REG - Secured Income Fd - Annual Financial Report
08/09/2022 10:00
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RNS Number : 7545Y Secured Income Fund PLC 08 September 2022
8 September 2022
Secured Income Fund plc
("SSIF" or the "Company")
Annual Financial Report
For the year ended 30 June 2022
A copy of the Company's Annual Report and Financial Statements for the year
ended 30 June 2022 will shortly be available to view and download from the
Company's website, http://www.securedincomefundplc.co.uk/
(http://www.securedincomefundplc.co.uk/) . Neither the contents of the
Company's website nor the contents of any website accessible from hyperlinks
on the Company's website (or any other website) is incorporated into or forms
part of this announcement.
Enquiries to:
Directors
David Stevenson (Chair) tel: +44 7973 873785
Susan Gaynor Coley tel: +44 7977 130673
Brett Miller tel: +44 7770 447338
finnCap Ltd. tel: +44 20 7220 0500
Corporate Finance: William Marle
Sales: Mark Whitfeld
http://www.securedincomefundplc.co.uk/
(http://www.securedincomefundplc.co.uk/)
The contents of this announcement have been extracted from the Company's
Annual Report, which is currently in print and will be distributed within the
week. The information shown for the years ended 30 June 2022 and 30 June 2021
does not constitute statutory accounts and has been extracted from the full
accounts for the years ended 30 June 2022 and 30 June 2021. The reports of the
auditors on those accounts were unqualified and did not contain adverse
statements under sections 498(2) or (3) of the Companies Act 2006. The
accounts for the year ended 30 June 2021 have been filed with the Registrar of
Companies. The accounts for the year ended 30 June 2022 will be delivered to
the Registrar of Companies in due course.
Strategic Report
Key Points
30 June 2022 30 June 2021
Net assets ( 1 ) £10,916,000 £19,106,000
NAV per Ordinary Share 20.73p 36.28p
Share price 12.00p 42.50p
(Discount)/premium to NAV (42.1)% 17.1%
Loss for the year £(554,000) £(11,017,000)
Dividend per share declared in respect of the year 0.75p ( 2 ) 8.50p
B Share issue and redemption per Ordinary Share declared in respect of the 14.50p 19.50p
year
Total return per Ordinary Share (based on NAV) ( 3 ) -2.9% -25.6%
Total return per Ordinary Share (based on share price) ( 3 ) -37.6% -7.8%
Ordinary Shares in issue 52,660,350 52,660,350
1 In addition to the Ordinary Shares in issue, 1 Management Share of £1 is in
issue (2021: 1) (see note 20).
2 On 2 September 2022, the Board declared a dividend of 0.75p per Ordinary Share
for the year ended 30 June 2022, which is to be paid on 7 October 2022. It is
the Board's intention that the Company will pay sufficient dividends each
financial year to maintain investment trust status under the Corporation Tax
Act 2010 for so long as the Company remains listed.
3 Total return per Ordinary Share has been calculated by comparing the NAV or
share price, as applicable, at the start of the year with the NAV or share
price, as applicable, plus dividends and B Share redemptions paid, at the year
end.
Chairman's Statement
Introduction
I am pleased to provide Shareholders with my Chairman's Statement, covering
the financial year from 1 July 2021 to 30 June 2022. Over the reporting
period, Secured Income Fund plc (the "Company") has continued to focus on
returning capital to Shareholders efficiently and in a timely manner. Since
the wind down proposals were adopted on 17 September 2020, the Company has
maintained regular distributions to Shareholders and has returned £22.4
million (equivalent to 42.5p per Ordinary Share) through a combination of
dividends and a B Share Scheme.
Performance
For the reporting year ended 30 June 2022, the Company suffered a net loss of
£0.6 million and loss per Ordinary Share of 1.05p (compared to a loss of
£11.0 million and loss per Ordinary Share of 20.92p for the year ended 30
June 2021). The Company's NAV at 30 June 2022 was £10.9 million (20.73p (cum
income) per Ordinary Share) compared to £19.1 million (36.28p per Ordinary
Share) as at 30 June 2021. £7.6 million of the £8.2 million reduction in the
NAV in the period related to the B Share distributions of £7.6 million, with
the remainder being attributable to the net loss of £0.6 million.
During the reporting period, the IFRS 9 provision across some of the direct
loans has been increased further. Ongoing monitoring of the Film Production
Financing portfolio has highlighted further deterioration of the expected cash
flows. This portfolio remains heavily impacted by the changes in operating
practises resulting from the Covid-19 pandemic. The Company has engaged third
party specialists in the hope of maximising returns for Shareholders for the
remaining film portfolio.
Furthermore, there continues to be a delay in receiving the full principal
repayment from the SME loan company as they have yet to secure a refinance of
the facility. However, the Company has successfully negotiated monthly capital
repayments, which commenced in February 2022, and remains in regular dialogue
with the Borrower to assess the ongoing position.
Further information about the status of the remaining loans along with the
respective assigned provisions is provided within the Investment Report.
During the reporting period, the Company traded at an average discount to NAV
of 20.9%.
No foreign exchange hedging has been employed during the reporting period.
Non-Sterling cash balances are converted into Sterling at the earliest
opportunity. A table showing the FX exposure in the portfolio as at 30 June
2022 has been included in note 23.
The portfolio exposure by maturity, geography, type and currency are presented
in the Company Analytics section in the Annual Report and Financial
Statements.
Corporate Activity
The Company has focused on the expeditious return of capital to investors.
Costs have been monitored carefully and no new underwriting commitments were
made in the period.
As part of its ongoing management of the Company's running costs, a Special
Resolution was proposed and approved at the Company's General Meeting held on
16 December 2021. Once the Company's NAV falls below £7 million, the Board
will notify the London Stock Exchange of its intention to cancel the Company's
admission to trading on the Specialist Fund Segment of the Main Market (the
"Cancellation of Trading").
Management Arrangements
On 20 August 2021, the Company announced that it had reached an agreement with
KKV Investment Management Ltd and its AIFM, Kvika Securities Limited, to
terminate the Investment Management Agreement ("IMA"); the IMA was duly
terminated on 31 December 2021.
The Company had its application to become a small self-managed AIFM approved
by FCA and entered into the register of the Small Registered UK AIFMs with
effect from 31 December 2021.
In order to assist the Board with the management of the portfolio, with effect
from 1 January 2022, the Company has entered into a consultancy agreement to
secure the services of one of the individuals who has the greatest knowledge
of the Company's assets. In addition, Brett Miller, a Director of the Company
who is highly experienced in this area, has continued to be directly involved
in the managed wind down of the Company's portfolio.
The Board believes that the Company has the necessary resource and expertise
for the efficient and effective realisation of the balance of the portfolio.
However, the Board will engage specialist consultants where it considers that
such appointments will assist in maximising returns for, and/or expediting
capital returns to, Shareholders.
Dividends
Following the decision to proceed with a managed wind-down, the Board reviewed
the dividend policy and decided to cease paying monthly dividends and is
instead returning excess capital as and when the Company has excess cash
reserves available for distribution. However, it is the Board's intention
that the Company will pay sufficient dividends each financial year to maintain
investment trust status under the Corporation Tax Act 2010 for so long as the
Company remains listed. Therefore, On 2 September 2022, the Board declared a
dividend of 0.75p per Ordinary Share for the year ended 30 June 2022, which is
to be paid on 7 October 2022.
Capital Distributions
The Company adopted a B Share scheme, following approval by Shareholders at
the General Meeting held on 23 March 2021. The Company is therefore able to
issue redeemable B Shares to Shareholders which are subsequently redeemed for
cash, this allows the capital returns to be made in a more tax efficient
manner for some Shareholders.
During this reporting period, the Board distributed £7.6 million using the B
Share Scheme, which is equivalent to 14.5p per Ordinary Share.
To date, a total of £17.9 million has been distributed to Shareholders via
the B share scheme since the commencement of the managed wind down, this is
equivalent to 34.0p per Ordinary Share. Moreover, an additional £4.5 million,
equivalent to 8.5p per Ordinary Share, had been distributed in the form of
dividends prior to the B share scheme being set up.
The quantum and timing of a Return of Capital to Shareholders following
receipt by the Company of the net proceeds of realisations of investments will
be dependent on the Company's liabilities and general working capital
requirements. Accordingly, any future Return of Capital will continue to be at
the discretion of the Board, which will announce details of each Return of
Capital, including the relevant Record Date, Redemption Price and Redemption
Date, through an RNS Announcement, whilst the Company remains listed, a copy
of which will be posted to Shareholders. The Board intends for a further
capital return to be made within the next three months.
Shareholder Engagement
The Board has engaged with Shareholders over the reporting period, taking
feedback and responding to their recommendations where appropriate. Brett
Miller has led this activity and will continue to do so as we continue to wind
down the Company.
Outlook
The key focus of the Board remains resolute, achieving a balance between
maximising the value of the remaining assets and ensuring timely returns of
capital to Shareholders. The Board successfully navigated a smooth transition
of the management back to the Company by the start of 2022. The Company is
efficiently positioned to finalise the realisation of the remaining assets,
which the Board expects to be largely achieved within the next 18 months to
two years.
The Company is now close to reaching the £7 million NAV which will activate
the Special Resolution that was approved in December 2021. The Board will keep
Shareholders abreast of developments and dates over the next few months.
We thank investors for their continued support throughout this period and hope
to deliver investors total proceeds as close as possible for the remaining
NAV. We shall keep investors informed of any changes as they occur.
David Stevenson
Chairman
7 September 2022
Investment Report
Overview
The Company is continuing to work closely with Borrowers, whilst optimising
the return of capital to Shareholders in as expeditious a way as possible.
Since the wind-down of the Company commenced in September 2020, 8.5 pence per
Ordinary share (excluding the 0.75p per Ordinary Share dividend to be paid on
7 October 2022) has been returned to Shareholders via dividend distribution
and 34 pence per Ordinary share via a B Share Scheme, which was adopted to
ensure more tax efficient capital distributions for Shareholders.
The Investment Management Agreement between the Company and KKV Investment
Management Ltd was terminated on 31 December 2021. There has been a smooth
transition of management back to the Company, which has been facilitated by
retaining key personnel. Furthermore, with effect from 31 December 2021, the
Company has been approved by the FCA as a Small Registered UK AIFM.
Portfolio
There were ten direct loans in the portfolio as at 30 June 2022, with an
average carrying value of £0.8 million per loan. A direct loan to a UK
leasing company that had been in place since July 2017 was fully repaid at the
end of September 2021.
There has been further increases in IFRS 9 impairment provisions for some of
the direct loans during the reporting period. In particular, the six film
financings have suffered the effects of the Covid-19 pandemic with a marked
deterioration of the expected cash flows, through cancelled film festivals and
cinema screenings, and changes in operating practices whereby future sales are
expected to be made via longer tail earn-outs, instead of the customary large
upfront payments.
At the start of the reporting period, some of the legacy loans that formed
part of the portfolio prior to April 2017 were repaid in full or a settlement
was reached. The final performing loan that remained on the UK peer to peer
loan platform was repaid in full in August 2021. In September 2021, the agreed
settlement value was received for the US promissory note.
The remaining legacy loans are fully impaired under IFRS 9 and therefore have
zero carrying value assigned to them. This is due to various factors such as
continuous delays in repayment, depleted borrower assets and uncertainties in
relation to a borrower's going concern. The Company has continued to engage
with each of these Borrowers for updates and will reassess the positions
should there be any changes in circumstances.
