8 September 2022
Secured Income Fund plc
("SSIF" or the "Company")
Annual Financial Report
For the year ended 30 June 2022
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| A copy of the Company's Annual Report and Financial Statements for the year ended 30 June 2022 will shortly be available to view and download from the Company's website, http://www.securedincomefundplc.co.uk/. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into or forms part of this announcement.
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| Enquiries to: |
| Directors David Stevenson (Chair) Susan Gaynor Coley Brett Miller
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tel: +44 7973 873785 tel: +44 7977 130673 tel: +44 7770 447338
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| finnCap Ltd. Corporate Finance: William Marle Sales: Mark Whitfeld
| tel: +44 20 7220 0500
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| The contents of this announcement have been extracted from the Company's Annual Report, which is currently in print and will be distributed within the week. The information shown for the years ended 30 June 2022 and 30 June 2021 does not constitute statutory accounts and has been extracted from the full accounts for the years ended 30 June 2022 and 30 June 2021. The reports of the auditors on those accounts were unqualified and did not contain adverse statements under sections 498(2) or (3) of the Companies Act 2006. The accounts for the year ended 30 June 2021 have been filed with the Registrar of Companies. The accounts for the year ended 30 June 2022 will be delivered to the Registrar of Companies in due course. |
| Strategic Report | ||
| Key Points | ||
| | 30 June 2022 | 30 June 2021 |
| Net assets [1] | £10,916,000 | £19,106,000 |
| NAV per Ordinary Share | 20.73p | 36.28p |
| Share price | 12.00p | 42.50p |
| (Discount)/premium to NAV | (42.1)% | 17.1% |
| Loss for the year | £(554,000) | £(11,017,000) |
| Dividend per share declared in respect of the year | 0.75p [2] | 8.50p |
| B Share issue and redemption per Ordinary Share declared in respect of the year | 14.50p | 19.50p |
| Total return per Ordinary Share (based on NAV) [3] | -2.9% | -25.6% |
| Total return per Ordinary Share (based on share price) [3] | -37.6% | -7.8% |
| Ordinary Shares in issue | 52,660,350 | 52,660,350 |
| [1] | In addition to the Ordinary Shares in issue, 1 Management Share of £1 is in issue (2021: 1) (see note 20). |
| [2] | On 2 September 2022, the Board declared a dividend of 0.75p per Ordinary Share for the year ended 30 June 2022, which is to be paid on 7 October 2022. It is the Board's intention that the Company will pay sufficient dividends each financial year to maintain investment trust status under the Corporation Tax Act 2010 for so long as the Company remains listed. |
| [3] | Total return per Ordinary Share has been calculated by comparing the NAV or share price, as applicable, at the start of the year with the NAV or share price, as applicable, plus dividends and B Share redemptions paid, at the year end. |
| Chairman's Statement |
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| Introduction |
| I am pleased to provide Shareholders with my Chairman's Statement, covering the financial year from 1 July 2021 to 30 June 2022. Over the reporting period, Secured Income Fund plc (the "Company") has continued to focus on returning capital to Shareholders efficiently and in a timely manner. Since the wind down proposals were adopted on 17 September 2020, the Company has maintained regular distributions to Shareholders and has returned £22.4 million (equivalent to 42.5p per Ordinary Share) through a combination of dividends and a B Share Scheme.
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| Performance |
| For the reporting year ended 30 June 2022, the Company suffered a net loss of £0.6 million and loss per Ordinary Share of 1.05p (compared to a loss of £11.0 million and loss per Ordinary Share of 20.92p for the year ended 30 June 2021). The Company's NAV at 30 June 2022 was £10.9 million (20.73p (cum income) per Ordinary Share) compared to £19.1 million (36.28p per Ordinary Share) as at 30 June 2021. £7.6 million of the £8.2 million reduction in the NAV in the period related to the B Share distributions of £7.6 million, with the remainder being attributable to the net loss of £0.6 million. |
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| During the reporting period, the IFRS 9 provision across some of the direct loans has been increased further. Ongoing monitoring of the Film Production Financing portfolio has highlighted further deterioration of the expected cash flows. This portfolio remains heavily impacted by the changes in operating practises resulting from the Covid-19 pandemic. The Company has engaged third party specialists in the hope of maximising returns for Shareholders for the remaining film portfolio.
Furthermore, there continues to be a delay in receiving the full principal repayment from the SME loan company as they have yet to secure a refinance of the facility. However, the Company has successfully negotiated monthly capital repayments, which commenced in February 2022, and remains in regular dialogue with the Borrower to assess the ongoing position.
Further information about the status of the remaining loans along with the respective assigned provisions is provided within the Investment Report.
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| During the reporting period, the Company traded at an average discount to NAV of 20.9%.
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| No foreign exchange hedging has been employed during the reporting period. Non-Sterling cash balances are converted into Sterling at the earliest opportunity. A table showing the FX exposure in the portfolio as at 30 June 2022 has been included in note 23. |
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| The portfolio exposure by maturity, geography, type and currency are presented in the Company Analytics section in the Annual Report and Financial Statements. |
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| Corporate Activity |
| The Company has focused on the expeditious return of capital to investors. Costs have been monitored carefully and no new underwriting commitments were made in the period.
As part of its ongoing management of the Company's running costs, a Special Resolution was proposed and approved at the Company's General Meeting held on 16 December 2021. Once the Company's NAV falls below £7 million, the Board will notify the London Stock Exchange of its intention to cancel the Company's admission to trading on the Specialist Fund Segment of the Main Market (the "Cancellation of Trading"). |
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| Management Arrangements |
| On 20 August 2021, the Company announced that it had reached an agreement with KKV Investment Management Ltd and its AIFM, Kvika Securities Limited, to terminate the Investment Management Agreement ("IMA"); the IMA was duly terminated on 31 December 2021. |
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| The Company had its application to become a small self-managed AIFM approved by FCA and entered into the register of the Small Registered UK AIFMs with effect from 31 December 2021. |
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| In order to assist the Board with the management of the portfolio, with effect from 1 January 2022, the Company has entered into a consultancy agreement to secure the services of one of the individuals who has the greatest knowledge of the Company's assets. In addition, Brett Miller, a Director of the Company who is highly experienced in this area, has continued to be directly involved in the managed wind down of the Company's portfolio.
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| The Board believes that the Company has the necessary resource and expertise for the efficient and effective realisation of the balance of the portfolio. However, the Board will engage specialist consultants where it considers that such appointments will assist in maximising returns for, and/or expediting capital returns to, Shareholders.
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| Dividends |
| Following the decision to proceed with a managed wind-down, the Board reviewed the dividend policy and decided to cease paying monthly dividends and is instead returning excess capital as and when the Company has excess cash reserves available for distribution. However, it is the Board's intention that the Company will pay sufficient dividends each financial year to maintain investment trust status under the Corporation Tax Act 2010 for so long as the Company remains listed. Therefore, On 2 September 2022, the Board declared a dividend of 0.75p per Ordinary Share for the year ended 30 June 2022, which is to be paid on 7 October 2022. |
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| Capital Distributions |
| The Company adopted a B Share scheme, following approval by Shareholders at the General Meeting held on 23 March 2021. The Company is therefore able to issue redeemable B Shares to Shareholders which are subsequently redeemed for cash, this allows the capital returns to be made in a more tax efficient manner for some Shareholders.
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| During this reporting period, the Board distributed £7.6 million using the B Share Scheme, which is equivalent to 14.5p per Ordinary Share.
To date, a total of £17.9 million has been distributed to Shareholders via the B share scheme since the commencement of the managed wind down, this is equivalent to 34.0p per Ordinary Share. Moreover, an additional £4.5 million, equivalent to 8.5p per Ordinary Share, had been distributed in the form of dividends prior to the B share scheme being set up.
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| The quantum and timing of a Return of Capital to Shareholders following receipt by the Company of the net proceeds of realisations of investments will be dependent on the Company's liabilities and general working capital requirements. Accordingly, any future Return of Capital will continue to be at the discretion of the Board, which will announce details of each Return of Capital, including the relevant Record Date, Redemption Price and Redemption Date, through an RNS Announcement, whilst the Company remains listed, a copy of which will be posted to Shareholders. The Board intends for a further capital return to be made within the next three months. |
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| Shareholder Engagement |
| The Board has engaged with Shareholders over the reporting period, taking feedback and responding to their recommendations where appropriate. Brett Miller has led this activity and will continue to do so as we continue to wind down the Company. |
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| Outlook |
| The key focus of the Board remains resolute, achieving a balance between maximising the value of the remaining assets and ensuring timely returns of capital to Shareholders. The Board successfully navigated a smooth transition of the management back to the Company by the start of 2022. The Company is efficiently positioned to finalise the realisation of the remaining assets, which the Board expects to be largely achieved within the next 18 months to two years.
The Company is now close to reaching the £7 million NAV which will activate the Special Resolution that was approved in December 2021. The Board will keep Shareholders abreast of developments and dates over the next few months. |
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| We thank investors for their continued support throughout this period and hope to deliver investors total proceeds as close as possible for the remaining NAV. We shall keep investors informed of any changes as they occur. |
| David Stevenson |
| Chairman |
| 7 September 2022 |
| Investment Report |
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| Overview |
| The Company is continuing to work closely with Borrowers, whilst optimising the return of capital to Shareholders in as expeditious a way as possible. Since the wind-down of the Company commenced in September 2020, 8.5 pence per Ordinary share (excluding the 0.75p per Ordinary Share dividend to be paid on 7 October 2022) has been returned to Shareholders via dividend distribution and 34 pence per Ordinary share via a B Share Scheme, which was adopted to ensure more tax efficient capital distributions for Shareholders. |
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| The Investment Management Agreement between the Company and KKV Investment Management Ltd was terminated on 31 December 2021. There has been a smooth transition of management back to the Company, which has been facilitated by retaining key personnel. Furthermore, with effect from 31 December 2021, the Company has been approved by the FCA as a Small Registered UK AIFM. |
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| Portfolio |
| There were ten direct loans in the portfolio as at 30 June 2022, with an average carrying value of £0.8 million per loan. A direct loan to a UK leasing company that had been in place since July 2017 was fully repaid at the end of September 2021. |
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| There has been further increases in IFRS 9 impairment provisions for some of the direct loans during the reporting period. In particular, the six film financings have suffered the effects of the Covid-19 pandemic with a marked deterioration of the expected cash flows, through cancelled film festivals and cinema screenings, and changes in operating practices whereby future sales are expected to be made via longer tail earn-outs, instead of the customary large upfront payments. |
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| At the start of the reporting period, some of the legacy loans that formed part of the portfolio prior to April 2017 were repaid in full or a settlement was reached. The final performing loan that remained on the UK peer to peer loan platform was repaid in full in August 2021. In September 2021, the agreed settlement value was received for the US promissory note. |
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| The remaining legacy loans are fully impaired under IFRS 9 and therefore have zero carrying value assigned to them. This is due to various factors such as continuous delays in repayment, depleted borrower assets and uncertainties in relation to a borrower's going concern. The Company has continued to engage with each of these Borrowers for updates and will reassess the positions should there be any changes in circumstances. |
| Direct Loans | ||||||||
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Borrower | Principal Balance Outstanding as at 30 June 2022 £ | ECL provision at 30 June 2022 £ | Loan Carrying Value at Amortised Cost [1] at 30 June 2022 £ | Amortisation/ Bullet repayment/ other |
Asset Type |
Currency |
Yield | |
| Borrower 1 | £3,141,262 | £9,424 | £3,131,838 | Pass-through amortisation | SME and Leasing Fund | EUR | Variable | |
| Borrower 2 | £4,001,504 | £1,200,451 | £2,801,053 | Bullet repayment/other | Wholesale Lending | GBP | 10% | |
| Borrower 3 | £3,079,323 | £1,539,662 | £1,539,661 | Interest only for 12 months, then amortisation | Medical Services | USD | 12% | |
| Borrower 4 | £1,617,366 | £1,323,850 | £293,516 | Cash sweep | Film Production Financing | USD | 12% | |
| Borrower 5 | £1,624,925 | £1,490,404 | £134,521 | Cash sweep | Film Production Financing | GBP | 11% | |
| Borrower 6 | £1,537,010 | £1,415,992 | £121,018 | Cash sweep | Film Production Financing | GBP | 11% | |
| Borrower 7 | £104,351 | £313 | £104,038 | Scheduled amortisation | Laser and LED Manufacturer | GBP | 10% | |
| Borrower 8 | £642,559 | £597,347 | £45,212 | Cash sweep | Film Production Financing | GBP | 12% | |
| Borrower 9 | £506,945 | £476,563 | £30,382 | Cash sweep | Film Production Financing | GBP | 12% | |
| Borrower 10 | £2,395,295 | £2,365,292 | £30,003 | Cash sweep | Film Production Financing | GBP | 12% | |
| Direct Loans Total | £18,650,540 | £10,419,298 | £8,231,242 | | | | | |
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| [1] The carrying values of loans at amortised cost disclosed in the table above do not include capitalised transaction fees, which totalled £15,715 at 30 June 2022. | ||||||||
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| The following provides a narrative relating to our direct loan investments. Names of counterparties have been omitted for commercial and business sensitivity reasons. | ||||||||
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| Irish SME and Leasing Fund investment (Borrower 1) - 28.7% of NAV | ||||||||
| This portfolio of approximately 20 underlying loans has continued to perform well. Most of the underlying loans are delivering income and the manager has continued to make healthy distributions to the Company during the reporting period. As the Fund is in its harvest phase, the capital distributions are expected to accelerate as the loans mature or are refinanced. | ||||||||
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| During the reporting period, the Company has received €1,171,061 in capital repayments. A further €286,621 has been received in capital repayments post year end. | ||||||||
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| SME Loan company (Borrower 2) - 25.7% of NAV |
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| This loan has been in place since May 2017 and is secured against a wholesale portfolio of working capital SME loans.
