Notes to the Financial Statements

1. Principal Accounting Policies

Basis of accounting

The financial statements have been prepared in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under those standards. They comprise standards and interpretations approved by the International Accounting Standards Board ("IASB") and International Financial Reporting Committee, including interpretations issued by the IFRS Interpretations Committee and interpretations issued by the International Accounting Standard Committee ("IASC") that remain in effect.

The financial statements have been prepared on a consistent basis year on year, on a going concern basis and under the historic cost convention modified by the revaluation of financial assets held at fair value through profit and loss as applicable. The Directors consider that the Group has adequate financial resources to enable it to continue operations for a period of no less than 12 months from the signing of these accounts, being the 1 March 2022. In order to reach this conclusion the Directors have reviewed the financial projections of the Group from the date of this report, which shows that the Group will be able to generate sufficient cash flows in order to meet its liabilities as they fall due. These financial projections have been performed under various origination volumes and stressed scenarios and in all cases the Group is able to meet its liabilities as they fall due. The stressed scenarios considered included no future originations by the Group, late repayments of significant structured facilities and individual exposures experiencing ongoing performance at the worst monthly impact noted throughout 2020; which incorporated one-off macro-economic charges for Covid-19. As part of these projections, the Directors have also reviewed any financial and non-financial covenants in place under all debt facilities in place with no breaches anticipated, even in our stressed scenario.

The Directors have also reviewed the potential effect of the combination with Pollen Street on financial projections of the combined group.  These financial projections have been stress tested under different scenarios, including delaying all additional fund raises to demonstrate that the combined group will be able to generate sufficient cash flows in order to meet its liabilities as they fall due.

The principal accounting policies adopted by the Company and Group are set out below. Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts issued by the Association of Investment Companies ("AIC") in July 2018 is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.

All values are rounded to the nearest thousand pounds unless otherwise indicated.

Changes to Accounting Policies

At the date of authorisation of these financial statements, the following standards and interpretations have been applied in these financial statements:

Interest Rate Benchmark Reform Phase 2 - Amendments to IFRS 9, IFRS 7, IFRS 4 and IFRS 16

In August 2020, the IASB made amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 to address the issues that arise during the reform of an interest rate benchmark rate, including the replacement of one benchmark with an alternative one. The Phase 2 amendments provide the following reliefs:

·   When changing the basis for determining contractual cash flows for financial assets and liabilities (including lease liabilities), the reliefs have the effect that the changes, that are necessary as a direct consequence of IBOR reform and which are considered economically equivalent, will not result in an immediate gain or loss in the income statement.

The 'Phase 2' reforms are effective from 1 January 2021. The amendments require that, for financial instruments measured using amortised cost measurement (that is, financial instruments classified as amortised cost and debt financial assets classified as FVOCI), changes to the basis for determining the contractual cash flows required by interest rate benchmark reform are reflected by adjusting their effective interest rate. No immediate gain or loss is recognised. These expedients are only applicable to changes that are required by interest rate benchmark reform, which is the case if, and only if, the change is necessary as a direct consequence of interest rate benchmark reform and the new basis for determining the contractual cash flows is economically equivalent to the previous basis (that is, the basis immediately preceding the change).

Where some or all of a change in the basis for determining the contractual cash flows of a financial asset and liability does not meet the above criteria, the above practical expedient is first applied to the changes required by interest rate benchmark reform, including updating the instrument's effective interest rate. Any additional changes are accounted for in the normal way (that is, assessed for modification or derecognition, with the resulting modification gain / loss recognised immediately in profit or loss where the instrument is not derecognised). Refer to note 12 for further details on the group's exposure to IBOR as at the year end.

Accounting standards issued but not yet effective

IFRS 17 Insurance Contract

IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts. The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. This information gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity's financial position, financial performance and cash flows. IFRS 17 was issued in May 2017 and applies to annual reporting periods beginning on or after 1 January 2023.

The Directors do not anticipate that the adoption of this standard and interpretations will have a material impact on the financial statements, given the nature of the Group's business being that it has no insurance contracts.

Other future developments include the IASB undertaking a comprehensive review of existing IFRSs. The Group will consider the financial impact of these new standards as they are finalised.

Accounting Policies

Consolidation

Subsidiaries are investees controlled by the Company. The Company controls an investee if it is exposed to, or has the rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Company reassesses whether it has control if there are changes to one or more elements of control. Subsidiaries are valued at fair value. The Company does not consider itself to be an investment entity for the purposes of IFRS 10, as it does not hold substantially all of its investments at fair value. Consequently, it consolidates its subsidiaries rather than holding at fair value through profit or loss. At the Company level, the Company's investments in its subsidiaries are measured at fair value which is determined with reference to the underlying net asset value of the subsidiary.

On 20 June 2019 the Group incorporated Sting Funding Limited ("Sting"), a limited Company incorporated under the law of England and Wales. Sting became active on 28 August 2019 when it drew down on a debt facility backed by commercial and second charge residential mortgages. The company is registered at 1 Bartholomew Lane, London, United Kingdom, EC2N 2AX. The Group is considered to control Sting through holding 100 percent of the issued shares. As a result, the financial statements for the year ended 31 December 2020 and 31 December 2021 are prepared on a consolidated basis.

Due to the nature of Sting, whereby the credit facility is guaranteed by the investments within Sting this constitutes as a restriction on the Group's ability to access or use the assets and settle the liabilities of the Group. There is a restricted ability on the Group to transfer cash or other assets from Sting to the Group.

The Company controls Bud Funding Limited ("Bud"), a limited company incorporated under the law of England and Wales.  The Company is considered to control Bud through its involvement in the initial creation of Bud and in the absence of another entity now having control over Bud.  Bud was incorporated on 2 November 2020 and the junior note was funded on 2 December 2020.

 

In the consolidated financial statements, intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing consolidated financial statements.

All entities within the Group have co-terminus reporting dates.

Foreign Currency

The financial statements are prepared in Pounds Sterling because that is the currency of the majority of the transactions during the year, so has been selected as the presentational currency.

The primary objective of the Group is to generate returns in Pounds Sterling, its capital-raising currency. The liquidity of the Group is managed on a day-to-day basis in Pounds Sterling as the Group's performance is evaluated in that currency. Therefore, the Directors consider Pounds Sterling as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions and is therefore the functional currency.

Transactions involving foreign currencies are converted at the exchange rate ruling at the date of the transaction. Foreign currency monetary assets and liabilities are translated into Pounds Sterling at the exchange rate ruling on the year-end date. Foreign exchange differences arising on translation would be recognised in the Statement of Comprehensive Income.

Presentation of the Statement of Comprehensive Income

In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income.

In respect of the analysis between revenue and capital items presented within the Statement of Comprehensive Income, all expenses and finance costs, which are accounted for on an accruals basis, have been presented as revenue items except those items listed below:

·  Expenses are allocated to capital where a direct connection with the maintenance or enhancement of the value of the investments can be demonstrated; and

·    Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.

The following are presented as capital items:

·    Gains and losses on the realisation of capital investments (equity investments reported in Note 11);

·    Increases and decreases in the valuation of capital investments held at the 31 December 2020 and 31 December 2021;

·    Realised and unrealised gains and losses on transactions undertaken to hedge an exposure of a capital nature;

·    Realised and unrealised exchange differences of a capital nature; and

·    Expenses, together with the related taxation effect, allocated to capital in accordance with the above policies.

Income

Interest from loans are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost using the effective interest rate method ("EIRM").

The EIRM is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate ("EIR") is the rate that exactly discounts estimated future cash flows through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument, for example prepayment options, but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Fees and commissions which are not considered integral to the EIRM and deposit interest income are recognised on an accruals basis when the service has been provided or received.

Dividend income from investments is recognised when the Group's right to receive payment has been established, normally the ex-dividend date.

Expenses

All expenses are accounted for on the accrual basis. In respect of the analysis between revenue and capital items presented within the Statement of Comprehensive Income, all expenses have been presented as revenue items except as follows:

·    Transaction costs which are incurred on the purchases or sales of Equity Assets designated as fair value through profit or loss are expensed to capital in the Statement of Comprehensive Income; and

·    Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the equity investments held can be demonstrated and, accordingly, the management fee for the financial year has been allocated 98 percent to revenue and 2 percent to capital (being the management fee percentage applied to the Equity Assets throughout the financial year), in order to reflect the Directors' long-term view of the nature of the expected investment returns of the Group.

Finance costs

Finance costs are accrued on the effective interest rate basis and are presented as a separate line on the statement of comprehensive income.

Shares

Ordinary and treasury shares are classified as equity. The costs of issuing or acquiring equity are recognised in equity (net of any related income tax benefit), as a reduction of equity on the condition that these are incremental costs directly attributable to the equity transaction that otherwise would have been avoided.

The costs of an equity transaction that is abandoned are recognised as an expense. Those costs might include registration and other regulatory fees, legal fees, accounting and other professional advisers, printing costs and stamp duties.

Treasury shares have no entitlements to vote and are held directly by the Company.

Capital reserves

Capital reserves arise from:

·    Gains or losses on disposal of equity investments during the year

·    Increases and decreases in the valuation of equity investments held at the year end

·    Other capital charges and credits charged to this account in accordance with the accounting policies above or as applied to the capital column of the Consolidated Statement of Comprehensive Income, prepared under guidance issued by the Associated of Investment Companies.

All of the above are accounted for in the Consolidated Statement of Comprehensive Income. Any other gains or losses, charges or credits from investments still held or otherwise are included in the revenue reserves.

Taxation

The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. The taxable profit differs from profit before tax as reported in the Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using a blended rate as applicable throughout the year.

In line with the recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented against capital returns in the supplementary information in the Statement of Comprehensive Income is the 'marginal basis'. Under this basis, if taxable income is capable of being entirely offset by expenses in the revenue column of the statement of comprehensive income, then no tax relief is transferred to the capital return column.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the Statement of Financial Position liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset is realised. Deferred tax is charged or credited in the revenue return column of the Statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Investment trusts which have approval under Section 1158 of the Corporation Tax Act 2010 are not liable for taxation on capital gains. The Company has been approved as an Investment Trust by HMRC and continues to monitor itself against the conditions required to satisfy the investment trust criteria, including but not limited to making sufficient interest distributions.

Where additional SPVs are created these are structured in such a way that they either make no profit and as such pay no tax or that they are exempt from taxation.

Irrecoverable withholding tax is recognised on any overseas dividends on an accruals basis using the applicable rate for the country of origin.

Credit assets at amortised cost

Loans are initially recognised at a carrying value equivalent to the funds advanced to the borrower plus the costs of acquisition such as broker and packaging fees. After initial recognition loans are subsequently measured at amortised cost using the effective EIRM less expected credit losses (see Note 11 to the financial statements).

Investments held at fair value through profit or loss

All investments held by the Group which have been designated at fair value through profit or loss ("FVTPL") but are also described in these financial statements as investments held at fair value and are valued in accordance with the International Private Equity and Venture Capital Valuation Guidelines ("IPEVCV") effective 1 January 2019 and updated in March 2020 as recommended by the British Private Equity and Venture Capital Association. 

Purchases and sales of unquoted investments are recognised when the contract for acquisition or sale becomes unconditional.

Fixed assets

Fixed assets are shown at cost less accumulated depreciation. Depreciation is calculated by the Group on a straight-line basis by reference to the original cost, estimated useful life and residual value. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. The period of estimated useful life for this purpose is one to three years. Residual values are assumed to be nil.

Receivables

Receivables do not carry any interest and are short term in nature. They are initially stated at their nominal value and reduced by appropriate allowances for expected credit losses (if any). Given their short-term nature a lifetime ECL is not deemed necessary as expected life is less than a month.

Cash and cash equivalents

Cash and cash equivalents (which are presented as a single class of asset on the Statement of Financial Position) comprise cash at bank and in hand and deposits with an original maturity of three months or less. The carrying value of these assets approximates their fair value.

Financial liabilities

Financial liabilities are classified according to the substance of the contractual arrangements entered into. 

Payables

Payables are non-interest bearing. They are initially stated at their nominal value.

Interest bearing borrowings

Interest bearing borrowings are initially recognised at a carrying value equivalent to the proceeds received net of issue costs associated with the borrowings. After initial recognition, interest bearing borrowings are subsequently measured at amortised cost using the effective interest rate method.

Dividends

Dividends to shareholders are recognised in the year in which they are paid.

Investments in associates

Associates are entities over which the Company has significant influence, but does not control, generally accompanied by a shareholding of between 20 percent and 50 percent of the voting rights.

No associates are presented on the Statement of Financial Position as the Group elects to hold such investments at fair value through profit and loss. This treatment is permitted by IAS 28 Investment in Associates and Joint Ventures, which permits investments held by entities that are venture capital organisations, mutual funds or similar entities to be excluded from its measurement methodology requirements where those investments are designated, upon initial recognition, as at fair value through profit or loss and accounted for in accordance with IFRS 9. All associate investments held by the Company are for capital appreciation where such an opportunity has arisen, as opposed to being extensions of the Company's business, and have been designated as at fair value through profit or loss upon initial recognition. Changes in fair value of associates are recognised in the Statement of Comprehensive Income in the period in which the change occurs.

