TIDMSQN
RNS Number : 4604K
SQN Asset Finance Income Fund Ltd
21 September 2016
21 September 2016
FOR IMMEDIATE RELEASE
THE BOARD OF DIRECTORS OF SQN Asset Finance Income Fund Limited
ANNOUNCES THE ANNUAL REPORT AND AUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEARED 30 JUNE 2016
COMPANY OVERVIEW
The investment objective and policy of SQN Asset Finance Income
Fund Limited (the "Company" and together with its subsidiaries, the
"Group") is set out in this report.
Company SQN Asset Finance Income Fund Limited
Incorporated in Guernsey on 28 May 2014.
Registered Guernsey closed-ended investment company.
Admitted to the Official List of the UK Listing Authority and to
trading on the Main Market of the London Stock Exchange on 14 July
2014 for Ordinary Shares and 9 November 2015 for C Shares.
Registration number 58519.
Investment Managers SQN Capital Management, LLC (the "US Investment Manager")
Incorporated in the United States of America on 7 December
2007.
A Registered Investment Adviser with the United States
Securities and Exchange Commission.
File number 4466472.
SQN Capital Management (UK) Limited (the "UK Investment
Manager")
Incorporated in England & Wales on 12 May 2014.
A wholly owned subsidiary of the US Investment Manager
Registration number 09033846.
(together the "Investment Managers")
Details of other service providers are provided in the
Administration section.
FINANCIAL HIGHLIGHTS
On 9 November 2015, 180,000,000 C Shares were listed at a price
of GBP1.00 each, raising net proceeds of GBP176,907,988.
PERFORMANCE SUMMARY
(Sterling in millions, 1 July 2015 28 May 2014 to
except per share data to 30 June 30 June 2015
and number of shares 2016
in issue)
Number of Shares in
Issue
- Ordinary Shares 178,985,507 178,985,507
- C Shares 180,000,000 -
Total Net Asset Value
("NAV")
- Ordinary Shares GBP178.00 GBP178.86
- C Shares GBP176.83 -
NAV per share
- Ordinary Shares 99.45p 99.93p
- C Shares 98.24p -
Share Price(1)
- Ordinary Shares 107.00p 107.75p
- C Shares 104.50p -
Market Capitalisation(1)
- Ordinary Shares GBP191.51 GBP192.86
- C Shares GBP188.10 -
Earnings per share
- Ordinary Shares 6.64p 4.47p
- C Shares 0.66p -
Dividend paid per share
- Ordinary Shares 7.12p 3.93p
- C Shares 0.7p -
Comprehensive income GBP13.08 GBP6.32
before dividends
Investments GBP278.38 GBP99.24
Cash and cash equivalents GBP87.82 GBP75.65
Weighted average yield
(in excess of) 9.50% 9.50%
Weighted average remaining 82.69 months 72.30 months
term
Ongoing Charges
Expenses which are likely to recur in the foreseeable future and
which relate to the operation of the Company are known as ongoing
charges. Ongoing charges are based on actual costs incurred in the
year as being the best estimate of future costs excluding any
non-recurring fees in accordance with the Association of Investment
Companies ("AIC") methodology and provide shareholders with an
indication of the likely level of costs that will be involved in
managing the Group in the future. They are expressed as a
percentage of NAV. The ongoing charge for the year ended 30 June
2016 was 1.31% (30 June 2015: 1.35%).
Dividend History
Please refer to Note 13 for details on dividends paid during the
year.
(1) Source: London Stock Exchange - 30 June 2016
INVESTMENT OBJECTIVE
The investment objective of the Company is to provide its
Shareholders with regular, sustainable dividends and to generate
capital appreciation through investment, directly or indirectly, in
business-essential, revenue producing (or cost-saving) equipment
and other physical assets.
INVESTMENT POLICY
The Company will seek to invest in business-essential, revenue
producing (or cost-saving) equipment and other assets with high in
place value and long economic life relative to the investment
term.
The Company provides asset financing primarily by way of
equipment leases, loans, hire-purchase agreements, construction
finance, and residual participations. It is intended that each
investment made by the Company will generate returns either through
cash flow over the investment term or through the residual value of
the equipment or other assets at the end of the investment term.
When available, the Company targets investments in the specialist
segment of the leasing market where assets provide cash flow during
the base term of the leases as well as offering the potential for
additional proceeds through lease extensions or sales at the end of
the lease. The Company generally does not intend to invest in the
large single asset segment of the leasing market, such as wide-body
commercial aircraft leasing, which is heavily reliant on residual
value to meet its return targets, or the high volume, low margin
segment of the leasing market, such as photocopier and automobile
leasing, although it may do so, from time to time, if appropriate
opportunities are identified in these segments.
The Company may invest in assets in any industry. The Company,
however, generally expects to be invested in such industries where
the Investment Managers see the potential to make the most
attractive risk adjusted returns which currently include, but are
not limited to, Agriculture, Energy, Environmental, Manufacturing,
Material Handling, Medical, Modular Accommodation, Technology and
Transportation.
The Investment Managers will target transaction sizes below
GBP20 million but, generally, the average transaction size is
expected to be GBP3 million to GBP6 million, although it may
fluctuate based on the market opportunities and portfolio
composition that the Investment Managers believe will best achieve
the Company's investment objectives. Whilst there is no minimum
lease term, it is typical for the initial lease terms to be 3 to 10
years depending on the asset. Where appropriate, however, the term
of the lease may vary significantly from this range reflecting the
opportunities available and the needs of the lessee.
It is intended that the Company will primarily acquire assets
directly and function as the lessor under equipment lease
contracts. In such situations, the Company will own all rights,
title, and interest in and to the assets and will lease them to the
end-user. In other situations, the Company may own assets and enter
into hire-purchase agreements where the Company will own the assets
until all payments are made under the agreement and a pre-agreed
nominal purchase price is paid to the Company.
The assets held by the Company will generally be leased to a
third party and will be subject to either a direct finance (cash
flow) lease or an operating lease. The Company intends to balance
the portfolio between direct finance leases, to provide regular
cash flow, and operating leases, to provide capital appreciation
opportunities. Many, but not all, investments will be structured to
provide return of capital and interest during the lease term with
an opportunity for additional realisation from the residual value
after the initial lease term. In certain jurisdictions, direct
finance leases will be structured as loans and provide the same
advantages to the Company.
The Investment Managers will generally seek to acquire
investments and/or enter into lease arrangements that require the
lessee or other counterparty to bear all tax, maintenance,
insurance, and other costs related to the lease or the operation of
the underlying asset(s). Generally, as a result, the Company will
not be required to undertake maintenance on assets but reserves the
right to do so on an exceptional basis.
Whilst the Company will typically seek direct ownership of the
assets under lease, the Company may also obtain exposure to such
investments through holding securities that have exposure to an
underlying asset or assets that meet the Company's investment
criteria where it is more advantageous for the Company to do so or
a direct investment is not possible. This includes, but is not
limited to, holding or entering into debt securities, loan
agreements, equity securities, participation agreements, hybrid
instruments, or other securities, whilst maintaining the desired
economic exposure and level of security.
The Company may invest in residual interests in assets or
equipment. When the Company invests in residual interests, it or
its subsidiaries will acquire the rights and/or title to equipment,
assets, income or proceeds in respect of the period after the end
of the initial lease term or other underlying contract term. Cash
flow from the residual interests generally will not commence until
all of the obligations under the initial term are satisfied. Once
those obligations are satisfied, rights and/or title to the
underlying equipment, assets, income or proceeds will be
transferred to the Company or its subsidiaries. Furthermore, the
Company may elect to sell all or part of the lease receivables to a
third party investor or bank and retain its exposure to the asset
by retaining ownership of the residual value (in addition to any
proportion of the lease receivables retained). Therefore, in
relation to certain investments, the Company may be reliant on the
residual value to obtain its return on that investment. It is not
expected that residual interests would represent more than 35 per
cent of the portfolio at the time of investment.
Investments will primarily be made in the United Kingdom, the
United States and Europe which is expected to represent at least 75
per cent of the portfolio. The Company may also invest in assets
and equipment located or subject to law in Canada and Australia and
other countries, regions, or jurisdictions where the Investment
Managers believe they can adequately secure the Company's interest
in assets and equipment whilst achieving an appropriate
risk-adjusted return consistent with the rest of the portfolio.
For further details on the Investment Objective and Policy refer
to the Prospectus which can be viewed on the website,
www.sqnassetfinance.com.
CHAIRMAN'S STATEMENT
In this second Annual Report and Audited Consolidated Financial
Statements, I am pleased to confirm that, at the conclusion of
nearly twenty-four months of operations, the Group had constructed
a diverse portfolio of equipment leases and asset financing
investments which has successfully delivered consistent dividends
to investors without correlation to broader equity and debt
markets.
Over the last twelve months, the shares issued during the
Company's Initial Public Offering in July 2014, in addition to the
shares issued through the Company's subsequent placing programme
maintained a regular monthly dividend at a rate of 7.25% annually
(effective annual rate of 7.5%). During that period, the Group also
returned to the market with the issuance of a C Share class which
became the Group's third consecutive share offering to be
oversubscribed, and so, over the past financial year, the Group's
market capitalisation has increased from GBP192.86 million as at 30
June 2015 to GBP379.61 million as at 30 June 2016.
Between the Ordinary and C Shares, the Group invested GBP188.59
million during the year ended 30 June 2016 with the projected
weighted average yield on investments continuing to be in excess of
9.50%. This is particularly important since the weighted average
remaining term of investments in the portfolio is now just under 7
years (82.7 months). This means that even in a prolonged low
interest rate environment, the Group has locked in long term income
streams sufficient to support the dividends for the foreseeable
future.
For the year ended 30 June 2016, the Group generated total
income of GBP19.85 million and paid dividends totalling GBP14.01
million which translated to 7.12 pence per Ordinary Share and 0.70
pence per C Share.
As anticipated, total on-going charges decreased from 1.35% to
1.31% as a percentage of NAV, with further marginal improvement
expected as the Group continues to grow.
Both share classes have traded at healthy premiums to their net
asset value per share since their respective inceptions with the
Ordinary Shares trading at a 7.59% premium and the C Shares trading
at a 6.37% premium as at 30 June 2016.
The Group's Share Price and NAV both performed well throughout
the year, though the year-on-year performance figures included in
this annual report somewhat understate that fact since the
reporting date of 30 June 2016 was one week after the result of the
United Kingdom's referendum to leave the European Union (the
"Brexit Referendum").
Following the Brexit Referendum, both share classes were marked
lower by market-makers although no significant trades took place at
those lower levels. Once normal trading resumed, both share prices
re-set and have since reached new highs with the Group's aggregate
market capitalisation now approaching GBP400 million.
Whilst the majority of the Group's investments are
Sterling-denominated, 19.53% of the investments are
Euro-denominated and 21.27% of the investments are US
Dollar-denominated. All non-Sterling transactions are hedged for
both principal and interest over the committed term of the
investment. The steep decline of Sterling following the Brexit
Referendum had a temporary, non-cash impact on the Group's NAV. Due
to accounting policies, there is a mismatch between the recognised
asset values and the hedged value. For this reason, the Group has
to recognise unrealised fx losses in certain periods which have a
direct impact on the NAV even though, if the investments go to
term, there is no impact on the underlying cash flow. This was the
case as at 30 June 2016.
To date, none of the investments in the portfolio have been
impacted by the Brexit Referendum although the Investment Managers
continue to work with certain of the Group's counterparties in the
marine and hospitality industries, for unrelated reasons. In each
case the Investment Managers are comfortable that sufficient
collateralisation exists in the event that it is determined to be
in the Fund's best interest to restructure any of those
investments.
The investments in the portfolio are spread over more than 10
different industries and 14 different asset classes. The average
investment size of GBP6.59 million represents approximately 1.86%
of the Group's NAV. The three industries with the highest exposures
in the portfolio are the agricultural, manufacturing and
transportation industries. Each of these industries are
asset-intensive, requiring robust, long-lived capital equipment as
the primary means of generating revenue and therefore are ideal
industries for asset financing and equipment leasing
opportunities.
The Group continues to maintain a regular pipeline of over
GBP100 million of potential investments to deploy the balance of
the C Share proceeds as well as reinvest principal repayments and
excess income over the dividend and operating expenses. Further, to
the extent that banks were becoming more active in the equipment
leasing and asset finance arena, it is now likely that uncertainty
in the financial markets following the outcome of the Brexit
Referendum will cause banks and other heavily-regulated traditional
financing sources to restrict their lending which should provide
additional opportunities for the Group.
During the year, the Board has undertaken a due diligence visit
to the Investment Manager's office in New York and has also
commenced a programme of visiting projects within the portfolio to
gain a greater understanding of the industries and specific
investments the Group has funded.
In light of the Group's consistent performance and healthy
pipeline coupled with strong investor demand recently pushing the
share price to an all-time high, I am pleased to say that your
Board anticipates raising additional capital before the end of
2016.
STRATEGIC REPORT
The Investment Objective and Policy, the Chairman's Statement
and the Investment Managers' Report form part of the Strategic
Report. A review of the Company's activities is provided in the
Company Overview, the Chairman's Statement and the Investment
Managers' Report. These include a review of the business of the
Group and its core activities, the principal risks and
uncertainties it faces, dividend policy and results for the
year.
Structure
The Company is a non-cellular company limited by shares,
incorporated in Guernsey on 28 May 2014. The Company is regulated
in Guernsey by the Guernsey Financial Services Commission as a
Registered Closed-ended Collective Investment Scheme.
The Company is a member of the AIC and is classified within the
Specialist: Leasing sector.
Share Capital
The Company's issued share capital as at 30 June 2016 consisted
of 178,985,507 Ordinary Shares and 180,000,000 C Shares of no par
value. The share capital of the Company is represented by an
unlimited number of shares of no par value. All shares hold equal
voting rights with no restrictions and no shares carry special
rights with regard to the control of the Company. There are no
special rights attached to the shares in the event that the Company
is wound up.
The IPO of the Company took place on 9 July 2014, raising gross
proceeds of GBP150,000,000. The initial 150,000,000 Ordinary Shares
were admitted to the Premium Segment of the UK Listing Authority's
Official List and to trading on the Main Market of the London Stock
Exchange on 14 July 2014.
On 5 June 2015, the Company raised gross proceeds of
GBP30,000,000 through the placing of 28,985,507 Ordinary Shares at
an issue price of 103.5 pence per Ordinary Share.
In November 2015, net proceeds of GBP176,907,988 were raised
through the issue of 180,000,000 C Shares, which were admitted to
the Main Market of the London Stock Exchange on 9 November
2015.
Subsidiaries
The following wholly owned subsidiaries of the Company were
incorporated in Guernsey during the year:
-- SQN AFIF (Cobalt) Limited incorporated on 16 March 2016
-- SQN AFIF (Diamond) Limited incorporated on 16 March 2016
The Directors of all subsidiaries are the same as the
Company.
Diversification Strategy
The Group's portfolio is subject to diversification policies
limiting the maximum amount of capital that can be invested in a
single asset, in a single asset class, in assets held by a
corporation or group or held by companies in a specific industry
and as a percentage of NAV of the portfolio, measured at the time
of investment, as follows:
-- Maximum by asset: 15%
-- Maximum by asset class: 30%
-- Maximum by corporation or group: 15%
-- Maximum by industry: 30%
Principal Risks and Uncertainties
When considering the total return of the Group, the Board takes
account of the risk which has been taken to achieve that return.
The Board looks at numerous risk factors, an overview of which is
set out below:
Industry/Sector risk
The Group's success is subject to risks inherent in the
equipment leasing and finance business; in particular, the quality
of the assets it acquires and the risk of default by the Group's
lessees or other counterparties, which may affect the Group's
ability to operate profitably. Further, any decline in the residual
value of the Group's underlying assets at the end of a lease term,
which will depend on factors outside the Group's control, may erode
the ability of the Group to make a profit on those investments.
Geopolitical and economic risks
It is the intention of the Group to lease or make loans to
customers in several jurisdictions exposing the Group to potential
economic, social, legal and political risks. The adequacy and
timeliness of management's response to risks in these jurisdictions
are of critical importance to the mitigation of these risks. The
Board considers management to include third parties such as the
Investment Managers and the administrator to whom the Board has
delegated responsibility for key operations and day to day
functions.
Key personnel risk
The Group's performance is dependent on services provided by the
Investment Managers. The departure of a key employee from the
Investment Managers may adversely affect the returns available to
the Group.
Interest rate changes may reduce the value of the Group's
portfolio and the Group's returns
Changes in interest rates will affect the market value of the
Group's portfolio. In general, the market value of an equipment
lease will change in inverse relation to an interest rate change
when the lease has a fixed rate of return. The same is true for
fixed rate asset finance contracts and notes. Thus, in a period of
rising interest rates, the market value of the Group's equipment
leases and other fixed rate contracts will decrease. A decrease in
the market value of the Group's portfolio will adversely affect the
Group's ability to liquidate it without suffering losses. In times
of interest rate rises, protection to real returns will be
conditional on future leases being written at higher rates.
Movements in foreign currency rates may result in losses
The Group will enter into investment transactions where the
payments to be made or received are not in Sterling. The Investment
Managers hedge the principal amount of such investments and
anticipate that, where appropriate, they may also hedge the
expected income against foreign currency fluctuation risks.
However, there can be no assurance that the hedges put in place are
cost-effective or will provide adequate protection in all
circumstances. Refer to Note 16 for more detail on hedging.
Regulatory risk
Changes in law or regulation may adversely affect the Group's
ability to carry on its business or may increase the Group's
on-going charges.
Tax risk
Changes in tax legislation could result in adverse changes in
the tax position of the Group or the imposition of additional and
possibly material tax liabilities on Shareholders.
Other risks
The Directors wish to draw the attention of Shareholders to the
other risks as set out in the Company's Prospectus, which is
available on the Group's website: www.sqnassetfinance.com. Refer to
Note 16, for details on the Group's risk mitigation strategies and
details of additional risks.
