company's Articles of
Incorporation;
-- reviewing the structure, size and composition (including the
skills, knowledge and experience) required of the Board compared to
its current position and make recommendations to the Board with
regard to any changes necessary; and
-- giving full consideration to succession planning of
Directors, taking into account the challenges and opportunities
facing the Company.
Meetings and attendance
There were 7 Board meetings held during the financial year ended
31 March 2021. The attendance record of each of the Directors was
as follows:
Number of attendances
during the year
-------------------------------------- ----------------------
Frederic Hervouet 7
Jonathan Bridel 7
Richard Boléat 7
Richard Burwood 7
Sachin Patel or designated alternate 7
---------------------------------------- ----------------------
There were 4 Risk Committee meetings, 5 Audit Committee meetings
and 1 Remuneration and Nominations Committee meeting held during
the financial year ended 31 March 2021. A Management Engagement
Committee meeting was held subsequent to the year end in April
2021.
The attendance record of each of the Committee members was as
follows:
Number of attendances during the year
Remuneration
and Nominations
Audit Committee Risk Committee Committee
--------------------- ---------------- --------------- -----------------
Frederic Hervouet 5 4 1
Jonathan Bridel 5 4 1
Richard Boléat 5 4 1
Richard Burwood 5 4 1
Sachin Patel N/A 4 1
---------------------- ---------------- --------------- -----------------
Board Observers
Funding Circle UK has the right (pursuant to the Services
Agreement) to nominate up to two observers to attend meetings of
the Board. Those nominees may (other than in limited circumstances)
attend each such meeting as observers, but do not have any rights
to participate in the conduct of the business of the Company or to
vote on any matter.
The Board may require that those nominees not attend the part of
any Board meeting which considers (i) the termination of any
agreement to which Funding Circle is party, or (ii) any dispute or
litigation between Funding Circle and the Company.
Company Secretary
The Board appointed Sanne Group (Guernsey) Limited to act as
Company Secretary on 22 July 2015. The principal duties of the
Company Secretary are to monitor compliance with the established
corporate governance framework, report to the Board and to arrange
and host Board and Committee meetings.
Internal Control Review
The Board is responsible for ensuring the maintenance of a
robust system of internal control and risk management and for
reviewing the effectiveness of the Company's overall internal
control arrangements and processes following recommendations from
the Audit Committee. In performing their duties, the Board
considered the relevant guidance published by the FRC as they apply
to the Group. The systems and controls in place have been in place
for the year under review and up to the date of signing of this
annual report and audited consolidated financial statements. The
results of the Board's review of the systems and controls are
presented in the Audit Committee Report.
The Directors may delegate certain functions to other parties
such as Funding Circle UK, Funding Circle US, Funding Circle CE,
FCGPL, the Administrator and other service providers. In
particular, the Directors have appointed Funding Circle UK, Funding
Circle US and Funding Circle CE to service the Company's
investments in loans and FCGPL to provide corporate services to the
Company. Notwithstanding these delegations, the Directors have
responsibility for exercising overall control and supervision of
the services provided by Funding Circle UK, Funding Circle US and
Funding Circle CE, for the risk management of the Company and
otherwise for the Company's management and operations.
The Management Engagement Committee carries out regular reviews
of the performance of Funding Circle UK, Funding Circle US and
Funding Circle CE together with other service providers appointed
by the Company.
Investor Relations
All shareholders have the opportunity to attend and vote, in
person or by proxy, at the AGM or other meetings of shareholders.
The notice of the AGM, which is sent out at least fourteen days in
advance, sets out the business of the meeting. Shareholders are
encouraged to attend the AGM and to participate in proceedings. The
Chairman of the Board and the Directors, together with
representatives of Funding Circle, will be available to answer
shareholders' questions at the AGM.
Shareholders and other interested parties are able to contact
the Company through a dedicated investor relations function.
Contact details are as follows:
Email: ir@smecreditrealisation.com
Shareholders are also able to contact the Company via the
Chairman or Company Secretary as follows:
Richard Boléat
Tel: +44 (0) 1534 615 656
Email: Richard.Boleat@smecreditrealisation.com
Sanne Group (Guernsey) Limited
Tel: +44 (0) 1481 739 810
Email: smecreditrealisation@sannegroup.com
AUDIT COMMITTEE REPORT
Membership
Jonathan Bridel - Chairman (Independent non-executive
Director)
Richard Burwood (Independent non-executive Director)
Fred Hervouet (Independent non-executive Director)
Richard Boléat (Company Chairman* and Independent non-executive
Director)
* The Board believes it is appropriate for the Company Chairman
to be a member of the Audit Committee as he is a Fellow of the
Institute of Chartered Accountants in England & Wales and is an
independent Director.
Key Objectives
The provision of effective governance over the appropriateness
of the Company's financial reporting, taking into account the
consolidation of its subsidiaries, including the adequacy of
related disclosures, the performance of the external auditor and
the management of the Company's systems of internal controls and
business risks.
Responsibilities
The primary responsibilities of the Audit Committee are:
-- reviewing the Company's financial results announcements and
financial statements and monitoring compliance with relevant
statutory and listing requirements;
-- reporting to the Board on the appropriateness of the
Company's accounting policies and practices including critical
accounting policies and practices;
-- advising the Board on whether the Committee believes the
annual report and financial statements, taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the Company's performance, business
model and strategy;
-- scrutiny of the loans held at fair value through other
comprehensive income;
-- compiling a report on its activities to be included in the
Company's annual report;
-- overseeing the relationship with and appointment of the
external auditor;
-- agreeing with the external auditor the audit plan including
discussions on the key risk areas within the consolidated financial
statements;
-- considering the financial and other implications on the
independence of the auditor arising from any non-audit services to
be provided by the auditor; and
-- considering the appropriateness of appointing the auditor for
non-audit services.
The Audit Committee members have a wide range of financial and
commercial expertise necessary to fulfil the Committee's duties.
The Chairman of the Committee, Jonathan Bridel, is a Fellow of the
Institute of Chartered Accountants in England and Wales, and has
recent and relevant financial experience, as required by the AIC
Code. He serves as Audit Chairman on other listed companies and
previously worked in senior positions in banking and finance and
investment management including SME lending. The Board is satisfied
he has recent and relevant financial experience and has designated
him as its financial expert on the Committee. The Committee as a
body has the competence and experience relevant to the sector. The
qualification of the members of the committee are noted in the
biographies section in a separate section of this report.
Committee Meetings
The Committee meets formally at least three times a year. Only
members of the Audit Committee have the right to attend Audit
Committee meetings. However, other Directors and representatives of
Funding Circle and the Administrator are invited to attend Audit
Committee meetings on a regular basis and other non-members may be
invited to attend all or part of the meetings as and when
appropriate and necessary. The Company's external auditor,
PricewaterhouseCoopers CI LLP ("PwC"), is also invited to meetings
as is appropriate.
Main Activities during the year
The Committee assists the Board in carrying out its
responsibilities in relation to financial reporting requirements,
risk management and the assessment of internal controls and key
procedures adopted by the Company's service providers. The
Committee also manages the Company's relationship with the external
auditor and considers the appointment of external auditor,
discusses with the external auditor the nature and scope of the
audit, keeps under review the scope, results, cost and
effectiveness of the audit and reviews the independence of the
external auditor. The Committee also considers the objectivity of
the auditor and reviews the external auditor's letter of engagement
and management letter.
Meetings of the Committee generally take place prior to a
Company Board meeting. The Committee reports to the Board , as part
of a separate agenda item, on the activity of the Committee and
matters of particular relevance to the Board in the conduct of
their work. The Board requires that the Committee advise it on
whether it believes the annual report and financial statements,
taken as a whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the Company's
performance, business model and strategy.
At its meetings during the year, the Committee focused on:
Financial reporting
The primary role of the Committee in relation to financial
reporting is to review with Funding Circle, the Administrator and
the External Auditor the appropriateness of the half-yearly and
annual consolidated financial statements concentrating on, amongst
other matters:
-- The quality and acceptability of accounting policies and
practices;
-- The clarity of the disclosures and compliance with financial
reporting standards and relevant financial and governance reporting
requirements including the application of IFRS 9 and IFRS 10;
-- Material areas in which significant judgments have been
applied or where there has been discussion with the external
auditor;
-- Whether the annual report and consolidated financial
statements, taken as a whole, are fair, balanced and understandable
and provide the information necessary for shareholders to assess
the Company's performance, business model and strategy; and
-- Any correspondence from regulators and listing authorities in
relation to financial reporting .
To aid its review, the Committee considers reports from Funding
Circle and the Administrator.
Significant risks
In relation to the annual report and consolidated financial
statements for the year ended 31 March 2021, the following
significant risks were considered by the Audit Committee as they
are most relevant to the nature of the Group's business:
-- Valuation of loans advanced
Loans advanced recorded at fair value through other
comprehensive income ("FVTOCI") represent the
largest balance in the statement of financial position.
Furthermore, the FVTOCI basis of measurement
under IFRS 9 mandates that management evaluate the expected
credit losses on the loan portfolio and account for them through
the profit and loss, with movement on fair value going through the
OCI. Valuation of the loans advanced is received from a third party
valuation expert on a quarterly basis. The Audit Committee
regularly reviews and has satisfied itself as to the inputs used in
the valuation methodology of the loans advanced in the consolidated
financial statements at 31 March 2021.
-- Fraud risk in income recognition
Mitigating factors were reviewed through the risk register and
internal controls framework which is reviewed and approved by the
Committee on a regular basis. The Committee has considered and
challenged as appropriate the assessment of risks within these
documents and obtained evidence about the effective operation of
the internal controls in place, including critically assessing
reporting provided by Funding Circle. The Audit Committee is
satisfied that the accounting policy for recognition of the
interest earned on loans is in line with the relevant accounting
standards.
-- Valuation of the financial asset held at fair value through
profit or loss (the EIB transaction)
The fair value of the EIB transaction is determined by
considering the fair value of the senior loan note in the
structured finance transaction and the fair value of the underlying
loan portfolio, and any adjustments for other material assets and
liabilities. Refer to note 17 for further information on fair value
estimation.
The Committee in conjunction with the Board and Funding Circle
have reviewed the impact of COVID-19 on the consolidated financial
statements as at 31 March 2021. In the first part of the year,
underlying loan performance was largely effected by COVID-19 with a
number of borrowers directly impacted by the pandemic. However,
following the introduction of forbearance measures and government
initiatives the directors have seen resilient performance with 92%
of the combined portfolio by outstanding principal making full
contractual repayments as of 31 March 2021 . The assumptions used
for forecasting expected credit losses, as required under IFRS 9,
were based on a macroeconomic scenario developed specifically for
COVID-19 and consistent with portfolio modelling. Additionally,
multipliers are applied to individual loan probability of defaults
("PD") such that overall gross losses for the portfolio are
anchored to portfolio model expectations.
Internal Control and Risk Management
The Committee along with the Risk Committee has established a
process for identifying, evaluating and managing all major risks
faced by the Group. The process is subject to regular review by the
Board and accords with the AIC Code of Corporate Governance. The
Board is responsible overall for the Group's system of internal
control and for reviewing its effectiveness. However, such a system
is designed to manage rather than eliminate risks of failure to
achieve the Company's business objectives and can only provide
reasonable and not absolute assurance against material misstatement
or loss.
The Committee receives reports from the Risk Committee on the
Group's risk evaluation process and reviews changes to significant
risks identified. The Committee has undertaken a full review of the
Group's business risks, which have been analysed and recorded in a
risk report, which is reviewed and updated regularly. Each quarter
a Funding Circle report outlines the steps taken to monitor the
areas of risk including those that are not directly the
responsibility of Funding Circle and reports the details of any
known internal control failures.
Separately, Funding Circle has established an internal control
framework to provide reasonable but not absolute assurance on the
effectiveness of the internal controls operated on behalf of its
clients. The effectiveness of the internal controls is assessed by
Funding Circle's compliance and risk department on an on-going
basis. Funding Circle's controls processes have also been outlined
to the Board. The Board's assessment of the Company's principal
risks and uncertainties is set out in the Strategic Report. By
means of the procedures set out above, the Board confirms that it
has reviewed the effectiveness of the Group's system of internal
controls for the year ended 31 March 2021 and subsequently and that
no material issues have been noted.
External Audit
The effectiveness of the external audit process is dependent on
appropriate audit risk identification at the start of the audit
cycle. The Committee received a detailed audit plan from PwC,
identifying their assessment of these key risks. For the year ended
31 March 2021 significant risks were identified in relation to the
valuation of loans advanced and the risk of fraud in revenue
recognition (in addition to the risk of management override of
controls). These risks are tracked through the year and the
Committee challenged the work done by the auditor to test
management's assumptions and estimates around these areas. The
Committee has assessed the effectiveness of the audit process
addressing these matters through the reporting received for the
year-end consolidated financial statements. In addition, the
Committee will seek feedback from the Administrator on the
effectiveness of the audit process. For the year ended 31 March
2021, the Committee was satisfied that there had been appropriate
focus and challenge on the primary areas of audit risk and assessed
the quality of the audit process to be good.
Appointment and Independence
The Committee considers the reappointment of PwC, including the
rotation of the Audit Engagement Leader, and assesses their
independence on an annual basis. The external auditor is required
to rotate the Audit Engagement Leader responsible for the Company's
audit every five years. The Audit Committee has engaged with the
external auditor to ensure an effective rotation of the Audit
Engagement Leader following the fifth year of appointment and as
such a new Audit Engagement Leader has been appointed for the
current year's audit. In its assessment of the independence of the
auditor, the Committee receives details of any relationships
between the Company and PwC that may have a bearing on their
independence and receives confirmation that they are independent of
the Company. The Committee approved the fees for audit services for
the year ended 31 March 2021 after a review of the level and nature
of work to be performed and after being satisfied that the fees
were appropriate for the scope of the work required.
Non Audit Services
To safeguard the objectivity and independence of the external
auditors from becoming compromised, the Committee has a formal
policy governing the engagement of the external auditors to provide
non-audit services. No material changes have been made to this
policy during the year. The auditor and the Directors have agreed
that all non-audit services require the pre-approval of the Audit
Committee prior to commencing any work. Fees for non-audit services
are tabled annually so that the Audit Committee can consider the
impact on auditor's objectivity. The auditor (and their affiliated
network firms) was remunerated GBP264,792 (2020: GBP284,756) for
their audit and non-audit services rendered for the year ended 31
March 2021. The Committee assessed whether PwC should be appointed
in relation to certain tax and other non-audit services related
services and concluded that it would be in the best interest of the
Company to do so.
PwC were remunerated as follows for the year ended 31 March
2021:
2021 202 0
---------------------- -----------------------
Type of service PwC CI PwC Ireland PwC CI PwC Ireland
GBP GBP GBP GBP
-------------------------- -------- ------------ --------- ------------
Audit of the financial
statements 126,030 77,234 10 9,220 104 ,197
Review of half yearly
financial statements 22,000 - 22,000 -
Tax related services - 38,328 - 34,940
Other non-audit services 1,200 - 14,3 99 -
149,230 115,562 145,619 139,137
-------------------------- -------- ------------ --------- ------------
The current length of PwC's tenure is 6 years and the last time
tendering took place was in October 2015.
The Committee is satisfied with the effectiveness of the audit
provided by PwC, and is satisfied with the auditor's independence.
The Committee has therefore recommended to the Board that PwC be
reappointed as external auditor for the year ending 31 March 2022,
and to authorise the Directors to determine their remuneration and
terms of engagement. Accordingly, a resolution proposing the
reappointment of PwC as auditor will be put to the shareholders at
the 2021 AGM.
Committee Evaluation
The Committee's activities form part of the performance
evaluation that will be carried out by the Board.
Jonathan Bridel
Chairman of the Audit Committee
26 July 2021
DIRECTORS' REMUNERATION REPORT
The Board has established a Remuneration and Nominations
Committee which met once during the current financial year.
Composition
The Remuneration and Nominations Committee was formed on 28
September 2015, comprising all the members of the Board. The Board
has appointed Richard Boléat as Chairman of the Committee.
The Directors and Company Secretary are the only officers of the
Company. Copies of the Directors' letters of appointment are
available upon request from the Company Secretary at the registered
office and will be available for inspection at the AGM. The Company
Secretary is engaged under a Company Secretarial Agreement with the
Company. The Company has no employees.
The Directors are each entitled to serve as non-executive
Directors on the boards of other companies and to retain any
earnings from such appointments.
Responsibilities
The primary responsibilities of the Committee are:
-- determine and agree with the Board the framework or broad
policy for the remuneration of the Company's Chairman and
non-executive directors pursuant to the Company's Articles of
Incorporation;
-- review the ongoing appropriateness and relevance of the
remuneration policy;
-- ensure that contractual terms on termination, and any
payments made, are fair to the individual and the Company, that
failure is not rewarded and that the duty to mitigate loss is fully
recognised;
-- annually review the structure, size and composition
(including the skills, knowledge and experience) required of the
Board compared to its current position and make recommendations to
the Board with regard to any changes as necessary;
-- give full consideration to succession planning of directors,
taking into account the challenges and opportunities facing the
Company, and what skills and expertise are therefore needed on the
Board in the future; and
-- keep under review the leadership needs of the Company with a
view to ensuring the continued ability of the Company to compete
effectively in the Platform.
