REG - ICG-Longbow Senior - Half-year Report
03/10/2023 07:00
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RNS Number : 4392O ICG-Longbow Snr Sec UK Prop DebtInv 03 October 2023
This announcement is released by ICG-Longbow Senior Secured UK Property Debt
Investments Limited and contains inside information for the purposes of the
UK version of the Market Abuse Regulation (EC No. 594/2014).
ICG-Longbow Senior Secured UK Property Debt Investments Limited
Interim Report And
Unaudited Condensed Interim Financial Statements
For the six months ended 31 July 2023
ICG-Longbow Senior Secured UK Property Debt Investments Limited ("the
Company") is pleased to announce the released of its Interim Financial
Statements for the six months ended 31 July 2023 which will shortly be
available on the Company's website at (ww.lbow.co.uk) where further
information on the Company can also be found. The interim financial statements
are also available for viewing on the National Storage Mechanism
at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) .
All capitalised terms are defined in the Glossary of Capitalised Defined Terms
unless separately defined.
Financial Highlights
Key Developments
· The Company is continuing to pursue an orderly realisation of
its assets, although delays are occurring due to difficult market conditions.
During the period, the Company returned £6.67 million of shareholder capital,
equating to 5.50 pence per ordinary share.
· After period end, a further £9.00 million of shareholder capital
was returned, equating to 7.40 pence per ordinary share. As at the date of
this report, the Company has now returned capital of 44.90 pence per ordinary
share to shareholders, equating to £54.46 million in total.
· Dividends were declared and paid totalling 0.50 pence per
ordinary share for the six-month period to 31 July 2023.
· The Company is taking decisive action to seek to realise its
remaining investments. As at the date of this report, all remaining loans
other than Northlands are subject to formal enforcement processes.
· The Company has increased ECL provisions by £17.38 million to
£21.32 million.
- £5.13 million in respect of the Southport loan, increasing the
total provision to £7.42 million.
- £10.59 million in respect of the RoyaleLife loan, increasing
the total provision to £12.22 million.
- £1.66 million in respect of the Affinity loan, increasing the
total provision to £1.68 million.
· Total loans outstanding at amortised cost plus interest
receivable, excluding ECL adjustments, amount to £65.93 million as at 31 July
2023.
Performance
· NAV of £55.37 million as at 31 July 2023 after ECL adjustments
of £(21.32 million) (31 January 2023: £77.35 million after ECL adjustments
of £(3.94 million)).
· NAV per share as at 31 July of 45.64 pence and 38.24 pence
following capital repayment on 1 September 2023.
· (Loss)/profit after tax of £(14.71) million for the six months
ended 31 July 2023 (31 July 2022: £2.73 million).
· (Loss)/Earnings per share for the period of (12.13) pence (31
July 2022: 2.25 pence).
Dividend
· Total dividends paid and declared for the period ended 31 July
2023 of 0.50 pence per share (31 July 2022: 2.1 pence per share), comprising
an interim dividend of 0.50 pence per share paid in respect of quarter ended
31 January 2023.
Investment Portfolio
· As at 31 July 2023, the Company's investment portfolio comprised
of four loans with an aggregate principal balance of £57.97 million, and a
carrying value after provision for ECL of £44.61 million (31 January 2023:
five loans with an aggregate principal balance of £67.44 million, and a
carrying value of £68.96 million).
· Weighted average portfolio LTV as at 31 July 2023 was 99.4% (31
January 2023: 80.9%).
*Unless stated otherwise, loan balances are stated gross of ECL provisions for
impairment. A comparison to the carrying value of the loans is set out in
Note 5 to the accounts.
Corporate Summary
Investment Objective
In line with the revised Investment Objective and Policy approved by
shareholders at the Extraordinary General Meeting in January 2021, the Company
is undertaking an orderly realisation of its investments.
Structure
The Company is a non-cellular company limited by shares incorporated in
Guernsey on 29 November 2022 under the Companies Law. The Company's
registration number is 55917, and it has been registered with the GFSC as a
registered closed-ended collective investment scheme. The Company's ordinary
shares were admitted to the premium segment of the FCA's official List and to
trading on the Main Market of the London Stock Exchange as part of its IPO
which completed on 5 February 2013. The issued capital comprises the Company's
ordinary shares denominated in Pounds Sterling. Following the dissolution of
ICG Longbow Senior Debt S.A. on 18 January 2022, the Company assumed the
assets and liabilities of its former subsidiary.
Investment Manager
The Company has appointed ICG Alternative Investment Limited as external
discretionary investment manager, under the Alternative Investment Fund
Managers Directive (AIFMD), within a remit set by the Board.
Chairman's Statement
Introduction
On behalf of the Board, I present the Unaudited Interim Financial Statements
for the Company for the six months ended 31 July 2023.
There is no doubt that this half year period has been difficult for the
Company as it seeks to secure timely exits from its remaining portfolio of
investments in what are extremely challenging market conditions. Through the
Investment Manager, the Company has taken decisive action on all its remaining
positions to seek to accelerate realisations. Shareholders will be aware that
all three of the major remaining investments are now subject to enforcement
processes to assist in procuring appropriate exits. Following the further
deterioration in market conditions during the period, and in light of the
enforcement actions being taken, significant additional impairment provisions
have been made against these remaining loans. Detailed updates on the loan
positions are provided below and in the Investment Manager's Report.
Current UK economic and property market conditions are not conducive to quick
or easy asset sales. The sustained rise in UK interest rates, up four
percentage points in a little over a year, has dramatically reduced liquidity
in property and finance markets as well as affecting asset prices in many
property sectors. The value of property transactions in the first half of
2023 was over 50% lower than the same period in the prior year, and 37% below
the 10-year average. Hotel sales in the first half were at their lowest levels
for over a decade. More recently, the data has trended weaker again: Colliers
International reports that property investment transactions in July were less
than £1bn, the lowest monthly level since 2008.
An illiquid and distressed market with few buyers is clearly not helpful for
any seller. Compounding the problem are finance markets, where lenders are
struggling with reduced interest coverage on new or maturing loans, and
borrowers are facing all-in rates that often cannot be accretive to returns.
It is not clear how long it may take for liquidity to improve but it seems
unlikely to be soon. The few buyers that exist are opportunistic, under no
pressure to acquire assets and demand steep discounts. Accordingly, the
environment for the Company to exit its remaining investments is expected to
remain extremely challenging in the near term.
Portfolio
The Company received partial repayments of the Northlands loan during the
period, totalling over £9.0 million in aggregate. Following further partial
repayments after the period end, the remaining balance is £0.1 million, plus
a modest amount of interest and fees, and is expected to be repaid in full in
the near term through further property sales.
We have already notified shareholders of the challenges experienced in the
Company's RoyaleLife investment and, since our last report, administrators
were appointed over all of the property-holding vehicles securing the
Company's loan. The Board is aware that administrators have also been called
in over many other entities within the wider Royale group, as other secured
creditors have taken action to protect their positions in the same manner as
the Company.
Shareholders will recall that the Company's loan is a part of a wider
structure of lending to Royale. The Investment Manager, on behalf of the
Company and its co-lenders, together with the administrator, is in discussion
with credible parties who have expressed interest in acquiring the properties,
but the complexity of the structure and various hurdles associated with the
prior sponsor mean that challenges remain. We appreciate that it is
frustrating for shareholders that we are unable to provide more details at
this time due to necessary confidentiality. However, I wish to assure you that
every effort is being made by the Board, Investment Manager and advisers to
effect a good outcome. The valuation applied in these interim financial
statements reflects the uncertainty.
In order to try to accelerate a repayment, the Investment Manager appointed a
receiver over the asset securing the Affinity loan in September 2023. From
an occupational perspective, the property's performance continues to be robust
with interest covered in full by rental income. However, despite a lengthy
period on the market for sale there have been no formal bids and it is hoped
that a receivership-led sale will prompt renewed interest from potential
buyers.
The hotel asset securing the Southport loan continues to trade under the
administrator and has been profitable in the year to date despite the dramatic
increases in energy and labour costs faced by hoteliers. The property was
placed under conditional offer for sale by the administrator. However, after
period end, the buyer withdrew owing to obstacles encountered in discharging
some of its specific conditions for purchase. It is disappointing that the
anticipated transaction failed to complete but this is reflective of current
property market conditions.
To try to generate further interest, a new joint selling agent has been
brought in and both agents are now actively re-marketing the property,
pointing to the potential for the asset to benefit from the proposed new
Marine Lake Events Centre, due for completion in 2026, which will adjoin the
hotel and where works started in August 2023.
We are acutely aware of the delays to loan redemptions encountered to date and
the desire of shareholders to see capital returned to them at the earliest
opportunity.
Valuation and Impairment
As discussed in more detail in the notes to the accounts, and in the context
of the current property market conditions, we have reviewed the valuation of
the Company's remaining investments based on the latest property valuations,
but also the desired short timeframe for returning capital to Investors.