Going Concern
Going concern refers to the assumption that the Group has the
resources to continue in operation for the foreseeable future.
After analysing the following, the Directors believe that it is
appropriate to adopt the going concern basis in preparing these
Financial Statements:
-- Working capital - As at 30 June 2016, there was a working
capital surplus. The Directors noted that as at 30 June 2016 the
Group had no borrowings and therefore has sufficient capital in
hand to cover all expenses (which mainly consist of Investment
Managers' fees, administration fees and professional fees) and to
meet all its obligations as they fall due.
-- Consideration of various areas of possible financial risk,
including comprehensive financial forecasts.
-- Closed-ended Company - The Company has been registered with
the Guernsey Financial Services Commission as a Registered
Closed-ended Collective Investment Scheme, as such Shareholders
have no right to have their Ordinary Shares redeemed, and there
will therefore be no cash flows out of the Company in this
respect.
Given the nature of the Group's business, the Directors have a
reasonable expectation that the Group has adequate financial
resources to continue in operational existence for the foreseeable
future. Accordingly, the Financial Statements have been prepared on
a going concern basis.
Viability Statement
The Directors are required to make a Viability Statement which
explains how they have assessed the prospects of the Company, over
what period they have done so and why they consider that period to
be appropriate, taking into account the Company's current position
and principal risks.
The Directors have conducted a robust assessment of the
viability of the Company over a three year period, taking account
of the Company's current position and the potential impact of the
principal risks. This statement is made on the assumption that
continuation votes will be passed throughout the period under
assessment (see Life of the Company section).
The Directors have determined that a three year period is an
appropriate time over which to provide its viability statement as
this takes account of the average weighted life of the
portfolio.
In making their assessment, factors taken into consideration by
the Directors included the Company's NAV, dividend cover and cash
flows. These factors were subjected to stress tests which involved
sensitivity analysis of the key assumptions underlying the
forecast. Where appropriate, this analysis was carried out to
evaluate the potential impact of the Company's principal risks
occurring, severe changes to macro-economic conditions, increased
defaults and counterparty risks.
Based on this assessment, the Directors have a reasonable
expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due over the three year
period to 30 June 2019.
Key Related Party Transactions
The contracts with the US Investment Manager (and related
entities) and the UK Investment Manager are the key related party
transactions currently in place. Other than fees payable in the
ordinary course of business, there have been no material
transactions with these related parties which have affected the
financial position or performance of the Group in the year. Further
details on related party transactions can be found in Note 17.
Financial Review
At 30 June 2016, the Net Assets of the Group amounted to
GBP354,829,918 (30 June 2015: GBP178,855,243).
Borrowing
The Group does not currently intend to utilise borrowings on a
portfolio basis for investment purposes. The Group, however, may,
from time to time, utilise borrowings for share buybacks and short
term liquidity purposes, but such borrowings will not, in any
event, exceed 15% of the Group's NAV at the time of investment.
This does not prevent the Group from purchasing the equity or
subordinated participation in a special purpose entity set up to
own an asset or a pool of assets or equipment, which itself may be
geared.
Hedging
The Investment Managers seek to hedge the expected income on the
Group's portfolio and anticipate that they may hedge the principal
amount of investments and, where appropriate, expected income
against foreign currency fluctuation risks. Accordingly, the Group
may use derivative instruments to hedge against foreign currency
risks, although there can be no certainty as to the efficacy of any
such hedging. Hedging arrangements, however, will be implemented
only when suitable hedging contracts, such as currency swap
agreements, futures contracts, options and forward currency
exchange and other derivative contracts, are available in a timely
manner and on terms acceptable to the Group. The Group may
otherwise employ the use of derivatives for efficient portfolio
management purposes but derivatives will not be employed for
investment purposes.
Performance Measurement and Key Performance Indicators
In order to measure the success of the Group in meeting its
objectives and to evaluate the performance of the Investment
Managers, the Directors take into account the following performance
indicators:
-- Returns and NAV - The Board reviews and compares at monthly
meetings the performance of the portfolio as well as the NAV,
income, dividend and share price of the Company.
-- Discount/premium to NAV - at monthly meetings the Board
monitors the level of the Group's discount or premium to NAV. The
Group publishes the NAV per share on a monthly basis through the
official newswire of the London Stock Exchange.
-- Formal quarterly reports from the Investment Managers and
Broker, which assess the performance of the Group, including asset
quality and cash flow.
INVESTMENT MANAGERS' REPORT
Overview
In a market with investors seeking regular income with an
attractive risk-adjusted return, equipment leasing and asset
finance investments remains one of the few sectors capable of
delivering higher yields on a relatively non-correlated basis with
hard assets securing the investments.
With a particular focus on business-essential assets and
equipment in the GBP1 million to GBP20 million range, the Group has
been able to build a diversified portfolio of nearly GBP300 million
which pays monthly dividends at a target rate of 7.25% annually and
an overall return target of 8% to 10%. As at 30 June 2016, the
Group had an additional GBP87.82 million of cash on hand which had
already been committed or scheduled to be drawn through the balance
of 2016.
The portfolio consists of equipment leases, secured loans, and
project financings spread across 42 separate counterparties. The
portfolio, as currently constructed, does not utilise leverage to
generate returns and yet it has been able to achieve a projected
weighted average yield across the portfolio of more than 9.5% per
annum.
Seven transactions, representing investments totalling GBP28.89
million have reached maturity or been brought to an early
conclusion through the year ended 30 June 2016. Those investments
generated yields between 8.43% and 16% per annum with a weighted
average effective annual return on investment of 12.15%.
There have been no asset impairments to date. However, the Group
has granted certain concessions, such as interest-only payments for
a period, to one of the operators of marine vessels which were
financed by the Group, as well as for the operators of remotely
operated subsea vehicles which are on lease from the Group. The
Group has also entered into discussions relating to restructuring
with the lessee of modular accommodations under a long-term lease.
In each case, a review of the underlying collateral has been
undertaken and, at this time, the Investment Managers believe there
is sufficient value to cover all principal and interest payments
due to the Group, over time.
Portfolio Diversification
Risk in the portfolio is spread over more than 10 different
industries and 14 different asset classes as well as over currency,
geography, and investment structure.
Significant Transactions Accounting for 5% or more of Net Asset
Value
Anaerobic Digestion Plants
One of the most important asset classes within the portfolio is
the Group's investments in anaerobic digestion plants. The Group
has invested approximately GBP54.7 million, representing 15.42% of
NAV, in leases and project financing transactions for anaerobic
digestion plants ("AD Plants"). AD Plants are a closed system that
processes organic material to produce methane which can be used as
a fuel source or fed into a combined heat and power unit to create
electricity and heat. The AD Plants that are financed by the Group
are run on agricultural waste as the primary component of the
feedstock. The majority of the cash flow generated from operations
is derived from long-term, non-cancellable government subsidies
related to the production of electricity. Each investment is backed
by a full Engineering Procurement Construction (EPC) contract and a
performance warranty to ensure a minimum level of production. The
average term of the Group's investments in AD Plants is over 10
years at rates in excess of 10%. It should be noted that the AD
Plants that are farm-based and are primarily sourced with
agricultural waste are categorized as agricultural industry
exposure as opposed to energy industry exposure because the core
business of the Fund's counterparties are not energy-related.
Further, AD Plants, Combined Heat and Power Units (CHP), and Wind
Turbines would each be energy assets, if a broader definition was
applied.
Glass Manufacturing Plant
The largest single investment made by the Group was an
approximately GBP27.2 million investment, representing 7.66% of
NAV, in a major glassware manufacturer in France. The lessee is one
of the largest plate and cup manufacturers in the world with over
3,000 separate products and specialty contracts with some of the
world's most recognized brands. The financing was provided in
conjunction with an acquisition and recapitalisation of the
company. The lease is secured by all but one of the company's
production lines including their large blast furnaces and all the
ancillary equipment.
Semiconductor Manufacturing Equipment
After successfully exiting two investments in semiconductor
manufacturing and testing equipment with yields between 9.93% and
10.35% per annum, the Group made two new investments in
semiconductor manufacturing equipment for two unrelated
manufactures of solar photovoltaic microchips and panels. The first
investment was for a France-based public company in the approximate
amount of GBP8.8 million that contained an element of VAT financing
which was refunded reducing the Group's exposure to approximately
GBP7.2 million. The Group's other investment, of approximately
GBP21.1 million was to finance the expanded capacity of a US-based
manufacturer who was acquired by a large publicly traded Chinese
conglomerate during the course of the underwriting process. The
Group's investment was ultimately guaranteed by the acquirer. The
two investments together represent 7.98% of NAV.
Marine Vessels
The Group has provided financing under three separate
transactions for marine vessels. The largest of the three
investments was in the form of ship mortgages for two Supramax Dry
Bulk Carriers built in 2002 and 2003. This one investment of
approximately GBP15.5 million represents 4.36% of NAV. This
investment has performed without incident with all payments made on
time when due.
The Group has also provided financing for four Jumbo Class
Multipurpose Vessels built between 2007 and 2009 with a different
operator. This investment of approximately GBP14.1 million
represents 3.96% of NAV. The operator of these vessels has come
under pressure as the result of lower than expected charter rates
across its entire fleet. As a consequence, this account has
occasionally been in arrears but had made all payments and was
current as at 30 June 2016. These vessels have been valued within
the last 60 days and it has been determined that the investment
remains over-collateralised even at distressed disposal levels.
During 2016, the Group made an additional investment of
approximately GBP2 million in a newly built supply vessel subject
to a nine year fully amortising lease. The Group's total exposure
to marine vessels is approximately 8.32% of NAV as at 30 June 2016,
which is a reduced concentration from approximately 15.20% as at 30
June 2015.
Paper Mill
The Group entered into an approximately GBP20 million sale and
leaseback of a paper mill in Scotland for a well-known specialty
paper company that was consolidating operations from multiple
international plants into the Scottish facility. This investment
represents 5.43% of NAV. The company was originally founded in 1761
and was a constituent of the FTSE 100 on the London Stock Exchange
until it was taken private in 2000. The company is one of the few
in the world capable of producing paper stock for currencies. The
equipment being financed includes the industrial reel wrappers, the
speciality and colour paper manufacturing machines, the bespoke
currency paper production equipment, and the business stationary
and watermarking tools.
Fundamental Investments
One of the key components of the investment strategy is focusing
on transaction sizes which have historically been too large for
'High Street' Funders to underwrite efficiently and too small for
larger structured funders to justify their resources in due
diligence. Transactions of this nature enhance the Group's
portfolio in two ways. Firstly, these transactions tend to be
higher yielding than investment opportunities of similar credit
quality that are within the comfort zone of traditional lenders.
Secondly, the size of these transactions make it possible to
increase the overall diversity of the portfolio while being
substantial enough that the underlying assets commonly have
meaningful secondary market value and liquidity. Examples of these
types of investments within the portfolio include multiple leases
for plant hire equipment and machine tools used in the automobile
manufacturing industry.
Top Ten Holdings
Investment Net Yield % of Asset
Asset (GBP) per Annum NAV Industry Class Region
=================== ===== =========== =========== ====== =============== ============== ============
29,585,307
Glass Factory EUR (i) 9.14% 8.34% Glassware Manufacturing France
AD Plant GBP 24,608,621 9.81% 6.94% Agriculture AD UK
Manufacturing 22,946,589
Equipment USD (ii) 11.00% 6.47% Solar Manufacturing US
Paper
Paper Mill GBP 19,249,747 9.47% 5.43% Paper Mill UK
15,468,380
Vessels USD (iii) 10.28% 4.36% Transportation Vessels UK
14,251,051
IT Infrastructure EUR (iv) 9.19% 4.02% Hospitality IT & Telecom Netherlands
14,054,798
Vessels EUR (v) 10.81% 3.96% Transportation Vessels Netherlands
Diversified
Portfolio 13,190,591
Interest USD (vi) 9.61% 3.72% Portfolios Portfolios US
Medical 9,690,583
Equipment USD (vii) 11.26% 2.73% Medical Medical US
Combined
Heat & Power
Unit GBP 9,301,239 9.41% 2.62% Agriculture CHP UK
(i) Actual net exposure is GBP27,196,541 representing 7.66% of NAV
(ii) Actual net exposure is GBP21,139,328 representing 5.96% of NAV
(iii) Actual net exposure is GBP13,224,524 representing 3.73% of NAV
(iv) Actual net exposure is GBP12,309,889 representing 3.47% of NAV
(v) Actual net exposure is GBP13,408,817 representing 3.78% of NAV
(vi) Actual net exposure is GBP11,418,088 representing 3.22% of NAV
(vii) Actual net exposure is GBP8,453,292 representing 2.38% of NAV
The financial statements show the Group's gross position in
investments without adjustment for foreign currency hedges. It
should be noted, the Group does not adopt hedge accounting under
IFRS. In each noted case, the position is offset by a corresponding
hedge contract which reduces the exposures as indicated above.
Outlook
The first half 2016 was a period of prolonged uncertainty which
began with market volatility across Asia and culminated in a
market-unexpected vote for the U.K. to leave the E.U. While
businesses tended to hold off borrowing and growth-related
decisions leading into the Brexit Referendum, interest rates
continued to stay at historically low levels with some additional
markets entering into negative rate territory. These macro
conditions had a minimal effect on the Group's portfolio and
pipeline which evidenced itself with strong share price
performance.
Heading into the second half of the year, the climate of
uncertainty has become more pronounced. Businesses and lenders are
both assessing operations in light of a new relationship between
the U.K. and the rest of the world while at the same time the U.S.
is holding a presidential election the results of which are likely
to have a meaningful market impact. Interest rates in the U.K. are
likely to stay low for the foreseeable future but it is reasonable
to assume that credit will remain tight and potentially
tighten.
It is the opinion of the Investment Managers that the Group is
well-positioned to profitably trade under current conditions as
well as within the context of whatever the ultimate outcome of the
Brexit Referendum and the U.S election. There are multiple
underlying factors that are at the foundation of this
assessment.
The Group operates on a permanent capital basis. This has
enabled the construction of a portfolio with a weighted average
remaining term of almost seven years at a projected yield of over
9.5% per annum. The fixed rate and non-cancellable nature of the
contracts ensures long-term income streams regardless of the
current interest rate environment.
The Group has sufficient deal flow already identified to deploy
all of the cash on hand plus the anticipated run-off of the
portfolio. Further, tighter credit from banks expands the potential
customer base of the Group and sets up an opportunity to increase
market share.
The Group's focus on business-essential, mission critical, core
assets and equipment means that growth is not necessary for
investments to perform but rather the threshold is sustained
operations.
The current market gives the Group the venue to prove the
investment objective of providing non-correlated performance, which
has been the case for 2016. All in all, the Investment Managers
expect this to be a period of sustained growth for the Group with
the aim of expanding its origination capacity in both the U.S. and
the U.K. and further increasing the asset base by calendar
year-end.
DIRECTORS' REPORT
The Directors present the Annual Report and Financial Statements
of the Group for the year ended 30 June 2016.
Board of Directors
The Directors of the Company who served during the year
were:
Peter Niven (Chairman)
John Falla
Carol Goodwin
Christopher Spencer
Directors' Interests
All Directors held a minor interest in the Company's share
capital during the year ended 30 June 2016 as below. There have
been no changes in the interests of the Directors since the year
end.
Director Number of Ordinary Number of C
Shares Shares
Peter Niven 40,000 20,000
John Falla 10,000 9,706
Carol Goodwin 30,000 15,000
Christopher Spencer 10,000 10,000
Notifications of Shareholdings
During the year ended 30 June 2016, the Company had been
notified in accordance with Chapter 5 of the Disclosure and
Transparency Rules (which covers the acquisition and disposal of
major shareholdings and voting rights), of the following voting
rights as a Shareholder of the Company. When more than one
notification has been received from any Shareholder only the latest
notification is shown.
Notifications of Shareholdings Number of Percentage
Shares of total voting
rights (%)
Investec Wealth & Investment
Limited 42,948,446 11.96%
Schroders plc 36,051,235 10.04%
Sarasin & Partners LLP 18,627,408 5.19%
Rathbone Brothers plc 12,968,751 3.61%
Life of the Company
The Company has an indefinite life. The Directors shall propose
one or more ordinary resolutions at the Annual General Meeting (the
"AGM") to be held in 2017 and at every third AGM thereafter that
the Company continues as a closed-ended investment company (the
"Continuation Resolution"). In the event that a Continuation
Resolution is not passed, the Directors shall formulate proposals
to be put to Shareholders as soon as is practicable but, in any
event, by no later than six months after the Continuation
Resolution is not passed, to reorganise, unitise or reconstruct the
Company or for the Company to be wound up with the aim of enabling
Shareholders to realise their holdings in the Company.
Dividends
The Company targets a dividend of 7.25 pence per Ordinary Share.
The dividend target is a target only and there can be no guarantee
that this will be achieved. Dividends were initially declared and
paid quarterly with the first ordinary share dividend declared for
the period to 30 September 2014, and were declared and paid monthly
from January 2015.
Quarterly dividends on the C Shares were declared for the
periods to 31 January 2016 and 30 April 2016, with monthly
dividends declared for the period from May 2016 onwards.
Refer to Note 13 for details on dividends that the Company has
declared and paid to its Shareholders during the year and Note 18
for details on dividends declared and paid after the year end.
Ordinary Share Buybacks
On 19 November 2015 the Directors were granted authority to
repurchase 26,829,927 Ordinary Shares (being equal to 14.99% of the
number of Ordinary Shares in issue) for cancellation or to be held
as treasury shares. This authority, which has not been used, will
expire at the forthcoming AGM. The Directors intend to seek annual
renewal of this authority from the Shareholders. Pursuant to this
authority, and subject to the Companies Law and the discretion of
the Directors, the Company may purchase Ordinary Shares in the
market if they believe it to be in Shareholders' interests; in
particular, as a means of correcting any imbalance between the
supply and demand for the Ordinary Shares.