Direct Loans
Principal Balance Outstanding as at 30 June 2022 ECL provision at 30 June 2022 Loan Carrying Value at Amortised Cost ( 1 ) at 30 June 2022 Amortisation/ Bullet repayment/ other
Borrower £ £ £ Asset Type Currency Yield
Borrower 1 £3,141,262 £9,424 £3,131,838 Pass-through amortisation SME and Leasing Fund EUR Variable
Borrower 2 £4,001,504 £1,200,451 £2,801,053 Bullet repayment/other Wholesale Lending GBP 10%
Borrower 3 £3,079,323 £1,539,662 £1,539,661 Interest only for 12 months, then amortisation Medical Services USD 12%
Borrower 4 £1,617,366 £1,323,850 £293,516 Cash sweep Film Production Financing USD 12%
Borrower 5 £1,624,925 £1,490,404 £134,521 Cash sweep Film Production Financing GBP 11%
Borrower 6 £1,537,010 £1,415,992 £121,018 Cash sweep Film Production Financing GBP 11%
Borrower 7 £104,351 £313 £104,038 Scheduled amortisation Laser and LED Manufacturer GBP 10%
Borrower 8 £642,559 £597,347 £45,212 Cash sweep Film Production Financing GBP 12%
Borrower 9 £506,945 £476,563 £30,382 Cash sweep Film Production Financing GBP 12%
Borrower 10 £2,395,295 £2,365,292 £30,003 Cash sweep Film Production Financing GBP 12%
Direct Loans Total £18,650,540 £10,419,298 £8,231,242
( 1 ) The carrying values of loans at amortised cost disclosed in the table
above do not include capitalised transaction fees, which totalled £15,715 at
30 June 2022.
( )
The following provides a narrative relating to our direct loan investments.
Names of counterparties have been omitted for commercial and business
sensitivity reasons.
( )
Irish SME and Leasing Fund investment (Borrower 1) - 28.7% of NAV
This portfolio of approximately 20 underlying loans has continued to perform
well. Most of the underlying loans are delivering income and the manager has
continued to make healthy distributions to the Company during the reporting
period. As the Fund is in its harvest phase, the capital distributions are
expected to accelerate as the loans mature or are refinanced.
( )
During the reporting period, the Company has received €1,171,061 in capital
repayments. A further €286,621 has been received in capital repayments post
year end.
SME Loan company (Borrower 2) - 25.7% of NAV
This loan has been in place since May 2017 and is secured against a wholesale
portfolio of working capital SME loans.
The Borrower was initially due to make a bullet repayment at the end of
September 2021. An extension was granted until the end of 2021 so the Borrower
could source new funding to refinance the facility, this revised date was not
met. The Borrower is continuing to pursue refinance opportunities.
In the meantime, material amortisation has taken place during the second half
of this reporting period. The Company has received £1,631,056 by way of
capital repayments as a result of active collection efforts undertaken. A
further £579,433 has been received in capital repayments post year end. In
addition to this, monthly interest on the loan continues to be serviced by the
Borrower.
US healthcare services company (Borrower 3) - 14.1% of NAV
This loan was made to a company specialising in ancillary medical services to
a number of hospitals in the American Midwest including optometry, audiology,
dentistry and podiatry. A key aspect of the security package is that there is
a parent company guarantee in place over all scheduled interest and principal
repayments.
The Borrower is in default as it sold its core business assets, rendering the
business economically unviable. Several Reservations of Rights letters have
been issued to the Borrower and Guarantor in relation to this and certain
payment defaults.
After some delays in payment, monthly payments of principal and interest have
been made on schedule recently. At the time of writing, payments are up to
date but we will be continuing to monitor these receivables very closely.
Whilst there is necessarily a sizeable IFRS 9 provision against this position
as it is in unremedied default, we believe it is in the Guarantor's best
interest to ensure the loan is repaid in full as per the schedule. All
rights over the Guarantor have been reserved.
Media financing (Borrowers 4, 5, 6, 8, 9 and 10) - 6.0% of NAV
Ongoing monitoring of the Film Production Financing portfolio has highlighted
further deterioration of the expected cash flow. The portfolio, comprising of
six film financings, has been heavily impacted by the changes in operating
practises resulting from the Covid-19 pandemic. This has resulted in
significant delays in recouping the outstanding balances within the
"contracted cash flow" element (comprising Tax Credit, Receipts and Presold
Income), hampered further by the political uncertainty across some of the
remaining territories. Moreover, the level of uncertainty across the
"non-contractual Future Sales" element, which is considered mezzanine in
nature and carries a higher risk profile, has continued to increase.
The Company remains in regular dialogue with the borrower to closely monitor
receipts, expectations of future sales and assess any changes to the
cashflows.
External specialists have been engaged by the Company to independently value
these positions and provide assistance in identifying the best approach in
realising maximum value for Shareholders given the specialist nature of the
sector.
LED manufacturer in Ireland (Borrower 7) - 1.0% of NAV
This is a secured term loan that has been in place since May 2017 and is
secured by a guarantee from the parent company, a debenture over the borrower
and a charge over equipment purchased via the Capex portion of the facility.
During the reporting period, with the Company's consent, the guarantor was
sold to a US company for approximately 40% premium to the share price.
The loan continues to make timely amortised payments and is due to mature in
December 2022.
Legacy portfolio
Borrower Principal Balance Outstanding at 30 June 2022 ECL provision at 30 June 2022 Loan Carrying Value at Amortised Cost at 30 June 2022 Currency Yield
£ £ £
Borrower 11 £1,218,063 £1,218,063 - GBP -
Borrower 12 £1,000,000 £1,000,000 - GBP -
Borrower 13 £415,714 £415,714 - GBP -
Borrower 14 £320,566 £320,566 - EUR -
Legacy Loans Total £2,954,343 £2,954,343 -
The following provides a narrative relating to the legacy loans within the
portfolio.
UK Venture Debt (Borrower 11) - 0.0% of NAV
This broadband company was previously restructured and has been facing key
decisions with regards to its going concern. Therefore, we have continued to
fully provide for this position and will reassess once there is further
clarity on next steps.
The broadband company is in advanced talks to be acquired by a competitor
which has a new generation product. The combined entity would use the
Borrower's existing customer base to accelerate sales of their new product.
The Company will remain as an investor of this combined entity in the hope of
achieving a positive resolution for its Shareholders.
UK Offshore platform (Borrower 12) - 0.0% of NAV
The final credit from this offshore platform has been in place since early
2017 and is a real estate linked loan to a developer in Gibraltar. Despite
continued assurances, we have not been repaid, and the position (including the
accrued penalty interest) remains fully impaired, given the continuous delays.
We remain in regular contact with the platform to monitor progress and will
continue to press for repayment. However, we remain uncertain of the balance
that will be recovered.
Small company bond platform (Borrower 13) - 0.0% of NAV
The only outstanding debt from this platform was a recruitment business that
had undergone a protracted recovery process through the courts. This loan is
fully impaired.
Spanish peer to peer loan platform (Borrower 14) - 0.0% of NAV
We have assigned zero probability of any further collections on the remaining
loans within the portfolio. The platform is engaged in ongoing legal
proceedings with the borrowers of the four remaining loans on the platform.
Outlook
The Company has continued to make good progress with the realisation of the
portfolio to date.
The Company is working closely with the relevant borrowers to ensure all
parties remain aligned to our objective of achieving the maximum returns for
Shareholders from the outstanding loans. The Company has also engaged
specialists to enhance returns where possible.
We would like to thank Shareholders for their continued support and will share
any updates on the progress over the upcoming months.
Brett Miller
Director
7 September 2022
Principal Risks and Uncertainties
Risk is inherent in the Company's activities, but it is managed through an
ongoing process of identifying and assessing risks and ensuring that
appropriate controls are in place. The key risks faced by the Company, along
with controls employed to mitigate those risks, are set out below.
Macroeconomic risk
Adverse macroeconomic conditions may have a material adverse effect on the
Company's yield on investments, default rate and cash flows. The Board and
(until the termination of Investment Management Agreement on 31 December
2021), KKV Investment Management Limited (the "Former Investment Manager")
keep abreast of market trends and information to try to prepare for any
adverse impact.
The Company's assets are diversified by geography, asset class, and duration,
thereby reducing the impact that macroeconomic risk may have on the overall
portfolio.
Interest rate risk arises from the possibility that changes in interest rates
will affect future cash flows and/or fair values of the Company's
investments. Exposure to interest rate risk is limited by the use of fixed
rate interest on the majority of the Company's loans, thereby giving security
over future loan interest cash flows.
Currency risk is the risk that changes in foreign exchange rates will impact
future profits and net assets.
Covid-19
The Covid-19 pandemic is a risk to the global economy. Details of the
macroeconomic impact, as it may affect the Company, are provided in the
Chairman's Statement and Investment Report. The situation continues to
change and future cashflows and valuations are more uncertain and may be more
volatile than pre-pandemic. Indeed, the level of estimation uncertainty and
judgement for the calculation of expected credit losses has increased as a
result of the economic effects of the Covid-19 pandemic (see note 4 for
further details). However, the Directors believe that the Company is well
placed to survive the impact of the Covid-19 pandemic, thereby enabling the
Company to realise its assets in an orderly manner.
Russian Invasion of Ukraine and the subsequent energy crisis
Russia's invasion of Ukraine is a risk to the global economy. The invasion
itself and resulting international sanctions on Russia are believed to have
already caused substantial economic damage to that country, which is likely to
worsen the longer the sanctions are in place, and has had some wider global
effect on the supply and prices of certain commodities and consequently on
inflation and general economic growth of the global economy. The effects
vary from country to country, depending, for example, on their dependence on
Russian energy supplies, particularly gas, which cannot be so easily
transported and substituted as oil. The full effects will take time to flow
through fully and manifest themselves in the balance sheets of companies and
impact their ability to repay loans. In this context, we can only express
reservations on the near-term impact on credit risk and the impairment of
securities, which may be more volatile as a result of the Russian invasion and
the subsequent energy crisis.
Credit risk
The Company invests in a range of secured loan assets mainly through wholesale
secured lending opportunities, secured trade and receivable finance and other
collateralised lending opportunities. The Company is also exposed to direct
loans. Significant due diligence is undertaken on the borrowers of these
loans and security taken to cover the loans and to mitigate the credit risk on
such loans.
The key factor in underwriting secured loans is the predictability of cash
flows to allow the borrower to perform as per the terms of the contract.
Following the change of investment objective on 17 September 2020, the Company
ceased to make any new investments or to undertake capital expenditure except
where, in the opinion of both the Board and the Former Investment Manager (or,
where relevant, the Former Investment Manager's successors):
- the investment is a follow-on investment made in connection with
an existing asset in order to comply with the Company's pre-existing
obligations; or
- failure to make the follow-on investment may result in a breach
of contract or applicable law or regulation by the Company; or
- the investment is considered necessary to protect or enhance the
value of any existing investments or to facilitate orderly disposals.
The Company's assets are diversified by geography, asset class, and duration,
thereby reducing the impact that investment risk may have on the overall
portfolio. This diversification may reduce as assets are realised, but is an
acceptable, and to some extent unavoidable, risk associated with the
realisation process.
The credit risk associated with the investments is reduced not only by
diversification but also by the use of security. Despite the use of
security, credit risk is not reduced entirely and so the Board monitors the
recoverability of the loans (on an individual loan basis) each month and
impairs loans in accordance with IFRS 9 Financial Instruments.
Regulatory risk
The Company's operations are subject to wide ranging regulations, which
continue to evolve and change. Failure to comply with these regulations
could result in losses and damage to the Company's reputation.
The Company employs third party service providers to ensure that regulations
are complied with.
Reputational risk
Any adverse impact on the Company's reputation would likely result in a fall
in its share price, thereby adversely affecting Shareholders.
Details of the premium/discount of the share price to NAV are disclosed in the
Key Performance Indicators section of the Company's Annual Report and
Financial Statements.
Environment, Employee, Social and Community Issues
As an investment company, the Company does not have any employees or physical
property, and most of its activities are performed by other organisations.
Therefore, the Company does not combust fuel and does not have any greenhouse
gas emissions to report from its operations, nor does it have responsibility
for any other emissions producing sources under the Companies (Directors'
Report) and Limited Liability Partnerships (Energy and Carbon Report)
Regulations 2018.
When making investment decisions, the Former Investment Manager had not,
historically, considered the impact that an entity in which the Company
invested may have on the community. However, whilst the Board believes that
all companies have a duty to consider their impact on the community and the
environment, the Company does not have a direct impact on the community or
environment and, as a result, does not maintain policies in relation to these
matters.
The Board is committed to achieving the best possible risk-adjusted returns
through integrating Environmental, Social and Governance ("ESG")
considerations into its core investment analysis and decision-making process,
whilst being mindful of the managed wind-down of the Company. The Board and
Former Investment Manager recognised the value in considering ESG risks and
the Former Investment Manager had adopted the following ESG approach in
conducting its business:
· Taking into account the non-financial performance of target
companies, specifically related to governance, social and environmental
policy.