The Borrower was initially due to make a bullet repayment at the end of September 2021. An extension was granted until the end of 2021 so the Borrower could source new funding to refinance the facility, this revised date was not met. The Borrower is continuing to pursue refinance opportunities.
In the meantime, material amortisation has taken place during the second half of this reporting period. The Company has received £1,631,056 by way of capital repayments as a result of active collection efforts undertaken. A further £579,433 has been received in capital repayments post year end. In addition to this, monthly interest on the loan continues to be serviced by the Borrower. |
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| US healthcare services company (Borrower 3) - 14.1% of NAV |
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| This loan was made to a company specialising in ancillary medical services to a number of hospitals in the American Midwest including optometry, audiology, dentistry and podiatry. A key aspect of the security package is that there is a parent company guarantee in place over all scheduled interest and principal repayments.
The Borrower is in default as it sold its core business assets, rendering the business economically unviable. Several Reservations of Rights letters have been issued to the Borrower and Guarantor in relation to this and certain payment defaults.
After some delays in payment, monthly payments of principal and interest have been made on schedule recently. At the time of writing, payments are up to date but we will be continuing to monitor these receivables very closely. Whilst there is necessarily a sizeable IFRS 9 provision against this position as it is in unremedied default, we believe it is in the Guarantor's best interest to ensure the loan is repaid in full as per the schedule. All rights over the Guarantor have been reserved. |
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| Media financing (Borrowers 4, 5, 6, 8, 9 and 10) - 6.0% of NAV |
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| Ongoing monitoring of the Film Production Financing portfolio has highlighted further deterioration of the expected cash flow. The portfolio, comprising of six film financings, has been heavily impacted by the changes in operating practises resulting from the Covid-19 pandemic. This has resulted in significant delays in recouping the outstanding balances within the "contracted cash flow" element (comprising Tax Credit, Receipts and Presold Income), hampered further by the political uncertainty across some of the remaining territories. Moreover, the level of uncertainty across the "non-contractual Future Sales" element, which is considered mezzanine in nature and carries a higher risk profile, has continued to increase.
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| The Company remains in regular dialogue with the borrower to closely monitor receipts, expectations of future sales and assess any changes to the cashflows. |
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| External specialists have been engaged by the Company to independently value these positions and provide assistance in identifying the best approach in realising maximum value for Shareholders given the specialist nature of the sector. |
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| LED manufacturer in Ireland (Borrower 7) - 1.0% of NAV |
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| This is a secured term loan that has been in place since May 2017 and is secured by a guarantee from the parent company, a debenture over the borrower and a charge over equipment purchased via the Capex portion of the facility. |
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| During the reporting period, with the Company's consent, the guarantor was sold to a US company for approximately 40% premium to the share price. |
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| The loan continues to make timely amortised payments and is due to mature in December 2022. |
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| Legacy portfolio | |||||
| Borrower | Principal Balance Outstanding at 30 June 2022 £ | ECL provision at 30 June 2022 £ | Loan Carrying Value at Amortised Cost at 30 June 2022 £ | Currency | Yield |
| Borrower 11 | £1,218,063 | £1,218,063 | - | GBP | - |
| Borrower 12 | £1,000,000 | £1,000,000 | - | GBP | - |
| Borrower 13 | £415,714 | £415,714 | - | GBP | - |
| Borrower 14 | £320,566 | £320,566 | - | EUR | - |
| Legacy Loans Total | £2,954,343 | £2,954,343 | - |
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| The following provides a narrative relating to the legacy loans within the portfolio. |
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| UK Venture Debt (Borrower 11) - 0.0% of NAV |
| This broadband company was previously restructured and has been facing key decisions with regards to its going concern. Therefore, we have continued to fully provide for this position and will reassess once there is further clarity on next steps.
The broadband company is in advanced talks to be acquired by a competitor which has a new generation product. The combined entity would use the Borrower's existing customer base to accelerate sales of their new product. The Company will remain as an investor of this combined entity in the hope of achieving a positive resolution for its Shareholders. |
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| UK Offshore platform (Borrower 12) - 0.0% of NAV |
| The final credit from this offshore platform has been in place since early 2017 and is a real estate linked loan to a developer in Gibraltar. Despite continued assurances, we have not been repaid, and the position (including the accrued penalty interest) remains fully impaired, given the continuous delays. We remain in regular contact with the platform to monitor progress and will continue to press for repayment. However, we remain uncertain of the balance that will be recovered. |
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| Small company bond platform (Borrower 13) - 0.0% of NAV |
| The only outstanding debt from this platform was a recruitment business that had undergone a protracted recovery process through the courts. This loan is fully impaired. |
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| Spanish peer to peer loan platform (Borrower 14) - 0.0% of NAV |
| We have assigned zero probability of any further collections on the remaining loans within the portfolio. The platform is engaged in ongoing legal proceedings with the borrowers of the four remaining loans on the platform. |
| Outlook |
| The Company has continued to make good progress with the realisation of the portfolio to date. |
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| The Company is working closely with the relevant borrowers to ensure all parties remain aligned to our objective of achieving the maximum returns for Shareholders from the outstanding loans. The Company has also engaged specialists to enhance returns where possible. |
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| We would like to thank Shareholders for their continued support and will share any updates on the progress over the upcoming months. |
| Brett Miller |
| Director |
| 7 September 2022 |
| Principal Risks and Uncertainties
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| Risk is inherent in the Company's activities, but it is managed through an ongoing process of identifying and assessing risks and ensuring that appropriate controls are in place. The key risks faced by the Company, along with controls employed to mitigate those risks, are set out below.
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| Macroeconomic risk Adverse macroeconomic conditions may have a material adverse effect on the Company's yield on investments, default rate and cash flows. The Board and (until the termination of Investment Management Agreement on 31 December 2021), KKV Investment Management Limited (the "Former Investment Manager") keep abreast of market trends and information to try to prepare for any adverse impact.
The Company's assets are diversified by geography, asset class, and duration, thereby reducing the impact that macroeconomic risk may have on the overall portfolio.
Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows and/or fair values of the Company's investments. Exposure to interest rate risk is limited by the use of fixed rate interest on the majority of the Company's loans, thereby giving security over future loan interest cash flows.
Currency risk is the risk that changes in foreign exchange rates will impact future profits and net assets. |
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| Covid-19 The Covid-19 pandemic is a risk to the global economy. Details of the macroeconomic impact, as it may affect the Company, are provided in the Chairman's Statement and Investment Report. The situation continues to change and future cashflows and valuations are more uncertain and may be more volatile than pre-pandemic. Indeed, the level of estimation uncertainty and judgement for the calculation of expected credit losses has increased as a result of the economic effects of the Covid-19 pandemic (see note 4 for further details). However, the Directors believe that the Company is well placed to survive the impact of the Covid-19 pandemic, thereby enabling the Company to realise its assets in an orderly manner. |
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| Russian Invasion of Ukraine and the subsequent energy crisis Russia's invasion of Ukraine is a risk to the global economy. The invasion itself and resulting international sanctions on Russia are believed to have already caused substantial economic damage to that country, which is likely to worsen the longer the sanctions are in place, and has had some wider global effect on the supply and prices of certain commodities and consequently on inflation and general economic growth of the global economy. The effects vary from country to country, depending, for example, on their dependence on Russian energy supplies, particularly gas, which cannot be so easily transported and substituted as oil. The full effects will take time to flow through fully and manifest themselves in the balance sheets of companies and impact their ability to repay loans. In this context, we can only express reservations on the near-term impact on credit risk and the impairment of securities, which may be more volatile as a result of the Russian invasion and the subsequent energy crisis. |
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| Credit risk The Company invests in a range of secured loan assets mainly through wholesale secured lending opportunities, secured trade and receivable finance and other collateralised lending opportunities. The Company is also exposed to direct loans. Significant due diligence is undertaken on the borrowers of these loans and security taken to cover the loans and to mitigate the credit risk on such loans. |
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| The key factor in underwriting secured loans is the predictability of cash flows to allow the borrower to perform as per the terms of the contract. |
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| Following the change of investment objective on 17 September 2020, the Company ceased to make any new investments or to undertake capital expenditure except where, in the opinion of both the Board and the Former Investment Manager (or, where relevant, the Former Investment Manager's successors): - the investment is a follow-on investment made in connection with an existing asset in order to comply with the Company's pre-existing obligations; or - failure to make the follow-on investment may result in a breach of contract or applicable law or regulation by the Company; or - the investment is considered necessary to protect or enhance the value of any existing investments or to facilitate orderly disposals.
The Company's assets are diversified by geography, asset class, and duration, thereby reducing the impact that investment risk may have on the overall portfolio. This diversification may reduce as assets are realised, but is an acceptable, and to some extent unavoidable, risk associated with the realisation process.
The credit risk associated with the investments is reduced not only by diversification but also by the use of security. Despite the use of security, credit risk is not reduced entirely and so the Board monitors the recoverability of the loans (on an individual loan basis) each month and impairs loans in accordance with IFRS 9 Financial Instruments. |
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| Regulatory risk The Company's operations are subject to wide ranging regulations, which continue to evolve and change. Failure to comply with these regulations could result in losses and damage to the Company's reputation.
The Company employs third party service providers to ensure that regulations are complied with. |
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| Reputational risk Any adverse impact on the Company's reputation would likely result in a fall in its share price, thereby adversely affecting Shareholders.
Details of the premium/discount of the share price to NAV are disclosed in the Key Performance Indicators section of the Company's Annual Report and Financial Statements. |
| Environment, Employee, Social and Community Issues
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| As an investment company, the Company does not have any employees or physical property, and most of its activities are performed by other organisations. Therefore, the Company does not combust fuel and does not have any greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions producing sources under the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.
When making investment decisions, the Former Investment Manager had not, historically, considered the impact that an entity in which the Company invested may have on the community. However, whilst the Board believes that all companies have a duty to consider their impact on the community and the environment, the Company does not have a direct impact on the community or environment and, as a result, does not maintain policies in relation to these matters. |
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| The Board is committed to achieving the best possible risk-adjusted returns through integrating Environmental, Social and Governance ("ESG") considerations into its core investment analysis and decision-making process, whilst being mindful of the managed wind-down of the Company. The Board and Former Investment Manager recognised the value in considering ESG risks and the Former Investment Manager had adopted the following ESG approach in conducting its business: |
| · Taking into account the non-financial performance of target companies, specifically related to governance, social and environmental policy. · Adopting responsible and ethical approach to governance including: - Remuneration of senior management and a policy on bonuses that is compliant with international standards; - Implementation of compliance policies and procedures and on-going monitoring of the firm's systems and controls; - Implementation of risk controls throughout the business; and - Consideration of our ethical obligations in all business conduct (anti money laundering, anti-corruption, reputational due diligence). · Encouraging a human resource policy which values and respects all staff members through: - Objective criteria to measure performance and competencies; - Support programs requiring senior management involvement in all staff members career progression; and - Equality across all staff irrespective of role, gender, race, age, religious belief or sexual orientation. |
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| Gender Diversity
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| The Board of Directors of the Company currently comprises two male Directors and one female Director. Further information in relation to the Board's policy on diversity can be found in the Directors' Remuneration Report in the Company's Annual Report and Financial Statements. |
| Key Performance Indicators |
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| The Board uses the following key performance indicators ("KPIs") to help to assess the Company's performance against its objectives. Further information on the Company's performance is provided in the Chairman's Statement and the Investment Report. |
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| Cash returned to Shareholders |
| The Company distributes at least 85% of its distributable income by way of dividends. During any year, the Company may retain some of the distributable income and use these to smooth future dividend flows. |
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| The Company has announced dividends of £395,000 (0.75p per Ordinary Share) for the year ended 30 June 2022 (2021: £4,476,000 (8.50p per Ordinary Share)), being an 11% retention of distributable income (2021: far in excess of distributable income) for the year (see notes 5 and 21 for further details). To ensure the tax efficient streaming of qualifying interest income, the Company may announce an additional dividend for the year ended 30 June 2022, once the tax advisers have finalised the tax computations. |
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| Following the change in investment objective on 17 September 2020, the Directors consider it important to measure the amount of capital returned to Shareholders. During the year, £7,636,000 (2021: £10,269,000) (see note 5) was returned to Shareholders by way of B Share redemptions and £nil (2021: £5,090,000) (see note 5) was paid to Shareholders by way of dividends. In addition, during 2021 49,999 Management Shares were bought back for £49,999 and cancelled (see note 20). |
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| NAV and total return |
| The Directors regard the Company's NAV as a key component to delivering value to Shareholders, but believe that total return (which includes dividends and B Share redemptions) is the best measure for shareholder value.