Indemnities
To the extent permitted by Guernsey Law, the Company's Articles
provide an indemnity for the Directors against any liability except
such (if any) as they shall incur by or through their own breach of
trust, breach of duty or negligence.
During the year, the Group has maintained insurance cover for
its Directors and Officers under a Directors' and Officers'
liability insurance policy.
2016 AGM
The AGM will be held in Guernsey on 24 November 2016. The notice
for the AGM sets out the ordinary and special resolutions to be
proposed at the meeting. Separate resolutions are proposed for each
substantive issue.
The Articles of the Company state that fourteen clear days'
notice of the AGM of the Company is required. It is, however, the
intention of the Board that the Notice of AGM is issued to
Shareholders so as to provide at least twenty business days' notice
of the meeting. The Directors welcome communication with all
Shareholders and can be contacted in writing at the Company's
Registered Address, which can be found in the Administration
section.
Voting on all resolutions at the 2016 AGM will be on a poll. The
proxy votes cast, including details of votes withheld are disclosed
to those in attendance at the meeting and the results are published
on our website and announced via the Regulatory Information
Service.
DIRECTORS' STATEMENT OF RESPONSIBILITIES
The Directors are responsible for preparing Financial Statements
for each financial year which give a true and fair view, in
accordance with applicable Guernsey law and International Financial
Reporting Standards as adopted by the European Union ('IFRS'), of
the state of affairs of the Group and of the profit or loss for the
year. In preparing those Financial Statements, the Directors are
required to:
-- Select suitable accounting policies and 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 Financial Statements; and
-- Prepare the 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 Financial Statements comply with the Companies (Guernsey) Law,
2008, as amended ("Companies Law"). The Directors are also
responsible for safeguarding the assets of the Group and hence for
taking reasonable steps for the prevention and detection of fraud
and other irregularities.
The Directors confirm to the best of their knowledge that:
-- the Financial Statements which have been prepared in
conformity with IFRS and give a true and fair view of the assets,
liabilities, financial position and profit of the Group, and the
undertakings included in the Financial Statements taken as a whole
as required by the United Kingdom Listing Authority Disclosure and
Transparency Rules ("DTR") 4.1.12R and are in compliance with the
requirements set out in the Companies Law;
-- the Financial Statements include a fair review of the
information required by DTR 4.1.8R and DTR 4.1.11R, which provide
an indication of important events and a description of principal
risks and uncertainties during the year;
-- there is no information relevant to the preparation of their
report of which the Group's external auditor, Baker Tilly CI Audit
Limited (the "Auditor") is unaware and he or she has taken all
steps a Director might reasonably be expected to have taken to be
aware of relevant audit information and to establish that the
Auditor is aware of that information; and
-- 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 Group's performance,
business model and strategy.
The maintenance and integrity of the Company's website is the
responsibility of the Directors; the work carried out by the
Auditor does not involve consideration of these matters and,
accordingly, the Auditor accept no responsibility for any changes
that may have occurred to the Annual Report and 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.
DIRECTORS' BIOGRAPHIES
Peter Niven (Non-executive Chairman)
Peter Niven, is a resident of Guernsey. He has worked in the
financial services industry in the UK, offshore and internationally
for over 40 years, 30 of those with the Lloyds Banking Group from
which he retired in 2005 as the head of the Group's Offshore
Banking Division. Since then Peter has worked for the Guernsey
Government and the local financial services sector, through
Guernsey Finance, with the remit to develop and promote the island
on the world stage as a premier international finance centre. He
retired from that role in December 2012.
He now acts as a non-executive director on a broad portfolio of
listed (LSE, AIM, CISE) and unlisted investment funds investing in
asset classes including property, hedge funds, emerging markets and
private equity and has wide experience of chairing Boards, Audit
and Management Committees. He is also a director of ABTA's Guernsey
captive insurance entity. Peter is a Fellow of the Institute of
Bankers, a Fellow of the Institute of Directors and a Chartered
Director.
John Martyn Falla (Non-executive Director)
John Falla, a Guernsey resident, is a Chartered Accountant and
has a BSc Hons degree in Property Valuation and Management from The
City University, London. He is a Chartered Fellow of the Chartered
Institute for Securities and Investment having been awarded their
diploma. He is a non-executive director and consultant to a number
of companies, most of which are listed on the London Stock
Exchange.
John trained with Ernst & Young in London before moving to
their Corporate Finance Department. On returning to Guernsey he
worked for an International Bank, before joining the Channel
Islands Stock Exchange as a member of the Market Authority. In 2000
John joined the Edmond de Rothschild Group in Guernsey and provided
corporate finance advice to clients including open and closed-ended
investment funds, and institutions with significant property
interests. John was a director of a number of Edmond de Rothschild
group operating and investment companies.
Carol Patricia Goodwin (Non-executive Director)
Carol Goodwin has extensive experience in the finance industry
and has held senior executive positions with several European and
North American banks, managing businesses in London, Toronto,
Montreal, Amsterdam, Nassau and Guernsey. Since 2002 Carol has
devoted her time to non-executive director roles. She currently
serves as a non-executive director for a local bank and a number of
other financial services entities, including a variety of listed
and unlisted investment funds and property companies. Carol has a
strong background in corporate governance and risk management.
Ms Goodwin is a Fellow of the Institute of Canadian Bankers
(FICB), a Trust and Estate Practitioner (TEP), a Chartered Director
(C.Dir.) and a Fellow of the Institute of Directors (FioD).
Christopher Paul Spencer (Non-executive Director)
Christopher Spencer, a resident of Guernsey, qualified as a
chartered accountant in London in 1975. Following two years in
Bermuda he moved to Guernsey. Christopher, who specialised in audit
and fiduciary work, was Managing Partner/Director of Pannell Kerr
Forster (Guernsey) Limited from 1990 until his retirement in May
2000. Christopher is a member of the AIC Offshore Committee, a past
President of the Guernsey Society of Chartered and Certified
Accountants and a past Chairman of the Guernsey Branch of the
Institute of Directors. Christopher sits on the Board of Directors
of JPEL Private Equity Limited, John Laing Infrastructure Fund
Limited, Ruffer Investment Company Limited, each of which is listed
on the London Stock Exchange and Summit Germany Ltd which is an AIM
listed company.
CORPORATE GOVERNANCE REPORT
Introduction
The Board is committed to high standards of corporate governance
and has put in place a framework for corporate governance which it
believes is appropriate for an investment company.
Compliance with Corporate Governance Codes
The Company is a member of the AIC. The UK Corporate Governance
Code (the "UK Code") acknowledges that the AIC Corporate Governance
Code ("AIC Code") can assist externally managed companies in
meeting their obligations under the UK Code in areas that are of
specific relevance to investment companies. The Guernsey Financial
Services Commission has also confirmed that companies that report
against the UK Code or AIC Code are deemed to meet the Guernsey
Code of Corporate Governance. Copies of the AIC Code and the AIC
Guide can be found at www.theaic.co.uk. The UK Code is available
from the Financial Reporting Council website (www.frc.co.uk).
Throughout the year ended 30 June 2016, the Company has complied
with the recommendations of the AIC Code and as such also meets the
requirements of the UK Code except to the extent highlighted
below:
-- the role of the chief executive;
-- executive Directors' remuneration;
-- Senior Independent Director; and
-- internal audit function.
For the reasons set out in the AIC Guide, and as explained in
the UK Code, the Board considers these provisions are not relevant
to the position of the Group, being an externally managed
investment company. In particular, all of the Group's day-to-day
management and administrative functions are outsourced to third
parties. As a result, the Group has no executive directors, direct
employees or internal operations. The Group has therefore not
reported further in respect of these provisions.
The Group complies with the corporate governance statement
requirements pursuant to the UK Financial Conduct Authority's
("FCA") Disclosure and Transparency Rules by virtue of the
information included in the Corporate Governance section of the
Annual Report.
The Board believes that this Annual Report and Financial
Statements presents a fair, balanced and understandable assessment
of the Group's position and prospects, and provides the information
necessary for Shareholders to assess the Group's performance,
business model, strategy, principal risks and uncertainties.
Directors
All Directors were appointed on 28 May 2014. The Directors
are:
Peter Niven (Non-executive Chairman)
John Martyn Falla (Non-executive Director)
Carol Patricia Goodwin (Non-executive Director)
Christopher Paul Spencer (Non-executive Director)
Directors' Duties and Responsibilities
The Directors have adopted a set of Reserved Powers, which
establish the key purpose of the Board and detail its major duties.
These duties cover the following areas of responsibility:
-- statutory obligations and public disclosure;
-- approval of key investment decisions;
-- strategic matters and financial reporting;
-- Board composition and accountability to Shareholders;
-- risk assessment and management, including reporting,
compliance, monitoring, governance and control; and
-- other matters having material effects on the Group.
These reserved powers of the Board have been adopted by the
Directors to demonstrate clearly the importance with which the
Board takes its fiduciary responsibilities and as an ongoing means
of measuring and monitoring the effectiveness of its actions.
The Board meets at least four times each year and monitors the
Group's share price and NAV and regularly considers ways in which
future share price performance can be enhanced. The Board is
responsible for the safeguarding of the assets of the Group and
taking reasonable steps for the prevention and detection of fraud
and other irregularities. The Investment Managers together with the
Company Secretary also ensure that all Directors receive, in a
timely manner, all relevant management, regulatory and financial
information relating to the Group and its portfolio of investments.
Directors unable to attend a Board meeting are provided with the
Board papers and can discuss issues arising in the meeting with the
Chairman or another Non-executive Director.
Individual Directors may, at the expense of the Group, seek
independent professional advice on any matters that concerns them
in the furtherance of their duties.
Board and Committees
The Board has established three committees, the Audit and Risk
Committee, the Management Engagement Committee, and the
Remuneration and Nomination Committee. Due to the size and nature
of the Company all Directors have been appointed to all Committees.
The responsibilities of these Committees are described below. Terms
of reference for each Committee have been approved by the Board and
are available in full on the Company's website.
Board
Responsibilities:
-- Statutory obligations and public disclosure.
-- Approval of key investment decisions.
-- Strategic matters and financial reporting.
-- Board composition and accountability to Shareholders.
-- Risk assessment and management, including reporting,
compliance, monitoring, governance and control.
-- Responsible for financial statements.
Audit and Risk Committee
Delegated Responsibilities:
-- Review the financial statements, including review of the
accounting policies and methods utilised.
-- Review the effectiveness and internal control policies and
procedures over financial reporting and identification, assessment
and reporting of risk.
-- Make recommendations to the Board in relation to appointment,
re-appointment and removal of external auditors and approving
remuneration and terms of engagement of external auditors.
-- To monitor risk management and internal control systems on an
ongoing basis, performing a review of their effectiveness, and
recommending actions to remedy any failings or weaknesses
identified.
Management Engagement Committee
Delegated Responsibilities:
-- Review on a regular basis the performance of the Investment
Managers and the Group's key advisers and major service suppliers
to ensure that performance is satisfactory and in accordance with
the terms and conditions of the respective appointments.
Remuneration and Nomination Committee
Delegated Responsibilities:
-- Review the structure, size and composition of the Board.
-- Give full consideration to succession planning
-- Identify suitable Board candidates to fill Board vacancies.
-- Make recommendations as to the appropriate level of Directors' remuneration.
-- Undertake Board performance evaluations.
Audit and Risk Committee
Mr Spencer is the Chairman of the Audit and Risk Committee. The
duties of the Audit and Risk Committee in discharging its
responsibilities are outlined above. The report on the role and
activities of this Committee and its relationship with the external
auditors is contained in the Audit and Risk Committee Report.
Management Engagement Committee
Mr Falla is the Chairman of the Management Engagement Committee.
The duties of the Management Engagement Committee in discharging
its responsibilities are outlined above.
The Management Engagement Committee carries out its review of
the Group's key advisers through consideration of a number of
objective and subjective criteria and through a review of the terms
and conditions of the advisers' appointments with the aim of
evaluating performance, identifying any weaknesses and ensuring
value for money for the Company's Shareholders. The Management
Engagement Committee formally reviewed the performance of the
Investment Managers and other key service providers to the Group,
most recently on 20 May 2016. During this review, no material
weaknesses were identified. Overall the Management Engagement
Committee confirmed its satisfaction with the services and advice
received.
Remuneration and Nomination Committee
Ms Goodwin is the Chairman of the Remuneration and Nomination
Committee. The duties of the Remuneration and Nomination Committee
in discharging its responsibilities are outlined above.
The Remuneration and Nomination Committee undertakes an
evaluation of the Board on an annual basis. The performance of each
Director is considered as part of a formal review by the
Remuneration and Nomination Committee. The Directors also meet
without the Chairman of the Board present in order to review his
performance.
During the 2016 Board evaluation on 20 May 2016, all relevant
topics were fully discussed and it was agreed that Board meetings
were effective. It was concluded that the Board have a good range
of skills, diversity and competencies, with all Directors being
independent. The Committee confirmed that the Chairman and all
Directors had a good understanding of the investments and markets
in which the Company operates and felt well prepared and able to
participate fully at Board meetings.
Directors' Remuneration Report
The following report meets the relevant Listing Rules of the FCA
and the AIC Code and describes how the Board has applied the
principles relating to Directors' remuneration.
Single total figure for the fees paid to Directors for the year
ended 30 June 2016:
Director Fees Extra Services Total
(C Share)
GBP GBP GBP
--------------- -------- --------------- --------
Peter Niven 60,000 7,500 67,500
--------------- -------- --------------- --------
Christopher
Spencer 50,000 7,500 57,500
--------------- -------- --------------- --------
John Falla 40,000 7,500 47,500
--------------- -------- --------------- --------
Carol Goodwin 40,000 7,500 47,500
--------------- -------- --------------- --------
Total 190,000 30,000 220,000
--------------- -------- --------------- --------
The Company's Articles currently limit the aggregation of fees
payable to the Directors to a total of GBP200,000 per annum. Extra
services are not included in the definition of fees as per the
Company's Articles. The extra services fee was paid from the C
Share issue costs. Although the aggregate fees do not reach the
current aggregate fee limit, the Directors believe it would be
prudent to increase the aggregate fees payable to GBP300,000 to
accommodate growth in the Company and any potential new Director
appointments in the future. A resolution will be proposed at the
AGM in November 2016 to raise the limit.
Annual Report on Remuneration
Other than as shown above, no other remuneration or compensation
was paid or payable by the Company during the year to any of the
Directors.
Advisers to the Nomination Committee
The Board has not sought the advice or services by any outside
person, at this time, in respect of its consideration of the
Directors' remuneration.
Board Independence, Composition and Diversity
The Board is chaired by Peter Niven who is responsible for its
leadership and for ensuring its effectiveness in all aspects of its
role. The Board currently consists of four Non-Executive Directors.
The Directors holding office at the date of this report demonstrate
a breadth of investment, accounting, banking and professional
experience. The appointment of a Senior Independent Director has
been considered but is not felt necessary as all Board members are
independent Non-Executive Directors, with different qualities and
areas of expertise on which they may lead where issues arise and to
whom concerns can be conveyed.
The Board values the importance of diversity, including gender,
to the effective functioning of the Board. The Board, however, does
not consider it appropriate or in the interest of the Company and
its Shareholders to set prescriptive targets for gender or other
diversity on the Board. Any future appointments would be primarily
based on merit of skills, experience and knowledge of each
appointee. The Board consists of one woman and three men.
The Chairman and all Directors are considered independent. The
Directors consider that there are no factors, as set out in
Principle 1 or 2 of the AIC Code, which compromise the Chairman's
or other Directors' independence and that they all contribute to
the affairs of the Company in an adequate manner. The Board reviews
the independence of all Directors annually. The Company Secretary,
BNP Paribas Securities Services S.C.A., Guernsey Branch, through
its representative, acts as Secretary to the Board and Committees
and in doing so it: assists the Chairman in ensuring that all
Directors have full and timely access to all relevant
documentation; organises induction of new Directors; and is
responsible for ensuring that the correct Board procedures are
followed and advises the Board on corporate governance matters.
Directors' Appointment and Policy on Payment of Loss of
Office
No Director has a service contract with the Company. Directors
have agreed letters of appointment with the Company, copies of
which are available for review by Shareholders at the Registered
Office and will be available at the AGM. All Directors have served
since incorporation of the Company. Any Director may resign in
writing to the Board at any time. Directors' appointments will be
reviewed during the annual Board evaluation. Directors are not
entitled to payment for loss of office.
The Articles of Incorporation require that all Directors submit
themselves for election by Shareholders at the first opportunity
following their appointment. The Articles of the Company also
require that the Directors shall retire by rotation on a three
yearly basis, commencing from the third AGM after inception. The
retiring Directors will then be eligible for reappointment. The
Directors have elected to stand for re-election on a yearly basis,
so will all retire at each AGM and be eligible for
reappointment.
Tenure of Non-Executive Directors
The Board has adopted a policy on tenure that is considered
appropriate for an investment company. The Board does not believe
that length of service, by itself, leads to a closer relationship
with the Investment Managers or necessarily affects a Director's
independence.
The Board's tenure and succession policy seeks to ensure that
the Board is well balanced and will be refreshed from time to time
by the appointment of new Directors with the skills and experience
necessary to replace those lost by Directors' retirements and meet
future requirements. Directors must be able to demonstrate their
commitment and fiduciary responsibility to the Company. The Board
seeks to encompass relevant past and current experience of various
areas relevant to the Company's business.
Conflict of Interests
The Directors have a duty to avoid situations where they have,
or could have, a direct or indirect interest that conflicts, or
possibly could conflict, with the Company's interests. Only
Directors who have no material interest in the matter being
considered will be able to participate in the Board approval
process. Directors are required to disclose all actual and
potential conflicts of interest to the Chairman in advance of any
proposed external appointment.
In deciding whether to approve an individual Director's
participation, the other Directors will act in a way they consider
to be in good faith in assessing the materiality of the conflict in
accordance with the Company's Articles of Incorporation.
