REG - Funding Circle Hldgs - Final Results
10/03/2022 07:01
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RNS Number : 2689E Funding Circle Holdings PLC 10 March 2022
Funding Circle Holdings plc
Full Year 2021 Results
Embargoed until 7.00am, 10 March 2022
THIS ANNOUNCEMENT INCLUDES INSIDE INFORMATION AS DEFINED IN ARTICLE 7 OF THE
MARKET ABUSE REGULATION NO. 596/2014
Funding Circle Holdings plc ("Funding Circle") today announces results for the
year ended 31 December 2021.
Lisa Jacobs, CEO, said:
"2021 was a successful year for Funding Circle. We continued to deliver a
superior customer experience through our world-class technology, with over 70%
of UK applications now receiving an instant decision. SMEs are increasingly
using digital channels to manage all aspects of their business and this trend
is here to stay.
Our focus for the last two years has been on profitable growth and today's
results highlight the excellent progress we have made. I am particularly proud
to announce AEBITDA of £92 million and £64 million of operating profit,
exceeding our previous guidance.
We are in a strong position as a business and as we look ahead to the rest of
2022 and beyond, there is a bright future ahead of us. A decade of R&D
is now coming to fruition as we begin to empower small businesses to not only
borrow, but pay and spend as well".
Performance highlights
2021 2020 % change year-on-year
£m £m
Loans under Management ("LuM") 4,457 4,214 5.8%
Originations 2,296 2,742 (16%)
Fee income ("Operating income") 165.5 155.7 6.3%
Net investment income 1 41.4 66.3 (38%)
Total income 206.9 222.0 (7%)
Fair value gains/(losses) 28.6 (118.3) N/M
Net income 235.5 103.7 127%
AEBITDA 2 91.8 (63.8) N/M
Operating profit (loss) 64.2 (106.3) N/M
Profit (Loss) before taxation 64.1 (108.1) N/M
Cash 224.0 103.3 117%
Net Assets 288.0 217.6 32%
Financial summary:
· Operating income of £165.5 million (2020: £155.7 million) up
6.3% driven by higher servicing fees.
· Investment income of £41.4 million (2020: £66.3 million) down
38% as investments were monetised in line with strategy.
· Total income of £206.9 million (2020: £222.0 million) down 7%
as a result of anticipated lower investment income.
· Fair Value gain of £28.6 million (2020: losses of £118.3
million) due to positive revaluations, reflecting underlying credit
performance.
· Net Income of £235.5 million (2020: 103.7 million) up 127%
reflecting positive revaluations in Fair Value.
· Loans under management of £4.46 billion (2020: £4.21 billion)
up 5.8% and originations of £2.30 billion (2020: £2.74 billion) down 16%
year-on-year, reflecting the conclusion of CBILS and PPP.
· AEBITDA of £91.8 million (2020: negative £63.8 million), UK
business AEBITDA of £61.9 million (2020: £6.5 million).
· Operating expenses reduced 12% to £167.4 million (2020: £191.3
million) following cost management initiatives.
· Operating profit of £64.2 million (2020: negative £106.3
million), UK business: £44.3 million operating profit (2020: negative £7.9
million).
· Net assets of £288.0 million (2020: £217.6 million), up 32% and
comprising £224.0 million cash (2020: £103.3 million).
1 Net investment income refers to investment income less investment expense.
2 ("AEBITDA") Adjusted EBITDA represents operating profit/(loss) before
depreciation and amortisation, share-based payment charges, associated social
security costs, foreign exchange gains/(losses), and exceptional items. A
reconciliation between AEBITDA and operating profit/(loss) is shown in the
Business Review.
Operating and Strategic Summary:
· We have a proven business model:
o The quality and resilience of the loans Funding Circle originates has been
proven through the cycle.
o All UK and US cohorts expected to deliver positive annualised returns with
projections for Covid-affected cohorts upgraded.
o We continue to see strong demand from investors to fund loans in the UK
and US.
o Covid has led to a rapid acceleration in the shift towards online in small
business lending and this increased digital usage is here to stay. 68% of SMEs
are looking to manage as many aspects of their business via digital channels
as possible going forward 3 .
· We have a strong leadership position in the UK:
o Funding Circle is the leading SME loans platform in the UK and has over 10
years' experience of lending to SMEs.
§ Approximately £4bn of loans under management in the UK (Dec 20:
£3.3bn).
o The superior experience we deliver to customers leads to high customer
advocacy and stable repeat rates.
§ Net promoter score of 82 in the UK.
§ On average, UK customers take out 2 loans every 5 years.
· Our world-class technology continues to deliver a superior
customer experience:
o At Funding Circle we are reinventing small business lending through
technology and machine learning.
o Our world-class tech platform delivers significant customer benefits and
creates a deep moat around our business.
o Over the past 10 years, we've built the capability for SMEs in the UK to
receive an instant lending decision. Today, more than 70% of applications
receive an instant decision in the UK. This figure is up from c.60% at our
Half Year results in September.
o In the UK, our 8(th) generation risk models significantly outperform
traditional bureau scores, optimising access whilst delivering strong investor
returns.
o Our Decision Engine platform generates personalised customer journeys,
pricing and propositions which helps to increase conversion.
o Our data lake has over 2 billion data points on SMEs across the UK and US
enabling us to build accurate and predictive models.
· We have ambitious growth opportunities over the medium-term:
o A combination of our strong financial position, world-class technology and
superior customer experiences has meant that today we are at an inflection
point.
o Our medium term plan is focused on empowering small businesses to not only
borrow, but pay and spend as well. This will make Funding Circle a
multi-product platform, serving a direct and embedded audience.
o In order to deliver on this opportunity we are focused on three pillars:
§ Attract more businesses: strengthen direct and indirect channels, and
embed natively in more partner environments through our API.
§ Say yes to more businesses: optimise our platform, expand our products,
and leverage our marketplace for everyone else.
§ #1 in new products: empower small businesses to not only borrow, but pay
and spend as well.
Launch of Funding Circle's Economic Impact Report:
Alongside today's results, Funding Circle, in partnership with Oxford
Economics, today publishes its 2021 Economic Impact Report. Key findings from
the report include:
· In 2021, lending through Funding Circle's UK platform helped
generate more than £7bn in GDP while creating and sustaining 100,000 jobs.
· The share of SMEs intending to grow has doubled since Q2 2020 and
is now at pre-pandemic levels.
· 60% of SMEs that took a Funding Circle loan in 2021 were
first-time users of online finance; almost eight out of ten of these say they
will come back to Funding Circle first in future.
· Three-quarters of Funding Circle's customers expect to require
further finance and 40% have said they expect to require finance in the next
12 months, primarily for growth or investment. The proportion of SMEs happy to
use finance to meet their growth aspirations is at its highest level since
2016.
· The full report can be found here:
https://www.fundingcircle.com/uk/impact
(https://www.fundingcircle.com/uk/impact)
Outlook:
The business is in the strongest position it has been and we have proven the
resilience of our model over the last two years. The economic environment is
uncertain and, as previously highlighted, the market continues to be distorted
as a result of Covid Government loan schemes. However, as demand returns to
pre-Covid levels through 2022, we are well placed to capture the opportunity
going forward.
2022 FY guidance
· Group operating income will be in the range of £145m - £155m as
we start to see demand normalising.
· Group investment income will continue to decline. Investment
income will be in the £10m - £15m range.
· Group total income will therefore be in the range of £155m -
£170m.
· The business will continue to be AEBITDA positive with a skew to
H2.
2025 guidance
· By 2025 we expect UK total income (primarily operating income) of
at least £220m. 2025 AEBITDA margins at 30-35%.
· We anticipate at least £70m of US total income (primarily
operating income) by 2025 having reached AEBITDA breakeven during 2024
(incurring maximum cumulative AEBITDA losses of c.£25m to get to breakeven).
· For FlexiPay (including FlexiPay Card), we see significant growth
opportunities between now and 2025 but it remains early to be precise on
income expectations.
· By 2025, all segments of the Group to be profitable.
Board changes:
As announced at the Half Year results in September 2021, Samir Desai stepped
down from his role as CEO on January 1(st) and was replaced by Lisa Jacobs as
CEO. Samir remains a Non-Executive Director on the Board.
Changes to retail lending:
Today we have confirmed to customers that we are permanently closing the
retail platform to new investments. Retail lending represents only c.5% of
Funding Circle's total loans under management and has been closed since March
2020.
Retail investors in the UK will continue to receive repayments of interest and
principal every month and can withdraw these funds at any time. Since launch
in 2010, retail investors have earned average net returns (after fees and bad
debts) of c.5% annually lending to businesses on the platform.
Analyst presentation:
A presentation for analysts will be held today via webcast at 9:30am. Please
contact IR@fundingcircle.com (mailto:IR@fundingcircle.com) if you wish to
attend.
An on-demand replay will also be available on the Funding Circle website
(corporate.fundingcircle.com) following the presentation.
3 https://www.ey.com/en_gl/banking-capital-markets/the-five-step-journey-to-sme-banking-transformation
(https://www.ey.com/en_gl/banking-capital-markets/the-five-step-journey-to-sme-banking-transformation)
Investor relations and media relations:
Investor Relations
David de Koning - Director of Investor Relations and Communications (0203 927
3893)
Media relations
Headland Consultancy: Mike Smith / Stephen Malthouse (0203 805 4822)
About Funding Circle:
Funding Circle (LSE: FCH) is a small and medium enterprise ("SME") loans
platform. Since launching in 2010, investors and lenders across Funding
Circle's geographies - including banks, asset management companies, insurance
companies, government-backed entities, retail investors and funds - have lent
more than £14 billion to more than 120,000 businesses globally.
Forward looking statements and other important information:
This document contains forward looking statements, which are statements that
are not historical facts and that reflect Funding Circle's beliefs and
expectations with respect to future events and financial and operational
performance. These forward looking statements involve known and unknown risks,
uncertainties, assumptions, estimates and other factors, which may be beyond
the control of Funding Circle and which may cause actual results or
performance to differ materially from those expressed or implied from such
forward-looking statements. Nothing contained within this document is or
should be relied upon as a warranty, promise or representation, express or
implied, as to the future performance of Funding Circle or its business. Any
historical information contained in this statistical information is not
indicative of future performance.
The information contained in this document is provided as of the dates
shown. Nothing in this document should be construed as legal, tax,
investment, financial, or accounting advice, or solicitation for or an offer
to invest in Funding Circle.
Business Review
At Funding Circle we deliver an amazing customer experience through
technology, machine learning and data science.
Over the past 10 years, we've revolutionised SME lending and built the
capability for SMEs in the UK to receive an instant lending decision. This is
a first in SME term lending.
Today, as the leading global platform for small business loans we have helped
more than 120,000 small businesses to access more than £14 billion. Our
investment in technology has resulted in strong customer satisfaction scores
and high repeat rates, helping us to grow alongside our small businesses. Our
proven model has been demonstrated through the cycle as seen by the fact that
every cohort of loans is expected to deliver positive returns to investors.
This resilience of the loan portfolio has proven attractive to institutional
investors, with high levels of demand to fund loans in both the UK and US.
We believe that, as we get bigger and help more small businesses access the
finance they need to grow, we will create a stronger platform that drives
significant competitive advantage. This creates a virtuous circle that will
enable us to continue to help thousands of small businesses around the world
and drive market share.
2021 overview
During the first half of 2021 we continued to provide loans through SME
government-guarantee schemes in both the UK and US. The Coronavirus Business
Interruption Loan Scheme ("CBILS") in the UK ended on 31 March 2021 with
applications received by that date continuing to be processed until June 2021.
The Paycheck Protection Program ("PPP") through the Small Business
Administration ("SBA") in the US closed on 4 May 2021.