The Company has recent valuations on all of the assets securing the three main
loans. Adoption of these valuations, as the Company has often done in the
past, would have reflected a much lower impairment charge than that now
applied and, in the case of Affinity, a notable equity buffer. However, in
recognition of current property market conditions, we developed alternative,
negative scenarios and probability weighted each. This conclusion, now adopted
in these accounts, might be viewed as "realistically pessimistic" but reflects
considerable uncertainty in terms of eventual disposal values and timing.
Accordingly, readers' attention is also drawn to the stress analysis
discussed in note 4 (iv) to the accounts which illustrates the potential
impact of any further deterioration in the market.
Revenue and Profitability
Income from the loan portfolio for the period totalled £0.89 million (31 July
2022: £3.61 million) as the Company's loan portfolio continued to reduce and
interest recognition was suspended on certain of the loans. After accounting
for impairments, the Company realised a loss for the period of (£14.71)
million (31 July 2022: profit of £2.73 million).
Earnings per share for the period were negative 12.13 pence (31 July 2022:
positive 2.25 pence), again reflecting additional expected credit losses
recognised against the remaining portfolio loans. Details of these additional
provisions are set out in the notes to the condensed accounts.
Dividend and Return of Capital
The Company paid a 0.50 pence per share dividend in May 2023, covering the
three months to 31 January 2023. It did not declare a dividend for the
quarter ended 31 April 2023 and will not declare a dividend for the quarter
ended 31 July 2023.
As previously reported to shareholders, the Company will only look to declare
dividends when cashflow and profits prudently allow. Currently the Board does
not envisage that these conditions will be met.
The repayment of capital of £6.67 million or 5.50 pence per ordinary share,
declared on 26 January 2023, was paid during the period.
After the period end and following the substantial repayment at par of the
Northlands loan, a further return of capital of approximately £9.00 million
or 7.40 pence per ordinary share to shareholders was made on 1 September 2023.
NAV and Share Price Performance
The Company's NAV reduced to £55.37 million as at 31 July 2023 (31 January
2023: £77.35 million), as a result of the partial repayment of the Northlands
loan during the period and recognising the additional ECL provisions in the
period.
The Company's share price ended the period at 36.1 pence per share, down from
52.25 pence as at 31 January 2023, during which time 5.5 pence per share has
been returned to shareholders through capital repayments. The share price
reflected, at period end, a 20.9% discount to the Company's NAV.
Outlook
Property market conditions in the UK remain extremely challenging with very
limited liquidity in many sectors. Where debt is available, pricing is often
simply not accretive to borrower returns, with the result that bids, where
they are made at all, are often not palatable to sellers. Bid-ask spreads
remain wide in many sectors, and consequently transaction volumes are low.
This presents particular challenges for the Company as it seeks to realise its
final investments. With a very limited number of active buyers in the market,
many open market sale processes are resulting in no credible bids being
forthcoming as buyers seek out the most distressed seller to maximise their
future returns. Consequently, any suggestion that a sale is forced or
time-sensitive tends to lead to low bid levels for assets, as buyers test the
seller's resolve.
The Board expects to have to make difficult choices in the coming period. The
stated investment objective of the Company is to conduct an orderly
realisation of its assets, and the Board and Investment Manager continue to
actively seek to accelerate repayments as far as they are able. Decisive
action has been taken on all the three major investments to step in and
oversee management of the assets and control sales processes. The acceleration
of these processes does need to be balanced against the potential value to be
realised.
The Board shares shareholders' frustration with the ongoing delays in
realising loans, combined with the disappointment of having to recognise
further impairment provisions. Regrettably there is no easy way for the
Board, Investment Manager or any other party to accelerate realisations in a
market with such a limited buyer pool. As a result, the continued focus is
on actively managing the remaining assets to protect and enhance value, to
control costs and to continue to seek the optimal recovery possible.
Jack Perry
Chairman
2 October 2023
Investment Manager's Report
Summary
As at 31 July 2023 the Company had four investments remaining, the three
largest of which (Affinity, Southport and RoyaleLife) are being managed and
realised through enforcement processes. This report provides a summary update
on the realisation process for each investment, and steps being taken by ICG
Real Estate to secure those outcomes.
Company Performance
During the period, the Company received a series of partial repayments of the
Northlands loan, following sales of certain of the portfolio properties as the
sponsor works towards full repayment. These payments totalled £9.0 million in
aggregate.
At the period end, the Company had £11.3 million of cash, of which £9.0
million was returned to shareholders in September 2023. The balance is
sufficient to cover all the Company's expected working capital needs while
maintaining a prudent liquidity buffer.
Portfolio
Portfolio statistics 31 July 2023 31 July 2022
Number of loan investments 4 5
Aggregate principal advanced (1) £57,967,370 £74,749,557
Aggregate carrying value after ECL £44,612,344 £77,976,950
Cash held £11,348,746 £3,068,145
Investment Update
Southport
The Company's Southport hotel loan continues to be run by the administrator,
while maintaining the same local management team. Trading at the hotel is
seasonal, with revenues strongest from April to October. Despite the
administration, the hotel has continued to trade profitably albeit it is clear
that the uncertainty around the long term future of the business has been and
may continue to be a drag on results in the near term. Moreover, given the
impact of administration and advisory costs, no interest payments are expected
in the near term.
In the first quarter of 2023 the property was under conditional offer for sale
to a large trade buyer. However, after the period end the proposed sale fell
away as the purchaser was unable to satisfy themselves that that all
conditions could be met in a reasonable timeframe and, despite significant
diligence costs, withdrew from the process.
As a consequence, and to reinvigorate the sales process, through the
administrator the Investment Manager has appointed a new joint selling agent
for the property. The two in-place agents are now actively remarketing the
asset to interested parties, pointing to the potential for the asset to
benefit from the proposed new Marine Lake Events Centre, which will adjoin the
hotel and where works started in August 2023. The local council hopes to
open the centre in 2026 and forecasts it will bring over half a million new
visitors to the town each year.
After period end, and following a request from the administrator, the Company
prudently determined to provide a £0.3 million working capital facility to
allow for continued investment in the asset during this sales process.
RoyaleLife
The RoyaleLife investment has been challenging. As disclosed in the Financial
Statements as at 31 January 2023 and subsequent RNS announcements, the sponsor
group behind the RoyaleLife loan was undergoing severe liquidity issues as a
result of a slowdown in sales during, and following, the Covid-19 pandemic.
Whilst sales resumed, the borrower was significantly behind its original
business plan, and no longer able to fully support its operations.
As a result, and following a winding up petition issued by a third party
creditor against some entities within the structure, the Company, acting
together with its co-lenders, appointed an administrator over three group
companies in May 2023, and over the remainder of the borrower structure in
August 2023. The Company is aware that administrators have also been appointed
by other lenders and creditors over other parts of the Royale group.
Prior to the appointment of the administrator, the Investment Manager had been
in discussion with the borrower to restructure its loans and see fresh equity
injected into the platform to re-activate the sales program. Since the
appointment a number of parties have come forward and expressed an interest in
acquiring the business or some, or all, of the sites. These include a number
of highly credible, well-capitalised parties with experience in the sector and
smaller local operators. The Investment Manager and administrator are
continuing discussions with these parties and seeking a whole business exit as
a priority, however the underlying portfolio and operations are complex, and
no certainty can be given at this stage that these negotiations will lead to a
satisfactory outcome, or when such an outcome might be achieved, and
consequently all options are being pursued.
In parallel with these discussions the Investment Manager, on behalf of the
Company and its co-lenders, continues to work with the administrator and
advisors to stabilise the operations across the portfolio and has recently
completed a partial restructure of the Investment in order to bring in a new
operator and preserve value in the underlying property security.
Affinity
The office property securing the Affinity loan remains well occupied and we
are aware of several existing tenants seeking to renew leases as well as
active interest for the limited remaining vacant space at the property.
Average rents in the building are in the region of £22 per sq ft with the
most recent lettings at over £25 per sq ft and new deals under discussion at
still higher levels. These represent a material discount to prime Bristol
office rents in excess of £40 per sq ft. Net income from the asset
continues to cover interest in full, at a 10.5% rate, and additional default
interest is being accrued.
The disconnect between the positive occupational conditions and the investment
market appetite remains stark. The asset was on the market for sale
throughout the reporting period and despite a number of inspections by
potential buyers the ongoing lack of investor demand for regional offices has
hampered the sales effort and no formal bids have been forthcoming. In terms
of market competition, we are aware that in Q2 2023, there were 16 competing
Bristol office assets being offered to the market as well as several further
buildings available to buy off-market. There is a similar pattern in other
UK regional cities.
Nonetheless, the Investment Manager is seeking to use every tool to try to
accelerate the sales process and in September 2023 appointed a receiver over
the asset with the aim of re-invigorating the marketing and flushing out
potential buyers to try and achieve a realisation.