The Board believes that its powers of authorisation of conflicts
of interest have operated effectively. The Board also confirms that
its procedure for the approval of conflicts of interest, if any,
has been followed by the Directors. None of the Directors had a
material interest in any contract which is significant to the
Group's business. Directors' holdings in the Company can be found
within the Directors' Report.
Performance Evaluation
The performance of the Board and the Directors was reviewed by
the Remuneration and Nomination Committee in May 2016. The Chairman
of the Committee reviewed and discussed various areas, including
the process and style of meetings, strategy, investment matters,
shareholder value and governance. In addition the Board reviewed
the performance of the Chairman in his role and evaluated their
personal contributions. It was concluded that Board meetings were
effective and all relevant topics were fully discussed, with the
Board having a good range of skills and competency. The Directors
confirm that they have devoted sufficient time, as considered
necessary, to the matters of the Company. It was agreed that all
Directors were independent and that the Chairman and all Directors
had a good understanding of the investments and markets in which
the company operates and felt well prepared and able to participate
fully at Board meetings.
Induction/Information and Professional Development
Directors are provided, on a regular basis, with key information
on the Company's policies, regulatory requirements and its internal
controls. Regulatory and legislative changes affecting Directors'
responsibilities are advised to the Board as they arise along with
changes to best practice from, amongst others, the Company
Secretary and the Auditor. Advisers to the Group also prepare
reports for the Board from time to time on relevant topics and
issues. In addition, Directors attend relevant seminars and events
to allow them to continually refresh their skills and knowledge and
keep up with changes within the investment company industry.
When a new Director is appointed to the Board, they will be
provided with all relevant information regarding the Group and
their duties and responsibilities as a Director. In addition, a new
Director will also spend time with representatives of the
Investment Managers in order to learn more about their processes
and procedures. No Directors were appointed during the year.
Attendance at scheduled meetings of the Board and its committees
for the year ended 30 June 2016
Quarterly NAV Audit Remuneration Management Separate
Board & & & Nomination Engagement Investment
Dividend Risk Committee Committee Meetings
Meetings Committee
--------------- ---------- ---------- ----------- -------------- ------------ ------------
Number
of
meetings
during
the period 4 8 6 2 2 5
--------------- ---------- ---------- ----------- -------------- ------------ ------------
Peter Niven 4 6 6 2 2 5
--------------- ---------- ---------- ----------- -------------- ------------ ------------
John Falla 4 8 6 2 2 4
--------------- ---------- ---------- ----------- -------------- ------------ ------------
Carol Goodwin 4 8 6 2 2 3
--------------- ---------- ---------- ----------- -------------- ------------ ------------
Chris Spencer 4 5 6 2 2 4
--------------- ---------- ---------- ----------- -------------- ------------ ------------
In addition to these meetings, 4 ad-hoc meetings were held
during the year covering various Group matters.
Relationship with the Investment Managers, Company Secretary and
the Administrator
The Board has delegated various duties to external parties
including the management of the investment portfolio, the custodial
services (including the safeguarding of assets), the registration
services and the day-to-day company secretarial, administration and
accounting services. Each of these contracts was entered into after
full and proper consideration by the Board of the quality and cost
of services offered, including the control systems in operation in
so far as they relate to the affairs of the Group.
The Board receives and considers reports regularly from the
Investment Managers, with ad hoc reports and information supplied
to the Board as required. The Investment Managers take decisions as
to the purchase and sale of individual investments, within the
delegated authority established by the Board. The Board meet with
the Investment Managers on an ad-hoc basis to discuss and approve
investment decisions as necessary. The Investment Managers comply
with the risk limits as determined by the Board and have systems in
place to monitor cash flow and the liquidity risk of the Group. The
Investment Managers and BNP Paribas Securities Services S.C.A.,
Guernsey Branch (the "Administrator") also ensure that all
Directors receive, in a timely manner, all relevant management,
regulatory and financial information. Representatives of the
Investment Managers and Administrator attend each Board meeting as
required, enabling the Directors to probe further on matters of
concern. The Directors have access to the advice and service of the
corporate Company Secretary through its appointed representative
who is responsible to the Board for ensuring that Board procedures
are followed and that applicable rules and regulations are complied
with. The Board, the Investment Managers and the Administrator
operate in a supportive, co-operative and open environment.
Shareholder Engagement
The Board believes that the maintenance of good relations with
Shareholders is important for the long-term prospects of the
Company. It has, since admission, sought engagement with investors.
Where appropriate the Chairman, and other Directors are available
for discussion about governance and strategy with major
Shareholders and the Chairman ensures communication of
Shareholders' views to the Board. The Board receives feedback on
the views of Shareholders from its Corporate Broker and the
Investment Managers. Shareholders are welcome to contact the
Directors at any time via the Company Secretary.
The Board believes that the AGM provides an appropriate forum
for investors to communicate with the Board, and encourages
participation. The AGM will be attended by at least one Director.
There is an opportunity for individual Shareholders to question the
Directors at the AGM. Details of proxy votes received in respect of
each resolution will be made available to Shareholders at the
meeting and will be posted on the Company's website following the
meeting.
The Interim Report and Financial Statements, Annual Report and
Financial Statements and fact sheets are available to provide
Shareholders with a clear understanding of the Group's activities
and its results. This information is supplemented by the monthly
calculation and publication on the London Stock Exchange of the NAV
of the Company's shares and the dividend declared thereon. All
documents issued by the Company can be viewed on the website,
www.sqnassetfinance.com.
AIFMD
The Company is classed as an externally managed Alternative
Investment Fund under the Alternative Investment Fund Managers
Directive ("AIFMD"). The US Investment Manager is the authorised
Alternative Investment Fund Manager ("AIFM") for the purposes of
AIFMD. The AIFM is responsible for managing the Company's
investments and the risks it faces, subject to the overall scrutiny
of the Board. The US Manager is registered with the FCA as a "small
third country AIFM". The requirements of AIFMD have been applied
accordingly.
AIFM Remuneration
The total fees paid to the Investment Managers by the Company
are disclosed in Note 17.
AUDIT AND RISK COMMITTEE REPORT
Committee Meetings
The Audit and Risk Committee meets at least three times a year.
Only members of the Audit and Risk Committee have the right to
attend Audit and Risk Committee meetings. Representatives of the
Investment Managers and Administrator will be invited to attend
Audit and Risk Committee meetings on a regular basis and other
non-members may be invited to attend all or part of the meeting as
and when appropriate and necessary. The Auditor is also invited
whenever it is appropriate. The Audit and Risk Committee is also
able to meet separately with the Auditor without the Investment
Managers being present.
Main Activities
The Audit and Risk Committee assists the Board in carrying out
its overall responsibility in relation to financial reporting
requirements, risk management and the assessment of internal
financial and operating controls. It also manages the Group's
relationship with the Auditor. Meetings of the Committee generally
take place prior to a Company Board meeting. The 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 day to day management and administrative functions are
outsourced to third parties and as a consequence there is no
requirement for an internal audit function. The Committee reviews
and monitors reports on the internal control and risk management
systems on which the Company is reliant.
Financial Reporting
The primary role of the Committee in relation to financial
reporting is to review in conjunction with the Investment Managers
and the Administrator the appropriateness of the Interim Report and
Financial Statements, Annual Report and Financial Statements
concentrating on, amongst other matters:
-- the quality and acceptability of accounting policies and practices;
-- the clarity of the disclosures and compliance with financial
reporting standards and relevant financial and governance reporting
requirements;
-- material areas in which significant judgements have been
applied or there has been discussion with the Auditor;
-- in relation to the UK Corporate Governance Code and AIC Code,
whether the Annual Report and Financial Statements, taken as a
whole, is fair, balanced and understandable and provides the
information necessary for Shareholders to assess the Group's
performance, business model and strategy; and
-- any correspondence from regulators in relation to the quality
of the Group's financial reporting.
To aid its review, the Committee seeks the appropriate input
from the Investment Managers, Administrator and also reports from
the Auditor.
Significant Issues
In relation to the Annual Report and Financial Statements for
the year ended 30 June 2016, the following significant issues were
considered by the Audit and Risk Committee:
(i) Revenue Recognition
The risk that revenue (classified as "finance income" in the
Financial Statements and primarily comprising interest income or
finance charges receivable under loans, leases and hire purchase
agreements) may be materially misstated.
The Committee has reviewed and is satisfied that a robust
transaction reporting system is in place between the Investment
Managers and Administrator to ensure that transactions and the
revenue received are reflected correctly.
(ii) Investment Portfolio
The investment portfolio primarily comprises of loans, hire
purchase contracts and finance leases. The carrying value of these
assets is key to the financial performance of the fund and drives
returns to shareholders. The valuation models rely on a number of
underlying assumptions and there is a risk is that these values may
be misstated due to fraud or error.
The Committee reviews the regular reports from the Investment
Managers and Administrator regarding the valuation of the
investments and with the Board reviews the NAV of the Company,
together with the value of investments on a regular basis.
(iii) Compliance
The Company is required to comply with a number of rules and
regulations including London Listing Rules, Transparency Rules,
Corporate Governance Code and any other regulatory rules in
Guernsey. In addition the Company needs to ensure that it complies
with the investment strategy set out in its Prospectus, as amended
from time to time.
The Board and the committee regularly receive compliance reports
from the Investment Managers and the Administrator.
(iv) Fraud Risk
The risk of fraud due to management override of controls.
The Committee reviews the reports from the Investment Managers
and Administrator as to the system of checks in place to combat
fraud.
(v) Related Parties and Consolidation
The Company has a number of subsidiaries and affiliated
entities.
In addition a number of shares have been issued to existing
shareholders/investors. Consideration needs to be given to
financial reporting requirements - primarily around consolidation
(and control) and related party disclosure.
The Administrator and Investment Manager have a number of
worksheets and documents to ensure that all subsidiaries and
affiliated entities are correctly reflected in the monthly
valuations and fed through to the financial statements. Related
party disclosure is reviewed by all parties.
Risk Management and Internal Controls
As stated earlier the day to day management and administrative
functions are outsourced to third parties. The Board is responsible
for overall risk management with delegation provided to the Audit
and Risk Committee.
The Company continues to review and develop a comprehensive risk
management framework, outsourced to the Investment Managers and the
Administrator, with a risk register that is reviewed and updated as
necessary by the Board and Audit and Risk Committee. The Audit and
Risk Committee considers the risks facing the Group and controls
and other measures in place to mitigate the impact of risks.
The work of the Audit Committee is primarily driven by the
Company's assessment of the principal risks and uncertainties as
set out in the Strategic Report and in Note 16, the reports
received from the Investment Manager and the Company's risk
evaluation process.
Risk Framework and Systems of Internal Control
The Board recognises the importance of identifying and actively
monitoring the financial and non-financial risks facing the
business. Whilst responsibility for risk management rests with the
Board, the management of risk is embedded as part of the everyday
business and culture of the Company and its principal advisers.
The Board has considered the need for an internal audit function
but because of the internal controls systems in place at the key
service providers, and the independent controls process performed
it has decided instead to place reliance on those control and
assurance processes.
Risk Identification
The Board and Audit and Risk Committee identify risks with input
from the Group's Investment Managers and Administrator. The Board
also receives detailed quarterly asset management reports
highlighting performance and potential risk issues on an
investment-by-investment basis.
Risk Assessment
Each identified risk is assessed in terms of probability of
occurrence, potential impact on financial performance and movements
in the relative significance of each risk from period to
period.
Action Plans to Mitigate Risk
Where new risks are identified or existing risks increase in
terms of likelihood or impact, the Audit and Risk Committee assists
the Group in developing an action plan to mitigate the risk and put
in place enhanced monitoring and reporting.
Re-assessment and Reporting of Risk
Such risk mitigation plans are reassessed by the Audit and Risk
Committee, where applicable with the relevant key service providers
and reported to the Board on a quarterly basis. The direct
communication between the Group and its Investment Managers is
regarded as a key element in the effective management of risk (and
performance) at the underlying investment level.
External Audit
The effectiveness of the external audit process is dependent on
appropriate audit risk identification at the start of the audit
cycle. The Audit and Risk Committee received a detailed audit plan
from the Auditor identifying their assessment of the significant
audit risks. The significant risks were tracked through the year
and the Audit and Risk Committee challenged the work performed by
the Auditor to test management override of controls and in addition
the audit work undertaken in respect of valuations of unlisted
investments. The Audit and Risk Committee assess the effectiveness
of the audit process in addressing these matters through the
reporting received from the Auditor in relation to the year end. In
addition, the Audit and Risk Committee seeks feedback from the
Investment Managers and the Administrator on the effectiveness of
the audit process. For the year ended 30 June 2016 the Audit and
Risk Committee was satisfied that there had been appropriate focus
and challenge on the significant and other key areas of audit risk
and assessed the quality of the audit process to be good.
Appointment and Independence
The Audit and Risk Committee considers the reappointment of the
Auditor, including the rotation of the audit engagement partner,
and assesses their independence on an annual basis. The Auditor is
required to consider rotation of the engagement partner responsible
for the audit every five years. The Auditor has been the Group's
external auditor since incorporation.
In its assessment of the independence of the Auditor, the Audit
and Risk Committee receives details of any relationships between
the Group and the Auditor that may have a bearing on their
independence and receives confirmation that they are independent of
the Group.
The Auditor is entitled to a fee of GBP48,440 for their services
rendered during the year ended 30 June 2016.
The Audit and Risk Committee recommended to the Board the
approval of the fees for audit services for the year ended 30 June
2016 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 Auditor
from becoming compromised, the Committee has a formal policy
governing the engagement of the Auditor to provide non-audit
services. The Auditor and the Directors have agreed that all
non-audit services require the pre-approval of the Audit and Risk
Committee prior to commencing any work. Fees for non-audit services
will be tabled annually so that the Audit and Risk Committee can
consider the impact on the Auditor's objectivity.
The Committee is satisfied with the effectiveness of the audit
provided by the Auditor, and is satisfied with their independence.
The Committee has therefore recommended to the Board that the
Auditor be reappointed as external Auditor for the year ending 30
June 2017, and that a resolution proposing the reappointment of
Baker Tilly as the external Auditor should be put to the
Shareholders at the 2016 AGM. The Auditor, have indicated their
willingness to continue in office. There are no contractual
obligations restricting the Committee's choice of external auditor
and the external auditor is not indemnified by the Group.
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF SQN ASSET FINANCE
INCOME FUND LIMITED
We have audited the financial statements of SQN Asset Finance
Income Fund Limited (referred to as the "Company" and together with
its subsidiaries as the "Group") for the year ended 30 June 2016
which comprise the Statement of Financial Position, the Statement
of Comprehensive Income, the Statement of Cash Flows, the Statement
of Changes in Equity and the related notes. The financial reporting
framework that has been applied in their preparation is applicable
Guernsey law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
This report is made solely to the Company's members, as a body,
in accordance with Section 262 of the Companies (Guernsey) Law,
2008. Our audit work is undertaken so that we might state to the
Company's members those matters we are required to state to them in
an auditors' report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
Respective responsibilities of Directors and auditor
As explained more fully in the Directors' Responsibilities
Statement, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view. Our responsibility is to audit and express an
opinion on the financial statements in accordance with applicable
law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board's
(APB's) Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of: whether the accounting policies are
appropriate to the Group's circumstances and have been consistently
applied and adequately disclosed; the reasonableness of significant
accounting estimates made by the Directors; and the overall
presentation of the financial statements. In addition, we read all
the financial and non-financial information in the Annual Report to
identify material inconsistencies with the audited financial
statements and to identify any information that is apparently
materially incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing the audit. If
we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion the financial statements:
-- give a true and fair view of the state of the Group's affairs
as at 30 June 2016 and of its profit for the year then ended;
-- have been properly prepared in accordance with IFRSs as adopted by the European Union; and
-- have been prepared in accordance with the requirements of the
Companies (Guernsey) Law, 2008.
Audit commentary
A: What has changed in the current year approach.
The approach followed was consistent with the 2015 audit
strategy, enhanced in the following areas:
-- Heightened review of the investment portfolio in light of
additional investments undertaken. This included how we selected
our sample and the time spent. As part of this we included elements
of unpredictability in our sample selection.
-- The Corporate governance review included a further
independent expert review including of the viability statement as
it became applicable for the first time.
B: An overview of the scope of our audit
Our audit approach is risk based and focusses on identification
of key business risks and those areas of operation that are
considered significant to the results for the year. It focuses on
the robustness and effectiveness of the Group's control environment
established by management to ensure sound operational and financial
control and the mitigation of risk.
For purposes of the Group, management includes those 3(rd)
parties such as the investment managers and administrator to whom
the board has delegated responsibility for key operations and day
to day functions. Where possible, we seek to validate and
subsequently place reliance on the controls that are in place, in
order to increase the efficiency of our audit work.
Our audit comfort comes from evaluating and validating how
management monitor and control the business and financial
risks.
Our audit approach covered both pre and year end procedures
described as follows:
-- Pre-year end: In conjunction with the testing of the internal
controls, the pre year-end audit work included "walk through
testing" which was undertaken to help us understand the control
environment (including IT controls) established by management and
the entire investment process of the different investments included
in the portfolio of the Group (from deal sourcing, due diligence to
recognition in the financial statements). We obtained this
understanding from discussions/meetings with the administrator, the
investment manager(s) and the board as well as review of relevant
documentation provided.
As part of our discussion with management and the board around
the control environment and the overall business environment of the
Group, we considered a number of emerging and developing areas to
be significant for management and the board's attention on an
on-going basis. These included but were not limited to cyber risk,
development in the global tax area and short term market volatility
as a result of the Brexit Referendum.
-- Year end: Based on the understanding of the business, from
the pre year end testing, we undertook substantive testing on
significant balances, transactions and disclosures in line with our
risk assessment including the results of the work done at the pre
year end.
C: Our application of materiality
The directors have primary responsibility for ensuring that the
financial statements are free from material misstatement or error.
