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REG - Sancus Lending Group - Interim Results

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RNS Number : 9885M  Sancus Lending Group Limited  20 September 2023

 

20 September 2023

 

Sancus Lending Group Limited

("Sancus", the "Company" or "Group")

 

Interim Results for the six-month period ended 30 June 2023

 

 

The Directors are pleased to announce the Company's half-year results for the
six months ending 30 June 2023.

 

HIGHLIGHTS

 

Rory Mepham, Chief Executive Officer of Sancus Lending Group Limited,
commented:

 

We started 2023 cautiously but with cause for optimism. However the
uncertainty in residential real estate markets in the jurisdictions in which
we operate, together with the impact of inflation and rising interest rates,
has led to a slow down in loan origination in H1 2023 as we became more
selective from both a credit and loan pricing perspective.

 

The refinance and extension of the ZDP share final entitlement to December
2027, and the increase and extension of the Pollen Street Plc facility up to
£125m (expiry not before November 2026) at the end of 2022, provide the
Company with a more stable base from which to grow when the right
opportunities present themselves, in the meantime caution shall prevail.

 

Financial Highlights

 

·      New loan facilities written H1 2023 of £83m (H1 2022: £86m);

·      Group revenue H1 2023 of £5.4m (H1 2022: £4.8m);

·      Group operating loss H1 2023 of £3.8m (H1 2022: loss £2.1m);

·      £3m of ZDP shares held in Treasury were sold to the Group's
largest shareholder, Somerston, providing further growth capital;

·      An increase in IFRS 9 provisions H1 2023 of £0.8m (H1 2022:
£nil).

 

Operational Highlights

 

·      The Company completed its office rationalisation program in H1
2023, and now operates from three locations, Jersey; Dublin and London, to
align with its core lending markets and optimise costs.

·      Geographic focus remains unchanged, with three core markets UK,
Ireland and Offshore.   Offshore represent 42% of the current loan book, UK
39% and Ireland 19%.  Ireland is the fastest growing market with a 52%
increase in loans under management in H1 2023.

·      The Company continues to seek ways to reduce its operational
costs. Headcount was further reduced during the period from 39 to 31 FTE.

·      Since onboarding Salesforce software at the end of 2022,
significant progress has been made with implementation and use of technology
to manage workflows, standardisation of process and controls across the
lending life cycle and integration with the Company's propriety loan
management system.

·      Focus on maintaining credit discipline has remained.

 

For further information, please contact:

 

 Sancus Lending Group Limited                              +44 (0)1534 708 900

 Rory Mepham

 Liberum Capital (Nominated Adviser and Corporate Broker)  +44 (0) 20 3100 2000

 Lauren Kettle

 Chris Clarke

 William King

 Instinctif Partners (PR Adviser)                          +44 (0)207 457 2020

 Tim Linacre

 Victoria Hayns

 Sanne Fund Services (Guernsey) Limited                    +44 (0)1481 755530

 (Company Secretary)

 Matt Falla

 

CHAIRMAN'S STATEMENT

 

Introduction

 

In the last 12 months the Company has made advances in its structural change
program, and whilst operational progress is not reflected in the results for
the H1 2023, we expect to see benefits in H2 2023 and beyond.  In H1 2023 the
Company reported a loss of £3.3m, and the loan book has remained flat since
Dec 2022 at £169m, a reflection of robust credit discipline and a cautious
approach to loan deployment, particularly in the UK. The cost of Funding has
increased and we are now operating in the highest interest rate environment
since 2008.  Careful use of Group capital, and draw-down from our funding
sources, is paramount to the successful navigation of a very tough market
environment, but in spite of these exacting circumstances demand in our chosen
markets remains firm and we believe may present opportunities for the Company
to grow in the coming period.

 

Our People

 

As noted in our FY22 results, we did not expect to increase headcount in 2023,
and we took the opportunity to reduce Group headcount further to 31 as at 30
June 2023 (31 December 2022: 39).

 

As detailed in the 2022 Annual Report, Tracy Clarke was appointed as Group CFO
on 30 March 2023 and Carlton Management Services Limited was appointed to
restructure the Group Finance Function.  The migration of the Group Finance
Function under Tracy's leadership was completed in Q2 2023.

 

Capital Raise

 

A significant milestone at the end of 2022 was the extension of the ZDP final
entitlement date from 5 December 2022 to 5 December 2027.  In addition, £3m
of ZDP shares held in Treasury were sold to Somerston, the Company's largest
shareholder, in April 2023, providing the company with additional growth
capital. I thank our ZDP shareholders for their continued support.

 

Dividend and Shareholders

 

It is the Board's intention to reinvest surplus resources for growth. As such,
the Group does not intend to declare a dividend for the period. The Board
intends to revisit this policy at the appropriate time, should the
profitability and cash flow profile support the reinstatement of a dividend.

 

On behalf of the Board, I would like to thank shareholders for their
continuing support and patience and for the efforts of the management and
employees.

 

As I noted in the Chairman's statement in the 2022 annual report, we do not
underestimate the scale and continuing challenges ahead. I remain of the view
that we have the right strategy, systems and personnel to put the business
onto a firmer footing and return to profitability and I look forward to
reporting more positive developments in the coming period.

 

Steve Smith

Chairman

Date: 19 September 2023

 

 

CHIEF EXECUTIVE OFFICER'S REVIEW

 

Overview

 

In the first half year of 2023 we have taken a number of steps to position the
Company on the road to profitability and to simplify the core business of
residential development and bridge financing.  We reduced the number of
physical office locations from five to three with the sale of Gibraltar and
closure of Guernsey during the period.

 

Loan book origination in H1 2023 was £83m versus £86m written in H1 2022.
Opportunities to lend more have been considered but rejected where the return
to risk ratio was considered inappropriate. The Credit team have adjusted
their underwriting approach and attitude to risk accordingly, to ensure
optimal use of Group capital, strict loan pricing discipline and  particular
focus on valuation assessment in the current uncertain environment.  Despite
some headwinds the residential lending market continues to present significant
opportunity for Alternative Lenders, including Sancus, in all of our three
core geographic markets.

 

Strategic KPIs

 

The Board are providing an update to the Strategic KPIs set out in the 2022
Annual report:

 

·      Revenue growth

 

o  Revenue is up 12% compared to the same period last year, with new loan
origination being almost exclusively being priced using variable interest
rates.

 

·      Growing loans under management

 

o  Loan book / Assets Under Management remains unchanged from 31 December
2022 to 30 June 2023 at £169m.

 

·      Reducing cost of funding

 

o  Reducing cost of Funding remains a priority, but also continues to present
a challenge in the current macro-economic environment. It is pleasing to
report we saw a modest increase in Funding through the Sancus Loan Note
program in H1 2023 of £10m, an increase of 50%.

 

·      Become a capital efficient business

 

o  The amount of own capital within loans continues to be maintained at a low
level, which at 30 June 2023 represented 4.5% of the total loan book, in
comparison to 4.2% at 30 June 2022.

 

·      Increasing operating profits - by increasing gross margin and
reducing costs

 

o  Gross profit margin in H1 2023 was £0.3m, compared to H1 2022, £1.2m.
The reduction is due to the financing cost of £3m additional ZDPs held by
shareholders, an increase in the ZDP coupon from 8% to 9% and the run off of
the legacy loan book priced at fixed interest rates whilst the cost of Funding
those loans has increased.

o  Operating costs are flat compared to the same period last year at £3.3m
and are expected to reduce in the H2 2023 due to the effect of Group cost
saving initiatives, in particular, reduction in headcount and premises costs.

 

·      Return on Equity ("ROE")

 

o  Going forward we plan to become profitable and increase our ROE.  We are
also focused on reducing the need for additional capital to participate in
Loan funding to support ROE.

 

·      Ensuring a risk based approach is taken on all decision making

 

o  We have imbedded institutional credit processes across the Group.  We
continue to increase our technology enablement to streamline processes,
improve the delivery and format of management information to aid decision
making and improve internal controls.