Details of the NAV and total return are disclosed in the Key Points section of this Annual Financial Report. |
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| Premium/discount of share price to NAV |
| The Board understand the importance of minimising the discount to NAV at which the Company's Ordinary Shares trade and the Board regularly monitors the premium/discount of the price of the Ordinary Shares to the NAV per share. During the year, the Company traded at an average discount to NAV of 20.9% (2021: 8.7%). At 30 June 2022, the shares were trading at 12.00p, a 42.1% discount to NAV (2021: 42.50p, a 17.1% premium to NAV). |
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| David Stevenson |
| Chairman |
| 7 September 2022 |
| Promoting the Success of the Company |
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| The following disclosure outlines how the Directors have had regard to the matters set out in Section 172(1)(a) to (f) of the Companies Act 2006. |
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| The Board considers the needs of a number of stakeholders when considering the long-term future of the Company. The key stakeholders with which the Board has liaised during the year ended 30 June 2022 were: · Shareholders; and · Key service providers.
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| Shareholders |
| The Company's significant Shareholders at the year end can be found in the Directors' Report in the Company's Annual Report and Financial Statements. |
| |
| When making principal decisions the Board consider it imperative to analyse the views of the Company's investors to ensure that its decisions are aligned with the wishes of Shareholders and that the Company can achieve its Investment Policy (as disclosed in the Company's Annual Report and Financial Statements). The key performance indicators have been considered on an ongoing basis as part of the Board's decision making process. |
| |
| Details of how the Directors communicate with Shareholders can be found in the Corporate Governance Report in the Company's Annual Report and Financial Statements. |
| |
| Other than the routine engagement with investors regarding strategy and performance, the Company's continuation was discussed with investors. A continuation vote was held on 19 June 2020 that, in line with the Directors' recommendation, did not pass. A further general meeting of the Company was held on 17 September 2020 at which a special resolution approved the managed wind-down of the Company and the adoption of the new investment policy of the Company. |
| |
| Key service providers |
| Details of the Company's key service providers can be found in the Directors' Report in the Company's Annual Report and Financial Statements. |
| |
| The key service providers are fundamental to the Company's ability to continue in the same state as any changes could disrupt the expected timeliness of information provided to the markets. In turn, this would be likely to have a detrimental impact on the Company's reputation. However, on 20 August 2021, the Company agreed with the Former Investment Manager and its AIFM to amend the Investment Management Agreement and for the agreement to terminate with effect from midnight on 31 December 2021. The Board believed that the revised Agreement provided the Company with certainty over the level of future management fees payable to the Former Investment Manager with the added flexibility of facilitating the Company becoming self-managed, whilst providing for the ongoing management of the portfolio to 31 December 2021. Overall, it allowed for an orderly transition of the management of the portfolio to the Company. |
| |
| The Board has continuous access to the Company's key service providers and has open two-way communication with them. Key aspects of discussion with these service providers, other than those regarding Company performance and strategy, were in respect of fees payable to these providers. |
| |
| David Stevenson |
| Chairman |
| 7 September 2022 |
| Statement of Comprehensive Income | |||
| for the year ended 30 June 2022 | |||
| | Note | Year ended 30 June 2022 | Year ended 30 June 2021 |
| | | £'000 | £'000 |
| Revenue | |
|
|
| Interest income | 3f | 2,600 | 4,010 |
| Impairment of interest income | 14 | (1,195) | (877) |
| |
| ------------ | ------------ |
| Net interest income |
| 1,405 | 3,133 |
| |
| ------------ | ------------ |
| Total revenue |
| 1,405 | 3,133 |
| |
| ------------ | ------------ |
| Operating expenses |
| | |
| Directors' remuneration | 8 | (195) | (119) |
| Other expenses | 11 | (172) | (203) |
| Management fees | 7a | (133) | (309) |
| Administration fees | 7b | (118) | (130) |
| Legal and professional fees |
| (109) | (139) |
| Audit fees | 10 | (71) | (46) |
| Consultancy fees | 7c | (71) | - |
|
|
| ------------ | ------------ |
| Total operating expenses | | (869) | (946) |
|
| | ------------ | ------------ |
| Investment gains and losses | |
|
|
| Movement in unrealised gains and losses on loans due to movement in foreign exchange on non-Sterling loans | 14, 23 | 363 | (1,283) |
| Movement in impairment losses on financial assets (or loans) | 14 | 720 | (9,657) |
| Realised loss on disposal of loans |
| (2,186) | (2,544) |
| Movement in unrealised loss on investments at fair value through profit or loss | 15 | - | (92) |
| Movement in unrealised gain on derivative financial instruments | 16, 23 | - | 6 |
| Realised gain on disposal of investments at fair value through profit or loss |
| - | 94 |
| Realised gain on derivative financial instruments | 16, 23 | - | 269 |
|
|
| ------------ | ------------ |
| Total investment gains and losses | | (1,103) | (13,207) |
|
| | ------------ | ------------ |
| Net loss from operating activities before gain on foreign currency exchange | | (567) | (11,020) |
|
| |
|
|
| Net foreign exchange gain | 23 | 13 | 3 |
|
| | ------------ | ------------ |
| Loss and total comprehensive income for the year attributable to the owners of the Company |
| (554) | (11,017) |
|
| | ------------ | ------------ |
|
| |
|
|
| Loss per Ordinary Share (basic and diluted) | 13 | (1.05)p | (20.92)p |
|
| | ------------ | ------------ |
| There were no other comprehensive income items in the year. Except for unrealised investment gains and losses, all of the Company's profit and loss items are distributable. The accompanying notes form an integral part of the financial statements. |
| Statement of Changes in Equity for the year ended 30 June 2022 | ||||||
|
| ||||||
|
| Note | Called up share capital | Capital redemption reserve | Special distributable reserve | Profit and loss account | Total |
|
|
| £'000 | £'000 | £'000 | £'000 | £'000 |
| At 1 July 2020 | | 577 | - | 48,181 | (3,226) | 45,532 |
| | | | | | | |
| Loss for the year | 21 | - | - | - | (11,017) | (11,017) |
| | | | | | | |
| Transactions with Owners in their capacity as owners: | ||||||
| Dividends paid | 5,21 | - | - | (4,324) | (766) | (5,090) |
| B Shares issued during the year | 5, 20, 21 | 10,269 | - | (10,269) | - | - |
| B Shares redeemed during the year | 5, 20, 21 | (10,269) | 10,269 | (10,269) | - | (10,269) |
| Management Share buy backs | 20, 21 | (50) | 50 | (50) | - | (50) |
| | | | | | | |
| | | ------------ | ------------ | ------------ | ------------ | ------------ |
| At 30 June 2021 |
| 527 | 10,319 | 23,269 | (15,009) | 19,106 |
| | | | | | | |
| Loss for the year | 21 | - | - | - | (554) | (554) |
| |
| | | | | |
| Transactions with Owners in their capacity as owners: | ||||||
| Dividends paid | 5,21 | - | - | - | - | - |
| B Shares issued during the year | 5, 20, 21 | 7,636 | - | (7,636) | - | - |
| B Shares redeemed during the year | 5, 20, 21 | (7,636) | 7,636 | (7,636) | - | (7,636) |
| |
| | | | | |
| | | ------------ | ------------ | ------------ | ------------ | ------------ |
| At 30 June 2022 |
| 527 | 17,955 | 7,997 | (15,563) | 10,916 |
| | | ------------ | ------------ | ------------ | ------------ | ------------ |
|
| ||||||
| There were no other comprehensive income items in the year. The above amounts are all attributable to the owners of the Company. The accompanying notes on form an integral part of the financial statements. | ||||||
| Statement of Financial Position | |||
| as at 30 June 2022 | |||
| | |||
| | Note | 30 June 2022 | 30 June 2021 |
| | | £'000 | £'000 |
| Non-current assets |
|
| |
| Loans at amortised cost | 14 | 3,440 | 7,336 |
| | | ------------ | ------------ |
| Total non-current assets |
| 3,440 | 7,336 |
| | | ------------ | ------------ |
| Current assets |
| | |
| Loans at amortised cost | 14 | 4,807 | 7,333 |
| Other receivables and prepayments | 17 | 65 | 189 |
| Cash and cash equivalents | | 2,770 | 4,396 |
| | | ------------ | ------------ |
| Total current assets |
| 7,642 | 11,918 |
| | | ------------ | ------------ |
| Total assets | | 11,082 | 19,254 |
| | | ------------ | ------------ |
| Current liabilities |
|
| |
| Other payables and accruals | 18 | (166) | (148) |
| | | ------------ | ------------ |
| Total liabilities |
| (166) | (148) |
| | | ------------ | ------------ |
| | |
| |
| | | ------------ | ------------ |
| Net assets |
| 10,916 | 19,106 |
| | | ------------ | ------------ |
| Capital and reserves attributable to owners of the Company |
|
| |
| Called up share capital | 20 | 527 | 527 |
| Other reserves | 21 | 10,389 | 18,579 |
| | | ------------ | ------------ |
| Equity attributable to the owners of the Company |
| 10,916 | 19,106 |
| | | ------------ | ------------ |
| | |
|
|
| Net asset value per Ordinary Share | 22 | 20.73p | 36.28p |
| | | ------------ | ------------ |
| | |||
| These financial statements of Secured Income Fund plc (registered number 09682883) were approved by the Board of Directors on 7 September 2022 and were signed on its behalf by: | |||
|
David Stevenson Chairman 7 September 2022 |
Gaynor Coley Director 7 September 2022 | ||
| | |||
| The accompanying notes form an integral part of the financial statements. | |||
| Statement of Cash Flows | ||
| for the year ended 30 June 2022 | ||
| | ||
| | Year ended 30 June 2022 | Year ended 30 June 2021 |
| | £'000 | £'000 |
| Cash flows from operating activities |
| |
| Net loss before taxation | (554) | (11,017) |
| Adjustments for: |
| |
| Movement in unrealised gains and losses on loans due to movement in foreign exchange on non-Sterling loans | (363) | 1,283 |
| Movement in impairment losses on financial assets (or loans) | (720) | 9,657 |
| Realised loss on disposal of loans | 2,186 | 2,544 |
| Amortisation of transaction fees | 28 | 46 |
| Movement in unrealised loss on investments at fair value through profit or loss | - | 92 |
| Movement in unrealised gain on derivative financial instruments | - | (6) |
| Realised gain on disposal of investments at fair value through profit or loss | - | (94) |
| Realised gain on derivative financial instruments | - | (269) |
| Interest received and reinvested by platforms | - | (1) |
| Capitalised interest | - | (1,174) |
| Decrease in investments | 5,291 | 16,131 |
| | ------------ | ------------ |
| Net cash inflow from operating activities before working capital changes | 5,868 | 17,192 |
| Decrease in other receivables and prepayments | 124 | 1,436 |
| Increase/(decrease) in other payables and accruals | 18 | (16) |
| | ------------ | ------------ |
| Net cash inflow from operating activities | 6,010 | 18,612 |
| |
|
|
| Cash flows from financing activities |
| |
| B Share scheme redemptions | (7,636) | (10,269) |
| Dividends paid | - | (5,090) |
| Management share buy backs | - | (50) |
| | ------------ | ------------ |
| Net cash outflow from financing activities | (7,636) | (15,409) |
| |
| |
|
| ------------ | ------------ |
| (Decrease)/increase in cash and cash equivalents in the year | (1,626) | 3,203 |
| Cash and cash equivalents at the beginning of the year | 4,396 | 1,193 |
| | ------------ | ------------ |
| Cash and cash equivalents at the year end | 2,770 | 4,396 |
| | ------------ | ------------ |
| |
|
|
| Supplemental cash flow information |
|
|
| Non-cash transaction - interest income | - | 1,175 |
| | ||
| The accompanying notes form an integral part of the financial statements. | ||
| Notes to the Financial Statements for the year ended 30 June 2022 |
|
|
| 1. General information |
| The Company is a public company (limited by shares) and was incorporated and registered in England and Wales under the Companies Act 2006 on 13 July 2015 with registered number 09682883. The Company's shares were admitted to trading on the London Stock Exchange Specialist Fund Segment on 23 September 2015 ("Admission"). The Company is domiciled in England and Wales.