· Adopting responsible and ethical approach to governance
including:
- Remuneration of senior management and a policy on bonuses that
is compliant with international standards;
- Implementation of compliance policies and procedures and
on-going monitoring of the firm's systems and controls;
- Implementation of risk controls throughout the business; and
- Consideration of our ethical obligations in all business conduct
(anti money laundering, anti-corruption, reputational due diligence).
· Encouraging a human resource policy which values and respects all
staff members through:
- Objective criteria to measure performance and competencies;
- Support programs requiring senior management involvement in all
staff members career progression; and
- Equality across all staff irrespective of role, gender, race,
age, religious belief or sexual orientation.
Gender Diversity
The Board of Directors of the Company currently comprises two male Directors
and one female Director. Further information in relation to the Board's
policy on diversity can be found in the Directors' Remuneration Report in the
Company's Annual Report and Financial Statements.
Key Performance Indicators
The Board uses the following key performance indicators ("KPIs") to help to
assess the Company's performance against its objectives. Further information
on the Company's performance is provided in the Chairman's Statement and the
Investment Report.
Cash returned to Shareholders
The Company distributes at least 85% of its distributable income by way of
dividends. During any year, the Company may retain some of the distributable
income and use these to smooth future dividend flows.
The Company has announced dividends of £395,000 (0.75p per Ordinary Share)
for the year ended 30 June 2022 (2021: £4,476,000 (8.50p per Ordinary
Share)), being an 11% retention of distributable income (2021: far in excess
of distributable income) for the year (see notes 5 and 21 for further
details). To ensure the tax efficient streaming of qualifying interest
income, the Company may announce an additional dividend for the year ended 30
June 2022, once the tax advisers have finalised the tax computations.
Following the change in investment objective on 17 September 2020, the
Directors consider it important to measure the amount of capital returned to
Shareholders. During the year, £7,636,000 (2021: £10,269,000) (see note 5)
was returned to Shareholders by way of B Share redemptions and £nil (2021:
£5,090,000) (see note 5) was paid to Shareholders by way of dividends. In
addition, during 2021 49,999 Management Shares were bought back for £49,999
and cancelled (see note 20).
NAV and total return
The Directors regard the Company's NAV as a key component to delivering value
to Shareholders, but believe that total return (which includes dividends and B
Share redemptions) is the best measure for shareholder value.
Details of the NAV and total return are disclosed in the Key Points section of
this Annual Financial Report.
Premium/discount of share price to NAV
The Board understand the importance of minimising the discount to NAV at which
the Company's Ordinary Shares trade and the Board regularly monitors the
premium/discount of the price of the Ordinary Shares to the NAV per share.
During the year, the Company traded at an average discount to NAV of 20.9%
(2021: 8.7%). At 30 June 2022, the shares were trading at 12.00p, a 42.1%
discount to NAV (2021: 42.50p, a 17.1% premium to NAV).
David Stevenson
Chairman
7 September 2022
Promoting the Success of the Company
The following disclosure outlines how the Directors have had regard to the
matters set out in Section 172(1)(a) to (f) of the Companies Act 2006.
The Board considers the needs of a number of stakeholders when considering the
long-term future of the Company. The key stakeholders with which the Board has
liaised during the year ended 30 June 2022 were:
· Shareholders; and
· Key service providers.
Shareholders
The Company's significant Shareholders at the year end can be found in the
Directors' Report in the Company's Annual Report and Financial Statements.
When making principal decisions the Board consider it imperative to analyse
the views of the Company's investors to ensure that its decisions are aligned
with the wishes of Shareholders and that the Company can achieve its
Investment Policy (as disclosed in the Company's Annual Report and Financial
Statements). The key performance indicators have been considered on an ongoing
basis as part of the Board's decision making process.
Details of how the Directors communicate with Shareholders can be found in the
Corporate Governance Report in the Company's Annual Report and Financial
Statements.
Other than the routine engagement with investors regarding strategy and
performance, the Company's continuation was discussed with investors. A
continuation vote was held on 19 June 2020 that, in line with the Directors'
recommendation, did not pass. A further general meeting of the Company was
held on 17 September 2020 at which a special resolution approved the managed
wind-down of the Company and the adoption of the new investment policy of the
Company.
Key service providers
Details of the Company's key service providers can be found in the Directors'
Report in the Company's Annual Report and Financial Statements.
The key service providers are fundamental to the Company's ability to continue
in the same state as any changes could disrupt the expected timeliness of
information provided to the markets. In turn, this would be likely to have a
detrimental impact on the Company's reputation. However, on 20 August 2021,
the Company agreed with the Former Investment Manager and its AIFM to amend
the Investment Management Agreement and for the agreement to terminate with
effect from midnight on 31 December 2021. The Board believed that the revised
Agreement provided the Company with certainty over the level of future
management fees payable to the Former Investment Manager with the added
flexibility of facilitating the Company becoming self-managed, whilst
providing for the ongoing management of the portfolio to 31 December 2021.
Overall, it allowed for an orderly transition of the management of the
portfolio to the Company.
The Board has continuous access to the Company's key service providers and has
open two-way communication with them. Key aspects of discussion with these
service providers, other than those regarding Company performance and
strategy, were in respect of fees payable to these providers.
David Stevenson
Chairman
7 September 2022
Statement of Comprehensive Income
for the year ended 30 June 2022
Note Year ended Year ended
30 June 2022 30 June 2021
£'000 £'000
Revenue
Interest income 3f 2,600 4,010
Impairment of interest income 14 (1,195) (877)
------------ ------------
Net interest income 1,405 3,133
------------ ------------
Total revenue 1,405 3,133
------------ ------------
Operating expenses
Directors' remuneration 8 (195) (119)
Other expenses 11 (172) (203)
Management fees 7a (133) (309)
Administration fees 7b (118) (130)
Legal and professional fees (109) (139)
Audit fees 10 (71) (46)
Consultancy fees 7c (71) -
------------ ------------
Total operating expenses (869) (946)
------------ ------------
Investment gains and losses
Movement in unrealised gains and losses on loans due to movement in foreign 14, 23 363 (1,283)
exchange on non-Sterling loans
Movement in impairment losses on financial assets (or loans) 14 720 (9,657)
Realised loss on disposal of loans (2,186) (2,544)
Movement in unrealised loss on investments at fair value through profit or 15 - (92)
loss
Movement in unrealised gain on derivative financial instruments 16, 23 - 6
Realised gain on disposal of investments at fair value through profit or loss - 94
Realised gain on derivative financial instruments 16, 23 - 269
------------ ------------
Total investment gains and losses (1,103) (13,207)
------------ ------------
Net loss from operating activities before gain on foreign currency exchange (567) (11,020)
Net foreign exchange gain 23 13 3
------------ ------------
Loss and total comprehensive income for the year attributable to the owners of (554) (11,017)
the Company
------------ ------------
Loss per Ordinary Share (basic and diluted) 13 (1.05)p (20.92)p
------------ ------------
There were no other comprehensive income items in the year.
Except for unrealised investment gains and losses, all of the Company's profit
and loss items are distributable.
The accompanying notes form an integral part of the financial statements.
Statement of Changes in Equity
for the year ended 30 June 2022
Note Called up share capital Capital redemption reserve Special distributable reserve Profit and loss account Total
£'000 £'000 £'000 £'000 £'000
At 1 July 2020 577 - 48,181 (3,226) 45,532
Loss for the year 21 - - - (11,017) (11,017)
Transactions with Owners in their capacity as owners:
Dividends paid 5,21 - - (4,324) (766) (5,090)
B Shares issued during the year 5, 20, 21 10,269 - (10,269) - -
B Shares redeemed during the year 5, 20, 21 (10,269) 10,269 (10,269) - (10,269)
Management Share buy backs 20, 21 (50) 50 (50) - (50)
------------ ------------ ------------ ------------ ------------
At 30 June 2021 527 10,319 23,269 (15,009) 19,106
Loss for the year 21 - - - (554) (554)
Transactions with Owners in their capacity as owners:
Dividends paid 5,21 - - - - -
B Shares issued during the year 5, 20, 21 7,636 - (7,636) - -
B Shares redeemed during the year 5, 20, 21 (7,636) 7,636 (7,636) - (7,636)
------------ ------------ ------------ ------------ ------------
At 30 June 2022 527 17,955 7,997 (15,563) 10,916
------------ ------------ ------------ ------------ ------------
There were no other comprehensive income items in the year.
The above amounts are all attributable to the owners of the Company.
The accompanying notes on form an integral part of the financial statements.
Statement of Financial Position
as at 30 June 2022
Note 30 June 2022 30 June 2021
£'000 £'000
Non-current assets
Loans at amortised cost 14 3,440 7,336
------------ ------------
Total non-current assets 3,440 7,336
------------ ------------
Current assets
Loans at amortised cost 14 4,807 7,333
Other receivables and prepayments 17 65 189
Cash and cash equivalents 2,770 4,396
------------ ------------
Total current assets 7,642 11,918
------------ ------------
Total assets 11,082 19,254
------------ ------------
Current liabilities
Other payables and accruals 18 (166) (148)
------------ ------------
Total liabilities (166) (148)
------------ ------------
------------ ------------
Net assets 10,916 19,106
------------ ------------
Capital and reserves attributable to owners of the Company
Called up share capital 20 527 527
Other reserves 21 10,389 18,579
------------ ------------
Equity attributable to the owners of the Company 10,916 19,106
------------ ------------
Net asset value per Ordinary Share 22 20.73p 36.28p
------------ ------------
These financial statements of Secured Income Fund plc (registered number
09682883) were approved by the Board of Directors on 7 September 2022 and were
signed on its behalf by:
David Stevenson Gaynor Coley
Chairman Director
7 September 2022 7 September 2022
The accompanying notes form an integral part of the financial statements.
Statement of Cash Flows
for the year ended 30 June 2022
Year ended 30 June 2022 Year ended 30 June 2021
£'000 £'000
Cash flows from operating activities
Net loss before taxation (554) (11,017)
Adjustments for:
Movement in unrealised gains and losses on loans due to movement in foreign (363) 1,283
exchange on non-Sterling loans
Movement in impairment losses on financial assets (or loans) (720) 9,657
Realised loss on disposal of loans 2,186 2,544
Amortisation of transaction fees 28 46
Movement in unrealised loss on investments at fair value through profit or - 92
loss
Movement in unrealised gain on derivative financial instruments - (6)
Realised gain on disposal of investments at fair value through profit or loss - (94)
Realised gain on derivative financial instruments - (269)
Interest received and reinvested by platforms - (1)
Capitalised interest - (1,174)
Decrease in investments 5,291 16,131
------------ ------------
Net cash inflow from operating activities before working capital changes 5,868 17,192
Decrease in other receivables and prepayments 124 1,436
Increase/(decrease) in other payables and accruals 18 (16)
------------ ------------
Net cash inflow from operating activities 6,010 18,612
Cash flows from financing activities
B Share scheme redemptions (7,636) (10,269)
Dividends paid - (5,090)
Management share buy backs - (50)
------------ ------------
Net cash outflow from financing activities (7,636) (15,409)
------------ ------------
(Decrease)/increase in cash and cash equivalents in the year (1,626) 3,203
Cash and cash equivalents at the beginning of the year 4,396 1,193
------------ ------------
Cash and cash equivalents at the year end 2,770 4,396
------------ ------------
Supplemental cash flow information
Non-cash transaction - interest income - 1,175
The accompanying notes form an integral part of the financial statements.
Notes to the Financial Statements
for the year ended 30 June 2022
1. General information
The Company is a public company (limited by shares) and was incorporated and
registered in England and Wales under the Companies Act 2006 on 13 July 2015
with registered number 09682883. The Company's shares were admitted to trading
on the London Stock Exchange Specialist Fund Segment on 23 September 2015
("Admission"). The Company is domiciled in England and Wales.
The Company is an investment company as defined in s833 of the Companies Act
2006.
The Investment Management Agreement between the Company and KKV Investment
Management Ltd was terminated on 31 December 2021. There has been a smooth
transition of management back to the Company, which has been facilitated by
retaining key personnel. Furthermore, with effect from 31 December 2021, the
Company has been approved by the FCA as a Small Registered UK AIFM.