The disclosures required by Section 409 of the Companies Act 2006 for associated undertakings are included in Note 24 to the financial statements.

Classification and measurement

Financial assets and financial liabilities are recognised in the Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument. The Group shall offset financial assets and financial liabilities if it has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis. Financial assets and liabilities are derecognised when the Group settles its obligations relating to the instrument.

Classification and measurement - Financial assets

IFRS 9 contains a classification and measurement approach for debt instruments that reflects the business model in which assets are managed and their cash flow characteristics. This is a principle-based approach and applies one classification approach for all types of debt instruments. For debt instruments, two criteria are used to determine how financial assets should be classified and measured:

·    The entity's business model (i.e. how an entity manages its debt Instruments in order to generate cash flows by collecting contractual cash flows, selling financial assets or both); and

·    The contractual cash flow characteristics of the financial asset (i.e. whether the contractual cash flows are solely payments of principal and interest).

A debt instrument is measured at amortised cost if it meets both of the following conditions and is not designated as at fair value through profit and loss ("FVTPL"): (a) it is held within a business model whose objective is to hold assets to collect contractual cash flows; and (b) its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A debt instrument is measured at fair value through other comprehensive income ("FVOCI") if it meets both of the following conditions and is not designated as at FVTPL:

(a) it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

(b) its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Movements in the carrying amount are taken through the Other Comprehensive Income ("OCI"), except for the recognition of expected credit losses, interest revenue and foreign exchange gains and losses on the investments at amortised cost which is recognised in the Consolidated Statement of Comprehensive Income. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to the Consolidated Statement of Comprehensive Income and recognised in 'Income'. Interest income from these financial assets in included in 'Income' using the EIRM. No assets have been classified at FVOCI as at 31 December 2020 or 31 December 2021.

Equity instruments are measured at FVTPL, unless they are not held for trading purposes, in which case an irrevocable election can be made on initial recognition to measure them at FVOCI with no subsequent reclassification to profit or loss. This election is made on an investment by investment basis.

All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL. All equity positions are measured at FVTPL. Financial assets measured at FVTPL are recognised in the balance sheet at their fair value. Fair value gains and losses together with interest coupons and dividend income are recognised in the income statement within net trading income in the period in which they occur. The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the Group establishes a fair value by using valuation techniques. In addition, on initial recognition the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

Business model assessment

The Group assesses the objective of the business model in which a financial asset is held at a portfolio level in order to generate cash flows because this best reflects the way the business is managed, and information is provided to the Investment Manager. That is, whether the Group's objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. If neither of these are applicable, then the financial assets are classified as part of the other business model and measured at FVTPL.

The information that is considered includes:

·   The stated policies and objectives for the portfolio and the operation of those policies in practice, including whether the strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of assets;

·    Past experience on how the cash flows for these assets were collected;

·    How the performance of the portfolio is evaluated and reported to the Investment Manager;

·   The risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; and

·   The frequency, volume and timing of sales in prior periods, the reasons for such sales and expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Investment Manager's stated objective for managing the financial assets is achieved and how cashflows are realised.

Assessment whether contractual cash flows are solely payments of principal and interest

For the purposes of this assessment, 'principal' is defined as the fair value of the financial asset on initial recognition. 'Interest' is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a reasonable profit margin. 

In assessing whether the contractual cash flows are solely payments of principal and interest, the contractual terms of the instrument are considered. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment the following features are considered:

·    Contingent events that would change the amount and timing of cash flows;

·    Leverage features;

·    Prepayment and extension terms;

·    Terms that limit the Group's claim to cash flows from specified assets, e.g. non-recourse asset arrangements; and

·    Features that modify consideration for the time value of money, e.g. periodic reset of interest rates.

Classification and measurement - Financial liabilities

In both the current period and prior year, financial liabilities are classified and subsequently measured at amortised cost, except for:

·    Financial liabilities at fair value through profit or loss: this classification is applied to derivatives, financial liabilities held for trading (e.g. short positions in the trading booking) and other financial liabilities designated as such at initial recognition. Gains or losses on financial liabilities designated at fair value through profit or loss are presented partially in other comprehensive income (the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability, which is determined as the amount that is not attributable to change in market conditions that give rise to market risk) and partially profit or loss (the remaining amount of change in the fair value of the liability). This is unless such a presentation would create, or enlarge, an accounting mismatch, in which case the gains and losses attributable to changes in the credit risk of the liability are also presented in the Consolidated Statement of Comprehensive Income;

·   Financial liabilities arising from the transfer of financial assets which did not qualify for derecognition, whereby a financial liability is recognised for the consideration received for the transfer. In subsequent periods, the Company recognises any expense incurred on the financial liability; and

·    Financial guarantee contracts and loan commitments

Deemed loans

The deemed loans are a non-derivative financial liability with fixed or determinable repayments that are not quoted in an active market. Deemed loans in relation to the Company arise from loans originated by the Company and subsequently sold to in a special purpose entity to reduce the cost of borrowing, in this case Sting Funding Limited and Bud Funding Limited. Although the loans are no longer legally owned by the Company, the Company maintains the economic risks and rewards of the underlying assets and therefore does not meet the criteria to derecognise. Derecognition cannot be achieved by merely transferring the legal title of a financial asset to another party. The substance of the arrangement must be assessed in order to determine whether an entity has transferred the economic exposure associated with the rights inherent in the asset.

Loans and related transaction costs are measured at initial recognition at fair value and are subsequently measured at amortised cost using the EIRM. International accounting standards ("IAS") makes it clear that assets should only appear on one statement of financial position. IFRS require a reporting entity, as part of the derecognition assessment, to consider whether the transfer includes a transfer to a consolidated subsidiary. Derecognition cannot be achieved by merely transferring the legal title to a financial asset to another party. The substance of the arrangement must be assessed in order to determine whether an entity has transferred the economic exposure associated with the rights inherent in the asset (i.e., its risks and rewards) and, in some cases, control of those rights.

In the case of the Company, it has not met the requirements of derecognition in relation to the deemed loans given the economic exposure associated with the rights inherent in the assets (i.e., its risks and rewards), have been retained. As such the Company fails to meet the requirements for derecognition and continues to recognise the financial assets and as such has a deemed loans liability to the to the relevant special purpose entity. At a consolidated Group level, the deemed liability is eliminated.

Equity instruments

Equity instruments are instruments that meet the definition of equity from the issuer's perspective; that is, instruments that do not contain a contractual obligation to pay and that evidence a residual interest in the issuer's net assets. Examples of equity instruments include basic ordinary shares.

The Group subsequently measures all equity investments at FVTPL. Gains and losses on equity investments at FVTPL are included in the 'Income' line in the Statement of Comprehensive Income.

Expected Credit loss allowance for financial assets measured at amortised cost

The impairment charge in the income statement includes the change in expected credit losses which are recognised for loans and advances to customers, other financial assets held at amortised cost and certain loan commitments.

IFRS 9 applies a single impairment model to all financial instruments subject to impairment testing. Impairment losses are recognised on initial recognition, and at each subsequent reporting period, even if the loss has not yet been incurred. In addition to past events and current conditions, reasonable and supportable forecasts affecting collectability are also considered when determining the amount of impairment in accordance with IFRS 9. Under IFRS 9 expected credit loss model expected credit losses are recognised at each reporting period, even if no actual loss events have taken place. In addition to past events and current conditions, reasonable and supportable forward-looking information that is available without undue cost or effort is considered in determining impairment, with the model applied to all financial instruments subject to impairment testing.

At initial recognition, allowance is made for expected credit losses resulting from default events that are possible within the next 12 months (12-month expected credit losses). In the event of a significant increase in credit risk, allowance (or provision) is made for expected credit losses resulting from all possible default events over the expected life of the financial instrument (lifetime expected credit losses). Financial assets where 12-month expected credit losses are recognised are considered to be Stage 1; financial assets which are considered to have experienced a significant increase in credit risk are in Stage 2; and financial assets which have defaulted or are otherwise considered to be credit impaired are allocated to Stage 3. Stage 2 and Stage 3 are based on lifetime expected credit losses.

The measurement of ECLs is primarily based on the product of the instrument's probability of default ("PD"), loss given default ("LGD"), and exposure at default ("EAD"), taking into account the value of any collateral held or other mitigants of loss and including the impact of discounting using the effective interest rate.

·    The PD represents the likelihood of a borrower defaulting on its financial obligation, either over the next 12 months ("12M PD"), or over the remaining lifetime ("Lifetime PD") of the obligation.

·    EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12 months ("12M EAD") or over the remaining lifetime ("Lifetime EAD"). For example, for a revolving commitment, the Group includes the current drawn balance plus any further amount that is expected to be drawn up to the current contractual limit by the time of default, should it occur. The EAD is discounted back to the reporting date using the effective interest rate ("EIR") determined at initial recognition.

·    LGD represents the Group's expectation of the extent of loss on a defaulted exposure. LGD varies by type of counterparty, type and seniority of claim and availability of collateral or other credit support. LGD is expressed as a percentage loss per unit of exposure at the time of default (EAD). LGD is calculated on a 12-month or lifetime basis, where 12-month LGD is the percentage of loss expected to be made if the default occurs in the next 12 months and Lifetime LGD is the percentage of loss expected to be made if the default occurs over the remaining expected lifetime of the loan.

The estimated credit loss ("ECL") is determined by estimating the PD, LGD, and EAD for each individual exposure or collective segment. These three components are multiplied together and adjusted for the likelihood of survival (i.e. the exposure has not prepaid or defaulted in an earlier month). This effectively calculates an ECL, which is then discounted back to the reporting date and summed. The discount rate used in the ECL calculation is the original EIR or an approximation thereof. The Lifetime PD is developed by applying a maturity profile to the current 12M PD. The maturity profile looks at how defaults develop on a portfolio from the point of initial recognition throughout the lifetime of the loans. The maturity profile is based on historical observed data and is assumed to be the same across all assets within a portfolio and credit grade band where supported by historical analysis. The 12-month and lifetime EADs are determined based on the expected payment profile, which varies by product type.

·    For amortising products and bullet repayment loans, this is based on the contractual repayments owed by the borrower over a 12 month or lifetime basis. This is also adjusted for any expected overpayments made by a borrower. Early repayment/refinance assumptions are also incorporated into the calculation.

·    For revolving products, the exposure at default is predicted by taking current drawn balance and adding a "credit conversion factor" which allows for the expected drawdown of the remaining limit by the time of default. These assumptions vary by product type and current limit utilisation band, based on analysis of the Company's recent default data.

The 12-month and lifetime LGDs are determined based on the factors which impact the recoveries made post default. These vary by product type.

·    For secured products, this is primarily based on collateral type and projected collateral values, historical discounts to market/book values due to forced sales, time to repossession and recovery costs observed.

·    For unsecured products, LGDs are typically set at product level due to the limited differentiation in recoveries achieved across different borrowers. These LGDs are influenced by collection strategies, including contracted debt sales and price.

 

The main difference between Stage 1 and Stage 2 is the respective PD horizon. Stage 1 estimates use a maximum of a 12-month PD, while Stage 2 estimates use a lifetime PD. The main difference between Stage 2 and Stage 3 is Stage 3 is effectively the point at which there has been a default event. For financial assets in stage 3, entities continue to recognise lifetime ECL but now recognise interest income on a net basis. This means that interest income is calculated based on the gross carrying amount of the financial asset less ECL. Stage 3 estimates continue to leverage existing processes for estimating losses on impaired loans, however, these processes are updated to reflect the requirements of IFRS 9, including the requirement to consider multiple forward-looking scenarios using independent third-party economic information.

Movements between Stage 1 and Stage 2 are based on whether an instrument's credit risk as at the reporting date has increased significantly relative to the date it was initially recognised. Where the credit risk subsequently improves such that it no longer represents a significant increase in credit risk since origination, the asset is transferred back to Stage 1.

In assessing whether a borrower has had a significant increase in credit risk the following indicators are considered:

·        Consumer

-    Short-term forbearance

-    Extension of terms granted

·        Structured/SME/Property

-    Significant increase in credit spread, where this information is available

-    Significant adverse changes in business, financial and/or economic conditions in which the borrower operates

-    Actual or expected forbearance or restructuring

-    Actual or expected significant adverse change in operating results of the borrower

-    Significant change in collateral value (secured facilities only) which is expected to increase the risk of default

-    Early signs of cashflow/liquidity problems such as delay in servicing of trade creditors

 

However, as a backstop, unless identified at an earlier stage, the credit risk of financial assets is deemed to have increased significantly when repayments are more than 30 days past due. Movements between Stage 2 and Stage 3 are based on whether financial assets are credit impaired as at the reporting date. IFRS 9 contains a rebuttable presumption that default occurs no later than when a payment is 90 days past due. The Group uses this 90-day backstop for all its assets except for UK second mortgages, the Group has assumed a backstop of 180 days past due as mortgage exposures more than 90 days past due, but less than 180 days, typically show high cure rates and this aligns to the Group's risk management practices. Assets can move in both directions through the stages of the impairment model.