Remuneration Policy
In setting the Company's remuneration policy, the Remuneration
and Nominations Committee has sought (so far as it considers
appropriate for a company with a non-executive Board) to align the
interests of the Board with those of the Company and to incentivise
the Directors to help the Company to achieve its investment
objective.
The Directors shall be paid such remuneration by way of fees for
their services as is defined in each of the Directors' letters of
appointment. Under the terms of their appointments as non-executive
Directors of the Company, the Directors (other than Sachin Patel
who has waived his entitlement to an annual fee) are entitled to
the following annual fees:
Annual fee Notes
GBP
--------------------- ----------- ----------------------------------
Frederic Hervouet 40,000 Chairman of the Risk
Committee
Jonathan Bridel 40,000 Chairman of the Audit
Committee
Richard Boléat 50,000 Chairman of the Board
and Chairman of the Remuneration
and Nominations Committee
Richard Burwood* 30,000 Chairman of the Management
Engagement Committee
Sachin Patel - Waived annual Director's
fee
--------------------- ----------- ----------------------------------
160,000
--------------------- ----------- ----------------------------------
*Richard Burwood resigned from the boards of Tallis Lending
Designated Activity Company and Basinghall Lending Designated
Activity Company on 13 July 2020, Lambeth Designated Activity
Company on 15 September 2020 and Queenhithe Lending Designated
Activity Company on 3 December 2020 and is no longer entitled to
receive GBP5,000 per annum for each of these entities.
The Directors are not entitled to any other fixed or variable
remuneration.
No Director has a service contract with the Company, nor are any
such contracts proposed. The retirement, disqualification and
removal provisions relating to the Directors (in their capacity as
Directors) are set out in their letters of appointment.
No annual bonus will be paid to any Director and the Company
does not operate a long term incentive plan.
The Directors are entitled to be repaid by the Company all
properly incurred out-of-pocket expenses reasonably incurred in the
execution of their duties.
In setting the level of each non-executive Director's fees, the
Company has had regard to: the time commitments expected, the level
of skill and experience of each Director, the current market, the
fee levels of companies of similar size and complexity.
On termination of their appointment, Directors shall only be
entitled to such fees as may have accrued to the date of
termination, together with reimbursement in the normal way of any
expenses properly incurred prior to that date. If the Board
considers it appropriate to appoint a new director, the new
director remuneration will comply with the current policy.
Directors' remuneration and Share interests
The total remuneration of the Directors for the year ended 31
March 2021 was as follows:
31 March 31 March
2021 2020
GBP GBP
--------------------- --------- ---------
Frederic Hervouet 40,000 40,000
Jonathan Bridel 40,000 40,000
Richard Boléat 50,000 50,000
Richard Burwood 37,257 46,958
167,257 176,958
--------------------- --------- ---------
Richard Burwood was also a Director of Basinghall, Tallis,
Lambeth and Queenhithe until resigning as a director of each entity
during the year. The total remuneration to the Directors disclosed
in the above table excludes GBP10 (2020: GBP4,240) representing
Directors' expenses charged to the Company, Basinghall, Tallis and
Queenhithe. There were no other items in the nature of
remuneration, pension entitlements or incentive scheme arrangements
which were paid or accrued to the Directors during this year.
As at 31 March 2021 Richard Boléat had a share interest in the
Company, in the form of 13,554 (2020: 4,448) Ordinary shares,
representing 0.0047% (2020: 0.0015%) interest in voting rights.
Jonathan Bridel had a share interest in the Company, in the form of
65,552 (2020: 4,448) Ordinary shares, representing 0.0225% (2020:
0.0015%) interest in voting rights, and Richard Burwood had a share
interest in the Company, in the form of 24,784 (2020: 4,448)
Ordinary shares, representing 0.0085% (2020: 0.0015%) interest in
voting rights. Frederic Hervouet had a share interest in the
Company in the form of 92,041 (2020: 95,176) Ordinary shares,
representing 0.0316% in the voting rights as at 31 March 2021
(2020: 0.0327%).
During the year no remuneration was received by any Director in
a form other than cash. Furthermore, no payments were made for loss
of office, other benefits or other compensation for extra services
to any Director or former Director of the Company.
The Company has no employees other than its Directors who are
all non-executive. When periodically considering the level of fees,
the Remuneration and Nominations Committee evaluates the
contribution and responsibilities of each Director and the time
spent on the Company's affairs. Following this evaluation, the
Committee will determine whether the fees as set out in the
Remuneration Policy continue to be appropriate. Although the
Company has not to date consulted shareholders on remuneration
matters, it has reviewed the remuneration of Directors of other
investment companies of similar size and complexity and to the
limits set out in the Company's Articles of Incorporation. The
Company welcomes any views the shareholders may have on its
remuneration policy.
Richard Boléat
Chairman of the Remuneration and Nominations Committee
26 July 2021
STATEMENT OF DIRECTORS' RESPONSIBILITIES
IN RESPECT OF THE FINANCIAL STATEMENTS
The Directors are responsible for preparing the Directors'
Report and the consolidated financial statements in accordance with
applicable law and regulations.
The Companies (Guernsey) Law, 2008 (as amended) requires the
Directors to prepare financial statements for each financial year
and under that law they have elected to prepare the consolidated
financial statements in accordance with IFRS as issued by the
International Accounting Standards Board ("IASB").
The consolidated financial statements are required by law to
give a true and fair view of the state of affairs of the Group and
of the profit or loss of the Group for that year.
In preparing these consolidated financial statements, the
Directors are required to:
-- Select suitable accounting policies and then apply them consistently;
-- Make judgements and estimates that are reasonable and prudent;
-- State whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the consolidated financial statements; and
-- Prepare the consolidated financial statements on the going
concern basis unless it is inappropriate to presume that the Group
will continue in business.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Group and to enable them to ensure that
the consolidated financial statements comply with The Companies
(Guernsey) Law, 2008 (as amended). They have general responsibility
for taking such steps as are reasonably open to them to safeguard
the assets of the Group and to prevent and detect fraud and other
irregularities.
The Directors confirm that they have complied with the above
requirements in preparing the consolidated financial statements and
that to the best of their knowledge and belief:
-- This annual report includes a fair review of the development
and performance of the business and the position of the Group
together with a description of the principal risks and
uncertainties that the Group faces;
-- The consolidated financial statements, prepared in accordance
with IFRS issued by the IASB and interpretations issued by the IFRS
Interpretations Committee, give a true and fair view of the assets,
liabilities, financial position and results of the Group; and
-- The annual report and consolidated financial statements,
taken as a whole, provide the information necessary to assess the
Group's position and performance, business model and strategy and
is fair, balanced and understandable.
Richard Boléat Jonathan Bridel
Chairman Chairman of the Audit Committee
26 July 2021 26 July 2021
Independent auditor's report to the members of SME Credit
Realisation Fund Limited
Report on the audit of the consolidated financial statements
Our opinion
In our opinion, the financial statements give a true and fair
view of the financial position of SME Credit Realisation Fund
Limited (the "company") and its subsidiaries (together "the group")
as at 31 March 2021, and of their consolidated financial
performance and their consolidated cash flows for the year then
ended in accordance with International Financial Reporting
Standards and have been properly prepared in accordance with the
requirements of The Companies (Guernsey) Law, 2008.
What we have audited
The group's consolidated financial statements comprise:
-- the consolidated statement of financial position as at 31 March 2021;
-- the consolidated statement of comprehensive income for the year then ended;
-- the consolidated statement of changes in shareholders' equity for the year then ended;
-- the consolidated statement of cash flows for the year then ended; and
-- the notes to the consolidated financial statements, which
include significant accounting policies and other explanatory
information.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing ("ISAs"). Our responsibilities under those
standards are further described in the Auditor's responsibilities
for the audit of the consolidated financial statements section of
our report.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the group in accordance with the ethical
requirements that are relevant to our audit of the consolidated
financial statements of the group, as required by the Crown
Dependencies' Audit Rules and Guidance. We have fulfilled our other
ethical responsibilities in accordance with these requirements.
Our audit approach
Our audit of the group for the year ended 31 March 2021 was
planned and executed having considered the key activities of the
group during the year.
At the Extraordinary General Meeting on 11 June 2019 the
shareholders of the company voted to amend the company's investment
objective and policy to implement a managed wind-down of the
company by means of natural amortisation of the company's
investments in loans advanced as well as potential, opportunistic
portfolio sales. Due to the change in the business model, the loans
advanced previously measured at amortised cost have been
reclassified to fair value through other comprehensive income in
the consolidated financial statements.
Although there was a sale of a pool of UK non-performing loans
in the period, the group continues to hold loans advanced as at 31
March 2021. Our assessment is therefore that the primary operations
of the group remained largely unchanged from the prior year up
until 31 March 2021, other than the change in basis of measurement
for the loans advanced.
Overview
Audit scope
* The company is based in Guernsey, with subsidiaries
located in Ireland, and engages Funding Circle Ltd
(the "Portfolio Administrator") to administer its
loan portfolio. The consolidated financial statements
are a consolidation of the company and all its
subsidiaries.
* We conducted our audit of the consolidated financial
statements from using information provided by Sanne
Group (Guernsey) Limited (the "Administrator"), to
whom the board of directors has delegated the
provision of certain functions. We also had
significant interaction with the Portfolio
Administrator in completing aspects of our overall
audit work.
* We conducted our audit work in Guernsey and we
tailored the scope of our audit, taking into account
the types of investments within the group, the
involvement of the third parties referred to above,
the accounting processes and controls, and the
industry in which the group operates.
------------------------------------------------------------------
Key audit matters
* Valuation of loans advanced
* Valuation of the financial asset at fair value
through profit or loss (the EIB transaction)
* Management's consideration of the impact of COVID-19
------------------------------------------------------------------
Materiality
* Overall group materiality: GBP 3.0million (2020: GBP
5.2million) based on 2.5% of consolidated net assets
(2020: 2.25% of consolidated net assets).
* Performance materiality: GBP 2.2million (group).
------------------------------------------------------------------
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the consolidated
financial statements. In particular, we considered where the
directors made subjective judgements; for example, in respect of
significant accounting estimates that involved making assumptions
and considering future events that are inherently uncertain. As in
all of our audits, we also addressed the risk of management
override of internal controls, including among other matters,
consideration of whether there was evidence of bias that
represented a risk of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the
consolidated financial statements of the current period. These
matters, and any comments we make on the results of our procedures
thereon, were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters.
This is not a complete list of all risks identified by our
audit.
Key audit matter How our audit addressed the
key audit matter
Valuation of loans advanced We understood and assessed the
Refer to Note 2 to the consolidated methodology and assumptions
financial statements, Note 3 applied in determining the fair
to the consolidated financial value of loans advanced and
statements, Note 4 to the consolidated related expected credit losses,
financial statements and the by reference to accounting standards
Audit Committee Report. and industry practice.
Loans advanced are recorded We obtained an understanding
at fair value through other of the design of the fair value
comprehensive income ("FVOCI") models developed by management's
in the Consolidated Statement experts and assessed whether
of Financial Position and amounted the approach is in accordance
to GBP83 million as at 31 March with recognised industry methodology.
2021. We understood and evaluated
They represent the largest balance the internal controls relating
in the consolidated statement to the reconciliation, accounting
of financial position. Furthermore, and reporting of loans advanced.
the FVOCI basis of measurement Our procedures related to the
under IFRS 9 mandates that the data used in the determination
directors evaluate the expected of the fair value of loans included:
credit losses on the loan portfolio * testing the integrity of the data used in the fair
and account for them through value and expected credit loss models and its
the profit and loss, with movements completeness and accuracy;
on fair value going through
the other comprehensive income.
The 31 March 2021 year end is * discussing the logic of the fair value models to
the first reporting period subject understand the application of discounted cash flow
to audit where this revised methodology;
measurement basis is being applied.
The valuation of loans advanced,
and related expected credit * assessing the accuracy of forecasting by comparing
losses are subject to significant the historical forecast cash flows in the valuation
estimates and judgements applied models to the actual figures, as well as considering
by the directors such that changes expected credit losses and default history compared
to key inputs to the estimates to previous assumptions; and
and judgements made can result
in material changes to their
valuation. * testing the inputs in the loan models, including
interest rates and loan maturity, and agreeing to the
legal loan documentation on a sample basis.
With the assistance of PwC valuation
experts, we assessed whether
the valuation approach used
by management's expert is in
accordance with recognised industry
methodology and recalculated
the net present value of the
loan portfolios by applying
the assumptions used by management's
expert in our own valuation
model.
We then analysed the performance
reports of the loan portfolio
to better understand the performance
of the underlying loans to identify
and consider the key assumptions
used to determine the fair value
of the loans and the related
expected credit loss. Our testing
included the following:
* reviewed and challenged, as appropriate,
reasonableness of macroeconomic assumptions,
selection of economic scenarios, prepayment rates,
probabilities of default rates, loss given default,
exposure at default, recovery rates and discount
margins applied in the various models by benchmarking
these to independent market data and knowledge;
* assessed key assumptions used, such as those relating
to when a significant increase in credit risk has
occurred; and
* reviewed and analysed macroeconomic scenarios
developed by management specifically to address the
impact of the COVID-19 pandemic, and assessed whether
they are consistent with the loan portfolio modelling
and evaluated multipliers applied to individual loan
probability of default rates such that overall gross
losses for the portfolio are in line with portfolio
model expectations.
We concluded that the recording
of loans advanced at fair value
through other comprehensive
income was consistent with the
accounting policies and that
the models and assumptions used
to calculate the expected credit
loss provision (recognised in
profit or loss) and the movement
in fair value (recognised in
other comprehensive income)
was supported by appropriate
evidence.
------------------------------------------------------------------------
Valuation of the financial asset
held at fair value through profit With the assistance of PwC valuation
or loss (the EIB transaction) experts, we understood and evaluated
the valuation methodology applied,
Refer to Note 2 to the consolidated by reference to IFRS 9 and industry
financial statements, Note 3 practice, and tested the techniques
to the consolidated financial used in determining the valuation
statements, Note 5 to the consolidated of the EIB transaction. Our
financial statements and the testing included:
Audit Committee Report. * obtaining and understanding the legal agreements
entered by the group for the EIB transaction;
The valuation of the financial understanding the contractual terms outlined in the
asset held at fair value through Cash Management agreement in relation to the priority
profit or loss (the "EIB transaction" of payments between the senior loan note and the
or "Class B Note"), in the Consolidated Class B Note;
Statement of Financial Position
is GBP5.1m as at 31 March 2021.
* reviewing the quarterly investor reports to
The fair value of the EIB transaction understand the performance of the underlying loan
is determined by considering portfolio;
the fair value of the underlying
loan portfolio and the senior
loan note in the structured * reviewing management's expert's cash flow forecasting
finance transaction, as well model of the expected cashflows from the underlying
as any adjustments for other loan portfolio by:
material assets and liabilities.
The EIB transaction is classified * performing detailed testing over the loan models used
as a level 3 instrument as its by management's expert to value the underlying loan
valuation is based on a discounted portfolio at fair value, with assistance from PwC
cash flow model incorporating valuation experts;
a range of unobservable inputs,
such as estimated cash flows
which are dependent on the performance * challenging the reasonableness and performing
of the underlying portfolio sensitivity analyses over the key inputs and
of loans and an appropriate assumptions including future default rates and
discount rate. prepayment rates, and the timings of forecast cash
flows;
As such, the valuation of the
EIB transaction is judgmental,
increasing the risk of material * checking the inputs in the loan model, including
misstatement in relation to interest rates and loan maturity, and agreeing to the
the overall consolidated financial legal loan documentation on a sample basis; and
statements.
* reviewing and analysing the methodology used to
determine the expected credit losses against the
requirements of IFRS 9.
* reviewing the split of the expected cashflows from
the underlying loan portfolio between the senior loan
note, Class B Note and allocation of fees;
* obtaining an independent confirmation of the
outstanding principal and interest attributable to
the senior loan note and recalculating the portion
attributable to the Class B Note;
* assessing the appropriateness of the discount rate
applied to the future expected cash flows
attributable to the Class B Note and performing
sensitivity analysis of the fair value to movements
in the discount rate; and
* assessing the appropriateness of the disclosures made
by management in the consolidated financial
statements.
We concluded that the recording
of the EIB transaction at fair
value through profit or loss
was consistent with the accounting
policies and that the models
and assumptions used to calculate
the fair value gain (recognised
in profit or loss) were supported
by appropriate evidence.