Northlands
The Northlands loan has been largely repaid through the sale of newly built
residential properties and the break-up of the commercial portfolio on which
it is secured. As at 31 July 2023, the outstanding loan balance was £0.09
million with a further £0.43 million of accrued interest and exit fees
outstanding. Default interest continues to be charged.
Investment Portfolio Summary as at 31 July 2023
Project Region Sector Balance outstanding (£m)((2)) Book Value after ECL (£m) Book Value per share (p) Current LTV
(%)
Affinity South West Office 17.30 15.99 13.2 85.9%
Southport ((1)) North West Hotel 15.20 9.38 7.7 121.6%
Northlands London Mixed use 0.09 0.52 0.4 7.1%
RoyaleLife National Residential 25.38 18.72 15.4 95.6%
Total / weighted average 57.97 44.61 36.7 99.4%
(1) LTV reflects balance outstanding before adjustment for ECL.
(2) Balance outstanding excludes accrued interest. A comparison to the
carrying value of the loans is set out in Note 5 to the accounts.
Economy and Financial Market Update
The reporting period brought a constant stream of mixed economic signals,
leaving participants watchful for a clear turning point in markets. While the
September meeting of the Bank of England's Monetary Policy Committee kept
rates stable, previously the UK had seen 14 successive interest rate rises,
with inflation stubbornly high, and 'core' inflation now at over 6% per annum.
Despite a gradual decline in inflation in recent months, markets remain
nervous of a period of sustained 'higher for longer' interest rates ahead to
control inflation.
The UK is seeing continued wage growth. Private sector nominal wage growth
remained above expectations at 8.1% in July, higher than in the US or Europe.
This contrasts with a gradual increase in unemployment, standing at 4.3% in
July, up from 3.7% in January 2023. After the period end, real wage growth
turned positive, as higher wage settlements took effect in a period of
reducing inflation rates.
Consensus independent GDP forecasts published by the UK Treasury remain
marginally positive for 2023 & 2024 at 0.3% and 0.6% respectively, and
inflation rates are expected to ease to 4.5% at end of 2023 (albeit still
above target levels). Public sector net borrowing remains elevated at £130bn,
greater than 2022, however lower than pandemic year peaks.
Occupational Demand/Supply
While many high profile corporate names advocate for an increased return to
the office, occupational demand across the big six office markets in H1 2023
was approximately 20% down on the five year average, measured by take up. The
majority of leasing took place in the capital, though Central London vacancy
ticked upward to 9.2%, driven by speculative completions. The flight to
quality - a trend of occupiers seeking the best buildings - continues across
all of the UK's regional markets, with regional H1 leasing down 13%
year-on-year, but Grade A stock accounting for only 25% of regional stock
available.
Industrial take up also dropped in H1, at 12.5m sq ft, being half of the last
three years' average, and the lowest H1 since 2013. A contributing factor was
a drop in 'big box logistic' deals, with the average deal size dropping to
50,000 sq ft. Demand for second hand space is said to be bouncing back, and
agents' requirements indices suggest H2 will bring greater take up.
UK consumer confidence improved in the reporting period, albeit remaining
negative and losing some of its earlier gains in July as inflation data showed
to be persistently high, leading to expectations of further interest rate
rises. Agency data indicated retail leases signed were down c. 30% in the
first half of 2023, with retail rents in Q2 also dropping again for the first
time since 2021, potentially due to the side effects of persistent inflation.
Hotel markets reported a more favourable operating environment, with average
daily rates (ADR) 23% ahead of 2019 over the first six months of the year, and
occupancy up year on year and only slightly lagging 2019 on a trailing 12
month basis. Gross operating profit per available room (GOPPAR) in H1 2023
had fully recovered to 2019 levels, although hotels continue to face cost
pressures ranging from energy to staffing.
Property Investment Market
H1 2023 saw investment volumes remaining depressed across the board. Total
commercial property investment volumes at c. £15bn were 55% down on H1 2022,
reflecting an overall buyer-seller pricing mismatch, with no buyers under
pressure to trade and a lack of forced sellers at current pricing. Successive
interest rate rises and debt pricing are further fuelling transaction
hesitation. The MSCI All Property index remained close to neutral over the
reporting period, showing 1.2% growth with increased rental income offsetting
declining capital values.
While the lack of deals makes average prime yields difficult to ascertain in
many sectors or sub-markets, prime London office yields appeared to hold firm
in July 2023, at 4.0% in the West End, and 5.0% in the City, whilst provincial
yields continued to move slightly out in H1 2023 to c. 6.25%. Q2 2023 London
office investment volumes were 38% below Q1, dipping to only £1.44bn, despite
Q1's strong performance at £2.3bn.
The industrial investment market showed an inverse trend, registering a much
stronger Q2 2023 at £2.1bn, following a weaker start to the year. Half year
volumes more closely reflected pre-pandemic volumes however, at only 54% of
2022's bumper H1. Demand was focused on the regions, with 50% of Q2 investment
in the North West, driven by heavyweight Blackstone's acquisition of two of
the region's best-known industrial estates for c. £480m. Prime industrial
yields stood at c. 5.0%, far from their peak however still tight.
Within the retail market, shopping centres continued to struggle, with retail
parks and food stores anchoring the market. Food stores have been one of the
most resilient sectors over the last 12 months, with prime yields stabilising
at 5.00%. H1 transactions were also inflated by a number of supermarket
portfolios, including the Sainsbury's Reversion Portfolio trading twice in the
period (£427m combined).
A lack of transactional evidence in the hotel market has also led to
uncertainty about yields, with the H1 total of £1.3bn the lowest since 2012.
Three quarters of all sales were in the regions, 69% of hotels transacting had
less than 100 keys and 80% were sub-£25m lot sizes. Those assets that are
trading appear to be modest in scale.
Finance Markets
Net UK bank lending to commercial property has been positive for five
consecutive months since March, although there has been a fall back of
development financing this year. This positive position, contrasted with
dropping investment volumes, signals borrowers and lenders have been working
through a backlog of refinancings. The proportion of total bank debt secured
on commercial property remained stable at 7.1%.
Lower LTVs persist for new lending and, together with market wide valuation
adjustments, have left a significant debt funding gap for sponsors, i.e. the
difference between historic or in-place debt levels and those available in the
market today. This is estimated at £16.3bn for the UK between now and 2026.
Furthermore, in the next four and half years, around 80% of outstanding
commercial real estate debt is due for repayment.
The industry is still grappling with the cost of debt outstripping valuation
yields in many sectors, with the result that interest coverage levels are low,
and, in many cases, debt is no longer accretive to returns. Lenders do have
appetite to lend however this is at increasingly conservative levels and often
higher credit margins than borrowers may be used to. We are also aware that
many lenders have limited or no appetite for retail and office properties.
Portfolio Outlook
The data clearly suggests that property market conditions will remain
difficult for sellers for the immediate future with some relief expected in
2024 as core inflation and interest rates are forecast to begin to fall, and
economic growth begins to return.
Through the appointment of receivers and administrators, the Investment
Manager and the Company are now better placed to control the repayment of the
Affinity and Southport loans via marketing and ultimate sale of the underlying
properties but will continue to work with the respective property managers and
operators in the meantime to maximise performance, and protection and
enhancement of income.
Whilst the companies operating the residential parks securing the RoyaleLife
loan are also in administration, the operations are more complex and the
Company will continue to work with its co-lenders, the administrator and their
advisors first to stabilise operations and protect value, and secondly to
secure an exit that will enable the Company to wind-up.
As discussed in this report, all potential routes to exit are being explored
and progressed, however the complex nature of the business and niche sector in
which it operates may present additional challenges to realising full value in
the near term.
There are likely to be difficult decisions required as the Company balances
the level of recovery with the speed of realisation and cost of running the
Company through to its ultimate liquidation.
ICG Real Estate
2 October 2023
Directors' Responsibilities Statement
The Directors are responsible for preparing this Interim Financial Report in
accordance with applicable law and regulations. The Directors confirm that to
the best of their knowledge:
• The Unaudited Condensed Interim Financial Statements have been
prepared in accordance with IAS 34 Interim Financial Reporting as adopted by
the EU; and
• The Chairman's Statement and Investment Manager's Report include a
fair review of the information required by:
(i) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an
indication of important events that have occurred during the first six months
of the financial year and their impact on the Unaudited Condensed Interim
Financial Statements; and a description of the principal risks and
uncertainties for the remaining six months of the year; and
(ii) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being
related party transactions that have taken place in the first six months of
the financial year and that have materially affected the financial position
and performance of the entity during that period; and any changes in the
related party transactions described in the last Annual Report and Financial
Statements that could do so.
On behalf of the Board
Jack Perry
Chairman
2 October 2023
Principal Risks and Uncertainties
The Company invests primarily in UK commercial real estate loans of a fixed
rate nature; as such, it is exposed to the performance of the borrower and the
underlying property on which its loans are secured.