Following the end of these schemes, in the UK we relaunched our core product
alongside the Recovery Loan Scheme ("RLS"), a new 80% government-guaranteed
scheme introduced following CBILS. RLS is expected to cease in June 2022 and
we will transition to operating solely our core product by the end of H1. In
the US we also relaunched our core product for SMEs following the completion
of PPP.
As a result of these schemes running through 2021, originations for the year
were weighted towards the first half of the year. Following the relaunch of
core loans in both the UK and US, we saw continued growth quarter on quarter
from June 2021.
Originations
2021 2020
H1 H2 FY H1 H2 FY
£m £m £m £m £m £m
United Kingdom 1,381 591 1,972 662 1,449 2,111
United States 247 69 316 410 171 581
Developing Markets 7 1 8 40 10 50
1,635 661 2,296 1,112 1,630 2,742
The loans under each of the government schemes have different characteristics,
and therefore the income that Funding Circle earns on them is different:
- CBILS - for loans issued under this scheme, the British Business
Bank ("BBB") provided an 80% guarantee to lenders, should the loan default, in
exchange for a fee from the investors. The BBB paid the origination fees on
behalf of borrowers together with the interest due on the loans for the first
year. No principal repayments were required in the first year. Thereafter
borrowers pay the interest and principal repayments. Investors continue to pay
servicing fees.
- RLS - for loans under this scheme, the BBB continued to provide
a guarantee to lenders to ensure that there was sufficient availability from
lenders to support small businesses, again in exchange for a fee from the
investors (which in Funding Circle's case, as with CBILS, was shared
proportionately among Funding Circle and its applicable investors, with
Funding Circle's share of both the loan amounts and fee being approximately 1%
of the total). The loans then had characteristics similar to the core loan
product with borrowers paying the origination fees, interest and repayments
and investors paying the servicing fees. However the borrower, not the BBB,
pays the fees and interest in the first year.
- PPP - the loans issued under the PPP scheme have very different
characteristics to those under CBILS or RLS. Under this scheme, Funding Circle
earns an origination fee, paid by the SBA, but there are no servicing fees
associated with the loans. This is because borrowers are allowed to apply for
the loans to be forgiven by the SBA if the funds are used to pay eligible
expenses such as payroll costs of employees.
Loans under management
31 December 31 December Change
2021 2020
£m £m %
United Kingdom 3,944 3,271 21%
United States 425 759 (44%)
Developing Markets 88 184 (52%)
4,457 4,214 6%
Loans under management were £4,457 million at 31 December 2021, up 6% on the
prior year. This was driven by the strong origination performance in the UK
during the year, especially in H1. The loans under management in the US
declined in the year as previously originated loans continued to repay and
borrowers who had taken out PPP loans were applying for and getting
forgiveness of those loans.
Geographic highlights
Net income/(loss) 2021 2020
United Kingdom United States Developing Markets Total United Kingdom United States Developing Markets Total
£m £m £m £m £m £m £m £m
Fee income ("operating income") 137.7 25.1 2.7 165.5 123.9 25.7 6.1 155.7
Net Investment income 21.7 19.7 - 41.4 29.0 37.3 - 66.3
Total income 159.4 44.8 2.7 206.9 152.9 63.0 6.1 222.0
Fair value gains/(losses) 10.5 18.1 - 28.6 (43.8) (74.5) - (118.3)
Net income/(loss) 169.9 62.9 2.7 235.5 109.1 (11.5) 6.1 103.7
Segment profit 2021 2020
United Kingdom United States Developing Markets Total United Kingdom United States Developing Markets Total
£m £m £m £m £m £m £m £m
Adjusted EBITDA 61.9 28.4 1.5 91.8 6.5 (62.4) (7.9) (63.8)
Depreciation and amortisation (9.7) (4.1) (0.1) (13.9) (9.4) (6.5) (1.3) (17.2)
Share-based payments and social security costs (7.6) (1.3) - (8.9) (5.0) (1.2) (0.4) (6.6)
Foreign exchange losses (0.3) (0.6) - (0.9) - - - -
Exceptional items - (3.9) - (3.9) - (13.5) (5.2) (18.7)
Operating profit/(loss) 44.3 18.5 1.4 64.2 (7.9) (83.6) (14.8) (106.3)
Operating AEBITDA 4 29.7 (9.4) 1.5 21.8 21.4 (25.3) (7.9) (11.8)
Investment AEBITDA 4 32.2 37.8 - 70.0 (14.9) (37.1) - (52.0)
United Kingdom
During the year, the UK originated £1,972 million (2020: £2,111 million),
with loans under management growing by 21% to £3,944 million. Whilst
transaction fees were 7% lower than 2020, in line with originations, the
strong growth in loans under management drove higher servicing fees and
resulted in operating income of £137.7 million (2020: £123.9 million).
Investment income was lower than in 2020, driven by the continuing paying down
of loans in the investment vehicles and, in November 2021, the UK sold the
loans held within its warehouse vehicle, crystallising c.£32 million of cash
after paying off the bank debt associated with the vehicle.
The SME loans that are held in the investment vehicles are carried on the
balance sheet at fair value. With improved actual performance and prospects
for small businesses, as the economy has opened up, compared to the
expectations at 31 December 2020 when the country was still under a full
lockdown, the fair value of the loans has improved materially resulting in a
fair value gain of £10.5 million (2020: loss of £43.8 million). This helped
drive net income to £169.9 million (2020: £109.1 million).
Marketing costs remained at similar levels to 2020 of c.29% of operating
income with other costs remaining consistent year-on-year. The UK generated
adjusted EBITDA of £61.9 million (2020: £6.5 million) and an operating
profit of £44.3 million (2020: loss of £7.9 million).
United States
The US had a strong first six months of trading in 2021 as it continued to
originate PPP loans before reverting to its core product in June 2021 as PPP
ended.
In July 2020, the US business was granted access to the use of the Federal
Reserve's PPP liquidity facility ("PPPLF") although PPP was paused between
September and December 2020 in the run up to the US elections, before
relaunching in January 2021.
Using the PPPLF allowed for lending to be undertaken with funds coming
directly from this facility. Prior to that date, all PPP lending was done
through our marketplace (referral) model for which we earned reduced
origination fees.
Accordingly, whilst total origination in 2021 totalled £316 million compared
to £581 million in 2020, operating income for the US business remained at
consistent levels to 2020 at £25.1 million.
Consistent with the UK, the investment vehicles continued to amortise down and
in June 2021, the US business sold loans held in the US warehouse for c.£38
million of net cash proceeds. Together these led to investment income reducing
to £19.7 million (2020: £37.3 million).
The improved economic outlook in the US compared to the view as at 31 December
2020, together with the strength and resilience of our borrowers, led to
material improvements in fair value with a fair value gain of £18.1 million
(2020: loss of £74.5 million) and drove investment AEBITDA (being net
investment income and fair value gains/(losses)) to £37.8 million (2020: loss
of £37.1 million). Operating profit was £18.5 million (2020: loss of £83.6
million).
In the prior year, the Group announced that it was restructuring the US
operations, downsizing the premises in San Francisco and reducing the
headcount across the business. This, coupled with reduced investor incentives
paid in the early stages of PPP, led to reduced costs of c.£13 million and an
improvement in the operating AEBITDA loss, reducing to a loss of £9.4 million
compared to a loss in 2020 of £25.3 million. This reduction was also impacted
by a stronger pound with the average $:£ exchange rate of $1.37:£1 in 2021
compared to $1.28:£1 in 2020.
4 Investment AEBITDA is defined as investment income, investment expense
and fair value adjustments, and operating AEBITDA represents AEBITDA excluding
investment AEBITDA.
Announcement of Medium Term Plan
Today we are announcing our new medium term plan which is focused on helping
small businesses to not only borrow, but pay and spend as well. This will make
Funding Circle a multi-product platform, serving a direct and embedded
audience.
The new medium-term plan is based on three strategic pillars:
· attract more businesses
· say yes to more businesses
· #1 in new products
Attract more businesses
Strengthen direct and indirect channels, and embed natively in more partner
environments through our API.
We're working on a number of areas, including growing and improving our
existing distribution channels, and leveraging our market-leading technology.
We're particularly excited about embedding our services into our partners'
environments in both the UK and the US.
In the UK, we've created a new capability to enable partners to seamlessly
offer Funding Circle loans to SMEs within their own website and we announced
two new partners - Capitalise and Funding Options - in 2021, with more to
follow in 2022. In the US, we're developing our Lending as a Service ("LaaS")
partnership programme with banks and other large SME providers who are looking
to leverage our technology platform to provide small business loans to their
customers.
Through these developments, we're deepening key relationships and increasing
our distribution potential. It's a unique proposition that will help us extend
our reach and attract more businesses in the UK and the US.
Say yes to more businesses
Optimise our platform, expand our products and leverage our marketplace for
everyone else.
As part of our focus on saying yes to more customers, we want to offer every
customer that comes to Funding Circle a personalised journey that suits their
needs, ensuring we deliver the right product to every applicant. This will
mean we increase the conversion of the quality applications we receive today.
In order to deliver the right product to every applicant we will launch new
risk segments and expand our marketplace offering in both the UK and US. This
will connect borrowers with other lenders in the market, offering further
products beyond our current range, such as larger loans, asset finance and
invoice finance.
#1 in new products
Empower small businesses to not only borrow, but to pay and spend as well.
Since launching in August 2021, our beta trial of FlexiPay has exceeded our
expectations and we have seen high levels of engagement from c.850 trial
customers.
· Total value of credit limits approved: £11.8m with £7.6m
originated.
· Average FlexiPay payment is 20% higher than expected.
· Average value of transactions is double our initial expectations.
In 2022, we expanded the trial to new customers and will launch in full in Q3
2022.
We will also launch FlexiPay Card in the UK to help SMEs settle regular
payments and meet expenditure needs. We expect to launch to a selection of our
existing customers by the end of 2022.
Finance review
Overview
The financial year has seen significant growth in net income and operating
profit compared to the previous year. The Group's operating profit of £64.2
million compared to a loss of £106.3 million in 2020.
The drivers for this are strong originations, record loans under management,
cost actions and the quality of our underwriting coming through. The results
also benefited from the improved economic outlook and the positive impact this
has had on the value of the SME loans held on balance sheet and the
corresponding fair value gains/(losses). The prior year included one-off
exceptional items following the reorganisation of the US and Developing
Markets businesses.
Profit and loss
2021 2020
Before exceptional items Before exceptional items
Exceptional items Exceptional items
Total Total
£m £m £m £m £m £m
Transaction fees 115.0 - 115.0 122.5 - 122.5
Servicing fees 47.0 - 47.0 30.2 - 30.2
Other income 3.5 - 3.5 3.0 - 3.0
Fee income ("operating income") 165.5 - 165.5 155.7 - 155.7
Investment income 53.7 - 53.7 89.0 - 89.0
Investment expense (12.3) - (12.3) (22.7) - (22.7)
Total income 206.9 - 206.9 222.0 - 222.0
Fair value gains/(losses) 28.6 - 28.6 (118.3) - (118.3)
Net income 235.5 235.5 103.7 - 103.7
People costs (77.7) - (77.7) (81.3) (4.0) (85.3)
Marketing costs (46.9) - (46.9) (46.8) - (46.8)
Depreciation, amortisation and impairment (13.9) (3.9) (17.8) (17.2) (13.7) (30.9)
Loan repurchase credit/(charge) 0.1 - 0.1 (6.2) - (6.2)
Other costs (29.0) - (29.0) (39.8) (1.0) (40.8)
Operating expenses (167.4) (3.9) (171.3) (191.3) (18.7) (210.0)
Operating profit/(loss) 68.1 (3.9) 64.2 (87.6) (18.7) (106.3)
Total income which consists of operating income and investment income less
investment expense, totalled £206.9 million (2020: £222.0 million). The
reduction was principally due to the reduced net investment income.