The Company is an investment company as defined in s833 of the Companies Act 2006.
The Investment Management Agreement between the Company and KKV Investment Management Ltd was terminated on 31 December 2021. There has been a smooth transition of management back to the Company, which has been facilitated by retaining key personnel. Furthermore, with effect from 31 December 2021, the Company has been approved by the FCA as a Small Registered UK AIFM. |
| |
| 2. Statement of compliance |
| a) Basis of preparation These financial statements present the results of the Company for the year ended 30 June 2022. These financial statements have been prepared in accordance with UK-adopted International Accounting Standards.
The Company's capital is raised in Sterling, expenses are paid in Sterling, the majority of the Company's financial assets and liabilities are Sterling based, and (until September 2020) the Company hedged substantially all of its foreign currency risk back to Sterling. Therefore, the Board of Directors consider that Sterling most faithfully represents the economic effects of the underlying transactions of the Company, events and conditions. These financial statements are presented in Sterling, which is the Company's functional and presentation currency. All amounts are rounded to the nearest thousand.
|
| Financial statements prepared on a non-going concern basis On 19 June 2020, the Company held a continuation vote (the "Continuation Vote") that, in line with the Directors' recommendation, did not pass. This vote was required under the Articles as the Company did not have a Net Asset Value of at least £250 million as at 31 December 2019. As this vote did not pass, the Directors (as required under the Articles) convened a further general meeting of the Company on 17 September 2020 at which a special resolution approved the managed wind-down of the Company and the adoption of the new investment policy of the Company, as set out in the Company's Annual Report and Financial Statements, to carry out an orderly realisation of the Company's portfolio of assets and distribution of cash to Shareholders.
This has had no significant impact on the accounting policies, judgements or recognition of and carrying value of assets and liabilities within the financial statements as the loans are included net of their expected credit loss provision ("ECL") and are expected to be realised in an orderly manner, and the estimated costs of winding up the Company are immaterial and therefore have not been provided for in the financial statements.
|
| The ongoing Covid-19 pandemic, the Russian invasion of Ukraine and the subsequent energy crisis are risks to the global economy. Details of the impact, as they may affect the Company, are provided in the Chairman's Statement, Investment Report and note 4. The Directors believe that the Company is well placed to survive the impact of the Covid-19 pandemic, the Russian invasion of Ukraine and the subsequent energy crisis, thereby enabling the Company to realise its assets in an orderly manner. |
|
|
| b) Basis of measurement The financial statements have been prepared on a historical cost basis, except for investments at fair value through profit or loss and derivative instruments, which are measured at fair value through profit or loss. |
|
|
| Given the Company's investment policy to carry out an orderly realisation of the Company's portfolio of assets and distribution of cash to Shareholders, the financial statements have been prepared on a non-going concern basis. |
| |
| c) Segmental reporting The Directors are of the opinion that the Company is engaged in a single economic segment of business, being investment in a range of SME loan assets. Consequently, no segmental analysis is required. |
|
|
| d) Use of estimates and judgements |
| The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods.
Judgements made by management in the application of IFRS that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 4. |
| 3. Significant accounting policies | |
| a) Foreign currency Foreign currency transactions are translated into Sterling using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income. Translation differences on non-monetary financial assets and liabilities are recognised in the Statement of Comprehensive Income. | |
|
| |
| b) Financial assets and liabilities The financial assets and liabilities of the Company are defined as loans, bonds with loan type characteristics, investments at fair value through profit or loss, cash and cash equivalents, other receivables, derivative instruments and other payables. | |
| | |
| Classification IFRS 9 requires the classification of financial assets to be determined on both the business model used for managing the financial assets and the contractual cash flow characteristics of the financial assets. Loans have been classified at amortised cost as: - they are held within a "hold to collect" business model with the objective to hold the assets to collect contractual cash flows; and - the contractual terms of the loans give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Although there has been a change in the investment objective and policy, there has been no change in the business model as the loans continued to be held under a 'hold to collect' model.
The Company's unquoted investments have been classified as held at fair value through profit or loss as they are held to realise cash flows from the sale of the investments. | |
|
| |
| Recognition The Company recognises a financial asset or a financial liability when, and only when, it becomes a party to the contractual provisions of the instrument. Purchases and sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace are recognised on the trade date, i.e. the date that the Company commits to purchase or sell the asset. | |
|
| |
| Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar assets) is derecognised where: - The rights to receive cash flows from the asset have expired; or - The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a "pass-through" arrangement; and - Either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows from an asset (or has entered into a pass-through arrangement) and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Company's continuing involvement in the asset.
The Company derecognises a financial liability when the obligation under the liability is discharged, cancelled or expires. | |
|
| |
| Initial measurement Financial assets and financial liabilities at fair value through profit or loss are recorded in the Statement of Financial Position at fair value. All transaction costs for such instruments are recognised directly in profit or loss.
Financial assets and financial liabilities not designated as at fair value through profit or loss, such as loans, are initially recognised at fair value, being the amount issued less transaction costs. | |
|
| |
| Subsequent measurement After initial measurement, the Company measures financial assets and financial liabilities not designated as at fair value through profit or loss, at amortised cost using the effective interest rate method, less impairment allowance. Gains and losses are recognised in the Statement of Comprehensive Income when the asset or liability is derecognised or impaired. Interest earned on these instruments is recorded separately as investment income.
After initial measurement, the Company measures financial instruments which are classified at fair value through profit or loss at fair value. Subsequent changes in the fair value of those financial instruments are recorded in net gain or loss on financial assets and liabilities at fair value through profit or loss.
The carrying value of cash and cash equivalents and other receivables and payables equals fair value due to their short-term nature. | |
|
| |
| Impairment | |
| A financial asset is credit-impaired when one or more events that have occurred have a significant impact on the expected future cash flows of the financial asset. It includes observable data that has come to the attention of the holder of a financial asset about the following events: · Significant financial difficulty of the issuer or borrower; · A breach of contract, such as a default or past-due event; · The lenders for economic or contractual reasons relating to the borrower's financial difficulty granted the borrower a concession that would not otherwise be considered; · It becoming probable that the borrower will enter bankruptcy or other financial reorganisation; · The disappearance of an active market for the financial asset because of financial difficulties; or · The purchase or origination of a financial asset at a deep discount that reflects incurred credit losses. | |
| | |
| Each direct loan is assessed on a continuous basis by the Board and, prior to 31 December 2021, the Former Investment Manager's own underwriting team with peer review occurring on a regular basis.
Each platform loan is monitored via the company originally deployed to conduct underwriting and management of the borrower relationship. When a potential impairment is identified, the Board and Investment Consultant (prior to 31 December 2021, the Former Investment Manager) requests data and management information from the platform. The Board and Investment Consultant (prior to 31 December 2021, the Former Investment Manager) will then actively pursue collections, giving guidance to the platforms on acceptable levels of impairment. In some cases, the Board and Investment Consultant (prior to 31 December 2021, the Former Investment Manager) will proactively take control of the process.
Impairment of financial assets is recognised on a loan-by-loan basis in stages: | |
| Stage 1: | As soon as a financial instrument is originated or purchased, 12-month expected credit losses are recognised in profit or loss and a loss allowance is established. This serves as a proxy for the initial expectations of credit losses. For financial assets, interest revenue is calculated on the gross carrying amount (i.e. without deduction for expected credit losses). |
|
| |
| Stage 2: | If the credit risk increases significantly and is not considered low, full lifetime expected credit losses are recognised in profit or loss. The calculation of interest revenue is the same as for Stage 1. This stage is triggered by scrutiny of management accounts and information gathered from regular updates from the borrower by way of email exchange or face-to-face meetings. The Board (prior to 31 December 2021, the Former Investment Manager) extends specific queries to borrowers if they acquire market intelligence or channel-check the data received. A covenant breach may be a temporary circumstance due to a one-off event and will not trigger an immediate escalation in risk profile to stage 2.
At all times, the Board (prior to 31 December 2021, the Former Investment Manager) considers the risk of impairment relative to the cash flows and general trading conditions of the company and the industry in which the borrower resides. |
| | |
| Stage 3: | If the credit risk of a financial asset increases to the point that it is considered credit-impaired, interest revenue is calculated based on the amortised cost (i.e. the gross carrying amount less the loss allowance). Financial assets in this stage will generally be assessed individually. Lifetime expected credit losses are recognised on these financial assets. This stage is triggered by a marked deterioration in the management information received from the borrower and a view taken on the overall credit conditions for the sector in which the company resides. A permanent breach of covenants and a deterioration in the valuation of security would also merit a move to stage 3.
The Board (prior to 31 December 2021, the Former Investment Manager) also takes into account the level of security to support each loan and the ease with which this security can be monetised. This has a meaningful impact on the way in which impairments are assessed, particularly as the Former Investment Manager had a very strong track record in managing write-downs and reclaim of assets.
For more details in relation to judgements, estimates and uncertainty see note 4. |
|
| |
| c) Cash and cash equivalents Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value.
The carrying values of cash and cash equivalents are deemed to be a reasonable approximation of their fair values. | |
|
| |
| d) Receivables and prepayments Receivables are carried at the original invoice amount, less impairments, as discussed above.
The carrying values of the accrued interest and other receivables are deemed to be reasonable approximations of their fair values. | |
|
| |
| e) Transaction costs Transaction costs incurred on the acquisition of loans are capitalised upon recognition of the financial asset and amortised over the term of the respective loan.
| |
| f) Income and expenses Interest income and bank interest are recognised on a time-proportionate basis using the effective interest rate method.
Dividend income is recognised when the right to receive payment is established.
All expenses are recognised on an accruals basis. All of the Company's expenses (with the exception of share issue costs, which are charged directly to the special distributable reserve) are charged through the Statement of Comprehensive Income in the period in which they are incurred. | |
|
| |
| g) Taxation The Company is exempt from UK corporation tax on its chargeable gains as it satisfies the conditions for approval as an investment trust. The Company is, however, liable to UK corporation tax on its income. However, the Company has elected to take advantage of modified UK tax treatment in respect of its "qualifying interest income" in order to deduct all, or part, of the amount it distributes to Shareholders as dividends as an "interest distribution". | |
|
| |
| h) B Shares B Shares are redeemable at the Company's option and are classified as equity as the potential indicator of a liability, being the fixed rate cumulative dividend, is immaterial given the shares are allotted and redeemed on the same day. B Shares, which are redeemed immediately following issue, are measured at the redemption amount. | |
|
| |
| i) Reserves | |
| Under the Company's articles of association, the Directors may, having obtained the relevant authority of Shareholders pursuant to the implementation of the B share scheme, capitalise any sum standing to the credit of any reserve of the Company for the purposes of paying up, allotting and issuing B Shares to Shareholders. | |
| | |
| (i) Capital Redemption Reserve The nominal value of Ordinary Shares if bought back and cancelled and the nominal value of B Shares redeemed and subsequently cancelled are added to this reserve. This reserve is non-distributable.
(ii) Special Distributable Reserve During the period ended 30 June 2016, and following the approval of the Court, the Company cancelled the share premium account and transferred £51,143,000 to a special distributable reserve, being premium on issue of shares of £52,133,000 less share issue costs of £990,000. The special distributable reserve is available for distribution to Shareholders, including the payment of dividends, return capital to shareholders, buy back of Ordinary Shares or redemption of B Shares.