The principal risks and uncertainties of the Company were identified in detail
in the Annual Report and Financial Statements for the year ended 31 January
2023.
In addition to regular risk reviews, emerging risks are considered as they
arise, to assess any potential impact on the Company and to determine whether
any actions are required.
As a result of such risks emerging, the Audit and Risk Committee regularly
reviews its assessment of the key risks faced by the Company, which are
currently identified as the following:
· The inability to secure the sale or refinancing of an underlying
property will frustrate the timely repayment of capital;
· Imprecision of valuations will impact the Company's ability to
accurately determine collateral values and to appropriately consider the
potential impairment of any particular investment;
· A further deterioration in property market conditions or liquidity
could likely result in a further reduction in shareholder value;
· Portfolio diversification: the effect on the Company of challenges
experienced on the smaller number of remaining investments is magnified and
could lead to increased volatility in cash flows or net asset values;
· Some of the Company's costs are fixed and will therefore consume a
greater proportion of the Company's revenues as the Company shrinks, which
will impact the amount of funds available for distribution to shareholders;
· Complications with the liquidation process could affect timing of
the final distribution to shareholders.
Condensed Statement of Comprehensive Income
FOR THE SIX-MONTH PERIOD TO 31 JULY 2023
1 February 2023 to 1 February 2022 to 1 February 2022 to
31 July 2023 31 July 2022 31 January 2023
£ £ £
Notes (Unaudited) (Unaudited) (Audited)
Income
Income from loans 1,060,573 3,611,439 7,136,574
Other fee income from loans - - 133,051
Income from cash and cash equivalents 29,280 - 2,864
Total income 1,089,853 3,611,439 7,272,489
Expenses
Investment Management fees 9 369,261 519,039 761,047
Other expenses 10 310,566 280,736 451,438
Directors' remuneration 9 80,000 80,000 160,000
Finance costs - - -
ECL provision on financial assets 4 15,039,979 - 3,940,181
Total expenses 15,799,806 879,775 5,312,666
(Loss)/Profit for the period/year before tax (14,709,953) 2,731,664 1,959,823
Taxation charge - - -
(Loss)/Profit for the period/year after tax (14,709,953) 2,731,664 1,959,823
Total comprehensive (expense)/income for the period/year (14,709,953) 2,731,664 1,959,823
Basic and diluted (Loss)/Earnings per Share (pence) 5 (12.13) 2.25 1.62
All items within the above statement have been derived from discontinuing
activities on the basis of the orderly realisation of the Company's assets.
The Company has no recognised gains or losses for either period other than
those included in the results above, therefore no separate statement of other
comprehensive income has been prepared.
The accompanying notes form an integral part of these Interim Financial
Statements.
Condensed Statement of Financial Position
As at 31 July 2023
31 July 2023 31 January 2023 31 July 2022
£ £ £
Notes (Unaudited)
(Audited) (Unaudited)
Assets
Loans advanced at amortised cost 4 44,612,344 68,963,675 77,976,950
Cash and cash equivalents 11,348,746 43,435 3,068,145
Trade and other receivables 13,193 9,209,494 529,620
Total assets 55,974,283 78,216,604 81,574,715
Liabilities
Trade and other payables 607,452 861,653 1,021,864
Total liabilities 607,452 861,653 1,021,864
Net assets 55,366,831 77,354,951 80,552,851
Equity
Share capital 6 73,626,766 80,298,419 80,298,422
Retained (loss)/earnings (18,259,935) (2,943,468) 254,429
Total equity attributable to the owners of the Company 55,366,831
77,354,951 80,552,851
Number of ordinary shares in issue at period/year end 6 121,302,779
121,302,779 121,302,779
Net Asset Value per ordinary share (pence) 5 45.64 66.41
63.77
The Interim Financial Statements were approved by the Board of Directors on 2
October 2023 and signed on their behalf by:
Jack Perry Fiona Le Poidevin
Chairman Director
The accompanying notes form an integral part of these Interim Financial
Statements.
Condensed Statement of Changes in Equity
For the SIX-MONTH period to 31 July 2023
Number Ordinary Share B Share Retained
Notes of shares capital capital (loss) Total
£ £ £ £
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
As at 1 February 2023 121,302,779 80,298,419 - (2,943,468) 77,354,951
Loss for the period - - - (14,709,953) (14,709,953)
Dividends paid 7 - - - (606,514) (606,514)
B Shares issued February 2023 6 121,302,779 (6,671,653) 6,671,653 - -
B Shares redeemed & cancelled February 2023 6 (121,302,779) - (6,671,653) - (6,671,653)
As at 31 July 2023 121,302,779 73,626,766 - (18,259,935) 55,366,831
For the SIX-MONTH period to 31 July 2022
Number Ordinary Share B Share Retained
Notes of shares capital capital earnings Total
£ £ £ £
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
As at 1 February 2022 121,302,779 87,576,589 - 191,426 87,768,015
Profit for the year - - - 2,731,664 2,731,664
Dividends paid 7 - - - (2,668,661) (2,668,661)
B Shares issued May 2022 6 121,302,779 (7,278,167) 7,278,167 - -
B Shares redeemed & cancelled May 2022 6 (121,302,779) - (7,278,167) - (7,278,167)
As at 31 July 2022 121,302,779 80,298,422 - 254,429 80,552,851
The accompanying notes form an integral part of these Interim Financial
Statements.
Condensed Statement of Cash Flows
For the SIX-MONTH period to 31 July 2023
1 February 2023 to 1 February 2022 to 1 February 2022 to
31 July 2023 31 July 2022 31 January 2023
£ £ £
Notes (Unaudited) (Unaudited) (Audited)
Cash flows generated from operating activities
(Loss)/Profit for the period/year (14,709,953) 2,731,664 1,959,823
Adjustments for non-cash items and working
capital movements:
Movement in other receivables 30,242 (27,135) 459,050
Movement in other payables and accrued expenses (254,201) 228,641 68,430
Loan amortisation 14,875,644 (513,291) 1,193,484
(58,268) 2,419,879 3,680,787
Loans advanced, less arrangement fees (8,400) (162,434) (487,610)
Arrangement fees received - - 64,740
Loans repaid at par 4 9,484,087 5,956,304 13,523,240
Net loans repaid less arrangement fees 9,475,687 5,793,870 13,100,370
Net cash generated from operating activities 9,417,419 8,213,749 16,781,157
Cash flows used in financing activities
Dividends paid 7 (606,514) (2,668,661) (5,094,717)
Return of Capital paid 6 (6,671,653) (7,278,167) (7,278,170)
Net cash used in financing activities (7,278,167) (9,946,828) (12,372,887)
Net movement in cash and cash equivalents 2,139,252 (1,733,079) 4,408,270
Cash and cash equivalents at the start of the period/year 9,209,494 4,801,224 4,801,224
Cash and cash equivalents at the end of the period/year 11,348,746 3,068,145 9,209,494
The accompanying notes form an integral part of these Interim Financial
Statements.
Notes to the Unaudited Condensed Interim Financial Statements
For the six-month period to 31 July 2023
1. General information
ICG-Longbow Senior Secured UK Property Debt Investments Limited is a
non-cellular company limited by shares and was incorporated in Guernsey under
the Companies Law on 29 November 2012 with registered number 55917 as a
closed-ended investment company. The registered office address is Floor 2,
Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 4LY.
The Company's shares were admitted to the Premium Segment of the Official List
and to trading on the Main Market of the London Stock Exchange on 5 February
2013.
The unaudited condensed financial statements comprise the financial statements
of the Company as at 31 July 2023.
In line with the revised Investment Objective and Policy approved by
shareholders in the Extraordinary General Meeting in January 2021, the Company
is undertaking an orderly realisation of its investments. As sufficient funds
become available the Board returns capital to shareholders, taking account of
the Company's working capital requirements and funding commitments.
ICG Alternative Investment Limited is the external discretionary investment
manager.
2. Accounting policies
a) Basis of preparation
The Interim Financial Statements included in this Interim Report, have been
prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted
by the EU, and the Disclosure and Transparency Rules of the FCA.
The Interim Financial Statements have not been audited or reviewed by the
Company's Auditor.
The Interim Financial Statements do not include all the information and
disclosures required in the Annual Report and Financial Statements and should
be read in conjunction with the Company's Annual Report and Financial
Statements for the year ended 31 January 2023, which are available on the
Company's website (www.lbow.co.uk). The Annual Report and Financial Statements
have been prepared in accordance with IFRS as adopted by the EU.
