REG - Secured Income Fd - Half-year Report
25/03/2022 07:16
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RNS Number : 9752F Secured Income Fund PLC 25 March 2022
25 March 2022
Secured Income Fund plc
("SSIF" or the "Company")
Half-Yearly Financial Report
For the six months ended 31 December 2021
A copy of the Company's Half-Yearly Report and Condensed Financial Statements
for the six months ended 31 December 2021 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 following text is extracted from the Half-Yearly Report and Unaudited
Condensed Financial Statements of the Company for the six months ended 31
December 2021.
Strategic Report
Key Points
31 December 2021 31 December 2020 30 June 2021 (audited)
(unaudited) (unaudited)
Net assets ( 1 ) £13,218,000 £41,262,000 £19,106,000
NAV per Ordinary Share 25.10p 78.26p 36.28p
Share price 18.50p 66.50p 42.50p
(Discount)/premium to NAV (26.3)% (15.0)% 17.1%
(Loss)/profit for the period £(1,412,000) £820,000 £(11,017,000)
Dividend per share declared in respect of the period - 8.50p 8.50p
B Share issue and redemption per Ordinary Share declared in respect of the 19.50p
period
8.50p -
Total return per Ordinary Share (based on NAV) ( 2 ) -7.4% +1.8% -25.6%
Total return per Ordinary Share (based on share price) ( 2 ) -36.5% -0.4% -7.8%
Ordinary Shares in issue 52,660,350 52,660,350 52,660,350
( 1 ) In addition to the Ordinary Shares in issue, 1 Management Share of £1 is in
issue (31 December 2020: 50,000, 30 June 2021: 1) (see note 20).
( 2 ) Total return per Ordinary Share has been calculated by comparing the NAV or
share price, as applicable, at the start of the period with the NAV or share
price, as applicable, plus dividends and B Share redemptions paid, at the
period end.
Chairman's Statement
Introduction
I am pleased to provide Shareholders with my Chairman's statement, covering
the interim period from 1 July 2021 to 31 December 2021. 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 £19.2m (equivalent to 36.5p
per Ordinary Share) through a combination of dividends and a B Share Scheme.
Performance
For the interim period ended 31 December 2021, the Company suffered a net loss
of £1.4 million and loss per Ordinary Share of 2.68p (compared to a profit of
£0.8 million and earnings per Ordinary Share of 1.56p for the period ended 31
December 2020). The Company's NAV at 31 December 2021 was £13.2 million
(25.10p (cum income) per Ordinary Share) compared to £19.1 million (36.28p
per Ordinary Share) as at 30 June 2021. £4.5 million of the £5.9 million
reduction in the NAV in the period related to the B Share distribution of
£4.5 million, with the remainder being attributable to the net loss of £1.4
million.
The IFRS 9 provision across some of the direct loans has been increased
further during the reporting period. Ongoing monitoring of the Film Production
Financing portfolio has highlighted further deterioration of the expected cash
flow. The portfolio remains heavily impacted by the changes in operating
practises resulting from the Covid-19 pandemic. Furthermore, there continues
to be delays in the principal repayment of the largest position in the
portfolio. The Company is in regular dialogue with the Borrower to ensure
maximum returns for Shareholders.
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 10.9%.
No foreign exchange hedging has been employed during the reporting period.
Non-Sterling cash balances are converted into Sterling at the earliest
opportunity. The table below shows the FX exposure in the portfolio as at 31
December 2021.
FX exposure (millions) Loan Carrying Value at Amortised Cost at 31 December 2021
CCY GBP
GBP 7.7 7.7
EUR 4.4 3.7
USD 2.7 2.0
The portfolio exposure by maturity, geography, type and currency are presented
in the Company Analytics.
Corporate Activity
The Company has made a good start 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 £7m, 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 agreement with
KKV Investment Management Ltd ("KKVIM") for termination of the Investment
Management Agreement between the Company and KKVIM; the IMA was duly
terminated on 31 December 2021.