 

Origination

 

We have new loan facilities written during the H1 2023 of £83m compared with
£86m in H1 2022 and £156m in FY 2022.

 

Maintaining a high-quality credit process whilst cautiously scaling the
quantity of new loans remains a priority. We expect to see ample opportunities
to lend in each of our  markets and are confident that our businesses in
these jurisdictions are well placed to execute as  suitable opportunities
arise.

 

Loan Management

 

Assets Under Management have not changed since the end of 2022 at £169m. With
the number of new facilities written, and as we see funds deployed, we expect
to be reporting a moderate increase in our loan book by 31 December 2023.

 

Continued emphasis has been placed on actively managing loans once the initial
drawdown has been made. This has been particularly important during a time
when various market related pressures such as cost inflation are impacting our
borrowers. Active management is helping us to deal with issues before they
become problems and we are pleased to report that the percentage of loan book
in recovery continues to reduce.

 

Funding

 

We continue to concentrate on growing the funding capacity of the business, on
improved terms. This is particularly important in the context of the wider
economic climate where we are in a significant inflationary environment.
Additionally, we are seeking to work with a diversified mix of funders, both
private and institutional, to match funders with loans meeting their varied
risk and reward criteria. Currently, the Group is reliant on four funding
sources:

 

·      Co-Funders

·      Loan Note program

·      Institutional funders

·      Proprietary capital

 

Sancus has an institutional funding line from Pollen Street Plc ("Pollen),
that is designed to complement our Co-Funder funding base and Sancus Loan Note
program. As at 30 June 2023 the total drawn from the Pollen facility was
£77.75m (31 December 2022: £67.75m). The Pollen facility continues to be
strategic for the business.

 

The availability, cost and flexibility of funding is key to achieving our
growth ambitions and we are reviewing the capital position of the business
with a view to ensuring it is best placed to grow funding capacity on market
adjusted improved terms. During the first half of 2023 the loan book funded by
institutional funding increased by 5% with the majority of the UK and Irish
loan book funded by this channel.

 

Finance & Operations

 

An emphasis on operational efficiencies within Finance & Operations,
driven by technology where possible, is well underway. We continue to drive
improvement in relation to Corporate Governance, Compliance & Risk with
the implementation of a developed risk management structure to ensure the
business is well set for future growth plans.

 

Sancus has developed, and continues to evolve, its own proprietary loan
management system ("LMS") for the administration of loans and customise the
use of Salesforce as the Group's CRM tool.  A comprehensive review of the LMS
system and our wider Technology strategy was carried out in 2022, and in 2023
we are focussed on implementation of our Technology strategy with good
progress being made.

 

We have seen our headcount reduce in the first H1 2023 as we look for
efficiencies and cost control. At 30 June 2023, the Group headcount was 31 (31
December 2022: 39).  We believe the business is well resourced to meet its
objectives and are focussing on continuous improvement and development of our
people.

 

ESG

 

At Sancus, we are committed to taking Environmental, Social and Governance
("ESG") factors seriously. We recognise our responsibility to incorporate
sustainability throughout the operations of our business, be custodians of
the environment and practice good stewardship of our stakeholders'
interests.

 

In Q1 2023 we present our first Environmental, Social, and Governance report,
marking the start of our journey towards greater transparency and
sustainability. The report highlights our progress and achievements in the
areas of environmental protection, social responsibility and governance, as
well as the challenges and opportunities that we face.

 

It is essential that we understand what ESG factors are most important to
internal and external stakeholders, such that we can continue to improve and
evolve in line with our ESG strategy principals and are ready to take
appropriate action.

 

Outlook

 

Whilst the outlook remains unclear, some of uncertainties present at the end
of 2022 have now played out to a greater extent. For example, we have seen a
series of rate rises from central banks during H1 and whilst some further
incremental increases are possible, we are unlikely to see material further
increases. In a world of asset price uncertainty the Company remains
optimistic that the residential property market will remains resilient,
assisted by the perennial imbalance between supply and demand for housing
across our target markets.

 

A challenging dynamic remains but management have a clear plan to navigate the
current market, avoid taking undue risks and be ready to take advantage of the
opportunities that such times will inevitably present.

 

Rory Mepham

Chief Executive Officer

19 September 2023

 

 

RISKS, UNCERTAINTIES AND RESPONSIBILITY STATEMENT

 

Risks and uncertainties

 

There are a number of potential risks and uncertainties which could have a
material impact on the Group's performance over the remainder of the financial
year. These include, but are not limited to, Capital and liquidity risk,
Regulatory and compliance risk, Market risk, Credit risk with respect to the
loan book (primarily bridging loans and, increasingly, development loans),
Operational risk and the execution of Sancus strategy. These risks remain
unchanged from December 2022 and are not expected to change in the 6 months to
the end of the 2023 financial year. Further details on these risks and
uncertainties can be found in the December 2022 Annual Report.

 

Responsibility statement

 

The Directors confirm that to the best of their knowledge:

 

§  The Interim Report has been prepared in accordance with the AIM rules of
the London Stock Exchange;

 

§  This financial information has been prepared in accordance with IAS 34 as
adopted by the UK;

 

§  The interim results include a fair review of the important events during
the first half of the financial year and their impact on the financial
information as required by DTR 4.2.7R; and

 

§  The interim results include a fair review of the disclosure of related
party transactions as required by DTR 4.2.8R.

 

Approved and signed on behalf of the Board of Directors

19 September 2023

 

 

INDEPENDENT REVIEW REPORT ON INTERIM FINANCIAL INFORMATION

 

Conclusion

 

We have been engaged by Sancus Lending Group Limited (the 'Company') to review
the condensed set of consolidated financial statements in the Interim Report
for the six months ended 30 June 2023 which comprises the condensed
consolidated statement of comprehensive income, the condensed consolidated
statement of financial position, the condensed consolidated statement of
changes in shareholders' equity, the condensed consolidated statement of cash
flows and related Notes 1 to 19.

 

We have read the other information contained in the Interim Report and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of Consolidated
Financial Statements.

 

Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of consolidated financial statements in the
half-yearly financial report for the six months ended 30 June 2023 is not
prepared, in all material respects, in accordance with International
Accounting Standard 34 as adopted by the UK and the AIM Rules of the London
Stock Exchange.

 

Basis for Conclusion

 

We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410, "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" issued by the Auditing Practices Board
for use in the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an audit
opinion.

 

As disclosed in note 2 of the interim condensed consolidated financial
statements, the financial statements of the Company are prepared in accordance
with IFRSs as adopted by the UK. The condensed set of financial statements
included in this half-yearly financial report has been prepared in accordance
with the International Accounting Standard 34, "Interim Financial Reporting",
as adopted by the UK.

 

Conclusions Relating to Going Concern

 

Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis of Conclusion section of this report,
nothing has come to our attention to suggest that management have
inappropriately adopted the going concern basis of accounting or that
management have identified material uncertainties relating to going concern
that are not appropriately disclosed.

 

This conclusion is based on the review procedures performed in accordance with
this ISRE, however future events or conditions may cause the entity to cease
to continue as a going concern.

 

Responsibilities of directors

 

The Interim Report is the responsibility of, and has been approved by, the
Directors.  The Directors are responsible for preparing the Interim Report in
accordance with the AIM Rules of the London Stock Exchange.

 

In preparing the half-yearly financial report, the directors are responsible
for assessing the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the Company or to cease operations, or have no realistic alternative
but to do so.

 

Auditor's Responsibilities for the review of the financial information

 

In reviewing the half-yearly report, we are responsible for expressing to the
Company a conclusion on the condensed set of consolidated financial statements
in the half-yearly financial report. Our conclusion, including our Conclusions
Relating to Going Concern, are based on procedures that are less extensive
than audit procedures, as described in the Basis for Conclusion paragraph of
this report.