In assessing whether a borrower is credit impaired the following qualitative indicators are considered:

·        Consumer

-    Long-term forbearance

-    Borrower deceased

-    Borrower insolvent

 

·        Structured/SME/Property

-    Borrower in breach of financial covenants

-    Concessions have been made by the lender relating to the borrower's financial difficulty

-    Significant adverse changes in business, financial or economic conditions on which the borrower operates

-    Long term forbearance or restructuring.

 

The following quantitative indicators are also considered 

·      The remaining lifetime PD at the reporting date has increased, compared to the residual lifetime PD expected at the reporting date when the exposure was first recognised; and

·        Based on data developed internally and obtained from external sources.

The criteria above have been applied to all financial instruments held by the Group and are consistent with the definition of default used for internal credit risk management purposes. The default definition has been applied consistently to model the PD, EAD and LGD throughout the Group's expected credit loss calculations.

Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances.

Under IFRS 9, when determining whether the credit risk (i.e. the risk of default) on a financial instrument has increased significantly since initial recognition, reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information and analysis based on historical experience, credit assessment and forward-looking information.

The measurement of expected credit losses for each stage and the assessment of significant increases in credit risk considers information about past events and current conditions as well as reasonable and supportable forward-looking information. A 'Base case' view of the future direction of relevant economic variables and a representative range of other possible forecasts scenarios have been developed. The process has involved developing two additional economic scenarios and considering the relative probabilities of each outcome.

The base case represents a most likely outcome and is aligned with information used for other purposes, such as strategic planning and budgeting. The number of scenarios and their attributes are reassessed at each reporting date. At 31 December 2021 as well as 31 December 2020, all the portfolios of the Group use one positive, more optimistic and one downside, more pessimistic outcomes. The scenario weightings are determined by a combination of statistical analysis and expert credit judgement, taking account of the range of possible outcomes each chosen scenario is representative of.

The estimation and application of forward-looking information requires significant judgement. PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances, are modelled and adjusted based on the macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the relevant portfolio. The Group has utilised macroeconomic scenarios prepared and provided by Oxford Economics ("Oxford"). Oxford combines two decades of forecast errors with the quantitative assessment of the current risks facing the global and domestic economy to produce robust forward-looking distributions for the economy. Oxford construct 3 alternative scenarios at specific percentile points in the distribution. In any distribution, the probability of a given discrete scenario is close to zero. Therefore, scenario probabilities represent the probability of that scenario or similar scenarios occurring. In effect, a given scenario represents the average of a broader bucket of similar severity scenarios and the probability reflects the width of that bucket. Given that it is known where the IFRS 9 scenarios sit in the distribution (the percentiles), their probability (the width of the bucket of similar scenarios) depends on how many scenarios are chosen. Scenario probabilities must add up to 100 percent so the more scenarios chosen, the smaller the section of the distribution, or bucket, each scenario represents and therefore the smaller the probability. This allows the probabilities to be calculated according to whichever subset of scenarios chosen to use in the ECL calculation. The scenarios are generated at the year-end and are only updated during the year if economic conditions change significantly. The Base case is given a 40 percent weighting and the downside and upside a 30 percent weighting each. These weightings were introduced in the 2018 financial year and maintained in the current financial year.

As with any economic forecasts, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. The Group considers these forecasts to represent its best estimate of the possible outcomes and has analysed the non-linearities and asymmetries within the Group's different portfolios to establish that the chosen scenarios are appropriately representative of the range of possible scenarios.

Other forward-looking considerations not otherwise incorporated within the above scenarios, such as the impact of any regulatory, legislative or political changes, have also been considered, but no adjustment has been made to the ECL for such factors. This is reviewed and monitored for appropriateness on an annual basis.

In March 2020, the World Health Organisation recognised Covid-19 as a pandemic. Covid-19 has caused major disruption to businesses and economic activity with corresponding volatility in global stock markets. There are no comparable recent events which may provide guidance as to the effect of the spread of the Covid-19 and a potential pandemic, and as a result, the ultimate impact of the Covid-19 outbreak or a similar health epidemic is highly uncertain and subject to change. Given the Group's strategy, its performance is linked to the health of the economy. We expect the Group could experience further impairments and consequently reduced profits, particularly if economic expectations deteriorate. The government has also launched a number of initiatives aimed at providing finance to SMEs and support to consumers. Two of our largest borrowers are in the process of lending under the Recovery Loan Scheme government guarantee scheme which will also refinance part of their exposure with the benefit of the government guarantee. The recent market improvements and progress made on national vaccination programmes are encouraging, however uncertainty remains.

Collateral and other credit enhancements

The Group employs a range of policies to mitigate credit risk. The most common of these is accepting collateral for funds advanced. The Group has internal policies of the acceptability of specific classes of collateral or credit risk mitigation.

The Group prepares a valuation of the collateral obtained as part of the loan origination process. This assessment is reviewed periodically. The principal collateral types for loans and advances are:

·    Mortgages over residential properties;

·    Security over our borrowers receivables;

·    Margin agreement for derivatives, for which the Group has also entered into master netting agreements;

·    Charges over business assets such as premises, inventory and accounts receivable; and

·    Charges over financial instruments such as debt securities and equities.

 

Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured.

Collateral held as security for financial assets other than loans and advances depends on the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, with the exception of asset-backed securities and similar instruments, which are secured by portfolios of financial instruments. Derivatives are also collateralised.

The Group closely monitors collateral held for financial assets considered to be credit-impaired, as it becomes more likely that the Group will take possession of collateral to mitigate potential credit losses.

Modification of financial assets

The Group sometimes modifies the terms or loans provided to customers due to commercial renegotiations, or for distressed loans, with a view to maximising recovery.

Such restructuring activities include extended payment term arrangements, payment holidays and payment forgiveness. Restructuring policies and practice are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans.

The risk of default of such assets after modification is assessed at the reporting date and compared with the risk under the original terms at initial recognition, when the modification is not substantial and so does not result in derecognition of the original assets. The Group monitors the subsequent performance of modified assets. The Group may determine that the credit risk has significantly improved after restructuring, so that the assets are moved from Stage 3 or Stage 2.

Modification of loans

The Company sometimes renegotiates or otherwise modifies the contractual cash flows of loans to customers. When this happens, the Group assesses whether or not the new terms are substantially different to the original terms. The Group does this by considering, among others, the following factors:

·    If the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows to amounts the borrower is expected to be able to pay;

·    Whether any substantial new terms are introduced, such as a profit share/equity-based return that substantially affects the risk profile of the loan;

·    Significant extension of the loan term when the borrower is not in financial difficulty;

·    Significant change in the interest rate;

·    Change in the currency the loan is denominated in; and

·    Insertion of collateral, other security or credit enhancements that significantly affect the credit risk associated with the loan.

 

If the terms are substantially different, the Group derecognises the original financial asset and recognises a 'New' asset at fair value and recalculates a new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purposes, including for the purpose of determining whether a significant increase in credit risk has occurred. However, the Group also assesses whether the new financial asset recognised is deemed to be credit-impaired at initial recognition, especially in circumstances where the renegotiation was driven by the debtor being unable to make the originally agreed payments. Differences in the carrying amounts are also recognised in the Consolidated Statement of Comprehensive Income as a gain or loss on derecognition. If the terms are not substantially different, the renegotiation or modification does not result in derecognition, and the Group recalculates the gross carrying amount based on the revised cash flows of the financial asset and recognises a modification gain or loss in the Consolidated Statement of Comprehensive Income. The new gross carrying amount is recalculated by discounting the modified cash flows at the original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets).

Derecognition other than a modification

Financial assets, or a portion thereof, are derecognised when the contractual rights to receive the cash flows from the assets have expired, or when they have been transferred and either (i) the Group transfers substantially all the risks and rewards of ownership, or (ii) the Group neither transfers nor retains substantially all the risks and rewards of ownership and the Company has not retained control.

The Company enters into transactions where it retains the contractual rights to receive cash flows from assets but assumes a contractual obligation to pay those cash flows to other entities and transfers substantially all of the risks and rewards. These transactions are accounted for as 'pass through' transfers that result in derecognition if the Group:

·    Has no obligation to make payments unless it collects equivalent amounts from the assets;

·    Is prohibited from selling or pledging the assets; and

·    Has an obligation to remit any cash it collects from the assets without material delay.

Derecognition

Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires). Different terms, as well as substantial modifications of the terms of existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10 percent different from the discounted present value of the remaining cash flows of the original financial liability. In addition, other qualitative factors, such as the currency that the instrument is denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in covenants are also taken into consideration. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability.

Segmental Reporting

The Board and Investment Manager consider investment activity in Credit Assets and selected Equity Assets as the single operating segment of the Group, being the sole purpose for its existence. No other activities are performed.

Whilst visibility over deal type and sector is afforded at an operational level, all are considered 'routes to market' for acquiring interests in credit assets, and thus act merely as indicators of financial performance.  There are no segment managers directly accountable for the individual routes to market and the routes to market are not determinants of resource allocations, rather each investment opportunity is considered on its own merits.

The Directors are of the opinion that the Company is engaged in a single segment of business and operations of the Group are mainly in the United Kingdom

2.    Significant Accounting Judgements, Estimates and Assumptions

The preparation of financial statements accordance with both International Accounting Standards in conformity with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under those standards requires the Group to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. UK company law and IFRS require the Directors, in preparing the Group's financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable. The Group's estimates and assumptions are based on historical experience and expectations of future events and are reviewed on an ongoing basis. Although these estimates are based on the Directors' best knowledge of the amount, actual results may differ ultimately from those estimates. 

The estimates of most significance to the financial statements, are in relation to expected credit losses and equity investments at fair value through profit or loss. These are detailed below.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

The critical judgements relate to the application of consolidation accounting principles, and within the Company, the treatment of asset derecognition and deemed loans. These have been explained on pages 77 to 83 as well as in the accounting policies section of the Notes.

Estimates

Expected Credit loss allowance for financial assets measured at amortised cost

The calculation of the Group's ECL allowances and provisions against loan commitments and guarantees under IFRS 9 is complex and involves the use of significant judgement and estimation. Loan Impairment Provisions represent an estimate of the losses incurred in the loan portfolios at the balance sheet date. Individual impairment losses are determined as the difference between the carrying value and the present value of estimated future cash flows, discounted at the loans' original effective interest rate. To calculate this involves the formulation and incorporation of multiple forward-looking economic conditions into ECL to meet the measurement objective of IFRS 9. Depending on a range of factors such as changes in the economic environment in the UK driven by Covid-19 pandemic, there could be a material adjustment to the carrying amounts of assets and liabilities in the next financial year. The most significant factors are set out below. 

Definition of default - The Probability of Default ("PD") of an exposure, both over a 12-month period and over its lifetime, is a key input to the measurement of the ECL allowance. Default has occurred when there is evidence that the customer is experiencing significant financial difficulty which is likely to affect the ability to repay amounts due.

The definition of default adopted by the Company is described in expected credit loss allowance for financial assets measured at amortised cost above.

As noted on page 84, the Group has rebutted the presumption in IFRS 9 that default occurs no later than when a payment is 90 days past due on some of its portfolio.

The lifetime of an exposure - To derive the PDs necessary to calculate the ECL allowance it is necessary to estimate the expected life of each financial instrument. A range of approaches has been adopted across different product groupings including the full contractual life and taking into account behavioural factors such as early repayments and refinancing. The Group has defined the lifetime for each product by analysing the time taken for all losses to be observed and for a material proportion of the assets to fully resolve through either closure or write-off.

Significant increase in credit risk ("SICR") - Performing assets are classified as either Stage 1 or Stage 2. An ECL allowance equivalent to 12 months expected credit losses is established against assets in Stage 1; assets classified as Stage 2 carry an ECL allowance equivalent to lifetime expected credit losses. Assets are transferred from Stage 1 to Stage 2 when there has been an SICR since initial recognition. The Company uses a quantitative test together with qualitative indicators and a backstop of 30 days past due for determining whether there has been a SICR. The setting of precise trigger points combined with risk indicators requires judgement. The use of different trigger points may have a material impact upon the size of the ECL allowance. 

Forward looking information - IFRS 9 requires the incorporation of forward-looking macroeconomic information that is reasonable and supportable, but it provides limited guidance on how this should be performed. The measurement of expected credit losses is required to reflect an unbiased probability-weighted range of possible future outcomes. 

In order to do this the Group uses a model to project a number of key variables to generate future economic scenarios. These are ranked according to severity of loss and three economic scenarios have been selected to represent an unbiased and full loss distribution. They represent a 'most likely outcome' (the Base case scenario) and two, less likely, 'outer' scenarios, referred to as the 'Upside' and 'Downside' scenarios. These scenarios are used to produce a weighted average PD for each product grouping which is used to calculate the related ECL allowance. This weighting scheme is deemed appropriate for the computation of unbiased ECL. Key scenario assumptions are set using external economist forecasts, helping to ensure the IFRS 9 scenarios are unbiased and maximise the use of independent information. Using externally available forecast distributions helps ensure independence in scenario construction. While key economic variables are set with reference to external distributional forecasts, the overall narrative of the scenarios is aligned to the macroeconomic risks faced by the Group at the 31 December 2021.