2. Statement of compliance
a) Basis of preparation
These financial statements present the results of the Company for the year
ended 30 June 2022. These financial statements have been prepared in
accordance with UK-adopted International Accounting Standards.
The Company's capital is raised in Sterling, expenses are paid in Sterling,
the majority of the Company's financial assets and liabilities are Sterling
based, and (until September 2020) the Company hedged substantially all of its
foreign currency risk back to Sterling. Therefore, the Board of Directors
consider that Sterling most faithfully represents the economic effects of the
underlying transactions of the Company, events and conditions. These financial
statements are presented in Sterling, which is the Company's functional and
presentation currency. All amounts are rounded to the nearest thousand.
Financial statements prepared on a non-going concern basis
On 19 June 2020, the Company held a continuation vote (the "Continuation
Vote") that, in line with the Directors' recommendation, did not pass. This
vote was required under the Articles as the Company did not have a Net Asset
Value of at least £250 million as at 31 December 2019. As this vote did not
pass, the Directors (as required under the Articles) convened a further
general meeting of the Company on 17 September 2020 at which a special
resolution approved the managed wind-down of the Company and the adoption of
the new investment policy of the Company, as set out in the Company's Annual
Report and Financial Statements, to carry out an orderly realisation of the
Company's portfolio of assets and distribution of cash to Shareholders.
This has had no significant impact on the accounting policies, judgements or
recognition of and carrying value of assets and liabilities within the
financial statements as the loans are included net of their expected credit
loss provision ("ECL") and are expected to be realised in an orderly manner,
and the estimated costs of winding up the Company are immaterial and therefore
have not been provided for in the financial statements.
The ongoing Covid-19 pandemic, the Russian invasion of Ukraine and the
subsequent energy crisis are risks to the global economy. Details of the
impact, as they may affect the Company, are provided in the Chairman's
Statement, Investment Report and note 4. The Directors believe that the
Company is well placed to survive the impact of the Covid-19 pandemic, the
Russian invasion of Ukraine and the subsequent energy crisis, thereby enabling
the Company to realise its assets in an orderly manner.
b) Basis of measurement
The financial statements have been prepared on a historical cost basis, except
for investments at fair value through profit or loss and derivative
instruments, which are measured at fair value through profit or loss.
Given the Company's investment policy to carry out an orderly realisation of
the Company's portfolio of assets and distribution of cash to Shareholders,
the financial statements have been prepared on a non-going concern basis.
c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
economic segment of business, being investment in a range of SME loan assets.
Consequently, no segmental analysis is required.
d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect the
application of policies and the reported amounts of assets and liabilities,
income and expenses. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis of
making the judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from
these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised, if the revision affects only that period, or in the
period of the revision and future periods, if the revision affects both
current and future periods.
Judgements made by management in the application of IFRS that have a
significant effect on the financial statements and estimates with a
significant risk of material adjustment in the next year are discussed in note
4.
3. Significant accounting policies
a) Foreign currency
Foreign currency transactions are translated into Sterling using the exchange
rates prevailing at the dates of the transactions. Foreign exchange gains
and losses resulting from the settlement of such transactions and from the
translation at period-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the Statement of
Comprehensive Income. Translation differences on non-monetary financial
assets and liabilities are recognised in the Statement of Comprehensive
Income.
b) Financial assets and liabilities
The financial assets and liabilities of the Company are defined as loans,
bonds with loan type characteristics, investments at fair value through profit
or loss, cash and cash equivalents, other receivables, derivative instruments
and other payables.
Classification
IFRS 9 requires the classification of financial assets to be determined on
both the business model used for managing the financial assets and the
contractual cash flow characteristics of the financial assets. Loans have
been classified at amortised cost as:
- they are held within a "hold to collect" business model with the
objective to hold the assets to collect contractual cash flows; and
- the contractual terms of the loans give rise on specified dates to
cash flows that are solely payments of principal and interest on the principal
amount outstanding.
Although there has been a change in the investment objective and policy, there
has been no change in the business model as the loans continued to be held
under a 'hold to collect' model.
The Company's unquoted investments have been classified as held at fair value
through profit or loss as they are held to realise cash flows from the sale of
the investments.
Recognition
The Company recognises a financial asset or a financial liability when, and
only when, it becomes a party to the contractual provisions of the
instrument. Purchases and sales of financial assets that require delivery of
assets within the time frame generally established by regulation or convention
in the marketplace are recognised on the trade date, i.e. the date that the
Company commits to purchase or sell the asset.
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part
of a group of similar assets) is derecognised where:
- The rights to receive cash flows from the asset have expired;
or
- The Company has transferred its rights to receive cash flows
from the asset or has assumed an obligation to pay the received cash flows in
full without material delay to a third party under a "pass-through"
arrangement; and
- Either (a) the Company has transferred substantially all the
risks and rewards of the asset, or (b) the Company has neither transferred nor
retained substantially all the risks and rewards of the asset, but has
transferred control of the asset.
When the Company has transferred its rights to receive cash flows from an
asset (or has entered into a pass-through arrangement) and has neither
transferred nor retained substantially all the risks and rewards of the asset
nor transferred control of the asset, the asset is recognised to the extent of
the Company's continuing involvement in the asset.
The Company derecognises a financial liability when the obligation under the
liability is discharged, cancelled or expires.
Initial measurement
Financial assets and financial liabilities at fair value through profit or
loss are recorded in the Statement of Financial Position at fair value. All
transaction costs for such instruments are recognised directly in profit or
loss.
Financial assets and financial liabilities not designated as at fair value
through profit or loss, such as loans, are initially recognised at fair value,
being the amount issued less transaction costs.
Subsequent measurement
After initial measurement, the Company measures financial assets and financial
liabilities not designated as at fair value through profit or loss, at
amortised cost using the effective interest rate method, less impairment
allowance. Gains and losses are recognised in the Statement of Comprehensive
Income when the asset or liability is derecognised or impaired. Interest
earned on these instruments is recorded separately as investment income.
After initial measurement, the Company measures financial instruments which
are classified at fair value through profit or loss at fair value.
Subsequent changes in the fair value of those financial instruments are
recorded in net gain or loss on financial assets and liabilities at fair value
through profit or loss.
The carrying value of cash and cash equivalents and other receivables and
payables equals fair value due to their short-term nature.
Impairment
A financial asset is credit-impaired when one or more events that have
occurred have a significant impact on the expected future cash flows of the
financial asset. It includes observable data that has come to the attention
of the holder of a financial asset about the following events:
· Significant financial difficulty of the issuer or borrower;
· A breach of contract, such as a default or past-due event;
· The lenders for economic or contractual reasons relating to the
borrower's financial difficulty granted the borrower a concession that would
not otherwise be considered;
· It becoming probable that the borrower will enter bankruptcy or
other financial reorganisation;
· The disappearance of an active market for the financial asset
because of financial difficulties; or
· The purchase or origination of a financial asset at a deep
discount that reflects incurred credit losses.
Each direct loan is assessed on a continuous basis by the Board and, prior to
31 December 2021, the Former Investment Manager's own underwriting team with
peer review occurring on a regular basis.
Each platform loan is monitored via the company originally deployed to conduct
underwriting and management of the borrower relationship. When a potential
impairment is identified, the Board and Investment Consultant (prior to 31
December 2021, the Former Investment Manager) requests data and management
information from the platform. The Board and Investment Consultant (prior to
31 December 2021, the Former Investment Manager) will then actively pursue
collections, giving guidance to the platforms on acceptable levels of
impairment. In some cases, the Board and Investment Consultant (prior to 31
December 2021, the Former Investment Manager) will proactively take control of
the process.
Impairment of financial assets is recognised on a loan-by-loan basis in
stages:
Stage 1: As soon as a financial instrument is originated or purchased, 12-month
expected credit losses are recognised in profit or loss and a loss allowance
is established. This serves as a proxy for the initial expectations of
credit losses. For financial assets, interest revenue is calculated on the
gross carrying amount (i.e. without deduction for expected credit losses).
Stage 2: If the credit risk increases significantly and is not considered low, full
lifetime expected credit losses are recognised in profit or loss. The
calculation of interest revenue is the same as for Stage 1. This stage is
triggered by scrutiny of management accounts and information gathered from
regular updates from the borrower by way of email exchange or face-to-face
meetings. The Board (prior to 31 December 2021, the Former Investment
Manager) extends specific queries to borrowers if they acquire market
intelligence or channel-check the data received. A covenant breach may be a
temporary circumstance due to a one-off event and will not trigger an
immediate escalation in risk profile to stage 2.
At all times, the Board (prior to 31 December 2021, the Former Investment
Manager) considers the risk of impairment relative to the cash flows and
general trading conditions of the company and the industry in which the
borrower resides.
Stage 3: If the credit risk of a financial asset increases to the point that it is
considered credit-impaired, interest revenue is calculated based on the
amortised cost (i.e. the gross carrying amount less the loss allowance).
Financial assets in this stage will generally be assessed individually.
Lifetime expected credit losses are recognised on these financial assets.
This stage is triggered by a marked deterioration in the management
information received from the borrower and a view taken on the overall credit
conditions for the sector in which the company resides. A permanent breach
of covenants and a deterioration in the valuation of security would also merit
a move to stage 3.
The Board (prior to 31 December 2021, the Former Investment Manager) also
takes into account the level of security to support each loan and the ease
with which this security can be monetised. This has a meaningful impact on
the way in which impairments are assessed, particularly as the Former
Investment Manager had a very strong track record in managing write-downs and
reclaim of assets.
For more details in relation to judgements, estimates and uncertainty see note
4.
c) Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits and
short-term, highly liquid investments readily convertible to known amounts of
cash and subject to insignificant risk of changes in value.
The carrying values of cash and cash equivalents are deemed to be a reasonable
approximation of their fair values.
d) Receivables and prepayments
Receivables are carried at the original invoice amount, less impairments, as
discussed above.
The carrying values of the accrued interest and other receivables are deemed
to be reasonable approximations of their fair values.
e) Transaction costs
Transaction costs incurred on the acquisition of loans are capitalised upon
recognition of the financial asset and amortised over the term of the
respective loan.
f) Income and expenses
Interest income and bank interest are recognised on a time-proportionate basis
using the effective interest rate method.
Dividend income is recognised when the right to receive payment is
established.
All expenses are recognised on an accruals basis. All of the Company's
expenses (with the exception of share issue costs, which are charged directly
to the special distributable reserve) are charged through the Statement of
Comprehensive Income in the period in which they are incurred.
g) Taxation
The Company is exempt from UK corporation tax on its chargeable gains as it
satisfies the conditions for approval as an investment trust. The Company
is, however, liable to UK corporation tax on its income. However, the
Company has elected to take advantage of modified UK tax treatment in respect
of its "qualifying interest income" in order to deduct all, or part, of the
amount it distributes to Shareholders as dividends as an "interest
distribution".
h) B Shares
B Shares are redeemable at the Company's option and are classified as equity
as the potential indicator of a liability, being the fixed rate cumulative
dividend, is immaterial given the shares are allotted and redeemed on the same
day. B Shares, which are redeemed immediately following issue, are measured at
the redemption amount.
i) Reserves
Under the Company's articles of association, the Directors may, having
obtained the relevant authority of Shareholders pursuant to the implementation
of the B share scheme, capitalise any sum standing to the credit of any
reserve of the Company for the purposes of paying up, allotting and issuing B
Shares to Shareholders.
(i) Capital Redemption Reserve
The nominal value of Ordinary Shares if bought back and cancelled and the
nominal value of B Shares redeemed and subsequently cancelled are added to
this reserve. This reserve is non-distributable.
(ii) Special Distributable Reserve
During the period ended 30 June 2016, and following the approval of the Court,
the Company cancelled the share premium account and transferred £51,143,000
to a special distributable reserve, being premium on issue of shares of
£52,133,000 less share issue costs of £990,000. The special distributable
reserve is available for distribution to Shareholders, including the payment
of dividends, return capital to shareholders, buy back of Ordinary Shares or
redemption of B Shares.
(iii) Profit and loss account - distributable
The net profit/loss arising from realised revenue (income, expenses, foreign
exchange gains and losses and taxation) in the Statement of Comprehensive
Income is added to this reserve, along with realised gains and losses on the
disposal of financial assets and derivative positions. Dividends paid during
the year are deducted from this reserve, where sufficient reserves are
available.