------------------------------------------------------------------------
Management's consideration of In assessing management's consideration
the impact of COVID-19 of the impact of COVID-19, we
have undertaken the following
Management and the directors audit procedures:
have considered the impact of * We obtained management's updated assessment and
the events that have been caused conclusions with respect to the going concern status
by the pandemic, COVID-19, on and ongoing viability of the group as at 31 March
the current and future operations 2021. We challenged management and the directors on
of the group (Note 2). The extent the key assumptions supporting these assessments.
of the negative impact of the
pandemic on future performance
is unclear and measurement of * We evaluated the critical estimates and judgements
the impacts as they relate to underpinning the fair valuation of the loans advanced
the consolidated financial statements and the EIB transaction and our conclusions are set
entails a significant degree out in our Key Audit Matters above.
of estimation uncertainty.
In doing so, management have
made estimates and judgements * We considered the appropriateness of the disclosures
that are critical to the outcomes made by management and the directors in respect to
of these considerations with the impact of COVID-19 on the current and future
particular focus on the valuation operations of the group, explaining the significant
of loan advanced and the group's estimation uncertainty in relation to the evaluation
ability to continue as a going of the recognised expected credit losses, the
concern for a period of at least valuation of the loans advanced and the EIB
12 months from the date of the transaction.
consolidated financial statements.
As a result of the impact of
COVID-19 on the wider financial * We considered whether changes to working practices
markets we have determined management's brought about by COVID-19 had any adverse impacts on
consideration of the impact the effectiveness of the group's operations and the
of COVID-19 (including their business processes and IT controls.
associated estimates and judgements)
to be a key audit matter.
Based on our procedures and
the information available at
the time of the directors' approval
of the consolidated financial
statements we have not identified
any matters to report with respect
to both management's and the
directors' consideration of
the impact of COVID-19 on the
current and future operations
of the group, albeit acknowledging
that the situation continues
to evolve.
------------------------------------------------------------------------
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the consolidated
financial statements as a whole, taking into account the structure
of the group, the accounting processes and controls, and the
industry in which the group operates.
The company is based in Guernsey with four underlying
subsidiaries located in Ireland. The consolidated financial
statements are a consolidation of the company and all underlying
subsidiaries.
Scoping was performed at the group level, irrespective of
whether the underlying transactions took place within the company
or within the subsidiaries. The group audit was led, directed and
controlled by PricewaterhouseCoopers CI LLP and audit work for
material items within the consolidated financial statements was
performed in Guernsey by PricewaterhouseCoopers CI LLP. All
subsidiaries and the parent that make up the group were in scope
for our audit procedures over the consolidated financial
statements.
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating
the effect of misstatements, both individually and in aggregate on
the consolidated financial statements as a whole.
Based on our professional judgement, we determined materiality
for the consolidated financial statements as a whole as
follows:
Overall group materiality GBP 3.0million (2020: GBP 5.2million).
How we determined 2.5% of consolidated net assets (2020:
it 2.25% of consolidated net assets)
--------------------------------------------------
Rationale for benchmark We believe that consolidated net assets
applied are the most appropriate benchmark because
this is the key metric of interest to investors.
It is also a generally accepted measure
used for companies in this industry.
We have increased the overall materiality
percentage to 2.5% of consolidated net
assets from 2.25% in the previous year
as due to the change of measurement basis
of loans advanced from amortised cost to
fair value through other comprehensive
income using discounted cash flow modelling,
the subjectivity of the loan portfolio
valuation has increased. The loan portfolio
consists of unquoted, unsecured SME loans
with few comparable market data points,
and the discounted cash flow modelling
used to determine fair value involves estimation
of inputs that is substantially more judgmental
than effective interest rate modelling
utilised previously to calculate amortised
cost.
--------------------------------------------------
In determining the performance materiality, we considered a
number of factors - the history of misstatements, risk assessment
and aggregation risk and the effectiveness of controls - and
concluded that an amount at the upper end of our normal range was
appropriate.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP 149,000 (2020:
GBP 258,000) as well as misstatements below that amount that, in
our view, warranted reporting for qualitative reasons.
Reporting on other information
The directors are responsible for the other information. The
other information comprises all the information included in the
Annual Report and Audited Consolidated Financial Statements (the
"Annual Report") but does not include the consolidated financial
statements and our auditor's report thereon.
Our opinion on the consolidated financial statements does not
cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is
materially inconsistent with the consolidated financial statements
or our knowledge obtained in the audit, or otherwise appears to be
materially misstated. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report based on these responsibilities.
Responsibilities for the consolidated financial statements and
the audit
Responsibilities of the directors for the consolidated financial
statements
As explained more fully in the Statement of Directors'
Responsibilities, the directors are responsible for the preparation
of the consolidated financial statements that give a true and fair
view in accordance with international Financial Reporting
Standards, the requirements of Guernsey law and for such internal
control as the directors determine is necessary to enable the
preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the
directors are responsible for assessing the group's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but
to do so.
Auditor's responsibilities for the audit of the consolidated
financial statements
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditor's report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated
financial statements.
Our audit testing might include testing complete populations of
certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited
number of items for testing, rather than testing complete
populations. We will often seek to target particular items for
testing based on their size or risk characteristics. In other
cases, we will use audit sampling to enable us to draw a conclusion
about the population from which the sample is selected.
As part of an audit in accordance with ISAs, we exercise
professional judgement and maintain professional scepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide
a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal
control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the group's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by the directors.
-- Conclude on the appropriateness of the directors' use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the group's
ability to continue as a going concern over a period of at least
twelve months from the date of approval of the consolidated
financial statements. If we conclude that a material uncertainty
exists, we are required to draw attention in our auditor's report
to the related disclosures in the consolidated financial statements
or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date
of our auditor's report. However, future events or conditions may
cause the group to cease to continue as a going concern.
-- Evaluate the overall presentation, structure and content of
the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair
presentation.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the group to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for
our audit opinion.
We communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide those charged with governance with a statement
that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with those charged with
governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements
of the current period and are therefore the key audit matters. We
describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in
extremely rare circumstances, we determine that a matter should not
be communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
Use of this report
This report, including the opinions, has been prepared for and
only for the members as a body in accordance with
Section 262 of The Companies (Guernsey) Law, 2008 and for no
other purpose. We do not, in giving these opinions, 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.
Report on other legal and regulatory requirements
Company Law exception reporting
Under The Companies (Guernsey) Law, 2008 we are required to
report to you if, in our opinion:
-- we have not received all the information and explanations we require for our audit;
-- proper accounting records have not been kept; or
-- the consolidated financial statements are not in agreement with the accounting records.
We have no exceptions to report arising from this
responsibility.
Corporate governance statement
The Listing Rules require us to review the directors' statements
in relation to going concern, longer-term viability and that part
of the corporate governance statement relating to the company's
compliance with the provisions of the UK Corporate Governance Code
specified for our review. Our additional responsibilities with
respect to the corporate governance statement as other information
are described in the Reporting on other information section of this
report.
The company has reported compliance against the 2019 AIC Code of
Corporate Governance (the "Code") which has been endorsed by the UK
Financial Reporting Council as being consistent with the UK
Corporate Governance Code for the purposes of meeting the company's
obligations, as an investment company, under the Listing Rules of
the FCA.
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the corporate
governance statement is materially consistent with the consolidated
financial statements and our knowledge obtained during the audit,
and we have nothing material to add or draw attention to in
relation to:
-- The directors' confirmation that they have carried out a
robust assessment of the emerging and principal risks;
-- The disclosures in the Annual Report that describe those
principal risks, what procedures are in place to identify emerging
risks and an explanation of how these are being managed or
mitigated;
-- The directors' statement in the consolidated financial
statements about whether they considered it appropriate to adopt
the going concern basis of accounting in preparing them, and their
identification of any material uncertainties to the group's ability
to continue to do so over a period of at least twelve months from
the date of approval of the consolidated financial statements;
-- The directors' explanation as to their assessment of the
group's prospects, the period this assessment covers and why the
period is appropriate; and
-- The directors' statement as to whether they have a reasonable
expectation that the company will be able to continue in operation
and meet its liabilities as they fall due over the period of its
assessment, including any related disclosures drawing attention to
any necessary qualifications or assumptions.
Our review of the directors' statement regarding the longer-term
viability of the group was substantially less in scope than an
audit and only consisted of making inquiries and considering the
directors' process supporting their statements; checking that the
statements are in alignment with the relevant provisions of the
Code and considering whether the statement is consistent with the
consolidated financial statements and our knowledge and
understanding of the group and its environment obtained in the
course of the audit.
In addition, based on the work undertaken as part of our audit,
we have concluded that each of the following elements of the
corporate governance statement is materially consistent with the
consolidated financial statements and our knowledge obtained during
the audit:
-- The directors' statement that they consider the Annual
Report, taken as a whole, is fair, balanced and understandable, and
provides the information necessary for the members to assess the
group's position, performance, business model and strategy;
-- The section of the Annual Report that describes the review of
effectiveness of risk management and internal control systems;
and
-- The section describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to
report when the directors' statement relating to the company's
compliance with the Code does not properly disclose a departure
from a relevant provision of the Code specified under the Listing
Rules for review by the auditors.
Tony Corbin
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
26 July 2021
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARED 31 MARCH 2021
2021 2020
Notes GBP GBP
----------------------------------- ------ ------------ ------------
Operating income
Interest income on loans
advanced 4 14,715,117 28,861,837
Net gain on financial assets
at fair value through profit
or loss 5 5,141,217 -
Net realised and unrealised
gain on foreign exchange 17 - 925,960
Bank interest income 21,409 91,170
Gain on sale of non-performing 605,402 -
loans
------------------------------------ ------ ------------ ------------
Total operating income 20,483,145 29,878,967
------------------------------------ ------ ------------ ------------
Operating expenditure
Net loss on financial assets
at fair value through profit
or loss 5 - 6,195,281
Impairment of loans 4 11,936,141 22,454,031
Net realised and unrealised
loss on foreign exchange 17 2,742,932 -
Loan servicing fees 16 1,319,418 2,517,245
Company administration and
secretarial fees 16 314,229 417,930
Directors' remuneration and
expenses 15 167,267 181,198
Audit, audit-related and
non-audit related fees 16 260,546 284,756
Corporate broker services 50,000 40,000
Corporate services fees 16 184,969 284,691
Regulatory fees 29,530 191,498
Advisory services fees - (10,120)
Loan interest expense 10 63,600 1,030,887
Legal and professional fees 304,548 505,199
Commitment fee 10 187,500 837,500
Other operating expenses 501,937 194,164
------------------------------------ ------ ------------ ------------
Total operating expenditure 18,062,617 35,124,260
------------------------------------ ------ ------------ ------------
Operating income/(loss) for
the year before taxation 2,420,528 (5,245,293)
Taxation for the year 12 (348,809) (1,000)
Operating income/(loss) after
taxation for the year 2,071,719 (5,246,293)
------------------------------------ ------ ------------ ------------
Other comprehensive income:
Items that may be reclassified
to profit or loss
Gain on movement in fair
value of loans advanced 4 2,507,892 -
------------------------------------ ------ ------------ ------------
Total comprehensive income/(loss)
for the year 4,579,611 (5,246,293)
------------------------------------ ------ ------------ ------------
Other comprehensive income
The other comprehensive income recognised above relates to the
unrealised gain on the movement in fair valuation of the Group's
portfolio of loans advanced.
There were no other items of other comprehensive income in the
current or prior period.
The accompanying notes form part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OFINANCIAL POSITION
AS AT 31 MARCH 2021
31 March 2021 31 March 2020
Notes GBP GBP
---------------------------------------- ------ -------------- --------------
ASSETS
Cash and cash equivalents 7 30,784,718 46,602,238
Other receivables and prepayments 9,870 48,533
Fair value of currency derivatives 8 768,964 -
Financial asset at fair value through
profit or loss 5 5,141,217 -
Loans advanced 4 83,355,445 200,094,130
TOTAL ASSETS 120,060,214 246,744,901
---------------------------------------- ------ -------------- --------------
EQUITY AND LIABILITIES
CAPITAL AND RESERVES
Share capital 11 157,513,148 263,017,723
Retained deficit (40,782,264) (33,007,021)
Other reserves 2,507,892 -
---------------------------------------- ------ -------------- --------------
TOTAL SHAREHOLDERS' EQUITY 119,238,776 230,010,702
---------------------------------------- ------ -------------- --------------
LIABILITIES
Fair value of currency derivatives 8 - 3,400,699
Loans payable 10 - 11,531,076
Accrued expenses and other liabilities 9 821,438 1,802,424
---------------------------------------- ------ -------------- --------------
TOTAL LIABILITIES 821,438 16,734,199
---------------------------------------- ------ -------------- --------------
TOTAL EQUITY AND LIABILITIES 120,060,214 246,744,901
---------------------------------------- ------ -------------- --------------
NAV per share outstanding 88.87p 89.05p
---------------------------------------- ------ -------------- --------------
The consolidated financial statements were approved and
authorised for issue by the Board of Directors on 26 July 2021 and
were signed on its behalf by:
Richard Boléat Jonathan Bridel
Chairman Chairman of the Audit Committee
The accompanying notes form part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARED 31 MARCH 2021
Other reserves Retained
Share capital deficit Total
Notes GBP GBP GBP GBP
--------------------- ------ -------------- --------------------------------------- -------------- --------------
Balance at 1 April
2020 263,017,723 - (33,007,021) 230,010,702
Operating profit
after
taxation - - 2,071,719 2,071,719
Other comprehensive
income - 2,507,892 - 2,507,892
Transactions with
owners
in their capacity as
owners:
Compulsory
redemption
of ordinary shares 11 (105,499,718) - - (105,499,718)
Share repurchases 11 (4,857) - - (4,857)
Dividends declared 14 - - (9,846,962) (9,846,962)
Balance at 31 March
2021 157,513,148 2,507,892 (40,782,264) 119,238,776
--------------------- ------ -------------- --------------------------------------- -------------- --------------
Balance at 1 April
2019 320,944,247 - (12,596,119) 308,348,128
Total comprehensive
income - - (5,246,293) (5,246,293)
Transactions with
owners in their
capacity as owners:
Compulsory redemption
of ordinary shares 11 (30,499,833) - - (30,499,833)
Share repurchases 11 (27,426,691) - - (27,426,691)
Dividends declared 14 - - (15,164,609) (15,164,609)
Balance at 31 March
2020 263,017,723 - (33,007,021) 230,010,702
----------------------- ---- ------------- ------------- -------------
The accompanying notes form part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARED 31 MARCH 2021
2021 2020
Notes GBP GBP
--------------------------------------------- ------ -------------- --------------
Operating activities
Operating income/(loss) for the year
before taxation 2,420,528 (5,245,293)
Adjustments for:
Foreign exchange loss/(gain) 17 5,295,103 (5,388,447)
Interest income on loans advanced 4 (14,715,117) (28,861,837)
Net (gain)/loss on financial assets
at fair value through profit or loss 5, 17 (5,141,217) 6,195,281
Impairment of loans 4 11,936,141 22,454,031
Fair value movement of currency derivatives 17 (4,169,664) 4,392,813
--------------------------------------------- ------ -------------- --------------
Operating cash flows before movements
in working capital (4,374,226) (6,453,452)
Loans advanced - (9,147,121)
Principal and interest collections
on loans advanced 4 118,670,288 160,603,434
Principal and interest collections
on financial asset at fair value
through profit or loss 5 - 6,153,897
Decrease in other receivables and
prepayments 38,663 542,115
(Decrease)/increase in accrued expenses
and other liabilities (1,329,795) 546,372
Net cash generated from operating
activities 113,004,930 152,245,245
--------------------------------------------- ------ -------------- --------------
Financing activities
Loans issued - 2,636,619
Loans repayment paid 10 (11,531,076) (64,757,163)
Dividends paid 14 (9,846,962) (15,164,609)
Repurchase of shares 11 (4,857) (27,426,691)
Compulsory redemption of shares 11 (105,499,718) (30,499,833)
--------------------------------------------- ------ -------------- --------------
Net cash used in financing activities (126,882,613) (135,211,677)
--------------------------------------------- ------ -------------- --------------
Net (decrease)/increase in cash and
cash equivalents (13,877,683) 17,033,568
Cash and cash equivalents at the
beginning of the year 46,602,238 29,408,480
Foreign exchange (gain)/loss on cash
and cash equivalents (1,939,837) 160,190
Cash and cash equivalents at the
end of the year 30,784,718 46,602,238
--------------------------------------------- ------ -------------- --------------
Reconciliation of movement in net debt
Liabilities Cash Net Debt
-------------------------------- ------------- ------------- ------------
Opening balance as at 1 April
2020 (11,539,200) 46,602,238 35,063,038
Cash movement during the year 11,539,200 (15,817,520) (4,278,320)
-------------------------------- ------------- ------------- ------------
Closing balance as at 31 March
2021 - 30,784,718 30,784,718
-------------------------------- ------------- ------------- ------------
The accompanying notes form part of these consolidated financial
statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARED 31 MARCH 2021
1. GENERAL INFORMATION
The Company is a closed-ended limited liability company
incorporated under The Companies (Guernsey) Law, 2008 (as amended)
with registration number 60680. The Company is a registered and
closed ended investment scheme in Guernsey and admitted to trading
on the London Stock Exchange's Main Market and listed on the United
Kingdom Listing Authority ("UKLA's") premium segment. The Company's
home member state for the purposes of the EU Transparency Directive
is the United Kingdom. As such, the Company is subject to
regulation and supervision by the Financial Conduct Authority,
being the financial markets supervisor in the United Kingdom. The
registered office of the Company is De Catapan House, Grange Road,
St Peter Port, Guernsey GY1 2QG.