 

Moore Stephens Audit and Assurance (Jersey) Limited

1 Waverley Place,

Union Street,

St. Helier,

JE4 8SG, Jersey

 

19 September 2023

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

 

                                                                 Notes  Period ended  Period ended
                                                                        30 June 2023  30 June 2022

                                                                        (unaudited)   (unaudited)

                                                                        £'000         £'000

 Revenue                                                         4      5,407         4,823
 Cost of sales                                                   5      (5,105)       (3,560)
 Gross profit                                                           302           1,263
 Operating expenses                                              6      (3,318)       (3,350)
 Changes in expected credit losses                               17     (799)         -
 Operating loss                                                         (3,815)       (2,087)
 FinTech Ventures fair value movement                            17     362           114
 Other net gains/(losses)                                               37            (9)
 Loss on disposal of subsidiary                                  19     (202)         -
 Profit on disposal of other assets                              12     303           -
 Loss for the period before tax                                         (3,315)       (1,982)
 Income tax expense                                                     2             -
 Loss for the period after tax                                          (3,313)       (1,982)

 Items that may be reclassified subsequently to profit and loss
 Foreign exchange arising on consolidation                              (20)          10
 Other comprehensive (loss)/income for the period after tax             (20)          10
 Total comprehensive loss for the period                                (3,333)       (1,972)

 Basic loss per Ordinary Share                                   7      (0.57)p       (0.41)p
 Diluted loss per Ordinary Share                                        (0.57)p       (0.41)p

 

The accompanying Notes form an integral part of these financial statements.

 

 

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

 

 

                                                      30 June 2023  31 December 2022 (audited)

                                                      (unaudited)
 ASSETS                                        Notes  £'000         £'000
 Non-current assets
 Fixed assets                                  8      211           425
 Goodwill                                      9      14,255        14,255
 Other intangible assets                       10     -             -
 Sancus loans and loan equivalents             17     20,733        23,864
 FinTech Ventures investments                  17     237           -
 Investments in joint ventures and associates         -             -
 Other investments                                    100           100
 Total non-current assets                             35,536        38,644

 Current assets
 Other assets                                  12     -             706
 Sancus loans and loan equivalents             17     64,209        52,261
 Trade and other receivables                   11     7,097         5,806
 Cash and cash equivalents                            4,293         4,134
 Total current assets                                 75,599        62,907

 Total assets                                         111,135       101,551

 EQUITY
 Share premium                                 13     118,340       118,340
 Treasury shares                               13     (1,172)       (1,172)
 Other reserves                                       (113,327)     (109,994)
 Total Equity                                         3,841         7,174

 LIABILITIES
 Non-current liabilities
 Borrowings                                           105,202       90,868
 Other liabilities                                    -             152
 Total non-current liabilities                 14     105,202       91,020

 Current liabilities
 Trade and other payables                      14     611           1,708
 Tax liabilities                               14     169           145
 Provisions                                    14     649           413
 Other liabilities                             14     663           1,091
 Total current liabilities                            2,092         3,357

 Total liabilities                                    107,294       94,377

 Total equity and liabilities                         111,135       101,551

 

The financial statements were approved by the Board of Directors on 19
September 2023 and were signed on its behalf by:

 

 Director: John Whittle

 

The accompanying Notes form an integral part of these financial statements.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)

 

 

                                                                                    Share       Treasury Shares  Warrants Outstanding  Foreign Exchange Reserve  Retained Earnings/  207BTotal

                   208BEquity
                                                                                     Premium                                                                     (Losses)
                                                                                    0B£'000     1B£'000          2B£'000               3B£'000                   4B£'000             £'000
 Balance at 31 December 2022 (audited)                                              118,340     (1,172)          -                     31                        (110,025)           7,174
 Transactions with owners                                                           5B-         6B-              7B-                   8B-                       9B-                 -
 Total comprehensive loss for the period                                            10B-        11B-             12B-                  13B(20)                   14B(3,313)          (3,333)
 Balance at 30 June 2023 (unaudited)                                                15B118,340  16B(1,172)       17B-                  18B11                     19B(113,338)        3,841

 Balance at 31 December 2021 (audited)                                              20B116,218  21B(1,172)       22B385                23B11                     24B(96,348)         19,094
 Fair value of warrants                                                             25B-        26B-             27B(385)              28B-                      29B385              -
 Transactions with owners                                                           30B-        31B-             32B(385)              33B-                      34B385              -
 Total comprehensive profit/(loss) for the period                                   35B-        36B-             37B-                  38B10                     39B(1,982)          (1,972)
 Balance at 30 June 2022 (unaudited)                                                40B116,218  41B(1,172)       42B-                  43B21                     44B(97,945)         17,122

 

The accompanying Notes form an integral part of these financial statements.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

 

                                                                 Period ended                                             Period ended
                                                                 30 June 2023                                             30 June 2022

                                                                 (unaudited)                                              (unaudited)
                                                          Notes  £'000                                                    £'000
                                                                 (4,374)

 Cash outflow from operations, excluding loan movements   15                                                              (626)

 (Increase) / Decrease in Sancus loans                           (211)                                                    195
 Increase in loans through the Pollen facility                   (9,237)                                                  (5,840)
 Net cash outflow from operating activities                      (13,822)                                                 (6,271)

 Cash inflows from investing activities
 Divestment in IOM Preference Shares                             -                                                        516
 Net Repayments / (Investments) in FinTech Ventures              125                                                      (236)
 Investment in joint ventures                                    (50)                                                     (50)
 Expenditure on Properties                                12     -                                                        (178)
 Sale of Properties                                              1,008                                                    -
 Expenditure on fixed assets and intangibles                     (5)                                                      (14)
 Net cash inflow from investing activities                       1,078                                                    38

 Cash inflows from financing activities
 Draw down of Pollen facility                             15     10,000                                                   2,500
 Capital element of lease payments                        15     (109)                                                    (104)
 Debt issue costs                                                                           32                            -
 Sale of ZDPs                                             15     3,000                                                    -
 Net cash inflow from financing activities                       12,923                                                   2,396

 Effects of Foreign Exchange                                     (20)                                                     10

 Net increase / (decrease) in cash and cash equivalents          159                                                      (3,827)

 Cash and cash equivalents at beginning of period                4,134                                                    12,436

 Cash and cash equivalents at end of period                      4,293                                                    8,609

 

£2.2m of the £4.3m cash held at 30 June 2023 is for the exclusive use of
Sancus Loans Limited (June 2022: £3.2m of the £8.6m)

 

The accompanying Notes form an integral part of these financial statements.

 

 

NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS

 

1.      GENERAL INFORMATION

 

Sancus Lending Group Limited (the "Company"), together with its subsidiaries,
(the "Group") was incorporated, and domiciled in Guernsey, Channel Islands, as
a company limited by shares and with limited liability, on 9 June 2005 in
accordance with The Companies (Guernsey) Law, 1994 (since superseded by The
Companies (Guernsey) Law, 2008). Until 25 March 2015, the Company was an
Authorised Closed-ended Investment Scheme and was subject to the Authorised
Closed-ended Investment Scheme Rules 2008 issued by the Guernsey Financial
Services Commission ("GFSC"). On 25 March 2015, the Company was registered
with the GFSC as a Non-Regulated Financial Services Business ("NRFSB"), at
which point the Company's authorised fund status was revoked. The Company's
Ordinary Shares were admitted to trading on the AIM market of the London Stock
Exchange on 5 August 2005 and its issued zero dividend preference shares were
listed and traded on the Standard listing Segment of the main market of the
London Stock Exchange with effect from 5 October 2015.  The Company changed
where its business is managed and controlled, from Guernsey to Jersey,
effective 1 April 2023. The Board agreed that the Company should revoke its
NRFSB status, which was completed on 23 June 2023.