The choice of alternative scenarios and probability weighting is a combination of quantitative analysis and judgemental assessments, designed to ensure that the full range of possible outcomes and material non-linearity are captured. Paths for the two outer scenarios are benchmarked to the Base scenario and reflect the economic risk assessment. Scenario probabilities reflect management judgement and are informed by data analysis of past recessions, transitions in and out of recession, and the current economic outlook. The key assumptions made, and the accompanying paths, represent our 'best estimate' of a scenario at a specified probability. Suitable narratives are developed for the central scenario and the paths of the two outer scenarios. It may be insufficient to use three scenarios in certain economic environments. Additional analysis may be requested at management's discretion, including the production of extra scenarios. We anticipate there will only be limited instances when the standard approach will not apply. The Base case, Upside and Downside scenarios are usually generated annually and those described herein reflect the conditions in place at the balance sheet date and are only updated during the year if economic conditions change significantly.

The Group's UK mild upside scenario can be thought of as an alternative, more optimistic, base case in which households run down savings accumulated during the pandemic at a faster pace than assumed in the baseline, permanent scars to the supply side are avoided, and the economy reverts to its pre-crisis trajectory within a couple of years. This mild-upside case scenario sees UK unemployment drop by 0.8 per cent in 2022. Consequently, for the mild upside scenario the Bank of England base rate is forecast to rise to around 0.9 per cent by the end of 2022. The one-year forecast changes in these key economic drivers are shown in the table below.

The base case forecasts unemployment reducing to 3.8% by the end of 2025; returning to match unemployment seen in March 2020. The downside scenario however forecasts a much slower recovery, with unemployment at 6.1% by December 2025 and HPI still 19.3% lower than at the end of 2021.

See Note 10 for the sensitivity analysis. 

2021	Base	Upside	Down-side
UK unemployment rate yearly change	(0.17%)	(0.84%)	1.64%
UK HPI yearly change	(0.45)	4.25%	(9.43%)
UK Base Rate	0.37%	0.75%	(0.13%)

 

2020	Base	Upside	Down-side
UK unemployment rate yearly change	(0.11%)	(1.60%)	2.01%
UK HPI yearly change	(5.50%)	(1.32%)	(14.32%)
UK Base Rate	0.1%	0.4%	(0.3%)

Loss given default ("LGD") - LGD represents the expectation of the extent of loss on a defaulted exposure. LGD varies by type of counterparty, type and seniority of claim and availability of collateral or other credit support. LGD is expressed as a percentage loss per unit of exposure at the time of default. LGD is calculated on a 12-month or lifetime basis, where 12-month LGD is the percentage of loss expected to be made if the default occurs in the next 12 months and Lifetime LGD is the percentage of loss expected to be made if the default occurs over the remaining expected lifetime of the loan.

The 12-month and lifetime LGDs are determined based on the factors which impact the recoveries made post default. These vary by product type:

·      For secured products, this is primarily based on collateral type and projected collateral values, historical discounts to market/book values due to forced sales, time to repossession and recovery costs observed.

·   For unsecured products, LGDs are typically set at product level due to the limited differentiation in recoveries achieved across different borrowers. These LGDs are influenced by collection strategies, including contracted debt sales and price.

Exposure at default ("EAD") - EAD is based on the amounts expected to be owed at the time of default, over the next 12 months ("12M EAD") or over the remaining lifetime ("Lifetime EAD"). IFRS 9 requires an assumed draw down profile for committed amounts.

Equity Investments

The valuation of unquoted investments and investments for which there is an inactive market is a key area of estimation and may cause material adjustment to the carrying value of those assets and liabilities. The unquoted equity assets are valued on a periodic basis using techniques including a market multiple approach, costs approach and/or income approach. The valuation process is collaborative, involving the finance and investment functions of the Investment Manager with the final valuations being reviewed by the Investment Manager's Valuation Committee. The techniques used include earnings multiples, discounted cash flow analysis, the value of recent transactions and the net asset value of the investment. The valuations often reflect a synthesis of a number of different approaches in determining the final fair value estimate. The individual approach for each investment will vary depending on relevant factors that a market participant would take into account in pricing the asset. These might include the specific industry dynamics, the Investee's stage of development, profitability, growth prospects or risk as well as the rights associated with the particular security.

Increases or decreases in any of the inputs in isolation may result in higher or lower fair value measurements. Changes in fair value of all investments held at fair value are recognised in the Consolidated Statement of Comprehensive Income as a capital item. On disposal, realised gains and losses are also recognised in the Consolidated Statement of Comprehensive Income. Transaction costs are included within gains or losses on investments held at fair value, although any related interest income, dividend income and finance costs are disclosed separately in the financial statements. Sensitivity analysis has been performed on the equity investment valuations in Note 11.

Judgement

Consolidation

Determining whether the Group has control of an entity is generally straightforward when based on ownership of the majority of the voting capital. However, in certain instances, this determination will involve significant judgement, particularly in the case of structured entities where voting rights are often not the determining factor in decisions over the relevant activities. This judgement may involve assessing the purpose and design of the entity. It will also often be necessary to consider whether the Group, or another involved party with power over the relevant activities, is acting as a principal in its own right or as an agent on behalf of others.

The Company does not consider itself to be an investment entity for the purposes of IFRS 10, as it does not hold substantially all of its investments at fair value. Consequently, it consolidates its subsidiaries rather than treating its subsidiaries as investments at fair value through profit or loss.

The Company controls Bud Funding Limited ("Bud"), a limited company incorporated under the law of England and Wales, though it does not own the majority of the voting capital the Company is considered to control Bud through its exposure to the variable returns of the vehicle through hold of a junior note issued by it and the controls it exerts over Bud. Bud was incorporated on 2 November 2020 and the junior note was funded on 2 December 2020, at which point control was obtained. The Company exercises control over Bud through its involvement in the initial creation of Bud and in the absence of another entity now having control over Bud and so the Group consolidates Bud.

3.    Business Combination

On 20 June 2019 the Group incorporated Sting Funding Limited ("Sting"), a limited Company incorporated under the law of England and Wales. Sting became active on 28 August 2019 when it drew down on a debt facility backed by commercial and second charge residential mortgages. The Group is considered to control Sting through holding 100 percent of the issued shares.

The Company also controls Bud Funding Limited ("Bud"), a limited company incorporated under the law of England and Wales. The Company is considered to control Bud through its exposure to the variable returns of the vehicle through holding of a junior note issued by it and the control it exerts over Bud. Bud was incorporated on 2 November 2020 and the junior note was funded on 2 December 2020, at which point the control began.

As a result, the financial statements for the year ended 31 December 2021 and 31 December 2020 are prepared on a consolidated basis.

 

4.    InTEREST INCOME ON CREDIT ASSETS AT AMORTISED COST

Group	31 December 2021 £'000	31 December 2020 £'000
Investment income
Interest income	51,900	50,948
Commitment fee income	2,403	2,154
Arrangement fee income	2,232	1,844
Net (loss) / gain on foreign exchange*	(53)	21
Total investment income	56,482	54,967
Other income
Deposit interest	2	3
Total income	56,484	54,970

*Net (loss)/Gain on foreign exchange also includes fair value movements on derivatives taken out to economically hedge fair value exposures

5.    Management and Performance Fee

Management Fee

The management fee is calculated and payable monthly in arrears at a rate equal to 1/12 of 1.0 percent per month of Gross Asset Value (the ''Management Fee''). Gross Asset Value is the equivalent of Total Assets on the Consolidated Statement of Financial Position. The aggregate fee payable on this basis must not exceed 1.0 percent of the gross assets of the Company and its group in any year. The Management Fee is allocated between the revenue and capital accounts based on the prospective split of the Gross Asset Value between revenue and capital.

In respect of any issue of Ordinary Shares or C Shares, until the date on which 80 percent of the net proceeds of such issue have been invested or committed to be invested in Credit Assets or Equity Assets, the Net Asset Value attributable to such Ordinary Shares or C Shares shall, for the purposes of the Management Fee, exclude any portion of the issue proceeds in cash, or invested in cash deposits or cash equivalent investments. Where there are C Shares in issue, the Management Fee will be calculated separately on the gross assets attributable to the Ordinary Shares and the C Shares.

Management fees charged for the year ended 31 December 2021 totalled £6.4 million (2020: £5.9 million) of which £1.0 million was payable at the year-end (2020: £1.0 million).

Performance Fee

The Investment Manager is also entitled to a performance fee, which is calculated in respect of each twelve-month period starting on 1 January and ending on 31 December in each calendar year ("Calculation Period"), and the final Calculation Period shall end on the day on which the management agreement is terminated or, if earlier, the business day immediately preceding the day on which the Company goes into liquidation.

The performance fee will only be payable if the Adjusted Net Asset Value at the end of a Calculation Period exceeds a hurdle threshold, equal to the Adjusted Net Asset Value immediately following admission to trading on the London Stock Exchange, compounded at a rate equal to 5 percent per annum (the "Hurdle").

If, on the last day of a Calculation Period (each a "Calculation Date"), the Adjusted Net Asset Value exceeds the Hurdle, the Investment Manager shall be entitled to a performance fee equal to the lower of:

a)   the amount by which the Adjusted Net Asset Value exceeds the Hurdle, in each case as at the Calculation Date; and

b)  10 percent of the amount by which total growth in Adjusted Net Asset Value since first admission (being the aggregate of the growth in Adjusted Net Asset Value in the relevant Calculation Period and in each previous Calculation Period), after adding back any performance fees paid to the Investment Manager, exceeds the aggregate of all performance fees payable to the Investment Manager in respect of all previous Calculation Periods.

'Adjusted Net Asset Value' means the Net Asset Value after: (i) excluding any increases or decreases in Net Asset Value attributable to the issue or repurchase of any Ordinary Shares; (ii) adding back the aggregate amount of any dividends paid or distributions made in respect of any Ordinary Shares; (iii) excluding the aggregate amount of any dividends or distributions accrued but unpaid in respect of any Ordinary Shares; and (iv) excluding the amount of any Performance Fees accrued but unpaid, in each case without double counting.

Performance fees for the year ended 31 December 2021 totalled £3.4 million (2020: £2.3 million) of which £3.4 million was payable at the year-end (2020: £2.3 million).

6. Fund Expenses

Group	31 December 2021 £'000	31 December 2020 £'000
Directors' fees	203	200
Administrator's fees	179	148
Auditors' remuneration	319	287
Amortisation	-	41
Potential merger costs	-	585
LSE market listing costs	18	280
Other expenses	1,441	1,064
Total fund expenses	2,160	2,605

 

All expenses where applicable are inclusive of VAT (except those paid to the auditors which are net). Directors' fees above include £203,000 (2020: £178,000) paid to Directors' and £23,256 (2020: £21,538) of employment taxes. Further details on Directors' fees can be found in the Directors' remuneration report on pages 53 to 56.

The auditors' remuneration net of VAT for the audit of the Group was £319,000 for the year ended 31 December 2021 (2020: £287,000). Remuneration includes the audit of subsidiaries during the year was £29,000 (2020: £37,500). Non-audit fees amounted to £0 in 2021 (2020: £nil).

7. Tax expense

It is the intention of the Directors to conduct the affairs of the Company so as to satisfy the conditions for approval as an investment trust. As an investment trust the Company is exempt from corporation tax on capital gains. The Company's revenue income from loans is subject to tax, but offset by any interest distribution paid, which has the effect of reducing that corporation tax to nil. This means the interest distribution may be taxable in the hands of the Company's shareholders.

Any change in the Company's tax status or in taxation legislation generally could affect the value of investments held by the Company, affect the Company's ability to provide returns to shareholders, lead the Company to lose its exemption from UK Corporation tax on chargeable gains or alter the post-tax returns to shareholders. It is not possible to guarantee that the Company will remain a non-close company, which is a requirement to maintain status as an investment trust, as the ordinary shares are freely transferable. The Company, in the event that it becomes aware that it is a close company, or otherwise fails to meet the criteria for maintaining investment trust status, will as soon as reasonably practicable, notify shareholders of this fact.

The Company may be subject to taxation under the tax rules of the jurisdictions in which it invests, including by way of withholding of tax from interest and other income receipts. Although the Company will endeavour to minimise any such taxes this may affect the level of returns to shareholders.

 

The following table presents the tax chargeable for the period ended 31 December 2021.

Group	Revenue £'000	Capital £'000	Total £'000
Corporation tax	-	-	-
Total current tax charge	-	-	-
Deferred tax movement	-	-	-
Total tax charge in income statement	-	-	-

The following table presents the tax chargeable for the year ended 31 December 2020.

Group	Revenue £'000	Capital £'000	Total £'000
Corporation tax	-	-	-
Total current tax charge	-	-	-
Deferred tax movement	-	-	-
Total tax charge in income statement	-	-	-

Factors affecting taxation charge for the year

The taxation charge for the year is lower than the standard rate of UK corporation tax of 19.00 percent (2020: 19.00 percent). A reconciliation of the 2021 taxation charge based on the standard rate of UK corporation tax to the actual taxation charge is shown below.