In order to assist the Board with the management of the portfolio, the Company
has, with effect from 1 January 2022, entered into a consultancy agreement to
secure the services of one of the individuals previously employed by KKVIM and
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, will
continue to be directly involved in the managed wind down of the Company's
portfolio.
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 1 January 2022.
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 is 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 for so long as the Company remains listed.
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 interim period, the Board distributed a further £4.48m using the
B Share Scheme, which is equivalent to 8.5p per Ordinary Share. To date, a
total of £14.74m has been distributed to Shareholders via the B share scheme
since the commencement of the managed wind down, this is equivalent to 28p per
Ordinary Share. Moreover, an additional £4.48m, equivalent to 8.5p per
Ordinary Share, had been distributed in the form of dividends prior to the B
share 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.
Shareholder Engagement
The Board have 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 Board has successfully navigated a smooth transition of the management
back to the Company. The primary focus remains unchanged in the managed
wind-down, achieving a balance between maximising the value received from the
remaining assets and making timely returns of capital to Shareholders. The
Board expects to have realised most of the remaining portfolio within the next
two years.
The Covid-19 pandemic has resulted in a marked deterioration of some of the
assets within the portfolio, the economic effects of which are expected to
continue well into 2022. The Company is working closely with the relevant
borrowers to ensure maximum returns for Shareholders in all cases.
We thank investors for their continued support throughout this period and
shall keep investors informed of any developments as they occur.
David Stevenson
Chairman
24 March 2022
Investment Report
Overview
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 1 January 2022, the
Company has been approved by the FCA as a Small Registered UK AIFM.
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 has been returned to Shareholders via dividend distribution and
28 pence per Ordinary share via a B Share Scheme, which was adopted to ensure
more tax efficient capital distributions for Shareholders.
Portfolio
There were ten direct loans in the portfolio as at 31 December 2021, with an
average carrying value of £1.07m 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.
During the reporting period, there has been further increases in IFRS 9
impairment provisions for some of the direct loans. 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.
The remaining legacy loans that formed part of the portfolio prior to April
2017 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 will continue to engage with each of
these Borrowers for updates and will reassess the positions should there be
any changes in circumstances.
No leverage has been used throughout the reporting period and no foreign
exchange hedging has been employed, all assets are held in their base
currency.
Direct Loans
Principal Balance Outstanding as at 31 December 2021 ECL provision at 31 December 2021 Loan Carrying Value at Amortised Cost ( 1 ) at 31 December 2021 Amortisation/ Bullet repayment/ other
Borrower £ £ £ Asset Type Currency Yield
Borrower 1 £5,632,560 £1,689,768 £3,942,792 Bullet repayment/other Wholesale Lending GBP 10%
Borrower 2 £3,616,108 £10,848 £3,605,259 Pass-through amortisation SME and Leasing Fund EUR Variable
Borrower 3 £3,262,406 £1,631,203 £1,631,203 Interest only for 12 months, then scheduled amortisation Medical Services USD 12%
Borrower 4 £1,455,534 £1,074,414 £381,120 Cash sweep Film Production Financing USD 12%
Borrower 5 £1,673,510 £1,362,174 £311,336 Cash sweep Film Production Financing GBP 11%
Borrower 6 £1,661,925 £1,433,547 £228,378 Cash sweep Film Production Financing GBP 11%
Borrower 7 £202,777 £608 £202,169 Scheduled amortisation Laser and LED Manufacturer GBP 10%
Borrower 8 £2,433,795 £2,238,295 £195,500 Cash sweep Film Production Financing GBP 12%
Borrower 9 £506,945 £383,904 £123,042 Cash sweep Film Production Financing GBP 12%
Borrower 10 £672,048 £603,476 £68,572 Cash sweep Film Production Financing GBP 12%
Direct Loans Total £21,117,608 £10,428,237 £10,689,371
( 1 )The carrying values of loans at amortised cost disclosed in the table
above do not include capitalised transaction fees, which totalled £27,227 at
31 December 2021.
The following provides a narrative relating to our direct loan investments.