The Company was established to provide shareholders with
sustainable and attractive levels of dividend income, primarily by
way of investment in loans originated both directly through the
Platforms operated by Funding Circle and indirectly, in each case
as detailed in the investment policy. The Company identified
Funding Circle as a leader in the growing Platform lending space
with its established infrastructure, scale of origination volumes
and expertise in accurately assessing loan applications.
On 21 May 2019, the Company published a circular and notice of
extraordinary general meeting ("EGM") which sets out details of,
and sought shareholder approval for, certain Proposals. The
Proposals involved modifying the Company's Investment Objective and
Policy to reflect a realisation strategy and amending its Articles
to include a mechanism to enable the Company to redeem shares in
the Company compulsorily so as to return cash to shareholders.
On 11 June 2019, the Proposals were approved at the EGM as
discussed in detail in the Strategic Report.
The Company publishes net asset value statements on its website
at www.smecreditrealisation.com .
2. Basis of preparation
a) Statement of compliance
The consolidated financial statements, which give a true and
fair view, have been prepared in accordance with International
Financial Reporting Standards ("IFRS") as promulgated by the
International Accounting Standards Board and are in compliance with
The Companies (Guernsey) Law, 2008 (as amended).
The Directors of the Company have elected to only prepare
consolidated financial statements for the year under Section 244 of
The Companies (Guernsey) Law 2008 (as amended).
Assets and liabilities of the Group have been presented in the
Statement of Financial Position in their order of liquidity as
permitted by International Accounting Standard 1, Presentation of
Financial Statements.
On 5 April 2019, the Company announced that following
consultation with shareholders accounting for over two thirds of
the register, the Board acknowledged their preference to cease
investment in new Credit Assets and commence a process to return
capital in an orderly and expeditious manner with the objective of
optimising returns to shareholders.
As noted above, the Company published a circular and notice of
EGM which sets out details of, and sought shareholder approval for,
certain Proposals. On 11 June 2019, the shareholders approved the
Proposals which resulted in, amongst other things, the change to
the Company's Investment Policy and Objective to achieve a managed
wind-down of the Company.
Whilst the managed wind-down of the Company was approved at the
EGM, there is no definite and final plan in relation to the timing
of the liquidation of the Company's assets and the process of
returning capital to shareholders. The Company will continue to be
considered a going concern. However, this may be required to change
through the course of the managed wind-down as the natural
amortisation of the Company's investments in Credit Assets takes
place and potentially opportunistic portfolio sales are pursued
.
The Company is not in active discussion with any parties in
relation to the disposal of its loan portfolios in whole or in
part, and the reducing size of these portfolios through natural
loan amortisation suggests that any such transaction, at least in
relation to performing assets, is now unlikely. That said, the
Company will continue to explore potential disposals where pricing
levels are attractive.
As a result of the Company's managed wind-down and exploration
of portfolio sales, for the purposes of accounting, the Company's
business model was deemed to have changed from hold to collect to
hold to collect and sell during the prior financial year. The
Company is therefore required to report under fair value accounting
for the valuation of Credit Assets from 1 April 2020. This change
in methodology is discussed further in note 17.
New Accounting Standards, amendments to existing Accounting
Standards and/or interpretations of existing Accounting Standards
(separately or together, "New Accounting Requirements") adopted in
the current year
In the Directors' opinion, all non-mandatory New Accounting
Requirements are either not yet permitted to be adopted, or would
have no material effect on the reported performance, financial
position or disclosures of the Group and consequently have neither
been adopted nor listed.
b) Basis of measurement and consolidation
These consolidated financial statements have been prepared on a
historical cost basis, as modified by the valuation of derivative
financial instruments and the Company's investment in the EIB
transaction at fair value through profit or loss and for the period
beginning 1 April 2020, the loans advanced at fair value through
other comprehensive income. The methods used to measure fair value
are further disclosed in note 17.
The Company owns 100% of the Profit Participating Notes issued
by Basinghall and Tallis. Basinghall owns all the Profit
Participating Notes issued by Queenhithe and Lambeth. Basinghall,
Tallis, Queenhithe and Lambeth are all companies incorporated in
the Republic of Ireland.
The Directors believe that the Company's ownership of the Profit
Participating Notes issued by Basinghall and Tallis constitute
control as it exposes the Company to variability of returns from
its involvement with the financial and operating activities of
these entities. Lambeth and Queenhithe both transferred their
portfolios of Credit Assets to Basinghall during the year for
amounts equal to the outstanding amount of principal and accrued
interest, with EUR 1 principal amount outstanding on the class B
Notes issued. The liquidation process was still ongoing for both
entities as at 31 March 2021 and any residual cash remaining after
the settlement of all outstanding liabilities for each entity is
payable to Basinghall. Therefore, these financial statements have
been prepared on a consolidated basis.
Intercompany transactions including intercompany gains and
losses on currency translation between the Company and its
subsidiaries were eliminated in the consolidation process.
c) Functional and presentation currency
These consolidated financial statements are presented in Pound
Sterling, which is the functional currency of each of the entities
in the Group and the presentation currency of the Group. In the
Directors' opinion, Pound Sterling is the functional currency of
the Company, Basinghall, Lambeth and Queenhithe because
substantially all their financing and operating activities are
carried out in Pound Sterling. The Directors believe that the
functional currency of Tallis is Pound Sterling as its operations
are carried out as an extension of the Company's operations. The
Group hedges the projected cash flows from its US dollar and Euro
investments such that its principal exposure is to Pound
Sterling.
d) Use of estimates and judgements
The preparation of financial statements in accordance with IFRS
requires the Board to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts of
assets and liabilities and income and expenses. The estimates and
associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making the
judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates.
The estimates and underlying assumptions are reviewed on a
quarterly basis by the Board. Revisions to accounting estimates are
recognised in the year in which the estimate is revised if the
revision affects only that year, or in the year of the revision and
future years if the revision affects both current and future
years.
In particular, information about significant areas of estimation
uncertainty and critical judgements in applying accounting policies
that have the most significant effect on the amounts recognised in
the consolidated financial statements are included in the
following:
Judgements
-- Note 2(b) - The assumption that the Company's business model
of holding Credit Assets to collect is no longer deemed
appropriate. A s a result of the Company's managed wind-down and
potential portfolio disposals, the Company's business model has
changed from hold to collect to hold to collect and sell from 1
April 2020.
-- Note 2(b) - The accounting treatment of Lambeth and
Queenhithe as consolidated subsidiary's based on the assessment
that the Company still maintains an element of control following
the transfer of the entities loan portfolios to Basinghall and
still maintains the right to variability of returns from its
involvement with the financial and operating activities of Lambeth
and indirectly Queenhithe throughout the process of
liquidation.
-- Note 2(c) - Tallis has its primary assets and liabilities
denominated in Euro. The Directors assessed whether the functional
currency is the Euro or Pound Sterling. The subsidiary's operations
are considered to be an extension of the operations of the Company
and therefore the Directors believe that the appropriate functional
currency for the subsidiary is Pound Sterling, the functional
currency of the Company.
Estimates
-- Note 2(b) - The Company has reported under fair value
accounting for the valuation of Credit Assets from 1 April 2020. As
of 31 March 2021 therefore, these portfolios are recognised at fair
value through other comprehensive income and have been estimated by
discounting future cash flows expected to be received from the
Credit Assets (note 17).
-- Note 3(b) - The estimation of impairment of loans require
judgement based on the model set out above. During the financial
year, the downside scenario was replaced by a macroeconomic
scenario developed specifically for COVID-19 and consistent with
portfolio modelling. Additionally, multipliers are applied to
individual loan PDs such that overall gross losses for the
portfolio are anchored to portfolio model expectations.
-- Note 3(k) - The Directors assessed whether the Group had a
single operating segment based on its original business model
(origination of loans) or several operating segments based on the
jurisdictions where loans were originated. After consideration of
the financial information that the Board regularly reviews in
making economic decisions, the Board concluded that operating
segments based on jurisdiction is a more appropriate basis.
-- Note 17 - The determination of fair value of the Group's
investment in the EIB transaction requires estimation of future
cash flows and judgement on the appropriate market discount rate to
apply. The fair value of the EIB transaction has been estimated by
discounting future cash flows expected from the investment (note
17).
3. Significant accounting policies
The accounting policies set out below have been applied
consistently throughout the year and the prior year.
a) Foreign currencies
Transactions in foreign currencies are initially translated at
the foreign currency exchange rate ruling at the date of the
transaction. Monetary assets and monetary liabilities denominated
in foreign currencies are retranslated to Pound Sterling at the
foreign currency closing exchange rate ruling at the reporting
date.
None of the Group entities have a functional currency different
to presentation currency.
b) Financial instruments
i) Classification and measurement
IFRS 9 requires financial assets to be classified into the
following measurement categories: (i) those measured at fair value
through profit or loss; (ii) those measured at fair value through
other comprehensive income; and, (iii) those measured at amortised
cost. The determination is made at initial recognition. Unless the
option to designate a financial asset as measured at fair value
through profit or loss is applicable, the classification depends on
the entity's business model for managing its financial instruments
and the contractual cash flow characteristics of the
instrument.
The Group classifies its financial instruments in the following
measurement categories:
-- fair value through profit or loss; or
-- amortised cost; or
-- fair value through other comprehensive income.
The Group holds debt instruments and derivative financial
instruments. Debt instruments are those that meet the definition of
a financial liability from the issuer's perspective, such as the
Group's loans advanced, investment in the EIB structured finance
transaction and loans payable. Classification and subsequent
measurement of these debt instruments depend on:
-- the Group's business model for managing the instrument; and
-- cash flow characteristics of the instrument.
Derivative financial instruments relate to the Group's forward
foreign exchange transactions that are covered in more detail later
in this note.
Amortised cost
Financial assets that are held for collection of contractual
cash flows where those cash flows represent solely payments of
principal and interest ("SPPI"), and that are not designated at
fair value through profit or loss, are measured at amortised cost.
The carrying amount of these assets is adjusted by any expected
credit loss allowance measured as described below. Interest income
from these financial assets is included in the 'interest income on
loans advanced'.
The Group's cash and cash equivalents and other receivables are
included in this category.
Fair value through other comprehensive income
Financial assets that are held for collection of contractual
cash flows and for selling the assets, where the assets' cash flows
represent solely payments of principal and interest, and that are
not designated at fair value through profit or loss, are measured
at fair value through other comprehensive income. Movements in the
carrying amount are taken through other comprehensive income,
except for the recognition of impairment gains or losses, interest
revenue and foreign exchange gains and losses on the instrument's
amortised cost which are recognised in profit or loss.
Reclassification of loans advanced from financial asset at
amortised cost to financial asset at fair value through other
comprehensive income
For financial assets, reclassification is required between fair
value through other comprehensive income ("FVTOCI") and amortised
cost, if and only if the entity's business model objective for its
financial assets changes so its previous model assessment would no
longer apply.
If reclassification is appropriate, it must be done
prospectively from the reclassification date which is defined as
the first date of the first reporting year following the change in
business model. An entity does not restate any previously
recognised gains, losses, or interest.
The Group's loans advanced have been reclassified and now fall
within this category from 1 April 2020 due to the change in
business model during the prior financial year. This is the first
reporting year showing the loans advanced at fair value through
other comprehensive income.
The fair value of the loans advanced has been estimated by
discounting expected future cash flows from the loans advanced
using a discount rate determined by the Directors based on
appropriate market comparatives and conditions. Refer to note 17
for further information.
Disposal
On disposal of any financial asset measured at FVTOCI, any
related balance within the FVTOCI reserve is reclassified to other
gains/(losses) within profit or loss.
In the Directors' opinion, all other non-mandatory new
accounting requirements are either not yet permitted to be adopted,
or would
have no material effect on the reported performance, financial
position or disclosures of the Group and consequently have
neither
been adopted nor listed.
Fair value through profit or loss
Assets that do not meet the criteria for amortised cost or fair
value through other comprehensive income are measured at fair value
through profit or loss. A gain or loss on a debt investment that is
subsequently measured at fair value through profit or loss and is
not part of a hedging relationship is recognised in profit or loss
within 'net income on financial asset at fair value through profit
or loss'. Interest income from these financial assets is included
within the same line using the effective interest rate method.
The Group's investment in the EIB structured finance transaction
falls within this category and has been measured at fair value
through profit or loss as this investment has exposure to returns
that is affected by the profitability of the underlying SPV. The
Directors believe that the contractual cash flows are not solely
linked to payments of principal and interest consistent with a
basic lending arrangement.
ii) Impairment of financial assets
At initial recognition, an impairment allowance is required for
expected credit losses ("ECL") on financial assets measured at
amortised cost and debt instruments measured at FVOCI resulting
from possible default events within the next 12 months. When an
event occurs that increases the credit risk of the counterparty, an
allowance is required for ECL for possible defaults over the term
of the financial instrument. The change in credit risk of the
counterparty will also have an impact on the recognition of income
on the financial asset.
The model for estimating impairment losses calculates the ECL on
either a 12-month or lifetime basis depending on whether
significant increase in credit risk has occurred since initial
recognition or whether an asset is considered to be
credit-impaired.
These metrics used to calculate the 12-month and lifetime
expected credit losses are forecast for each loan for the next 12
months and to maturity, then a 12-month and lifetime expected
credit loss can be calculated. These future losses are discounted
at the Effective Interest Rate (EIR) individually for each
loan.
Probability of default scores are not updated for individual
loans post origination and thus cannot be used to indicate a
significant increase in credit risk, therefore stage 2 criteria is
based on loan payment performance. As a result, lifetime expected
credit losses are taken as an impairment for loans which have
missed a single payment within the last 6 months and are less than
91 days late.
The Group classifies that loans are 91 or more days late as
credit impaired or defaulted for which lifetime expected loss is
taken as an impairment charge. Stage 3 includes loans that have
fallen 91 or more days late as a result of forbearance measures
introduced in April 2020 as a response to COVID-19, which have not
been contractually defaulted. The treatment of defaulted loans is
the same as the Group's policy before adoption of IFRS 9 on 1 April
2018.
If, in a subsequent year, the amount of the default allowance
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised (such as an
improvement in the debtor's credit rating), the reversal of the
previously recognised default allowance is recognised in the
Consolidated Statement of Comprehensive Income.
Where a loan is not recoverable, it is written off within the
related provision for loan impairment. Subsequent recoveries of
amounts previously written off are reflected against the impairment
losses recorded in the Consolidated Statement of Comprehensive
Income.
Use of forward-looking information
Forecast Probability of Default ("PD") for loans are adjusted to
take into account the current and future macroeconomic environment.
This method was previously based on a modelled relationship with
key macroeconomic variables, with forecasts for a base case
scenario and for multiple alternative scenarios.
iii) Financial asset at fair value through profit or loss
The Group's investment in the EIB structured finance transaction
has been classified as a financial asset at fair value through
profit or loss. This investment has exposure to returns that is
affected by the profitability of the underlying SPV. This
investment is measured initially and subsequently at fair value
with changes in fair value recognised in the Consolidated Statement
of Comprehensive Income.
iv) Derivative financial instruments
The Group holds derivative financial instruments to minimise its
exposure to foreign exchange risks. Derivatives are classified as
financial assets or financial liabilities (as applicable) at fair
value through profit or loss. They are initially recognised at fair
value with attributable transaction costs recognised in the
Consolidated Statement of Comprehensive Income when incurred.
Subsequent to initial recognition, derivatives are measured at fair
value and changes therein are recognised in the Consolidated
Statement of Comprehensive Income. The fair values of derivative
transactions are measured at their market prices at the reporting
date.
v) Offsetting of financial instruments
Financial assets and financial liabilities are offset and the
net amount is reported within assets and liabilities where there is
a legally enforceable right to set-off the recognised amounts and
there is an intention to settle on a net basis, or realise the
asset and settle the liability simultaneously.
vi) Derecognition of financial instruments
Financial assets, or a portion thereof, are derecognised when
the contractual rights to receive the cash flows from the assets
have expired, or when they have been transferred and either (i) the
Group transfers substantially all the risks and rewards of
ownership, or (ii) the Group neither transfers nor retains
substantially all the risks and rewards of ownership and the Group
has not retained control.
There may be instances when the Group renegotiates or otherwise
modifies the contractual cash flows of loans to customers. When
this happens, the Group assesses whether or not the new terms are
substantially different to the original terms. If the terms are
substantially different, the Group derecognises the original
financial asset and recognises a 'new' asset initially at fair
value and recalculates a new effective interest rate for the
asset.