(iv) Profit and loss accounts - non-distributable
Unrealised gains and losses on financial assets and derivative positions are
taken to this reserve.
j) Changes in accounting policy and disclosures
New and amended standards and interpretations
The accounting policies adopted are consistent with those of the previous
financial year, except as outlined below. The Company adopted the following
new and amended relevant IFRS in the year:
IFRS 7 Financial Instruments: Disclosures - amendments regarding replacement issues
in the context of the IBOR reform
IFRS 9 Financial Instruments - amendments regarding replacement issues in the context
of the IBOR reform
The adoption of these accounting standards did not have any impact on the
Company's Statement of Comprehensive Income, Statement of Financial Position
or equity. A number of other amendments and interpretations are applicable
for the year but are not relevant to the Company.
k) Accounting standards issued but not yet effective
The International Accounting Standards Board ("IASB") has issued/revised a
number of relevant standards with an effective date after the date of these
financial statements. Any standards that are not deemed relevant to the
operations of the Company have been excluded. The Directors have chosen not
to early adopt these standards and interpretations and they do not anticipate
that they would have a material impact on the Company's financial statements
in the period of initial application.
Effective date
IFRS 9 Financial Instruments - Amendments resulting from Annual Improvements to IFRS
Standards 2018-2020 (fees in the "10 per cent" test for derecognition of
financial liabilities) 1 January 2022
IAS 1 Presentation of Financial Statements - amendments regarding the classification
of liabilities
1 January 2023
Presentation of Financial Statements - amendments to defer the effective date
of the January 2020 amendments
Presentation of Financial Statements - amendments regarding the disclosure of 1 January 2023
accounting policies
1 January 2023
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors - Amendments
regarding the definition of accounting estimate
1 January 2023
IAS 37 Provisions, Contingent Liabilities and Contingent Assets - Amendments
regarding the costs to include when assessing whether a contract is onerous
1 January 2022
4. Use of judgements and estimates
The preparation of the Company's financial statements requires the Directors
to make judgements, estimates and assumptions that affect the reported amounts
recognised in the financial statements. However, uncertainty about these
assumptions and estimates could result in outcomes that could require a
material adjustment to the carrying amount of the asset or liability in future
periods.
Judgements
In the process of applying the Company's accounting policies, management made
the following judgements, which has had a significant effect on the amounts
recognised in the financial statements:
Covid-19
The ongoing Covid-19 pandemic is a risk to the global economy. Details of the
macroeconomic impact, as it may affect the Company, are provided in the
Chairman's Statement and Investment Report. The situation continues to
change and future cashflows and valuations are more uncertain and may be more
volatile than pre-pandemic. Indeed, the level of estimation uncertainty and
judgement for the calculation of expected credit losses has increased as a
result of the economic effects of the Covid-19 pandemic. However, the
Directors believe that the Company is well placed to survive the impact of the
Covid-19 pandemic, thereby enabling the Company to realise its assets in an
orderly manner.
Russian Invasion of Ukraine and the subsequent energy crisis
Russia's invasion of Ukraine is a risk to the global economy. The invasion
itself and resulting international sanctions on Russia are believed to have
already caused substantial economic damage to that country, which is likely to
worsen the longer the sanctions are in place, and has had some wider global
effect on the supply and prices of certain commodities and consequently on
inflation and general economic growth of the global economy. The effects
vary from country to country, depending, for example, on their dependence on
Russian energy supplies, particularly gas, which cannot be so easily
transported and substituted as oil. The full effects will take time to flow
through fully and manifest themselves in the balance sheets of companies and
impact their ability to repay loans. In this context, we can only express
reservations on the near-term impact on credit risk and the impairment of
securities, which may be more volatile as a result of the Russian invasion and
the subsequent energy crisis.
Classification of B Shares
The B Shares pay a fixed rate cumulative preferential cash dividend of 1% per
annum of the nominal value of £1, and have limited rights, including that:
the holders of the B Shares shall not be entitled to any further right of
participation in the profits or assets of the Company; and the B Shares are
redeemable at the Company's option.
However, as the potential indicator of a liability, being the fixed rate
cumulative dividend, is immaterial given the B Shares are allotted and
redeemed on the same day, the B Shares are classified as equity.
B Shares, which are redeemed immediately following issue, are measured at the
redemption amount.
Estimates and assumptions
The Company based its assumptions and estimates on parameters available when
the financial statements were approved. However, existing circumstances and
assumptions about future developments may change due to market changes or
circumstances arising beyond the control of the Company. Such changes are
reflected in the assumptions when they occur.
The current economic uncertainty (and the frequent changes in outlook for
different economic sectors) has created increased volatility and uncertainty
(as mentioned above and in the Investment Report). In such circumstances the
level of estimation uncertainty and judgement of expected credit losses has
increased. As noted in the Investment Report, there are uncertainties about
the need for future provisions that may need to be made against individual
loans and receivables. Notwithstanding the best endeavours of management to
obtain full repayment there is an inherent uncertainty in relation to the
level of provisioning made in these financial statements. The Board has
updated the expected credit loss assessment (as set out in note 3b) to the
best of its knowledge at the time of signing these financial statements to
reflect the likely impact on the Company's loan portfolio.
i) Recoverability of loans and other receivables
In accordance with IFRS 9, the impairment of loans and other receivables has
been assessed as described in note 3b. When assessing the credit loss on a
loan, and the stage of impairment of that loan, the Company considers whether
there is an indicator of credit risk for a loan when the borrower has failed
to make a payment, either capital or interest, when contractually due and upon
assessment. The Company assesses at each reporting date (and at least on a
monthly basis) whether there is objective evidence that a loan classified as a
loan at amortised cost is credit-impaired and whether a loan's credit risk or
the expected loss rate has changed significantly. As part of this process:
· Platforms are contacted to determine default and delinquency
levels of individual loans; and
· Recovery rates are estimated.
The analysis of credit risk is based on a number of factors and a degree of
uncertainty is inherent in the estimation process.
As mentioned above, due to the Covid-19 pandemic future cashflows and
valuations are more uncertain at the current time, and may be more volatile
than in recent years. Indeed, the level of estimation uncertainty and
judgement for the calculation of expected credit losses has increased as a
result of the economic effects of the Covid-19 pandemic, the Russian invasion
of Ukraine and the subsequent energy crisis.
The determination of whether a specific factor is relevant and its weight
compared with other factors depends on the type of product, the
characteristics of the financial instrument and the borrower, and the
geographical region. It is not possible to provide a single set of criteria
that will determine what is considered to be a significant increase in credit
risk. Events that the Company will assess when deciding if a financial asset
is credit impaired include:
· significant financial difficulty of the borrower;
· a breach of contract, such as a default or past-due event; and
· it becoming probable that the borrower will enter bankruptcy or
other financial reorganisation.
Although it may not always be the case (e.g. if discussions with a borrower
are ongoing), generally a loan is deemed to be in default if the borrower has
missed a payment of principal or interest by more than 180 days, unless the
Company has good reason not to apply this rule. If the Company has evidence to
the contrary, it may make an exception to the 180 day rule to deem that a
borrower is, or is not, in default. Therefore, the definitions of credit
impaired and default are aligned as far as possible so that stage 3 represents
all loans that are considered defaulted or otherwise credit impaired.
IFRS 9 confirms that a Probability of Default ("PD") must never be zero as
everything is deemed to have a risk of default; this has been incorporated
into the assessment of expected credit losses. All PDs are assessed against
historic data as well as the prevailing economic conditions at the reporting
date, adjusted to account for estimates of future economic conditions that are
likely to impact the risk of default.
Since November 2020, 12-month PD has been calculated based on a 10 level
grading system, where:
· levels 1 to 6 fall into Stage 1, with 12-month PD ranging from
0.01% to 10%;
· levels 7 to 9 fall into Stage 2, with 12-month PD ranging from
20% to 60%, and
· level 10 falls into Stage 3, with a 12-month PD of 100%.
Prior to November 2020, 12-month PD was applied across the collective as a
cumulative in Stage 1, set at 2% in line with the Former Investment Manager's
historic performance data, market knowledge, and credit enhancements (that was
equivalent to there being 1 default for an average portfolio of 50 unique
borrowers). Once an investment moved to Stage 2 then PD was calculated on an
individual basis (and adjusted for Stage 3 if appropriate).
All assessment is based on reasonable and supportive information available at
the time.
Since November 2020, 12-month ECL has been calculated based on the following
categorisation:
Category Loss given default ("LGD") approach
Easily Realisable Asset value less 10% haircut discounted at 10% IRR for 12 months to recovery
Realisable Asset value less 20% discounted at 20% IRR for 2 years to recovery
Highly Specialised/Unsecured 70% LGD
Subordinated Debt 100% LGD
Prior to November 2020, 12-month ECL was applied across the collective as a
cumulative in Stage 1, split according to the investment's classification. For
direct loan investments this was calculated as 2% of the individual
investment's Contracted Cash Flows ("CCF"), and 2% of the investment's CCF for
platform investments. Those Stage 1 12-month ECL amounts were taken to be the
investments' floor amounts - the Lifetime ECL for any investment could never
be less than its floor amount. Once an investment moved to Stage 2, Lifetime
ECL was calculated on an individual basis.
Lifetime ECL is reviewed at each reporting date based on reasonable and
supportive information available at the time.
Details of the judgements applied in assessing the recoverability of loans can
be found in the Investment Report and should be read in conjunction with the
current economic environment and, in particular, the impact of Covid-19.
Collateral
While the presence of collateral is not a key element in the assessment of
whether there has been a significant increase in credit risk, it is of great
importance in the measurement of ECL. IFRS 9 states that estimates of cash
shortfalls reflect the cash flows expected from collateral and other credit
enhancements that are integral to the contractual terms. This is a key
component of the Company's ECL measurement and interpretation of IFRS 9, as
any investment would include elements of (if not all): a fully collateralised
position, fixed and floating charges, a corporate guarantee, a personal
guarantee.
Loans written off
Financial assets (and the related impairment allowances) are normally written
off, either partially or in full, when there is no realistic prospect of
recovery. Where loans are secured, this is generally after receipt of any
proceeds from the realisation of security. In circumstances where the net
realisable value of any collateral has been determined and there is no
reasonable expectation of further recovery, write-off may be earlier.
Platform loans of £1,880,000 were written off in the year (2021:
£1,887,000).
Renegotiated loans
A loan is classed as renegotiated when the contractual payment terms of the
loan are modified because the Company has significant concerns about a
borrower's ability to meet payments when due. On renegotiation, the loan will
also be classified as credit impaired, if it is not already. Renegotiated
loans will continue to be considered to be credit impaired until there is
sufficient evidence to demonstrate a significant reduction in the risk of
non-payment of future payments.
In addition to the methodology used, the Company has taken impairment data
from Platforms for the assessment of loans with third party exposure, which
was consistent with the approach the Board would have expected to take in
those circumstances as at 30 June 2022.
There were no new assets originated during the year that were credit-impaired
at the point of initial recognition. There were no financial assets that have
been modified since initial recognition at a time when the loss allowance was
measured at an amount equal to lifetime expected credit losses and for which
the loss allowance changed during the year to an amount equal to 12-month
expected credit losses.
There were no financial assets for which cash flows were modified in the year
while they had a loss allowance measured at an amount equal to the lifetime
expected credit loss.
Please see note 3b, note 14 and note 23 for further information on the loans
at amortised cost and credit risk.
5. Dividends
The Company distributes at least 85% of its distributable income earned in
each financial year by way of dividends.
The Company elected to designate all of the dividends for the year ended 30
June 2022 as interest distributions to its Shareholders. In doing so, the
Company took advantage of UK tax treatment by "streaming" income from
interest-bearing investments into dividends that will be taxed in the hands of
Shareholders as interest income.
To date, the Company has declared the following dividends in respect of
earnings for the year ended 30 June 2022:
Announcement date Pay date Total dividend declared in respect of earnings in the year Amount per
Ordinary Share
£'000
2 September 2022 7 October 2022 395 0.75p
------------ ------------
Dividends declared (to date) for the year 395 0.75p
Less, dividends paid after the year end (395) (0.75)p
------------ ------------
Dividends paid in the year - -
------------ ------------
In accordance with UK-adopted International Accounting Standards, dividends
are only provided for when they become a contractual liability of the
Company. Therefore, during the year a total of £nil (2021: £5,090,000) was
incurred in respect of dividends, none of which was outstanding at the
reporting date (2021: none).