Names of counterparties have been omitted for commercial and business
sensitivity reasons.
SME Loan company (Borrower 1) - 29.8% of NAV
This is the largest individual facility provided by the Company and has been
in place since May 2017. The loan is secured against a wholesale portfolio of
working capital SME loans.
The Borrower was due to repay the remaining balance at the end of September
but was unable to refinance the facility. An extension was granted until the
end of 2021 to source new funding, which has not been met. However, the
Borrower is continuing to pursue refinance opportunities. If the refinance
fails to progress, then it appears possible that the underlying portfolio may
enter run off and require collections over the coming years. Since the
period end, the Company has received £653,052 by way of capital repayments as
a result of active collection efforts undertaken.
Irish SME and Leasing Fund investment (Borrower 2) - 27.3% 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. The fund is in its harvest phase, and we expect capital distribution
to accelerate as loans mature or are refinanced. Since the period end, the
Company has received a capital repayment of €427,619.
US healthcare services company (Borrower 3) - 12.3% 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 the core business assets, rendering the
business economically unviable. A Reservations of Rights letter was issued
during the reporting period.
That said, all amortised payments continue to be made on time; however, given
the current situation we are monitoring the receivables very closely.
Media financing (Borrowers 4, 5, 6, 8, 9 and 10) - 9.9% 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.
An external specialist has 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.
Since the period end, a further approximately £468,000 has been provided for
against these borrowers.
LED manufacturer in Ireland (Borrower 7) - 1.5% 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 31 December 2021 ECL provision at 31 December 2021 Loan Carrying Value at Amortised Cost at 31 December 2021 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 £316,364 £316,364 - EUR -
Legacy Loans Total £2,950,141 £2,950,141 -
The following provides a narrative relating to the legacy loans within the
portfolio.
UK Venture Debt (Borrower 11) - 0.0% of NAV
The final position within the current portfolio, a broadband company, was
previously restructured and is facing key decisions with regards to its going
concern. As such, we have continued to fully provide for this position and
will reassess once there is further clarity on next steps.
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. We continued to push for some return from these
loans but after receiving a number of liquidation confirmations, we concluded
that there was very little probability of recouping any further capital.
Outlook
There has been good progress made so far with the realisation of the Company's
portfolio. The remaining positions are closely monitored and we engage in
regular dialogue with each of the Borrowers to ensure we remain aligned to our
objective of achieving the maximum returns for Shareholders from the
outstanding loans.
We would like to thank Shareholders for their support and will continue to
share any updates on the progress over the upcoming months.
Brett Miller
Director
24 March 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, are set
out below:
· macroeconomic risk;
· Covid-19;
· Russian invasion of Ukraine;
· credit risk;
· platform risk;
· regulatory risk; and
· reputational risk.
Further details of each of these risks and how they are mitigated are
discussed in the Principal Risks and Uncertainties section of the Strategic
Report within the Company's Annual Report for the year ended 30 June 2021.
The Board believes that these risks are applicable to the six month period
ended 31 December 2021 and the remaining six months of the current financial
year.
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 at the current
time 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.
The impact of the various vaccines is being seen, and there is light at the
end of the Covid-19 pandemic tunnel. It is expected that the risk to the
Company from the pandemic will continue to decrease over the next 12 months.
However, the Board recognises the possibility that there will be further
future "waves" and variants of the Covid-19 virus and it will be some time
before the pandemic can be declared "over".
Russian Invasion of Ukraine
Russia's invasion of Ukraine is a new emerging 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 may well
have 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 will 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.
On behalf of the Board.