Financial liabilities and derivative financial instruments are
derecognised when they are extinguished or when the obligation
specified in the contract is discharged, cancelled or expired.
vii) Financial liabilities
In both the current and prior year, the Group's loans payable
and accrued expenses and other liabilities are classified as
subsequently measured at amortised cost. The Group does not hold
any financial liabilities that meet the criteria for subsequent
measurement at fair value through profit or loss.
c) Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and
highly liquid interest-bearing securities with original maturities
of three months or less.
d) Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of Ordinary shares are
recognised as a deduction from the proceeds.
Shares purchased by the Company during the year are held in
Treasury until cancelled and formally withdrawn on a quarterly
basis throughout the year.
e) Treasury shares
Treasury shares are classified as equity and are measured at
cost.
f) Earnings per share
The Company presents basic and diluted earnings per share
("EPS") data for its Ordinary shares. Basic EPS is calculated by
dividing the profit or loss attributable to Ordinary shareholders
by the weighted average number of Ordinary shares outstanding
during the year. The diluted EPS is calculated by adjusting the
profit or loss attributable to Ordinary shareholders for the
effects of all dilutive potential Ordinary shares. For further
details, see note 13.
g) Income
Income on loans held at FVTOCI (2020: amortised cost) is
recognised under the effective interest rate method, by reference
to the principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts estimated
future cash receipts through the expected life of the loan to its
net carrying amount on initial recognition.
In calculating the effective interest rate, the Group estimates
cash flows considering all contractual terms of the financial
instrument but does not consider future credit losses. The
calculation includes all fees received and paid and costs borne
that are an integral part of the effective interest rate and all
premiums or discounts above or below market rates.
Bank interest and other income receivable are accounted for on
an accrual basis.
h) Expenses and fees
Expenses are accounted for on an accrual basis and are
recognised in the Consolidated Statement of Comprehensive
Income.
i) Taxation
The Company is classified as exempt for taxation purposes under
the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 (as
amended) and as such incurs a flat fee (presently GBP1,200 per
annum). No other taxes are incurred in Guernsey.
Basinghall, Tallis, Lambeth and Queenhithe are Irish resident
companies that are subject to corporation tax in Ireland at a rate
of 25% on their profits.
The tax currently payable by Basinghall, Tallis, Lambeth and
Queenhithe is based on the taxable profit of the companies for the
year. Taxable profit differs from net profit as reported in the
Consolidated Statement of Comprehensive Income because it excludes
items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or
deductible. The Group's liability for current tax is calculated
using tax rates that have been enacted or substantively enacted at
the reporting date.
Deferred tax is the tax expected to be payable or recoverable on
temporary differences between the carrying amounts of assets and
liabilities in the consolidated financial statements and the
corresponding tax bases used in the computation of taxable profit,
and is accounted for using the liability method. Deferred tax
liabilities are recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset is
realised based on tax rates that have been enacted or substantively
enacted at the Consolidated Statement of Financial Position
date.
The carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered.
j) Dividends payable
Dividends payable on the Company's shares are recognised in the
Consolidated Statement of Changes in Shareholders' Equity when
declared by the Directors or, where applicable, when approved by
the Shareholders. The Directors consider declaration of a dividend
on a quarterly basis, having regard to various considerations,
including the financial position of the Company. The payment of any
dividend by the Company is subject to the satisfaction of a
solvency test as required by The Companies (Guernsey) Law, 2008 (as
amended).
k) Segment reporting
An operating segment is a component of the Group that engages in
business activities from which it may earn revenues and incur
expenses. The Group has three operating segments based on
jurisdiction: UK, US and CE.
4. LOANS ADVANCED
31 March 2021 31 March 2020
At FVTOCI At amortised cost
GBP GBP
------------------------------------------------------------------- -------------- -------------------
Balance at the beginning of the year 200,094,130 340,222,868
Advanced - 8,838,632
Interest income 14,715,117 28,861,837
Principal and interest collections* (118,670,288) (160,603,434)
Impairment allowance for the year (11,936,141) (22,454,031)
Foreign exchange (losses)/gains (3,960,666) 5,228,258
Gain on movement in fair value through other comprehensive income 2,507,892 -
Realised gain on sale of NPL loans 605,402 -
------------------------------------------------------------------- -------------- -------------------
Balance at the end of the year 83,355,445 200,094,130
-------------------------------------------------------------------- -------------- -------------------
*The sale of non-performing loans by Basinghall in October 2020
is included within the principal and interest collections line.
The Group predominantly made unsecured loans in previous years
and prior to the modification of the Company's investment policy
during the prior year. As at 31 March 2021, the carrying value of
loans secured by charges over properties is nil (31 March 2020:
GBP647,606).
Information about the gain recognised on the movement of the
loans at FVTOCI and information about the methods and assumptions
used in determining the fair value is provided in note 17.
Each loan has a contractual payment date for principal and
interest. The Group classifies loans that are 91 or more days late
as credit impaired or defaulted for which lifetime expected loss is
taken as an impairment charge.
The following table shows the movement in impairment allowance
during the year.
31 March 2021 31 March 2020
GBP GBP
---------------------------------------------- -------------- -------------
Impairment allowance at beginning of the
year - previously reported 59,019,908 36,565,877
Impairment allowance for the year 11,936,141 22,454,031
Sale of Non-performing loans during the year (9,751,300) -
Impairment allowance at the end of the year 61,204,749 59,019,908
---------------------------------------------- -------------- -------------
Impairment allowance has increased for the year due to an
increased number of delinquencies across the Group's portfolio of
loans advanced. Impairment losses increased by GBP11,936,141 during
the year to GBP61,204,749.
The table below shows an analysis of the principal and interest
of the loans along with the amount recognised as an impairment
allowance analysed by the stages described within IFRS 9:
31 March 2021
-----------------------------
Principal Impairment
and interest allowance
GBP GBP
---------------------------------------------------- --------------- ------------
Stage 1 - 1 to 30 days late and no missed payments 62,728,086.40 5,747,801
Stage 2 - 31+ days late/missed a payment in
last 6 months 23,195,119 1,815,713
Stage 3 - Legally defaulted & 90+ days late 55,523,697 53,641,235
141,446,902 61,204,749
---------------------------------------------------- --------------- ------------
Stage 3 includes loans that have fallen 91 or more days late as
a result of forbearance measures introduced in April 2020 as a
response to COVID-19, which have not been contractually
defaulted.
The table below shows an analysis of the principal and interest
of the loans along with the amount recognised as an impairment
allowance as at 31 March 2020:
31 March 2020
---------------------------
Principal Impairment
and interest allowance
GBP GBP
--------------------------------------------------- -------------- -----------
Stage 1 - no change in credit risk from inception 184,087,094 7,570,445
Stage 2 - significant increase in credit risk
but not yet defaulted 19,635,038 4,828,723
Stage 3 - defaulted 55,391,906 46,620,740
259,114,038 59,019,908
--------------------------------------------------- -------------- -----------
In October 2020, Basinghall received proceeds of GBP2,203,183
for the sale of a pool of UK non-performing loans to a third party
at a recovery rate which is consistent with historical recovery
rates observed on the portfolio.
Structured Finance Transactions
In June 2016, the Company entered into a structured finance
transaction with the European Investment Bank (the "EIB
transaction"). The transaction involved the Company participating
in the financing of an Irish domiciled special purpose vehicle
("EIB SPV"). The Company invested GBP25 million into the junior
Class B Note issued by the EIB SPV whilst the European Investment
Bank ("EIB") committed GBP100 million in a senior loan to the EIB
SPV.
In August 2018, the Group entered into a transaction to provide
lending to a special purpose vehicle, Queenhithe, which makes loans
to UK small businesses. The Group, through Basinghall, provided an
initial funding of approximately GBP9.2 million through
subscription into the Class B note issued by Queenhithe. Queenhithe
has been accounted for in these consolidated financial statements
as a subsidiary consolidated into the results of the Group.
In November 2018, the transaction was updated whereby the
Department for Business, Energy and Industrial Strategy ("BEIS") -
the British Business Bank's ("BBB") sole shareholder - agreed to
provide up to GBP150 million of funding via a senior floating rate,
loan to Queenhithe.
Following the result of the EGM on 11 June 2019, the Group has
ceased any further investment through Queenhithe.
The transactions entered into by the Group in respect of the
structured financing arrangements for Lambeth are discussed in note
10.
5. FINANCIAL ASSET AT FAIR VALUE THROUGH PROFIT OR LOSS
31 March 2021 31 March
2020
GBP GBP
------------------------------------ ------------- -----------
Balance at the beginning of
the year - 12,349,178
Principal and interest collections - (6,153,897)
Net gain/(loss) on the change
in fair value of financial
asset at fair value through
profit or loss during the year 5,141,217 (6,195,281)
Balance at the end of the year 5,141,217 -
-------------------------------------- ------------- -----------
The Group's financial asset at fair value through profit or loss
relates to the investment in the EIB transaction.
In October 2019, one of the financial covenants in respect of
the EIB transaction was breached resulting in a switch from
principal proceeds being distributed pari passu between the EIB and
the Company to being fully allocated to the EIB until such time as
the loan with the EIB has been fully repaid or the breach is no
longer continuing.
On 29 July 2020, the EIB SPV entered into an agreement with the
EIB and the Company (amongst other parties) which altered the order
of repayment of the principal and interest amounts due to the EIB
and the Company and prioritised repayment to the EIB as senior
lender. Principal and interest collections on the portfolio, net of
SPV running costs, are currently being applied to repay the loan
with the EIB.
As a result of resilient performance seen on the portfolio of
loans held by the EIB SPV, It has been estimated that the Company
will receive future cashflows from its investment in the EIB
transaction and as such has resulted in a fair value gain of
GBP5,141,217 being recognised in the consolidated statement of
comprehensive income for the year (31 March 2020: loss of
GBP6,195,281).
The calculation of the fair value is discussed in note 17.
6. SEGMENTAL REPORTING
The Group operates in the UK, US, Germany, Spain and the
Netherlands. For financial reporting purposes, Germany, Spain and
the Netherlands combine to make up the Continental Europe operating
segment.
The measurement basis used for evaluating the performance of
each segment is consistent with the policies used for the Group as
a whole. Assets, liabilities, profits and losses for each
reportable segment are recognised and measured using the same
accounting policies as the Group.
Except for the EIB transaction, all of the Group's investments
are loans to SMEs. Each individual SME loan does not generate
income that exceeds 10% of the Group's total income.
The structured finance transaction and the corresponding income
have been reported under the 'UK' segment below. All items of
income and expenses not directly attributable to specific
reportable segments have been included in 'Other income and
expenses' column.
Segment performance for the year ended 31 March 2021
UK US CE Other income Consolidated
and expenses
GBP GBP GBP GBP GBP
------------------------------ ------------ ------------ ------------ ----------------- -------------
Total revenue 9,254,957 1,684,813 1,637,817 21,409 15,564,861
Impairment of loans (8,424,952) (1,265,682) (2,245,507) - (11,936,141)
Net gain on the change
in fair value of financial
asset at fair value
through profit or loss 5,141,217 - - - 5,141,217
Net gain on change
in fair value of loans
advanced 889,003 1,330,180 288,709 - 2,507,892
Total comprehensive
income 4,537,154 1,139,121 (1,118,072) 21,409 4,579,611
UK US CE Other assets Consolidated
and liabilities
GBP GBP GBP GBP GBP
-------------------- ---------------------- ------------ ------------ ----------------- -------------
Assets 83,967,266 15,735,112 20,357,836 - 120,060,214
Liabilities (487,118) (145,039) (189,281) - (821,438)
Segment performance for the year ended 31 March 2020
UK US CE Other income Consolidated
and expenses
GBP GBP GBP GBP GBP
----------------------------- ------------- ------------ ------------ ----------------- -------------
Total revenue 16,411,164 7,229,629 6,147,006 91,170 29,878,969
Impairment of loans (11,356,416) (6,297,293) (4,800,322) - (22,454,031)
Net loss on the change
in fair value of financial
asset at fair value
through profit or loss (6,195,281) - - - (6,195,281)
Total comprehensive
(loss)/income (5,746,781) 10,612 399,707 91,169 (5,245,293)
UK US CE Other assets Consolidated
and liabilities
GBP GBP GBP GBP GBP
------------------- ----------------------- ------------ ------------ ----------------- -------------
Assets 167,316,544 39,452,582 39,927,242 48,533 246,744,901
Liabilities (13,077,759) (1,885,154) (1,771,286) - (16,734,199)
7. cash and cash equivalents
31 March 2021 31 March 2020
GBP GBP
-------------------------------- -------------- --------------
Cash at bank 7,969,502 17,233,099
Cash equivalents 22,815,216 29,369,139
Balance at the end of the year 30,784,718 46,602,238
-------------------------------- -------------- --------------
Cash equivalents are term deposits held with different banks
with maturities between overnight and 90 days.
8. Derivatives
Foreign exchange swaps are held to hedge the currency exposure
generated by US dollar assets and Euro assets held by the Group
(see note 17). The hedges have been put in place taking into
account the fact that derivative positions, such as simple foreign
exchange swaps, could cause the Group to require cash to fund
margin calls on those positions. The Group negotiated the terms of
the contracts with each counterparty such that no collateral is
required on the initial transaction and in instances of temporary
negative fair value positions.
Fair value of currency derivatives
Fair value Fair value
31 March 2021 31 March 2020
GBP GBP
--------------------------------------------- ---------------- ----------------
Valuation of currency derivatives 768,964 (3,400,699)
768,964 (3,400,699)
--------------------------------------------- ---------------- ----------------
Fair value Fair value
31 March 2021 31 March 2020
GBP GBP
-------------------------------------------- ---------------- ----------------
Euro (33,918) 47,402
USD 1,780 127,088
GBP 801,102 (3,575,189)
-------------------------------------------- ---------------- ----------------
Total 768,964 (3,400,699)
-------------------------------------------- ---------------- ----------------
9. ACCRUED EXPENSES and other LIABILITIES
31 March 31 March 2020
2021
GBP GBP
------------------------------------ --------- --------------
Service fees payable 145,785 158,864
Audit fees payable 252,807 254,745
Legal fees payable 12,154 19,166
Loan interest payable (see note 4) - 8,124
Taxation payable 348,130 1,000
Directors fees payable 5,416 -
Other liabilities 57,146 201,843
Amount payable to the EIB SPV - 1,158,682
------------------------------------- --------- --------------
821,438 1,802,424
------------------------------------ --------- --------------
10. loanS payable
31 March 2021 31 March 2020
GBP GBP
------------------------------------------ ----------------- --------------
Balance at the beginning of the year 11,531,076 73,651,620
Drawdown - 2,636,619
Repayment (11,531,076) (64,757,163)
Balance at the end of the year - 11,531,076
------------------------------------------ ----------------- --------------
In January 2018, the Group entered into the Citibank transaction
to provide lending to a special purpose vehicle, Lambeth, which
makes loans to UK small businesses. Under the terms of the Senior
Facility Agreement, Citibank provided GBP50 million into the
transaction, by entering into a senior floating rate loan.
In July 2018, the Citibank transaction was amended whereby the
senior loan from Citibank was increased to GBP66 million with a
corresponding net increase to the Group's lending to Lambeth. As a
result, Basinghall has increased its investments into Lambeth to
keep the proportional exposure between Citibank and Basinghall.
The loan from Citibank was fully repaid by Lambeth on 11 April
2020. Total interest expense on this loan during the period was
GBP638 (2020: GBP696,276). The remaining portfolio of Credit Assets
held were transferred to Basinghall on 17 June 2020 for an amount
equal to the outstanding balance of the Class B note in issue. In
October 2020, liquidators were formally appointed and commenced
proceedings to wind up Lambeth in an orderly manner. The
proceedings are still ongoing as at the date of signing of these
consolidated financial statements.
In August 2018, the Group entered into a transaction to provide
lending to Queenhithe. The Group provided initial funding of
approximately GBP9.2 million through subscription into the Class B
note issued by Queenhithe. In November 2018, the transaction was
updated whereby the Department for Business, Energy and Industrial
Strategy ("BEIS") - the British Business Bank's ("BBB") sole
shareholder - agreed to provide up to GBP150 million of funding via
a senior floating rate loan to Queenhithe. The facility came with a
12-year legal maturity. As at 31 March 2021, Queenhithe has drawn
GBP20,378,043 (2020: GBP20,378,043) from the facility.
Pursuant to the original loan agreement with BBB and the
relevant agreement supplement signed in November 2018, the total
commitment fee incurred for the year was GBP187,500 (2020:
GBP837,500) with GBPnil (2019: GBP93,750) outstanding as at 31
March 2021.
On 17 August 2020, Queenhithe fully repaid the remaining amount
owed on its loan with Fleetbank. The remaining portfolio of Credit
Assets held were transferred to Basinghall on the same date for an
amount equal to the principal and interest outstanding at 31 July
2020 being the economic cut-off date for the transaction. In
December 2020, liquidators were formally appointed and commenced
proceedings to wind up Queenhithe in an orderly manner. The
proceedings are still ongoing as at the date of signing of these
consolidated financial statements.