In accounting terms, a material error is one that, if it were
unadjusted, would cause a user of the financial statements to alter
his view of those statements or the results or the financial
position of the entity being reported on. Materiality, therefore,
is incapable of monetary definition, since it has both quantitative
and qualitative elements. It is necessary to consider not only the
impact of an error on the financial statements as a whole, but also
on the individual accounting items affected. Additionally, the
cumulative impact of all unadjusted errors must be considered.
Auditors examine accounts on a test basis. The level of testing
we have carried out is based on our assessment of the risk that an
item in the financial statements may be materially misstated.
A key element of our annual audit planning is to make an
assessment of the risk that the financial statements might contain
material errors. We base this assessment on our cumulative
knowledge of the Group and our understanding of its activities and
the industry sector in which it operates. We assess risk both at
the overall financial statement level and at the individual item
level. The nature and volume of audit work we have conducted is
directly related to our risk assessments.
Whilst the audit process is designed to provide reasonable
assurance of identifying material misstatements or omissions it is
not guaranteed to do so. Rather we plan the audit to determine the
extent of testing needed to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected
misstatements does not exceed materiality for the financial
statements as a whole. This testing requires us to conduct
significant depth of work on a broad range of assets, liabilities,
income and expense as well as devoting significant time of the most
experienced members of the audit team, in particular the
Responsible Individual (who signs the audit report), to subjective
areas of the accounting and reporting process.
In making these assessments and in particular cognisant of the
challenges of defining materiality, we considered a threshold of
GBP2,974,000 to be an indicator of materiality for the financial
statements as a whole. This threshold was based on an average of
the following figures: 0.5% of revenue, 5% of profit, 1% of gross
assets and 100% of the smallest disclosed balance. This is intended
to avoid the distorting effect of using only one financial
statement figure as the measure.
We agreed with the Audit Committee to report to it all corrected
and uncorrected misstatements we identified through our audit with
a value in excess of GBP74,350, in addition to other audit
misstatements below that threshold that we believe warranted
reporting on qualitative grounds.
D: Our assessment of risks of material misstatement
The risks of material misstatement detailed in this section of
this report are those risks that we have deemed, in our
professional judgment, to have had the greatest effect on: the
overall audit strategy; the allocation of resources in our audit;
and directing the efforts of the engagement team. Our audit
procedures relating to these risks were designed in the context of
our audit of the financial statements as a whole. Our opinion on
the financial statements is not modified with respect to any of
these risks, and we do not express an opinion on these individual
risks.
In arriving at our audit opinion above on the financial
statements, the risks of material misstatement that had the
greatest effect on our audit were as listed below. They are
consistent with our 2015 audit strategy:
(i) Revenue recognition
Revenue is classified as "finance income" in the financial
statements and primarily comprises of interest income including
from loans, leases and hire purchase agreements. The respective
Group company enters into legal agreements with clients of varying
lengths (typically up to 10 years). The terms of the agreements are
summarised in a trade ticket which is reviewed by both the
investment manager and administrator including on a monthly basis
as part of the NAV reporting process.
The risk - As finance income is the Group's major source of
revenue and is a material item in the Statement of Comprehensive
Income, the recognition of finance income is considered to be a
significant risk.
Our response - Our audit procedures with respect to revenue
recognition included, but were not limited to: tests of control
over trade ticket terms; substantive analytical procedures and
tests of detail over balances to corroborate the value of income
and debtors during the period to the trade ticket and underlying
documentation; and testing of cash receipts or debtors records to
test the completeness of revenue.
(ii) Loans and receivables
The risk - The carrying value of the investment portfolio may be
misstated. The investments primarily comprise of loans, hire
purchase contracts and leases.
Our response - In conjunction with the revenue testing described
above, we performed tests of control over trade ticket terms. We
also performed analytical procedures to ensure that the
amortisation schedule and carrying value were in line with relevant
IFRS requirements.
(iii) Compliance
The risk - The Group is required to comply with a number of
rules and regulations including London Listing Rules, Transparency
Rules, Corporate Governance Code and any other regulatory rules in
Guernsey. In addition, the Group needs to ensure that it complies
with the investment strategy set out in its prospectus, as amended
from time to time.
Our response - Our audit procedures include a review for
compliance with key rules e.g. London Listing Rules, Transparency
Rules, Corporate Governance Code and any other regulatory rules. We
also performed a review of Board Minutes to check for board
oversight of the compliance work carried out by the administrator
and of investment strategy compliance.
(iv) Related parties
The risk - The fund has a number of subsidiaries and affiliated
entities. In addition a number of shares have been issued to
existing shareholders/investors. Consideration needs to be given to
financial reporting requirements - primarily around consolidation
(and control) and related party disclosure - as applicable.
Our response - Our audit procedures include use of an IFRS
disclosure checklist in addition to discussions with management on
key related party transactions and the substance of the
transactions for the purpose of the consolidated financial
statements including appropriate disclosure thereof.
(v) Management override of internal controls
The risk - ISA (UK and Ireland) 240 'The Auditor's
Responsibilities Relating to Fraud in an Audit of Financial
Statements' requires us to consider the risk of management override
of controls. There is a risk of fraud due to management override of
controls particularly as the group is controlled by a small number
of individuals with limited segregation of duties.
Our response - Our audit work included a specific review of all
significant management journals, with special focus on journals
around the year end.
Directors' assessment of the principal risks that would threaten
the solvency or liquidity of the entity
We have nothing material to add or draw attention to in relation
to:
-- the Directors' confirmation in the Annual Report that they
have carried out a robust assessment of the principal risks facing
the entity, including those that would threaten its business model,
future performance, solvency or liquidity;
-- the disclosures in the annual report that describe those
risks and explain how they are being managed or mitigated;
-- the Directors' Statement in the 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 entity's ability to continue to
do so over a period of at least twelve months from the date of
approval of the financial statements; and
-- the Director's explanation in the Annual Report as to how
they have assessed the prospects of the entity, over what period
they have done so and why they consider that period to be
appropriate, and their statement as to whether they have a
reasonable expectation that the entity will be able to continue in
operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the ISAs (UK and Ireland), we are required to report to
you if, in our opinion, information in the annual report is:
-- materially inconsistent with the information in the audited financial statements; or
-- apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the Group acquired in the
course of performing our audit; or
-- is otherwise misleading.
In particular, we are required to consider whether we have
identified any inconsistencies between our knowledge acquired
during the audit and the directors' statement that they consider
the annual report is fair, balanced and understandable and whether
the annual report appropriately discloses those matters that we
communicated to the audit committee which we consider should have
been disclosed.
Under the Companies (Guernsey) Law 2008 we are required to
report to you if, in our opinion:
-- the company has not kept proper accounting records; or
-- the financial statements are not in agreement with the accounting records and returns; or
-- we have not received all the information and explanations
which to the best of our knowledge and belief are necessary for the
purposes of our audit.
Under the Listing Rules we are required to review:
-- the Directors' Responsibilities Statement, in relation to long term viability; and
-- the part of the Corporate Governance Statement relating to
the company's compliance with the nine provisions of the UK
Corporate Governance Code specified for our review.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 June 2016
Notes Year ended 28 May
30 June 2014 to
2016 30 June
2015
GBP GBP
Income
Finance income 17,709,536 5,722,864
Interest on cash and cash
equivalents 486,926 255,455
Other income 1,656,788 631,422
--------------- --------------
Total income 2.10 19,853,250 6,609,741
--------------- --------------
Net unrealised gain on revaluation
of investments 288,266 699,601
Net unrealised foreign exchange
gain/(loss) on investments 16,626,443 (1,095,379)
Net unrealised foreign exchange
(loss)/gain on forward contracts (10,263,615) 1,704,952
Net realised foreign exchange
gain on investments 1,829,076 247,906
Net realised foreign exchange
(loss)/gain on forward contracts (11,005,490) 447,414
---------------
Net realised and unrealised
gain (2,525,320) 2,004,494
--------------- --------------
Expenses
Investment management fees 3(a)/4 (2,893,765) (1,454,088)
Directors' fees and travel
expenses 4 (202,593) (131,856)
Administration and professional
fees 3(b)/4 (801,295) (589,238)
Depreciation 2.9/6 (351,768) (117,256)
--------------- --------------
Total operating expenses 4 (4,249,421) (2,292,438)
--------------- --------------
Total comprehensive income
for the year/period 13,078,509 6,321,797
---------------
Total comprehensive income
for the year/period analysed
as follows:
Attributable to Ordinary
Shareholders 11,892,845 6,321,797
Attributable to C Shareholders 1,185,664 -
--------------- --------------
Total 13,078,509 6,321,797
--------------- --------------
Basic and diluted earnings
per Ordinary Share (pence) 5.1 6.64 4.47
Basic and diluted earnings
per C Share (pence) 5.2 0.66 -
All results are derived from continuing operations.
The Group has no items of other comprehensive income, and
therefore the profit for the year is also the total comprehensive
income.
The accompanying notes form an integral part of these financial
statements.
CONSOLIDATED Statement of Financial Position
As at 30 June 2016
Notes 30 June 30 June
2016 2015
GBP GBP
Non-current assets
Property, plant and equipment 6 4,631,548 4,983,316
Residual value 2.7 1,041,623 839,012
Investments designated as
fair value through profit
or loss 7.2 4,373,701 3,548,636
Finance lease and hire-purchase
investments 8 62,389,028 17,230,475
Loans and other investments 7.1 205,944,354 72,642,190
278,380,254 99,243,629
Current assets
Cash and cash equivalents 2.14/14 87,815,244 75,654,965
Interest receivables 9 2,494,276 1,544,788
Other receivables and prepayments 9 1,974,907 874,840
Investment receivables 9 173,632 399,472
Derivative financial asset 7.2/15 - 1,704,952
------------- ------------
92,458,059 80,179,017
Total assets 370,838,313 179,422,646
------------- ------------
Current liabilities
Other payables and accrued
expenses 10 (794,431) (567,403)
Derivative financial liability 7.2/15 (15,213,964) -
------------- ------------
(16,008,395) (567,403)
Net assets 354,829,918 178,855,243
============= ============
Equity
Share capital 12 353,716,434 176,808,446
Retained earnings 1,113,484 2,046,797
------------- ------------
354,829,918 178,855,243
============= ============
NAV per Share
* Ordinary Shares 5.1 99.45p 99.93p
* C Shares 5.2 98.24p -
These Financial Statements were approved and authorised for
issue by the Board of Directors on 21 September 2016.
The accompanying notes form an integral part of these financial
statements.
CONSOLIDATED Statement of Changes in Equity
For the year ended 30 June 2016
Net Assets Attributable
to Shareholders
Note Share Retained
Capital Earnings Total
GBP GBP GBP
Opening balance 176,808,446 2,046,797 178,855,243
Total comprehensive
income for the year - 13,078,509 13,078,509
Transactions with Shareholders,
recorded directly in
equity
Issue of shares 12 176,907,988 - 176,907,988
Dividends paid 13 - (14,011,822) (14,011,822)
Total transactions with
Shareholders 176,907,988 (14,011,822) 162,896,166
------------ ------------- -------------
Closing balance 353,716,434 1,113,484 354,829,918
============ ============= =============
From 28 May 2014 to 30 June 2015
Net Assets Attributable
to Shareholders
Share Retained
Note Capital Earnings Total
GBP GBP GBP
Balance at inception - - -
Total comprehensive
income for the period - 6,321,797 6,321,797
Transactions with Shareholders,
recorded directly in
equity
Issue of shares 12 176,808,446 - 176,808,446
Dividends paid - (4,275,000) (4,275,000)
Total transactions with
Shareholders 176,808,446 (4,275,000) 172,533,446
------------ ------------ ------------
Closing balance 178,808,446 2,046,797 178,855,243
============ ============ ============
The accompanying notes form an integral part of these financial
statements.
CONSOLIDATED Statement of Cash Flows
For the year ended 30 June 2016
Note Year ended 28 May
30 June 2014 to
2016 30 June
2015
GBP GBP
Operating activities:
Total comprehensive income
for the year/period 13,078,509 6,321,797
Adjustments for:
Unrealised gain on investments (288,266) (699,601)
Unrealised foreign exchange
gain in the year/period (6,362,828) (609,573)
Depreciation 6 351,768 117,256
Realised foreign exchange (gain)/loss
on investments (1,829,076) 247,906
Increase in interest receivable (949,488) (1,544,788)
Decrease/(increase) in investment
receivables 225,840 (399,472)
Increase in other receivables
and prepayments (1,100,067) (874,840)
(Decrease)/increase in investment
payables (128,164) 130,000
Increase in other payables
and accrued expenses 10 355,192 437,403
Acquisition of investments 6/7/8 (203,357,736) (112,069,949)
Disposals/amortisation of investment
principal during the year/period 6/7/8 42,613,143 12,113,595
-------------- --------------
Net cash outflow from operating
activities (157,391,173) (96,830,266)
Cash flow from financing activities
Share issue (net proceeds) 12 176,907,988 176,808,446
Dividends paid 13 (14,011,822) (4,275,000)
-------------- --------------
Net cash flows provided by
financing activities 162,896,166 172,533,446
Net increase in cash and cash
equivalents 5,504,993 75,703,180
Cash and cash equivalents at 75,654,965 -
start of the year/period
Effect of exchange rate changes
on cash and cash equivalents 6,655,286 (48,215)
-------------- --------------
Cash and cash equivalents at
end of the year/period 87,815,244 75,654,965
============== ==============
The accompanying notes form an integral part of these financial
statements.
NOTES TO THE FINANCIAL STATEMENTS
1. General Information
The Company was incorporated on 28 May 2014 and registered in
Guernsey as a closed-ended collective investment scheme. The
Company listed its Ordinary Shares on the London Stock Exchange on
14 July 2014. The Company's registered office is BNP Paribas House,
St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA.
In November 2015, the Group raised additional capital by issuing
C Shares, net proceeds of GBP176,907,988 were raised through the
issue of 180,000,000 C Shares. C Shares are listed separately on
the Main Market of the London Stock Exchange and were admitted on 9
November 2015. C Shares have a separate portfolio and the terms and
timing of the conversion of C Shares to Ordinary Shares will be
announced at a later date (refer to Note 12 for further
details).
The Company's subsidiaries, SQN Asset Finance (Guernsey)
Limited, SQN AFIF (Amber) Limited, SQN AFIF (Bronze) Limited, SQN
AFIF (Cobalt) Limited and SQN AFIF (Diamond) Limited ('the
Subsidiaries') are wholly owned Subsidiaries incorporated in
Guernsey and established for the primary purpose of acting as
investment holding companies (refer to Note 2.5 for further
details).
2. Accounting Policies
2.1 Basis of Preparation
The Financial Statements have been prepared in accordance with
IFRS, which comprise standards and interpretations approved by the
International Accounting Standards Board ("IASB") together with the
interpretations of the International Accounting Standards and
Standing Interpretations Committee as approved by the International
Accounting Standards Committee ("IASC") and endorsed by the
European Union ("EU") which remain in effect. They give a true and
fair view of the Group's affairs and comply with the Company
(Guernsey) Law 2008, as amended.
These Financial Statements have been prepared on a going concern
basis. After reviewing the Group's budget and cash flow forecast
for the next financial period, the Directors are satisfied that, at
the time of approving the Financial Statements, it is appropriate
to adopt the going concern basis in preparing the Financial
Statements.
2.2 New Standards, Amendments and Interpretations Not Adopted in these Financial Statements
Detailed below are new standards, amendments and interpretations
to existing standards that become effective in future accounting
periods, subject to EU endorsement, which have not been adopted by
the Group:
Effective for
periods beginning
IFRS on or after
--------------------------------------- ------------------------
IFRS 10 - Consolidated Financial
Statements (amendment) 1 January 2016
IFRS 12 - Disclosure of Interests
in Other Entities (amendment) 1 January 2016
IAS 16 - Property, Plant and Equipment 1 January 2016
(amendment)
IAS 7 - Statement of Cash Flows 1 January 2017
(amendment)
IFRS 15 - Revenue from Contracts 1 January 2018
with Customers
IFRS 9 - Financial Instruments 1 January 2018
IFRS 16 - Leases 1 January 2019
The Directors have not yet fully assessed the impact that these
new standards will have on the Financial Statements of the Group,
however their initial opinion is that the impact will not be
significant. The new standards will be applied to periods on or
after the effective date.
2.3 Functional and Presentation Currency
Items included in the Financial Statements of the Group are
measured using Sterling as the currency of the primary economic
environment in which the Group operates (the "Functional
Currency"). The Financial Statements are presented in Sterling,
which is the Group's presentation currency.
2.4 Foreign Currency Translation
Transactions in currencies other than the Functional Currency
are recorded using the exchange rate prevailing at the transaction
date. Foreign exchange gains and losses resulting from the
settlement of such transactions and those from the translation at
year end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the Statement
of Comprehensive Income.
Translation differences on non-monetary items such as financial
assets at fair value through profit or loss are reported as part of
net gains or losses on financial assets through profit or loss in
the Statement of Comprehensive Income.
2.5 Consolidation
Refer to Note 1 for details on the Subsidiaries.
Subsidiaries are all entities (including special purpose
entities) over which the Company has the power to govern the
financial and operating policies generally accompanying a
shareholding of more than one half of the voting rights. The
existence and effect of potential voting rights that are currently
exercisable or convertible are considered when assessing whether
the Company controls another entity. The principal place of
business of the Subsidiaries is Guernsey.
In accordance with IFRS 10 Consolidated Financial Statements, if
the Company meets the definition of an investment entity ("IE") it
qualifies for a consolidation exemption. The relevant provisions
for an IE under IFRS 10 are set out below.
IFRS 10.27 - An IE is an entity that:
a. obtains funds from one or more investors for the purpose of
providing those investor(s) with investment management
services;
b. commits to its investor(s) that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income, or both; and
c. measures and evaluates the performance of substantially all
of its investments on a fair value basis.
IFRS 10.28 - An entity shall consider whether it has the
following characteristics of an IE:
a. it has more than one investment;
b. it has more than one investor;
c. it has investors that are not related parties of the entity; and
d. it has ownership interests in the form of equity or similar interests.