Group	Revenue £'000	Capital £'000	Total £'000
Profit before taxation	29,809	509	30,318
Profit before taxation multiplied by the standard rate of UK corporation tax of 19.00%	5,664	97	5,761
Effects of:
Capital items exempt from tax	-	(127)	(127)
Excess management expenses not utilised / (utilised)	(304)	30	(274)
Interest distributions paid in respect of the year	(5,360)	-	(5,360)
Total tax charge in income statement	-	-	-

A reconciliation of the 2020 taxation charge based on the standard rate of UK corporation tax to the actual taxation charge is shown below.

Group	Revenue £'000	Capital £'000	Total £'000
Profit/(loss) before taxation	20,420	281	20,701
Profit/(loss) before taxation multiplied by the standard rate of UK corporation tax of 19.00%	3,880	53	3,933
Effects of:
Excess management expenses not utilised	855	(53)	802
Interest distributions paid in respect of the year	(4,735)	-	(4,735)
Total tax charge in income statement	-	-	-

 

 

8. Earnings per Share

Group	31 December 2021	31 December 2020
Revenue	90.2p	55.7p
Capital	(4.2)p	0.8p
Earnings per ordinary share	86.0p	56.5p

 

The calculation for the year ended 31 December 2021 is based on revenue returns of £31.8 million, capital returns of £(1.5) million and total returns of £30.3 million and a weighted average number of ordinary shares of 35,259,741.

The calculation for the year ended 31 December 2020 is based on revenue returns of £20.4 million, capital returns of £0.3 million and total returns of £20.7 million and a weighted average number of ordinary shares of 36,657,807.

9. Ordinary Dividends

	31 December 2021 £'000	31 December 2020 £'000
20.00p Interim dividend for the period to 31 December 2019 (paid 27 March 2020)	-	7,450
20.00p Interim dividend for the period to 31 March 2020 (paid on 23 June 2020)	-	7,303
20.00p Interim dividend for the period to 30 June 2020 (paid on 22 September 2020)	-	7,201
20.00p Interim dividend for the period to 30 September 2020 (paid 27 December 2020)	-	7,051
20.00p Interim dividend for the period to 31 December 2020 (paid 26 March 2021)	7,052	-
20.00p Interim dividend for the period to 31 March 2021 (paid on 25 June 2021)	7,052	-
20.00p Interim dividend for the period to 30 June 2021 (paid on 30 September 2021)	7,052	-
20.00p Interim dividend for the period to 30 September 2021 (paid 24 December 2021)	7,052	-
Total dividend paid in period	28,208	29,005
20.00p Interim dividend for the period to 31 December 2020 (paid 26 March 2021)	-	7,051
20.00p Interim dividend for the period to 31 December 2021 (to be paid 25 March 2022)	7,052	-
Total dividend paid/to be paid in relation to period	28,208	28,606

The 31 December 2021 interim dividend of 20.00 pence was approved on 23 February 2022 and will be paid on the 25 March 2022 before the approval of the financial statements.

10. INVESTMENTS at Amortised Cost

(a) Credit Assets at amortised cost

The disclosure below presents the gross carrying value of financial instruments to which the impairment requirements in IFRS 9 are applied and the associated allowance for ECL. Please see Note 1 for more detail on the allowance for ECL.

The following table analyses loans by industry sector and represent the concentration of exposures on which credit risk is managed for both the Group and Company as at 31 December 2021:

	31 December 2021			31 December 2020
Group and Company	Gross Carrying Amount £'000	Allowance for ECL £'000	Net Carrying Amount £'000	Gross Carrying Amount £'000	Allowance for ECL £'000	Net Carrying Amount £'000
Credit Assets at amortised cost
Consumer	95,665	(3,190)	92,475	211,636	(20,000)	191,636
Property	383,473	(7,596)	375,877	343,219	(10,269)	332,950
SME	97,642	-	97,642	23,359	(208)	23,151
Total Assets	576,780	(10,786)	565,994	578,214	(30,477)	547,737

 

The following table analyses loans by staging for both the Group and Company as at 31 December 2021:

	31 December 2021			31 December 2020
Group and Company	Gross Carrying Amount £'000	Allowance for ECL £'000	Net Carrying Amount £'000	Gross Carrying Amount £'000	Allowance for ECL £'000	Net Carrying Amount £'000
Credit Assets at amortised cost
Stage 1	544,233	(952)	543,281	509,550	(1,464)	508,086
Stage 2	6,363	(946)	5,417	11,691	(1,927)	9,764
Stage 3	26,184	(8,888)	17,296	56,973	(27,086)	29,887
Total Assets	576,780	(10,786)	565,994	578,214	(30,477)	547,737

 

 

Group and Company	Stage 1 £'000	Stage 2 £'000	Stage 3 £'000	Total £'000
At 1 January 2021	1,464	1,927	27,086	30,477
Movement from stage 1 to stage 2	(8)	450	-	442
Movement from stage 1 to stage 3	(2)	-	766	764
Movement from stage 2 to stage 1	-	(218)	-	(218)
Movement from stage 2 to stage 3	-	(321)	432	111
Movement from stage 3 to stage 1	2	-	(388)	(386)
Movement from stage 3 to stage 2	-	58	(237)	(179)
Decreases due to repayments	(53)	(139)	(1,651)	(1,843)
Increases due to origination	67	-	-	67
Remeasurements due to modelling	460	33	(94)	399
Loans sold	(978)	(843)	(16,714)	(18,535)
Loans written off	-	(1)	(312)	(313)
Allowance for ECL at 31 December 2021	952	946	8,888	10,786

 

Group and Company	Stage 1 £'000	Stage 2 £'000	Stage 3 £'000	Total £'000
At 1 January 2020	3,217	2,606	24,331	30,154
Movement from stage 1 to stage 2	(102)	3,170	-	3,068
Movement from stage 1 to stage 3	(270)	-	7,379	7,109
Movement from stage 2 to stage 1	11	(515)	-	(504)
Movement from stage 2 to stage 3	-	(1,180)	3,206	2,026
Movement from stage 3 to stage 1	4	-	(343)	(339)
Movement from stage 3 to stage 2	-	75	(213)	(138)
Decreases due to repayments	(794)	(2,607)	(4,870)	(8,271)
Increases due to origination	381	-	-	381
Remeasurements due to modelling	490	796	963	2,249
Loans sold	(1,473)	(418)	(3,367)	(5,258)
Allowance for ECL at 31 December 2020	1,464	1,927	27,086	30,477

 

 

 

 

(b) Expected Credit Loss allowance for IFRS 9

Under the expected credit loss model introduced by IFRS 9 Impairment Provisions are driven by changes in credit risk of instruments, with a provision for lifetime expected credit losses recognised where the risk of default of an instrument has increased significantly since initial recognition.

The following table analyses Group and Company loans by stage and sector for the year ended 31 December 2021:

Group	Consumer £'000	Property £'000	SME £'000	Total £'000
At 1 January 2021	20,000	10,269	208	30,477
Charge for the period - Stage 1	5	(41)	326	290
Charge for the period - Stage 2	3	(486)	-	(483)
Charge for the period - Stage 3	1,545	(2,196)	-	(651)
Charge for the period - total	1,553	(2,723)	326	(844)
Loans sold	(18,363)	50	(534)	(18,847)
Allowance for ECL at 31 December 2021	3,190	7,596	-	10,786

 

The following table analyses Group and Company loans by stage and sector for the year ended 31 December 2020:

Group	Consumer £'000	Property £'000	SME £'000	Total £'000
At 1 January 2020	19,844	10,051	259	30,154
Charge for the period - Stage 1	(344)	149	(91)	(286)
Charge for the period - Stage 2	61	(320)	(17)	(276)
Charge for the period - Stage 3	5,697	389	57	6,143
Charge for the period - total	5,414	218	(51)	5,581
Loans sold	(5,258)	-	-	(5,258)
Allowance for ECL at 31 December 2020	20,000	10,269	208	30,477

 

Measurement uncertainty and sensitivity analysis of ECL

The recognition and measurement of ECL is highly complex and involves the use of significant judgement and estimation. This includes the formulation and incorporation of multiple forward-looking economic conditions into ECL to meet the measurement objective of IFRS 9.

For most portfolios, the Group has adopted the use of three economic scenarios, representative of Oxford Economics view of forecast economic conditions, sufficient to calculate unbiased ECL. They represent a 'most likely outcome' (the Base scenario) and two, less likely, 'outer' scenarios, referred to as the 'Upside' and 'Downside' scenarios.

The ECL recognised in the financial statements reflect the effect on expected credit losses of a range of possible outcomes, calculated on a probability-weighted basis, based on the economic scenarios described in Note 2 to the financial statements, including management overlays where required. The probability-weighted amount is typically a higher number than would result from using only the Base (most likely) economic scenario. ECLs typically have a non-linear relationship to the many factors which influence credit losses, such that more favourable macroeconomic factors do not reduce defaults as much as less favourable macroeconomic factors increase defaults. The ECL calculated for each of the scenarios represent a range of possible outcomes that have been evaluated to estimate ECL. As a result, the ECL calculated for the Upside and Downside scenarios should not be taken to represent the upper and lower limits of possible actual ECL outcomes. There is a high degree of estimation uncertainty in numbers representing tail risk scenarios when assigned a 100 percent. A wider range of possible ECL outcomes reflects uncertainty about the distribution of economic conditions and does not necessarily mean that credit risk on the associated loans is higher than for loans where the distribution of possible future economic conditions is narrower.

For stage 3 impaired loans, LGD estimates consider independent recovery valuations provided by external consultants where available, or internal forecasts corresponding to anticipated economic conditions.

The table below shows a sensitivity analysis for ECL based on changing the weighting of the scenarios to allocate a 100 percent weight to the downside scenario. The scenarios are applicable to 31 December 2021. The analysis shows that the ECL would have been £2.9 million higher under this sensitivity. 

2021	Weighted Year end ECL £'000	100% Downside Scenario £'000
Consumer	3,190	5,096
Property	7,596	8,616
SME	-	-
Total	10,786	13,712

At 31 December 2020 if the weightings used represented a 100 percent downside scenario the ECL would have been £4.0 million higher as split below:

2020	Weighted Year end ECL £'000	100% Downside Scenario £'000
Consumer	20,000	20,205
Property	10,269	14,099
SME	208	208
Total	30,477	34,512

The sensitivity of the ECL has been further analysed by assessing the impact of £10.0 million of credit assets at amortised cost moving from Stage 1 to Stage 2. The analysis shows that the ECL would have been £1.5 million higher under this sensitivity.

The amortised cost of the structurally secured portfolio is £297 million, and the largest exposure is on page 12. We have stress tested each structured position as at 31 December 2021 to analyse the sensitivity to impairment of the underlying assets. The portfolio was able to withstand the stress test without incurring a loss, this has been done by running each structured model on a 100% downside scenario to show that excess cashflow remains, such that in the event of default LGD is nil.

 

11. Assets at Fair Value Through Profit or Loss

Total assets at Fair Value Through Profit or Loss

Group and Company	2021
	£'000
Opening fair value	20,864
Purchases at cost	31,347
Reclassification from loans at amortised cost	5,476
Disposal at cost	(9,726)
Net change in unrealised gains	809
Realised (losses)/gains	-
Closing fair value as at 31 December 2021	48,770
Comprising:
Equity assets at fair value	15,659
Credit assets at fair value	33,111
Closing fair value as at 31 December 2021	48,770

 

Group and Company	2020
	£'000
Opening fair value	8,390
Purchases at cost	16,220
Reclassification from loans at amortised cost	2,509
Disposal at cost	(6,655)
Net change in unrealised gains	1,155
Realised (losses)/gains	(755)
Closing fair value as at 31 December 2020		20,864
Comprising:
Equity assets at fair value	14,959
Credit assets at fair value	5,905
Closing fair value as at 31 December 2020		20,864

 

 

Equity assets at Fair value through profit or loss

(a) Movements in the year

The table below sets out the movement in equities assets at fair value through profit or loss for the Group for the year ended 31 December 2021.

Group and Company	2021 £'000
Valued using transaction price	13,600
Valued using an earnings multiple	1,359
Opening fair value	14,959
Purchases at cost	2,037
Disposal at cost	-
Net change in unrealised gains	(1,337)
Realised (losses)/gains	-
Closing fair value as at 31 December 2021	15,659
Comprising:
Valued using an earnings multiple	1,359
Valued using a TNAV[5] multiple	14,300
Closing fair value as at 31 December 2021	15,659

 

The table below sets out the movement in equity assets at fair value through profit or loss for the Group for the year ended 31 December 2020.

Group	2020 £'000
Valued using transaction price	550
Valued using an earnings multiple	7,840
Opening fair value	8,390
Purchases at cost	13,599
Disposal at cost	(6,655)
Net change in unrealised gains	380
Realised losses	(755)
Closing fair value as at 31 December 2020	14,959
Comprising:
Valued using sales value	1,380
Valued using an earnings multiple	13,579
Closing fair value as at 31 December 2020	14,959

 

The table below sets out the movement in equity assets at fair value through profit or loss for the Company for the year ended 31 December 2020.