(iii) Profit and loss account - distributable The net profit/loss arising from realised revenue (income, expenses, foreign exchange gains and losses and taxation) in the Statement of Comprehensive Income is added to this reserve, along with realised gains and losses on the disposal of financial assets and derivative positions. Dividends paid during the year are deducted from this reserve, where sufficient reserves are available. | |
| | |
| (iv) Profit and loss accounts - non-distributable Unrealised gains and losses on financial assets and derivative positions are taken to this reserve. | |
| j) Changes in accounting policy and disclosures | |
| New and amended standards and interpretations The accounting policies adopted are consistent with those of the previous financial year, except as outlined below. The Company adopted the following new and amended relevant IFRS in the year: | |
| IFRS 7 | Financial Instruments: Disclosures - amendments regarding replacement issues in the context of the IBOR reform |
| IFRS 9 | Financial Instruments - amendments regarding replacement issues in the context of the IBOR reform |
|
The adoption of these accounting standards did not have any impact on the Company's Statement of Comprehensive Income, Statement of Financial Position or equity. A number of other amendments and interpretations are applicable for the year but are not relevant to the Company. | |
| k) Accounting standards issued but not yet effective | |||
| The International Accounting Standards Board ("IASB") has issued/revised a number of relevant standards with an effective date after the date of these financial statements. Any standards that are not deemed relevant to the operations of the Company have been excluded. The Directors have chosen not to early adopt these standards and interpretations and they do not anticipate that they would have a material impact on the Company's financial statements in the period of initial application. | |||
|
| Effective date |
| |
| IFRS 9 | Financial Instruments - Amendments resulting from Annual Improvements to IFRS Standards 2018-2020 (fees in the "10 per cent" test for derecognition of financial liabilities) |
1 January 2022 |
|
| IAS 1 | Presentation of Financial Statements - amendments regarding the classification of liabilities Presentation of Financial Statements - amendments to defer the effective date of the January 2020 amendments Presentation of Financial Statements - amendments regarding the disclosure of accounting policies |
1 January 2023
1 January 2023
1 January 2023 |
|
| IAS 8 | Accounting Policies, Changes in Accounting Estimates and Errors - Amendments regarding the definition of accounting estimate |
1 January 2023 |
|
| IAS 37 | Provisions, Contingent Liabilities and Contingent Assets - Amendments regarding the costs to include when assessing whether a contract is onerous |
1 January 2022 |
|
| 4. Use of judgements and estimates | |
| The preparation of the Company's financial statements requires the Directors to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability in future periods. | |
| | |
| Judgements | |
| In the process of applying the Company's accounting policies, management made the following judgements, which has had a significant effect on the amounts recognised in the financial statements: | |
|
| |
| Covid-19 The ongoing Covid-19 pandemic is a risk to the global economy. Details of the macroeconomic impact, as it may affect the Company, are provided in the Chairman's Statement and Investment Report. The situation continues to change and future cashflows and valuations are more uncertain and may be more volatile than pre-pandemic. Indeed, the level of estimation uncertainty and judgement for the calculation of expected credit losses has increased as a result of the economic effects of the Covid-19 pandemic. However, the Directors believe that the Company is well placed to survive the impact of the Covid-19 pandemic, thereby enabling the Company to realise its assets in an orderly manner. | |
| | |
| Russian Invasion of Ukraine and the subsequent energy crisis Russia's invasion of Ukraine is a risk to the global economy. The invasion itself and resulting international sanctions on Russia are believed to have already caused substantial economic damage to that country, which is likely to worsen the longer the sanctions are in place, and has had some wider global effect on the supply and prices of certain commodities and consequently on inflation and general economic growth of the global economy. The effects vary from country to country, depending, for example, on their dependence on Russian energy supplies, particularly gas, which cannot be so easily transported and substituted as oil. The full effects will take time to flow through fully and manifest themselves in the balance sheets of companies and impact their ability to repay loans. In this context, we can only express reservations on the near-term impact on credit risk and the impairment of securities, which may be more volatile as a result of the Russian invasion and the subsequent energy crisis. | |
| | |
| Classification of B Shares | |
| The B Shares pay a fixed rate cumulative preferential cash dividend of 1% per annum of the nominal value of £1, and have limited rights, including that: the holders of the B Shares shall not be entitled to any further right of participation in the profits or assets of the Company; and the B Shares are redeemable at the Company's option.
However, as the potential indicator of a liability, being the fixed rate cumulative dividend, is immaterial given the B Shares are allotted and redeemed on the same day, the B Shares are classified as equity.
B Shares, which are redeemed immediately following issue, are measured at the redemption amount. | |
| | |
| Estimates and assumptions The Company based its assumptions and estimates on parameters available when the financial statements were approved. However, existing circumstances and assumptions about future developments may change due to market changes or circumstances arising beyond the control of the Company. Such changes are reflected in the assumptions when they occur. | |
| | |
| The current economic uncertainty (and the frequent changes in outlook for different economic sectors) has created increased volatility and uncertainty (as mentioned above and in the Investment Report). In such circumstances the level of estimation uncertainty and judgement of expected credit losses has increased. As noted in the Investment Report, there are uncertainties about the need for future provisions that may need to be made against individual loans and receivables. Notwithstanding the best endeavours of management to obtain full repayment there is an inherent uncertainty in relation to the level of provisioning made in these financial statements. The Board has updated the expected credit loss assessment (as set out in note 3b) to the best of its knowledge at the time of signing these financial statements to reflect the likely impact on the Company's loan portfolio. | |
|
| |
| i) Recoverability of loans and other receivables In accordance with IFRS 9, the impairment of loans and other receivables has been assessed as described in note 3b. When assessing the credit loss on a loan, and the stage of impairment of that loan, the Company considers whether there is an indicator of credit risk for a loan when the borrower has failed to make a payment, either capital or interest, when contractually due and upon assessment. The Company assesses at each reporting date (and at least on a monthly basis) whether there is objective evidence that a loan classified as a loan at amortised cost is credit-impaired and whether a loan's credit risk or the expected loss rate has changed significantly. As part of this process: · Platforms are contacted to determine default and delinquency levels of individual loans; and · Recovery rates are estimated.
The analysis of credit risk is based on a number of factors and a degree of uncertainty is inherent in the estimation process. As mentioned above, due to the Covid-19 pandemic future cashflows and valuations are more uncertain at the current time, and may be more volatile than in recent years. Indeed, the level of estimation uncertainty and judgement for the calculation of expected credit losses has increased as a result of the economic effects of the Covid-19 pandemic, the Russian invasion of Ukraine and the subsequent energy crisis. | |
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|
|
| The determination of whether a specific factor is relevant and its weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, and the geographical region. It is not possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk. Events that the Company will assess when deciding if a financial asset is credit impaired include: |
|
| · significant financial difficulty of the borrower; · a breach of contract, such as a default or past-due event; and · it becoming probable that the borrower will enter bankruptcy or other financial reorganisation. |
|
| |
|
| Although it may not always be the case (e.g. if discussions with a borrower are ongoing), generally a loan is deemed to be in default if the borrower has missed a payment of principal or interest by more than 180 days, unless the Company has good reason not to apply this rule. If the Company has evidence to the contrary, it may make an exception to the 180 day rule to deem that a borrower is, or is not, in default. Therefore, the definitions of credit impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit impaired. |
|
| |
|
| IFRS 9 confirms that a Probability of Default ("PD") must never be zero as everything is deemed to have a risk of default; this has been incorporated into the assessment of expected credit losses. All PDs are assessed against historic data as well as the prevailing economic conditions at the reporting date, adjusted to account for estimates of future economic conditions that are likely to impact the risk of default.
Since November 2020, 12-month PD has been calculated based on a 10 level grading system, where: · levels 1 to 6 fall into Stage 1, with 12-month PD ranging from 0.01% to 10%; · levels 7 to 9 fall into Stage 2, with 12-month PD ranging from 20% to 60%, and · level 10 falls into Stage 3, with a 12-month PD of 100%.
Prior to November 2020, 12-month PD was applied across the collective as a cumulative in Stage 1, set at 2% in line with the Former Investment Manager's historic performance data, market knowledge, and credit enhancements (that was equivalent to there being 1 default for an average portfolio of 50 unique borrowers). Once an investment moved to Stage 2 then PD was calculated on an individual basis (and adjusted for Stage 3 if appropriate).
All assessment is based on reasonable and supportive information available at the time. |
|
| |
|
| Since November 2020, 12-month ECL has been calculated based on the following categorisation: |
|
| Category | Loss given default ("LGD") approach |
| Easily Realisable | Asset value less 10% haircut discounted at 10% IRR for 12 months to recovery |
| Realisable | Asset value less 20% discounted at 20% IRR for 2 years to recovery |
| Highly Specialised/Unsecured | 70% LGD |
| Subordinated Debt | 100% LGD |
| Prior to November 2020, 12-month ECL was applied across the collective as a cumulative in Stage 1, split according to the investment's classification. For direct loan investments this was calculated as 2% of the individual investment's Contracted Cash Flows ("CCF"), and 2% of the investment's CCF for platform investments. Those Stage 1 12-month ECL amounts were taken to be the investments' floor amounts - the Lifetime ECL for any investment could never be less than its floor amount. Once an investment moved to Stage 2, Lifetime ECL was calculated on an individual basis.
Lifetime ECL is reviewed at each reporting date based on reasonable and supportive information available at the time. | |
| | |
| Details of the judgements applied in assessing the recoverability of loans can be found in the Investment Report and should be read in conjunction with the current economic environment and, in particular, the impact of Covid-19. | |
| | |
| Collateral While the presence of collateral is not a key element in the assessment of whether there has been a significant increase in credit risk, it is of great importance in the measurement of ECL. IFRS 9 states that estimates of cash shortfalls reflect the cash flows expected from collateral and other credit enhancements that are integral to the contractual terms. This is a key component of the Company's ECL measurement and interpretation of IFRS 9, as any investment would include elements of (if not all): a fully collateralised position, fixed and floating charges, a corporate guarantee, a personal guarantee. |
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|
|
|
| Loans written off Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier. Platform loans of £1,880,000 were written off in the year (2021: £1,887,000).
|
|
| Renegotiated loans A loan is classed as renegotiated when the contractual payment terms of the loan are modified because the Company has significant concerns about a borrower's ability to meet payments when due. On renegotiation, the loan will also be classified as credit impaired, if it is not already. Renegotiated loans will continue to be considered to be credit impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future payments. |
|
| |
|
| In addition to the methodology used, the Company has taken impairment data from Platforms for the assessment of loans with third party exposure, which was consistent with the approach the Board would have expected to take in those circumstances as at 30 June 2022. |
|
| |
|
| There were no new assets originated during the year that were credit-impaired at the point of initial recognition. There were no financial assets that have been modified since initial recognition at a time when the loss allowance was measured at an amount equal to lifetime expected credit losses and for which the loss allowance changed during the year to an amount equal to 12-month expected credit losses. |
|
| |
|
| There were no financial assets for which cash flows were modified in the year while they had a loss allowance measured at an amount equal to the lifetime expected credit loss. |
|
| |
|
| Please see note 3b, note 14 and note 23 for further information on the loans at amortised cost and credit risk. |
|
| 5. Dividends |
| The Company distributes at least 85% of its distributable income earned in each financial year by way of dividends. |
|
|
| The Company elected to designate all of the dividends for the year ended 30 June 2022 as interest distributions to its Shareholders. In doing so, the Company took advantage of UK tax treatment by "streaming" income from interest-bearing investments into dividends that will be taxed in the hands of Shareholders as interest income.
|
| To date, the Company has declared the following dividends in respect of earnings for the year ended 30 June 2022: |
| Announcement date | Pay date | Total dividend declared in respect of earnings in the year | Amount per Ordinary Share |
| | | £'000 | |
| 2 September 2022 | 7 October 2022 | 395 | 0.75p |
| | | ------------ | ------------ |
| Dividends declared (to date) for the year | 395 | 0.75p | |
| Less, dividends paid after the year end | (395) | (0.75)p | |
| | | ------------ | ------------ |
| Dividends paid in the year | | - | - |
| | | ------------ | ------------ |
| In accordance with UK-adopted International Accounting Standards, dividends are only provided for when they become a contractual liability of the Company. Therefore, during the year a total of £nil (2021: £5,090,000) was incurred in respect of dividends, none of which was outstanding at the reporting date (2021: none).
All dividends in the year were paid out of revenue (and not capital) profits. |
| Mechanics for returning cash to Shareholders |
| The Board carefully considered the potential mechanics for returning cash to Shareholders and the Company's ability to do so. The Board believes it is in the best interests of Shareholders as a whole to make distributions to Shareholders without a significant delay following realisations of a material part of the Portfolio (whether in a single transaction or through multiple, smaller transactions concluded on similar timing), whether by dividend or other method.
After careful consideration and discussions with a number of Shareholders, the Board believes that one of the fairest and most cost-efficient ways of returning substantial amounts of cash to Shareholders is by adopting a B Share Scheme, whereby the Company will be able to issue redeemable B Shares to Shareholders. These are then redeemed on a Redemption Date without further action being required by Shareholders. |
| |
| The B Shares are issued out of the special distributable reserve, then the special distributable reserve is utilised again when the B Shares are redeemed - the B Share capital is cancelled and an equal amount credited to the capital redemption reserve. |
|
|
| The Company made three B Share Scheme redemptions in the year, totalling £7,636,000 (2021: £10,269,000), equivalent to 14.50p per Ordinary Share (2021: 19.50p). |
| |
| The Board also intends to make dividend payments to maintain investment trust status for so long as the Company remains listed. |
| 6. Related parties |
| As a matter of best practice and good corporate governance, the Company has adopted a related party policy which applies to any transaction which it may enter into with any Director, the Investment Consultant and (prior to 1 January 2022), the Former Investment Manager, or any of their affiliates which would constitute a "related party transaction" as defined in, and to which would apply, Chapter 11 of the Listing Rules. In accordance with its related party policy, the Company obtained: (i) the approval of a majority of the Directors; and (ii) a third-party valuation in respect of these transactions from an appropriately qualified independent adviser. |
|
|
| See notes 7 and 8 for further details. |
| 7. Key contracts |
| a) Former Investment Manager |
| The Former Investment Manager had responsibility for managing the Company's portfolio until 31 December 2021. For their services, until 16 September 2020, the Former Investment Manager was entitled to a management fee at a rate equivalent to the following schedule (expressed as a percentage of NAV per annum, before deduction of accruals for unpaid management fees for the current month): · 1.0% per annum for NAV lower than or equal to £250 million; · 0.9% per annum for NAV greater than £250 million and lower than or equal to £500 million; and · 0.8% per annum for NAV greater than £500 million.