Other than as set out above, the same accounting policies and methods of
computation have been followed in the preparation of these Interim Financial
Statements as in the Annual Report and Financial Statements for the year ended
31 January 2023.
There were no new standards or interpretations effective for the first time
for periods beginning on or after 1 January 2023 that had a significant effect
on the Company's financial statements. Furthermore, none of the amendments to
standards that are effective from 1 January 2023, had a significant effect on
the Company's interim condensed financial statements. It is not anticipated
that any standard which is not yet effective, will have a material impact on
the Company's financial position or on the performance of the Company's
statements.
b) Going concern
The Directors, at the time of approving the Financial Statements, are required
to satisfy themselves that they have a reasonable expectation that the Company
has adequate resources to continue in operational existence for the
foreseeable future and whether there is any threat to the going concern status
of the Company. At the EGM of the Company on 14 January 2021, following a
recommendation from the Board published in a circular on 16 December 2020,
shareholders voted by the requisite majority in favour of a change to the
Company's Objectives and Investment Policy which would lead to an orderly
realisation of the Company's assets and a return of capital to shareholders.
It is intended that the investments will be realised over time and the
Directors expect that some investments will be held past the formal maturity
date of the last loan, currently due for repayment by the end of 2023. The
Company may take actions with the consequence of accelerating or delaying
repayment in order to optimise shareholder's returns in the context of the
Company's size and position at that time.
Whilst the Directors are satisfied that the Company has adequate resources to
continue in operation throughout the remaining realisation period and to meet
all liabilities as they fall due, given the Company is now in a managed wind
down, the Directors consider it appropriate to adopt a basis other than going
concern in preparing the financial statements.
In the absence of a ready secondary market in real estate loans by which to
assess market value, the basis of valuation for investments is amortised cost
net of impairment, recognising the anticipated realisable value of each
investment in the orderly wind down of the Company. In accordance with the
Company's IFRS 9 Policy there has been a change in the carrying value of some
investments following the increase of the lifetime ECL allowances on the stage
three loans, as detailed in Note 4. No material adjustments have arisen solely
as a result of ceasing to apply the going concern basis.
c) Segmental reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision-maker. The chief operating
decision-maker, who is responsible for allocating resources and assessing
performance of the operating segments, has been identified as the Board of
Directors as a whole. The key measure of performance used by the Board to
assess the Company's performance and to allocate resources is the total return
on the Company's Net Asset Value, as calculated under IFRS, and therefore no
reconciliation is required between the measure of profit or loss used by the
Board and that contained in the Financial Statements.
For management purposes, the Company is organised into one main operating
segment, being the provision of a diversified portfolio of UK commercial
property backed senior debt investments.
The majority of the Company's income is derived from loans secured on
commercial and residential property in the United Kingdom.
Due to the Company's nature, it has no employees.
The Company's results do not vary significantly during reporting periods as a
result of seasonal activity.
3. Critical accounting judgements and estimates in applying the Company's
accounting policies
The preparation of the Financial Statements under IFRS requires management to
make judgements, estimates and assumptions that affect the application of
policies and reported amounts of assets and liabilities, income and expenses.
The estimates and associated assumptions are based on historical experience
and other factors that are believed to be reasonable under the circumstances,
including the Company's timeframe for orderly realisation of investments in
order to return capital to shareholders. These factors help form the basis
of making judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period or in the period
of the revision and future periods if the revision affects both current and
future periods.
Critical judgements
In assessing the ECL, the Board has made critical judgements in relation to
the staging of the loans and assessments which impact the loss given default.
In assessing whether the loans have incurred a significant increase in credit
risk the Investment Manager, on behalf of the Board, assesses the credit risk
attaching to each of the loans and the realisable value of the underlying
property on which the loans are secured. Realisable value is an estimate
informed by third party valuations, but also taking into consideration
property market liquidity, availability of debt funding and the timeframes in
which the Company is seeking to return capital to its shareholders.
The Company has adopted the Investment Manager's Internal credit rating
methodology and has used its loss experience to benchmark investment
performance and potential impairment for Stage 1, Stage 2 and Stage 3 loans
under IFRS 9 considering both probability of default and loss given default.
It is noted that the Company's remaining loans are either past due or have a
residual contractual maturity of less than one year.
In the case of past due loans, the Investment Manager and the Board will also
take into consideration the likely repayment term of such loans and of actions
taken to repay such loans. Consequently, a loan which is past due, but
otherwise performing, may continue to be assessed as Stage 1 where there is an
active repayment plan in place, or supporting evidence that the loan can be
repaid in full and the Company has given a period of forbearance whilst
reserving its rights to, or charging, default interest.
The sustained rise in UK interest rates, up four percentage points in a little
over a year, has dramatically reduced liquidity in property and finance
markets as well as affecting asset prices in many property sectors. As a
result, the number of UK commercial property transactions in the first half of
2023 was over 50% lower than the same period in the prior year, and 37% below
the 10-year average. Hotel sales in the first half were at their lowest levels
for over a decade. More recently, the data has trended weaker: Colliers
International reports that investment transactions in July were less than
£1bn, the lowest level since 2008.
Against this backdrop the Investment Manager and Board agree that, other than
the Northlands loan, all remaining investments have a heightened credit
risk. At the reporting date all three loans are subject to enforcement
action and, in the absence of an active and liquid property market, are
considered as Stage 3 assets with a material risk of credit loss.
Critical accounting estimates
The measurement of both the initial and ongoing ECL allowance for loan
receivables measured at amortised cost is an area that requires the use of
significant assumptions about credit behaviour such as the ability of
borrowers to refinance; the likelihood of them defaulting; the realisable
value of the secured properties; and the resulting losses. In assessing the
probability of default and ECL, the Board has taken note of the experience and
loss history of the Investment Manager which may not be indicative of future
losses in changing market conditions. The default probabilities are based on a
number of factors including rental income trends, interest cover and LTV
headroom and sectoral trends which the Investment Manager believes to be a
good predictor of the probability of default, in accordance with recent market
studies of European commercial real estate loans.
In line with the Company's investment strategy at the time, all loans
benefited from significant LTV headroom at origination, with business plans
designed to deliver further value increases over time. This combined with
tight covenants had enabled the Investment Manager to manage risk over the
term of the loans. Following the change in Investment Strategy to one of
orderly wind down, the Investment Manager and the Board have placed greater
emphasis on the source and delivery of repayment over the residual term of
each loan when assessing valuation of the Company's loans and the risk of
capital loss.
The Board's valuation of Stage 3 assets (those loans considered to have a
material risk of credit loss), is first informed by third party property
valuations and supporting comparative transactional evidence. The Investment
Manager and the Board will then overlay property level cashflows, expected
sales costs and other factors considered necessary to achieve exits within the
target timeframes for returning capital to shareholders.
Since the Russian invasion of Ukraine in February 2022, UK inflation has been
rising, and UK monetary policy has tightened. Inflation and therefore interest
rate expectations have remained high driven by rising fuel and food costs and,
more recently, wage settlements. These factors have combined to make the
UK's economic outlook less certain, with GDP growth of less than 1% per annum
forecast for the next two years.
As such, investor confidence in the UK commercial property markets is low as
reflected by market transaction volumes discussed above. Higher inflation
and interest rates are also now beginning to impact consumer spending patterns
and filter through to house prices.
All of the Company's Stage 3 assets were either past due or subject to
enforcement action in the form of administration or receivership at the
reporting date. As a result, the Company has considered the likelihood of
achieving sales at the most recent third-party valuation or at discounts to
reflect the current lack of liquidity in the relevant property sector and the
Company's target timeframes and the probability of such outcomes. These
probabilities and discounts are further informed by prospective purchasers'
offers or expressions of interest where properties have been marketed.
In arriving at the investment valuations, the Investment Manager has overlayed
the expected costs of sale and exit timeframes to determine a weighted average
valuation of each loan under the expected interest rate method and, thereby,
the expected credit loss for each loan that may result.
Revenue recognition is considered a significant accounting judgement and
estimate that the Directors make in the process of applying the Company's
accounting policies. In respect of the Company's Stage 3 loans, Interest
Income will be recognised through in the Statement of Comprehensive Income as
and when it is received. In view of the trading conditions of the Southport
hotel and liquidity challenges facing the RoyaleLife loan, the Directors
consider it unlikely that interest payments will be received in the near
term. The Affinity loan is also a Stage 3 asset, however the property
remains well occupied and the Directors expect interest will continue to be
paid in full and such receipts will be recognised as and when received.
Following the period end, the remaining companies within the RoyaleLife loan's
security structure were placed into administration, and a partial restructure
of the investment has taken place. These actions have been taken together with
the Company's co-lenders in order to preserve the value of the underlying
property security, to stabilise operations and to protect corporate cashflows.
The property securing the Affinity loan was placed into receivership following
the period end and is now being remarketed for sale. The properties and
companies securing the Southport Hotel loan were placed into administration in
September 2022.