Operating income which includes transaction fees, service fees and other
income, was £165.5 million (2020: £155.7 million).
- Transaction fees, being the fees Funding Circle earns on
originations, were £115.0 million compared to £122.5 million in 2020. This
small reduction reflects the 7 months of CBILS originations in 2020 from May
2020 onwards compared to 5 months during 2021 up until May 2021.
The yields on CBILS loans in the UK were set at 4.75% and yields on subsequent
UK lending have been at similar levels. The yields on the US PPP loans were
nearly 9% in 2021 driven by i) the use of the PPP liquidity facility to
originate loans directly rather than referring them to our partners for a
referral fee and ii) following the extension of the programme, PPP loans in
2021 were generally lower value loans which attracted a higher yield. Yields
post-PPP in the US have normalised to c.4.50%.
- Servicing fees, being the annual fees for servicing loans under
management, increased to £47.0 million following the strong origination
levels in the UK which increase loans under management. Servicing yields on
CBILS loans were fixed at 1.25% although there are no servicing fees earned on
PPP loans.
- Other income represents a fee premium we receive from certain
institutional investors in respect of buying back defaulted loans under a
historical loan purchase commitment together with collection fees where we are
able to charge a fee to investors for recovering monies on defaulted loans.
Other income remained consistent with 2020.
Net investment income represents the investment income, less investment
expense, on loans invested within Funding Circle's investment vehicles. No new
loans were originated in the securitisation vehicles during the year and the
net investment income earned has continued to reduce as loans paid down.
Additionally the reduction was accelerated following the monetisation of the
warehouse vehicles through selling of the loans and the repayment of the
associated bank debt.
Fair value gains/(losses) represent the gains or losses arising on the
Group's investments in SME loans held on balance sheet that are carried at
fair value. The investments are valued using discounted cash flows that take
into account projected cash flows from the underlying SME loans including
principal and interest repayments, prepayment rates and expected levels of
defaults and recoveries.
At 31 December 2020, the UK was still in lockdown with significant
uncertainties for the prospects of SME businesses. Since then, there has been
an overall improved view of the economic outlook and accordingly there has
been a more favourable view on the expected default levels and recoveries with
consequential improvements to the valuation of the loans held on balance
sheet. As a result, fair value gains in the year were £28.6 million (2020:
loss of £118.3 million).
Net income, defined as total income after fair value adjustments was £235.5
million (2020: £103.7 million).
Operating expenses
Operating expenses have reduced overall by £38.7 million to £171.3 million.
Some of this reduction is caused by reduced exceptional costs. When these
costs are excluded, operating expenses have dropped by £23.9 million. This
reduction was largely a result of the annualisation of cost savings following
the reorganisation of the US and Developing Markets businesses in 2020.
People costs (including contractors) remain the Group's largest cost. Before
capitalised development spend is taken into account, the total wage bill
(including contractors) was £85.9 million (2020: £94.7 million). This
reduction was a result of savings from the reduced headcount following the
reorganisation of the US and Developing Markets during 2020. This was a
further reduction from 2019 when people costs totalled £104.6 million. People
costs includes share-based payments of £8.9 million (2020: £5.6 million).
2021 2020 Change
£m £m %
People costs 85.9 94.7 (9%)
Less capitalised development spend ("CDS") (8.2) (9.4) (13%)
People costs net of CDS 77.7 85.3 (9%)
Average headcount (incl. contractors) 929 1,002 (7%)
Year end headcount (incl. contractors) 979 863 13%
Marketing costs, which consist of online and direct mail, TV and brand
campaigns and broker commissions, remained flat year-on-year with overall
marketing spend just under 30% of operating income.
Depreciation, amortisation and impairment costs were £17.8 million (2020:
£30.9 million). This includes impairments of the right-of-use
property-related assets in the US and Developing Markets following the
reorganisations. Once these are excluded, the charge was £13.9 million (2020:
£17.2 million), the reduction being caused by the downsizing of the San
Francisco office.
Loan repurchase charges relate to the Developing Markets, where Funding Circle
entered into arrangements to buyback certain defaulted loans from certain
financial institutions under a loan purchase commitment. In return, the
business received a fee premium (reflected in other income).
Under IFRS 9 this commitment is accounted for under the expected credit loss
model. Following the impact of Covid-19 in 2020, the loan repurchase charge in
the prior year was £6.2 million reflecting the increased likelihood that
there would be further defaulted loans to buy back. No further charge was
required in 2021.
Other costs, which include cost of sales, data and technology costs and
property costs, reduced from £40.8 million to £29.0 million, largely due to
additional cost of sales and investor incentives that were required in 2020 in
the early stages of PPP but were not required in 2021.
Balance sheet and investments
Following the strong trading performance during the year, coupled with
improvements in the economic outlook for SMEs compared to those expected at 31
December 2020, the net assets of the Group have increased from £217.6 million
to £288.0 million.
With the monetisation of the warehouses in the UK and US during the year, the
Group now holds £224.0 million of cash, of which £24.6 million is restricted
in use, principally as it is held within the securitisation SPVs. Additionally
the Group has £70 million of net equity in the remaining investment vehicles.
The following table sets out the split of the Group's net equity:
31 December 31 December 2020
2021
Operating business Investment in trusts and co-investments Securitisation SPVs PPP loans Other investments Total Total
£m £m £m £m £m £m £m
Investment in SME loans 5.8 39.1 148.1 71.6 9.2 273.8 558.8
Cash 208.3 - 14.4 1.3 - 224.0 103.3
Other assets/(liabilities) - - (0.8) 0.3 - (0.5) 11.1
Borrowings/bonds - - (140.3) (73.2) - (213.5) (489.8)
Cash and investments 214.1 39.1 21.4 - 9.2 283.8 183.4
Other assets 67.9 - - - - 67.9 109.0
Other liabilities (63.7) - - - - (63.7) (74.8)
Equity 218.3 39.1 21.4 - 9.2 288.0 217.6
Our investment in the securitisation SPVs is split between two types:
i) The vertical tranches where we are required by regulation to retain
a 5% equal participation in all classes of bonds issued. These have continued
to pay down and are now valued at £6 million (2020: £12 million).
ii) The horizontal tranches - once loans are securitised, we held the
residual horizontal tranches with the intention to sell once seasoned. These
tranches have the potential to earn the greatest returns, but they also absorb
losses first. As the loans are valued at fair value using discounted cash flow
forecasts, improved economic assumptions have increased the value of the
horizontals and they are now valued at £16 million (2020: £4 million).
As part of our participation in the CBILS and RLS programmes we are required
to co-invest c.1% alongside institutional investors. As the underlying SME
loans are 80% guaranteed our exposure is limited. The growth in these
investments has been driven by the strong originations during the year.
Cash flow
The Group had strong cash generation during 2021 with the cash position at 31
December 2021 at £224.0 million (2020: £103.3 million), with unrestricted
cash of £199.4 million (2020: £59.1 million). This was driven by strong
operational performance and cash generation from the investment vehicles, as
well as monetisation of both the UK and US warehouses.
Free cash flow which represents the net cash flows from operating activities
less the cost of purchasing intangible assets, property, plant and equipment,
lease payments and interest received. It excludes the warehouse and
securitisation financing and funding cash flows.
2021 2020
£m £m
Adjusted EBITDA 91.8 (63.8)
Fair value adjustments (28.6) 118.3
Purchase of tangible and intangible assets (9.4) (10.3)
Net payment of lease liabilities (7.9) (7.8)
Working capital/other 36.9 (21.0)
Fee cash flow 82.8 15.4
Net investment in associates 3.9 2.3
Net investment in trusts and co-investments (18.8) (20.9)
Net investment in warehouses 63.8 (234.0)
Net investment in securitisations (10.4) 176.1
Other (1.5) 0.2
Effect of foreign exchange 0.9 (0.3)
Movement in the year 120.7 (61.2)
Cash and cash equivalents at the beginning of the year 103.3 164.5
Cash and cash equivalents at the end of the year 224.0 103.3
Free cash flow has principally improved due to cash flows from operating and
investment income with costs down year-on-year, together with the working
capital benefit of receiving net £27 million of fees due at 31 December 2020
which were subsequently received in February 2021.
In addition to the paydown of investments in both the warehouses and
securitisation vehicles and the subsequent sale of the loans in the UK and US
warehouses, the Group's investment in associates has also reduced as capital
has been paid back to investors, including Funding Circle. As with the
previous year, the Group continued to co-invest in the CBILS loans and
subsequently the RLS loans at c.1%.
Statement of Director's responsibilities
The Funding Circle Report and Accounts for year end 31 December 2021 contains
a responsibility statement in the following form:
The Directors consider that the Annual Report and accounts, taken as a whole,
is fair, balanced and understandable and provides the information necessary
for shareholders to assess the Group's and Company's position and performance,
business model and strategy.
Each of the Directors, whose names and functions are listed in the Report of
the Directors confirm that, to the best of their knowledge:
· the Group and Company financial statements, which have been
prepared in accordance with UK-adopted international accounting standards,
give a true and fair view of the assets, liabilities and financial position of
the Group and Company, and of the profit of the Group; and
· the Strategic report includes a fair review of the development
and performance of the business and the position of the Group and Company,
together with a description of the principal risks and uncertainties that they
face.
In the case of each Director in office at the date the Directors' report is
approved:
· so far as the Director is aware, there is no relevant audit
information of which the Group's and Company's auditors are unaware; and
· they have taken all the steps that they ought to have taken as a
Director in order to make themselves aware of any relevant audit information
and to establish that the Group's and Company's auditors are aware of that
information.
By order of the Board
Lisa Jacobs, Chief Executive Officer
Oliver White, Chief Financial Officer
10 March 2022
Consolidated statement of comprehensive income
for the year ended 31 December 2021
Note 31 December Exceptional 31 December 31 December Exceptional 31 December
2021 items 1 2021 2020 items1 2020
Before £m £m Before £m £m
exceptional exceptional
items items
£m £m
Transaction fees 115.0 - 115.0 122.5 - 122.5
Servicing fees 47.0 - 47.0 30.2 - 30.2
Other income 3.5 - 3.5 3.0 - 3.0
Fee income 165.5 - 165.5 155.7 - 155.7
Investment income 53.7 - 53.7 89.0 - 89.0
Investment expense (12.3) - (12.3) (22.7) - (22.7)
Total income 206.9 - 206.9 222.0 - 222.0
Fair value gains/(losses) 28.6 - 28.6 (118.3) - (118.3)
Net income 2 235.5 - 235.5 103.7 - 103.7
People costs 3, 5 (77.7) - (77.7) (81.3) (4.0) (85.3)
Marketing costs 3 (46.9) - (46.9) (46.8) - (46.8)
Depreciation, amortisation and impairment 3 (13.9) (3.9) (17.8) (17.2) (13.7) (30.9)
Loan repurchase credit/(charge) 3 0.1 - 0.1 (6.2) - (6.2)
Other costs 3 (29.0) - (29.0) (39.8) (1.0) (40.8)
Operating expenses 3 (167.4) (3.9) (171.3) (191.3) (18.7) (210.0)
Operating profit/(loss) 68.1 (3.9) 64.2 (87.6) (18.7) (106.3)
Finance income 0.1 - 0.1 0.4 - 0.4
Finance costs (1.1) - (1.1) (1.4) - (1.4)
Share of net profit/(loss) of associates 0.9 - 0.9 (0.8) - (0.8)
Profit/(loss) before taxation 68.0 (3.9) 64.1 (89.4) (18.7) (108.1)
Income tax (2.9) - (2.9) (0.2) - (0.2)
Profit/(loss) for the year 65.1 (3.9) 61.2 (89.6) (18.7) (108.3)
Other comprehensive
income
Items that may be reclassified subsequently to profit and loss:
Exchange differences on translation of foreign operations 1.4 - 1.4 1.7 - 1.7
Total comprehensive profit/(loss) for the year 66.5 (3.9) 62.6 (87.9) (18.7) (106.6)
Total comprehensive profit/(loss) attributable to:
Owners of the Parent 66.5 (3.9) 62.6 (87.9) (18.7) (106.6)
Earnings/(loss) per share
Basic earnings/(loss) per share 6 18.5p 17.4p (25.8)p (31.2)p
Diluted earnings/(loss) per share 6 17.1p 16.0p (25.8)p (31.2)p
1. Exceptional items are detailed within note 4.
All amounts relate to continuing activities.