The loan from BBB had a floating interest rate plus a margin.
Total interest expense on this loan during the year was GBP62,962
(31 March 2020: GBP334,611) with GBPnil (31 March 2020: GBP6,964)
outstanding as at 31 March 2021.
11. Share capital
Issued and fully Number of shares Shares issued Issue costs Net Shares
paid amount amount
Ordinary shares GBP GBP GBP
----------------- ---- -------------------------- --------------- ------------- --------------
At 1 April 2020 258,301,354 268,762,623 (5,744,900) 263,017,723
Share repurchases (10,000) (4,857) - (4,857)
Shares redeemed (124,126,432) (105,499,718) - (105,499,718)
----------------------- -------------------------- --------------- ------------- --------------
At 31 March 2021 134,164,922 163,258,048 (5,744,900) 157,513,148
----------------------- -------------------------- --------------- ------------- --------------
Issued and fully Number of Shares Issue costs Net Shares
paid shares issued amount
amount
Ordinary GBP GBP GBP
shares
------------ ------ -------------------------------------------------------- ------------- ------------ -------------
At 1 April 2019 323,044,293 326,689,147 (5,744,900) 320,944,247
Share repurchases (32,497,167) (27,426,691) - (27,426,691)
Shares redeemed (32,245,772) (30,499,833) - (30,499,833)
-------------------- -------------------------------------------------------- ------------- ------------ -------------
At 31 March 2020 258,301,354 268,762,623 (5,744,900) 263,017,723
-------------------- -------------------------------------------------------- ------------- ------------ -------------
As at 31 March 2021, the Company has purchased a total of
43,746,667 shares (20 20 : 43,736,667 shares) of which nil (31
March 2020: 586,243) remain held in treasury. During the year, a
total of 596,243 shares held in treasury were cancelled and
formally discharged.
Following the COVID-19 pandemic and the uncertainty around its
impact, the directors resolved to suspend the programme of
repurchases of the Company's shares on 2 April 2020 until further
notice.
The Company redeemed a total of 124,126,432 (2020: 32,245,772)
shares for a total amount of GBP105,499,718 (2020: 30,499,833)
during the year.
Rights attaching to the Ordinary share class
All shareholders have the same voting rights in respect of the
share capital of the Company. Every member who is present in person
or by a duly authorised representative or proxy shall have one vote
on a show of hands and on a poll every member present shall have
one vote for each share of which he is the holder, proxy or
representative. All shareholders are entitled to receive notice of
the Annual General Meeting and any other General meetings.
Each Ordinary share will rank in full for all dividends and
distributions declared after their issue and otherwise pari passu
in all respects with each existing Ordinary share and will have the
same rights (including voting and dividend rights and rights on a
return of capital) and restrictions as each existing Ordinary
share.
12. taxation
31 March 31 March 2020
2021
GBP GBP
--------------------------------------------- ----------- ----------------
Operating income/(loss) for the year
before taxation 2,420,528 (5,245,293)
---------------------------------------------- ----------- ----------------
Tax at the standard Guernsey income - -
tax rate of 0%
Effects of tax rates in other jurisdictions (348,809) (1,000)
Taxation expense (348,809) (1,000)
---------------------------------------------- ----------- ----------------
The Group may be subject to taxation under the tax rules of the
jurisdictions in which it invests. During the year, Basinghall,
Tallis, Lambeth and Queenhithe which are consolidated into the
Group's results were subject to a corporation tax rate of 25% in
Ireland.
From 1 January 2020 new tax rules were applicable under the
legislative changes made to the Irish Finance Act 2019. These rules
included changes to the anti-hybrid and anti-avoidance rules in
section 110 TCA of the legislation.
Basinghall paid class B profit participating note interest to
SCRF in February 2020 totaling GBP1,392,467, which is considered
disallowable for tax purposes in Ireland following the legislative
changes discussed above and so a 25% tax charge will be levied
totaling GBP348,117. This charge relates to the prior financial
year ended 31 March 2020 and is accrued in the current period due
to the timing of the completion of the impact assessment. As at 31
March 2021, this amount remains accrued and unpaid. The Group has
been advised by its legal advisors that changes made to its
structural arrangements have caused the relevant entity to fall
outside the scope of the legislative changes discussed above with
effect from 1 April 2020.
13. Earnings per share ("EPS")
The calculation of the basic and diluted EPS is based on the
following information:
31 March 2021 31 March 2020
GBP GBP
----------------------------------- -------------- --------------
Profit/(Loss) for the purposes of
basic and diluted EPS 2,071,719 (5,246,293)
Basic and diluted 197,065,272 291,019,214
Basic and diluted EPS 1.05p (1.80p)
------------------------------------ -------------- --------------
14. Dividends
The following table shows a summary of dividends declared during
the year, and previous year, in relation to Ordinary shares and C
Shares.
31 March Date declared Ex-dividend Per share Total
2021 date
Pence GBP
------------------ --------------- ------ ---------- ------------- -------------
Ordinary
shares
20 April
Interim dividend 2020 23 April 2020 1.3125 3,132,722
Interim dividend 24 July 2020 30 July 2020 1.3125 2,805,335
21 October 29 October
Interim dividend 2020 2020 1.3125 2,147,990
20 January 28 January
Interim dividend 2021 2021 1.3125 1,760,915
Total 5.250 9,846,962
------------------------------------------------------- --- -------- -------------
31 March 2020 Date declared Ex-dividend Per share Total
date
Pence GBP
------------------ --------------- ------ ----------- ------------ ------------
Ordinary shares
25 April
Interim dividend 2019 02 May 2019 1.312 4,143,549
Interim dividend 22 July 2019 01 August 2019 1.312 4,006,829
21 October 07 November
Interim dividend 2019 2019 1.3125 3,616,331
17 January 30 January
Interim dividend 2020 2020 1.3125 3,397,900
Total 5.249 15,164,609
-------------------------------------------------------- ---- ------ ------------
The Company's scrip offering programme has been discontinued
from 31 March 2019.
15. Directors' remuneration and expenses
31 March 2021 31 March 2020
GBP GBP
--------------------- -------------- --------------
Directors' fees 167,257 176,958
Directors' expenses 10 4,240
---------------------- -------------- --------------
167,267 181,198
--------------------- -------------- --------------
None of the Directors have any personal financial interest in
any of the Group's investments other than indirectly through their
shareholding in the Group.
16. FEES AND EXPENSES
Loan origination and servicing
Funding Circle UK has been appointed pursuant to the UK
Origination Agreement, UK Servicing Agreement and the Services
Agreement. Funding Circle US (as defined in the Prospectus) has
been appointed pursuant to the US Origination Agreement and the US
Servicing Agreement.
Funding Circle Nederlands B.V. ("Funding Circle Netherlands")
has been appointed pursuant to the Dutch Origination Agreement and
the Dutch Servicing Agreement. Funding Circle Espana SLU ("Funding
Circle Spain") has been appointed pursuant to the Spanish
Origination Agreement and the Spanish Servicing Agreement. Funding
Circle CE GmbH ("Funding Circle CE") has been appointed pursuant to
the German Origination Agreement and the German Servicing
Agreement. Each of Funding Circle Netherlands and Funding Circle
Spain has agreed to designate Funding Circle CE as sub-contracting
agent for the purposes of their respective Origination Agreements
and Servicing Agreements.
The Group does not pay Funding Circle any fees on the initial
origination of loans.
Funding Circle UK is entitled to receive loan servicing fees
equal to 1 per cent. per annum, calculated daily, on the aggregate
outstanding principal balance of the portfolio of loans held by
each of Basinghall, Lambeth and Queenhithe excluding any loans
which have been charged off as defined in the Servicing Agreement.
Servicing fees to Funding Circle UK of GBP678,191 were incurred
during the year (2020: GBP1,386,591). Servicing fees outstanding as
at 31 March 2021 were GBP74,569 (2020: GBP56,860). Following the
transfer of Credit Assets by Lambeth to Basinghall on 17 June 2020,
Lambeth's servicing agreement in place with Funding Circle UK was
terminated on the same date. Following the transfer of Credit
Assets by Queenhithe to Basinghall on 17 August 2020, Queenhithe' s
servicing agreement in place with Funding Circle UK was terminated
on the same date.
FCGPL is also entitled to receive fees under the Services
Agreement at an annual rate of 0.1 per cent. of net asset value of
the Group. This fee accrued from the date on which the Group made
investments in respect of loans in an amount equal to 80 per cent.
of the gross IPO issue proceeds of GBP150 million. During the year
ended 31 March 2021, GBP184,970 (2020: GBP284,691) was incurred
under the Services Agreement. Corporate servicing fees outstanding
as at 31 March 2021 was GBPnil (2020: GBPnil).
Funding Circle US is entitled to receive loan servicing fees
equal to 1 per cent. per annum, calculated daily, on the aggregate
outstanding principal balance of the portfolio of loans held by the
Company which have been originated in the US excluding any loans
which have been charged off as defined in the Servicing Agreement.
Servicing fees to Funding Circle US of GBP327,599 were incurred
during the year (2020: GBP604,327). Servicing fees outstanding as
at 31 March 2021 were GBP34,165 (2020: GBP36,748).
Funding Circle Netherlands is entitled to receive loan servicing
fees equal to 1 per cent. per annum, calculated daily, on the
aggregate outstanding principal balance of the portfolio of loans
held by Tallis excluding any loans which have been charged off as
defined in the Servicing Agreement.
Funding Circle Spain is entitled to receive loan servicing fees
equal to 1 per cent. per annum, calculated daily, on the aggregate
outstanding principal balance of the portfolio of loans held by
Tallis excluding any loans which have been charged off as defined
in the Servicing Agreement.
Funding Circle Deutschland GmbH is entitled to receive loan
servicing fees equal to 1 per cent. per annum, calculated daily, on
the aggregate outstanding principal balance of the portfolio of
loans held by Tallis excluding any loans which have been charged
off as defined in the Servicing Agreement.
Funding Circle CE receives servicing fees for Funding Circle
Netherlands, Funding Circle Spain and Funding Circle Deutschland
GmbH as per the sub-contracting agency agreement. Servicing fees to
Funding Circle CE during the year amounted to GBP313,628 (2020:
GBP526,327). Servicing fees outstanding as at 31 March 2021 were
GBP37,051 (2020: GBP35,579).
Each of the Funding Circle entities is entitled to additional
fees of up to 40 per cent. of collections received on charged off
assets under each of the relevant Services Agreement in
reimbursement of costs incurred in respect of collection charges
and external legal fees. No such additional fees were charged to
the Group during the current year or the prior year.
Administration, company secretarial and cash management
Sanne Group (Guernsey) Limited ("Sanne Guernsey") has been
appointed as Administrator to the Company pursuant to the
Administration Agreement. The Administrator also acts as Company
Secretary and Cash Manager of the Company.
Sanne Guernsey is entitled to receive an annual fee equal to
five basis points of the net asset value of the Group subject to a
minimum amount of GBP85,000 (2020: GBP85,000). Administration fees
of GBP150,303 were incurred during the year (2020: GBP188,780).
There were no administration fees outstanding as at 31 March 2021
and 31 March 2020.
Sanne Capital Markets Ireland Limited ("Sanne Ireland") has been
appointed as Administrator to Basinghall, Tallis and Lambeth and is
entitled to receive an annual fee for each entity of GBP58,000 (20
20: GBP58,000). Administration fees of GBP138,598 were incurred
during the year (20 20: GBP172,601) (including fees for additional
work performed). There were no administration fees outstanding as
at 31 March 2021 and 31 March 2020.
Intertrust Management Ireland Limited ("Intertrust Ireland") has
been appointed as Administrator to Queenhithe and is entitled to
receive an annual fee of GBP23,000. Administration fees of
GBP16,431 (2020: GBP56,549) were incurred during the year. The
total administration fees outstanding as at 31 March 2021 was
GBPnil (2020: GBP1,779).
Registrar
Link Asset Services (the "Registrar") has been appointed as the
Company's Registrar to undertake maintenance of the statutory books
of the Company and to perform such related activities as are
required to carry out the registrar function. The Registrar is
entitled to an annual maintenance fee per shareholder subject to a
minimum charge of GBP4,500 (2020: GBP4,500) per annum. Registrar
service fees of GBP86,796 were incurred during the year (2020:
GBP61,588). Registrar service fees outstanding as at 31 March 2021
amounted to GBP13,589 (2020: GBP26,811).
Currency management fee
Record Currency Management Limited has been appointed as
currency manager. The currency manager is entitled to fees
calculated based on the GBP equivalent amount of the US Dollar and
EUR denominated exposure being hedged within the Group's portfolio.
Fees of GBP43,768 were incurred during the year (2020: GBP106,335).
Fees outstanding as at 31 March 2021 amounted to GBP8,935 (2019:
GBP25,020).
Audit, audit related and non-audit related services
Remuneration for all work carried out for the Group by the
statutory audit firm in each of the following categories of work is
disclosed below:
31 March 202 1 31 March 20 20
----------------------- ----------------------
Type of service PwC CI PwC Ireland PwC CI PwC Ireland
GBP GBP GBP GBP
--------------------------------- --------- ------------ -------- ------------
Audit of the financial
statements 126,030 77,234 109,220 104,197
Review of half-yearly financial
statements 22,000 - 22,000 -
Tax related services - 38,328 - 34,940
Other non-audit services 1,200 - 14,399 -
149,230 115,562 145,619 139,137
--------------------------------- --------- ------------ -------- ------------
17. Financial risk management
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework. The Group's risk management policies are established to
identify and analyse the risks faced by the Group, to set
appropriate risk limits and controls and to monitor risks and
adherence to limits. Risk management policies are reviewed
regularly to reflect changes in market conditions and the Group's
activities. Below is a summary of the risks that the Group is
exposed to as a result of its use of financial instruments.
i) Operational risk
The directors outsource most of the Company's operations to
third parties which increases the operational risk in which the
Company is exposed to.
The Group is dependent on Funding Circle's resources and on the
ability and judgement of the employees of Funding Circle and its
professional advisers to originate and service the Credit Assets
purchased by the Group. Failure of Funding Circle's Platform or
inconsistent operational effectiveness of the internal controls at
Funding Circle may result in financial losses to the Group.
The Board manages this risk by performing a regular evaluation
of Funding Circle's performance against the terms and conditions of
the Group's agreements with Funding Circle.
ii) Market risk
Market risk is the risk of changes in market rates, such as
interest rates, foreign exchange rates and equity prices, affecting
the Group's income and/or the value of its holdings in financial
instruments.
The Board of Directors regularly reviews the Credit Assets
portfolios and industry developments to ensure that any events
which impact the Group are identified and considered in a timely
manner.
Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair value of
financial instruments.
The Group is exposed to risks associated with the effect of
fluctuations in the prevailing levels of market interest rates on
its cash balances and indirectly on the pricing of and returns from
Credit Assets. This may also impact on the disclosed fair values of
the investments into the EIB transaction.
Loans are held by the Group at fair value through other
comprehensive income and bear fixed interest rates. The Board has
not performed an interest rate sensitivity analysis on these loans
as they are intended to be held until maturity and bear fixed
interest rates. Financial instruments with floating interest rates
that reset as market rates change are exposed to cash flow interest
rate risk. As at 31 March 202 1 , the Group had GBP30.7 million (31
March 2020: GBP46.6 million) of the total assets classified as cash
and cash equivalents with floating interest rates. At 31 March 202
1 , had interest rates increased or decreased by 25 basis points
with all other variables held constant, the change in the value of
future expected cash flows of these assets would have been
GBP76,962 (31 March 2020: GBP116,506). The Board of Directors
believes that a change in interest rate of 25 basis points is a
reasonable measure of sensitivity in interest rates based on their
assessment of market interest rates at the year end.
The Group was also exposed to interest rate risk in respect of
its external loans payable however all external loans payable have
been fully repaid during the year as discussed in note 10.
Currency risk
Currency risk is the risk that the value of the Group's net
assets will fluctuate due to changes in foreign exchange rates.
Aside from GBP, the Group has invested in loans denominated in
US Dollars and Euro, and may invest in loans denominated in other
currencies. Accordingly, the value of such assets may be affected
favourably or unfavourably by fluctuations in currency rates. The
Board of Directors monitors the fluctuations in foreign currency
exchange rates and uses forward foreign exchange swaps to seek to
hedge the currency exposure of the Group arising from US Dollar and
Euro denominated investments.
The currency risk of the Group's non-GBP monetary financial
assets and liabilities as at 31 March 202 1 including the effect of
a change in exchange rates by 5% is shown below. The effect of a 5%
change is shown below by applying an increase (for favourable
change in currency rates) or a decrease (for unfavourable change in
currency rates) to the reported amounts of the assets and
liabilities of the Group. The Directors believe that a change of 5%
in currency exchange rates is a reasonable measure of sensitivity
based on available data on currency rates at the year end.