The Company considered all the above factors and noted that
whilst it might meet many of the IE criteria, as it does not
measure and evaluate the performance of substantially all of its
investments on a fair value basis, the Directors' have concluded
that the Company does not meet the definition of IE and does not
qualify for the IFRS 10 consolidation exemption. The Subsidiaries
have therefore been consolidated into these Financial
Statements.
2.6 Financial Assets
a) Classification and Measurement
Financial assets are classified into the following specified
categories: financial assets 'at fair value through profit or loss'
("FVTPL"), and 'loans and receivables'. The classification depends
on the nature and purpose of the financial assets and is determined
at the time of initial recognition.
Financial assets designated at fair value through profit or loss
at inception
Financial assets designated at fair value through profit or loss
at inception are financial instruments that are managed, and their
performance is evaluated on a fair value basis in accordance with
the Group's documented investment strategy.
The Group's policy requires the Investment Managers and the
Directors to evaluate the information about these financial assets
on a fair value basis together with other related financial
information. Financial assets at fair value through profit are
recognised at fair value and changes in fair value are recorded in
the Statement of Comprehensive Income.
Loans and receivables
Trade receivables, loans, and other receivables that have fixed
or determinable payments that are not quoted in an active market
are classified as 'loans and receivables'. Loans and receivables
are measured at amortised cost using the effective interest method,
less any impairment.
Financial assets, other than those at FVTPL, are assessed for
indicators of impairment at the end of each reporting period.
Financial assets are considered to be impaired when the value of
the asset is less than the carrying value on the Group's Financial
Statements. When assessing impairment, the Investment Managers
consider the ability of the end-user to make all contracted
payments due to the Group, the delinquency status of each account,
and the value of the equipment or assets relative to all
outstanding obligations in the case of defaults. In assessing
residual values for the purpose of impairment, each account is
reviewed at least annually and third-party appraisals used when
necessary.
Income is recognised on an effective interest basis for debt
instruments other than those financial assets classified as at
FVTPL. Gains and losses are recognised in the Statement of
Comprehensive Income when loans and receivables are derecognised or
impaired, as well as through the amortisation process.
b) Recognition and De-Recognition
The Group initially recognises loans and receivables on the date
when they are originated. All other financial assets are initially
recognised on the trade date.
The Group derecognises a financial asset when the contractual
rights to the cash flows from the asset expire, or it transfers the
rights to receive the contractual cash flows in a transaction in
which substantially all the risk and rewards of ownership of the
financial asset are transferred, or it neither transfers nor
retains substantially all the risk and rewards of ownership and
does not retain control over the transferred asset. Any interest in
such derecognised financial assets that is created or retained by
the Group is recognised as a separate asset or liability.
Financial assets are offset and the net amount presented in the
Statement of Financial Position when, and only when, the Group has
a legal right to offset the amounts and intends either to settle
them on a net basis or to realise the asset.
The Group derecognises a financial liability when its
contractual obligations are discharged, cancelled or expired.
c) Fair Value Estimation
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
The fair value measurement is based on the presumption that the
transaction to sell the asset or transfer the liability is
conducted in either:
-- the principal market for the asset or liability; or
-- in the absence of a principal market, the most advantageous
market for the asset or liability.
The fair value of an asset or liability is measured using the
assumption that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
A fair value measurement of a non-financial asset takes into
account a market participant's ability to generate economic
benefits by using the asset in its highest and best use capacity or
by selling it to another market participant that would use the
asset in its highest and best use capacity.
The Group assesses at each reporting date whether a financial
asset or group of financial assets is impaired.
If there is objective evidence that an impairment loss on loans
and receivables carried at amortised cost has been incurred, the
amount of the loss is measured as the difference between the
asset's carrying amount and the present value of estimated future
cash flows discounted at the financial asset's original effective
interest rate. The carrying amount of the asset is reduced and the
amount of the loss is recognised in the Statement of Comprehensive
Income.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised, the previously
recognised impairment loss is reversed. Any subsequent reversal of
an impairment loss is recognised in the Statement of Comprehensive
Income to the extent that the carrying value of the asset does not
exceed its amortised cost at the reversal date.
2.7 Finance Leases
The Group, as lessor, categorises finance leases as a lease
arrangement where the terms of the lease transfer substantially all
risks and rewards of ownership to the lessee (in accordance with
the requirements of IAS 17 - Leases). Under such arrangements, at
the commencement of the lease term, the Group records a finance
lease in the Statement of Financial Position as a receivable, at an
amount equal to the net investment in the lease.
The net investment in the lease is equal to the gross investment
in the lease (minimum lease payments receivable by the Group under
the finance lease plus any unguaranteed residual value accruing to
the Group) discounted by the interest rate implicit in the
lease.
On subsequent measurement, the Group splits the minimum payments
received under the lease between finance income and reduction of
the lease receivable.
The Group applies the principles of IAS 39 - Financial
Instruments: Recognition and Measurement ("IAS 39"), to lease
receivables with respect to the derecognition and impairment
provisions.
Residual Value
The unguaranteed residual value on finance leases is calculated
by estimating the fair market value of the leased assets less the
lease payments from the lessee.
Estimates of residual value are based on a number of assumptions
including, but not limited to, the in-place value of the equipment
or assets to the end-user, the secondary market value of similar
assets and equipment, the replacement cost of the asset or
equipment including the cost of de-installation and re-delivery,
and the Investment Managers' own assumptions based on historical
experience.
2.8 Operating Leases
The Group categorises operating leases as a lease arrangement in
which a significant portion of the risks and rewards of ownership
are retained by the lessor (in accordance with the requirements of
IAS 17).
2.9 Property, Plant and Equipment
Assets held for use under operating leases are measured at cost
less depreciation and are depreciated on a straight line basis over
the remaining useful life.
Estimates of the useful life of equipment are based on
manufacturers' recommendations, the age of similar products in the
market, the intended use and utilisation of the equipment, and the
Investment Managers' own assumptions based on historical
experience.
2.10 Income
Income is recognised to the extent that it is probable that
economic benefits will flow to the entity and can be reliably
measured.
Finance income from finance leases is recognised in the
Statement of Comprehensive Income based on a pattern reflecting a
constant periodic rate of return on the net investment outstanding
in respect of the finance lease.
Income on cash and cash equivalents relates to interest
receivable on cash and cash deposits with banks.
Other income relates to upfront commitment and facility fees
received by the Group in connection to the lease and loan
undertakings. The income is recognised in the Statement of
Comprehensive Income immediately when the loan or lease agreements
are approved and signed.
2.11 Interest Income and Expenses
Interest income and expenses are recognised in the Statement of
Comprehensive Income on an accruals basis at the effective interest
rate.
2.12 Issue Costs
Costs directly incurred on share issues are netted off against
the share issue proceeds.
2.13 Dividends Payable
The Group pays sustainable dividends to Shareholders subject to
the solvency test prescribed by Guernsey Law. Refer to Note 13 for
details of dividends announced during the year and when they were
paid.
2.14 Cash and Cash Equivalents
Cash and cash equivalents comprise cash in hand, and deposits
held at call with banks. Cash equivalents are short-term, highly
liquid investments that are readily convertible to known amounts of
cash and are subject to insignificant risk of changes in value.
2.15 Taxation
Profits arising in the Company are subject to tax at the
standard rate of 0%. The Subsidiaries are exempt from Guernsey
taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance,
1989 for which they pay an annual fee of GBP1,200.
2.16 Derivative Financial Instruments
The Group makes use of derivative financial instruments to
manage its exposure to foreign exchange rate risk, including but
not restricted to the use of foreign exchange forward contracts. A
derivative with a positive fair value is recognised as a financial
asset and a derivative with a negative fair value is recognised as
a financial liability. Further details on derivative financial
instruments are disclosed in Notes 7.2 and 16.
2.17 Critical Accounting Judgements and Key Sources of
Estimation Uncertainty
The preparation of the Financial Statements in accordance with
IFRS requires management to make judgements, estimates and
assumptions that affect the application of policies and the
reported amounts of assets and liabilities, income and expenses.
The estimates and associated assumptions are based on various
factors that are believed to be reasonable under the circumstances,
the results of which form the basis of making judgements about
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision affects
only that period, or in the period of the revision and future
periods, if the revision affects both current and future
periods.
In the normal course of business, the Investment Managers make
certain assumptions about residual values (Note 2.7), useful life
of equipment (Note 2.9), and asset impairment (Note 2.6 c).
Equity Holding
During the year ended 30 June 2016, the Group provided (or
committed to provide) asset finance facilities in the form of
construction finance and hire purchase investments to five investee
companies.
In addition to these finance arrangements the Group acquired a
25.5% equity holding in each investee company. The terms of the
shareholder agreement included an option (the "Call Option"),
exercisable by the developer upon or following full repayment of
the asset finance/loan, to purchase the Group's shares at a price
that will produce a maximum 12% per annum return on capital to the
Group, taking account of both interest paid under the debt
facilities and (if applicable) any dividends, assuming each project
is fully delivered.
The equity holdings do not qualify for equity method accounting
under IAS 28 - Investments in Associate, as although the Group
holds greater than 20% of the voting power in each of the
investees, the Directors judge that the Group does not have
significant influence due to the following factors for each
investment:
-- The equity holdings can be bought back at the developer's
discretion once conditions per the shareholder agreement are
satisfied.
-- The return is fixed at a maximum of 12% per annum across the
entire investment (loan and shares). If the investment performs
better than expected, the developer will exercise the option to
purchase the shares at the agreed price and therefore the Group has
no realistic chance of participating in residual value.
In accordance with IAS 39, the separate investment in the shares
is measured initially at cost and subsequently at fair value
through profit or loss, taking into account all information
available including possible future cash flows, progress of the
projects and the call option available to the developer.
The Board are in ongoing communications with the Investment
Managers and from discussions and review of relevant information
available, believe that the fair value of the Call Option
throughout the period and as at 30 June 2016 is GBPnil.
2.18 Comparatives
The comparatives in the Statement of Comprehensive Income,
Statement of Changes in Equity and Statement of Cash Flow are for
the period from 28 May 2014 to 30 June 2015, which was not a
year-long period, and so are not entirely comparable to the current
year, particularly as the prior period was the initial period
during which the Group commenced trading and was in the process of
acquiring the portfolio and before the launch of the C Share.
3. Material Agreements
a) Investment Management Agreement
The Company's investments are managed by the Investment
Managers. Under the terms of the Investment Management Agreement
dated 16 June 2014, the Company appointed the Investment Managers
to provide management services to the Company. The Investment
Managers are together entitled to a management fee which is
calculated, accrued monthly and payable monthly in arrears at the
following rate per annum of the Group's NAV:
On first GBP300 million of the NAV 1.00%
On GBP300 million - GBP500 million of the NAV 0.90%
Any amount greater than GBP500 million of the NAV 0.80%
In addition to the above fee, the Investment Managers are
entitled to receive an additional fee where either of them or their
affiliates provides structuring advice and/or services in
connection with the acquisition (but not the disposal) of any
investment. The fee will be equal to 1% of the transaction
amount.
The Investment Managers are not entitled to any incentive or
performance based fees.
Refer to Note 17 for details on fees paid during the year to the
Investment Managers.
b) Administration and Custodian Agreement
The Company has engaged the services of the Administrator, to
provide administration and custodian services. With effect from 1
July 2015, under the terms of the revised schedule 2 of the
Administration and Custody Agreement dated 16 June 2014, the
Administrator is entitled to receive an annual administration fee
based on the Group's gross issue proceeds as follows:
On first GBP300 million 0.08%
On GBP300 million - GBP500 million 0.06%
Any amount greater than GBP500 million 0.04%
The Administrator receives an annual fee of GBP36,000 for
performing the function of Secretary to the Company plus fees for
ad-hoc Board meetings and an annual fee of GBP10,000 for provision
of compliance services.
The Administrator is due a fee of GBP10,000 for each share
launch and an annual fixed fee of GBP5,000 for up to seven Guernsey
subsidiaries.
c) Registrar Agreement
Capita Registrars (Guernsey) Limited has been appointed as
registrar of the Group pursuant to the registrar agreement dated 16
June 2014. The fee is charged at a rate of GBP1.60 per holder of
Ordinary Shares appearing on the register, subject to a minimum fee
of GBP5,000 per annum, plus disbursements.
d) Placing Agreements
The Company, the US Manager, the UK Manager, the Sub-Investment
Manager, the Directors and Winterflood Securities ("Winterflood")
entered into a Placing and Offer Agreement on 16 June 2014. In
addition, there are engagement letters dated 14 July 2014 and 15
September 2015 between the Company and Winterflood. In accordance
with the Placing and Offer Agreement and the engagement letters,
Winterflood acts as sponsor, financial advisor and sole book runner
in connection with the issue and/or the placing programme. For
their services, Winterflood are entitled to an annual brokerage and
advisory fee of GBP45,000 and to receive commission fees of 1% and
0.5% of the gross value of any share issues and repurchases
respectively. Winterflood were also entitled to commission fees of
1.5% on the gross proceeds of the C Shares which were issued in
November 2015.
4. Operating Expenses
30 June 30 June
2016 2015
GBP GBP
Investment management fees 2,893,765 1,454,088
Administration and custody
fees 254,707 110,219
Company secretarial fees 78,479 62,487
Directors' fees and travel
expenses 202,593 131,856
Depreciation 351,768 117,256
Audit fees 48,440 40,000
Brokerage fees 46,087 43,299
Public relation fees 46,070 39,843
Registrar fees 42,661 20,092
Legal fees 15,674 54,190
Professional fees 108,917 22,058
Restructuring fees - 84,445
Other expenses 160,260 112,605
Total 4,249,421 2,292,438
========== ==========
5 Earnings per Share and NAV per Share
5.1 Ordinary Shares
The calculation of basic earnings per Ordinary Share is based on
the operating profit attributable to Ordinary Shares of
GBP11,892,845 (30 June 2015: GBP6,321,797) and on the weighted
average number of Ordinary Shares in issue during the year of
178,985,507 Ordinary Shares (30 June 2015: 141,501,791).
The calculation of NAV per Ordinary Share is based on a NAV
attributable to Ordinary Shares of GBP177,996,266 (30 June 2015:
GBP178,855,243) and the number of shares in issue at 30 June 2016
of 178,985,507 Ordinary Shares (30 June 2015: 178,985,507).
5.2 C Shares
The calculation of basic earnings per C Share is based on the
operating profit attributable to C Shares of GBP1,185,664 and on
the weighted average number of C Shares in issue during the year of
180,000,000 C Shares.
The calculation of NAV per C Share is based on a NAV
attributable to C Shares of GBP176,833,652 and the number of C
Shares in issue at 30 June 2016 of 180,000,000 C Shares.
6. Property, Plant and Equipment
Property, Plant and Equipment comprises plant and machinery
originally subject to a hire purchase agreement which has been
re-leased to an alternative third party under an operating lease.
The assets have a remaining useful life of 13.5 years.
The carrying amount is detailed in the table below:
30 June 30 June
2016 2015
Cost GBP GBP
Opening balance 5,100,572 -
Additions during the
year/period - 5,100,572
Closing balance 5,100,572 5,100,572
---------- ----------
Accumulated depreciation
Opening balance (117,256) -
Depreciation during
the year/period (351,768) (117,256)
Net book value 4,631,548 4,983,316
---------- ----------
7. Financial Instruments
7.1 Loans and Other Investments
The following table summarises the changes in investments
measured at amortised cost using the effective interest method:
30 June 2016 Loans Construction Receivables Total
Finance
GBP GBP GBP GBP
Opening balance 47,664,651 22,131,934 2,845,605 72,642,190
Purchases during
the year 66,985,094 98,071,965 8,638,201 173,695,260
Principal amortisation
during the year (33,854,841) (1,037,392) (3,015,862) (37,908,095)
Reclassification - (20,290,025) - (20,290,025)
Realised foreign
exchange gain on
investments 1,689,357 22,324 108,137 1,819,818
Unrealised foreign
exchange gain on
revaluation 10,480,961 4,632,009 872,236 15,985,206
Closing balance 92,965,222 103,530,815 9,448,317 205,944,354
--------------- -------------- -------------- ---------------
In respect of the above table, GBP20,290,025 of advances were
reclassified from the construction finance category to additions in
the finance lease and hire-purchase investments category (Note
8).
30 June 2015 Loans Construction Receivables Total
Finance
GBP GBP GBP GBP
Opening balance - - - -
at inception
Purchases during
the period 46,734,159 44,291,953 3,370,683 94,396,795
Principal amortisation
during the period (6,340,770) - (525,078) (6,865,848)
Reclassification 7,970,493 (22,160,019) - (14,189,526)
Realised foreign
exchange gain on
investments 228,611 - - 228,611
Unrealised foreign
exchange loss on
revaluation (927,842) - - (927,842)
Closing balance 47,664,651 22,131,934 2,845,605 72,642,190
-------------- ------------- ------------ --------------
In respect of the above table, GBP22,160,019 of advances were
reclassified from the construction finance category as follows:
GBP7,970,493 to additions in the loans category (as detailed in the
above table) and GBP14,189,526 to additions in the finance leases
category (Note 8).
Construction Finance investments comprise initial drawings or
advances made under loan agreements, finance leases or
hire-purchase agreements during a period of procurement or
construction of underlying assets (the "Construction Period").
During the Construction Period, interest or similar service
payments on the advances may be paid or (more usually) rolled-up
and capitalised on expiry of the Construction Period, typically
when the assets have been commissioned and (if applicable)
commercial operations have commenced.
The amortisation period (in the case of a loan) or lease/hire
term (in the case of a finance lease or hire-purchase) commences at
the end of the Construction Period and the service payments or
lease/hire payments rentals are calculated by reference to the
total advances during the Construction Period plus interest accrued
(if not paid). In the case of a finance lease, the advances (and
accrued interest) are repayable in full if a default or insolvency
event occurs or if the Construction Period has not ended by a
specified long-stop date.