 

The Company does not have a fixed life and the Company's Memorandum and
Articles of Incorporation (the "Articles") do not contain any trigger events
for a voluntary liquidation of the Company. The Company is an operating
company for the purpose of the AIM rules. The Executive Team is responsible
for the management of the Company.

 

The Company has taken advantage of the exemption conferred by the Companies
(Guernsey) Law, 2008, Section 244, not to prepare company only financial
statements which is consistent with the 2022 Annual Report.

 

 

2.      ACCOUNTING POLICIES

 

(a)           Basis of preparation

 

These condensed consolidated financial statements ("financial statements")
have been prepared in accordance with International Financial Reporting
Standard (IAS) 34 'Interim Financial Reporting', as adopted by the United
Kingdom and all applicable requirements of Guernsey Company Law.  They do not
include all the information and disclosures required in annual financial
statements and should be read in conjunction with the Company's annual audited
financial statements for the year ended 31 December 2022, which have been
prepared in accordance with International Financial Reporting Standards
("IFRS") as adopted by the United Kingdom.

 

The Group does not operate in an industry where significant or cyclical
variations, as a result of seasonal activity, are experienced during any
particular financial period.

 

These financial statements were authorised for issue by the Company Directors
on 19 September 2023.

 

(b)           Principal accounting policies

 

The same accounting policies and methods of computation are followed in these
financial statements as in the last annual financial statements for the year
ended 31 December 2022.

 

(c)         Going Concern

 

The Directors have considered the going concern basis in the preparation of
the financial statements as supported by the Director's assessment of the
Company's and Group's ability to pay its debts as they fall due and have
assessed the current position and the principal risks facing the business with
a view to assessing the prospects of the Company. Following the extension of
the ZDPs at the end of 2022, for a further 5 years to 5 December 2027 and with
the Bonds maturity date not until 31 December 2025, the Company does not have
any debt liabilities that fall due within the next 12 months.  Based on this,
the Directors are of the opinion that the Company has adequate financial
resources to continue in operation and meet its liabilities as they fall due
for the foreseeable future.

 

It is however expected, whereby equity is required to facilitate an increase
in drawdown from institutional funding lines, that the Company will require
growth capital to fund the continued growth of the loan book. The Company's
largest shareholder, Somerston, has indicated their willingness to support the
Company's growth plans. The Company will be looking at options available to
raise additional growth capital over the course of the year, which may include
a form of equity raise or sale by the Company of ZDP shares held in treasury.

 

The Directors therefore believe it is appropriate to continue to adopt the
going concern basis in preparing the financial statements.

(d)           Critical accounting estimates and judgements in
applying accounting policies

 

The critical accounting estimates and judgements are as outlined in the
financial statements for the year ended 31 December 2022.

 

 

3.     SEGMENTAL REPORTING

 

Operating segments are reported in a manner consistent with the manner in
which the Executive Team reports to the Board, which is regarded to be the
Chief Operating Decision Maker (CODM) as defined under IFRS 8. The main focus
of the Group is Sancus. Bearing this in mind the Executive team have
identified 4 segments based on operations and geography.

 

Finance costs and Head Office costs are not allocated to segments as such
costs are driven by central teams who provide, amongst other services,
finance, treasury, secretarial and other administrative functions based on
need. The Group's borrowings are not allocated to segments as these are
managed by the Central team. Segment assets and liabilities are measured in
the same way as in these financial statements and are allocated to segments
based on the operations of the segment and the physical location of those
assets and liabilities.

 

The four segments based on geography, whose operations are identical (within
reason), are listed below. Note that Sancus Loans Limited, although based in
the UK, is reported separately as a stand-alone entity to the Board and as
such is considered to be a segment in its own right.

 

1.             Offshore

 

Contains the operations of Sancus Lending (Jersey) Limited, Sancus Lending
(Guernsey) Limited, Sancus Properties Limited, Sancus Group Holdings Limited
and Sancus Lending (Gibraltar) Limited up to the date of its sale, 15 March
2023.

 

2.             United Kingdom (UK)

 

Contains the operations of Sancus Lending (UK) Limited and Sancus Holdings
(UK) Limited.

 

3.             Ireland

 

Contains the operations of Sancus Lending (Ireland) Limited.

 

4.             Sancus Loans Limited

 

Contains the operations of Sancus Loans Limited.

                                                                                                                         Reconciliation to Consolidated Financial Statements

 Six months to 30 June 2023  Offshore  UK      Ireland  Sancus Loans Limited (SLL)  Sancus Debt Costs  Total Sancus      Head Office  SLL Debt Costs  FinTech Ventures Fair Value & Forex      Other                 Consolidated Financial Statements

                             £'000     £'000   £'000    £'000                       £'000              £'000             £'000        £'000           £'000                                    £'000                 £'000

 Revenue                     721       1,131   886      (603)                       -                  2,135             -            3,272           -                                        -                     5,407

 Operating Profit/(loss) *   (228)     (160)   320      (625)                       -                  (693)             (662)        -               -                                        (9)                   (1,364)
 Credit Losses               (122)     (29)    -        (648)                       -                  (799)             -            -               -                                        -                     (799)
 Debt Costs                  -         -       -        -                           (1,652)            (1,652)           -            -               -                                        -                     (1,652)
 Other Gains/(losses)        101       -       8        84                          -                  193               -            -               362                                      (5)                   550
 Loss on JVs and associates  -         -       -        -                           -                  -                 -            -               -                                        (50)                  (50)
 Taxation                    2         -       -        -                           -                  2                 -            -               -                                        -                     2

 Profit After Tax            (247)     (189)   328      (1,189)                     (1,652)            (2,949)           (662)        -               362                                      (64)                  (3,313)

 

 Six months to 30 June 2022

 Revenue                     658    1,386  752  (251)  -      2,545        -      2,278  -    -         4,823

 Operating Profit/(loss) *   (481)  (319)  467  (259)  -      (592)        (618)  -      -    (17)      (1,227)
 Credit Losses               191    -      -    (191)  -      -            -      -      -    -         -
 Debt Costs                  -      -      -    -      (860)  (860)        -      -      -    -         (860)
 Other Gains/(losses)        24     -      5    (34)   -      (5)          5      -      155  -         155
 Loss on JVs and associates  -      -      -    -      -      -            -      -      -    (50)      (50)
 Taxation                    -      -      -    -      -      -            -      -      -    -         -

 Profit After Tax            (266)  (319)  472  (484)  (860)  (1,457)      (613)  -      155  (67)      (1,982)

 

* Operating Profit/(loss) before credit losses and debt costs

 

Sancus Loans Limited is consolidated into the Group's results as it is a 100%
owned subsidiary of the Group. Sancus Loans Limited is considered a Co-Funder,
the same as any other Co-Funder. As a result the Board reviews the economic
performance of Sancus Loans Limited in the same way as any other Co-Funder,
with revenue being stated net of debt costs. Operating expenses include
recharges from UK to Offshore £244,000, Offshore to Ireland £37,000, Head
Office to Offshore £68,000 and UK to Head Office £96,000. "Other" includes
FinTech (excluding fair value and forex).