Carrying Effect of Carrying Effect of
amount as a 5% change amount as at a 5% change
at in currency 31 March in currency
31 March rate 2020 rate
202 1
GBP GBP GBP GBP
--------------------- ----------- ------------- --------------- -------------
US Dollar 15,256,783 552,902 32,464,006 1,623,200
Euro 19,986,113 851,259 35,300,829 1,765,041
Total 35,242,896 1,404,161 67,764,835 3,388,241
--------------------- ----------- ------------- --------------- ---------------
The Group's exposure has been calculated as at the year end and
may not be representative of the year as a whole. Furthermore, the
above currency risk estimate does not take into account the effect
of the Group's foreign exchange hedging policy. The net foreign
exchange gain charged to the Consolidated Statement of
Comprehensive Income during the year was GBP 235,111 (20 20 : GBP
925,960). The details of the net foreign exchange gain or loss are
shown below.
31 March 202 31 March 2020
1
GBP GBP
-------------------------------------------- -------------- --------------
Unrealised foreign currency (losses)/gains (6,035,985) 5,388,447
Realised gains on currency derivatives 2,930,944 8,879,663
Realised losses on currency derivatives (3,807,555) (8,949,337)
Unrealised fair value gains/(losses)
on currency derivatives 4,169,664 (4,392,813)
--------------------------------------------- -------------- --------------
(2,742,932) 925,960
-------------------------------------------- -------------- --------------
iii) Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due. Substantially all
of the non-cash assets held by the Group are illiquid.
The Board of Directors manages liquidity risk through active
monitoring of amortising cash flows and reviewing the Group cash
flow forecast on a regular basis. Prior to the EGM on 11 June 2019,
the Group was allowed to borrow up to 0.5 times the then-current
net asset value of the Group at the time of borrowing. The Board
will focus on achieving a managed wind down of the Company and any
further borrowing is not anticipated.
Maturity profile
The following tables show the contractual maturity of the
financial assets and financial liabilities of the Group:
As at 31 March 202 1
Within one One to five years Over five Total
year years
GBP GBP GBP GBP
--------------------------- ------------- ------------------ ---------- -------------
Financial assets
Cash and cash equivalents 30,784,718 - - 30,784,718
Loans advanced 82,899,529 58,547,373 - 141,446,902
Financial assets at
fair value through
profit or loss 5,141,217 - - 5,141,217
Fair value of currency
derivatives 768,964.00 - - 768,964
Other receivables 9,870 - - 9,870
119,604,298 58,547,373 - 178,151,671
--------------------------- ------------- ------------------ ---------- -------------
Within one One to five Over five
year years years Total
GBP GBP GBP GBP
----------------------- ----------- ------------ ---------- --------
Financial liabilities
Accrued expenses and
other liabilities 821,438 - - 821,438
821,438 - - 821,438
----------------------- ----------- ------------ ---------- --------
As at 31 March 20 20
Within one One to five years Over five Total
year years
GBP GBP GBP GBP
--------------------------- ------------ ------------------ ---------- ------------
Financial assets
Cash and cash equivalents 46,602,238 - - 46,602,238
Loans advanced 144,218,172 114,895,866 - 259,114,038
Other receivables 48,533 - - 48,533
190,868,943 114,895,866 - 305,764,809
--------------------------- ------------ ------------------ ---------- ------------
Within one One to five Over five
year years years Total
GBP GBP GBP GBP
------------------------ ----------- ------------ ---------- -----------
Financial liabilities
Fair value of currency
derivatives 3,400,699 - - 3,400,699
Accrued expenses and
other liabilities 1,802,424 - - 1,802,424
Loans payable 900,997 10,630,079 - 11,531,076
------------------------ ----------- ------------ ---------- -----------
6,104,120 10,630,079 - 16,734,199
------------------------ ----------- ------------ ---------- -----------
iv) Credit risk and counterparty risk
Credit risk is the risk of financial loss to the Group if a
counterparty to a financial instrument fails to meet its
contractual obligations. The carrying amounts of financial assets
best represent the maximum credit risk exposure at the reporting
date. Impairment recognised on the loans advanced is disclosed in
note 4.
The Group's credit risks arise principally through exposures to
loans advanced by the Group, which are subject to the risk of
borrower default. As disclosed in note 4, the loans advanced by the
Group are predominantly unsecured, but the Group holds assets as
security for certain property-related loans.
Credit quality
The credit quality of loans is assessed on an ongoing basis
through evaluation of various factors, including credit scores,
payment data and other information related to counterparties. This
information is subject to stress testing on a regular basis.
Set out below is the analysis of the Group's loan investments by
internal grade rating:
% of Carrying % of Carrying
Carrying value value value
31 March 202 31 March Carrying value 31 March
1 202 1 31 March 2020 2020
---------------- --------------- -------------- --------------- --------------
Internal grade GBP % GBP %
---------------- --------------- -------------- --------------- --------------
A+ 8,511,443 10.61% 44,508,893 22.24
A 29,407,644 36.65% 64,766,756 32.37
B 19,496,527 24.30% 43,947,527 21.96
C 12,013,516 14.97% 25,755,451 12.87
D 7,621,654 9.50% 15,232,403 7.61
E 3,191,367 3.98% 5,883,100 2.94
80,242,151 100.00 200,094,130 100.00
---------------- --------------- -------------- --------------- --------------
The internal grade risk rating assigned to a borrower is based
on Funding Circle's proprietary credit scoring methodology to
evaluate each loan application. Analysis has regard to all the
relevant application data gathered so far as well as information
obtained from commercial and consumer credit bureaus. It also
includes analysis of the borrower's financial information.
Allocation limits
The Board of Directors implemented the following portfolio
limits to manage the concentration risk exposure of the Group:
The proportionate division between loans originated through the
various Platforms (as defined in the Prospectus) must fall within
the ranges set out below. The actual proportion within the ranges
will be determined by Funding Circle UK (and communicated by
Funding Circle UK to Funding Circle US, Funding Circle CE, and
other Funding Circle group entities, as appropriate) pursuant to
the Services Agreement:
-- originated through the UK Platform - between 50 per cent. and
100 per cent. of the gross asset value of the Group
-- originated through the US Platform - between 0 per cent. and
50 per cent. of the gross asset value of the Group
-- originated through the CE Platform - between 0 per cent. and
15 per cent. of the gross asset value of the Group
Other limitations
In addition to the allocation limits described above, in no
circumstances will loans be acquired by the Group, nor will
indirect exposure to loans be acquired, if such acquisition or
exposure would result in:
-- excess of 50 per cent. of the gross asset value being
represented by loans in respect of which the relevant borrower is
located in the US; or
-- the amount of the relevant loan or borrowing represented by
any one loan exceeding, or resulting in the Group's exposure to a
single borrower exceeding (at the time such investment is made)
0.75 per cent. of the net asset value.
The allocation limits and other limitations shown above no
longer apply after shareholders passed the resolutions at the EGM
on 11 June 2019.
Banking counterparties
The Group is also exposed to credit risk in relation to cash
placed with its banking counterparties. The Directors monitor the
credit quality of these banking counterparties on a regular
basis.
The Group may invest cash held for working capital purposes and
pending investment or distribution in cash or cash equivalents,
government or public securities, money market instruments, bonds,
commercial paper or other debt obligations with banks or other
counterparties having a "BBB" (or equivalent) or higher credit
rating as determined by any internationally recognised rating
agency selected by the Board.
The Group held cash with the following financial
institutions:
Amount as Short term Amount as at Short term
at 31 March credit rating 31 March 2020 credit rating
202 1 (S&P) (S&P)
GBP GBP
----------- ------------- --------------- --------------- ---------------
HSBC 6,307,209 A-1 3,159,701 A-1
Santander - A-1 16,500,000 A-1
Barclays 24,364,947 A-2 25,538,482 A-2
Citibank 112,562 A-2 1,404,055 A-2
----------- ------------- --------------- --------------- ---------------
Total 30,784,718 46,602,238
----------- ------------- --------------- --------------- ---------------
In addition, the Group uses forward foreign currency
transactions to seek to minimise the Group's exposure to changes in
foreign exchange rates. The Group is exposed to counterparty credit
risk in respect of these transactions. The Board of Directors
employs various techniques to limit actual counterparty credit
risk, including the requirement for cash margin payments or
receipts for foreign currency derivative transactions on a regular
basis. As at year end, the Group's derivative counterparties were
State Street and Northern Trust. The long term-credit rating of
State Street as at 31 March 202 1 assigned by Moody's was Aa1 (31
March 20 20 : Aa1). The long term-credit rating of Northern Trust
as at 31 March 202 1 assigned by Moody's was Aa2 (20 20 : Aa2). The
Directors monitor the credit quality of these banking
counterparties on a regular basis.
v) Fair value estimation
The Group classifies fair value measurements using a fair value
hierarchy that reflects the significance of the inputs used in
making the measurements. The fair value hierarchy has the following
levels:
-- Level 1 - quoted prices (unadjusted) in active markets for
identical assets or liabilities. Investments, whose values are
based on quoted market prices in active markets and are therefore
classified within Level 1, include active listed equities. The
quoted price for these instruments is not adjusted;
-- Level 2 - inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (that is, as prices) or indirectly (that is, derived from
prices). Financial instruments that trade in markets that are not
considered to be active but are valued based on quoted market
prices, dealer quotations or alternative pricing sources supported
by observable inputs are classified within Level 2. As Level 2
investments include positions that are not traded in active markets
and/or are subject to transfer restrictions, valuations may be
adjusted to reflect illiquidity and/or non-transferability, which
are generally based on available market information; and
-- Level 3 - inputs for the asset or liability that are not
based on observable market data (that is, unobservable inputs).
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined on
the basis of the lowest level input that is significant to the fair
value measurement in its entirety. For this purpose, the
significance of an input is assessed against the fair value
measurement in its entirety. If a fair value measurement uses
observable inputs that require significant adjustment based on
unobservable inputs, that measurement is a Level 3 measurement.
Assessing the significance of a particular input to the fair value
measurement in its entirety requires judgement, considering factors
specific to the asset or liability. The determination of what
constitutes "observable" requires significant judgement by the
Group. The Group considers observable data to be that market data
that is readily available, regularly distributed or updated,
reliable and verifiable, not proprietary and provided by
independent sources that are actively involved in the relevant
market.
The Group's only financial instruments measured at fair value as
at 31 March 2020 are its currency derivatives, its investment in
the EIB transaction and its loans advanced.
The fair value of the currency derivatives held by StateStreet
and Northern Trust were estimated by Record Currency Management
Limited based on the GBP-USD forward exchange rate, the GBP-EUR
forward exchange rate, the GBP-USD spot rate and the GBP-EUR spot
rate as at 31 March 2021.
As a result of resilient performance seen on the portfolio of
loans held by the EIB SPV, It has been estimated by a third party
valuation expert that the Company will receive future cashflows
from its investment in the EIB transaction and as such has resulted
in a fair value gain of GBP5,141,217 being recognised in the
consolidated statement of comprehensive income for the year (31
March 2020: loss of GBP6,195,281). The ending fair value estimated
as at 31 March 2021 is also GBP5,141,217 (2020: nil).
As a result of the Company's managed wind-down and change in
business model, the Company has reclassified the valuation of its
Credit Assets from amortised cost to fair value through other
comprehensive income from 1 April 2020.
The Company has appointed a third-party valuation expert to
provide quarterly valuations of its Credit Assets. The fair value
of the Credit Assets has been estimated by discounting expected
future cash flows from the loans advanced using a discount rate
determined by the Directors based on appropriate market
comparatives and conditions. The fair value of the Group's Credit
Assets as at 31 March 2021 was GBP83,355,445 (31 March 2020:
GBP200,094,130). The most relevant unobservable input to the fair
valuation was the discount rate, which has been summarised below
based on the geography of each of the Groups portfolios:
31 March 2021 31 March 31 March 31 March 31 March 31 March
2021 2021 2020 2020 2020
UK US CE UK US CE
Discount
rate 7.66% 7.51% 6.90% 13.88% 14.19% 13.63%
Fair value GBP50,896,298 GBP13,678,529 GBP18,780,618 GBP124,405,020 GBP37,545,283 GBP38,143,827
The Board of Directors believe that the fair value of the
currency derivatives falls within Level 2 in the fair value
hierarchy described above. The fair value of the EIB transaction
and the Credit Assets falls within Level 3 in the fair value
hierarchy due to the unobservable inputs used in the valuation
which include discount rate, timing and amounts of cash flows and
performance of the underlying loan portfolios. Refer to notes 4 and
5 for the movement on these financial instruments during the
year.
The Directors have prepared the below sensitivity analysis for
the Credit Assets based on a movement in discount rate of 1% with
an increase in discount rate of 1% causing a GBP759,769 reduction
in fair value and a 1% decrease causing a GBP771,321 increase in
fair value of loans advanced.
UK US CE Total
1% decrease in GBP466,514 GBP120,232 GBP184,575 GBP771,321
discount rate
1% increase in (GBP459,528) (GBP118,573) (GBP181,668) (GBP759,769)
discount rate
--------------- ------------- ------------- ------------- -------------
The Directors have also prepared the below sensitivity analysis
for the EIB transaction based on a movement in discount rate of
2.5% with an increase in discount rate of 2.5% causing a GBP134,445
reduction in fair value and a 2.5% decrease causing a GBP139,517
increase in fair value of the EIB transaction.
Total
2.5% decrease in GBP139,517
discount rate
2.5% increase in (GBP134,445)
discount rate
----------------- -------------
The following table presents the fair value of the Group's
assets and liabilities not measured at fair value as at 31 March
202 1 but for which fair value is disclosed:
31 March 202 1
------------------------------------------------
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
----------------------------------- ------------ ---------- -------- ------------
Cash and cash equivalents 30,784,718 - - 30,784,718
Other receivables and prepayments - 9,870 - 9,870
Loans payable - - - -
Accrued expenses and other
liabilities - (821,438) - (821,438)
30,784,718 (811,568) - 29,973,150
----------------------------------- ------------ ---------- -------- ------------
31 March 2020
-------------------------------------------------------
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
----------------------------------- ----------- ------------ ------------- -------------
Loans advanced - - 169,800,037 169,800,037
Cash and cash equivalents 46,602,238 - - 46,602,238
Other receivables and prepayments - 48,533 - 48,533
Loans payable - - (11,531,076) (11,531,076)
Accrued expenses and other
liabilities - (1,802,424) - (1,802,424)
46,602,238 (1,753,891) 158,268,961 203,117,308
----------------------------------- ----------- ------------ ------------- -------------
The Board of Directors believe that the carrying values for cash
and cash equivalents, other receivables and prepayments, loans
payable and accrued expenses and other liabilities approximate
their fair values.
In the case of cash and cash equivalents, other receivables and
prepayments, and accrued expenses and other liabilities the amount
estimated to be realised in cash are equal to their value shown in
the Consolidated Statement of Financial Position due to their short
term nature.
There were no transfers between levels during the year or the
prior year.
The managed wind-down of the Company is being operated with a
view to the Company realising all of its investments in accordance
with the Investment Objective. Such realisations will comprise
natural amortisation of the Company's investments in Credit Assets
as well as potentially opportunistic portfolio sales.
During the prior financial year, the Company ran an auction
process as the Board explored a potential sale of a portion of the
Company's assets during which it received a high level of interest
from potential buyers. However, the Company is not in active
discussion with any parties in relation to the disposal of its loan
portfolios in whole or in part, and the reducing size of these
portfolios through natural loan amortisation suggests that any such
transaction, at least in relation to performing assets, is now
unlikely.
Capital risk management
The Board's policy is to maintain a strong capital base so as to
maintain investor, creditor and market confidence and to sustain
future development of the Group. The Group's capital is represented
by Ordinary share capital and retained earnings. The capital of the
Group is managed in accordance with its investment policy, in
pursuit of its investment objectives. The return of capital to
investors is managed in line with the Company's investment
objective and managed wind-down process.
The Group is not subject to externally imposed capital
requirements. However, certain calculations on the employment of
leverage are required under the AIFMD. This directive requires more
information to be reported if the Group's leverage exceeds three
times its net asset value. All of the Group's leverage facilities
have now been fully repaid.
18. Related party disclosure
The Directors, who are the key management personnel of the
Group, are remunerated per annum as follows:
GBP
-------------------------- --------
Chairman 50,000
Audit Committee Chairman 40,000
Risk Committee Chairman 40,000
Other Directors 30,000
160,000
-------------------------- --------
Sachin Patel has waived his fees as a director of the
Company.
Richard Burwood resigned from the boards of Tallis, Basinghall,
Lambeth and Queenhithe during the year and is no longer entitled to
receive GBP5,000 per annum for each of these entities.
The Directors and/or their connected parties held the following
number of shares as at 31 March 202 1 and 31 March 2020:
As at 31 March 202 As at 31 March 20
1 20
---------------------
Number of % of total Number of % of total
shares shares in shares shares
issue in issue
Richard Boléat 13,554 0.0069 4,448 0.0015
Jonathan Bridel 65,552 0.0333 4,448 0.0015
Richard Burwood 24,784 0.0126 4,448 0.0015
Frederic Hervouet 92,041 0.0467 95,176 0.0327
Sachin Patel - - - -
195,931 0.0995% 108,520 0.0372
Movement in the number of shares held by each of the directors
during the year relates to the redemptions paid by the Company and
the purchase of further shares which were approved and cleared for
issue at the time of purchase.