All dividends in the year were paid out of revenue (and not capital) profits.
Mechanics for returning cash to Shareholders
The Board carefully considered the potential mechanics for returning cash to
Shareholders and the Company's ability to do so. The Board believes it is in
the best interests of Shareholders as a whole to make distributions to
Shareholders without a significant delay following realisations of a material
part of the Portfolio (whether in a single transaction or through multiple,
smaller transactions concluded on similar timing), whether by dividend or
other method.
After careful consideration and discussions with a number of Shareholders, the
Board believes that one of the fairest and most cost-efficient ways of
returning substantial amounts of cash to Shareholders is by adopting a B Share
Scheme, whereby the Company will be able to issue redeemable B Shares to
Shareholders. These are then redeemed on a Redemption Date without further
action being required by Shareholders.
The B Shares are issued out of the special distributable reserve, then the
special distributable reserve is utilised again when the B Shares are redeemed
- the B Share capital is cancelled and an equal amount credited to the capital
redemption reserve.
The Company made three B Share Scheme redemptions in the year, totalling
£7,636,000 (2021: £10,269,000), equivalent to 14.50p per Ordinary Share
(2021: 19.50p).
The Board also intends to make dividend payments to maintain investment trust
status for so long as the Company remains listed.
6. Related parties
As a matter of best practice and good corporate governance, the Company has
adopted a related party policy which applies to any transaction which it may
enter into with any Director, the Investment Consultant and (prior to 1
January 2022), the Former Investment Manager, or any of their affiliates which
would constitute a "related party transaction" as defined in, and to which
would apply, Chapter 11 of the Listing Rules. In accordance with its related
party policy, the Company obtained: (i) the approval of a majority of the
Directors; and (ii) a third-party valuation in respect of these transactions
from an appropriately qualified independent adviser.
See notes 7 and 8 for further details.
7. Key contracts
a) Former Investment Manager
The Former Investment Manager had responsibility for managing the Company's
portfolio until 31 December 2021. For their services, until 16 September
2020, the Former Investment Manager was entitled to a management fee at a rate
equivalent to the following schedule (expressed as a percentage of NAV per
annum, before deduction of accruals for unpaid management fees for the current
month):
· 1.0% per annum for NAV lower than or equal to £250 million;
· 0.9% per annum for NAV greater than £250 million and lower than
or equal to £500 million; and
· 0.8% per annum for NAV greater than £500 million.
From 17 September 2020, the 1.0% per annum base management fee was reduced as
follows:
· for 12 months from 17 September 2020 to 16 September 2021, to
0.75% per annum of the Company's NAV; and
· from 17 September 2021, to 0.55% of the Company's NAV.
On 20 August 2021, the Company agreed with the Former Investment Manager and
its AIFM to amend the Investment Management Agreement and for the agreement to
terminate with effect from midnight on 31 December 2021.
The key terms of the revised agreement were as follows:
· Management fees payable by the Company to the Former
Investment Manager of £20,500 per month from 1 August 2021 to 31 December
2021;
· A payment of £20,000 in total payable by the Company to the
Former Investment Manager, but conditional on a senior employee providing
continued services to the Company to 31 December 2021; and
· The agreement terminated with effect from midnight on 31
December 2021. No party had the right to terminate the agreement prior to this
date without cause. No fees were payable by either party on termination other
than the amount referred to above.
The Board believed that the revised Agreement provided the Company with
certainty over the level of future management fees payable to the Former
Investment Manager with the added flexibility of facilitating the Company
becoming self-managed, whilst providing for the ongoing management of the
portfolio to 31 December 2021. Overall, it allowed for an orderly transition
of the management of the portfolio to the Company.
The management fee was payable monthly in arrears on the last calendar day of
each month.
During the year, a total of £133,000 (2021: £309,000) was incurred in
respect of management fees, none of which was payable at the reporting date
(2021: £25,000).
Performance fee
From 17 September 2020, the Former Investment Manager was entitled to a
performance fee. During the year, no performance fee was paid, or payable, to
the Former Investment Manager (2021: none).
The performance fee ceased with effect from 1 January 2022, following the
termination of the Investment Management Agreement on 31 December 2021.
Transaction costs
Prior to the change in the investment policy, the Company incurred transaction
costs for the purposes of structuring investments for the Company. These
costs formed part of the overall transaction costs that were capitalised at
the point of recognition and were taken into account when pricing a
transaction. When structuring services were provided by the Investment Manager
(incumbent at the time of the transaction) or an affiliate of them, they were
entitled to charge an additional fee to the Company equal to up to 1.0% of the
cost of acquiring the investment (ignoring gearing and transaction expenses).
This cost was not charged in respect of assets acquired from the Former
Investment Manager (incumbent at the time of the transaction), the funds they
managed or where they or their affiliates did not provide such structuring
advice.
During the year, transaction costs of £28,000 (2021: £46,000) were
amortised.
b) Administration fees
Elysium Fund Management Limited ("Elysium") is entitled to an administration
fee of £100,000 per annum in respect of the services provided in relation to
the administration of the Company, together with time-based fees in relation
to work on investment transactions. During the year, a total of £118,000
(2021: £130,000) was incurred in respect of administration fees, of which
£33,000 (2021: £37,000) was payable at the reporting date.
c) Consultancy fees
With effect from 1 January 2022, the Company entered into a consultancy
agreement with Syon Arc Limited ("Syon" or the "Consultant") to secure the
services of one of the individuals previously employed by KKV. From that date,
Syon was entitled to £6,000 exclusive of VAT (if applicable) per month plus
an additional £15,000 exclusive of VAT (if applicable) upon the publication
of the 31 December 2021 unaudited condensed half-yearly financial statements
and a further £15,000 exclusive of VAT (if applicable) upon the publication
of these audited financial statements.
At the Company's discretion, the Consultant may also be eligible for an
additional success fee in the event that the Company achieves recoveries in
excess of £100,000 in respect of positions carried at zero as referenced by
the Company's management accounts and IFRS 9 table from which the Net Asset
Value for 31 October 2021 was derived, if it is determined by the Board that
the Consultant is instrumental to the work involved to achieve such
recoveries. The amount of such additional fee would be determined at the
Company's sole discretion, however, no less than £10,000 exclusive of VAT (if
applicable).
During the year, a total of £71,000 (2021: nil) was incurred in respect of
consultancy fees, of which £7,000 (2021: nil) was payable at the reporting
date and a further £18,000 (2021: nil) had been accrued but was not yet
payable at the reporting date (being the amount payable following the
publication of these audited financial statements).
8. Directors' remuneration
During the year, a total of £195,000 (2021: £119,000) was incurred in
respect of Directors' remuneration, none of which was payable at the reporting
date (2021: none). No bonus or pension contributions were paid or payable on
behalf of the Directors. Further details can be found in the Directors'
Remuneration Report in the Company's Annual Report and Financial Statements.
9. Key management and employees
The Company had no employees during the year (2021: none). Therefore, there
were no key management (except for the Directors) or employees during the
year.
The following distributions were paid to the Directors during the year by
virtue of their holdings of Ordinary Shares (these distributions were not
additional remuneration):
Year ended 30 June 2022 Year ended 30 June 2021
Dividends £ £
David Stevenson - 1,958
Gaynor Coley - 206
Brett Miller - -
B Share Scheme Redemptions
David Stevenson 2,937 3,950
Gaynor Coley 310 417
Brett Miller - -
10. Auditor's remuneration
For the year ended 30 June 2022, total fees, plus VAT, charged by MKS,
together with amounts accrued at 30 June 2022, amounted to £71,000 (2021:
£46,000), £48,000 of which related to audit services (2021: £46,000) and
£23,000 of which related to non-audit services (2021: nil).
As at 30 June 2022, £48,000 was due to MKS and £16,000 was due to RSM UK
Audit LLP (2021: £46,000 was due to MKS and £16,000 was due to RSM UK Audit
LLP).
11. Other expenses
Year ended 30 June 2022 Year ended 30 June 2021
£'000 £'000
Registrar fees 42 49
Broker fees 36 56
Transaction fees (note 7a) 28 46
Directors' national insurance 24 12
Other expenses 23 15
Listing fees 13 16
Accountancy and taxation fees 6 9
------------ ------------
172 203
------------ ------------
12. Taxation
The Company has received confirmation from HMRC that it satisfied the
conditions for approval as an investment trust, subject to the Company
continuing to meet the eligibility conditions in s.1158 of the Corporation Tax
Act 2010 and the ongoing requirements for approved investment trust companies
in Chapter 3 of Part 2 of the Investment Trust (approved Company) Tax
Regulations 2011 (Statutory Instrument 2011.2999). The Company intends to
retain this approval and self-assesses compliance with the relevant conditions
and requirements.
As an investment trust the Company is exempt from UK corporation tax on its
chargeable gains. The Company is, however, liable to UK corporation tax on
its income. However, the Company has elected to take advantage of modified
UK tax treatment in respect of its "qualifying interest income" in order to
deduct all, or part, of the amount it distributes to Shareholders as dividends
as an "interest distribution".
Year ended Year ended
30 June 2022 30 June 2021
£'000 £'000
Reconciliation of tax charge:
Loss before taxation (554) (11,017)
------------ ------------
Tax at the standard UK corporation tax rate of 19% (2021: 19%) (105) (2,093)
Effects of:
- Non-taxable investment gains and losses 209 2,509
- Adjustments for disallowable expenses 6 -
- Interest distributions ( 1 ) (75) (416)
- Relief claimed for carried forward losses (35) -
------------ ------------
Total tax expense - -
------------ ------------
( 1 ) On 2 September 2022, the Board declared a dividend of 0.75p per Ordinary Share
for the year ended 30 June 2022, which is to be paid on 7 October 2022.
Domestic corporation tax rates in the jurisdictions in which the Company
operated were as follows:
Year ended Year ended
30 June 2022 30 June 2021
United Kingdom 19% 19%
Guernsey nil nil
Due to the Company's status as an investment trust and the intention to
continue to meet the required conditions, the Company has not provided for
deferred tax on any capital gains and losses.
13. Loss per Ordinary Share
The loss per Ordinary Share of 1.05p (2021: loss per Ordinary Share of 20.92p)
is based on a loss attributable to the owners of the Company of £554,000
(2021: Loss of £11,017,000) and on a weighted average number of 52,660,350
(2021: 52,660,350) Ordinary Shares in issue since Admission. There is no
difference between the basic and diluted earnings per share.
14. Loans at amortised cost
Year ended Year ended
30 June 2022 30 June 2021
£'000 £'000
Loans 21,415 28,920
Unrealised loss* (13,168) (14,251)
------------ ------------
Balance at year end 8,247 14,669
------------ ------------
Loans: Non-current 3,440 7,336
Current 4,807 7,333
------------ ------------
Loans at amortised cost 8,247 14,669
------------ ------------
*Unrealised loss
Foreign exchange on non-Sterling loans 205 (158)
Impairments of financial assets (13,373) (14,093)
------------ ------------
Unrealised loss (13,168) (14,251)
------------ ------------
The movement in unrealised gains/losses on loans comprised:
Year ended Year ended
30 June 2022 30 June 2021
£'000 £'000
Movement in foreign exchange on non-Sterling loans 363 (1,283)
Movement in impairment losses on financial assets (or loans) 720 (9,657)
------------ ------------
Movement in unrealised gains and losses on loans 1,083 (10,940)
------------ ------------
The movement in the impairment for the year comprised:
Year ended Year ended
30 June 2022 30 June 2021
£'000 £'000
Impairment of interest income (1,195) (877)
Impairment losses on financial assets (or loans) 720 (9,657)
------------ ------------
Total movement in impairment in the year (475) (10,534)
------------ ------------
The weighted average interest rate of the loans as at 30 June 2022 was 10.68%
(2021: 6.48%).