 

                                                                                                  Reconciliation to Financial Statements

 At 30 June 2023           Offshore  UK        Ireland  Sancus Loans Limited (SLL)  Total Sancus         Head Office  Fintech Portfolio  Other   Inter Company Balances         Consolidated Financial Statements

                           £'000     £'000     £'000    £'000                       £'000                £'000        £'000              £'000   £'000                          £'000

 Total Assets              33,797    16,660    1,105    88,899                      140,461              60,132       237                87      (89,782)                       111,135

 Total Liabilities         (54,839)  (18,516)  (317)    (94,738)                    (168,410)            (28,342)     -                  (324)   89,782                         (107,294)

 Net Assets/(liabilities)  (21,042)  (1,856)   788      (5,839)                     (27,949)             31,790       237                (237)   -                              3,841

 

 

 At 31 December 2022

 Total Assets              37,724    14,855    1,133  78,952    132,664        44,214        -   93    (75,420)      101,551

 Total Liabilities         (44,250)  (16,528)  (653)  (83,205)  (144,636)      (25,068)      -   (93)  75,420        (94,377)

 Net Assets/(liabilities)  (6,526)   (1,673)   480    (4,253)   (11,972)       19,146        -   -     -             7,174

 

Head Office liabilities include borrowings £28.2m (December 2022: £24.0m).
Other FinTech assets and liabilities are included within "Other"

4.     REVENUE

 

                                              30 June 2023  30 June 2022

                                              (unaudited)   (unaudited)
                                              45B£'000      46B£'000
   Co-Funder fees                             47B1,228      48B767
 Earn out (exit) fees                         49B394        50B260
 Transaction fees                             51B1,024      52B1,711
 Total revenue from contracts with customers  53B2,646      54B2,738

 Interest on loans                            55B86         56B58
 Sancus Loans Limited interest income         57B2,669      58B2,027
 Other income                                 59B6          60B-
 Total Revenue                                61B5,407      62B4,823

 

 

5.      COST OF SALES

 

                                     30 June 2023  30 June 2022

                                     (unaudited)   (unaudited)
                                     63B£'000      64B£'000
 Interest cost                       65B1,664      66B881
 Sancus Loans Limited interest cost  67B3,272      68B2,278
 Other cost of sales                 69B169        70B401
 Total cost of sales                 71B5,105      72B3,560

 

 

6.      OPERATING EXPENSES

 

                                        30 June 2023  30 June 2022

                                        (unaudited)   (unaudited)
                                        73B£'000      74B£'000

 Administration and secretarial fees    75B47         76B61
 Amortisation and depreciation          77B118        78B157
 Audit fees                             79B63         80B69
 Corporate Insurance                    81B4          82B69
 Directors Remuneration                 83B55         84B64
 Employment costs                       85B2,157      86B2,201
 Investor relations expenses            87B30         88B30
 Legal and professional fees            89B185        90B82
 Marketing expenses                     91B55         92B126
 NOMAD fees                             93B38         94B38
 Other office and administration costs  95B502        96B385
 Pension costs                          97B46         98B51
 Registrar fees                         99B15         100B15
 Sundry                                 101B3         102B2
 Total operating expenses               103B3,318     104B3,350

 

 

7.          LOSS PER ORDINARY SHARE

 

Consolidated loss per Ordinary Share has been calculated by dividing the
consolidated loss attributable to Ordinary Shareholders in the period by the
weighted average number of Ordinary Shares outstanding (excluding treasury
shares) during the period.

 

Note 13 describes the warrants in issue which are currently out of the money,
and therefore are not considered to have a dilutive effect on the calculation
of Loss per Ordinary Share.

 

 

                                                           30 June 2023     30 June 2022

                                                           (unaudited)      (unaudited)

 Number of shares in issue                                 105B584,138,346  106B489,843,477
 Weighted average number of shares outstanding             107B584,138,346  108B477,990,801
 Loss attributable to Ordinary Shareholders in the period  109B£3,333,000   110B£1,982,000
 Basic Loss per Ordinary Share                             111B(0.57)p                          (0.41)p
 Diluted Loss per Ordinary Share                           113B(0.57)p      114B(0.41)p

 

 

8.          FIXED ASSETS

 

                          Right of use assets  Property & Equipment      Total
 Cost                     £'000                £'000                     £'000
 At 31 December 2022      1,247                460                       1,707
 Additions in the period  -                    5                         5
 Disposals in the period  (128)                (44)                      (172)
 At 30 June 2023          1,119                421                       1,540

 

 Accumulated depreciation         £'000   £'000   £'000
 At 31 December 2022              883     399     1,282
 Charge in the period             92      26      118
 Disposals in the period          (29)    (42)    (71)
 At 30 June 2023                  946     383     1,329

 Net book value 30 June 2023      173     38      211

 Net book value 31 December 2022  364     61      425

 

 

9.         GOODWILL

 

 Goodwill at 30 June 2023 and 31 December 2022 comprises:
                                                               £'000

 Sancus Lending (Jersey) Limited                               14,255
 Total                                                         14,255

 

Impairment tests

 

The carrying amount of goodwill arising on the acquisition of certain
subsidiaries is assessed by the Board for impairment on an annual basis or
sooner if there has been any indication of impairment. The Board last assessed
the Goodwill for impairment on the preparation of the 2023 interim accounts,
with the next assessment due on the preparation of the 2024 interim accounts,
assuming that there having been no indicators of impairment in the interim
period. There have been no indicators of impairment relating to the Jersey
goodwill so this will next be assessed for impairment in June 2024.

 

At 30 June 2023 the value in use of Sancus Jersey was based on an internal
Discounted Cash Flow ("DCF") value-in-use analysis using cash flow forecasts
for the years 2023/24 to 2026/27. The starting point for each of the cash
flows was the revised forecast for 2023 produced by Sancus Lending Jersey
management. Management's revenue forecasts applied a compound annual growth
rate (CAGR) to revenue of 27.9% and a cost of equity discount rate of 14.5%.
The resultant valuation indicated that no impairment of goodwill was
required.

 

Goodwill valuation sensitivities

 

When the discounted cash flow valuation methodology is utilised as the primary
goodwill impairment test, the variables which influence the results most
significantly are the discount rates applied to the future cash flows and the
revenue forecasts. The table below shows the impact on the Consolidated
Statement of Comprehensive Income of stress testing the period end goodwill
valuation with a decrease in revenues of 10% and an increase in cost of equity
discount rate of 3%. These potential changes in key assumptions fall within
historic variations experienced by the business (taking other factors into
account) and are therefore deemed reasonable. The current model reveals that a
sustained decrease in revenue of circa 12% or a sustained increase of circa 8%
in the cost of Equity discount rate would remove the headroom.

 

 Sensitivity Applied

                                                           Total

                                                           £'000

 10% decrease in revenue per annum                         4,228
 3% increase in cost of Equity discount rate               2,093

 

Neither a 10% decrease in revenue nor a 3% increase in the cost of Equity
discount rate implies a reduction of Goodwill in Jersey.

 

 

10.       OTHER INTANGIBLE ASSETS

                                       £'000
 Cost
 At 30 June 2023 and 31 December 2022  1,584

 Amortisation
 At 31 December 2022                   1,584
 Charge for the period                 -
 At 30 June 2023                       1,584

 Net book value at 30 June 2023        -

 Net book value at 31 December 2022    -

 

Other Intangible assets comprise capitalised contractors' costs and costs
related to core systems development. The assets have been fully amortised.

 

 

11.       TRADE AND OTHER RECEIVABLES

                                               115B30 June 2023  116B31 December 2022

(unaudited)
(audited)

 

 Current                                       117B£'000         118B£'000
 Loan fees, interest and similar receivable    119B6,356         120B4,673
 Receivable from associated companies          121B-             122B5
 Taxation                                      123B5             124B58
 Other trade receivables and prepaid expenses  125B736           126B1,070
                                               127B7,097         128B5,806

 

 

12.        OTHER ASSETS

 

                              Development properties
 Cost                         £'000
 At 31 December 2021          496
 Additions                    210
 Disposals                    -
 At 31 December 2022          706
 Disposals                    (706)
 At 30 June 2023              -

 

Other assets are development properties previously held as security against
certain loans which have defaulted. Other assets are held at the lower of cost
and net realisable value. All  development properties classified as Other
Assets were  sold during the period with a profit on disposal of £303k
recognised in the Consolidated Statement of Comprehensive Income.

 

 

13.       SHARE CAPITAL, SHARE PREMIUM & DISTRIBUTABLE RESERVE

 

Sancus Lending Group Limited has the power under the Articles to issue an
unlimited number of Ordinary Shares of nil par value.

 

No Ordinary Shares were issued in the period to 30 June 2023 (Period to 30
June 2022: Nil).