Consolidated balance sheet
as at 31 December 2021
Note 31 December 31 December
2021 2020
(restated)(1)
£m £m
Non-current assets
Intangible assets 7 24.9 24.4
Property, plant and equipment 8 14.1 28.7
Investment in associates 7.6 11.0
Investment in trusts and co-investments 12 39.1 21.2
Investment in SME loans (other) 12 74.2 25.0
Trade and other receivables 9 4.1 -
164.0 110.3
Current assets
Investment in SME loans (warehouse) 12 3.2 221.8
Investment in SME loans (securitised) 12 148.1 279.8
Investment in SME loans (other) 12 1.6 -
Trade and other receivables 9 25.0 67.0
Cash and cash equivalents 13 224.0 103.3
401.9 671.9
Total assets 565.9 782.2
Current liabilities
Trade and other payables 10 36.4 34.1
Bank borrowings 12 - 171.2
Bonds 12 140.3 294.3
Short-term provisions and other liabilities 11 3.4 8.7
Lease liabilities 8 6.9 7.3
187.0 515.6
Non-current liabilities
Long-term provisions and other liabilities 11 0.7 1.2
Bank borrowings 12 73.2 24.3
Lease liabilities 8 17.0 23.5
Total liabilities 277.9 564.6
Equity
Share capital 0.4 0.3
Share premium account 293.0 292.6
Foreign exchange reserve 11.1 9.7
Share options reserve 19.1 13.6
Accumulated losses (35.6) (98.6)
Total equity 288.0 217.6
Total equity and liabilities 565.9 782.2
(1)See note 1.
Consolidated statement of changes in equity
for the year ended 31 December 2021
Note Share Share Foreign Share Retained earnings/ (accumulated losses) Total
capital premium exchange options £m equity
£m account reserve reserve £m
£m £m £m
Balance at 1 January 2020 0.3 292.3 8.0 11.9 6.5 319.0
Loss for the year - - - - (108.3) (108.3)
Other comprehensive income
Exchange differences on translation of foreign operations - - 1.7 - - 1.7
Total comprehensive income/(expense) - - 1.7 - (108.3) (106.6)
Transactions with owners
Transfer of share option costs - - - (3.2) 3.2 -
Issue of share capital - 0.3 - - - 0.3
Employee share schemes - value of employee services - - - 4.9 - 4.9
Balance at 31 December 2020 0.3 292.6 9.7 13.6 (98.6) 217.6
Profit for the year - - - - 61.2 61.2
Other comprehensive income
Exchange differences on translation of foreign operations - - 1.4 - - 1.4
Total comprehensive income - - 1.4 - 61.2 62.6
Transactions with owners
Transfer of share option costs - - - (1.8) 1.8 -
Issue of share capital 0.1 0.4 - - - 0.5
Employee share schemes - value of employee services - - - 7.3 - 7.3
Balance at 31 December 2021 0.4 293.0 11.1 19.1 (35.6) 288.0
Consolidated statement of cash flows
for the year ended 31 December 2021
Note 31 December 31 December
2021 2020
£m £m
Net cash inflow from operating activities 13 100.1 33.1
Investing activities
Purchase of intangible assets 7 (8.6) (9.5)
Purchase of property, plant and equipment 8 (0.8) (0.8)
Origination of SME loans (other) 12 (213.5) (25.0)
Cash receipts from SME loans (other) 12 163.7 -
Purchase of SME loans (warehouse phase) 12 - (286.9)
Cash receipts from SME loans (warehouse phase) 12 58.6 146.9
Cash receipts from SME loans (securitised) 12 150.2 211.7
Proceeds from sale of SME loans (warehouse phase) 12 176.1 -
Proceeds from sale of investment bonds 12 - 4.0
Investment in trusts and co-investments 12 (22.1) (20.9)
Cash receipts from investments in trusts and co-investments 12 3.3 -
Redemption in associates 3.9 1.9
Dividends from associates - 0.4
Interest received 0.1 0.4
Net cash inflow from investing activities 310.9 22.2
Financing activities
Proceeds from bank borrowings 12 208.2 230.1
Repayment of bank borrowings 12 (331.3) (299.1)
Proceeds from issuance of bonds 12 - 186.5
Payment of bond liabilities 12 (160.6) (226.1)
Proceeds from the exercise of share options 0.4 0.2
Proceeds from subleases 0.2 -
Payment of lease liabilities 8 (8.1) (7.8)
Net cash outflow from financing activities (291.2) (116.2)
Net increase/(decrease) in cash and cash equivalents 119.8 (60.9)
Cash and cash equivalents at the beginning of the year 103.3 164.5
Effect of foreign exchange rate changes 0.9 (0.3)
Cash and cash equivalents at the end of the year 13 224.0 103.3
The impact of exceptional items on the consolidated statement of cash flows is
detailed in note 4.
Notes forming part of the consolidated financial statements
for the year ended 31 December 2021
1. Basis of preparation
The results for the year ended 31 December 2021 have been extracted from the
audited financial statements of Funding Circle Holdings plc. The Group
presents its annual financial statements in conformity with United Kingdom
laws and regulations.
On 31 December 2020, International Financial Reporting Standards ("IFRS") as
adopted by the European Union at that date were brought into UK law and became
UK-adopted International Accounting Standards, with future changes being
subject to endorsement by the UK Endorsement Board. The Group transitioned to
UK-adopted International Accounting Standards in its consolidated financial
statements on 1 January 2021. The financial statements have been prepared in
accordance with UK-adopted International Accounting Standards and with the
requirements of the Companies Act 2006 as applicable to companies reporting
under those standards. In the previous year the accounts were prepared in
accordance with IFRS pursuant to Regulation (EC) No 1606/2002 as it applies in
the European Union and IFRS in conformity with the requirements of the
Companies Act 2006, including International Accounting Standards ("IAS") and
interpretations issued by the International Financial Reporting Standard
Interpretations Committee ("IFRS-IC"). The financial statements have been
prepared on a going concern basis.
This change in basis of preparation is required by UK company law for the
purposes of financial reporting as a result of the UK's exit from the EU on 31
January 2020 and the cessation of the transition period on 31 December 2020.
This change does not constitute a change in accounting policy but rather a
change in framework which is required to ground the use of IFRS in company
law. However, there is no impact on recognition, measurement or disclosure in
the period reported as a result of the change in framework. The financial
statements have been prepared on the historical cost basis except for certain
financial instruments that are carried at fair value through profit and loss
("FVTPL").
The financial information in this statement does not constitute statutory
accounts within the meaning of s434 of the Companies Act 2006. The statutory
accounts for the year ended 31 December 2021, on which the auditors have given
an unqualified audit report, have not yet been filed with the Registrar of
Companies.
The preparation of financial statements requires the use of certain accounting
estimates. It also requires management to exercise its judgement in the
process of applying the Group's accounting policies. Changes in assumptions
may have a significant impact on the financial statements in the year the
assumptions changed. Management believes that the underlying assumptions are
appropriate. The areas involving a higher degree of judgement or complexity,
or areas where assumptions and estimates are significant to the financial
statements, are disclosed in note 15.
Except as described below in Note 14, the principal accounting policies
applied in the preparation of the consolidated financial statements are
consistent with those of the annual financial statements for the year ended 31
December 2020, as described in those financial statements.
Representation of comparative information
Investment in SME loans (other) of £24.3 million and related bank borrowings
of £24.3 million have been reclassified in the comparative period from
current to non-current to reflect the expected life of Paycheck Protection
Program ("PPP") loan assets and the contractual life of the Paycheck
Protection Program Liquidity Facility ("PPPLF") borrowings. The
reclassification has no impact on the profit and loss or net assets of the
Group. There was no impact on periods prior to the comparative period.
Going concern
The Group's business activities together with the factors likely to affect its
future development and position are set out in the Strategic Report.
The financial statements are prepared on a going concern basis as the
Directors are satisfied that the Group has the resources to continue in
business for the foreseeable future (which has been taken as at least 12
months from the date of approval of the financial statements).
The Group made a total comprehensive profit of £62.6 million during the year
ended 31 December 2021 (2020: loss of £106.6 million). As at 31 December
2021, the Group had net assets of £288.0 million (2020: £217.6 million).
This includes £224.0 million of cash and cash equivalents (2020: £103.3
million) of which £24.6 million (2020: £44.2 million) is held within the
securitisation vehicles or for other specific purposes and is restricted in
its use. Additionally, within the net assets, the Group holds £69.7 million
(2020: £118.3 million) of invested capital some of which is capable of being
monetised if liquidity needs arise.
The Group has prepared detailed cash flow forecasts for the next 15 months and
has updated the going concern assessment to factor in the potential ongoing
impact of Covid-19, inflation and related economic stress.
The base case scenario assumes:
• the new government-guaranteed Recovery Loan Scheme ("RLS") in the
UK is not extended beyond June 2022;
• there remains macroeconomic stress in H1 2022 from inflation, supply
chain and ongoing Covid-19-related pressures with a peak in defaults, however
volumes of core loans rise in H2 2022 and there is a general recovery;
• lending in the US steadily recovers; and
• costs and headcount remain relatively flat other than increased
investment in technology and risk;
Management prepared a severe but plausible downside scenario in which:
• Further macroeconomic volatility occurs in H1 2022 following the
tapering of government support along with increased inflation and interest
rates reducing borrower demand leading to decreased originations;
• investment returns reduce owing to increased funding costs, widening
discount rates and deterioration in loan performance;
• an operational event occurs requiring a cash outlay; and
• a downside loss scenario is applied to Funding Circle's on-balance
sheet investment in SME loans resulting in higher initial fair value losses
and lower cash flows to the subordinate tranches of investments it owns.
Management has reviewed financial covenants the Group must adhere to in
relation to its servicing agreements. These are with institutional investors
for which there are unrestricted cash, tangible net worth and debt to tangible
net worth ratios. Management has also reviewed regulatory capital
requirements. In the downside scenario the risk of covenant or capital
requirement breach is considered remote.
The Directors have made enquiries of management and considered budgets and
cash flow forecasts for the Group and have, at the time of approving these
financial statements, a reasonable expectation that the Company and the Group
have adequate resources to continue in operational existence for the
foreseeable future.
2. Segmental information
IFRS 8 Operating Segments requires the Group to determine its operating
segments based on information which is used internally for decision making.
Based on the internal reporting information and management structures within
the Group, it has been determined that there are three geographic operating
segments. Reporting on this basis is reviewed by the Global Leadership Team
("GLT") which is the chief operating decision-maker ("CODM"). The GLT is
made up of the Executive Directors and other senior management and is
responsible for the strategic decision making of the Group.
The three reportable segments consist of the geographic segments: the United
Kingdom, the United States and Developing Markets. The Developing Markets
segment includes the Group's businesses in Germany and the Netherlands.