Company	2020 £'000
Valued using Net Asset Value	4,493
Valued using transaction price	550
Valued using an earnings multiple	7,840
Opening fair value	12,883
Purchases at cost	13,599
Disposal at cost	(6,655)
Net change in unrealised losses	(4,113)
Realised losses	(755)
Closing fair value as at 31 December 2020	14,959
Comprising:
Valued using an earnings multiple	1,380
Valued using a TNAV multiple	13,579
Closing fair value as at 31 December 2020	14,959

 (b) Fair value of financial instruments

IFRS 13 requires the Company to classify its financial instruments held at fair value using a hierarchy that reflects the significance of the inputs used in the valuation methodologies. These are as follows:

·      Level 1 - quoted prices in active markets for identical investments;

·     Level 2 - other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk, etc.); and

·      Level 3 - significant unobservable inputs (including the Company's own assumptions in determining the fair value of investments).

An investment is always categorised as Level 1, 2 or 3 in its entirety. In certain cases, the fair value measurement for an investment may use a number of different inputs that fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgement and is specific to the investment.

The following sets out the classifications in valuing the Group's investments:

Group	Closing fair value as at 31 Dec 2021 £'000	Closing fair value as at 31 Dec 2020 £'000
Level 1	-	-
Level 2	-	-
Level 3	15,659	14,959
Total	15,659	14,959

 

The investments in unquoted equities are valued using several different techniques, including recent transactions and recent rounds of funding by the investee entities and the market approach. Quantitative information regarding the unobservable inputs for the Group's Level 3 positions as at 31 December 2021 is given below:

Closing fair value as at 31 Dec 2021                                               £'000	Valuation Technique	Earnings multiple changed by 1 £'000
1,359	Earnings Multiple	238
1,359		238

Earnings multiples used is 5.3x.

Closing fair value as at 31 Dec 2021                                               £'000	Valuation Technique	TNAV multiple changed by 0.25x £'000
14,300	TNAV Multiple	1,543
14,300		1,543

Tangible Net Asset Value ("TNAV") multiple used is 2.1x.

Quantitative information regarding the unobservable inputs for the Group and Company's Level 3 positions as at 31 December 2020 is given below:

Closing fair value as at 31 Dec 2020                                               £'000	Valuation Technique	Earnings multiple changed by 1 £'000
1,380	Earnings Multiple	265
1,380		265

Earnings multiples used is 4.3x.

 

Closing fair value as at 31 Dec 2020                                               £'000	Valuation Technique	TNAV multiple changed by 0.25x £'000
13,579	TNAV Multiple	1,583
13,579		1,583

TNAV multiple used is 2.15x.

 

 

 

 

 

 

 

 

 

 

 

 

Credit assets at Fair value through profit or loss

(a) Movements in the year

The table below sets out the movement in credit assets at fair value through profit or loss for the Group for the year ended 31 December 2021.

Group and Company	2021 £'000
Opening fair value	5,905
Purchases at cost	29,310
Reclassification from loans at amortised cost	5,476
Disposals	(9,726)
Net change in unrealised gains	2,146
Closing fair value as at 31 December 2021	33,111
Comprising:
Valued using an earnings multiple	7,775
Valued using a TNAV multiple	25,336
Closing fair value as at 31 December 2021	33,111

 

Group and Company	2020 £'000
Opening fair value	-
Purchases at cost	2,621
Reclassification from loans at amortised cost	2,509
Disposals	-
Net change in unrealised gains	775
Closing fair value as at 31 December 2020	5,905
Comprising:
Valued using an earnings multiple	1,655
Valued using a TNAV multiple	4,250
Closing fair value as at 31 December 2020	5,905

 

(b) Fair value of financial instruments

IFRS 13 requires the Company to classify its financial instruments held at fair value using a hierarchy that reflects the significance of the inputs used in the valuation methodologies. These are as follows:

·       Level 1 - quoted prices in active markets for identical investments;

·      Level 2 - other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk, etc.); and

·       Level 3 - significant unobservable inputs (including the Company's own assumptions in determining the fair value of investments).

An investment is always categorised as Level 1, 2 or 3 in its entirety. In certain cases, the fair value measurement for an investment may use a number of different inputs that fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgement and is specific to the investment.

The following sets out the classifications in valuing the Group and Company's investments:

Group and Company	Closing fair value as at 31 Dec 2021 £'000	Closing fair value as at 31 Dec 2020 £'000
Level 1	-	-
Level 2	-	-
Level 3	33,111	5,905
Total	33,111	5,905

Quantitative information regarding the unobservable inputs for the Group and Company's Level 3 positions as at 31 December 2021 is given below:

Closing fair value as at 31 Dec 2021                                               £'000	Valuation Technique	Earnings multiple changed by 1 £'000
	Earnings Multiple
7,775	1.08	1,740

Earnings multiple used is 1.33x.

Closing fair value as at 31 Dec 2021                                               £'000	Valuation Technique	TNAV multiple changed by 0.1x £'000
	TNAV Multiple
25,336	0.9	2,393

TNAV multiple used is 1.0x.

Assets and liabilities not carried at fair value but for which fair value is disclosed

For the Group as at 31 December 2021:

Group	As Presented	Fair Value
		Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Assets
Investments at amortised cost	565,994	-	-	579,482	579,482
Receivables	6,554	-	6,554	-	6,554
Cash and cash equivalents	12,948	12,948	-	-	12,948
Total assets	585,496	12,948	6,554	579,482	598,984
Liabilities
Management fee payable	(1,037)	-	(1,037)	-	(1,037)
Performance fee payable	(3,431)	-	(3,431)	-	(3,431)
Other payables	(2,691)	-	(2,691)	-	(2,691)
Interest bearing borrowings	(267,657)	-	(267,657)	-	(267,657)
Total liabilities	(274,816)	-	(274,816)	-	(274,816)

For the Company as at 31 December 2021:

Company	As Presented	Fair Value
		Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Assets
Investments at amortised cost	565,994	-	-	579,482	579,482
Receivables	6,554	-	6,554	-	6,554
Cash and cash equivalents	10,500	10,500	-	-	10,500
Total assets	583,048	10,500	6,554	579,482	596,536
Liabilities
Management fee payable	(1,037)	-	(1,037)	-	(1,037)
Performance fee payable	(3,431)	-	(3,431)	-	(3,431)
Other payables	(2,392)	-	(2,392)	-	(2,392)
Deemed Loan	(82,326)	-	(82,326)	-	(82,326)
Interest bearing borrowings	(183,182)	-	(183,182)	-	(183,182)
Total liabilities	(272,368)	-	(272,368)	-	(272,368)

For the Group as at 31 December 2020:

Group	As Presented	Fair Value
		Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Assets
Investments at amortised cost	547,737	22,175	-	538,314	560,489
Receivables	6,773	-	6,773	-	6,773
Cash and cash equivalents	62,548	62,548	-	-	62,548
Total assets	617,058	84,723	6,773	538,314	629,810
Liabilities
Management fee payable	(1,040)	-	(1,040)	-	(1,040)
Performance fee payable	(2,300)	-	(2,300)	-	(2,300)
Other payables	(3,832)	-	(3,832)	-	(3,832)
Interest bearing borrowings	(273,539)	-	(273,539)	-	(273,539)
Total liabilities	(280,711)	-	(280,711)	-	(280,711)

 

 

For the Company for the year ended 31 December 2020:

Company	As Presented	Fair Value
		Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Assets
Investments at amortised cost	547,737	22,175	-	538,314	560,489
Receivables	6,773	-	6,773	-	6,773
Cash and cash equivalents	59,673	59,673	-	-	59,673
Total assets	614,183	81,848	6,773	538,314	626,935
Liabilities
Management fee payable	(1,040)	-	(1,040)	-	(1,040)
Performance fee payable	(2,300)	-	(2,300)	-	(2,300)
Other payables	(3,429)	-	(3,429)	-	(3,429)
Deemed Loan	(103,719)	-	(103,719)	-	(103,719)
Interest bearing borrowings	(167,348)	-	(167,348)	-	(167,348)
Total liabilities	(277,836)	-	(277,836)	-	(277,836)

Categorisation within the hierarchy has been determined based on the lowest level input that is significant to the fair value measurement of the relevant asset or liability (see note 11). Further details of the loans at amortised cost held by the Group can be found in note 10 to the financial statements.

12. Financial Risk Management

The Group's investing activities undertaken in pursuit of its investment objective, as set out on page 4, involve certain inherent risks. The main financial risks arising from the Group's financial instruments are credit risk, market risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks as summarised below. Credit risk is analysed further in Note 13.

Market risk

The fair value or future cash flows of a financial instrument held by the Group may fluctuate because of changes in market prices. Market risk can be summarised as comprising three types of risk:

·  Interest rate risk - the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market interest rates; and

·  Currency risk - the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign exchange rates.

·    Price risk - the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk);

The Group's exposure, sensitivity to and management of each of these risks is described in further detail below. Management of market risk is fundamental to the Group's investment objective. The investment portfolio is continually monitored to ensure an appropriate balance of risk and reward. The Board has also established a series of investment parameters, which are reviewed annually, designed to limit the risk inherent in managing a portfolio of investments.

(a) Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair value of financial instruments.

The Group invests in Credit Assets which may be subject to a fixed rate of interest, or a floating rate of interest (which may be linked to base rates or other benchmarks). The Group's borrowings may be subject to a floating rate of interest.

The Group intends to manage the mismatch it has in respect of the income generated by its Credit Assets, on the one hand, with the liabilities in respect of its borrowings, on the other hand, by matching any floating rate borrowings with investments in Credit Assets that are also subject to a floating rate of interest. To the extent that the Group is unable to match its funding in this way, it may use derivative instruments, including interest rate swaps, to reduce its exposure to fluctuations in interest rates, however some unmatched risk may remain. The Group has not used any interest rate derivative instruments in the current or prior year.

The Group finances its operations through its share capital and reserves, including realised gains on investments as well as the Group's debt facilities. As at 31 December 2021 the Group had £270.0 million drawn down under these facilities (2020: £273.5 million).

Exposure of the Group's financial assets and liabilities to floating interest rates (giving cash flow interest rate risk when rates are reset) and fixed interest rates (giving fair value risk) as at 31 December 2021 is shown below:

Group Financial instrument	Floating Rate £'000	Fixed or Administered Rate £'000	Total £'000
Credit Assets at amortised cost	269,053	296,941	565,994
Cash and cash equivalents	12,948	-	12,948
Interest bearing borrowings	(267,657)	-	(267,657)
Total exposure	14,344	296,941	311,285

 

Exposure of the Company's financial assets and liabilities to floating interest rates (giving cash flow interest rate risk when rates are reset) and fixed interest rates (giving fair value risk) as at 31 December 2021 is shown below:

Company Financial instrument	Floating Rate £'000	Fixed or Administered Rate £'000	Total £'000
Credit Assets at amortised cost	269,053	296,941	565,994
Cash and cash equivalents	10,500	-	10,500
Interest bearing borrowings	(183,182)	-	(183,182)
Deemed loan	(82,326)	-	(82,326)
Total exposure	14,045	296,941	310,986

Exposure of the Company and Group's financial assets and liabilities to floating interest rates (giving cash flow interest rate risk when rates are reset) and fixed interest rates (giving fair value risk) as at 31 December 2020 is shown below:

Group Financial instrument	Floating Rate £'000	Fixed or Administered Rate £'000	Total £'000
Credit Assets at amortised cost	204,592	343,145	547,737
Cash and cash equivalents	62,548	-	62,548
Interest bearing borrowings	(273,539)	-	(273,539)
Total exposure	(6,399)	343,145	336,746

 

Exposure of the Company's financial assets and liabilities to floating interest rates (giving cash flow interest rate risk when rates are reset) and fixed interest rates (giving fair value risk) as at 31 December 2020 is shown below:

Company Financial instrument	Floating Rate £'000	Fixed or Administered Rate £'000	Total £'000
Credit Assets at amortised cost	204,592	343,145	547,737
Cash and cash equivalents	59,673	-	59,673
Interest bearing borrowings	(167,348)	-	(167,348)
Deemed loan	(103,719)	-	(103,719)
Total exposure	(6,802)	343,145	336,343

 

An administered rate is not like a floating rate, movements in which are directly linked to benchmarks, such as LIBOR. The administered rate can be changed at the discretion of the lender. 

A 1 percent change in interest rates impacts income on the assets with a floating rate by £2.8 million (2020: £2.7 million). A 1 percent change in interest rates impacts debt expense on the liabilities with a floating rate by £2.7 million (2020: £2.7 million).

(b) Currency risk

Currency risk is the risk that the value of net assets will fluctuate due to changes in foreign exchange rates. Relevant risk variables are generally movements in the exchange rates of non-functional currencies in which the Group holds financial assets and liabilities. The assets of the Group are invested in Credit Assets and other investments including unquoted equities which are denominated in Pounds Sterling and other currencies. Accordingly, the value of such assets may be affected favourably or unfavourably by fluctuations in currency rates. The Group hedges currency exposure between Pounds Sterling and other currencies.

Concentration of foreign currency exposure

The Investment Manager monitors the fluctuations in foreign currency exchange rates and may use forward foreign exchange contracts to hedge the currency exposure of the Group's non-GBP denominated investments. The Investment Manager re-examines the currency exposure on a regular basis in each currency and manages the Group's currency exposure in accordance with market expectations. The Group did not designate any derivatives as hedges for accounting purposes as described under IFRS 9 during the year (2020: none) and records its derivative activities on a fair value basis. The forward contracts held at 31 December 2021 were carried out with Lumon Pay Limited and represent USD12,000k (2020: USD0) and EUR1,950k (2020: 2,780k).