 

 Share Capital

 Number of Ordinary Shares - nil par value
 At 30 June 2023 (unaudited) and 31 December 2022 (audited)  129B584,138,346

 

 Share Premium

 Ordinary Shares - nil par value                             130B£'000
 At 30 June 2023 (unaudited) and 31 December 2022 (audited)  131B118,340

 

Ordinary shareholders have the right to attend and vote at Annual General
Meetings and the right to any dividends or other distributions which the
Company may make in relation to that class of share.

 

Treasury Shares

 

                                          132B30 June 2023   133B31 December 2022

(unaudited)
(audited)

                                          Number of shares   Number of shares

 Balance at start and end of period/year  134B11,852,676     135B11,852,676

 

                                      136B30 June 2023  137B31 December 2022

(unaudited)
(audited)

                                      £'000             £'000

 Balance at start end of period/year  138B1,172         139B1,172

 

Warrants in Issue

 

As at 30 June 2023 there were 89,396,438 Warrants in issue to subscribe for
new Ordinary Shares at a subscription price of 2.25 pence per ordinary
share.  The Warrants are exercisable on at least 30 days notice within the
period ending 31 December 2025.  The Warrants in issue are classified as
equity instruments because a fixed amount of cash is exchangeable for a fixed
amount of equity, there being no other features which could justify a
financial liability classification. The fair value of the warrants at 30 June
2023 is £Nil (31 December 2022: £Nil).

 

 

14.   LIABILITIES

 

 Non-current liabilities                30 June 2023         141B31 December 2022

(unaudited)
(audited)
                                142B£'000                    143B£'000
 Corporate bond (1)             144B14,937                   145B14,925
 Pollen Facility (2)            146B76,997                   147B66,826
 ZDP shares (3)                 148B13,268                   149B9,117
 Lease Creditor                 150B-                        151B152
 Total non-current liabilities  152B105,202                  153B91,020

 

 Current liabilities                          30 June 2023         155B31 December 2022

(unaudited)
(audited)
                                      156B£'000                    157B£'000
 Accounts payable                     158B104                      159B224
 Accruals and other payables           507                                 1,472
 Taxation                             162B169                      163B145
 Payable to associated companies      164B-                        165B12
 Interest payable                     166B497                      167B481
 Derivative contracts (note 17)       168B10                       169B398
 Provisions for financial guarantees  170B649                      171B413
 Lease creditor                       172B156                      173B212
 Total current liabilities            2,092                        174B3,357

 

 Movement on provision for financial guarantees
                                                     175B£'000
 At 31 December 2021                                 176B-
 Profit and loss charge in the year                  177B413
 At 31 December 2022                                 178B413
 Profit and loss charge in the period                179B236
 At 30 June 2023                                     180B649

 

Provisions for financial guarantees are recognised in relation to Expected
Credit Losses ("ECLs") on off-balance sheet loans and debtors where the
Company has provided a subordinated position or other guarantee (see Note 18).
The fair value is determined using the exact same methodology as that used in
determining ECLs (Note 17).

 

(1)    Corporate Bond

 

The £15m (31 December 2022: £15m) Corporate bonds bear interest at 7% (2022:
7%). The bonds have a maturity date of 31 December 2025.

 

(2)    Pollen Facility (previously HIT Facility)

 

On 28 January 2018, Sancus signed a funding facility with Honeycomb Investment
Trust plc (HIT), now Pollen Street PLC ("Pollen"). The funding line initially
had a term of 3 years and comprised of a £45m accordion and revolving credit
facility. On 3 December 2020 this facility was extended to a 6 year term to
end on 28 January 2024 and on 23 November 2022 this was extended further to 23
November 2026. In addition to the extension the facility was increased to
£75m in December 2020 and to £125m in November 2022.

 

The Pollen facility has portfolio performance covenants including that actual
loss rates are not to exceed 4% in any twelve month period and underperforming
loans are not to exceed 10% of the portfolio. Sancus Group participates 10% on
every drawdown with a first loss position on the Pollen facility. Sancus has
also provided Pollen with a guarantee, capped at £4m that will continue to
ensure the orderly wind down of the loan book, in the event of the insolvency
of Sancus Group, given its position as facility and security agent. Refer to
Note 18 Commitments and Guarantees.

 

(3)    ZDPs

 

The ZDP Shares have a maturity date of 5 December 2027, following a 5 year
extension of the final capital repayment approved on 5 December 2022. The
final capital entitlement is £2.5332 per ZDP Share.

 

Under the Companies (Guernsey) Law, 2008 shares in the Company can only be
redeemed if the Company can satisfy the solvency test prescribed under that
law. Refer to the Company's Memorandum and Articles of Incorporation for full
detail of the rights attached to the ZDP Shares. This document can be accessed
via the Company's website www.sancus.com (http://www.sancus.com/) .

 

The ZDP shares bore interest at an average rate of 8% until 5 December 2022.
As part of the extension agreement noted above the interest rate increased to
an average of 9% per annum with effect from 5 December 2022, through to the
final repayment date of 5 December 2027. In accordance with article 7.5.5 of
the Company's Memorandum and Articles of Incorporation, the Company may not
incur more than £30m of long term debt without prior approval from the ZDP
shareholders. The Memorandum and Articles (section 7.6) also specify that two
debt cover tests must be met in relation to the ZDPs. At 30 June 2023 the
Company was in compliance with these covenants as Cover Test A was 2.24
(minimum of 1.7) and the adjusted Cover Test B was 3.20 (minimum of 2.05). At
30 June 2023 senior debt borrowing capacity amounted to £15m. The Pollen
facility does not impact on this capacity as it is non-recourse to Sancus.

 

On 28 April 2023 the Company sold 2,068,966 ZDP shares, held in Treasury, to
Somerston, the Groups largest shareholder, at a price of 145 pence per share
being the mid-market closing price of the ZDP shares on 27 April 2023.

 

At 30 June 2023 the Company held 10,505,739 ZDP shares in Treasury (31
December 2022: 12,574,705) with an aggregate value of £18,352,475 (31
December 2022: £20,861,686).

 

 

15.   NOTES TO THE CASH FLOW STATEMENT

 Cash outflow from operations (excluding loan movements)      181B30 June 2023  182B30 June 2022

(unaudited)
(unaudited)
                                                              183B£'000         184B£'000

 Loss for the period                                          185B(3,313)       186B(1,982)

 Adjustments for:

 Net gain on FinTech Ventures                                 187B(362)         188B(114)
 Other net (gains)/losses                                     189B(195)         190B417
 Loss on disposal of subsidiary                               189B202           190B-
 Accrued interest on ZDPs                                     191B1,106         192B400
 Impairment of financial assets                               193B799           194B-
 Taxation                                                     195B45            196B-
 Amortisation / depreciation of fixed assets                  197B118           198B157
 Amortisation of debt issue costs                             199B195           200B95

 Changes in working capital:
 Trade and other receivables                                  201B(2,133)       202B82
 Trade and other payables                                     203B(836)                                           319

 Cash outflow from operations, excluding loan movements       205B(4,374)       206B(626)

 

Changes in liabilities arising from financing activities

 

The table below details changes in the Group's liabilities arising from
financing activities, including both cash and non-cash changes. Liabilities
arising from financing activities are those for which cash flows were, or
future cash flows will be classified in the Group's consolidated cash flow
statement as cash flows from financing activities.