The GLT measures the performance of each segment by reference to a non-GAAP
measure, adjusted EBITDA, which is defined as profit/loss before finance
income and costs, taxation, depreciation and amortisation ("EBITDA"), and
additionally excludes share-based payment charges and associated social
security costs, foreign exchange and exceptional items (see note 4). Together
with operating profit/loss, adjusted EBITDA is a key measure of Group
performance as it allows better comparability of the underlying performance of
the business.
Net income/(loss)
31 December 2021 31 December 2020
United United Developing Total United United Developing Total
Kingdom States Markets £m Kingdom States Markets £m
£m £m £m £m £m £m
Total income 159.4 44.8 2.7 206.9 152.9 63.0 6.1 222.0
Fair value gains/(losses) 10.5 18.1 - 28.6 (43.8) (74.5) - (118.3)
Net income/(loss) 169.9 62.9 2.7 235.5 109.1 (11.5) 6.1 103.7
Segment profit
31 December 2021 31 December 2020
United United Developing Total United United Developing Total
Kingdom States Markets £m Kingdom States Markets £m
£m £m £m £m £m £m
Adjusted EBITDA 61.9 28.4 1.5 91.8 6.5 (62.4) (7.9) (63.8)
Depreciation and amortisation (9.7) (4.1) (0.1) (13.9) (9.4) (6.5) (1.3) (17.2)
Share-based payments and social security costs (7.6) (1.3) - (8.9) (5.0) (1.2) (0.4) (6.6)
Foreign exchange losses (0.3) (0.6) - (0.9) - - - -
Exceptional items (note 4) - (3.9) - (3.9) - (13.5) (5.2) (18.7)
Operating profit/(loss) 44.3 18.5 1.4 64.2 (7.9) (83.6) (14.8) (106.3)
Net income by type
In addition to the segmental reporting of performance under IFRS 8, the table
below sets out net income by its type:
31 December 31 December
2021 2020
£m £m
Transaction fees 115.0 122.5
Servicing fees 47.0 30.2
Other income 3.5 3.0
Fee income 165.5 155.7
Investment income 53.7 89.0
Investment expense (12.3) (22.7)
Total income 206.9 222.0
Fair value gains/(losses) 28.6 (118.3)
Net income 235.5 103.7
3. Operating expenses
31 December 2021 31 December 2020
Before Total Before Exceptional Total
exceptional Exceptional £m exceptional items £m
items items items £m
£m £m £m
Depreciation 5.9 - 5.9 9.0 - 9.0
Amortisation 8.0 - 8.0 8.2 - 8.2
Rental income and other recharges (0.9) - (0.9) (1.1) - (1.1)
Operating lease rentals:
- Land and buildings 0.1 - 0.1 0.1 - 0.1
Employment costs (including contractors) 77.7 - 77.7 81.3 4.0 85.3
Marketing costs 46.9 - 46.9 46.8 - 46.8
(excluding employment costs)
Data and technology 9.0 - 9.0 10.9 - 10.9
Loan repurchase (credit)/charge (0.1) - (0.1) 6.2 - 6.2
Impairment of goodwill - - - - 12.0 12.0
Impairment of intangible and tangible assets - 3.9 3.9 - 1.7 1.7
Other expenses(1) 20.8 - 20.8 29.9 1.0 30.9
Total operating expenses 167.4 3.9 171.3 191.3 18.7 210.0
1. Includes £1.3 million (2020: £0.3 million) in relation to
expected credit loss impairment of loans held at amortised cost.
4. Exceptional items
31 December 31 December
2021 2020
£m £m
Restructuring costs - 6.0
Share-based payment credit relating to restructuring - (1.0)
Impairment of goodwill - 12.0
Impairment of non-financial assets (notes 7 and 8) 3.9 1.7
Total 3.9 18.7
Exceptional items are the items of income or expense that the Group considers
are material, one-off in nature and of such significance that they merit
separate presentation in order to aid the reader's understanding of the
Group's financial performance.
During the year to 31 December 2021 certain floors of the San Francisco office
were sublet to third parties for the remainder of the term of the head lease
for an amount lower than the head lease rental. As a result the sublease was
determined to be a finance lease which resulted in the right-of-use asset
being derecognised and a net investment in sublease recognised on the balance
sheet. The difference between the carrying value of the right-of-use asset
and the net investment in the sublease was £3.3 million and has been recorded
in the statement of comprehensive income as an impairment under exceptional
items. Additionally it was determined that the fixed assets associated with
the office were impaired in full as they were no longer used by the Group
resulting in impairment of £0.6 million. There was no cash movement in
relation to the impairment.
In the previous year ended 31 December 2020, the Group restructured the German
and Dutch (Developing Markets) businesses to focus on referring loans it
originates to local lenders. This restructuring resulted in one-off costs in
the comparative year totalling £4.6 million comprising redundancy costs of
£4.0 million, a related share-based payment credit of £(0.4) million and
other costs of £1.0 million. An additional impairment on right-of-use assets
was incurred of £0.6 million. Cash payments associated with these items
totalled £0.8 million in the year ended 31 December 2021 (2020: £3.8
million). See note 11 for movement in associated provisions and note 13 for
cash flow.
In the previous year, the Group reorganised the US business, centralising the
US technology team in the UK and moving sales and marketing to Denver,
resulting in a net reduction of c.85 roles. This restructuring resulted in
one-off costs in the comparative year totalling £0.4 million, comprising
redundancy costs of £1.0 million and related share-based payment credits of
£(0.6) million. An additional impairment on the right-of-use assets was
recognised of £1.1 million. Cash payments associated with these items
totalled £nil in the year ended 31 December 2021 (2020: £1.1 million). See
note 11 for movement in associated provisions and note 13 for cash flow.
In the previous year, following a change in the Group's income and cost
forecasts, an event indicating the possibility of impairment was identified
and the Group undertook a goodwill impairment review as a result of which it
was identified that goodwill in relation to the Funding Circle USA business
was carried at a value higher than the CGU's recoverable amount driven by a
reduction in the future discounted cash flows of the CGU. As a result, an
impairment was recognised of £12.0 million in the year ended 31 December
2020. There was no cash movement in relation to the impairment.
5. Employees
The average monthly number of employees (including Directors) during the year
was:
2021 2020
Number Number
UK 634 601
US 155 240
Developing Markets 15 70
804 911
In addition to the employees above, the average monthly number of contractors
during the year was 125 (2020: 91).
Employment costs (including Directors' emoluments) during the year were:
31 December 2021 31 December 2020
Before Exceptional Total Before Exceptional
exceptional items £m exceptional items Total
items £m items £m £m
£m £m
Wages and salaries 61.4 - 61.4 70.8 4.0 74.8
Social security costs 6.2 - 6.2 6.9 1.0 7.9
Pension costs 1.8 - 1.8 1.2 - 1.2
Share-based payments 8.9 - 8.9 6.6 (1.0) 5.6
78.3 - 78.3 85.5 4.0 89.5
Contractor costs 7.6 - 7.6 5.2 - 5.2
Less: capitalised development costs (8.2) - (8.2) (9.4) - (9.4)
Employment costs net of capitalised development costs 77.7 - 77.7 81.3 4.0 85.3
6. Earnings/(loss) per share
Basic earnings/(loss) per share amounts are calculated by dividing the
profit/(loss) for the year attributable to ordinary equity holders of the
Company by the weighted average number of ordinary shares outstanding during
the year.
For diluted earnings per share, the weighted average number of ordinary shares
in issue is adjusted to assume conversion of all dilutive potential ordinary
shares. The dilutive potential ordinary shares include those share options
granted to employees under the Group's share-based compensation schemes which
do not have an exercise price or where the exercise price is less than the
average market price of the Company's ordinary shares during the year.
The following table reflects the income and share data used in the basic and
diluted loss per share computations:
31 December 31 December
2021 2020
Profit/(loss) for the year (£m) 61.2 (108.3)
Basic weighted average number of ordinary shares in issue (million) 351.5 347.0
Basic earnings/(loss) per share 17.4p (31.2)p
Profit/(loss) for the year before exceptional items (£m) 65.1 (89.6)
Basic weighted average number of ordinary shares in issue (million) 351.5 347.0
Basic earnings/(loss) per share before exceptional items 18.5p (25.8)p
Profit/(loss) for the year (£m) 61.2 (108.3)
Diluted weighted average number of ordinary shares in issue (million) 381.7 347.0
Diluted earnings/(loss) per share 16.0p (31.2)p
Profit/(loss) for the year before exceptional items (£m) 65.1 (89.6)
Diluted weighted average number of ordinary shares in issue (million) 381.7 347.0
Diluted earnings/(loss) per share before exceptional items 17.1p (25.8)p
7. Intangible assets
Capitalised Computer Other Total
development software intangibles £m
costs £m £m
£m
Cost
At 1 January 2020 47.3 1.0 1.1 49.4
Exchange differences (0.5) - - (0.5)
Additions 9.4 0.1 - 9.5
Disposals (10.7) (0.3) - (11.0)
At 31 December 2020 45.5 0.8 1.1 47.4
At 1 January 2021 45.5 0.8 1.1 47.4
Exchange differences (0.2) 0.1 0.1 -
Additions 8.5 0.1 - 8.6
Disposals (4.8) (0.1) - (4.9)
At 31 December 2021 49.0 0.9 1.2 51.1
Accumulated amortisation
At 1 January 2020 24.0 0.8 1.0 25.8
Exchange differences - - - -
Charge for the year 8.0 0.2 - 8.2
Disposals (10.7) (0.3) - (11.0)
At 31 December 2020 21.3 0.7 1.0 23.0
At 1 January 2021 21.3 0.7 1.0 23.0
Exchange differences (0.1) - 0.2 0.1
Charge for the year 8.0 - - 8.0
Disposals (4.8) (0.1) - (4.9)
At 31 December 2021 24.4 0.6 1.2 26.2
Carrying amount
At 31 December 2021 24.6 0.3 - 24.9
At 31 December 2020 24.2 0.1 0.1 24.4
8. Property, plant and equipment, right-of-use assets and lease liabilities
The Group has right-of-use assets which comprise property leases held by the
Group. Information about leases for which the Group is a lessee is presented
below.
Analysis of property, plant and equipment between owned and leased assets
31 December 31 December
2021 2020
£m £m
Property, plant and equipment (owned) 2.7 3.9
Right-of-use assets 11.4 24.8
14.1 28.7
Reconciliation of amount recognised in the balance sheet
Leasehold Computer Furniture Right-of-use Total
improvements equipment and fixtures assets £m
£m £m £m (property)
£m
Cost
At 1 January 2020 5.8 4.8 3.0 49.4 63.0
Disposals (0.1) (1.6) (0.2) (2.2) (4.1)
Additions 0.4 0.4 - - 0.8
Exchange differences - - - (0.4) (0.4)
At 31 December 2020 6.1 3.6 2.8 46.8 59.3
At 1 January 2021 6.1 3.6 2.8 46.8 59.3
Disposals (1.4) (1.8) (1.0) - (4.2)
Additions - 0.7 0.1 - 0.8
Exchange differences - 0.2 - (0.4) (0.2)
Derecognition of right-of-use assets - - - (15.4) (15.4)
At 31 December 2021 4.7 2.7 1.9 31.0 40.3
Accumulated depreciation
At 1 January 2020 3.0 4.0 1.5 15.5 24.0
Disposals (0.1) (1.6) (0.2) (2.2) (4.1)
Charge for the year 0.8 0.8 0.4 7.0 9.0
Impairment (exceptional) - - - 1.7 1.7
Exchange differences - - - - -
At 31 December 2020 3.7 3.2 1.7 22.0 30.6
At 1 January 2021 3.7 3.2 1.7 22.0 30.6
Disposals (1.4) (1.8) (1.0) - (4.2)
Charge for the year 0.8 0.6 0.3 4.2 5.9
Impairment (exceptional) 0.2 - 0.4 3.3 3.9
Exchange differences (0.1) (0.1) 0.1 - (0.1)
Derecognition of right-of-use assets - - - (9.9) (9.9)
At 31 December 2021 3.2 1.9 1.5 19.6 26.2
Carrying amount
At 31 December 2021 1.5 0.8 0.4 11.4 14.1
At 31 December 2020 2.4 0.4 1.1 24.8 28.7
During the year, right-of-use assets related to the US San Francisco office
were sublet in a finance sublease. As a result the right-of-use asset was
derecognised and a net investment in sublease was recognised within other
receivables. During the year the right-of-use asset related to the
Netherlands business was exited along with the corresponding head lease
liability. The carrying values of the right-of-use asset and lease liability
at the point of derecognition were £0.4 million.