From 17 September 2020, the 1.0% per annum base management fee was reduced as follows: · for 12 months from 17 September 2020 to 16 September 2021, to 0.75% per annum of the Company's NAV; and · from 17 September 2021, to 0.55% of the Company's NAV. |
| |
| On 20 August 2021, the Company agreed with the Former Investment Manager and its AIFM to amend the Investment Management Agreement and for the agreement to terminate with effect from midnight on 31 December 2021. |
| |
| The key terms of the revised agreement were as follows: · Management fees payable by the Company to the Former Investment Manager of £20,500 per month from 1 August 2021 to 31 December 2021; · A payment of £20,000 in total payable by the Company to the Former Investment Manager, but conditional on a senior employee providing continued services to the Company to 31 December 2021; and · The agreement terminated with effect from midnight on 31 December 2021. No party had the right to terminate the agreement prior to this date without cause. No fees were payable by either party on termination other than the amount referred to above.
|
| The Board believed that the revised Agreement provided the Company with certainty over the level of future management fees payable to the Former Investment Manager with the added flexibility of facilitating the Company becoming self-managed, whilst providing for the ongoing management of the portfolio to 31 December 2021. Overall, it allowed for an orderly transition of the management of the portfolio to the Company. |
| The management fee was payable monthly in arrears on the last calendar day of each month.
During the year, a total of £133,000 (2021: £309,000) was incurred in respect of management fees, none of which was payable at the reporting date (2021: £25,000). |
| |
| Performance fee From 17 September 2020, the Former Investment Manager was entitled to a performance fee. During the year, no performance fee was paid, or payable, to the Former Investment Manager (2021: none).
The performance fee ceased with effect from 1 January 2022, following the termination of the Investment Management Agreement on 31 December 2021. |
| |
| Transaction costs Prior to the change in the investment policy, the Company incurred transaction costs for the purposes of structuring investments for the Company. These costs formed part of the overall transaction costs that were capitalised at the point of recognition and were taken into account when pricing a transaction. When structuring services were provided by the Investment Manager (incumbent at the time of the transaction) or an affiliate of them, they were entitled to charge an additional fee to the Company equal to up to 1.0% of the cost of acquiring the investment (ignoring gearing and transaction expenses). This cost was not charged in respect of assets acquired from the Former Investment Manager (incumbent at the time of the transaction), the funds they managed or where they or their affiliates did not provide such structuring advice. |
| During the year, transaction costs of £28,000 (2021: £46,000) were amortised. |
| b) Administration fees |
| Elysium Fund Management Limited ("Elysium") is entitled to an administration fee of £100,000 per annum in respect of the services provided in relation to the administration of the Company, together with time-based fees in relation to work on investment transactions. During the year, a total of £118,000 (2021: £130,000) was incurred in respect of administration fees, of which £33,000 (2021: £37,000) was payable at the reporting date. |
| c) Consultancy fees |
| With effect from 1 January 2022, the Company entered into a consultancy agreement with Syon Arc Limited ("Syon" or the "Consultant") to secure the services of one of the individuals previously employed by KKV. From that date, Syon was entitled to £6,000 exclusive of VAT (if applicable) per month plus an additional £15,000 exclusive of VAT (if applicable) upon the publication of the 31 December 2021 unaudited condensed half-yearly financial statements and a further £15,000 exclusive of VAT (if applicable) upon the publication of these audited financial statements. |
|
|
| At the Company's discretion, the Consultant may also be eligible for an additional success fee in the event that the Company achieves recoveries in excess of £100,000 in respect of positions carried at zero as referenced by the Company's management accounts and IFRS 9 table from which the Net Asset Value for 31 October 2021 was derived, if it is determined by the Board that the Consultant is instrumental to the work involved to achieve such recoveries. The amount of such additional fee would be determined at the Company's sole discretion, however, no less than £10,000 exclusive of VAT (if applicable). |
| |
| During the year, a total of £71,000 (2021: nil) was incurred in respect of consultancy fees, of which £7,000 (2021: nil) was payable at the reporting date and a further £18,000 (2021: nil) had been accrued but was not yet payable at the reporting date (being the amount payable following the publication of these audited financial statements). |
| 8. Directors' remuneration |
| During the year, a total of £195,000 (2021: £119,000) was incurred in respect of Directors' remuneration, none of which was payable at the reporting date (2021: none). No bonus or pension contributions were paid or payable on behalf of the Directors. Further details can be found in the Directors' Remuneration Report in the Company's Annual Report and Financial Statements. |
| 9. Key management and employees |
| The Company had no employees during the year (2021: none). Therefore, there were no key management (except for the Directors) or employees during the year. |
| |
| The following distributions were paid to the Directors during the year by virtue of their holdings of Ordinary Shares (these distributions were not additional remuneration): |
| | Year ended 30 June 2022 | Year ended 30 June 2021 |
| Dividends | £ | £ |
| David Stevenson | - | 1,958 |
| Gaynor Coley | - | 206 |
| Brett Miller | - | - |
| | | |
| B Share Scheme Redemptions | | |
| David Stevenson | 2,937 | 3,950 |
| Gaynor Coley | 310 | 417 |
| Brett Miller | - | - |
| 10. Auditor's remuneration |
| For the year ended 30 June 2022, total fees, plus VAT, charged by MKS, together with amounts accrued at 30 June 2022, amounted to £71,000 (2021: £46,000), £48,000 of which related to audit services (2021: £46,000) and £23,000 of which related to non-audit services (2021: nil).
As at 30 June 2022, £48,000 was due to MKS and £16,000 was due to RSM UK Audit LLP (2021: £46,000 was due to MKS and £16,000 was due to RSM UK Audit LLP). |
| 11. Other expenses | ||
| | Year ended 30 June 2022 | Year ended 30 June 2021 |
| | £'000 | £'000 |
| Registrar fees | 42 | 49 |
| Broker fees | 36 | 56 |
| Transaction fees (note 7a) | 28 | 46 |
| Directors' national insurance | 24 | 12 |
| Other expenses | 23 | 15 |
| Listing fees | 13 | 16 |
| Accountancy and taxation fees | 6 | 9 |
| | ------------ | ------------ |
| | 172 | 203 |
| | ------------ | ------------ |
| 12. Taxation |
| The Company has received confirmation from HMRC that it satisfied the conditions for approval as an investment trust, subject to the Company continuing to meet the eligibility conditions in s.1158 of the Corporation Tax Act 2010 and the ongoing requirements for approved investment trust companies in Chapter 3 of Part 2 of the Investment Trust (approved Company) Tax Regulations 2011 (Statutory Instrument 2011.2999). The Company intends to retain this approval and self-assesses compliance with the relevant conditions and requirements.
As an investment trust the Company is exempt from UK corporation tax on its chargeable gains. The Company is, however, liable to UK corporation tax on its income. However, the Company has elected to take advantage of modified UK tax treatment in respect of its "qualifying interest income" in order to deduct all, or part, of the amount it distributes to Shareholders as dividends as an "interest distribution". |
| | Year ended 30 June 2022 | Year ended 30 June 2021 | |
| | £'000 | £'000 | |
| Reconciliation of tax charge: | | | |
| Loss before taxation | (554) | (11,017) | |
| | ------------ | ------------ | |
| Tax at the standard UK corporation tax rate of 19% (2021: 19%) | (105) | (2,093) | |
| Effects of: | | | |
| - Non-taxable investment gains and losses | 209 | 2,509 | |
| - Adjustments for disallowable expenses | 6 | - | |
| - Interest distributions [1] | (75) | (416) | |
| - Relief claimed for carried forward losses | (35) | - | |
| | ------------ | ------------ | |
| Total tax expense | - | - | |
| | ------------ | ------------ | |
| |
|
| |
| [1] | On 2 September 2022, the Board declared a dividend of 0.75p per Ordinary Share for the year ended 30 June 2022, which is to be paid on 7 October 2022. | ||
| Domestic corporation tax rates in the jurisdictions in which the Company operated were as follows: | ||
| | Year ended 30 June 2022 | Year ended 30 June 2021 |
| United Kingdom | 19% | 19% |
| Guernsey | nil | nil |
| | ||
| Due to the Company's status as an investment trust and the intention to continue to meet the required conditions, the Company has not provided for deferred tax on any capital gains and losses. | ||
| 13. Loss per Ordinary Share |
| The loss per Ordinary Share of 1.05p (2021: loss per Ordinary Share of 20.92p) is based on a loss attributable to the owners of the Company of £554,000 (2021: Loss of £11,017,000) and on a weighted average number of 52,660,350 (2021: 52,660,350) Ordinary Shares in issue since Admission. There is no difference between the basic and diluted earnings per share. |
| 14. Loans at amortised cost | |||
|
| Year ended 30 June 2022 | Year ended 30 June 2021 | |
|
| £'000 | £'000 | |
| Loans | 21,415 | 28,920 | |
| Unrealised loss* | (13,168) | (14,251) | |
| | ------------ | ------------ | |
| Balance at year end | 8,247 | 14,669 | |
| | ------------ | ------------ | |
| Loans: | Non-current | 3,440 | 7,336 |
| | Current | 4,807 | 7,333 |
| | ------------ | ------------ | |
| Loans at amortised cost | 8,247 | 14,669 | |
| | ------------ | ------------ | |
| *Unrealised loss |
| | |
| Foreign exchange on non-Sterling loans | 205 | (158) | |
| Impairments of financial assets | (13,373) | (14,093) | |
| | ------------ | ------------ | |
| Unrealised loss | (13,168) | (14,251) | |
| | ------------ | ------------ | |
| The movement in unrealised gains/losses on loans comprised: | |||
| | Year ended 30 June 2022 | Year ended 30 June 2021 | |
| | £'000 | £'000 | |
| Movement in foreign exchange on non-Sterling loans | 363 | (1,283) | |
| Movement in impairment losses on financial assets (or loans) | 720 | (9,657) | |
| | ------------ | ------------ | |
| Movement in unrealised gains and losses on loans | 1,083 | (10,940) | |
| | ------------ | ------------ | |
| The movement in the impairment for the year comprised: | ||
| | Year ended 30 June 2022 | Year ended 30 June 2021 |
| | £'000 | £'000 |
| Impairment of interest income | (1,195) | (877) |
| Impairment losses on financial assets (or loans) | 720 | (9,657) |
| | ------------ | ------------ |
| Total movement in impairment in the year | (475) | (10,534) |
| | ------------ | ------------ |
| The weighted average interest rate of the loans as at 30 June 2022 was 10.68% (2021: 6.48%). | |
|
| |
| The table below details expected credit loss provision ("ECL") of financial assets in each stage at 30 June 2022: |
|
| | 30 June 2022 | 30 June 2021 | |||||||
| | Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
|
| | | | | | | | | |
| Direct loans [1] | 3,245 | - | 15,405 | 18,650 | 4,940 | 5,633 | 12,637 | 23,210 | |
| ECL on direct loans | (9) | - | (10,410) | (10,419) | (14) | (451) | (8,228) | (8,693) | |
| | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| Direct loans net of the ECL | 3,236 | - | 4,995 | 8,231 | 4,926 | 5,182 | 4,409 | 14,517 | |
| | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| | | | | | | | | | |
| Platform loans [1] | - | - | 2,954 | 2,954 | - | - | 5,508 | 5,508 | |
| ECL on platform loans | - | - | (2,954) | (2,954) | - | - | (5,400) | (5,400) | |
| | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| Platform loans net of the ECL | - | - | - | - | - | - | 108 | 108 | |
| | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| |
|
|
|
| | | | | |
| Accrued interest | 57 | - | 2 | 59 | 175 | - | 7 | 182 | |
| | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| | | | | | | | | | |
| Total loans [1] | 3,245 | - | 18,359 | 21,604 | 4,940 | 5,633 | 18,145 | 28,718 | |
| Total ECL | (9) | - | (13,364) | (13,373) | (14) | (451) | (13,628) | (14,093) | |
| | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| Total net of the ECL | 3,236 | - | 4,995 | 8,231 | 4,926 | 5,182 | 4,517 | 14,625 | |
| | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| | |||||||||
| [1] | These are the principal amounts outstanding at 30 June 2022 and do not include the capitalised transaction fees, which are not subject to credit risk. At 30 June 2022, the amortised cost of the capitalised transaction fees totalled £16,000 (2021: £44,000). | ||||||||
| The table below details the movements in the year ended 30 June 2022 of the principal amounts outstanding and the ECL on those loans: |
|
| Non-credit impaired | Credit impaired |
| ||||||
|
| Stage 1 | Stage 2 | Stage 3 | Total | |||||
| | Principal outstanding[1] | Allowance for ECL | Principal outstanding[1] | Allowance for ECL | Principal outstanding[1] | Allowance for ECL | Principal outstanding[1] | Allowance for ECL | |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| At 1 July 2021 | 4,940 | (14) | 5,633 | (451) | 18,145 | (13,628) | 28,718 | (14,093) | |