The largest exposure to FX is to the USD. The below table presents the net exposure to USD and Euros as at 31 December 2021. The table includes forward foreign exchange contracts at their notional exposure value and excludes all GBP assets and liabilities recorded on the Consolidated Statement of Financial Position.

 

Total Assets (£'000)	Total Liabilities  (£'000)	Forward Contract (£'000)	Net Exposure after Forward Contract (£'000)
9,149	-	(8,758)	391
9,149	-	(8,758)	391

If the GBP exchange rate simultaneously increased/decreased by 10 percent against the above currencies, the impact on profit would be an increase/decrease of £915k (2020: 3k). 10 percent is considered to be a reasonably possible movement in foreign exchange rates.

The table below presents the net exposure to Euro's at 31 December 2020. The table includes forward foreign exchange contracts at their notional exposure value and excludes all GBP assets and liabilities recorded on the Consolidated Statement of Financial Position.

 

 

Total Assets (£'000)	Total Liabilities  (£'000)	Forward Contract (£'000)	Net Exposure after Forward Contract (£'000)
1,762	-	(1,750)	12
1,762	-	(1,750)	12

(c) Price risk

Price risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting similar financial instruments traded in the market. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issue, recessions, or other events could have a significant impact on the Group and market prices of its investments. This risk applies to financial instruments held by the Group, including equity assets, credit assets and derivatives. Sensitivity analysis on the equity assets is included in Note 11.

Capital Management

The Company's primary objectives in relation to the management of capital are driven by strategic and organisational requirements but are focused around:

·    ensuring its ability to continue as a going concern; and

·    maximising the long-term capital growth for its shareholders through an appropriate balance of equity capital and gearing.

In the management of capital and in its definition, we include equity (including revenue and capital reserves), debt (including long-term credit facilities, commercial paper backstopped by long-term credit facilities and any hedging assets or liabilities associated with long-term debt items), cash and temporary investments.

The Board manage the capital structure and make adjustments to it considering changes in economic conditions and the risk characteristics of the business. The Company aims to meet these objectives by diversifying the leverage facilities through the introduction of a new Topco facility, a new amortising term loan and an increase in an existing facility.

The Group monitors capital using a ratio of debt to equity. Debt is calculated as total interest-bearing borrowings (as shown in the Consolidated Statement of Financial Position). The Group's debt to equity ratio which is a key performance indicator used for internal management at Group level was 74.5 percent at 31 December 2021 (31 December 2020: 76.6 percent).

Liquidity risk

Liquidity risk is the risk that the Group will be unable meet its obligations in respect of financial liabilities as they fall due. 

The Group manages its liquid resources to ensure sufficient cash is available to meet its expected contractual commitments. It monitors the level of short-term funding and balances the need for access to short-term funding, with the long-term funding needs of the Group.

A substantial proportion of the Group's net assets are in loans, whose cash collections could be utilised to meet funding requirements if necessary. The Group has the power, under its Articles of Association, to take out both short and long-term borrowings subject to a maximum value of one hundred percent of its share capital and reserves.

At 31 December 2021 the Company had a committed debt facility totalling £200.0 million with a maturity date of 4 September 2023. This facility includes a term and revolving facility secured on a range of assets. The Company also has a 2-year term facility that is structured as run-off financing in that the debt will paydown over the term of the facility and a £35m amortising term loan with a 49 year term, but where final repayment is expected in 2024 in line with the facility it is secured against. Categorisation within the hierarchy has been determined based on the lowest level input that is significant to the fair value measurement of the relevant asset or liability (see Note 11 for details). Further details of the loans at amortised cost held by the Group can be found in Note 10 to the financial statements.

 

The table below shows the amortised cost assets and liability balances by maturity dates:

Group	Total	Less than 3months	3 - 12months	1- 5years	More than 5 years
	£'000	£'000	£'000	£'000	£'000
Assets
Investments at amortised cost	565,994	35,479	47,590	314,073	168,852
Liabilities
Interest bearing borrowings	(267,657)	96	(49,435)	(182,602)	(35,717)

The table below shows the amortised cost assets and liability principal by contractual maturity dates:

Group	Total	Less than 3months	3 - 12months	1- 5years	More than 5 years
	£'000	£'000	£'000	£'000	£'000
Liabilities
Interest bearing borrowings	(269,980)	-	(49,435)	(185,545)	(35,000)

Effect of IBOR reform

Following the financial crisis, the reform and replacement of benchmark interest rates such as GBP LIBOR and other inter-bank offered rates ('IBORs') become a priority for global regulators. The Group's risk exposure that is directly affected by the interest rate benchmark reform predominantly comprises its portfolio of GBP credit assets that are measured at amortised cost, which as at the 31 Dec 2021 had an outstanding principal of GBP573.7m and liabilities of GBP270m.

For the GBP LIBOR reforms, the UK Financial Conduct Authority ('FCA') has decided to no longer compel panel banks to participate in the GBP LIBOR submission process after the end of 2021. The Group will now be using the SONIA reference rates to measure the variable elements of its credit assets and obligations. The key differences between GBP LIBOR and SONIA. GBP LIBOR is a 'term rate', which means that it is published for a borrowing period (such as three months or six months) and is 'forward looking', because it is published at the beginning of the borrowing period. SONIA is currently a 'backward-looking' rate, based on overnight rates from actual transactions, and it is published at the end of the overnight borrowing period. Furthermore, LIBOR includes a credit spread over the risk-free rate, which SONIA currently does not. To transition existing contracts and agreements that reference GBP LIBOR to SONIA, adjustments for term differences and credit differences might need to be applied to SONIA, to enable the two benchmark rates to be economically equivalent on transition.

As at 31 December 2021, changes required to systems, processes and models have been identified. The Group has identified that the areas of most significant risk arising from the replacement of GBP LIBOR are: updating systems and processes which capture GBP LIBOR referenced contracts, amendments to those contracts, or existing fallback/transition clauses not operating as anticipated.

 

The Group currently has a number of contracts which reference GBP or USD LIBOR and extend beyond 2021. The principal balance of these contracts are disclosed within the tables below by GBP and USD.

Non-derivative assets and liabilities exposed to GBP LIBOR	Carrying Value/Nominal Amount at 31 December 2021
	Assets	Liabilities
	£'000	£'000
Credit assets at amortised cost	51,268	30,129
Total exposure	51,268	30,129

 

Non-derivative assets and liabilities exposed to USD LIBOR		Carrying Value/Nominal Amount at 31 December 2021
	Assets		Liabilities
	£'000		£'000
Credit assets at amortised cost	285		-
Total exposure	285		-

 

The GBP positions that are yet to transition to SONIA will transition within Q1 of 2022.

13. Credit risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

The Group's credit risks arise principally through exposures to loans originated or acquired by the Group and cash deposited with banks, both of which are subject to risk of borrower default.

The Investment Manager establishes and adheres to stringent underwriting criteria. The Group invests in a granular portfolio of assets, diversified at the underlying borrower level, with each loan being subject to a maximum single loan exposure limit. This helps mitigate credit concentrations in relation to an individual customer, a borrower group or a collection of related borrowers.  

The credit quality of loans is assessed through evaluation of various factors, including credit scores, payment data, collateral available from the borrower and other information.

The Group further mitigates its exposure to credit risk through structuring facilities whereby the facilities are secured on a granular pool of performing loans and structured so that the Origination Platform and or borrower provides the first loss, and the Group finances the senior risk.

Further risk is mitigated in the property sector as the Group takes collateral in the form of property to mitigate the credit risk arising from residential mortgage lending and commercial real estate. 

The outbreak of Covid-19 continues to cause major disruption across the globe. The potential impacts of the government's assistance to consumers and businesses coming to an end are yet unknown, but they may increase the potential expected credit loss impact. Depending on the evolution of the Covid-19 situation, this could result in further economic downturn and potentially a material increase in credit risk. This is being continually monitored.

Set out below is the analysis of the gross closing balances of the Group and Company's credit assets split by the type of loan and the credit risk band as at 31 December 2021, each loan is assigned to a credit risk band at inception:

 

Credit Risk Band	Unsecured £'000	Secured £'000	Total £'000
A & B	1,411	575,369	576,780
C	-	-	-
D & E	-	-	-
Total	1,411	575,369	576,780

Set out below is the analysis of the closing balances of the Group and Company's credit assets split by the type of loan and the credit risk band as at 31 December 2020:

Credit Risk Band	Unsecured £'000	Secured £'000	Total £'000
A & B	29,845	524,989	554,834
C	9,419	-	9,419
D & E	13,961	-	13,961
Total	53,225	524,989	578,214

 

Each credit risk band is defined below:

Credit Risk Band	Definition
A	Highest quality with minimal indicators of credit risk
B	High quality, with minor adverse indicators
C	Medium-grade, moderate credit risk, may have some adverse credit risk indicators
D/E	Elevated credit risk, adverse indicators (e.g. lower borrowing ability, credit history, existing debt)

The Group ensures that it only deposits cash balances with institutions with appropriate financial standing or those deemed to be systemically important.

14. Fixed Assets

The tables below set out the movement in Fixed Assets for the Group and Company.

Year ended 31 December 2021	IT Development and Software £'000	Total £'000
Opening net book amount	-	-
Additions	-	-
Amortisation charge	-	-
Closing net book amount	-	-
As at 31 December 2021
Cost	-	-
Accumulated amortisation	-	-
Net book amount	-	-

 

Year ended 31 December 2020	IT Development and Software £'000	Total £'000
Opening net book amount	41	41
Additions	-	-
Amortisation charge	(41)	(41)
Closing net book amount	-	-
As at 31 December 2020
Cost	830	830
Accumulated amortisation	(830)	(830)
Net book amount	-	-

15. Receivables

The table below set out a breakdown of the Group receivables.

Group and Company	31 December 2021 £'000	31 December 2020 £'000
Prepayments and other debtors	5,583	4,820
Amounts due from platforms	924	1,820
Other receivables	47	133
Total receivables	6,554	6,773

The above receivables do not carry any interest and are short term in nature. The Directors consider that the carrying values of these receivables approximate their fair value.

Amounts due from platforms relate to cash that has been collected by the platform partners but not yet remitted to the Group, whereby the credit asset at amortised cost has been treated as if this cash had been received.

16. Other Payables

The table below set out a breakdown of the Group payables.

Group	31 December 2021 £'000	31 December 2020 £'000
Accruals and other payables	2,691	3,832
Total other payables	2,691	3,832

The table below set out a breakdown of the Company payables.

Company	31 December 2021 £'000	31 December 2020 £'000
Accruals and other payables	2,392	3,429
Total other payables	2,392	3,429

Withholding Taxation

The Company's revenue income from loans is subject to tax, but offset by the interest distribution paid, which has the effect of reducing that corporation tax to nil. This means the interest distribution may be taxable in the hands of the Company's shareholders. There is no withholding tax payable by the Company at 31 December 2021 (31 December 2020: £nil) due to the changes made in 2017 Finance Act whereby all interest distributions will be paid gross of tax, therefore withholding tax is retained by the Company and paid directly to HMRC.
 

17. Interest Bearing Borrowings

The table below sets out a breakdown of the Group's interest-bearing borrowings.

Group	31 December 2021 £'000	31 December 2020 £'000
Current Liabilities
Credit facility	49,435	20,916
Interest and commitment fees payable	195	183
Prepaid interest and commitment fees	(291)	(234)
Total current liabilities	49,339	20,865
Non-Current Liabilities
Credit facility	220,545	256,438
Interest and commitment fees payable	-	-
Prepaid interest and commitment fees	(2,227)	(3,764)
Total non-current liabilities	218,318	252,674
Total interest-bearing borrowings	267,657	273,539

The table below sets out a breakdown of the Company's interest-bearing borrowings.

Company	31 December 2021 £'000	31 December 2020 £'000
Current Liabilities
Credit facility	15,000	-
Interest and commitment fees payable	72	73
Prepaid interest and commitment fees	-	-
Total current liabilities	15,072	73
Non-Current Liabilities
Credit facility	170,000	170,000
Interest and commitment fees payable	-	-
Prepaid interest and commitment fees	(1,890)	(2,725)
Total non-current liabilities	168,110	167,275
Total interest-bearing borrowings	183,182	167,348

 

At 31 December 2021 the Company's main debt facility was a £250 million provided by Goldman Sachs, being a £170 million term loan and £80 million revolving credit facility. At 31 December 2021 the term loan was fully drawn with £nil drawn on the revolving element. Interest is charged at LIBOR plus a margin with the facility maturing in September 2023. From 2022 onwards the facility will be charged using SONIA; the Company does not expect to be negatively impacted by the change to SONIA. The debt facility is secured against the Company's loan portfolios and other assets, in addition to the net exposures the Company holds where the Company is the junior lender to an SPV.