During the previous year ended 31 December 2020, right-of-use assets were
identified as part of the FCCE and FCUSA restructures, which were considered
to be individual CGUs for which the recoverable amount was considered to be
the future potential sublet value. The estimated discounted cash flows from
sublet income were compared to the carrying value of the asset and an
impairment of £1.7 million was recognised. See note 4 for related exceptional
items.
Lease liabilities
Amounts recognised on the balance sheet were as follows:
31 December 31 December
2021 2020
£m £m
Current 6.9 7.3
Non-current 17.0 23.5
Total 23.9 30.8
Amounts recognised in the statement of comprehensive income were as follows:
31 December 31 December
2021 2020
£m £m
Depreciation charge of right-of-use assets (property) 4.2 7.0
Interest expense (included in finance costs) 1.1 1.4
Expense relating to short-term leases and leases of low-value assets 0.1 0.1
The total cash outflow for leases (excluding short-term and low-value leases)
in 2021 was £8.1 million (2020: £7.8 million).
As at 31 December 2021 the potential future undiscounted cash outflows that
have not been included in the lease liability due to lack of reasonable
certainty the lease extension options might be exercised amounted to £nil
(2020: £nil).
9. Trade and other receivables
31 December 31 December
2021 2020
£m £m
Other receivables 4.1 -
Non-current trade and other receivables 4.1 -
Trade receivables 1.8 1.6
Other receivables¹ 10.0 15.5
Prepayments 4.8 3.6
Accrued income² 6.2 43.7
Rent and other deposits 2.2 2.6
Current trade and other receivables 25.0 67.0
29.1 67.0
1. Includes £3.6 million (2020: £7.5 million) in relation to cash
and liquidity reserves held in the UK securitisation vehicle which will unwind
to make payments to bond holders in the future.
2. Includes £nil million (2020: £36.2 million) in relation to
transaction fees receivable on CBILS originations. Accrued income outstanding
at the start of the year was subsequently collected.
The maximum exposure to credit risk at the reporting date is the carrying
value of each class of receivables described earlier. No trade receivables
were overdue or impaired.
Included in rent and other deposits are £1.6 million of rental deposits
(2020: £1.9 million) in respect of the Group's property leases which expire
over the next five years.
The Directors consider that the carrying amount of trade and other receivables
approximates to their fair value.
10. Trade and other payables
31 December 31 December
2021 2020
£m £m
Trade payables 3.7 2.1
Other taxes and social security costs 4.9 3.7
Other creditors 11.4 5.6
Accruals and deferred income 16.4 22.7
36.4 34.1
The Directors consider that the carrying amount of trade and other payables
approximates to their fair value.
11. Provisions and other liabilities
Dilapidation Loan repurchase Restructuring1 Other Total
£m £m £m £m £m
At 1 January 2020 0.9 2.9 - 0.2 4.0
Exchange differences - 0.2 - (0.1) 0.1
Additional provision/liability - 6.2 6.0 3.2 15.4
Amount utilised - (4.1) (4.9) (0.6) (9.6)
At 31 December 2020 0.9 5.2 1.1 2.7 9.9
Exchange differences - (0.3) (0.1) 0.2 (0.2)
Additional provision/liability - - - 1.1 1.1
Amount utilised - (2.6) (0.8) (0.2) (3.6)
Amount reversed (0.3) (0.1) - (2.7) (3.1)
At 31 December 2021 0.6 2.2 0.2 1.1 4.1
1. Restructuring provision is in relation to reorganisation of the
US, German and Dutch businesses; see note 4.
31 December 31 December
2021 2020
£m £m
Current provisions and other liabilities 3.4 8.7
Non-current 0.7 1.2
4.1 9.9
The dilapidation provision represents an estimated cost for dismantling the
customisation of offices and restoring the leasehold premises to its original
state at the end of the tenancy period. The provision is expected to be
utilised by 2025.
Loan repurchase liability
In certain historical circumstances, in the less mature markets, Funding
Circle has entered into arrangements with institutional investors to assume
the credit risk on the loan investments made by the institutional investors.
Under the terms of the agreements, the Group is required either to make
payments when the underlying borrower fails to meet its obligation under the
loan contract or buy the defaulted loan from the investors at its carrying
value. In return for these commitments, the Group is entitled to the excess
returns or additional income which is recorded as other income.
Under IFRS 9, the Group is required to provide for these loan repurchases
under the expected credit loss ("ECL") model.
The liability related to each loan arranged is based on the ECLs associated
with the probability of default of that loan in the next 12 months unless
there has been a significant increase in credit risk of that loan since
origination. The Group assumes there has been a significant increase in credit
risk if outstanding amounts on the loan investment exceed 30 days, in line
with the rebuttable presumption per IFRS 9.
The Group defines a default, classified within non-performing, as a loan
investment with any outstanding amounts exceeding a 90-day due date, which
reflects the point at which the loan is considered to be credit-impaired.
Under the loan repurchase contracts, this was the point at which there is an
obligation for the Group to make a payment under the contract or buy back the
loan. However, while the buyback agreement is contractually defined as 90 days
past due, due to the impact of Covid-19, a consent letter was signed with the
institutional investors in April 2020 to accommodate loans on forbearance
plans whereby loans on such plans will be repurchased at 180 days past due.
However, the definition of default for the purposes of expected credit losses
remains 90 days past due and the buyback may lag the default definition
applied.
If the loan is bought back by the Group, at the point of buy back, the
financial asset associated with the purchase meets the definition of purchased
or originated credit-impaired ("POCI"), this element of the reserve is
therefore based on lifetime ECLs. After being bought back, POCI loans and
associated impairment provisions are recognised within investment in SME loans
(other) on the balance sheet.
The Group bands each loan investment using an internal risk rating and
assesses credit losses on a collective basis.
Performing: Underperforming: Non-performing: Total
12-month lifetime lifetime £m
ECL ECL ECL
£m £m £m
At 1 January 2020 2.1 0.8 - 2.9
Exchange differences 0.1 0.1 - 0.2
Liability against loans transferred from performing (0.3) 0.5 4.9 5.1
Amounts utilised - - (4.1) (4.1)
Loans repaid (0.8) - - (0.8)
Change in probability of default 1.1 0.1 0.7 1.9
At 31 December 2020 2.2 1.5 1.5 5.2
Exchange differences (0.1) (0.1) (0.1) (0.3)
Liability against loans transferred from performing (0.2) (0.5) 1.7 1.0
Amounts utilised - - (2.6) (2.6)
Loans repaid (0.9) (0.4) (0.6) (1.9)
Change in probability of default 0.4 (0.1) 0.5 0.8
At 31 December 2021 1.4 0.4 0.4 2.2
At 31 December 2020 Expected credit Basis for Gross assets Loan
loss coverage recognition of of external repurchase
% loan repurchase parties subject liability
liability to loan repurchase £m
liability
£m
Performing (due in 30 days or less) 10.8 12-month ECL 20.3 2.2
Underperforming (31-90 days overdue) 71.5 Lifetime ECL 2.1 1.5
Non-performing (90+ days overdue) 79.0 Lifetime ECL 1.9 1.5
Total 24.3 5.2
At 31 December 2021 Expected credit Basis for Gross assets Loan
loss coverage recognition of of external repurchase
% loan repurchase parties subject liability
liability to loan repurchase £m
liability
£m
Performing (due in 30 days or less) 15.3 12-month ECL 8.8 1.4
Underperforming (31-90 days overdue) 63.6 Lifetime ECL 0.6 0.4
Non-performing (90+ days overdue) 76.5 Lifetime ECL 0.6 0.4
Total 10.0 2.2
The percentages applied above are based on the Group's past experience of
delinquencies and loss trends, as well as forward-looking information in the
form of macroeconomic scenarios governed by an impairment committee, which
considers macroeconomic forecasts such as changes in interest rates, GDP and
inflation.
Macroeconomic scenarios are probability weighted within the model and include
stress scenarios of: i) low losses, a high GDP, market confidence and
political stability; ii) normal losses based on baseline economic conditions;
iii) high losses with manufacturing and political instability; and iv) very
high losses with an acceleration of defaults having peaked in H2 2021 as
government support schemes eased and then de-stressing gradually afterwards.
The stress scenario used was a geography-weighted scenario reflecting higher
losses on the Netherlands book than that of the German portion of the loan
book, resulting in a blended stress of defaults having peaked in H2 2021 and
de-stressing gradually afterwards.
The expected credit loss model includes actual defaults determined by monthly
cohort, adjusted for forecasted lifetime cumulative default rates. It applies
the latest default curve and lifetime default rates tailored to each cohort
based on the expected lifetime default rate. When actual defaults trend higher
than the curve, the forecast default curve is shifted upwards to align with
actual performance. Estimated recoveries from defaults are discounted back to
their present value using the effective interest rate.
Estimation is required in assessing individual loans and when applying
statistical models for collective assessments, using historical trends from
past performance as well as forward-looking information including
macroeconomic forecasts in each market together with the impact on loan
defaults. The most significant estimation is with default rates on
performing loans. For the year ended 31 December 2021 the weighted average
lifetime default rate is estimated at 19.6% (2020: 20.5%). If the weighted
average default rate estimate were to change by +/-250 bps the liability would
change by £1.4 million for the year (2020: £1.2 million from +/-240 bps).
It is considered that the range of reasonably possible outcomes in annual
default rates used might be +/-250 bps and as a result it is possible that the
liability in future could diverge from management's estimate.
The maximum exposure the Group might have to pay at the balance sheet date if
100% of eligible loans were required to be bought back would be £10.0 million
(2020: £24.3 million). This would be dependent on the timing of any eligible
loans defaulting. Repayments of eligible loans are no longer reinvested and
therefore the final loan is due to expire in December 2024, along with the
associated financial guarantees. At 31 December 2021, there is only one
portfolio of loans.
12. Financial risk management
The Board of Directors has overall responsibility for the establishment and
oversight of the Group's risk management framework.
The risk management policies are established to identify and analyse the risks
faced by the Group, to set appropriate risk limits and controls and to monitor
risks and ensure any limits are adhered to. The Group's activities are
reviewed regularly and potential risks are considered.
Risk factors
The Group has exposure to the following risks from its use of financial
instruments:
• credit risk;
• liquidity risk; and
• market risk (including foreign exchange risk, interest rate risk
and other price risk).
Principal financial instruments
The principal financial instruments used by the Group, from which financial
instrument risk arises, are as follows:
• investments;
• trade and other receivables;
• cash and cash equivalents;
• trade and other payables;
• bank borrowings;
• bonds;
• lease liabilities; and
• loan repurchase liabilities.