David Stevenson
Chairman
24 March 2022
Governance
Statement of Directors' Responsibilities
The Directors are responsible for preparing the half-yearly report and
condensed financial statements and are required to:
· prepare the condensed half-yearly financial statements in
accordance with UK-adopted International Accounting Standard 34: Interim
Financial Reporting, which gives a true and fair view of the assets,
liabilities, financial position and profit for the period of the Company, as
required by Disclosure and Transparency Rules ("DTR") 4.2.4 R;
· include a fair review of the information required by DTR 4.2.7 R,
being important events that have occurred during the period and their impact
on the half-yearly report and condensed financial statements and a description
of the principal risks and uncertainties for the remaining six months of the
financial year; and
· include a fair review of information required by DTR 4.2.8 R,
being related party transactions that have taken place during the period which
have had a material effect on the financial position or performance of the
Company.
The Directors confirm that the half-yearly report and condensed financial
statements comply with the above requirements.
On behalf of the Board.
David Stevenson
Chairman
24 March 2022
Independent Review Report to
Secured Income Fund plc
Conclusion
We have been engaged by the Company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 31
December 2021 which comprises the Unaudited Condensed Statement of
Comprehensive Income, the Unaudited Condensed Statement of Changes in Equity,
the Unaudited Condensed Statement of Financial Position, the Unaudited
Condensed Statement of Cash Flows and the accompanying notes.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 31 December 2021 is not prepared, in
all material respects, in accordance with UK adopted International Accounting
Standard 34.
Basis of conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410, 'Review of Interim Financial Information Performed by
the Independent Auditor of the Entity' issued for use in the United Kingdom. A
review of interim financial information consists of making enquiries,
primarily of persons responsible for financial and accounting matters, and
applying analytical and other review procedures. A review is substantially
less in scope than an audit conducted in accordance with International
Standards on Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
As disclosed in note 2, the annual financial statements of the Company are
prepared in accordance with UK adopted IFRSs. The condensed set of financial
statements included in this half-yearly financial report has been prepared in
accordance with UK adopted International Accounting Standard 34, 'Interim
Financial Reporting'.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis of Conclusion section of this report,
nothing has come to our attention to suggest that management have
inappropriately adopted the non-going concern basis of accounting or that
management have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
this ISRE.
Responsibilities of directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure and Transparency Rules ("DTR") of the United
Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the directors are responsible
for assessing the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the Company or to cease operations, or have no realistic alternative
but to do so.
Auditor's responsibilities for the review of the financial information
In reviewing the half-yearly report, we are responsible for expressing to the
Company a conclusion on the condensed set of financial statement in the
half-yearly financial report. Our conclusion, including our Conclusions
Relating to Going Concern, are based on procedures that are less extensive
than audit procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the Company in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim
Financial Information Performed by the Independent Auditor of the Entity'
issued by the Financial Reporting Council for use in the United Kingdom. Our
work has been undertaken so that we might state to the Company those matters
we are required to state to them in an independent review report and for no
other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company, for our review work,
for this report, or for the conclusions we have formed.