 

                                              1 January 2023  Financing cash flows(1)  Amortisation of debt issue costs  Other      30 June 2023

                                                                                       Non-cash                          Non-cash
                                              £'000           £'000                    £'000                             £'000      £'000
 ZDPs                                         9,117           3,000                    12                                1,139(2)   13,268
 Corporate Bond                               14,925          -                        12                                -          14,937
 Pollen Facility                              66,826          10,000                   171                               -          76,997
 Lease Liability                              364             (109)                    -                                 (99)       156
 Total liabilities from financing activities  91,232          12,891                   195                               1,040      105,358

 

                                              1 January 2022  Financing cash flows(1)  Amortisation of debt issue costs  Other      30 June 2022

                                                                                       Non-cash                          Non-cash
                                              £'000           £'000                    £'000                             £'000      £'000
 ZDPs                                         10,532          -                        13                                400(2)     10,944
 Corporate Bond                               12,474          -                        13                                -          12,487
 Pollen Facility                              52,203          2,500                    70                                -          54,773
 Lease Liability                              576             (104)                    -                                 -          472
 Total liabilities from financing activities  75,785          2,396                    95                                400        78,676

 

(1)These amounts can be found under financing cash flows in the cash flow
statement.

(2) Interest accruals.

 

 

16.       RELATED PARTY TRANSACTIONS

 

Transactions with the Directors/Executive Team

 

Non-executive Directors

 

As at 30 June 2023, the non-executive Directors' annualised fees, excluding
all reasonable expenses incurred in the course of their duties which were
reimbursed by the Company, were as detailed in the table below:

 

 

                                                                      30 June 2023      30 June 2022
                                                                      £                 £

 Stephen Smith (Chairman)                                             50,000            50,000
 John Whittle                                                         42,500            42,500
 Tracy Clarke (stepped down as non-executive director 30 March 2023)  35,000            35,000

 

Tracy Clarke was appointed Group CFO and joined the Executive Team on 30 March
2023.

 

Total Directors' fees charged to the Company for the period ended 30 June 2023
were £55,000 (30 June 2022: £63,750).

 

Executive Team

 

For the period ended 30 June 2023, the Executive Team members' remuneration
from the Company, excluding all reasonable expenses incurred in the course of
their duties which were reimbursed by the Company, were as detailed in the
table below:

 

                                                                         30 June 2023  30 June 2022
                                                                         £'000         £'000

 Aggregate remuneration in respect of qualifying service - fixed salary  284           238
 Aggregate amounts contributed to Money Purchase pension schemes         10            10
 Aggregate bonus paid                                                    -             -

 

All amounts have been charged to Operating Expenses.

 

On 30 March 2023, as an interim measure which may become permanent, Carlton
Management Services Limited ("Carlton"),  was appointed to manage and develop
the Group's finance function, including new technology integrations for
forecasting, performance and treasury management under a service agreement
which has a three-year term.  The annualised fee for the service is £170k.
Furthermore, Carlton sub-lease office space in the Group's offices in Jersey,
with a sub lease end date of 31 August 2024,  at an annual cost of c£100k
p.a.

 

On 30 March 2023 Carlton entered into a Director services agreement with
Sancus Lending Group Limited for the provision of Tracy Clarke as Interim CFO,
with an annual fee of £130k.

 

Tracy Clarke is Managing Director of Carlton Management Services Limited.

 

From time to time, the Somerston Group may participate as a Co-Funder in
Sancus loans, on the same commercial terms available to other Co-Funders. The
Group has not recorded any other transactions with any Somerston Group
companies for the period ended 30 June 2023 (30 June 2022: none).

 

Directors' and Persons Discharging Managerial Responsibilities ("PDMR")
shareholdings in the Company

 

As at 30 June 2023, the Directors had the following beneficial interests in
the Ordinary Shares of the Company:

 

               30 June 2023                                                    31 December 2022
               No. of Ordinary Shares Held  % of total issued Ordinary Shares  No. of Ordinary Shares Held  % of total issued Ordinary Shares

 John Whittle  138,052                      0.02                               138,052                      0.03
 Emma Stubbs   1,380,940                    0.24                               1,380,940                    0.28
 Rory Mepham   1,000,000                    0.17                               -                            -
 ( )

 

In the six month period to June 2023 and the year to December 2022, none of
the above received any amounts relating to their shareholding.

 

Emma Stubbs resigned as Executive Director of the Company on 30 March 2023.

 

Transactions with connected entities

 

The following significant transactions with connected entities took place
during the current period:

 

                                                        30 June  31 December 2022

 Receivable from/(payable to) related parties           2023
                                                        £'000    £'000
 Amberton Limited                                       -        (7)

 

 Net Cost recharges
                     30 June     30 June

                     2023        2022

                     £'000       £'000
 Amberton Limited    3           4

 

There is no ultimate controlling party of the Company.

 

 

17.       FINANCIAL INSTRUMENTS - Fair values and risk management

 

Sancus loans and loan equivalents

                                                      30 June 2023 (unaudited)  31 December 2022 (audited)
 Non-current                                          £'000                     £'000

 Sancus loans                                         34                        171
 Sancus Loans Limited loans                           20,699                    23,693
 Total Non-current Sancus loans and loan equivalents  20,733                    23,864

 Current

 Sancus loans                                         3,138                     2,790
 Sancus Loans Limited loans                           61,071                    49,471
 Total Current Sancus loans and loan equivalents      64,209                    52,261

 Total Sancus loans and loan equivalents              84,942                    76,125

 

Fair Value Estimation

 

The financial assets and liabilities measured at fair value in the
Consolidated Statement of Financial Position are grouped into the fair value
hierarchy as follows:

 

                                           30 June 2023      31 December 2022 (audited)

                                           (unaudited)
                                           Level 2  Level 3  Level 2         Level 3
                                           £'000    £'000    £'000           £'000

 Fintech Ventures investments              -        237      -               -
 Derivative contracts                      (10)     -        (398)           -
 Total assets / liabilities at fair value  (10)     237      (398)           -

 

The classification and valuation methodology remains as noted in the 2022
Annual Report.

 

All of the FinTech Ventures investments are categorised as Level 3 in the fair
value hierarchy. In the past the Directors have estimated the fair value of
financial instruments using discounted cash flow methodology, comparable
market transactions, recent capital raises and other transactional data
including the performance of the respective businesses. Having considered the
terms, rights and characteristics of the equity and loan stock held by the
Group in the FinTech Ventures investments, the Board's estimate of liquidation
value of these assets is £237k at 30 June 2023 (31 December 2022: £Nil)
following a recovery on one of the investments post period end. Changes in the
performance of these businesses and access to future returns via its current
holdings could affect the amounts ultimately realised on the disposal of these
investments, which may be greater or less than £Nil. There have been no
transfers between levels in the period (2022: None).

 

Assets at Amortised Cost

                                    30 June 2023  31 December 2022
                                    (unaudited)   (audited)
                                    £'000         £'000
 Sancus loans and loan equivalents  84,942        76,125
 Trade and other receivables        6,361         4,736
 Cash and cash equivalents          4,293         4,134
 Total assets at amortised cost     95,596        84,995

 

Liabilities at Amortised Cost

                                      30 June 2023  31 December 2022
                                      (unaudited)   (audited)
                                      £'000         £'000
 ZDPs                                 13,268        9,117
 Corporate Bond                       14,937        14,925
 Pollen facility                      76,997        66,826
 Trade and other payables             1,433         2,698
 Provisions in respect of guarantees  649           413
 Total liabilities at amortised cost  107,284       93,979

 

Refer to Note 14 for further information on liabilities.

 

 FinTech Ventures Investments                 Total Portfolio

 30 June 2023                                 £'000
 At 31 December 2022                          -
 Net new investments / loan repaid            (125)
 Realised gain recognised in profit and loss  362
 At 30 June 2023                              237

 

                                                   Total Portfolio
 31 December 2022                                  £'000
 At 31 December 2021                               500
 Net new investments / (divestments)               394
 Realised losses recognised in profit and loss     (894)
 At 31 December 2022                               -

Credit Risk

 

Credit risk is defined as the risk that a borrower/debtor may fail to make
required repayments within the contracted timescale. The Group invests in
senior debt, senior subordinated debt, junior subordinated debt and secured
loans. Credit risk is taken in direct lending to third party borrowers,
investing in loan funds, lending to associated platforms and loans arranged by
associated platforms. The Group mitigates credit risk by only entering into
agreements related to loan instruments in which there is sufficient security
held against the loans or where the operating strength of the investee
companies is considered sufficient to support the loan amounts outstanding.