4. Loans advanced
(i) Loans advanced
1 February 2023 to 31 July 2023 1 February 2022 to 31 January 2023
£ £
Loans Advanced: 65,932,533 72,903,856
Less: Expected Credit Losses (21,320,189) (3,940,181)
44,612,344 68,963,675
31 July 2023 31 July 2023 31 January 2023 31 January 2023
Principal advanced Fair value (at amortised cost) Principal advanced Fair value (at amortised cost)
£ £ £ £
Northlands 85,389 517,935 9,561,076 9,829,286
Affinity 17,299,963 17,667,277 17,299,963 17,774,436
Southport 15,200,000 16,799,773 15,200,000 15,988,651
RoyaleLife 25,382,017 30,947,548 25,382,017 29,311,483
57,967,369 65,932,533 67,443,056 72,903,856
(ii) Valuation considerations
As noted above, the Company is now in the process of an orderly wind down. It
had been the intention of the Investment Manager and Directors to hold loans
through to their repayment date, and seek a borrower led repayment in order to
maximise value for the shareholders. Economic and property market conditions
have not enabled this, with commercial property transactions in some sectors
at their lowest levels for 15 years.
The carrying value amounts of the loans, recorded at amortised cost in the
Financial Statements have been adjusted for expected credit losses. For
further information regarding the status of each loan and the associated risks
see the Investment Manager's Report.
Amortised cost is calculated using the effective interest rate method which
takes into account all contractual terms (including arrangement and exit fees)
that are an integral part of the loan agreement. As these fees are taken into
account when determining initial net carrying value, their recognition in
profit or loss is effectively spread over the life of the loan.
As loans have fallen past due and enforcement actions have been taken, the
Directors have reassessed the likelihood and timing of receipt of such exit
fees in the context of the current underlying property value and weak market
conditions.
Each property on which investments are secured was subject to an independent,
third-party valuation at the time the investment was entered into and updated
valuations are obtained as deemed appropriate. All investments are made on a
hold to maturity basis. Each investment is being closely monitored including a
review of the performance of the underlying property security.
Third party property valuations are typically based on the specific
particulars of the property (rent, Weighted Average Unexpired Lease Term
(WAULT), vacancy, condition and location) and assume a normal marketing period
and sales process. Valuers benchmark against comparative evidence from
recent transactions in similar properties.
Other than the Northlands loan, the remaining Investments are considered to be
Stage 3 assets and were at period end, or are now, subject to enforcement
action. Accordingly, the carrying value of each loan has been reviewed and
further provisions for expected credit loss raised. The carrying value of
each Stage 3 investment has been calculated to reflect the net present value
of the expected net proceeds from, and timing of, exit under a range of
scenarios reflecting the latest property valuation, the cost of disposal
(including enforcement action taken), and potential discount to valuation that
a willing buyer may offer in the current market for a purchase out of
administration/receivership in an accelerated process.
(iii) IFRS 9 - Impairment of Financial Assets
As discussed above, during 2023 the UK commercial property market has
experienced a period of historically low transaction volumes, as buyers adjust
their pricing in order to generate target returns in a higher interest rate
environment with uncertain occupational demand in many sectors. Conversely,
unless forced, sellers are inclined to hold properties where they can in the
expectation of improved liquidity as the economic outlook stabilises and
medium-term interest rates fall. In this context, valuation and, therefore,
the ECL of each investment has been recalculated based on the underlying
property performance and valuations together with any sales/marketing
experience to date and is discussed further below.
The internal credit rating of each loan as at 31 July 2023 has been reviewed.
One loan was identified as a Stage 3 asset at 31 January 2023, and the loan
has remained a Stage 3 asset, with an ECL provision of £7,418,760 (31 January
2023: £2,288,651). Of the two loans that were identified as Stage 2 assets at
31 January 2023, RoyaleLife is now identified as a Stage 3 asset, with an ECL
provision of £12,224,576 (31 January 2023: £1,638,828). Affinity is also
now identified as a Stage 3 asset, with an ECL provision of £1,676,853 (31
January 2023: £12,702).
As at 31 July 2023
Stage 1 Stage 2 Stage 3 Total
Principal advanced 85,389 - 57,881,980 57,967,369
Gross carrying value 517,935 - 65,414,598 65,932,533
Less ECL allowance - - (21,320,189) (21,320,189)
517,935 - 44,094,409 44,612,344
As at 31 January 2023
Stage 1 Stage 2 Stage 3 Total
Principal advanced 9,561,076 42,681,981 15,200,000 67,443,056
Gross carrying value 9,829,286 47,085,919 15,988,651 72,903,856
Less ECL allowance - (1,651,530) (2,288,651) (3,940,181)
9,829,286 45,434,389 13,700,000 68,963,675
The Northlands loan has been largely repaid through the sale of newly built
residential properties and the break-up of the commercial portfolio on which
it is secured. As at 31 July 2023, the outstanding loan balance was £85,737
with a further £432,198 of accrued interest and exit fees outstanding. Two
further property sales have completed since period end with proceeds applied
against interest, and the loan is expected to be fully repaid from a series of
further property sales which are currently under offer. As a result, the
look-through LTV is below 10% and the loan is expected to repay in full.
The Southport hotel was placed into administration in September 2022,
following a failed marketing and refinancing exercise by the sponsor. The
hotel has continued to trade throughout this period and, following a refreshed
marketing process, was placed under conditional offer in the first quarter of
2023. The purchaser has not been able to satisfy themselves that all
conditions could be met in a reasonable timeframe and, despite significant
diligence costs, withdrew from the process following period end. The
property was last valued in late March 2023 at £12.5 million. The hotel has
been brought back to the market and new bids are being solicited. The Company
has provided a working capital facility to the administrator. Whilst trading
has been profitable, it is insufficient to meet administrative and advisor
costs and no interest payments are expected. Based on an expected remarketing
period, sales and administration costs and the likelihood of achieving
valuation in the current market environment, a further ECL of £5,130,109 has
been recognised in the period.
Occupational demand for the Affinity office property has remained strong, with
discussion underway in respect of the only remaining vacant space. Interest at
10.5% has been paid in full and further default interest is being accrued.
The borrower engaged an agent to sell the property in February 2023 but,
despite a number of inspections, no formal offer has been forthcoming. After
a period of forbearance, the Company appointed a receiver over the property in
September 2023 who has re-engaged with the sales agent to re-launch the
property. The property was last valued in April 2023 at £20.15 million
representing an LTV of 85.8%. The regional office market remains difficult as
investors contemplate the ongoing occupational demand, with changing working
practices following the Covid-19 pandemic. The Investment Manager and Board
have adopted a probability-based approach to achieving full valuation and
discounts thereto, whilst taking into account the full costs of receivership
and eventual sale. As a result, the Company has made a provision for ECL of
£1,676,853 against the carrying value of the loan.
As disclosed in the Financial Statements as at 31 January 2023 and subsequent
RNS announcements, the sponsor group behind the RoyaleLife loan was undergoing
severe liquidity issues as a result of a slowdown in sales during, and
following, the Covid-19 pandemic. Whilst sales resumed, the borrower was circa
2 years behind its original business plan, and no longer able to fully support
its operations. As a result, and following a winding up petition issued by a
third party creditor against some entities within the structure, the Company,
acting together with its co-lenders, appointed an administrator over three
group companies in May 2023, and over the remainder of the borrower structure
in August 2023.
The Investment Manager on behalf of the lenders continues to work with the
administrator and advisors to stabilise the park operations and has recently
completed a partial restructure in order to bring in a new operator and
preserve value in the underlying property security.
The Investment Manager is in discussion with a number of parties who have
expressed an interest in acquiring the borrower group and these discussions
are continuing. The property valuations have been updated since period end and
following the appointment of the administrator. Based upon this, the Company's
current exposure is at 95.6% LTV, an increase from 72.4% as at January 2023.
As previously reported, the borrower group is not expected to service interest
in the near term and, at the lower valuation, exit fees in excess of £4
million are no longer likely to be received. In valuing the investment, the
Investment Manager and Board have considered a number of scenarios based on
discussions in hand and a full workout and have discounted the projected
cashflow in each scenario to the reporting date. As a result, the Board has
increased the ECL from £1,638,828 to £12,224,576, which includes a provision
for impairment against exit fees previously recognised under the amortised
cost accounting policy, as well as the accrued default interest.
A reconciliation of the ECL allowance is presented as follows:
Expected Credit Loss Allowances
At 31 January 2023 Movement in ECL Allowance during period At 31 July 2023
£ £ £
Affinity (12,702) (1,664,151) (1,676,853)
Southport (2,288,651) (5,130,109) (7,418,760)
RoyaleLife (1,638,828) (10,585,748) (12,224,576)
(3,940,181) (17,380,008) (21,320,189)
(iv) IFRS 9 Impairment - Stress Analysis
The carrying values of the remaining investments above contemplate sales in a
difficult market and have been adjusted for expected credit losses, making
allowance for the potential impact sales out of receivership/administration on
the properties' underlying liquidity and attractiveness to buyers, as well as
the timeframe in which the Company is seeking to realise its investments.