In August 2019, the Group entered a two-year debt facility to finance three residential mortgage portfolios, two commercial mortgage pools and a small unsecured consumer pool. These portfolios were previously leveraged through the Company level debt facility but getting assets specific leverage on these provides a lower cost of funding at a higher advance rate. The total debt raised on day one of this facility was £81.0 million.  Interest was charged at LIBOR plus a margin. From 2022 onwards, the facility is now be charged at SONIA plus a margin. The facility was a 2-year term with a 1-year extension option and is structured as a run-off financing in that the debt will paydown over the term of the facility. During 2020 the 1-year extension was exercised, and an additional mortgage portfolio was transferred into the pool. The facility therefore now expires in August 2022. The carrying value of the portfolio of loans, which this facility is secured against, at 31 December 2021 was £76.5 million (2020: £93.6 million).

In December 2020, the Group entered into a £35 million debt facility secured against a structured SME facility, the carrying value of this structured SME facility at 31 December 2021 was £39.5 million. The debt facility charges LIBOR plus a margin and is an amortising term loan with the full £35 million drawn on day one. From 2022 onwards, the facility will be charged using synthetic LIBOR plus a margin. The facility has a 49 year term but final repayment is expected in 2024.

During 2021 the below related debt costs had been incurred by the Group.

Group	2021 £'000	2020 £'000
Interest and commitment fees payable	11,022	8,729
Other finance charges	1,837	5,594
Total finance costs	12,859	14,323

During 2021 the below related debt costs had been incurred by the Company.

Company	2021 £'000	2020 £'000
Interest and commitment fees payable	8,577	6,832
Other finance charges	1,103	5,210
Total finance costs	9,680	12,042

As part of IAS 7, "Statement of cash flows", an entity is required to disclose changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes.

During 2021 the below changes occurred for the Group:

Group	Total £'000
At 1 January 2021	273,539
Drawdown of interest bearing borrowings	27,000
Repayments of interest-bearing borrowing	(34,375)
Finance costs	12,859
Interest paid on financing activities	(11,366)
At 31 December 2021	267,657

During  2021 the below changes occurred for the Company:

Company	Total £'000
At 1 January 2021	167,348
Drawdown of interest bearing borrowings	27,000
Repayments of interest-bearing borrowing	(12,000)
Finance costs	9,678
Interest paid on financing activities	(8,844)
At 31 December 2021	183,182

 

During 2020 the below changes occurred for the Group:

Group	Total £'000
At 1 January 2020	206,792
Drawdown of interest bearing borrowings	359,648
Repayments of interest-bearing borrowing	(289,013)
Finance costs	14,323
Interest paid on financing activities	(18,211)
At 31 December 2020	273,539

During 2020 the below changes occurred for the Company:

Company	Total £'000
At 1 January 2020	130,741
Drawdown of interest bearing borrowings	312,500
Repayments of interest-bearing borrowing	(272,752)
Finance costs	12,042
Interest paid on financing activities	(15,183)
At 31 December 2020	167,348

The table below analyses the Group's financial liabilities into relevant maturity groupings as well as expected future interest and commitment fee costs based on the remaining period at the Consolidated Statement of Financial Position date to the final scheduled maturity date.

2021 Group Financial instrument	< 1 year £'000	1 - 5 years £'000	More than 5 years £'000	Total £'000
Credit facility	49,435	185,545	35,000	269,980
Interest and commitment fees payable	(96)	(2,944)	717	(2,323)
Total exposure	49,339	182,601	35,717	267,657

The below table analyses the Company's financial liabilities into relevant maturity groupings as well as expected future interest and commitment fee costs based on the remaining period at the Statement of Financial Position date to the final scheduled maturity date.

 

2021 Company Financial instrument	< 1 year £'000	1 - 5 years £'000	More than 5 years £'000	Total £'000
Credit facility	15,000	170,000	-	185,000
Interest and commitment fees payable	72	(1,890)	-	(1,818)
Total exposure	15,072	168,110	-	183,182

 

The below table analyses the Group's financial liabilities into relevant maturity groupings as well as expected future interest and commitment fee costs based on the remaining period at the Consolidated Statement of Financial Position date to the final scheduled maturity date.

2020 Group Financial instrument	< 1 year £'000	1 - 5 years £'000	Total £'000
Credit facility	20,865	256,490	277,355
Interest and commitment fees payable	9,691	18,189	27,880
Total exposure	30,556	274,679	305,235

 

The below table analyses the Company's financial liabilities into relevant maturity groupings as well as expected future interest and commitment fee costs based on the remaining period at the Statement of Financial Position date to the final scheduled maturity date.

2020 Company Financial instrument	< 1 year £'000	1 - 5 years £'000	Total £'000
Credit facility	-	170,000	170,000
Interest and commitment fees payable	7,310	16,448	23,758
Total exposure	7,310	186,448	193,758

 

18. Deemed Loan

The Company has two deemed loans as at 31 December 2021 (two as at 31 December 2020). Deemed loans can only relate to the Company as they relate to loans originated by the Company and subsequently sold to a special purpose entity. Although the loans are not legally owned by the Company, the Company maintains the economic benefit of the underlying assets and therefore does not meet the criteria to derecognise as the economic exposure associated with the rights inherent in the asset are maintained. As the requirements of derecognition have not been met the Company has a deemed loan liability to the special purpose entity. As at the 31 December 2021 the Company had the below deemed loans:

Opening as at 1 January 2021 £'000	(Redemptions)/Novations £'000	Closing as at 31 December 2021 £'000
103,719	(21,393)	82,326
103,719	(21,393)	82,326

As at the 31 December 2020 the Company had the below deemed loan:

Opening as at 1 January 2020 £'000	(Redemptions)/Novations £'000	Closing as at 31 December 2020 £'000
78,612	25,107	103,719
78,612	25,107	103,719

 

 

19. Ordinary Share Capital

The table below details the issued share capital of the Company as at the date of the Financial Statements.

	31 December 2021	31 December 2020
No. Issued, allotted and fully paid ordinary shares of £0.01 each	35,259,741	35,259,741
Cost £'000	352	352

The table below shows the movement in shares during the period to 31 December 2021:

	Shares in issue at the beginning of the period	Buyback of Ordinary Shares	Shares in issue at the end of the period
Ordinary Shares	35,259,741	-	35,259,741
Treasury Shares	4,190,178	-	4,190,178

 

20.  Special Distributable Reserve

At a general meeting of the Company held on 14 December 2015, special resolutions were passed approving the cancellation of the amount standing to the credit of the Company's share premium account as at 23 December 2015.

Following the approval of the Court and the subsequent registration of the Court order with the Registrar of Companies on 21 March 2016, the reduction became effective. Accordingly, £98.1 million, previously held in the share premium account, has been transferred to the special distributable reserve as disclosed in the Statement of Financial Position.

21.  Investments in SUBSIDIARIES

On 20 June 2019 the Group incorporated Sting Funding Limited ("Sting"), a limited Company incorporated under the law of England and Wales. The company is registered at 1 Bartholomew Lane, London, United Kingdom, EC2N 2AX. The Group is considered to control Sting through holding 100 percent of the issued shares. As a result, the financial statements for the years ended 31 December 2020 and 31 December 2021 are prepared on a consolidated basis. Sting became active on 28 August 2019 when it drew down on a debt facility backed by commercial and second charge residential mortgages.

The Company also consolidates a structured entity, Bud Funding Limited ("Bud"), a limited company incorporated under the law of England and Wales. The company is registered at 1 Bartholomew Lane, London, United Kingdom, EC2N 2AX. The Company is considered to control Bud through its exposure to the variable returns of the vehicle through holding of a junior note issued by it and by way of control exerted through its involvement in the initial creation of Bud and in the absence of another entity now having control. Bud was incorporated on 2 November 2020 and the junior note was funded on 2 December 2020, at which point the control began.

The assets of the subsidiaries are credit assets that are included as part of the impairment policies of the group and no impairment triggers have been identified for the subsidiaries.

22.  Investments in associates

As at 31 December 2021, the Company has no associates. In the prior year, the Company disposed of its investment in Allium in August 2020 with no gain or loss recognised on disposal.

 

23.  Net Asset Value per Ordinary Share

	31 December 2021	31 December 2020
Net asset value per ordinary share pence	1,019.1p	1,013.1p
Net assets attributable £'000	359,342	357,232

 

The net asset value per ordinary share as at 31 December 2021 is based on net assets at the year-end of £359.3 million and on 35,259,741 ordinary shares in issue at the year-end. The net asset value per ordinary share as at 31 December 2020 is based on net assets at the year-end of £357.2 million and on 35,259,741 ordinary shares in issue at the year-end.

24.  Contingent Liabilities and Capital Commitments

As at 31 December 2021 there were no contingent liabilities or capital commitments for the Group (2020: None). The Group had £90.0 million (2020: £95.3 million) of undrawn committed structured credit facilities as at 31 December 2021 and £113.7 million (2020: £48.2 million) of undrawn commitments in relation to secured real estate loans.

25. Related Party Transactions and Transactions with the Investment Manager

IAS 24 'Related party disclosures' requires the disclosure of the details of material transactions between the Company and any related parties. Accordingly, the disclosures required are set out below:

Directors - The remuneration of the Directors is set out in the Directors' Remuneration Report on pages 53 to 56. There were no contracts subsisting during or at the end of the year in which a Director of the Company is or was interested and which are or were significant in relation to the Company's business. There were no other transactions during the year with the Directors of the Company. The Directors do not hold any ordinary shares of the Company.

At 31 December 2021, there was £nil (2020: £nil) payable to the Directors for fees and expenses.

Joanne Lake was appointed as a Director on 1 January 2021 and is a Director of Morses Club plc ("Morses"), an entity for which the Company previously provided a facility.

Investment Manager - Pollen Street Capital Limited (the 'Investment Manager'), a UK-based company authorised and regulated by the FCA, has been appointed the Company's investment manager and AIFM for the purposes of the AIFMD. Details of the services provided by the Investment Manager and the fees paid are given on Note 5 to the financial statements.

During the year the Group paid £9.72 million (2020: £8.24 million) of fees and at 31 December 2021, there was £4.47 million (2020: £3.34 million) payable to the Investment Manager.

The Group considers all transactions with the Manager or companies that are controlled by the Manager as related party transactions.

Oplo Group Limited ("Oplo", formerly 1st Stop Group) is an English based consumer lender and was owned by funds managed by an affiliate of the Investment Manager. During the year the Group provided a structured facility to Oplo that is secured on a granular pool of consumer loans. As at 31 December 2021 the structured facility was £29.7 million drawn (31 December 2020: £35.0 million). The Group also had a forward flow facility in place with Oplo in which the Group provided £26.7 million in 2021 (31 December 2020: £22.3 million) with the total pool of loans having an outstanding balance of £47.6 million as at 31 December 2021 (31 December 2020: £30.0 million). The company also invested £2m in Tandem Bank Limited.

Shawbrook Group PLC ("Shawbrook") is a specialist SME and consumer lending and savings bank. Shawbrook is 50 percent owned by funds that are managed by the Investment Manager. During the Year the Company sold its Shawbrook bond holdings. The bonds were acquired in the secondary market in 2020 from an unrelated third party at an arm's length price. The exposure at 31 December 2021 was £0m (31 December 2020: £11.4m). During the year, the Company carried out FX transactions with Lumon Risk Management LTD ("Lumon", formerly Infinity International Limited) in relation to Euro and USD derivative transactions. Lumon is owned by a fund that is managed by an affiliate of the Investment Manager. The exposure as at 31 December 2021 is disclosed in Note 12.

During the year, the Company sold holdings in related parties Freedom, Deko and Bumblebee portfolios which consisted of £9 million of assets. The Company also sold a portfolio of Avant loans for £18 million.

26. Ultimate Controlling Party

It is the opinion of the Directors that there is no ultimate controlling party.

27. Subsequent Events

On 23 February 2022, a dividend of 20.0 pence per ordinary share was approved for the final quarter of 2021.

Shareholders Information

Directors, Portfolio Manager and Advisers

 

Directors	Administrator
Robert Sharpe	Apex Fund Services (UK) Ltd
Jim Coyle	6th Floor, Bastion House
Richard Rowney	140 London Wall
Joanne Lake	London EC2Y 5DN
all at the registered office below	England
Registered Office	Depositary
6th Floor	Indos Financial Limited
65 Gresham Street	The Scalpel, 18th Floor, 52 Lime Street
London EC2V 7NQ	London EC3M 7AF
England	England
Investment Manager and AIFM	Registrar
Pollen Street Capital Limited	Computershare Investor Services PLC
11 - 12 Hanover Square	The Pavilions, Bridgewater Road
London W1S 1JJ	Bristol BS99 6ZZ
England	England
Financial Advisers and Brokers	Company Secretary
Liberum Capital Limited	Link Company Matters Limited
Level 12, Ropemaker Place	6th Floor
25 Ropemaker Place	65 Gresham Street
London EC2Y 9LY	London EC2V 7NQ
England	England
Cenkos Securities plc	Independent Auditors
6.7.8 Tokenhouse Yard	PricewaterhouseCoopers LLP
London EC2R 7AS	7 More London Riverside
England	London SE1 2RT
	England
Custodian
Sparkasse Bank Malta PLC
101 Townsquare
Sliema SLM3112
Malta
Website
http://www.honeycombplc.com/
Share Identifiers
ISIN: GB00BYZV3G25
Sedol: BYZV3G2
Ticker: HONY