| Transfers from: - stage 2 to stage 3 | - | - | (5,633) | 451 | 5,633 | (451) | - | - | |
| Net re-measurement of ECL arising from transfer of stage | - | - | - | - | - | (1,239) | - | (1,239) | |
| Net new and further lending/repayments, and foreign exchange movements | (1,695) | 5 | - | - | (3,539) | 74 | (5,234) | 79 | |
| Loans written-off in the year | - | - | - | - | (1,880) | 1,880 | (1,880) | 1,880 | |
| | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| At 30 June 2022 | 3,245 | (9) | - | - | 18,359 | (13,364) | 21,604 | (13,373) | |
| | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| | | ||||||||
| [1] | These are the principal amounts outstanding at 30 June 2022 and do not include the capitalised transaction fees, which are not subject to credit risk. At 30 June 2022, the amortised cost of the capitalised transaction fees totalled £16,000. | ||||||||
| The table below details the movements in the year ended 30 June 2021 of the principal amounts outstanding and the ECL on those loans: |
|
| Non-credit impaired | Credit impaired |
| ||||||
|
| Stage 1 | Stage 2 | Stage 3 | Total | |||||
| | Principal outstanding[1] | Allowance for ECL | Principal outstanding[1] | Allowance for ECL | Principal outstanding[1] | Allowance for ECL | Principal outstanding[1] | Allowance for ECL | |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| At 1 July 2020 | 41,633 | (24) | - | - | 5,346 | (4,412) | 46,979 | (4,436) | |
| Transfers from: - stage 1 to stage 2 - stage 1 to stage 3 | (10,000) (19,552) | 5 11 | 10,000 - | (5) - | - 19,552 | - (11) | - - | - - | |
| Net re-measurement of ECL arising from transfer of stage | - | - | - | (795) | - | (9,579) | - | (10,374) | |
| Net new and further lending/repayments, and foreign exchange movements | (5,736) | (1,411) | (4,367) | 349 | (6,271) | (108) | (16,374) | (1,170) | |
| Loans written-off in the year | (1,405) | 1,405 | - | - | (482) | 482 | (1,887) | 1,887 | |
| | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| At 30 June 2021 | 4,940 | (14) | 5,633 | (451) | 18,145 | (13,628) | 28,718 | (14,093) | |
| | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | ------------ | |
| | | ||||||||
| [1] | These are the principal amounts outstanding at 30 June 2021 and do not include the capitalised transaction fees, which are not subject to credit risk. At 30 June 2021, the amortised cost of the capitalised transaction fees totalled £44,000. | ||||||||
| An increase of 1% of total gross exposure into stage 3 (from stage 1) would result in an increase in ECL impairment allowance of £29,000 (2021: £43,000) based on applying the difference in average impairment coverage ratios to the movement in gross exposure. |
| |
| At 30 June 2022, the Board considered £13,373,000 (2021: £14,093,000) of loans to be impaired: |
| | 30 June 2022 | 30 June 2021 |
| | £'000 | £'000 |
| Direct SME loans | 10,419 | 8,693 |
| Platform loans | 2,954 | 5,400 |
| | ------------ | ------------ |
| Total impairment | 13,373 | 14,093 |
| | ------------ | ------------ |
| During the year, £1,880,000 (2021: £1,887,000) of loans were written off and included within realised loss on disposal of loans in the Statement of Comprehensive Income. |
| See note 3b and note 4i regarding the process of assessment of loan impairment. |
| |
| The carrying values of the loans at amortised cost (excluding capitalised transaction costs) are deemed to be a reasonable approximation of their fair values. |
| 15. Fair value of financial instruments | ||
| Investments at fair value through profit or loss | Year ended 30 June 2022 | Year ended 30 June 2021 |
| | £'000 | £'000 |
| Balance brought forward | - | 251 |
| Disposals in the year | - | (253) |
| Realised gain on disposal of investments at fair value through profit or loss |
- |
94 |
| Movement in unrealised gain on investments at fair value through profit or loss |
- |
(92) |
| | ------------ | ------------ |
| Balance at year end | - | - |
| | ------------ | ------------ |
| |
|
|
| Cost at year end | - | - |
| | ------------ | ------------ |
| The investment at fair value through profit or loss related to an investment in a Luxembourg fund which was sold during the previous financial year. |
|
|
| Transfers between levels There were no transfers between levels in the year (2021: none). |
|
|
| Financial assets and liabilities not designated as at fair value through profit or loss |
| The carrying values of the loans at amortised cost (excluding capitalised transaction costs) are deemed to be a reasonable approximation of their fair values. The carrying values of all other assets and liabilities not designated as at fair value through profit or loss are deemed to be a reasonable approximation of their fair values due to their short duration. |
| 16. Derivative financial instruments |
| In order to limit the exposure to foreign currency risk, the Company had previously entered into hedging contracts. However, in September 2020, the Company closed out its foreign currency forward contracts and it is not intended to enter into foreign exchange hedging contracts in the future. The Company realised no gain/loss on forward foreign exchange contracts during the year (2021: gain of £269,000).
|
| 17. Other receivables and prepayments | ||
| | 30 June 2022 | 30 June 2021 |
| | £'000 | £'000 |
| Accrued interest | 59 | 182 |
| Prepayments | 6 | 6 |
| Other receivables | - | 1 |
| | ------------ | ------------ |
| | 65 | 189 |
| | ------------ | ------------ |
| The carrying values of the accrued interest and other receivables are deemed to be reasonable approximations of their fair values. |
| 18. Other payables and accruals | ||
| | 30 June 2022 | 30 June 2021 |
| | £'000 | £'000 |
| Audit fee | 64 | 62 |
| Administration fee | 33 | 37 |
| Consultancy fee | 25 | - |
| Legal fees | 21 | - |
| Other payables and accruals | 13 | 20 |
| Directors' national insurance | 10 | 4 |
| Management fee | - | 25 |
| | ------------ | ------------ |
| | 166 | 148 |
| | ------------ | ------------ |
| The carrying values of the other payables and accruals are deemed to be reasonable approximations of their fair values. |
| 19. Reconciliation of liabilities arising from financing activities |
| IAS 7 requires the Company to detail the changes in liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Company's statement of cash flows as cash flows from financing activities.
As at 30 June 2022, the Company had no liabilities that would give rise to cash flows from financing activities (2021: none). |
| 20. Share capital | ||
| | 30 June 2022 | 30 June 2021 |
| | £'000 | £'000 |
| Authorised share capital: | | |
| Unlimited number of Ordinary Shares of 1 pence each | - | - |
| 43,857,133 B Shares of £1 each (2021: 43,857,133) | 43,857 | 43,857 |
| Unlimited C Shares of 10 pence each | - | - |
| Unlimited Deferred Shares of 1 pence each | - | - |
| 50,000 Management Share of £1 each (2021: 50,000) | 50 | 50 |
| | ------------ | ------------ |
| | 30 June 2022 | 30 June 2021 |
| | £'000 | £'000 |
| Called up share capital: | | |
| 52,660,350 Ordinary Shares of 1 pence each | 527 | 527 |
| 1 Management Share of £1 (2021: 1) | - | - |
| | ------------ | ------------ |
| | 527 | 527 |
| | ------------ | ------------ |
| Management Shares |
| The Management Share is entitled (in priority to any payment of dividend of any other class of share) to a fixed cumulative preferential dividend of 0.01% per annum on the nominal amount of the Management Share. |
| The Management Share does not carry any right to receive notice of, nor to attend or vote at, any general meeting of the Company unless no other shares are in issue at that time. The Management Share does not confer the right to participate in any surplus of assets of the Company on winding-up, other than the repayment of the nominal amount of capital. |
| During the year, no Management Shares were bought back or cancelled (2021: 49,999 Management Shares were bought back for £49,999 and cancelled). |
| |
| B Shares |
| The B Shares are entitled (in priority to any payment of dividend of any other class of share, with the exception of the Management Shares) to a fixed cumulative preferential dividend of 1% per annum on the nominal amount of the B Shares, such dividend to be paid annually on the date falling six months after the date on which the B Shares are issued and thereafter on each anniversary. The B Shares do not confer the right to participate in any surplus of assets of the Company on winding-up, other than the repayment of the nominal amount of capital. |
| |
| During the year 7,636,000 (2021: 10,269,000) B Shares of £1 each were issued and immediately redeemed by the Company in accordance with the B Share Scheme approved by Shareholders at a General Meeting held on 23 March 2021 (see note 5 for further details). As the B Shares were redeemed immediately upon issue, no cumulative preferential dividend was earned on those shares. |
| 21. Other reserves | |||||||
|
| Special distributable reserve [1] / [3] | Capital redemption reserve [3] | Profit and loss account [2] |
| |||
|
|
Distributable | Non-distributable |
Total | ||||
|
| £'000 | £'000 | £'000 | £'000 | £'000 | ||
| At 30 June 2020 | 48,181 | - | - | (3,226) | 44,955 | ||
| Realised revenue profit | - | - | 2,190 | - | 2,190 | ||
| Realised investment gains and losses | - | - | (2,181) | - | (2,181) | ||
| Unrealised investment gains and losses | - | - | - | (11,026) | (11,026) | ||
| Dividends paid | (4,324) | - | (766) | | (5,090) | ||
| B Shares issued during the year (notes 5 and 20) | (10,269) | - | - | - | (10,269) | ||
| B Shares redeemed during the year (notes 5 and 20) [3] | (10,269) | 10,269 | - | - | - | ||
| Management Share buy backs | (50) | 50 | - | - | - | ||
| | ------------ | ------------ | ------------ | ------------ | ------------ | ||
| At 30 June 2021 | 23,269 | 10,319 | (757) | (14,252) | 18,579 | ||
| Realised revenue profit | - | - | 549 | - | 549 | ||
| Realised investment gains and losses | - | - | (2,186) | - | (2,186) | ||
| Unrealised investment gains and losses | - | - | - | 1,083 | 1,083 | ||
| B Shares issued during the year (notes 5 and 20) | (7,636) | - | - | - | (7,636) | ||
| B Shares redeemed during the year (notes 5 and 20) [3] | (7,636) | 7,636 | - | - | - | ||
|
| ------------ | ------------ | ------------ | ------------ | ------------ | ||
| At 30 June 2022 | 7,997 | 17,955 | (2,394) | (13,169) | 10,389 | ||
|
| ------------ | ------------ | ------------ | ------------ | ------------ | ||
|
| |||||||
| [1] | During the period ended 30 June 2016, and following the approval of the Court, the Company cancelled the share premium account and transferred £51,143,000 to a special distributable reserve, being premium on issue of shares of £52,133,000 less share issue costs of £990,000. The special distributable reserve is available for distribution to Shareholders.
| ||||||
| [2] | The profit and loss account comprises both distributable and non-distributable elements, as defined by Company Law. Realised elements of the Company's profit and loss account are classified as "distributable", whilst unrealised investment gains and losses are classified as "non-distributable". | ||||||
|
| | ||||||
| [3] | The B Shares were issued out of the special distributable reserve, then the special distributable reserve was utilised again when the B Shares were redeemed, the B Share capital cancelled and an equal amount credited to the capital redemption reserve (see notes 5 and 20) | ||||||
| | |||||||
| With the exception of investment gains and losses, all of the Company's profit and loss items are of a revenue nature as it does not allocate any expenses to capital. | |||||||
| 22. Net asset value per Ordinary Share |
| The net asset value per Ordinary Share is based on the net assets attributable to the owners of the Company of £10,916,000 (2021: £19,106,000), less £1 (2021: £1), being amounts owed in respect of Management Shares, and on 52,660,350 (2021: 52,660,350) Ordinary Shares in issue at the year end. |
| 23. Financial Instruments and Risk Management |
| The Board (prior to 31 December 2021, the Former Investment Manager) manages the Company's portfolio to provide Shareholders with attractive risk adjusted returns, principally in the form of regular, sustainable dividends, through investment predominantly in a range of secured loans and other secured loan-based instruments originated through a variety of channels and diversified by way of asset class, geography and duration.
Prior to the change in investment policy on 17 September 2020, the Company sought to ensure that diversification of its portfolio was maintained, with the aim of spreading investment risk. |
| |
| Risk is inherent in the Company's activities, but it is managed through a process of ongoing identification, measurement and monitoring. The Company is exposed to market risk (which includes currency risk, interest rate risk and price risk), credit risk and liquidity risk from the financial instruments it holds. Risk management procedures are in place to minimise the Company's exposure to these financial risks, in order to create and protect Shareholder value. |
|
|
| Risk management structure |
| The Board (prior to 31 December 2021, the Former Investment Manager) is responsible for identifying and controlling risks. Prior to 31 December 2021, the Board of Directors supervised the Former Investment Manager and was ultimately responsible for the overall risk management approach within the Company.