Categorisation of financial assets and financial liabilities
The tables show the carrying amounts of financial assets and financial
liabilities by category of financial instrument as at 31 December 2021:
Assets Fair Amortised Total
value through cost £m
profit and loss Other
£m £m £m
Investment in SME loans (other) - 75.8 - 75.8
Investment in SME loans (warehouse) 3.2 - - 3.2
Investment in SME loans (securitised) 148.1 - - 148.1
Investment in trusts and co-investments 39.1 - - 39.1
Trade and other receivables - 24.3 - 24.3
Cash and cash equivalents 112.1 111.9 - 224.0
302.5 212.0 - 514.5
Liabilities Fair Amortised Total
value through cost £m
profit and loss £m Other
£m £m
Trade and other payables - (15.2) - (15.2)
Loan repurchase liability - - (2.2) (2.2)
Bank borrowings - (73.2) - (73.2)
Bonds (12.8) (127.5) - (140.3)
Lease liabilities - (23.9) - (23.9)
(12.8) (239.8) (2.2) (254.8)
The tables show the carrying amounts of financial assets and financial
liabilities by category of financial instrument as at 31 December 2020:
Assets Fair Amortised Total
value through cost £m
profit and loss £m Other
£m £m
Investment in SME loans (other) - 25.0 - 25.0
Investment in SME loans (warehouse) 221.8 - - 221.8
Investment in SME loans (securitised) 279.8 - - 279.8
Investment in trusts and co-investments 21.2 - - 21.2
Trade and other receivables 0.3 63.1 - 63.4
Cash and cash equivalents 24.8 78.5 - 103.3
547.9 166.6 - 714.5
Liabilities Fair Amortised Total
value through cost £m
profit and loss £m Other
£m £m
Trade and other payables - (7.7) - (7.7)
Loan repurchase liability - - (5.2) (5.2)
Bank borrowings - (195.5) - (195.5)
Bonds (7.8) (286.5) - (294.3)
Lease liabilities - (30.8) - (30.8)
(7.8) (520.5) (5.2) (533.5)
Financial instruments measured at amortised cost
Financial instruments measured at amortised cost, rather than fair value,
include cash and cash equivalents, trade and other receivables, investment in
SME loans (other), bank borrowings, lease liabilities, certain bonds and trade
and other payables. Due to their nature, the carrying value of each of the
above financial instruments approximates to their fair value.
Other financial instruments
Loan repurchase liabilities are measured at the amount of loss allowance
determined under IFRS 9.
Financial instruments measured at fair value
IFRS 13 requires certain disclosures which require the classification of
financial assets and financial liabilities measured at fair value using a fair
value hierarchy that reflects the significance of the inputs used in making
the fair value measurement.
Disclosure of fair value measurements by level is according to the following
fair value measurement hierarchy:
• level 1 inputs are quoted prices (unadjusted) in active markets
for identical assets or liabilities that the entity can access at the
measurement date;
• level 2 inputs are inputs other than quoted prices included within
level 1 that are observable for the assets or liabilities, either directly or
indirectly; and
• level 3 inputs are unobservable inputs for the assets or
liabilities.
The fair value of financial instruments that are not traded in an active
market (for example, investments in SME loans) is determined by using
valuation techniques. These valuation techniques maximise the use of
observable market data where it is available and rely as little as possible on
entity-specific estimates. If all significant inputs required to fair value an
instrument are observable, the instrument is included in level 2. The
investments categorised as level 2 relate to derivative financial instruments.
If one or more of the significant inputs is not based on observable market
data, the instrument is included in level 3.
Fair value measurement using
31 December 2021 Quoted prices Significant Significant Total
in active observable unobservable £m
markets inputs inputs
(level 1) (level 2) (level 3)
£m £m £m
Financial assets
Investment in SME loans (warehouse) - - 3.2 3.2
Investment in SME loans (securitised) - - 148.1 148.1
Investment in trusts and co-investments - - 39.1 39.1
Cash and cash equivalents 112.1 - - 112.1
112.1 - 190.4 302.5
Financial liabilities
Bonds - - (12.8) (12.8)
- - (12.8) (12.8)
Fair value measurement using
31 December 2020 Quoted prices Significant Significant Total
in active observable unobservable £m
markets inputs inputs
(level 1) (level 2) (level 3)
£m £m £m
Financial assets
Trade and other receivables - 0.1 0.2 0.3
Investment in SME loans (warehouse) - - 221.8 221.8
Investment in SME loans (securitised) - - 279.8 279.8
Investment in trusts and co-investments - - 21.2 21.2
Cash and cash equivalents 24.8 - - 24.8
24.8 0.1 523.0 547.9
Financial liabilities
Bonds - - (7.8) (7.8)
- - (7.8) (7.8)
The fair value of investment in SME loans (warehouse) has been estimated by
discounting future cash flows of the loans using discount rates that reflect
the changes in market interest rates and observed market conditions at the
reporting date. The estimated fair value and carrying amount of the investment
in SME loans (warehouse) was £3.2 million at 31 December 2021 (2020: £221.8
million).
The fair value of investment in SME loans (securitised) represents loan assets
in the securitisation vehicles and has been estimated by discounting future
cash flows of the loans using discount rates that reflect the changes in
market interest rates and observed market conditions at the reporting date.
The estimated fair value and carrying amount of the investment in SME loans
(securitised) was £148.1 million at 31 December 2021 (2020: £279.8 million).
Bonds represent the unrated tranches of bond liabilities measured at fair
value through profit and loss (the rated tranches of bonds are measured at
amortised cost). The fair value has been estimated by discounting future cash
flows in relation to the bonds using discount rates that reflect the changes
in market interest rates and observed market conditions at the reporting date.
The estimated fair value and carrying amount of the bonds was £12.8 million
at 31 December 2021 (2020: £7.8 million).
Investment in trusts and co-investments represents the Group's investment in
the trusts and other vehicles used to fund CBILS, RLS and certain core loans
and is measured at fair value through profit and loss. The government-owned
British Business Bank will guarantee up to 80% of the balance of CBILS loans
in the event of default (and between 70% and 80% of RLS loans). The fair value
has been estimated by discounting future cash flows in relation to the trusts
and co-investments using discount rates that reflect the changes in market
interest rates and observed market conditions at the reporting date. The
estimated fair value and carrying amount of the investment in trusts and
co-investments was £39.1 million at 31 December 2021 (2020: £21.2 million).
The most relevant significant unobservable input relates to the default rate
estimate and discount rates applied to the fair value calculation, details of
which are set out in note 15 for those with material estimation uncertainty.
Fair value movements on investment in SME loans (warehouse), investment in SME
loans (securitised), investments in trusts and bonds (unrated) are recognised
through the profit and loss account in fair value gains/(losses).
A reconciliation of the movement in level 3 financial instruments is shown as
follows:
Investment in Investment in Bonds Investment Trade and
SME loans SME loans (unrated) in trusts and co-investments other receivables
(warehouse) (securitised) £m £m £m
£m £m
At 1 January 2020 342.0 366.6 (20.0) - -
Additions 286.9 - - 20.9 -
Securitisations (214.2) 214.2 - - -
Transfers (0.2) - - - 0.2
Repayments (146.9) (211.7) 4.2 - -
Disposal - - (4.0) - -
Net (loss)/gain on the change in fair value of financial instruments at fair (43.4) (87.2) 12.0 0.3 -
value through profit and loss
Foreign exchange loss (2.4) (2.1) - - -
At 31 December 2020 221.8 279.8 (7.8) 21.2 0.2
Additions - - - 22.1 -
Transfers 0.2 - - - (0.2)
Repayments (58.6) (150.2) - (3.3) -
Disposal (176.1) - - - -
Net gain/(loss) on the change in fair value of financial instruments at fair 16.3 18.2 (5.0) (0.9) -
value through profit and loss
Foreign exchange (loss)/gain (0.4) 0.3 - - -
At 31 December 2021 3.2 148.1 (12.8) 39.1 -
13. Notes to the consolidated statement of cash flows
Cash inflow/(outflow) from operating activities
31 December 31 December
2021 2020
£m £m
Profit/(loss) before taxation 64.1 (108.1)
Adjustments for
Depreciation of property, plant and equipment 5.9 9.0
Amortisation of intangible assets 8.0 8.2
Impairment of goodwill (exceptional item) - 12.0
Impairment of intangible and tangible assets (exceptional item) 3.9 1.7
Share-based payment restructuring credit (exceptional item) - (1.0)
Interest receivable (0.1) (0.4)
Interest payable 1.1 1.4
Non-cash employee benefits expense - share-based payments and associated 8.5 6.4
social security costs
Fair value (gains)/losses (28.6) 118.3
Movement in restructuring provision (exceptional item) (0.9) 1.1
Movement in loan repurchase liability (3.0) 2.3
Movement in other provisions (1.9) 2.5
Share of (gains)/losses of associates (0.9) 0.8
Other non-cash movements (0.7) 1.2
Changes in working capital
Movement in trade and other receivables 46.4 (35.3)
Movement in trade and other payables 1.4 13.0
Tax paid (3.1) -
Net cash inflow from operating activities 100.1 33.1
Cash and cash equivalents
31 December 31 December
2021 2020
£m £m
Cash and cash equivalents 224.0 103.3
The cash and cash equivalents balance is made up of cash, money market funds
and bank deposits. The carrying amount of these assets is approximately equal
to their fair value. Included within cash and cash equivalents above is cash
of £1.0 million (2020: £1.0 million) which is restricted in use in the event
of rental payment defaults and cash held in the securitisation SPVs of £14.4
million (2020: £38.9 million including warehouse SPVs for on-payment to
lenders) which has been collected for on-payment to bond holders and is
therefore restricted in its use. A further £9.2 million (2020: £4.3 million)
of cash is held which is restricted in use to repaying investors in CBILS and
RLS loans and paying CBILS and RLS-related costs to the UK Government.
At 31 December 2021, money market funds totalled £112.1 million (2020: £24.8
million).
14. Significant changes in the current reporting year
The financial position and performance of the Group were affected by the
following events and transactions during the year ended 31 December 2021:
i) Sale of US and UK warehouse loan assets
In June 2021, Funding Circle sold SME loan assets from the warehouses in the
US for £64.3 million as part of its strategy of monetising pre-pandemic
investments. The bank borrowings associated with the loans were fully repaid
using the proceeds.
In November 2021, Funding Circle sold SME loan assets from the warehouse in
the UK for £111.8 million as part of its strategy of monetising pre-pandemic
investments. The bank borrowings associated with the loans were fully repaid
using the proceeds.
Certain SME loan assets in the warehouses were not sold as part of the
transactions and remain on the balance sheet under investment in SME loans
(warehouse).
ii) The UK Government's Recovery Loan Scheme ("RLS") and relaunch of core
lending
During the year, Funding Circle became an accredited lender under RLS, the new
government-guaranteed loan scheme successor to CBILS. Under the terms of the
scheme Funding Circle is required to co-invest in loans originated through
this scheme. The loans are beneficially owned by investors under trust
structures in which Funding Circle retains a small stake. Additionally, core
loans have been relaunched and are originated via the same trust structures in
the UK.
In certain RLS and core loan co-investments in the UK and in the relaunch of
core lending in the US, Funding Circle co-invests in notes of the leveraged
structured vehicles on a pari passu basis along with majority investors.
These notes are subordinate to senior notes issued to the senior borrowing
facility provider of the vehicle. These vehicles are the sole beneficiaries
of the trust structures under which loans are originated by drawing down on
the subordinate and senior note facilities during an investment period. Once
the investment period ends the vehicles distribute returns from the
amortisation of the associated loans to the senior and subordinate note
holders after paying any running expenses of the vehicle.
The Group does not consolidate the trusts or the structured vehicles or the
loans held within the trusts or borrowings and other net assets of the
vehicles, instead recognising its interest in the loans or vehicles as
investment in trusts and co-investment assets on the balance sheet. This
investment is held at FVTPL and interest is recognised within investment
income in the consolidated statement of comprehensive income.
iii) The US Government's Paycheck Protection Program ("PPP") loan funding
During the year, the US Government's PPP scheme was extended until May 2021.