The table below details expected credit loss provision ("ECL") of financial
assets in each stage at 30 June 2022:
30 June 2022 30 June 2021
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Direct loans ( 1 ) 3,245 - 15,405 18,650 4,940 5,633 12,637 23,210
ECL on direct loans (9) - (10,410) (10,419) (14) (451) (8,228) (8,693)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Direct loans net of the ECL 3,236 - 4,995 8,231 4,926 5,182 4,409 14,517
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Platform loans ( 1 ) - - 2,954 2,954 - - 5,508 5,508
ECL on platform loans - - (2,954) (2,954) - - (5,400) (5,400)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Platform loans net of the ECL - - - - - - 108 108
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Accrued interest 57 - 2 59 175 - 7 182
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total loans ( 1 ) 3,245 - 18,359 21,604 4,940 5,633 18,145 28,718
Total ECL (9) - (13,364) (13,373) (14) (451) (13,628) (14,093)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total net of the ECL 3,236 - 4,995 8,231 4,926 5,182 4,517 14,625
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
( 1 ) These are the principal amounts outstanding at 30 June 2022 and do not include
the capitalised transaction fees, which are not subject to credit risk. At
30 June 2022, the amortised cost of the capitalised transaction fees totalled
£16,000 (2021: £44,000).
The table below details the movements in the year ended 30 June 2022 of the
principal amounts outstanding and the ECL on those loans:
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 Total
Principal outstanding( 1 ) Allowance Principal outstanding( 1 ) Allowance Principal outstanding( 1 ) Allowance Principal outstanding( 1 ) Allowance
for ECL for ECL for ECL for ECL
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 1 July 2021 4,940 (14) 5,633 (451) 18,145 (13,628) 28,718 (14,093)
Transfers from: - - (5,633) 451 5,633 (451) - -
- stage 2 to stage 3
Net re-measurement of ECL arising from transfer of stage - - - - - (1,239) - (1,239)
Net new and further lending/repayments, and foreign exchange movements (1,695) 5 - - (3,539) 74 (5,234) 79
Loans written-off in the year - - - - (1,880) 1,880 (1,880) 1,880
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 June 2022 3,245 (9) - - 18,359 (13,364) 21,604 (13,373)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
( 1 ) These are the principal amounts outstanding at 30 June 2022 and do not include
the capitalised transaction fees, which are not subject to credit risk. At
30 June 2022, the amortised cost of the capitalised transaction fees totalled
£16,000.
The table below details the movements in the year ended 30 June 2021 of the
principal amounts outstanding and the ECL on those loans:
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 Total
Principal outstanding( 1 ) Allowance Principal outstanding( 1 ) Allowance Principal outstanding( 1 ) Allowance Principal outstanding( 1 ) Allowance
for ECL for ECL for ECL for ECL
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At 1 July 2020 41,633 (24) - - 5,346 (4,412) 46,979 (4,436)
Transfers from: (10,000) 5 10,000 (5) - - - -
- stage 1 to stage 2 (19,552) 11 - - 19,552 (11) - -
- stage 1 to stage 3
Net re-measurement of ECL arising from transfer of stage - - - (795) - (9,579) - (10,374)
Net new and further lending/repayments, and foreign exchange movements (5,736) (1,411) (4,367) 349 (6,271) (108) (16,374) (1,170)
Loans written-off in the year (1,405) 1,405 - - (482) 482 (1,887) 1,887
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 June 2021 4,940 (14) 5,633 (451) 18,145 (13,628) 28,718 (14,093)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
( 1 ) These are the principal amounts outstanding at 30 June 2021 and do not include
the capitalised transaction fees, which are not subject to credit risk. At
30 June 2021, the amortised cost of the capitalised transaction fees totalled
£44,000.
An increase of 1% of total gross exposure into stage 3 (from stage 1) would
result in an increase in ECL impairment allowance of £29,000 (2021: £43,000)
based on applying the difference in average impairment coverage ratios to the
movement in gross exposure.
At 30 June 2022, the Board considered £13,373,000 (2021: £14,093,000) of
loans to be impaired:
30 June 2022 30 June 2021
£'000 £'000
Direct SME loans 10,419 8,693
Platform loans 2,954 5,400
------------ ------------
Total impairment 13,373 14,093
------------ ------------
During the year, £1,880,000 (2021: £1,887,000) of loans were written off and
included within realised loss on disposal of loans in the Statement of
Comprehensive Income.
See note 3b and note 4i regarding the process of assessment of loan
impairment.
The carrying values of the loans at amortised cost (excluding capitalised
transaction costs) are deemed to be a reasonable approximation of their fair
values.
15. Fair value of financial instruments
Investments at fair value through profit or loss Year ended 30 June 2022 Year ended 30 June 2021
£'000 £'000
Balance brought forward - 251
Disposals in the year - (253)
Realised gain on disposal of investments at fair value through profit or loss
- 94
Movement in unrealised gain on investments at fair value through profit or
loss
- (92)
------------ ------------
Balance at year end - -
------------ ------------
Cost at year end - -
------------ ------------
The investment at fair value through profit or loss related to an investment
in a Luxembourg fund which was sold during the previous financial year.
Transfers between levels
There were no transfers between levels in the year (2021: none).
Financial assets and liabilities not designated as at fair value through
profit or loss
The carrying values of the loans at amortised cost (excluding capitalised
transaction costs) are deemed to be a reasonable approximation of their fair
values. The carrying values of all other assets and liabilities not
designated as at fair value through profit or loss are deemed to be a
reasonable approximation of their fair values due to their short duration.
16. Derivative financial instruments
In order to limit the exposure to foreign currency risk, the Company had
previously entered into hedging contracts. However, in September 2020, the
Company closed out its foreign currency forward contracts and it is not
intended to enter into foreign exchange hedging contracts in the future. The
Company realised no gain/loss on forward foreign exchange contracts during the
year (2021: gain of £269,000).
As at 30 June 2022, there were no open forward foreign exchange contracts
(2021: none).
17. Other receivables and prepayments
30 June 2022 30 June 2021
£'000 £'000
Accrued interest 59 182
Prepayments 6 6
Other receivables - 1
------------ ------------
65 189
------------ ------------
The carrying values of the accrued interest and other receivables are deemed
to be reasonable approximations of their fair values.
18. Other payables and accruals
30 June 2022 30 June 2021
£'000 £'000
Audit fee 64 62
Administration fee 33 37
Consultancy fee 25 -
Legal fees 21 -
Other payables and accruals 13 20
Directors' national insurance 10 4
Management fee - 25
------------ ------------
166 148
------------ ------------
The carrying values of the other payables and accruals are deemed to be
reasonable approximations of their fair values.
19. Reconciliation of liabilities arising from financing activities
IAS 7 requires the Company to detail the changes in liabilities arising from
financing activities, including both cash and non-cash changes. Liabilities
arising from financing activities are those for which cash flows were, or
future cash flows will be, classified in the Company's statement of cash flows
as cash flows from financing activities.
As at 30 June 2022, the Company had no liabilities that would give rise to
cash flows from financing activities (2021: none).
20. Share capital
30 June 2022 30 June 2021
£'000 £'000
Authorised share capital:
Unlimited number of Ordinary Shares of 1 pence each - -
43,857,133 B Shares of £1 each (2021: 43,857,133) 43,857 43,857
Unlimited C Shares of 10 pence each - -
Unlimited Deferred Shares of 1 pence each - -
50,000 Management Share of £1 each (2021: 50,000) 50 50
------------ ------------
30 June 2022 30 June 2021
£'000 £'000
Called up share capital:
52,660,350 Ordinary Shares of 1 pence each 527 527
1 Management Share of £1 (2021: 1) - -
------------ ------------
527 527
------------ ------------
Management Shares
The Management Share is entitled (in priority to any payment of dividend of
any other class of share) to a fixed cumulative preferential dividend of 0.01%
per annum on the nominal amount of the Management Share.
The Management Share does not carry any right to receive notice of, nor to
attend or vote at, any general meeting of the Company unless no other shares
are in issue at that time. The Management Share does not confer the right to
participate in any surplus of assets of the Company on winding-up, other than
the repayment of the nominal amount of capital.
During the year, no Management Shares were bought back or cancelled (2021:
49,999 Management Shares were bought back for £49,999 and cancelled).
B Shares
The B Shares are entitled (in priority to any payment of dividend of any other
class of share, with the exception of the Management Shares) to a fixed
cumulative preferential dividend of 1% per annum on the nominal amount of the
B Shares, such dividend to be paid annually on the date falling six months
after the date on which the B Shares are issued and thereafter on each
anniversary. The B Shares do not confer the right to participate in any
surplus of assets of the Company on winding-up, other than the repayment of
the nominal amount of capital.
During the year 7,636,000 (2021: 10,269,000) B Shares of £1 each were issued
and immediately redeemed by the Company in accordance with the B Share Scheme
approved by Shareholders at a General Meeting held on 23 March 2021 (see note
5 for further details). As the B Shares were redeemed immediately upon
issue, no cumulative preferential dividend was earned on those shares.
21. Other reserves
Special distributable reserve ( 1 / 3 ) Capital redemption reserve ( 3 ) Profit and loss account ( 2 )
Non-distributable
Distributable Total
£'000 £'000 £'000 £'000 £'000
At 30 June 2020 48,181 - - (3,226) 44,955
Realised revenue profit - - 2,190 - 2,190
Realised investment gains and losses - - (2,181) - (2,181)
Unrealised investment gains and losses - - - (11,026) (11,026)
Dividends paid (4,324) - (766) (5,090)
B Shares issued during the year (notes 5 and 20) (10,269) - - - (10,269)
B Shares redeemed during the year (notes 5 and 20) ( 3 ) (10,269) 10,269 - - -
Management Share buy backs (50) 50 - - -
------------ ------------ ------------ ------------ ------------
At 30 June 2021 23,269 10,319 (757) (14,252) 18,579
Realised revenue profit - - 549 - 549
Realised investment gains and losses - - (2,186) - (2,186)
Unrealised investment gains and losses - - - 1,083 1,083
B Shares issued during the year (notes 5 and 20) (7,636) - - - (7,636)
B Shares redeemed during the year (notes 5 and 20) ( 3 ) (7,636) 7,636 - - -
------------ ------------ ------------ ------------ ------------
At 30 June 2022 7,997 17,955 (2,394) (13,169) 10,389
------------ ------------ ------------ ------------ ------------
( 1 ) During the period ended 30 June 2016, and following the approval of the Court,
the Company cancelled the share premium account and transferred £51,143,000
to a special distributable reserve, being premium on issue of shares of
£52,133,000 less share issue costs of £990,000. The special distributable
reserve is available for distribution to Shareholders.
( 2 ) The profit and loss account comprises both distributable and non-distributable
elements, as defined by Company Law. Realised elements of the Company's
profit and loss account are classified as "distributable", whilst unrealised
investment gains and losses are classified as "non-distributable".
( )
( 3 ) The B Shares were issued out of the special distributable reserve, then the
special distributable reserve was utilised again when the B Shares were
redeemed, the B Share capital cancelled and an equal amount credited to the
capital redemption reserve (see notes 5 and 20)
With the exception of investment gains and losses, all of the Company's profit
and loss items are of a revenue nature as it does not allocate any expenses to
capital.
22. Net asset value per Ordinary Share
The net asset value per Ordinary Share is based on the net assets attributable
to the owners of the Company of £10,916,000 (2021: £19,106,000), less £1
(2021: £1), being amounts owed in respect of Management Shares, and on
52,660,350 (2021: 52,660,350) Ordinary Shares in issue at the year end.
23. Financial Instruments and Risk Management
The Board (prior to 31 December 2021, the Former Investment Manager) manages
the Company's portfolio to provide Shareholders with attractive risk adjusted
returns, principally in the form of regular, sustainable dividends, through
investment predominantly in a range of secured loans and other secured
loan-based instruments originated through a variety of channels and
diversified by way of asset class, geography and duration.
Prior to the change in investment policy on 17 September 2020, the Company
sought to ensure that diversification of its portfolio was maintained, with
the aim of spreading investment risk.
Risk is inherent in the Company's activities, but it is managed through a
process of ongoing identification, measurement and monitoring. The Company
is exposed to market risk (which includes currency risk, interest rate risk
and price risk), credit risk and liquidity risk from the financial instruments
it holds. Risk management procedures are in place to minimise the Company's
exposure to these financial risks, in order to create and protect Shareholder
value.