Other than the Northlands loan, the remaining loans are subject to enforcement
processes, which may be an additional factor in the liquidity of and buyer
pools for the subject assets. Following the additional provision for ECL,
all three of those loans are held at 100% LTV. Two of the loans (Southport
and RoyaleLife) are secured against operating assets which brings additional
complexity for buyers when compared to, say, single tenant investment
properties and, in the case of RoyaleLife, operates in a new and emerging
sector of retirement living.
The Investment Manager and the Board have considered the impact of a further
10%, 20% and 30% reduction in the underlying property values, broadly
reflecting a one, two and three stage credit deterioration as previously
presented, and recalculated its probability weighted valuations on this
basis. The impact of these further declines in property values on the
portfolio as a whole is set out below.
Stress test impact on Expected Credit Loss at 31 July 2023
31 July 2023 31 July 2022
One grade deterioration in credit rating £3,685,000 £236,000
Two grade deterioration in credit rating £8,124,000 £857,000
Three grade deterioration in credit rating £12,562,000 £3,023,000
All efforts continue to be made by the Investment Manager and the Board to
crystalise the value in the remaining investments in a reasonable time frame
in order to return capital to shareholders and proceed to the liquidation of
the Company. However, as discussed above, in the current market many
properties for sale are not receiving any bids, even where they are considered
distressed, and the limited number of buyers active in the market are seeking
out the maximum distress in order achieve best relative value and maximise
their potential returns. Accordingly, the timing of the final realisation of
the Company's remaining assets cannot be predicted with certainty.
5. Earnings per share and Net Asset Value per share
(Loss)/Earnings per share
1 February 2023 1 February 2022
to 31 July 2023 to 31 July 2022
(Loss)/Profit for the period after tax (£) (14,709,953) 2,731, 664
Weighted average number of ordinary shares in issue 121,302,779 121,302,779
Basic and diluted (Loss)/EPS (pence) (12.13) 2.25
The calculation of basic and diluted (Loss)/Earnings per share is based on the
(loss)/profit for the period and on the weighted average number of ordinary
shares in issue during the period.
There are no dilutive shares at 31 July 2023 (31 January 2023: £Nil).
Net Asset Value per share
31 July 2023 31 January 2023
NAV (£) 55,366,831 77,354,951
Number of ordinary shares in issue 121,302,779 121,302,779
NAV per share (pence) 45.64 63.77
The calculation of NAV per share is based on Net Asset Value and the number of
ordinary shares in issue at the period/year end.
After the period end and following the substantial repayment at par of the
Northlands loan, a further return of capital of £9.0 million or 7.40 pence
per ordinary share to shareholders was made on 1 September 2023.
6. Share Capital
The authorised share capital of the Company is represented by an unlimited
number of ordinary shares with or without a par value which, upon issue, the
Directors may designate as (a) ordinary shares; (b) B shares; and (c) C
shares, in each case of such classes and denominated in such currencies as the
Directors may determine.
31 July 2023 31 January 2023
Number of shares Number of shares
Authorised
Ordinary Shares of no par value Unlimited Unlimited
B Shares of no par value Unlimited Unlimited
Total No Total No
Issued Ordinary Shares 121,302,779 121,302,779
B Shares
B Shares issued May 2022 - 121,302,779
B Shares redeemed and cancelled May 2022 - (121,302,779)
B Shares issued February 2023 121,302,779 -
B Shares redeemed and cancelled February 2023 (121,302,779) -
B shares - -
£ £
Share capital brought forward 80,298,419 87,576,589
Repaid in the period/year (6,671,653) (7,278,170)
Share capital carried forward 73,626,766 80,298,419
Return of Capital
Return of Capital is recognised by the Company in the quarterly NAV
calculation following the declaration date.
The Directors announced one return during the period ended 31 July 2023 and
have returned an amount of 5.50 pence per Ordinary Share to shareholders,
being £6,671,653 in total based on the current number of ordinary shares in
issue. This return of capital was effected by way of an issue of redeemable B
Shares to existing shareholders pro rata to their shareholding on the record
date set out below and the subsequent redemption of those B Shares.
Return of Capital per share Total Return of Capital
1 February 2023 to 31 July 2023 Pence £
Return of Capital February 2023 5.50 6,671,653
5.50 6,671,653
After period end, a further £9.00 million of shareholder capital was
returned, equating to 7.40 pence per ordinary share.
7. Dividends
Dividends are recognised by the Company in the quarterly NAV calculation
following the declaration date. A summary of the dividends declared and/or
paid during the period/year ended 31 July 2023 and 31 January 2023 is set out
below:
Dividend per share Total dividend
1 February 2023 to 31 July 2023 Pence £
Interim dividend in respect of quarter ended 31 January 2023 0.50 606,514
Interim dividend in respect of quarter ended 30 April 2023 - -
0.50 606,514
Dividend per share Total dividend
1 February 2022 to 31 January 2023 Pence £
Interim dividend in respect of quarter ended 31 January 2022 1.10 1,334,331
Interim dividend in respect of quarter ended 30 April 2022 1.10 1,334,331
Interim dividend in respect of quarter ended 31 July 2022 1.00 1,213,028
Interim dividend in respect of quarter ended 31 October 2022 1.00 1,213,027
4.20 5,094,717
Following shareholder approval of proposed changes to the Company's Investment
Objectives and Investment Policy which allows an orderly realisation of the
Company's assets and return of capital to shareholders, the Board has made it
clear that payment of quarterly dividends would continue only whilst it
remained prudent to do so.
As three of the remaining investments have significant ECL provisions, there
is projected to be a significantly reduced level of operating cashflow.
The Company has a predictable cost base and the ability to hold back capital
from the imminent (contracted) and prospective future repayments to meet costs
and preserve working capital over the medium to long-term. However, it is no
longer considered appropriate to distribute a regular dividend.
The Company has a single class of ordinary shares which are not entitled to a
fixed dividend. The company had one issue of redeemable B shares which were
redeemed throughout the period ended 31 July 2023 on a Return of Capital
payment to shareholders of the redeemable B shares. At any General Meeting of
the Company each ordinary shareholder is entitled to have one vote for each
share held. The ordinary shares also have the right to receive all income
attributable to those shares and participate in distributions made and such
income shall be divided pari passu among the holders of ordinary shares in
proportion to the number of ordinary shares held by them.
The Company's Articles include a B Share mechanism for returning capital to
shareholders and following shareholder approval on 14 January 2021, the
Company has and will continue to utilise this mechanism in future. When the
Board determines to return capital to shareholders, the Company has issued B
Shares, paid up out of the Company's assets, to existing shareholders pro rata
to their holding of ordinary shares at the time of such issue. The amount paid
up on the B Shares will be equal to the cash distribution to be made to
shareholders via the B Share mechanism. The B Shares shall be redeemable at
the option of the Company following issue and the redemption proceeds (being
equal to the amount paid up on such B Shares) paid to the holders of such B
Shares on such terms and in such manner as the Directors may from time to time
determine. It is, therefore, expected that the B Shares will only ever be in
issue for a short period of time and will be redeemed for cash shortly after
their issue in order to make the return of capital to shareholders.
It is intended that following each return of capital the Company will publish
a revised estimated Net Asset Value and Net Asset Value per Ordinary Share
based on the prevailing published amounts adjusted to take into account the
return of capital. The number of ordinary shares in issue will remain
unchanged.
8. Financial Risk Management
The Company through its investment in senior loans is exposed to a variety of
financial risks. The main risks arising from the Company's financial
instruments are: market risk (including currency risk and interest rate risk),
credit risk and liquidity risk and are fully disclosed in the Annual Report
and Financial Statements for the year ended 31 January 2023 in addition to the
principal risks as set out above in this Interim Report.
The Company's principal risk factors were also discussed in the Company's
Prospectus, available on the Company's website (www.lbow.co.uk) and should be
reviewed by shareholders.
9. Related party transactions and Directors' remuneration
Parties are considered to be related if one party has the ability to control
the other party or exercise significant influence over the party in making
financial or operational decisions.
In the opinion of the Directors, on the basis of shareholdings advised to
them, the Company has no immediate or ultimate controlling party.
Directors
The Company Directors' fees for the period amounted to £80,000 (31 July 2022:
£80,000) with outstanding fees at 31 July 2023 of £31,250 due to the
Directors (31 January 2023: £31,250).
Investment Manager
Investment management fees for the period amounted to £369,261 (31 July 2022:
Investment management/advisory fees £519,039) of which £233,198 was
outstanding at the period/year end (31 January 2023: £517,343).
10. Other expenses
The other expenses shown in the Statement of Comprehensive Income are made up
as shown below.