Receivables comprise the legal right to streams of contracted
payments arising under lease, hire, licence or similar agreements
made between an end-user, lessee or licensee and lessor, owner or
licensor of goods or other assets, in respect of which the right to
receive payment has been sold or assigned absolutely to the Group
by a third party, but legal title to the goods or other assets lies
with that third party.
7.2 Fair Value Investments
The Group's accounting policy on fair value measurements is
discussed in Note 2.6 (c).
The Group measures fair values using the following fair value
hierarchy that reflects the significance of the inputs used in
making the measurements:
Level 1: Inputs that reflect unadjusted price quotes in active
markets for identical assets or liabilities that the Group has the
ability to access at the measurement date;
Level 2: Inputs that reflect price quotes of similar assets and
liabilities in active markets, and price quotes of identical assets
and liabilities in markets that are considered to be less than
active as well as inputs other than price quotes that are
observable for the asset or liability either directly or
indirectly; and
Level 3: Inputs that are unobservable for the asset or liability
and reflect the Investment Managers' own assumptions based upon
experience of similar assets and/or on third party appraised
values. This category includes instruments that are valued based on
price quotes for which the inputs are unobservable or price quotes
for similar instruments for which significant unobservable
adjustments or assumptions are required to reflect differences
between the instruments.
The fair values of derivative instruments are calculated using
quoted prices. Foreign currency forward contracts are measured
using quoted forward exchange rates and yield curves derived from
quoted interest rates matching maturities of the contracts.
For financial assets not carried at amortised cost, the
Investment Managers determine fair value using valuation techniques
approved by the Directors.
The table below analyses the investments and foreign exchange
instruments at the end of the reporting year by the level in the
fair value hierarchy into which the fair value measurement is
categorised:
30 June 2016 Level Level Level Total
1 2 3 GBP
GBP GBP GBP
Financial Assets
Designated at fair value
through profit
and loss - - 4,373,701 4,373,701
Finance lease residual
value - - 1,041,623 1,041,623
Equity holding - - - -
Financial Liabilities
Derivative liability - (15,213,964) - (15,213,964)
------- ------------- ------------ -------------
Total Fair Value
Investments - (15,213,964) 5,415,324 (9,798,640)
------ ------------- ------------ -------------
30 June 2015 Level Level Level Total
1 2 3 GBP
GBP GBP GBP
Financial Assets
Designated at fair value
through profit
and loss - - 3,548,636 3,548,636
Finance lease residual
value - - 839,012 839,012
Derivative asset - 1,704,952 - 1,704,952
------- ---------- ------------ ------------
Total Fair Value
Investments - 1,704,952 4,387,648 6,092,600
------ ---------- ------------ ------------
The following table summarises the changes in fair value of the
Group's Level 3 investments:
30 June 30 June
2016 2015
GBP GBP
Opening balance 4,387,648 -
Additions during the year/period 183,821 8,932,851
Principal amortisation / disposals
during the year/period (94,916) (5,428,175)
Realised foreign exchange gain on
investments 9,258 302,693
Unrealised foreign exchange gain/(loss)
on revaluation 929,513 580,279
---------- ------------
Closing balance 5,415,324 4,387,648
---------- ------------
Transfers between levels are deemed to have occurred at the date
of the event or change in circumstances that caused the
transfer.
There were no transfers of investments between the Levels during
the year.
The Lease Participation investments represent a single
participation investment in a portfolio of leases. The carrying
value of GBP4,373,701 (30 June 2015: GBP3,548,638) represents the
value attributable to the 'principal' element of the participation
interest, determined in accordance with the participation
agreement.
The participation agreement entitles the Group to receive
interest on the principal balance at the rate of 10.5%. Payment
amounts are not fixed and are dependent on the actual proceeds
received on the Lease Portfolio each month. Any shortfall in
interest payments is added to the principal balance and accrues
interest at the same rate.
The Group does not have any rights to any amounts received on
the portfolio over and above the repayment of their principal plus
any interest accrued at the rates stated above.
The Directors and the Investment Managers believe this is a
reasonable approximation of the fair value.
The Group has therefore not presented quantitative information
on the valuation of the Lease Participation investments.
Information about the Secondary Market for Level 3
Investments
The Investment Managers make assumptions about the residual
value of certain assets and equipment. As determined by the
Investment Managers, the residual value is a function of the
in-place value and/or the secondary market value of the equipment
or assets.
The in-place value is an assessment of the value of the
equipment or assets if the equipment or assets were to continue to
operate and provide value to the end-user. This takes into account
the marginal cost of keeping the asset in place as well as the cost
to the end-user of decommissioning, redelivering, and replacing the
equipment. In some cases, this amount (or a maximum value) is
negotiated in advance with the end-user.
The secondary market value is determined by the Investment
Managers' historical experience, quotes from dealers, third party
appraisals and recent sales. The secondary market value also takes
into account the geography of the equipment or assets, the time
frame required to conduct a sale, and the associated costs that are
not passed on to the end-user.
Equity Holding
The equity holdings as detailed in note 2.17 are valued by the
Directors, taking into consideration a range of factors including
the NAV of the investee, (if available), the existence of the call
option exercisable on the holding and other relevant available
information, including the price of recent transactions of equity
holdings, (if any), and advice received from the Investment Manager
and such other factors as the Directors, in their sole discretion,
deem relevant in considering a positive or negative adjustment to
the valuation.
The estimated fair values of the equity holdings may differ from
the values that would have been realised had a ready market existed
and the difference could be material.
The fair value of the equity holdings are reassessed on an
ongoing basis by the Board.
7.3 Valuation Process
The following table provides information about fair value
measurements using significant unobservable inputs:
30 June 2016
Description Fair Valuation Unobservable Inputs
Value Techniques
GBP
Lease Participation 4,373,701 Principal Third party appraisal
balance
Residual 1,041,623 Market approach In place value / secondary
value market value
Equity holding - Market approach N/A
30 June 2015
Description Fair Valuation Unobservable Inputs
Value Techniques
GBP
Lease Participation 3,548,636 Principal Third party appraisal
balance
Residual 839,012 Market approach In place value / secondary
value market value
8. Finance Lease and Hire-Purchase Investments
The Group's investments include a portfolio of leases of plant
and machinery leased under lease agreements that transfer
substantially all the risks and rewards incidental to ownership to
the lessee and in hire-purchase agreements that include a purchase
option exercisable by the lessee upon fulfilment of specified
conditions.
The lessee pays periodic rent for the use of the assets for a
fixed or minimum initial term of typically 3 to 10 years. At the
end of the fixed or minimum term, the lessee can elect to:
-- return the asset to the Group;
-- in the case of hire-purchase, exercise an option to purchase
the assets, typically at a 'bargain' price;
-- extend the lease for a further minimum term or from year to
year on payment of a pre-agreed rent (which is typically
substantially lower than the rent paid during the initial term);
or
-- arrange a sale of the asset to a third party and (typically)
receive all or the majority of the proceeds of sale. Legal title to
the leased assets remains with the Group at all times prior to such
sale.
The following tables summarise the changes in finance lease and
hire-purchase investments:
30 June 2016 Finance Hire-Purchase Total
Lease
GBP GBP GBP
Opening balance 17,230,475 - 17,230,475
Additions during the year 6,886,027 22,592,633 29,478,660
Reclassified construction
finance investments 2,880,118 17,409,907 20,290,025
Principal amortisation
during the year (3,334,415) (1,275,717) (4,610,132)
Closing balance 23,662,205 38,726,823 62,389,028
------------ -------------- ------------
30 June 2015 Finance Total
Lease
GBP GBP
Opening balance - -
Additions during the year 3,639,732 3,639,732
Reclassified construction finance
investments 14,189,526 14,189,526
Principal amortisation during
the year (598,783) (598,783)
Closing balance 17,230,475 17,230,475
----------- -----------
There are no comparatives for hire purchase as this investment
was acquired for the first time during the year ended 30 June
2016.
Assets leased to third parties under finance leases had an
unguaranteed residual value at the end of the year of GBP1,041,623
(30 June 2015: GBP839,012).
During the year, a residual investment was sold for
GBP94,916.
The following table summarises the changes in finance lease
investments:
30 June 30 June
2016 2015
GBP GBP
Non-current receivables
Finance leases - net receivables 20,497,468 15,393,445
Unearned finance income 6,742,928 5,485,147
----------- -----------
27,240,396 20,878,592
----------- -----------
Current receivables
Finance leases - net receivables 3,164,737 1,837,030
Unearned finance income 2,185,453 1,614,785
----------- -----------
5,350,190 3,451,815
----------- -----------
Net receivables from finance
leases
No later than 1 year 3,164,738 1,837,030
Later than 1 year and no later
than 5 years 13,558,940 9,015,446
Later than 5 years 6,938,527 6,377,999
-----------
23,662,205 17,230,475
----------- -----------
Unearned future income
on finance leases 8,928,381 7,099,932
Gross investment in finance
leases 32,590,586 24,330,407
----------- -----------
Reconciliation
No later than 1 year 5,350,191 3,451,815
Later than 1 year and no later
than 5 years 19,068,415 13,447,859
Later than 5 years 8,171,980 7,430,733
Gross investment in finance
leases 32,590,586 24,330,407
----------- -----------
The following table summarises the changes in hire purchase
investments:
30 June
2016
GBP
Non-current receivables
Hire purchase - net receivables 36,138,508
Unearned future income 17,943,256
-----------
54,081,764
-----------
Current receivables
Hire purchase - net receivables 2,588,315
Unearned future income 3,645,603
-----------
6,233,918
-----------
Net receivables from hire
purchase
No later than 1 year 2,588,315
Later than 1 year and no later than 5
years 14,961,767
Later than 5 years 21,176,741
-----------
38,726,823
-----------
Unearned future income
on hire purchase 21,588,859
Gross investment in hire
purchase 60,315,682
-----------
Reconciliation
No later than 1 year 6,233,918
Later than 1 year and no later than 5
years 26,271,712
Later than 5 years 27,810,052
Gross investment in hire
purchase 60,315,682
-----------
In the financial statements for the period ended 30 June 2015,
the category was named Finance Lease Receivables. The category has
been updated due to the addition of the hire-purchase investments
during the year.
9. Receivables
Interest Receivables
Interest receivables represent accrued interest receivable on
leases and loans.
The Group has financial risk management policies in place to
ensure that all receivables are received within the credit time
frame. The Directors considers that the carrying amount of all
receivables approximates to their fair value.
Other Receivables and Prepayments
Other receivables and prepayments include UK VAT receivable and
prepaid transaction fees due for arranging the investments of the
Group.
Investment Receivables
Investment receivables represent amounts due from the lessee or
loan counterpart with regards to ongoing contractual obligations
that remain outstanding at the reporting date.
10. Other Payables and Accrued Expenses
30 June 30 June
2016 2015
GBP GBP
Investment management fees 312,856 147,126
Administration and secretarial
fees 56,104 13,445
Audit fees 39,889 40,000
Custody fees - 1,667
Printing fees 4,972 6,000
Brokerage fees 18,625 11,096
Rental reserve 353,741 136,145
Other payables 6,408 81,924
Investment payables 1,836 130,000
794,431 567,403
======== ========
Investment payables of GBP1,836 (30 June 2015: GBP130,000)
represent amounts due for investments purchased that have been
contracted for but not settled at the reporting date.
The Group has financial risk management policies in place to
ensure that all payables are paid within the credit time frame.
The Directors considers that the carrying amount of all payables
approximates to their fair value.
11. Commitments and Contingent Liabilities
As at 30 June 2016, the Group had committed to invest a further
GBP39,584,941 (30 June 2015: GBP54,533,506). These commitments are
classified as "hard commitments" of GBP39,584,941 (30 June 2015:
GBP17,948,998) which represent investments for which the
documentation is finalised. As at 30 June 2016, there were no "soft
commitments" (30 June 2015: GBP36,584,508) which represent
investments at varying stages of documentation.
The Group does not have any contingent liabilities.
12. Share Capital
The authorised share capital of the Company is represented by an
unlimited number of shares of no par value. All shares hold equal
rights with no restrictions and no shares carry special rights with
regard to the control of the Company. There are no special rights
attached to the shares in the event that the Company is wound
up.
The C Share net proceeds and the investments made with the net
proceeds will be accounted for and managed as a separate pool of
assets in accordance with the Company's investment policy until the
conversion of C Shares to Ordinary Shares. Expenses are split
between Ordinary Shares and C Shares.
The Company's share capital is denominated in Sterling.
Number of Stated Number of
Shares Capital Shares Stated Capital
30 June 30 June 30 June 30 June
2016 2016 2015 2015
GBP GBP
Ordinary Shares 178,985,507 176,808,446 178,985,507 176,808,446
C Shares* 180,000,000 176,907,988 - -
Total 358,985,507 353,716,434 178,985,507 176,808,446
------------ ------------ ------------ ---------------
Share Movements
Issue
Number Gross Proceeds Costs Net Proceeds
GBP GBP GBP
Balance at the
start of the year 178,985,507 180,000,000 (3,191,554) 176,808,446
Ordinary Shares
issued during the
year - - - -
C Shares issued
during the year* 180,000,000 180,000,000 (3,092,012) 176,907,988
Balance at end
of the year 358,985,507 360,000,000 (6,283,566) 353,716,434
------------ --------------- ------------ -------------
* On 4 November 2015, the Board announced that the Company had
raised GBP180,000,000 through the issue of 180,000,000 C Shares.
The proceeds net of issue costs of GBP3,092,012 (1.72% of the gross
proceeds), amounted to GBP176,907,988. The C Shares were admitted
to the Main Market of the London Stock Exchange on 9 November 2015.
The terms and timing of the conversion of C Shares to Ordinary
Shares will be announced at a later date. The uninvested proceeds
were held in cash as at 30 June 2016.
13. Dividends
The Company has declared and paid the following dividends to its
Shareholders during the year:
Period Announcement Payment Amount Amount
Date Date per Share
Ordinary Shares GBP
19 June 20 July
1 to 31 May 2015 2015 2015 0.5200p 930,725
20 July 20 August
1 to 30 June 2015 2015 2015 0.5625p 1,006,797
21 August 18 September
1 to 31 July 2015 2015 2015 0.6042p 1,081,430
1 to 31 August 17 September 20 October
2015 2015 2015 0.6042p 1,081,430
1 to 30 September 21 October 27 November
2015 2015 2015 0.6042p 1,081,430
1 to 31 October 20 November 18 December
2015 2015 2015 0.6042p 1,081,430
1 to 30 November 21 December 19 January
2015 2015 2016 0.6042p 1,081,430
1 to 31 December 22 January 22 February
2015 2016 2016 0.6042p 1,081,430
1 to 31 January 22 February 21 March
2016 2016 2016 0.6042p 1,081,430
1 to 28 February 21 March 25 April
2016 2016 2016 0.6042p 1,081,430
21 April
1 to 31 March 2016 2016 23 May 2016 0.6042p 1,081,430
20 June
1 to 30 April 2016 23 May 2016 2016 0.6042p 1,081,430
-----------
Total 12,751,822
-----------
C Shares GBP
9 November 2015 to 22 February 21 March
31 January 2016 2016 2016 0.3p 540,000
1 February to 30 20 June
April 2016 23 May 2016 2016 0.4p 720,000
Total 1,260,000
-----------
Grand Total 14,011,822
===========
The dividends for the months ended May 2016 and June 2016 had an
ex-dividend date after the year end and are detailed in Note
18.
14. Capital Management Policies and Procedures
The Board defines capital as financial resources available to
the Group.
The Group's total capital at 30 June 2016 was GBP354,829,918
(2015: GBP178,855,243) and comprised equity share capital and
reserves. The Group was ungeared at the year end.
The Group's capital management objectives are:
-- to ensure that the Group will be able to continue as a going concern; and
-- provide returns to Shareholders.
In accordance with the Group's investment policy, the Group's
principal use of cash has been to fund investments sourced by the
Investment Managers, as well as initial expenses related to the
issue, ongoing operational expenses, currency hedging and payment
of dividends and other distributions to Shareholders in accordance
with the Group's dividend policy.
The Board, with the assistance of the Investment Managers,
monitor and review the broad structure of the Group's capital on an
ongoing basis.
The Group has no externally imposed capital requirements.
15. Segmental Reporting
The Group has two reportable segments, Ordinary Shares and C
Shares. Each Share Class has its own portfolio, is listed
separately on the Main Market of the London Stock Exchange and the
Directors review internal management reports for each segment
separately on a quarterly basis.
The Directors view the operations of the two reportable segments
as one operating segment, being investment business and both
segments have the same investment objectives. All significant
operating decisions are based upon analysis of the Group's
investments as one segment. The financial results from this segment
are equivalent to the financial results of the Group as a
whole.
For the period ended 30 June 2015, there was only one reportable
segment and so no comparatives are provided.
The below condensed Statement of Comprehensive Income details
the breakdown between the two reportable segments for the year
ended 30 June 2016:
Ordinary C Share Total
Share
GBP GBP GBP
Total income 16,484,602 3,368,648 19,853,250
Net realised and unrealised
gain (1,752,234) (773,086) (2,525,320)
Total operating expenses (2,839,523) (1,409,898) (4,249,421)
Total comprehensive
income for the year 11,892,845 1,185,664 13,078,509
============ ============ ============
The below condensed Statement of Financial Position details the
breakdown between the two reportable segments as at 30 June
2016:
Ordinary C Share Total
Share
GBP GBP GBP
Non-current assets 175,573,063 102,807,191 278,380,254
Current assets 14,853,833 77,604,226 92,458,059
Total assets 190,426,896 180,411,417 370,838,313
------------- ------------ -------------
Current liabilities (12,430,630) (3,577,765) (16,008,395)
Net assets 177,996,266 176,833,652 354,829,918
============= ============ =============
Equity 177,996,266 176,833,652 354,829,918
============= ============ =============
16. Financial Risk Management
The Group's financial assets mainly comprise investments and
cash balances. Note 2 sets out the accounting policies, including
criteria for recognition and the basis for measurement, applied to
significant financial assets and liabilities. Note 2 also includes
the basis on which income and expenses arising from financial
assets and liabilities are recognised.