The Company has no employees and is reliant on the performance of third party service providers. Failure by the Former Investment Manager, Administrator, Broker, Registrar or any other third party service provider to perform in accordance with the terms of its appointment could have a significant detrimental impact on the operation of the Company.
The market in which the Company participates is competitive and rapidly changing. The risks have not changed from those detailed on pages 20 to 30 in the Company's Prospectus, which is available on the Company's website, and as updated in the circular of 20 August 2020. |
|
|
| Risk concentration |
| Concentration indicates the relative sensitivity of the Company's performance to developments affecting a particular industry or geographical location. Concentrations of risk arise when a number of financial instruments or contracts are entered into with the same counterparty, or where a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of liquidity risk may arise from the repayment terms of financial liabilities, sources of borrowing facilities or reliance on a particular market in which to realise liquid assets. Concentrations of foreign exchange risk may arise if the Company has a significant net open position in a single foreign currency, or aggregate net open positions in several currencies that tend to move together. |
|
|
| In a Managed Wind-Down, the value of the Portfolio will be reduced as investments are realised and concentrated in fewer holdings, and the mix of asset exposure will be affected accordingly. |
| |
| With the aim of maintaining a diversified investment portfolio, and thus mitigating concentration risks, the Company had established (prior to the change in the investment policy on 17 September 2020) the following investment restrictions in respect of the general deployment of assets: |
| Investment Restriction | Investment Policy |
| Geography - Exposure to UK loan assets - Minimum exposure to non-UK loan assets | Minimum of 60% |
| Duration to maturity - Minimum exposure to loan assets with duration of less than 6 months - Maximum exposure to loan assets with duration of 6 - 18 months and 18 - 36 months - Maximum exposure to loan assets with duration of more than 36 months |
|
| Maximum single investment | 10% |
| Maximum exposure to single borrower or group | 10% |
| Maximum exposure to loan assets sourced through single alternative lending platform or other third party originator |
|
| Maximum exposure to any individual wholesale loan arrangement | 25% |
| Maximum exposure to loan assets which are neither sterling-denominated nor hedged back to sterling |
|
| Maximum exposure to unsecured loan assets | 25% |
| Maximum exposure to assets (excluding cash and cash-equivalent investments) which are not loans or investments with loan-based investment characteristics |
|
| The Company complied with the investment restrictions up to the change in investment policy on 17 September 2020, except that, on 9 September 2020, in preparation for the upcoming change in investment policy, additional foreign currency forward contracts were entered into in order to equally and oppositely match the open contracts at that date. |
| |
| Market risk (i) Price risk Price risk exposure arises from the uncertainty about future prices of financial instruments held. It represents the potential loss that the Company may suffer through holding market positions in the face of price movements. The investment at fair value through profit or loss (see note 15) was the only financial instrument exposed to price risk prior to being sold in the previous financial year. |
| |
| (ii) Foreign currency risk |
| Foreign currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign currency exchange rates. Currency risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Company's functional currency. The Company invests in securities and other investments that are denominated in currencies other than Sterling. Accordingly, the value of the Company's assets may be affected favourably or unfavourably by fluctuations in currency rates and therefore the Company will necessarily be subject to foreign exchange risks. |
| The impact of foreign currency fluctuations during the year comprised:
| ||
| | Year ended 30 June 2022 | Year ended 30 June 2021 |
| | £'000 | £'000 |
| Movement in unrealised gains and losses on loans due to movement in foreign exchange on non-Sterling loans | 363 | (1,283) |
| Net foreign exchange gain | 13 | 3 |
| | ------------ | ------------ |
| Foreign currency gain/(loss) in the year excluding the effect of foreign currency hedging | 376 | (1,280) |
| Movement in unrealised gain on foreign currency derivative financial instruments | - | 6 |
| Realised gain on foreign currency derivative financial instruments | - | 269 |
| | ------------ | ------------ |
| Foreign currency gain/(loss) in the year including the effect of foreign currency hedging | 376 | (1,005) |
| | ------------ | ------------ |
| As at 30 June 2022, a proportion of the net financial assets of the Company were denominated in currencies other than Sterling as follows: |
|
| Loans and receivables | Cash and cash equivalents | Other payables and accruals | Exposure |
| 30 June 2022 | £'000 | £'000 | £'000 | £'000 |
| US Dollars | 1,836 | 451 | (12) | 2,275 |
| Euros | 3,188 | - | - | 3,188 |
| | --------------- | --------------- | --------------- | --------------- |
|
| 5,024 | 451 | (12) | 5,463 |
|
| --------------- | --------------- | --------------- | --------------- |
| 30 June 2021 |
|
|
| |
| US Dollars | 2,713 | 1 | - | 2,714 |
| Euros | 4,293 | - | - | 4,293 |
| | --------------- | --------------- | --------------- | --------------- |
|
| 7,006 | 1 | - | 7,007 |
| | --------------- | --------------- | --------------- | --------------- |
| In order to limit the exposure to foreign currency risk, the Company had previously entered into hedging contracts. However, in September 2020, the Company closed out its foreign currency forward contracts and it is not intended to enter into foreign exchange hedging contracts in the future. |
| |
| At 30 June 2022, if the exchange rates for US Dollars and Euros had strengthened/weakened by 5% against Sterling with all other variables remaining constant, net assets at 30 June 2022 and the profit/(loss) for the year ended 30 June 2022 would have increased/(decreased) by £288,000/£(260,000) (2021: increased/(decreased) by £369,000/£(334,000)). |
| (ii) Interest rate risk |
| Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. The Company is exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial instruments and cash flow. However, due to the fixed rate nature of the majority of the loans, cash and cash equivalents of £2,770,000 (2021: £4,396,000) were the only interest bearing financial instruments subject to variable interest rates at 30 June 2022. Therefore, if interest rates had increased/decreased by 50 basis points, with all other variables held constant, the change in value of interest cash flows of these assets in the year would have been £14,000 (2021: £22,000). |
|
| Fixed interest | Variable interest | Non-interest bearing | Total | |
| 30 June 2022 | £'000 | £'000 | £'000 | £'000 | |
| Financial assets | | | | | |
| Loans [1] | 8,247 | - | - | 8,247 | |
| Other receivables | - | - | 59 | 59 | |
| Cash and cash equivalents | - | 2,770 | - | 2,770 | |
|
| ------------ | ------------ | ------------ | ------------ | |
| Total financial assets | 8,247 | 2,770 | 59 | 11,076 | |
| | ------------ | ------------ | ------------ | ------------ | |
| Financial liabilities | | | | | |
| Other payables | - | - | (166) | (166) | |
|
| ------------ | ------------ | ------------ | ------------ | |
| Total financial liabilities | - | - | (166) | (166) | |
| | ------------ | ------------ | ------------ | ------------ | |
| | | | | | |
| Total interest sensitivity gap | 8,247 | 2,770 | (107) | 10,910 | |
| | ------------ | ------------ | ------------ | ------------ | |
| 30 June 2021 |
|
|
|
| |
| Financial assets | | | | | |
| Loans [1] | 14,669 | - | - | 14,669 | |
| Other receivables | - | - | 183 | 183 | |
| Cash and cash equivalents | - | 4,396 | - | 4,396 | |
|
| ------------ | ------------ | ------------ | ------------ | |
| Total financial assets | 14,669 | 4,396 | 183 | 19,248 | |
| | ------------ | ------------ | ------------ | ------------ | |
| Financial liabilities | | | | | |
| Other payables | - | - | (148) | (148) | |
|
| ------------ | ------------ | ------------ | ------------ | |
| Total financial liabilities | - | - | (148) | (148) | |
| | ------------ | ------------ | ------------ | ------------ | |
| | | | | | |
| Total interest sensitivity gap | 14,669 | 4,396 | 35 | 19,100 | |
| | ------------ | ------------ | ------------ | ------------ | |
|
| | ||||
| [1] | Of the loans of £8,247,000 (2021: £14,669,000), one loan amounting to £3,132,000 (2021: £4,119,000) included both fixed elements and variable elements, based on the performance of the borrowers' underlying portfolios of loans. | ||||
| The Board (prior to 31 December 2021, the Former Investment Manager) manages the Company's exposure to interest rate risk, paying heed to prevailing interest rates and economic conditions, market expectations and its own views as to likely moves in interest rates.
|
| Although it has not done so to date, the Company may implement hedging and derivative strategies designed to protect investment performance against material movements in interest rates. Such strategies may include (but are not limited to) interest rate swaps and will only be entered into when they are available in a timely manner and on terms acceptable to the Company. The Company may also bear risks that could otherwise be hedged where it is considered appropriate. There can be no certainty as to the efficacy of any hedging transactions. |
| Credit risk |
| Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company, resulting in a financial loss to the Company.
At 30 June 2022, credit risk arose principally from cash and cash equivalents of £2,770,000 (2021: £4,396,000) and balances due from the platforms and SMEs of £8,247,000 (2021: £14,669,000). The Company seeks to trade only with reputable counterparties that the Board (prior to 31 December 2021, the Former Investment Manager) believes to be creditworthy. |
| |
| The Company's credit risks principally arise through exposure to loans provided by the Company, either directly or through platforms. These loans are subject to the risk of borrower default. Where a loan has been made by the Company through a platform, the Company will only receive payments on those loans if the corresponding borrower through that platform makes payments on that loan. The Board (prior to 31 December 2021, the Former Investment Manager) has sought to reduce the credit risk by obtaining security on the majority of the loans and by investing across various platforms, geographic areas and asset classes, thereby ensuring diversification and seeking to mitigate concentration risks, as stated in the "risk concentration" section earlier in this note. |
| |
| The cash pending investment or held on deposit under the terms of an investment instrument may be held without limit with a financial institution with a credit rating of "single A" (or equivalent) or higher to protect against counterparty failure.
The Company may implement hedging and derivative strategies designed to protect against credit risk. Such strategies may include (but are not limited to) credit default swaps and will only be entered into when they are available in a timely manner and on terms acceptable to the Company. The Company may also bear risks that could otherwise be hedged where it is considered appropriate. There can be no certainty as to the efficacy of any hedging transactions. |
| |
| Please see note 3b and note 4 for further information on credit risk and note 14 for information on the loans at amortised cost. |
| |
| Liquidity risk Liquidity risk is defined as the risk that the Company will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The principal liquidity risk is contained in unmatched liabilities. The liquidity risk at 30 June 2022 was low since the ratio of cash and cash equivalents to unmatched liabilities was 17:1 (2021: 30:1). |
| The Board (prior to 31 December 2021, the Former Investment Manager) managed the Company's liquidity risk by investing primarily in a diverse portfolio of loans, in line with the Prospectus and as stated in the "risk concentration" section earlier in this note. However, as the Company is in a Managed Wind-Down, the value of the Portfolio will be reduced as investments are realised and concentrated in fewer holdings, and the mix of asset exposure and liquidity will be affected accordingly.
|
| The maturity profile of the portfolio is as follows: |
|
| 30 June 2022 | 30 June 2021 |
| | Percentage | Percentage |
| 0 to 6 months | 55.1 | 54.7 |
| 6 months to 18 months | 31.0 | 7.6 |
| 18 months to 3 years | 13.9 | 27.9 |
| Greater than 3 years | - | 9.8 |
| | ------------ | ------------ |
| | 100.0 | 100.0 |
| | ------------ | ------------ |
| Capital management |
| During the year, the Board's policy was to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future operation of the Company. The Company's capital comprises issued share capital, retained earnings, a capital redemption reserve (see note 3(i)) and a distributable reserve created from the cancellation of the Company's share premium account. To maintain or adjust the capital structure, the Company could issue new Ordinary Shares, B Shares and/or C Shares, buy back shares for cancellation, buy back shares to be held in treasury or redeem B Shares. The Company returned capital to Shareholders through the use of a B Share Scheme, which was approved by Shareholders on 23 March 2021 (see note 5).
During the year ended 30 June 2022, the Company did not issue any new Ordinary or C shares, nor did it buy back any Ordinary Shares for cancellation or to be held in treasury (2021: none). 49,999 Management Shares were bought back for £49,999 and cancelled during the year ended 30 June 2021 (see note 21).
During the year ended 30 June 2022, 7,636,000 B Shares were issued and bought back for £7,636,000 (see note 5) (2021: 10,269,000 B Shares issued and bought back for £10,269,000).
The Company is subject to externally imposed capital requirements in relation to its statutory requirement relating to dividend distributions to Shareholders. The Company meets the requirement by ensuring it distributes at least 85% of its distributable income by way of dividend. |
| 24. Contingent assets and contingent liabilities |
| There were no contingent assets or contingent liabilities in existence at the year end (2021: none). |
| 25. Events after the reporting period |
| There were no other significant events after the reporting period. |
| 26. Parent and Ultimate Parent |
| The Directors do not believe that the Company has an individual Parent or Ultimate Parent, or an ultimate controlling party. |
--- ENDS ---
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