1 February 2023 to 1 February 2022 to 1 February 2022 to
31 July 2023 31 July 2022 31 January 2023
£ £ £
(Unaudited) (Unaudited) (Audited)
Broker fees 25,825 - 25,550
Administration fees 107,307 125,843 155,832
Regulatory fees 8,246 10,947 21,415
Listing fees 5,175 8,248 15,239
Legal & professional fees 73,148 44,832 71,296
Audit fees 40,438 23,161 42,353
Other expenses 50,427 67,705 119,753
Total expenses
310,566 280,736 451,438
11. Subsequent events
After period end and following the substantial repayment of the Northlands
loan, a further return of capital of £9.0 million or 7.40 pence per ordinary
share to shareholders was made on 1 September 2023.
In September 2023 the Company appointed a receiver over the asset securing the
Affinity loan, in order to seek to accelerate ultimate repayment of that
investment.
glossary of capitalised defined terms
"Administrator" means Ocorian Administration (Guernsey) Limited;
"Affinity" means Impact Spectrum Limited;
"AIFMD" means the Alternative Investment Fund Managers Directive;
"Annual Report" or "Annual Report and Financial Statements" means the annual
publication of the Company provided to the shareholders to describe their
operations and financial conditions, together with their Financial Statements;
"Board" or "Directors" or "Board of Directors" means the directors of the
Company from time to time;
"B shares" means a redeemable Ordinary Share of no par value in the capital of
the Company issued and designated as a B Share of such class, and denominated
in such currency, as may be determined by the Directors at the time of
issue. Issued for the purpose of returning capital in accordance with
Article 8;
"CMBS" means commercial mortgage-backed security;
"Companies Law" means the Companies (Guernsey) Law, 2008, (as amended);
"Company" means ICG-Longbow Senior Secured UK Property Debt Investments
Limited;
"Covid-19" means the global coronavirus pandemic;
"ECL" means expected credit losses;
"EPS" or "Earnings per share" means Earnings per Ordinary Share of the Company
and is expressed in Pounds Sterling;
"EU" means the European Union;
"Euro" or "€" means Euro;
"FCA" means the UK Financial Conduct Authority (or its successor bodies);
"Financial Statements" means the audited financial statements of the Company,
including the Statement of Comprehensive Income, the Statement of Financial
Position, the Statement of Changes in Equity, the Statement of Cash Flows and
associated notes;
"GDP" means gross domestic product;
"GFSC" means the Guernsey Financial Services Commission;
"GIIN" means Global Intermediary Identification Number;
"GFSC Code" means the GFSC Finance Sector Code of Corporate Governance;
"IAS" means international accounting standards as issued by the Board of the
International Accounting Standards Committee;
"ICG" means Intermediate Capital Group PLC;
"IFRS" means the International Financial Reporting Standards, being the
principles-based accounting standards, interpretations and the framework by
that name issued by the International Accounting Standards Board;
"Interest Cover Ratio" or "ICR" means the debt/profitability ratio used to
determine how easily a company can pay interest on outstanding debt;
"Interim Report" means the Company's interim report and unaudited interim
condensed financial statements for the period ended 31 July;
"Investment Manager" or "ICG-Longbow" or "ICG Real Estate" means ICG
Alternative Investment Limited or its associates;
"IPO" means the Company's initial public offering of shares to the public
which completed on 5 February 2013;
"ISIN" means an International Securities Identification Number;
"London Stock Exchange" or "LSE" means London Stock Exchange plc;
"LTV" means Loan to Value ratio;
"Main Market" means the main securities market of the London Stock Exchange;
"NAV per share" means the Net Asset Value per Ordinary Share divided by the
number of Shares in issue (other than shares held in treasury);
"Net Asset Value" or "NAV" means the value of the assets of the Company less
its liabilities, calculated in accordance with the valuation guidelines laid
down by the Board, further details of which are set out in the 2017
Prospectus;
"Northlands" means London & Guildford Properties Limited, London &
Weybridge Properties Limited, Lamborfore Limited, Northlands Holdings Limited,
Peeble Stone Limited, Auldana Limited, Felixstow Limited, Richmond Lodge
Construction Limited, Piperton Finance Limited and Alton & Farnham
Properties Limited;
"Official List" is the Premium Segment of the FCA's Official List;
"ONS" means Office for National Statistics;
"Registrar" means Link Asset Services (Guernsey) Limited;
"RoyaleLife" means the Time GB Properties LendCo Limited;
"Southport" means the Waterfront Southport Properties Limited and Waterfront
Hotels (Southport) Limited - now in administration;
"Sq ft" means square feet;
"UK" or "United Kingdom" means the United Kingdom of Great Britain and
Northern Ireland; and
"£" or "Pounds Sterling" means British pound sterling and "p" or "pence"
means British pence.
directors and general information
Board of Directors Independent Auditor English Solicitors to the Company
Jack Perry (Chair) Deloitte LLP Gowlings WLG (UK) LLP
Stuart
Beevor PO Box 137 4 More London Riverside
Paul Meader Regency Court London
Fiona Le Poidevin Glategny Esplanade United Kingdom
St. Peter Port SE1 2AU
Audit and Risk Committee Guernsey
Fiona Le Poidevin (Chair) GY1 3HW CMS Law
Stuart Beevor Cannon Place
Paul Meader Guernsey Administrator and Company Secretary 78 Cannon Street
Ocorian Administration (Guernsey) Limited London
Management Engagement Committee P.O. Box 286 United Kingdom
Jack Perry Floor 2 EC4N 6AF
(Chair)
Trafalgar Court
Paul Meader
Les Banques Guernsey Advocates to the Company
Fiona Le Poidevin
St Peter Port Carey Olsen
Stuart Beevor
Guernsey Carey House
GY1 4LY PO Box 98
Nomination Committee
Les Banques
Jack Perry
(Chair) Depositary St Peter Port
Stuart Beevor Ocorian Depositary (UK) Limited Guernsey
Paul Meader 5(th) Floor GY1 4BZ
Fiona Le Poidevin 20 Fenchurch Street
London Bankers
Remuneration Committee England Butterfield Bank (Guernsey) Limited
Paul Meader (Chair) EC3M 3BY PO Box 25
Jack Perry Regency Court
Stuart Beevor Registrar Glategny Esplanade
Fiona Le Poidevin Link Asset Services (Guernsey) Limited St Peter Port
Mont Crevelt House Guernsey
Investment Manager Bulwer Avenue GY1 3AP
ICG Alternative Investment Limited St Sampsons
Procession House Guernsey Barclays Bank plc
55 Ludgate Hill GY2 4LH 6-8 High Street
London St Peter Port
United Kingdom Corporate Broker and Financial Adviser Guernsey
EC4M 7JW Cavendish Securities plc (formerly Cenkos Securities plc) GY1 3BE
6-8 Tokenhouse Yard
Registered office London Lloyds Bank International Limited
Floor 2 United Kingdom PO Box 136
Trafalgar Court EC2R 7AS Sarnia House
Les Banques Le Truchot
St Peter Port Identifiers St Peter Port
Guernsey GIIN: 6IG8VS.99999.SL.831 Guernsey
GY1 4LY ISIN: GG00B8C23S81 GY1 4EN
Sedol: B8C23S8
Ticker: LBOW The Royal Bank of Scotland International Limited
Website: www.lbow.co.uk (http://www.lbow.co.uk) Royal Bank Place
1 Glategny Esplanade
St Peter Port
Guernsey
GY1 4BQ
cautionary statement
The Chairman's Statement and the Investment Manager's Report have been
prepared solely to provide additional information for shareholders to assess
the Company's strategies and the potential for those strategies to succeed.
These should not be relied on by any other party or for any other purpose.
The Chairman's Statement and Investment Manager's Report may include
statements that are, or may be deemed to be, "forward-looking statements".
These forward-looking statements can be identified by the use of
forward-looking terminology, including the terms "believes", "estimates",
"anticipates", "expects", "intends", "may", "will" or "should" or, in each
case, their negative or other variations or comparable terminology.
These forward-looking statements include all matters that are not historical
facts. They appear in a number of places throughout this document and include
statements regarding the intentions, beliefs or current expectations of the
Directors and the Investment Manager, concerning, amongst other things, the
investment objectives and investment policy, financing strategies, investment
performance, results of operations, financial condition, liquidity, prospects,
and distribution policy of the Company and the markets in which it invests.
By their nature, forward-looking statements involve risks and uncertainties
because they relate to events and depend on circumstances that may or may not
occur in the future. Forward-looking statements are not guarantees of future
performance.
The Company's actual investment performance, results of operations, financial
condition, liquidity, distribution policy and the development of its financing
strategies may differ materially from the impression created by the
forward-looking statements contained in this document.
Subject to their legal and regulatory obligations, the Directors and the
Investment Manager expressly disclaim any obligations to update or revise any
forward-looking statement contained herein to reflect any change in
expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based.
ICG-Longbow Senior Secured UK Property Debt Investments Limited
Floor 2, Trafalgar Court
Les Banques, St Peter Port, Guernsey
GY1 4LY, Channel Islands.
T +44 (0) 1481 742742
F +44 (0) 1481 742698
Further information available online:
www.lbow.co.uk (http://www.lbow.co.uk)
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