The Group finances its investment activities through the Group's
Ordinary Share capital and reserves.
Principal risks and uncertainties are detailed in the Strategic
Report, the Directors and the Investment Managers work together to
mitigate these risks by employing the following risk mitigation
strategies:
(a) Records Management - this is a critical way by which risk is
managed and mitigated. The Investment Managers' internal systems
are utilised to ensure the Group is not exposed from a record
maintenance standpoint. The Investment Managers have a
comprehensive electronic documentation system that is subject to
their internal/external backup procedure, maintaining information
access and retrieval 24/7 with offsite redundant backup in case of
a disaster when recovery would need to be deployed.
(b) Credit Management - sound credit management is a prerequisite for an entity's stability and profitability. Prudent management of credit risk can minimise both operational and credit risks. The Board and the Investment Managers pre-emptively begin to manage risk through the comprehensive underwriting process to ensure that there is not more than an acceptable amount of risk within the transaction. The risk is continually managed throughout the term of the lease (or other finance agreement) until the ultimate disposition of the asset(s). Stringent underwriting procedures are applied to mitigate risk.
(c) Loss Prevention Management - when available, insurance is
required for assets that the Group owns or which have been charged
or pledged to the Group as security. Insurance is in place for the
full term that an asset is owned by (or charged to) the Group,
thereby reducing the risk of loss from physical damage or
theft.
(d) Due Diligence - the Investment Managers perform
comprehensive due diligence on all sellers, individuals and
businesses relevant to the investment strategy of the Group.
(e) On-going Portfolio Management - ensures that if a problem
starts to arise it is immediately identified giving the capability
to address it and put into action whatever remediation steps are
necessary to help mitigate a potentially larger risk down the
line.
(f) Legal Review - the Investment Managers engage legal
professionals in order to ensure, on an on-going basis, that all
rights, title and interests, held as security for the Company's
investments are being protected and preserved.
Additional risks arising from the Group's activities listed in
order of severity and likelihood are:
(i) credit risk;
(ii) liquidity risk;
(iii) operational risk; and
(iv) market risk, including currency risk and interest rate risk.
The Company Secretary, in close cooperation with the Directors
and the Investment Managers, coordinates the Group's risk
management. The policies for managing each of these risks are
summarised below and have been applied throughout the year.
(i) Credit Risk
This is the risk of the failure of a lessee to make lease
payments, the failure of the issuer of a security or borrower to
pay interest or principal in a timely manner, or that the effect of
negative perceptions of the issuer's ability to make such payments
causing the value of the investment to decline. Counterparties with
debt securities rated below investment-grade (or unrated) are
especially susceptible to this risk. The Group looks to source
investments that can provide various credit and structural
enhancements to attempt to mitigate credit exposure to any single
counterparty or asset class.
There is a risk that the bank used by the Group to hold cash
balances could fail and that the Group's assets may not be
returned. Associated with this is the additional risk of fraud or
theft by employees of those third parties. The Board manages this
risk through the Investment Managers monitoring the financial
position of those banks used by the Group.
The credit rating of the Administrator, which is the bank used
by the Group, is A-1 with Standard & Poor's.
During the year ended 30 June 2016, certain finance investments
(two secured loans and a finance lease) were restructured resulting
in repayment terms being amended.
As at 30 June 2016, the Group continues to hold these
investments at their combined carrying amount of GBP19,201,474. The
Directors do not consider these investments to be impaired
subsequent to the restructuring of the financing agreement.
The Group holds one investment (a construction finance loan) for
which interest recognition was suspended as of 31 May 2016. The
Directors do not consider this investment to be impaired due to the
security held and consider the full carrying amount of GBP119,588
to be recoverable.
(ii) Liquidity Risk
This is the risk that the Group will encounter difficulty in
meeting obligations associated with financial liabilities or
funding commitments.
The Group's investments (excluding cash deposits) are
asset-backed loan or finance transactions with commercial entities.
The investments are substantially less liquid than traded
securities and will have a highly limited (if any) secondary
market. Some transactions may incorporate provisions that restrict
transfer or disposal of the investment.
The Group may be required to satisfy margin calls in respect of
foreign exchange forward if the current market rate varies from the
contract rate.
In accordance with the Group's policy, the Investment Managers
monitor the Group's liquidity risk, and the Directors review
it.
(iii) Operational Risk
Operational risk is the risk of direct or indirect loss arising
from a wide variety of causes associated with the processes,
technology and infrastructure supporting the Group's activities
with financial instruments either internally within the Group or
externally at the Group's service providers, and from external
factors other than credit, market and liquidity risks such as those
arising from legal and regulatory requirements and generally
accepted standards of investment management behaviour.
The Group's objective is to manage operational risk so as to
balance limiting of financial losses and damage to its reputation
with achieving its investment objective. The Group manages this
risk by having regular Board meetings to ensure oversight of the
Investment Managers and the Administrator.
(iv) Market Risk
The fair value of future cash flows of a financial instrument
held by the Group may fluctuate. This market risk comprises
currency risk and interest rate risk. The Board reviews and agrees
policies for managing these risks.
Currency Risk
The functional and presentational currency of the Group is Pound
Sterling and, therefore, the Group's principal exposure to foreign
currency risk comprises investments denominated in other
currencies, principally US Dollars and Euros. The Investment
Managers monitor the Group's exposure to foreign currencies and
reports to the Board on a regular basis. The Investment Managers
measure the risk to the Group of the foreign currency exposure by
considering the effect on the NAV and income of a movement in the
rates of exchange to which the Group's assets, liabilities, income
and expenses are exposed. The Investment Manager is mandated to
undertake a hedging strategy and to report its effectiveness and
costs to the Board on an on-going basis.
At 30 June 2016, the currency profile of those financial assets
and liabilities was:
GBP USD EUR Total
GBP GBP GBP GBP
Investments 129,959,636 77,624,753 70,795,865 278,380,254
Income receivable 1,845,261 527,925 121,090 2,494,276
Cash and cash
equivalents 82,140,948 492,118 5,182,178 87,815,244
Other receivables
and prepayments 1,845,578 250,916 52,045 2,148,539
Forward currency
contracts (15,213,964) - - (15,213,964)
Other payables
and accrued expenses (794,431) - - (794,431)
Total net foreign
currency exposure 199,783,028 78,895,712 76,151,178 354,829,918
-------------- ------------- ------------- --------------
At 30 June 2015, the currency profile of those financial assets
and liabilities was:
GBP USD EUR Total
GBP GBP GBP GBP
Investments 48,030,340 39,342,551 11,870,738 99,243,629
Forward currency
contracts 1,704,952 - - 1,704,952
Income receivable 611,939 834,889 97,960 1,544,788
Cash and cash equivalents 71,483,637 3,838,595 332,733 75,654,965
Other receivables
and prepayments 960,228 274,338 39,746 1,274,312
Other payables
and accrued expenses (567,403) - - (567,403)
Total net foreign
currency exposure 122,223,693 44,290,373 12,341,177 178,855,243
-------------- ------------- ------------- --------------
Sensitivity analysis is based on the Group's monetary foreign
currency instruments held at 30 June 2016:
Currency Increase/(decrease) Impact on Net Assets
in the exchange
rate
GBP GBP
Plus 5% Less 5%
USD 5% (3,756,939) 4,152,406
EUR 5% (3,626,247) 4,007,957
Sensitivity analysis is based on the Group's monetary foreign
currency instruments held at 30 June 2015:
Currency Increase/(decrease) Impact on Net Assets
in the exchange
rate
GBP GBP
Plus 5% Less 5%
USD 5% (2,109,065) 2,331,072
EUR 5% (587,675) 649,536
The foreign currency risk assumed by the Group in making and
retaining investments denominated in foreign currencies is hedged
by placing contracts for the sale of the future foreign currency
payments anticipated to be received in connection with such
investments ("FX Receivables"). Due to the limited availability,
inflexibility and cost of placing a matched forward contract for
each foreign currency investment (which may have a tenor of five
years or longer), the FX Receivables in respect of two or more
underlying investments are aggregated and a single forward contract
placed with short-term maturity (typically between three and nine
months). On maturity, the forward sale contract is part-settled
from actual foreign currency receipts and a new forward contract is
placed for the then applicable aggregate FX Receivables, adjusted
for payments received, contract variations and new investments.
The Group may be required to deposit initial cash collateral
against fluctuations in the applicable exchange rates and/or to
meet margin calls if the current market rate varies from the
contract rate. The Investment Managers monitor the Group's currency
risk, and the Directors review it.
As at 30 June 2016, the Group had the following open forward
foreign exchange contracts:
Notional
Buy/Sell Fair Value Settlement
Currency Foreign Currency GBP / GBP Equivalent Date Month/Year
GBP/EUR 28,937,566 24,067,026 (3,150,292) July 2016
GBP/EUR 226,613 188,524 (10,710) August 2016
September
GBP/USD 33,192,961 24,830,961 (1,458,927) 2016
September
GBP/EUR 6,773,233 5,643,146 (429,775) 2016
GBP/EUR 18,515,140 15,431,610 (896,184) October 2016
November
GBP/EUR 45,150,513 37,675,891 (2,862,012) 2016
December
GBP/USD 82,266,109 61,401,921 (6,406,064) 2016
------------------
(15,213,964)
------------------
As at 30 June 2015, the Group had the following open forward
foreign exchange contracts:
Notional
Buy/Sell Fair Value Settlement
Currency Foreign Currency GBP / GBP Equivalent Date Month/Year
EUR/GBP 482,850 342,091 (6,951) July 2015
GBP/EUR 486,183 344,543 2,362 July 2015
GBP/USD 22,469,450 14,291,616 8,287 July 2015
EUR/GBP 579,420 410,940 (3,010) August 2015
September
GBP/USD 54,193,239 34,484,403 181,277 2015
January
GBP/EUR 23,097,084 16,438,310 1,522,987 2016
Total 1,704,952
------------------
Interest Rate Risk
The value of fixed income securities usually rises and falls in
response to changes in interest rates. Declining interest rates
generally increase the value of existing instruments, and rising
interest rates generally decrease the value of existing
instruments. Changes in value usually will not affect the amount of
interest income, but will affect the value of the investment.
Interest rate risk is generally greater for investments with longer
maturities.
Certain fixed income securities pay interest at variable or
floating rates. Variable rate securities reset at specified
intervals, while floating rate securities reset whenever there is a
change in a specified index rate. The market prices of these
securities may fluctuate significantly when interest rates
change.
The possible effects on fair value and cash flows that could
arise as a result of changes in interest rates are taken into
account when making investment decisions. The Board reviews on a
regular basis the values of the financial instruments.
17. Related Party Transactions
Parties are considered to be related if one party has the
ability to control the other party or exercise significant
influence over the other party in making financial or operational
decisions. Details on the Investment Management Agreement are
included in Note 3.
The Investment Managers
The Group is party to an Investment Management Agreement with
the Investment Managers under which the Investment Managers are
entitled to payment of management fees based on the aggregate of
NAVs under management and structuring fees based on the value of
new investments. During the year, the management fees due to the
Investment Managers amounted to GBP2,893,765 (30 June 2015:
GBP1,454,088) and an additional GBP1,409,927 (30 June 2015:
GBP769,889) was paid in structuring fees. At 30 June 2016,
GBP312,856 (30 June 2015: GBP147,126) of the management fees was
still payable to the Investment Managers.
Loan to Summit Asset Management
During the year, the Group provided an additional loan of
GBP42,762 to Summit Asset Management Limited ("Summit") to finance
the construction of a biomass renewable energy generating station
(the "Plant") that is the subject of asset purchase and equipment
lease agreements made between Summit and the developers. The loan
finance provided was applied by Summit to finance the development
and construction of the Plant and the loans are secured by rights
over the Plant and related leases together with related
security.
The Group is entitled to receive interest on the principal
amount of the loans equal to the finance charges payable under the
related lease. This financing structure provided an interim
solution that allowed the Group to acquire these investments
shortly following the initial public offering. Summit was the
Company's sub-investment manager up to 21 January 2015.
On or prior to completion of construction, the Group will
acquire ownership of the Plant and the related lease.
The Investment Managers as Servicer, Manager,
Administrative/Collateral Agent, Security Trustee
In relation to certain investment transactions made during the
period, typically those involving parallel investors or lenders,
the US Manager or the UK Manager are appointed to act as servicer,
manager or administrative agent for general management and
servicing purposes, which may include collection and distribution
of service payments from underlying obligors, and/or as collateral
agent or security trustee to hold and enforce security. In such
cases, the Investment Managers receive no remuneration for the
performance of such duties other than the management fee provided
for in the Investment Management Agreement.
Share Interest
Neil Roberts, a Director of the UK Investment Manager holds
100,000 Ordinary Shares and 50,000 C Shares in the Company as at 30
June 2016 (30 June 2015: 100,000 Ordinary Shares).
During the year, Tim Spring, a Director of the UK Investment
Manager, purchased 73,085 Ordinary Shares and 74,800 C Shares in
the Company.
The table below details the Ordinary Shares and C Shares held by
the Directors in the Company as at 30 June 2016:
Director Number of Ordinary Number of C Shares
Shares
Peter Niven 40,000 20,000
John Falla 10,000 9,706
Carol Goodwin 30,000 15,000
Christopher Spencer 10,000 10,000
The table below details the Ordinary Shares and C Shares held by
the Directors in the Company as at 30 June 2015:
Director Number of Ordinary Number of C Shares
Shares
Peter Niven 40,000 -
John Falla 10,000 -
Carol Goodwin 30,000 -
Christopher Spencer 10,000 -
Luxembourg Investment Company 26 S.à r.l. (LuxCo)
LuxCo is a special purpose company wholly owned by the US
Investment Manager for the purpose of holding investments. LuxCo
holds for the benefit of the Company a loan and mortgage on two
commercial marine vessels under a comprehensive loan and security
agreement including a corporate guarantee.
SQN Helo, LLC
SQN Helo is a special purpose company owned by SQN Portfolio
Acquisition Company, LLC and SQN AIF IV, L.P., both being
investment funds managed by the US Investment Manager. SQN Helo was
established to purchase and hold legal ownership of a portfolio of
leases and related assets. Further details can be found in Note
7.2.
SQN Asset Finance (Ireland) DAC
During the year, the Group acquired EUR42,670,000 of bonds due
12 May 2018 which were issued by SQN Asset Finance (Ireland) DAC,
an unconsolidated structured entity in the Republic of Ireland. The
Investment Managers act as investment advisors to this entity.
18. Events Occurring After the Reporting Period
On 21 June 2016, the Company declared a dividend of 0.6042p per
Ordinary Share and 0.2p per C Share, for the month ended 31 May
2016. This dividend was paid to the Shareholders on 25 July
2016.
On 20 July 2016, the Company declared a dividend of 0.6042p per
Ordinary Share and 0.33p per C Share, for the month ended 30 June
2016. This dividend was paid to the Shareholders on 22 August
2016.
On 18 August 2016, the Company declared a dividend of 0.6042p
per Ordinary Share and 0.4167p per C Share, for the month ended 31
July 2016. This dividend will be paid to the Shareholders on 19
September 2016.
On 21 September 2016, the Company declared a dividend of 0.6042p
per Ordinary Share and 0.4861p per C Share, for the month ended 31
August 2016. This dividend will be paid to the Shareholders on 24
October 2016.
19. Ultimate Controlling Party
In the opinion of the Directors, there is no single ultimate
controlling party.
ADMINISTRATION
Non-Executive Directors (appointed 28 May 2014)
Peter Niven Christopher Spencer
(Chairman of the Board) (Chairman of Audit and
Risk Committee)
John Falla Carol Goodwin
(Chairman of Management (Chairman of Remuneration
Engagement Committee) and Nomination Committee)
Registered Office
BNP Paribas House, St Julian's Avenue, St Peter Port, Guernsey,
GY1 1WA
US Investment Manager
SQN Capital Management, LLC, 100 Wall Street, 28(th) Floor, New
York, New York, 10005, USA
UK Investment Manager
SQN Capital Management (UK) Limited, Melita House, 124 Bridge
Road, Chertsey, Surrey, KT16 8LA
Financial Adviser and Broker
Winterflood Securities Limited, The Atrium Building, Cannon
Bridge House, 25 Dowgate, Hill, London, EC4R 2GA
Auditor
Baker Tilly CI Audit Limited, Mont Crevelt House, Bulwer Avenue,
St Sampsons, Guernsey, GY2 4LH
Registrar
Capita Registrars (Guernsey) Limited, Mont Crevelt House, Bulwer
Avenue, St Sampsons, Guernsey, GY2 4LH
Principal Bankers
BNP Paribas Securities Services S.C.A., BNP Paribas House, St
Julian's Avenue, St Peter Port, Guernsey, GY1 1WA
Designated Administrator, Custodian and Secretary
BNP Paribas Securities Services S.C.A., Guernsey Branch, BNP
Paribas House, St Julian's Avenue, St. Peter Port, Guernsey, GY1
1WA
Receiving Agent
Capita Asset Services Corporate Actions, The Registry, 34
Beckenham Road, Beckenham, Kent BR3 4TU
Legal Advisers to the Group (English Law)
Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH
Legal Advisers to the Group (Guernsey Law)
Mourant Ozannes, PO Box 186, 1 Le Marchant Street, St Peter
Port, , Guernsey, GY1 4HP
Enquiries:
BNP Paribas Securities Services S.C.A., Guernsey Branch 01481 750822
Company Secretary
Sarah Hendry
A copy of the Company's Annual Report and Audited Consolidated
Financial Statements will be posted to the shareholders of the
Company. Copies are also available from the Company Secretary, BNP
Paribas Securities Services S.C.A., Guernsey Branch at BNP Paribas
House, St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA, or on
the Company's website www.sqnassetfinance.com.
Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into, or forms part of, this
announcement.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SEUFDFFMSEEU
(END) Dow Jones Newswires
September 21, 2016 13:00 ET (17:00 GMT)
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