Risk management structure
The Board (prior to 31 December 2021, the Former Investment Manager) is
responsible for identifying and controlling risks. Prior to 31 December
2021, the Board of Directors supervised the Former Investment Manager and was
ultimately responsible for the overall risk management approach within the
Company.
The Company has no employees and is reliant on the performance of third party
service providers. Failure by the Former Investment Manager, Administrator,
Broker, Registrar or any other third party service provider to perform in
accordance with the terms of its appointment could have a significant
detrimental impact on the operation of the Company.
The market in which the Company participates is competitive and rapidly
changing. The risks have not changed from those detailed on pages 20 to 30
in the Company's Prospectus, which is available on the Company's website, and
as updated in the circular of 20 August 2020.
Risk concentration
Concentration indicates the relative sensitivity of the Company's performance
to developments affecting a particular industry or geographical location.
Concentrations of risk arise when a number of financial instruments or
contracts are entered into with the same counterparty, or where a number of
counterparties are engaged in similar business activities, or activities in
the same geographic region, or have similar economic features that would cause
their ability to meet contractual obligations to be similarly affected by
changes in economic, political or other conditions. Concentrations of
liquidity risk may arise from the repayment terms of financial liabilities,
sources of borrowing facilities or reliance on a particular market in which to
realise liquid assets. Concentrations of foreign exchange risk may arise if
the Company has a significant net open position in a single foreign currency,
or aggregate net open positions in several currencies that tend to move
together.
In a Managed Wind-Down, the value of the Portfolio will be reduced as
investments are realised and concentrated in fewer holdings, and the mix of
asset exposure will be affected accordingly.
With the aim of maintaining a diversified investment portfolio, and thus
mitigating concentration risks, the Company had established (prior to the
change in the investment policy on 17 September 2020) the following investment
restrictions in respect of the general deployment of assets:
Investment Restriction Investment Policy
Geography Minimum of 60%
20%
- Exposure to UK loan assets
- Minimum exposure to non-UK loan assets
Duration to maturity None
None
- Minimum exposure to loan assets with duration of less than 6 months
50%
- Maximum exposure to loan assets with duration of 6 - 18 months and 18 - 36
months
- Maximum exposure to loan assets with duration of more than 36 months
Maximum single investment 10%
Maximum exposure to single borrower or group 10%
Maximum exposure to loan assets sourced through single alternative lending 25%
platform or other third party originator
Maximum exposure to any individual wholesale loan arrangement 25%
Maximum exposure to loan assets which are neither sterling-denominated nor 15%
hedged back to sterling
Maximum exposure to unsecured loan assets 25%
Maximum exposure to assets (excluding cash and cash-equivalent investments) 10%
which are not loans or investments with loan-based investment characteristics
The Company complied with the investment restrictions up to the change in
investment policy on 17 September 2020, except that, on 9 September 2020, in
preparation for the upcoming change in investment policy, additional foreign
currency forward contracts were entered into in order to equally and
oppositely match the open contracts at that date.
Market risk
(i) Price risk
Price risk exposure arises from the uncertainty about future prices of
financial instruments held. It represents the potential loss that the
Company may suffer through holding market positions in the face of price
movements. The investment at fair value through profit or loss (see note 15)
was the only financial instrument exposed to price risk prior to being sold in
the previous financial year.
(ii) Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument
will fluctuate because of changes in foreign currency exchange rates.
Currency risk arises when future commercial transactions and recognised
assets and liabilities are denominated in a currency that is not the Company's
functional currency. The Company invests in securities and other investments
that are denominated in currencies other than Sterling. Accordingly, the
value of the Company's assets may be affected favourably or unfavourably by
fluctuations in currency rates and therefore the Company will necessarily be
subject to foreign exchange risks.
The impact of foreign currency fluctuations during the year comprised:
Year ended Year ended
30 June 2022 30 June 2021
£'000 £'000
Movement in unrealised gains and losses on loans due to movement in foreign 363 (1,283)
exchange on non-Sterling loans
Net foreign exchange gain 13 3
------------ ------------
Foreign currency gain/(loss) in the year excluding the effect of foreign 376 (1,280)
currency hedging
Movement in unrealised gain on foreign currency derivative financial - 6
instruments
Realised gain on foreign currency derivative financial instruments - 269
------------ ------------
Foreign currency gain/(loss) in the year including the effect of foreign 376 (1,005)
currency hedging
------------ ------------
As at 30 June 2022, a proportion of the net financial assets of the Company
were denominated in currencies other than Sterling as follows:
Loans and receivables Cash and cash equivalents Other payables and accruals Exposure
30 June 2022 £'000 £'000 £'000 £'000
US Dollars 1,836 451 (12) 2,275
Euros 3,188 - - 3,188
--------------- --------------- --------------- ---------------
5,024 451 (12) 5,463
--------------- --------------- --------------- ---------------
30 June 2021
US Dollars 2,713 1 - 2,714
Euros 4,293 - - 4,293
--------------- --------------- --------------- ---------------
7,006 1 - 7,007
--------------- --------------- --------------- ---------------
In order to limit the exposure to foreign currency risk, the Company had
previously entered into hedging contracts. However, in September 2020, the
Company closed out its foreign currency forward contracts and it is not
intended to enter into foreign exchange hedging contracts in the future.
At 30 June 2022, if the exchange rates for US Dollars and Euros had
strengthened/weakened by 5% against Sterling with all other variables
remaining constant, net assets at 30 June 2022 and the profit/(loss) for the
year ended 30 June 2022 would have increased/(decreased) by
£288,000/£(260,000) (2021: increased/(decreased) by £369,000/£(334,000)).
(ii) Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates
will affect future cash flows or the fair values of financial instruments.
The Company is exposed to risks associated with the effects of fluctuations in
the prevailing levels of market interest rates on its financial instruments
and cash flow. However, due to the fixed rate nature of the majority of the
loans, cash and cash equivalents of £2,770,000 (2021: £4,396,000) were the
only interest bearing financial instruments subject to variable interest rates
at 30 June 2022. Therefore, if interest rates had increased/decreased by 50
basis points, with all other variables held constant, the change in value of
interest cash flows of these assets in the year would have been £14,000
(2021: £22,000).
Fixed interest Variable interest Non-interest bearing Total
30 June 2022 £'000 £'000 £'000 £'000
Financial assets
Loans ( 1 ) 8,247 - - 8,247
Other receivables - - 59 59
Cash and cash equivalents - 2,770 - 2,770
------------ ------------ ------------ ------------
Total financial assets 8,247 2,770 59 11,076
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (166) (166)
------------ ------------ ------------ ------------
Total financial liabilities - - (166) (166)
------------ ------------ ------------ ------------
Total interest sensitivity gap 8,247 2,770 (107) 10,910
------------ ------------ ------------ ------------
30 June 2021
Financial assets
Loans ( 1 ) 14,669 - - 14,669
Other receivables - - 183 183
Cash and cash equivalents - 4,396 - 4,396
------------ ------------ ------------ ------------
Total financial assets 14,669 4,396 183 19,248
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (148) (148)
------------ ------------ ------------ ------------
Total financial liabilities - - (148) (148)
------------ ------------ ------------ ------------
Total interest sensitivity gap 14,669 4,396 35 19,100
------------ ------------ ------------ ------------
( )
( 1 ) Of the loans of £8,247,000 (2021: £14,669,000), one loan amounting to
£3,132,000 (2021: £4,119,000) included both fixed elements and variable
elements, based on the performance of the borrowers' underlying portfolios of
loans.
The Board (prior to 31 December 2021, the Former Investment Manager) manages
the Company's exposure to interest rate risk, paying heed to prevailing
interest rates and economic conditions, market expectations and its own views
as to likely moves in interest rates.
Although it has not done so to date, the Company may implement hedging and
derivative strategies designed to protect investment performance against
material movements in interest rates. Such strategies may include (but are
not limited to) interest rate swaps and will only be entered into when they
are available in a timely manner and on terms acceptable to the Company. The
Company may also bear risks that could otherwise be hedged where it is
considered appropriate. There can be no certainty as to the efficacy of any
hedging transactions.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument will
fail to discharge an obligation or commitment that it has entered into with
the Company, resulting in a financial loss to the Company.
At 30 June 2022, credit risk arose principally from cash and cash equivalents
of £2,770,000 (2021: £4,396,000) and balances due from the platforms and
SMEs of £8,247,000 (2021: £14,669,000). The Company seeks to trade only
with reputable counterparties that the Board (prior to 31 December 2021, the
Former Investment Manager) believes to be creditworthy.
The Company's credit risks principally arise through exposure to loans
provided by the Company, either directly or through platforms. These loans
are subject to the risk of borrower default. Where a loan has been made by
the Company through a platform, the Company will only receive payments on
those loans if the corresponding borrower through that platform makes payments
on that loan. The Board (prior to 31 December 2021, the Former Investment
Manager) has sought to reduce the credit risk by obtaining security on the
majority of the loans and by investing across various platforms, geographic
areas and asset classes, thereby ensuring diversification and seeking to
mitigate concentration risks, as stated in the "risk concentration" section
earlier in this note.
The cash pending investment or held on deposit under the terms of an
investment instrument may be held without limit with a financial institution
with a credit rating of "single A" (or equivalent) or higher to protect
against counterparty failure.
The Company may implement hedging and derivative strategies designed to
protect against credit risk. Such strategies may include (but are not
limited to) credit default swaps and will only be entered into when they are
available in a timely manner and on terms acceptable to the Company. The
Company may also bear risks that could otherwise be hedged where it is
considered appropriate. There can be no certainty as to the efficacy of any
hedging transactions.
Please see note 3b and note 4 for further information on credit risk and note
14 for information on the loans at amortised cost.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to meet financial
commitments. The principal liquidity risk is contained in unmatched
liabilities. The liquidity risk at 30 June 2022 was low since the ratio of
cash and cash equivalents to unmatched liabilities was 17:1 (2021: 30:1).
The Board (prior to 31 December 2021, the Former Investment Manager) managed
the Company's liquidity risk by investing primarily in a diverse portfolio of
loans, in line with the Prospectus and as stated in the "risk concentration"
section earlier in this note. However, as the Company is in a Managed
Wind-Down, the value of the Portfolio will be reduced as investments are
realised and concentrated in fewer holdings, and the mix of asset exposure and
liquidity will be affected accordingly.
The maturity profile of the portfolio is as follows:
30 June 2022 30 June 2021
Percentage Percentage
0 to 6 months 55.1 54.7
6 months to 18 months 31.0 7.6
18 months to 3 years 13.9 27.9
Greater than 3 years - 9.8
------------ ------------
100.0 100.0
------------ ------------
Capital management
During the year, the Board's policy was to maintain a strong capital base so
as to maintain investor, creditor and market confidence and to sustain future
operation of the Company. The Company's capital comprises issued share
capital, retained earnings, a capital redemption reserve (see note 3(i)) and a
distributable reserve created from the cancellation of the Company's share
premium account. To maintain or adjust the capital structure, the Company
could issue new Ordinary Shares, B Shares and/or C Shares, buy back shares for
cancellation, buy back shares to be held in treasury or redeem B Shares. The
Company returned capital to Shareholders through the use of a B Share Scheme,
which was approved by Shareholders on 23 March 2021 (see note 5).
During the year ended 30 June 2022, the Company did not issue any new Ordinary
or C shares, nor did it buy back any Ordinary Shares for cancellation or to be
held in treasury (2021: none). 49,999 Management Shares were bought back for
£49,999 and cancelled during the year ended 30 June 2021 (see note 21).
During the year ended 30 June 2022, 7,636,000 B Shares were issued and bought
back for £7,636,000 (see note 5) (2021: 10,269,000 B Shares issued and bought
back for £10,269,000).
The Company is subject to externally imposed capital requirements in relation
to its statutory requirement relating to dividend distributions to
Shareholders. The Company meets the requirement by ensuring it distributes
at least 85% of its distributable income by way of dividend.
24. Contingent assets and contingent liabilities
There were no contingent assets or contingent liabilities in existence at the
year end (2021: none).
25. Events after the reporting period
There were no other significant events after the reporting period.
26. Parent and Ultimate Parent
The Directors do not believe that the Company has an individual Parent or
Ultimate Parent, or an ultimate controlling party.
--- ENDS ---
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