 

Credit risk is determined on initial recognition of each loan and re-assessed
at each balance sheet date. It is categorized into Stage 1, Stage 2 and Stage
3 with Stage 1 being to recognise 12 month ECLs, Stage 2 being to recognise
Lifetime ECLs not credit impaired and Stage 3 being to recognise Lifetime ECLs
credit impaired.

 

Foreign Exchange Risk - Derivative instruments

 

The Treasury Committee Team monitors the Group's currency position on a
regular basis, and the Board of Directors reviews it on a quarterly basis.
Loans denominated in Euros which are taken out through the Pollen facility are
hedged. Forward contracts to sell Euros at loan maturity dates are entered
into when loans are drawn in Euros. At 30 June 2023 the following forward
foreign exchange contracts were open:

 

 June 2023

 Counterparty              Settlement date               Buy Currency  Buy Amount £'000      Sell currency     Sell amount €'000       Unrealised gain/(loss) £'000

 Alpha                     Jun 2023 to July 2023         GBP           7,744                 Euro              9,000                   3
 Lumon Risk Management     Jun 2023 to July 2023         GBP           22,439                Euro              26,100                  (13)

                                                                                                                                       (10)

 

 December 2022

 Counterparty           Settlement date         Buy Currency  Buy Amount £'000   Sell currency  Sell amount €'000    Unrealised loss £'000

 EWealthGlobal Group     Jan 2023 to May 2023   GBP           3,565              Euro           4,187                (144)
 Liberum Wealth         Jan 2023 to Feb 2023    GBP           3,202              Euro           3,650                (35)
 Lumon Risk Management  Jan 2023 to May 2023    GBP           9,259              Euro           10,676               (219)

                                                                                                                     (398)

 

No hedging has been taken out against investments in the FinTech Ventures
platforms (2022: £Nil).

 

Provision for ECL

 

Provision for ECL is made using the credit risk, the probability of default
(PD) and the probability of loss given default (PL) all of which are
underpinned by the Loan to Value (LTV), historical position, forward looking
considerations and on occasion, subsequent events and the subjective judgement
of the Board. Preliminary calculations for ECL are performed on a loan by loan
basis using the simple formula: Outstanding Loan Value x PD x PL and are then
amended as necessary according to the more subjective measures as noted above.

 

A probability of default is assigned to each loan. This probability of default
is arrived at by reference to historical data and the ongoing status of each
loan which is reviewed on a regular basis. The probability of loss is arrived
at with reference to the LTV and consideration of cash that can be redeemed on
recovery.

 

Movement of provision for ECL

                                                 Trade Debtors £'000

                                      Loans                            Guarantees £'000    Total

                                       £'000                                                £'000
 Loss allowance at 31 December 2021   6,409      7,055                 -                   13,464
 Charge/(credit) for the year 2022    426        (421)                 413                 418
 Utilised in the year 2022            -          (141)                 -                   (141)
 Loss allowance at 31 December 2022   6,835      6,493                 413                 13,741
 Charge for the period to June 2023   44         519                   236                 799
 Disposed in the period to June 2023  (1,200)    (734)                 -                   (1,934)
 Loss allowance at 30 June 2023       5,679      6,278                 649                 12,606

 

 

18.       GUARANTEES

 

 

The Group undertakes a number of Guarantees and first loss positions which are
not deemed to be contingent liabilities under IAS37 as there is no present
obligation for these guarantees and it is considered unlikely that these
liabilities will crystallise.

 

Pollen Facility

Sancus Group participates 10% on every loan funded by the Pollen facility,
taking a first loss position. Sancus Group Lending Limited has provided Pollen
with a guarantee capped at £4m following the restructure of the Pollen
facility in November 2022 (previously was capped at £2m) and that it will
continue to ensure the orderly wind down of the Pollen funded loan book, in
the event of the insolvency of Sancus Group, given its position as facility
and security agent. No provision has been provided in the financial statements
(2022: £Nil).

 

Sancus Loan Notes

Sancus Loan Note 7 Limited was launched in May 2021 and currently stands at
£17.3m. Sancus Loan Note 7 Limited matures in May 2024 and has a coupon of 7%
p.a. (payable quarterly), with Sancus providing a 10% first loss guarantee.

 

Sancus Loan Note 8 plc was launched in January 2022 and currently stands at
£3.0m. Loan Note 8 matures on 1 December 2026 and has a coupon of 8% p.a.
(payable quarterly), with Sancus providing a 20% first loss guarantee.

 

Unfunded Commitments

As at 30 June 2023 the Group has unfunded commitments of £70.0m (31 December
2022: £73.9m). These unfunded commitments primarily represent the undrawn
portion of development finance facilities. Drawdowns are conditional on
satisfaction of specified conditions precedent, including that the borrower is
not in breach of its representations or covenants under the loan or security
documents. The figure quoted is the maximum exposure assuming that all such
conditions for drawdown are met. Directors expect the majority of these
commitments to be filled by Co-Funders and/or by our secured funding lines.

 

 

19.       LOSS ON DISPOSAL OF SUBSIDIARY

 

On 15 March 2023, the Company announced the sale of Sancus Lending (Gibraltar)
Limited for £10,000. A loss on disposal of £202k, being the difference
between the net assets of Sancus Lending (Gibraltar) and sale proceeds on
disposal has been recognised in the Consolidated Statement of Comprehensive
Income.

 

 

OFFICERS AND PROFESSIONAL ADVISERS

 

Directors

 

Non-executive:                          Steve Smith

                                                     John
Richard Whittle

 
 Tracy Clarke (resigned 30 March 2023)

 

Executive
Rory Mepham

                                                             Emma
Stubbs (resigned 30 March 2023)

                                                             Tracy
Clarke (appointed 30 March 2023)

 

The address of the Directors is the Company's registered office.

 

Executive Team:

 

Chief Executive Officer:                  Rory Mepham

 

Chief Financial Officer:                Tracy Clarke

 

Chief Investment Officer:               James Waghorn

 

Registered office:                             Les
Vardes House

 
La Charroterie

 
         St Peter Port

 
Guernsey, GY1 1EL

 
         Channel Islands

 

Nominated Adviser and Broker:   Liberum Capital Limited

 
Ropemaker Place

 
25 Ropemaker Street

 
London, EC2Y 9LY

 
United Kingdom

 

Company Secretary:                        Sanne Fund
Services (Guernsey) Limited

 
1 Royal Plaza

 
Royal Avenue

 
St. Peter Port

 
Guernsey

 
GY1 2HL

 

Legal
Advisers,
Carey Olsen

Channel Islands:
P.O. Box 98

 
         Carey House

 
         Les Banques

 
         St Peter Port

 
         Guernsey, GY1 4BZ

 
         Channel Islands

 

Legal Advisers, UK
Stephenson Harwood

 
         1 Finsbury Circus

 
         London, EC2M 7SH

 
         United Kingdom

 

Legal Advisers, US
Troutman Pepper

 
         3000 Two Logan Square

 
         Eighteenth and Arch Streets

 
         Philadelphia, PA 19103-2799

 
         United States

 

 

Bankers:
Barclays International

 
         1(st) Floor, 39041 Broad Street

 
         St Helier

 
         Jersey, JE4 8NE

 

Auditors:                                          Moore
Stephens

 
       1 Waverley Place,

 
Union Street,

 
St. Helier,

 
JE4 8SG, Jersey

 

 

Registrar:
Link Market Services Limited

 
The Registry, 34 Beckenham Road

 
Beckenham

 
Kent, BR3 4TU

 
United Kingdom

 

Public Relations:
Instinctif Partners Limited

 
65 Gresham Street

 
London, EC2V 7NQ

 
United Kingdom

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