Funding Circle continued to fund PPP loans via its lending platform,
predominantly drawing down on the US Government's Federal PPP lending
facility. As a result the Group holds £71.9 million (31 December 2020: £24.3
million) of PPP loans on balance sheet included within investment in SME loans
(other) with a corresponding draw down on the SBA facility of £73.2 million
(31 December 2020: £24.3 million) included within bank borrowings. The PPP
loans on balance sheet and PPPLF liability may not directly offset due to
timing of cash payments and forgiveness of the loans and repayment of the
liability. These loans are recognised initially at fair value and are
subsequently held at amortised cost as the business model under which the
assets are held is to collect contractual cash flows. The loans are guaranteed
and borrowers are incentivised to apply for forgiveness on the loans. Once a
loan is forgiven by the SBA, the loan and related borrowing are
extinguished.
Transaction fee income and broker commission expense associated with these
loans are treated under IFRS 9 as an adjustment to the effective interest rate
and are amortised over the expected life of the loans. While the contractual
life of the PPP loans is up to five years, due to the design of the PPP loan
programme, the loans are expected to be forgiven in a shorter period of
time. The Group has determined that the estimated expected life of PPP loans
is 16 months from origination. In arriving at this estimate, it has
considered: the timeframe in which PPP borrowers are incentivised to apply for
forgiveness prior to being required to commence repayments on the loans;
recent steps the SBA has taken to streamline the forgiveness process; and
trends in historical PPP loans. The impact of the estimate on the year ended
31 December 2021 is the extent to which fee income and broker cost are
deferred. At 31 December 2021 £2.6 million fee income received and £0.2
million of broker commission expense incurred were deferred to future
periods.
Changes in accounting policy and disclosures
The Group has adopted the following new and amended IFRS and interpretations
from 1 January 2021 on a full retrospective basis.
Standard/interpretation Content Applicable for financial
years beginning on/after
Amendments to IFRS 7, IFRS 9 and IAS 39 - Reliefs relating to interest rate 1 January 2021
Interest Rate Benchmark Reform - Phase 2
benchmark reforms
Amendments to IFRS 16 - Covid-19 Related Rent Concessions Leases 1 June 2020
The amendments and interpretations listed above did not materially affect the
current year and are not expected to materially affect future years.
Certain new accounting standards and interpretations have been published that
are not mandatory for 31 December 2021 reporting years and have not been early
adopted by the Group as follows:
Standard/interpretation Content Applicable for financial
years beginning on/after
Amendments to IFRS 3 - Reference to the Conceptual Framework Business combinations 1 January 2022
Amendments to IAS 16 - Property, Plant and Equipment: Proceeds before Intended Property, plant and equipment 1 January 2022
Use
Amendments to IAS 37 - Onerous Contracts - Costs of Fulfilling a Contract Provisions - onerous contracts 1 January 2022
Amendments to IAS 1 - Classification of Liabilities as Current or Non-current Presentation of financial statements 1 January 2023
Amendments to IAS 8 - Definition of Accounting Estimates Accounting policies, changes in accounting estimates 1 January 2023
Amendments to IAS 1 and IFRS Practice Statement 2 - Disclosure of Accounting Accounting policies 1 January 2023
Policies
Amendments to IAS 12 - Deferred Tax Related to Assets and Liabilities Arising Deferred tax 1 January 2023
from a Single Transaction
These standards are not expected to have a material impact on the Group in the
current or future reporting years or on foreseeable future transactions.
Summary of new and amended accounting policies
There were no significant new accounting policies or amendments to existing
accounting policies during the year.
15. Critical accounting judgements and key sources of estimation uncertainty
The preparation of the consolidated financial statements requires the Group to
make estimates and judgements that affect the application of policies and
reported amounts. Critical judgements represent key decisions made by
management in the application of the Group accounting policies. Where a
significant risk of materially different outcomes exists due to management
assumptions or sources of estimation uncertainty, this will represent a key
source of estimation uncertainty.
Estimates and judgements are continually evaluated and are based on experience
and other factors, including expectations of future events that are believed
to be reasonable under the circumstances. Although these estimates are based
on management's best knowledge of the amount, event or actions, actual results
ultimately may differ from those estimates.
The significant judgements and estimates applied by the Group in the financial
statements have been applied on a consistent basis with the financial
statements for the year to 31 December 2020.
Critical judgements
Consolidation and deconsolidation of special purpose vehicles ("SPVs") and
investment in trusts and co-investments (note 12)
As part of its asset-backed securitisation programmes, the Group has
established warehouse and securitisation SPVs. Judgement is required in
determining who is most exposed to the variability of returns and who has the
ability to affect those returns and therefore who should consolidate these
vehicles and subsequently deconsolidate them. Where the Group has a
significant interest in the junior tranches of the securitisation vehicles or
the subordinated debt in the warehouses, the Group is deemed to be exposed to
the majority of the variability of the returns of those vehicles and controls
them, and therefore consolidates them. Where this interest is reduced, the
Group considers whether the vehicles should be deconsolidated.
The Group also holds a small beneficial ownership in trusts set up to fund
CBILS, RLS and core loans with the remaining majority of the beneficial
ownership held by institutional investors. The SME loans are originated by a
Group subsidiary, Funding Circle Focal Point Lending Limited for CBILS and
Funding Circle Eclipse Lending Limited for RLS and core loans, which retain
legal title to the loans. These entities hold this legal title of trust on
behalf of the majority investors who substantially retain the economic
benefits the CBILS, RLS and core loans generate and therefore the trusts and
the assets held within, including the SME loans, are not consolidated.
The Group assesses whether it controls the trust structure under the criteria
of IFRS 10. Control is determined to exist if the Group has the power to
direct the activities of entities and structures and uses this control to
obtain a variable return. As the Group's holding is pari passu, the Group is
not exposed to the majority of the variability in the cash flows of the trust,
and it is not considered to control the trust structures, so they are not
consolidated by the Group.
Loans originated through the platform
The Group originates SME loans through its platform which are funded primarily
by banks, asset managers, other institutional investors, funds, national
entities, retail investors or by usage of its own capital. Judgement is
required to determine whether these loans should be recognised on the Group's
balance sheet. Where the Group, its subsidiaries or SPVs which it consolidates
have legal and beneficial ownership to the title of those SME loans, they are
recognised on the Group's balance sheet. Where this is not the case, the loans
are not recognised at the point of origination.
Key sources of estimation uncertainty
The following are the key sources of estimation uncertainty that the Directors
have identified in the process of applying the Group's accounting policies and
have the most significant effect on the amounts recognised in the financial
statements.
Fair value of financial instruments (note 12)
At 31 December 2021, the carrying value of the Group's financial instrument
assets held at fair value was £302.5 million (31 December 2020: £547.9
million) and the carrying value of financial liabilities carried at fair value
was £12.8 million (2020: £7.8 million).
In accordance with IFRS 13 Fair Value Measurement, the Group categorises
financial instruments carried on the consolidated balance sheet at fair value
using a three-level hierarchy. Financial instruments categorised as level 1
are valued using quoted market prices and therefore there is minimal
estimation applied in determining fair value. However, the fair value of
financial instruments categorised as level 2 and, in particular, level 3 is
determined using valuation estimation techniques including discounted cash
flow analysis and valuation models. The most significant estimation is with
respect to discount rates and default rates.
Since 31 December 2020 the assumptions related to estimating fair value have
been revised to reflect the observed actual performance of SME loans and a
revision to the timing of the assumed defaults to occur later given the
extension of government support measures to H2 2021. The combination of
favourable observed performance and later defaults on an amortising pool of
loans has led to a lower lifetime cumulative default expectation net of
recoveries and an increase in the relative estimation of fair value of the
loans. Additionally, market drivers of discount rates such as observed
tightening in collateralised loan obligation spreads have resulted in the
estimated cash flows being discounted at a lower rate which has led to an
increase in the relative estimation of fair value of the loans and bonds.
Sensitivities to assumptions in the valuation of investment in trusts and
co-investments, investment in SME loans (warehouse) and money market funds
within cash and cash equivalents are not disclosed below as reasonably
possible changes in the assumptions would not result in material changes in
the carrying values.
Sensitivities to the default rates and discount rates are illustrated below.
Description Fair value Unobservable input Inputs Relationship of
unobservable inputs to fair value
£m
Investment in SME 148.1 Lifetime cumulative default rate as % of original US: 19.6% and 19.8%1 A change in the lifetime cumulative default rate would have the following
loans (securitised)
impact:
UK: 17.3%
US SPV1¹: +50/-110 bps would decrease / increase fair value by £(0.8)
million/£1.7 million respectively.
US SPV2¹: +80/-170 bps would decrease / increase fair value by £(1.6)
million/£3.4 million respectively.
UK: +40/-150 bps would decrease / increase fair value by £(0.9) million/
£3.4 million respectively.
Bonds (unrated) (12.8) Lifetime cumulative default rate of associated assets 17.3% A change in the lifetime cumulative default rate by +40/-150 bps would
decrease / increase fair value by £0.3 million and £(1.2)million
respectively.
1. Two cumulative default rates are presented for the US
representing the portfolios in each of the two respective securitisation
vehicles. Separate sensitivities to default rates for the US securitisation
vehicles represent the respective seasoning of the loans and the different
reasonably possible range of outcomes.
The above sensitivities represent management's estimate of the reasonably
possible range of outcomes and as a result the fair value of the assets and
liabilities measured at fair value could materially diverge from management's
estimate.
Description Fair value Unobservable input Inputs Relationship of
unobservable inputs to fair value
£m
Investment in SME 148.1 Discount rate US: 8.0% A change in the discount rates by +/-100 bps would decrease / increase fair
loans (securitised)
value by £1.6 million/ £(1.6) million respectively.
UK: 8.2%
Bonds (unrated) (12.8) Discount rate 13.3% A change in the discount rate by +100/-100 bps would decrease / increase fair
value by £0.2 million/£(0.2) million respectively.
It is considered that the range of reasonably possible outcomes in relation to
the discount rate used could be +/-100 bps and as a result the fair value of
the assets could materially diverge from management's estimate.
As the discount rate is risk adjusted, it should be noted that the
sensitivities to discount rate and to lifetime cumulative default rate contain
a level of overlap regarding credit risk. The sensitivity in expected lifetime
cumulative defaults should not also be applied to the sensitivity of the
credit risk element of the risk-adjusted discount rate and the sensitivities
are most meaningful viewed independently of each other.
Estimated recoverable amount of non-financial assets (notes 4, 7 and 8)
Non-financial assets (primarily goodwill, intangible assets and property,
plant and equipment) are held within the Group within cash-generating units
("CGUs") which are expected to benefit from the assets. The Group has four
CGUs, being Funding Circle USA ("FCUSA") and its subsidiaries, Funding Circle
Ltd ("FCUK") and its subsidiaries, Funding Circle Global Partners Limited
("FCGPL") and the German and Dutch businesses (Funding Circle Continental
Europe or "FCCE"). These assets are assessed annually for impairment in the
case of goodwill or when indicators of impairment are identified for other
assets.
The impairment test involves comparing the carrying value of the non-financial
assets held for use to their recoverable amount for each CGU. The recoverable
amount represents the higher of the CGU's fair value net of selling costs and
its value in use, which were determined using discounted cash flow
methodology.
During the prior year ended 31 December 2020, impairment was recognised in
relation to the goodwill in FCUSA as the recoverable amount calculated was
below the carrying amount and the goodwill was fully impaired by £12.0
million. As the goodwill was fully impaired in 2020, an annual impairment
review was not necessary in 2021 and as there were no indicators of impairment
identified, an impairment test was not undertaken for the year ended 31
December 2021 in relation to the other non-financial assets.
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