The Group had no employees during the current year or the prior
year.
The Directors delegate certain functions to other parties. In
particular, the Directors appointed Funding Circle UK , Funding
Circle US and Funding Circle CE to originate and service the
Group's investments in loans and FCGPL to provide corporate
services.
Notwithstanding these delegations, the Directors have
responsibility for exercising overall control and supervision of
the services provided by the Funding Circle entities, for risk
management of the Group and otherwise for the Group's management
and operations.
The transaction amounts incurred during the year and amounts
payable to each of Funding Circle UK, FCGPL, Funding Circle US and
Funding Circle CE are disclosed below.
Expense Payable Expense Payable
during the as at 31 during the as at 31
year ended March 202 year ended March 2020
31 March 1 31 March
202 1 2020
Transaction GBP GBP GBP GBP
Funding Circle
UK Servicing fee 678,191 74,569 1,386,591 56,860
Corporate services
FCGPL fee 184,970 - 284,691 -
Reimbursement
FCGPL of expenses 24,331 490 28,093 1,549
Funding Circle
US Servicing fee 327,599 34,165 604,327 36,748
Funding Circle
CE Servicing fee 313,628 37,051 526,327 35,579
19. INVESTMENT IN SUBSIDIARIES
The Company accounts for its interest in the following entities
as subsidiaries, in accordance with the definition of subsidiaries
and control set out in IFRS 10:
Country Principal Transactions Outstanding Outstanding
of incorporation activity amount amount as
as at 31 March
at 31 March 2020
202 1 GBP
GBP
Invested
Basinghall in Credit Subscription
Lending Designated Assets originated of notes
Activity Company Ireland in the UK issued 55,733,625 127,017,192
Invested
in Credit
Assets originated
Tallis Lending in Germany, Subscription
Designated the Netherlands of notes
Activity Company Ireland and Spain issued 19,658,656 39,421,897
Subscription
Invested of notes
Lambeth Lending in Credit issued
Designated Assets originated (through
Activity Company Ireland in UK Basinghall) 71,757 66,216,309
Subscription
Invested of notes
Queenhithe in Credit issued
Lending Designated Assets originate (through
Activity Company Ireland in the UK Basinghall) 65,682 31,720,795
75,529,720 264,376,193
20. Subsequent events
On 1 July 2021, the final meeting in relation to the liquidation
of Lambeth took place. All liabilities have been discharged and
final payment made to Basinghall under the class B note agreement.
The entity is expected to be fully liquidated within 3 months of
the signing of these consolidated financial statements. The
liquidation of Queenhithe is still ongoing at the time of signing
these consolidated financial statements.
On 21 April 2021, the Company declared a quarterly dividend of
1.3125 pence per share payable in May 2021. The Company also
returned approximately GBP25.5m in May 2021 by way of a compulsory
partial redemption of shares.
The Directors have assessed at the time of the issue of these
consolidated financial statements that there are no other material
subsequent events that require adjustment to the balances as at the
year-end or disclosure in the financial statements.
BOARD OF DIRECTORS
Richard Boléat
Chairman, Remuneration and Nominations Committee Chairman,
Non-executive Director
Richard Boléat was born in Jersey in 1963. He is a Fellow of the
Institute of Chartered Accountants in England & Wales, having
trained with Coopers & Lybrand in Jersey and the United
Kingdom. After qualifying in 1986, he subsequently worked in the
Middle East, Africa and the UK for a number of commercial and
financial services groups before returning to Jersey in 1991. He
was formerly a Principal of Channel House Financial Services Group
from 1996 until its acquisition by Capita Group plc ("Capita") in
September 2005. Mr Boléat led Capita's financial services client
practice in Jersey until September 2007, when he left to establish
Governance Partners, L.P., an independent corporate governance
practice. He currently acts as Chairman of CVC Credit Partners
European Opportunities Limited and Yatra Capital Limited (in
liquidation) and Audit Committee Chairman of M&G Credit Income
Investment Trust plc, and also serves on the boards of a number of
other substantial collective investment and investment management
entities established in Jersey, the Cayman Islands and Luxembourg.
He is regulated in his personal capacity by the Jersey Financial
Services Commission.
Jonathan Bridel
Audit Committee Chairman, Non-executive Director
Mr Bridel is currently a non-executive Chairman or director of
various listed and unlisted investment funds and private equity
investment managers. Listings include The Renewables Infrastructure
Group Limited and Sequoia Economic Infrastructure Income Fund
Limited which are listed on the premium segment of the London Stock
Exchange. He is also Chairman of DP Aircraft 1 Limited and a
director of Fair Oaks Income Fund Limited. He was until 2011
Managing Director of Royal Bank of Canada's investment businesses
in Guernsey and Jersey. This role had a strong focus on corporate
governance, oversight, regulatory and technical matters and risk
management. He is a Chartered Accountant and has specialised in
Corporate Finance and Credit. After qualifying as a Chartered
Accountant in 1987, Mr Bridel worked with Price Waterhouse
Corporate Finance in London and subsequently served in a number of
senior management positions in Australia and Guernsey in corporate
and offshore banking and specialised in credit. This included
heading up an SME Lending business for a major bank in South
Australia. He was also chief financial officer of two private
multi-national businesses, one of which raised private equity. He
holds qualifications from the Institute of Chartered Accountants in
England and Wales where he is a Fellow, the Chartered Institute of
Marketing and the Australian Institute of Company Directors. He
graduated with an MBA from Durham University in 1988. Mr Bridel is
a Chartered Marketer and a member of the Chartered Institute of
Marketing, a Chartered Director and a Fellow of the Institute of
Directors and is a Chartered Fellow of the Chartered Institute for
Securities and Investment.
Richard Burwood
Management Engagement Committee Chairman, Non-executive
Director
Mr Burwood is a resident of Guernsey with 30 years' experience
in banking and investment management. During his 18 years with
Citibank London, Mr Burwood spent 11 years as a fixed income
portfolio manager spanning both banks/finance investments and Asset
Backed Securities.
Mr Burwood has lived in Guernsey since 2010, initially working
as a portfolio manager for EFG Financial Products, managing the
treasury department's ALCO Fixed Income portfolio. From 2011 to
2013, Mr Burwood worked as the Business and Investment Manager for
Man Investments, Guernsey.
In January 2013, Mr Burwood joined the board of TwentyFour
Income Fund, a London listed closed-ended fund which targets less
liquid, higher yielding asset backed securities. In January 2014,
Mr Burwood joined the board of RoundShield, a Guernsey private
equity fund, focused on European small to mid-cap real estate
opportunities. In August 2015, he became a Board Member of Funding
Circle SME Income Fund. Mr Burwood also serves on the boards of
Habrok, a Cayman-registered hedge fund specialising in Indian
equities, and EFG International Finance, a structured note issuance
vehicle based in Guernsey.
Frederic Hervouet
Risk Committee Chairman, Non-executive Director
Fred Hervouet is a resident of Guernsey and has dual nationality
with both British and French citizenship. He has more than 20 years
of experience in Hedge Funds and Capital Markets roles.
Until end of 2013, Fred was Managing Director and Head of
Commodity Derivatives Asia for BNP Paribas including Trading,
Structuring and Sales. Prior to BNP Paribas, he also worked for two
multi-billion, multi- strategy hedge funds including Quantitative
strategies (CTAs), Convertible Arbitrage, Event Driven, Fixed
Income Relative Value, Equity & Commodity Long-short, Global
Macro, and Emerging Markets Debt Fund. In the last 20 years, Fred
has worked in different aspects of the Financial Markets and Asset
Management Industry. His experience includes Derivatives Markets,
Structured Finance, Structured Products and Hedge Funds, Trading
and Risk Management.
Fred has worked in Singapore, Switzerland, United Kingdom and
France. Most recently, Mr Hervouet was a member of BNP Paribas
Commodity Group Executive Committee and BNP Paribas Credit
Executive Committees on Structured Finance projects (structured
debt and Trade Finance).
Fred now acts as a full time dedicated Non-executive Director of
a number of listed and non-listed companies. He is the Chairman of
Chenavari Toro Income Fund listed on the SFM of the LSE and a
director of Crystal Amber Fund Limited. He is also a GP on a number
of Guernsey Private Equity Funds (Terra Firma, Lakestar, Telstra
Ventures, LCH Partners).
Fred graduated from the University of Paris Dauphine, France
achieving a Masters (DESS 203) in Financial Markets, Commodity
Markets and Risk Management and an MSc in Applied Mathematics and
International Finance.
Fred has provided investment and risk management services to
corporations and institutions worldwide and worked with CEOs, CFOs
and Head of Investment Divisions. Appearances on financial programs
include CNBC, Bloomberg and other networks. He is a member of
various financial services interest Groups including the UK
Institute of Directors, the UK Association of Investment Companies,
the Guernsey Chamber of Commerce and of the Guernsey Investment
Fund Association ("GIFA").
Sachin Patel
Non-executive Director
Sachin Patel is the Chief Capital Officer at Funding Circle,
leads the Global Capital Markets group and is responsible for
investor strategy. Previously, Sachin was Vice President in the
cross-asset structured products and solutions businesses at
Barclays Capital and, prior to this, at J.P. Morgan, advising a
wide variety of investors including insurance companies, pension
funds, discretionary asset managers and private banks.
By virtue of Sachin's role at Funding Circle Ltd, Sachin is not
an independent Director. Notwithstanding this, Sachin has
undertaken in his service contract with the Company to communicate
to the Board any actual or potential conflict of interest arising
out of his position as a Director and the other Directors have
satisfied themselves that procedures are in place to address
potential conflicts of interest.
Sachin is not entitled to any fee for the services provided and
to be provided in relation to his directorship, although the
Company shall, during the course of his appointment, reimburse all
properly incurred out-of-pocket expenses incurred in the execution
of his duties as a Director.
AGENTS AND ADVISORS
SME Credit Realisation
Fund Limited
Company registration
number: 60680 (Guernsey,
Channel Islands)
Registered office Portfolio Administrator
De Catapan House Funding Circle Ltd
Grange Road 71 Queen Victoria Street
St Peter Port London EC4V 4AY
Guernsey GY1 2QG United Kingdom
Channel Islands
E-mail: ir@smecreditrealisation.com
Website: smecreditrealisation.com
Corporate broker and Bookrunner
Company Secretary and and Sponsor
Administrator Numis Securities Limited
Sanne Group (Guernsey) The London Stock Exchange
Limited Building
De Catapan House 10 Paternoster Square
Grange Road London EC4M 7LT
St Peter Port United Kingdom
Guernsey GY1 2QG
Channel Islands
Legal advisors as to UK Transfer Agent and
Guernsey Law Receiving Agent
Mourant Ozannes Link Market Services
1 Le Marchant Street Limited
St Peter Port The Registry
Guernsey GY1 4HP 34 Beckenham Road
Channel Islands Beckenham
Kent BR3 4TU
United Kingdom
Registrar
Legal advisors as to Link Market Services (Guernsey)
English Law Limited
Herbert Smith Freehills Mont Crevelt House
LLP (London) Bulwer Avenue
Exchange House, Primrose St Sampson
Street, Guernsey GY2 4LH
London EC2A, 2EG Channel Islands
United Kingdom
Legal advisors as to Independent Auditor
Irish Law PricewaterhouseCoopers
Matheson CI LLP
70 Sir John Rogerson's Royal Bank Place
Quay 1 Glategny Esplanade
Dublin 2 St Peter Port
Ireland Guernsey GY1 4ND
Channel Islands
GLOSSARY
Definitions and explanations of methodologies used are shown
below. The Company's prospectus contains a more comprehensive list
of defined terms.
"Administrator" Sanne Group (Guernsey) Limited
"Affiliates" With respect to any specified person means:
(a) any person that directly or indirectly controls,
is directly or indirectly controlled by or is directly
or indirectly under common control with such specified
person;
(b) any person that serves as a director or officer
(or in any similar capacity) of such specified
person;
(c) any person with respect to which such specified
person serves as a general partner or trustee (or
in any similar capacity).
For the purposes of this definition, "control"
(including "controlling", "controlled by" and
"under common control with") means the possession,
direct or indirect, of the power to direct or cause
the direction of the management and policies of
a person, whether through the ownership of voting
securities, by contract or otherwise.
"AGM" Annual General Meeting
"AIC Code" The AIC Code of Corporate Governance
"AIC" The Association of Investment Companies, of which
the Company is a member
AIFM" Alternative Investment Fund Manager, appointed
in accordance with the AIFMD
"AIFMD" The Alternative Investment Fund Managers Directive
"Available Cash" Cash determined by the Board as being available
for use by the Company in accordance with the Investment
Objective, and, in respect of Basinghall and Tallis,
cash determined by the Board of each of Basinghall
and Tallis Board (having regard to the terms of
the Origination Agreement and the Note) for use
by Basinghall and Tallis and excluding (without
limitation) amounts held as reserves or pending
distribution
"CE" Continental Europe
"Company Secretary" Sanne Group (Guernsey) Limited
"Credit Assets" Loans or debt or credit instruments of any type
originated through any of the Platforms
"Credit Losses" A measure of performance showing the decrease in
carrying value of Credit Assets as a result of
actual or possible default events.
"Dividend Per Share" A measure of performance showing dividend either
declared or paid for each share issued and outstanding
in the Company
"EGM" The Extraordinary General Meeting on 11 June 2019
"Fair value movement The gain or loss recognised through other comprehensive
on Credit Assets" income relating to the movement in valuation of
Credit Assets
"Funding Circle" FCGPL, Funding Circle UK, Funding Circle US, Funding
Circle CE or either of their respective Affiliates
(as defined in the Prospectus of the Company),
or any or all of them as the context may require
"Funding Circle Funding Circle CE GmbH, Funding Circle Deutschland
CE" GmbH, Funding Circle Nederlands B.V. and Funding
Circle Espa a SLU
"FCGPL" Funding Circle Global Partners Limited
"Funding Circle Funding Circle Ltd
UK"
"Funding Circle FC Platform, LLC
US"
"NAV Total Return" A measure of performance showing how the NAV per
share has performed over a period of time. This
is calculated by comparing the NAV per share at
the beginning of a period to the NAV per share
at the end of a period removing the effect of capital
returns and dividend payments.
"Near Affiliates" The relevant Irish subsidiary of the Company and
any other SPV or entity which, not being an Affiliate
of the Company, has been or will be formed in connection
with the Company's direct or indirect investment
in Credit Assets and which (save in respect of
any nominal amounts of equity capital) is or will
be financed solely by the Company or any Affiliate
of the Company
"Note" or "Profit Notes issued by Basinghall Lending Designated Activity
Participating Note" Company and Tallis Lending Designated Activity
Company under their separate note programmes
"Origination Agreements" The German Origination Agreement, the Dutch Origination
Agreement, the Spanish Origination Agreement, the
UK Origination Agreement, the US Origination Agreement,
and the CE Origination Agreements
"Platforms" The platforms operated in the UK, US and CE by
Funding Circle, together with any similar or equivalent
platform established or operated by Funding Circle
in any jurisdiction.
"Proposals" The proposals contained in the circular issued
on 21 May 2019 which were subsequently approved
at the EGM on 11 June 2019.
These included the proposals to (1) modify the
Company's Investment Objective and Policy to reflect
a realisation strategy; (2) amend its Articles
of Incorporation (the "Articles") to include a
mechanism to enable the Company to redeem shares
in the Company compulsorily so as to return cash
to shareholders; (3) appoint Funding Circle Global
Partners Limited ("FCGPL") to facilitate potential
portfolio sales on behalf of the Company and to
(4) change the name of the Company into SME Credit
Realisation Fund Limited ("SCRF") consistent to
the proposed modification of the Company's Investment
Objective and Policy.
"Prospectus" The prospectus issued on the initial IPO on 30
November 2015 and subsequently revised in February
2017 and in August 2018
"PwC" PricewaterhouseCoopers CI LLP, PricewaterhouseCoopers
Ireland
"PwC CI" PricewaterhouseCoopers CI LLP
"PwC Ireland" PricewaterhouseCoopers Ireland
"Share Price Premium A measure of performance showing difference between
or Discount to NAV" the Group's NAV per share and the prevailing share
price.
"Share Price Total A measure of performance showing how the share
Return" price has performed over a period of time. This
is calculated by comparing the change in NAV per
share (after removing the effect of capital returns
and dividend payments) over a period to the share
price of the Company.
"Share Redemption" A mechanism to enable the Company to redeem shares
compulsorily so as to return cash to Shareholders
as disclosed in the EGM circular published on 21
May 2020.
"Share repurchases" The Company's programme of repurchasing its own
shares in the secondary market.
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END
FR EAPXKAFSFEFA
(END) Dow Jones Newswires
July 27, 2021 02:00 ET (06:00 GMT)
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