Moore Kingston Smith LLP
Devonshire House
60 Goswell Road
London
EC1M 7AD
24 March 2022
Unaudited Condensed Statement of Comprehensive Income
for the six months ended 31 December 2021
Note Period from 1 July 2021 to 31 December 2021 Period from 1 July 2020 to 31 December 2020 Year ended
(unaudited) (unaudited) 30 June 2021
(audited)
£'000 £'000 £'000
Income
Investment income 1,354 2,346 4,010
Impairment of interest income (591) - (877)
------------ ------------ ------------
Net interest income 763 2,346 3,133
------------ ------------ ------------
Total revenue 763 2,346 3,133
------------ ------------ ------------
Operating expenses
Management fees 7a (133) (190) (309)
Other expenses 10 (111) (68) (147)
Directors' remuneration 8 (72) (56) (119)
Legal and professional fees (69) (8) (139)
Administration fees 7b (56) (57) (130)
Consultancy fees 7c (23) - -
Broker fees (18) (37) (56)
Transaction fees 7a (17) (24) (46)
------------ ------------ ------------
Total operating expenses (499) (440) (946)
------------ ------------ ------------
Investment gains and losses
Movement in unrealised gains and losses on loans due to movement in foreign 13 (210) (977) (1,283)
exchange on non-Sterling loans
Impairment losses on financial assets (or loans) 13 715 1,020 (9,657)
Movement in unrealised gain on investments at fair value through profit or 14 - 4 (92)
loss
Movement in unrealised gain on derivative financial instruments 16 - 6 6
Realised loss on disposal of loans (2,183) (1,410) (2,544)
Realised gain on disposal of investments at fair value through profit or loss 14 - - 94
Realised gain on derivative financial instruments 16 - 269 269
------------ ------------ ------------
Total investment gains and losses (1,678) (1,088) (13,207)
------------ ------------ ------------
Net (loss)/profit from operating activities before gain on foreign currency (1,414) 818 (11,020)
exchange
Net foreign exchange gain 2 2 3
------------ ------------ ------------
(Loss)/profit and total comprehensive income for the period/year attributable (1,412) 820 (11,017)
to the owners of the Company
------------ ------------ ------------
(Loss)/earnings per Ordinary Share (basic and diluted) 12 (2.68)p 1.56p (20.92)p
------------ ------------ ------------
There were no other comprehensive income items in the period/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 unaudited condensed
half-yearly financial statements.
Unaudited Condensed Statement of Changes in Equity
for the six months ended 31 December 2021
Note Called up share capital Capital redemption reserve Special distributable reserve Profit and loss account Total
Unaudited
£'000 £'000 £'000 £'000 £'000
At 1 July 2021 527 10,319 23,269 (15,009) 19,106
Loss for the period 21 - - - (1,412) (1,412)
Transactions with Owners in their capacity as owners:
B Shares issued during the year 5, 20, 21 4,476 - (4,476) - -
B Shares redeemed during the year 5, 20, 21 (4,476) 4,476 (4,476) - (4,476)
------------ ------------ ------------ ------------ ------------
At 31 December 2021 527 14,795 14,317 (16,421) 13,218
------------ ------------ ------------ ------------ ------------
Unaudited Condensed Statement of Changes in Equity
for the six months ended 31 December 2020
Note Called up share capital Special distributable reserve Profit and loss account Total
Unaudited
£'000 £'000 £'000 £'000
At 1 July 2020 577 48,181 (3,226) 45,532
Profit for the period 21 - - 820 820
Transactions with Owners in their capacity as owners:
Dividends paid 5, 21 - (4,323) (767) (5,090)
------------ ------------ ------------ ------------
At 31 December 2020 577 43,858 (3,173) 41,262
------------ ------------ ------------ ------------
Audited Statement of Changes in Equity
for the year ended 30 June 2021
Note Called up share capital Capital redemption reserve Special distributable reserve Profit and loss account Total
Audited
£'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 5,22 - - (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
------------ ------------ ------------ ------------ ------------
There were no other comprehensive income items in the period/year.
The above amounts are all attributable to the owners of the Company.
The accompanying notes form an integral part of the unaudited condensed
half-yearly financial statements.
Unaudited Condensed Statement of Financial Position
as at 31 December 2021
Note 31 December 2021 31 December 2020 30 June 2021
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Non-current assets
Loans at amortised cost 13 4,743 23,149 7,336
Investments at fair value through profit or loss 14, 15 - 255 -
------------ ------------ ------------
Total non-current assets 4,743 23,404 7,336
------------ ------------ ------------
Current assets
Loans at amortised cost 13 5,974 14,927 7,333
Other receivables and prepayments 17 152 574 189
Cash and cash equivalents 2,592 2,500 4,396
------------ ------------ ------------
Total current assets 8,718 18,001 11,918
------------ ------------ ------------
Total assets 13,461 41,405 19,254
------------ ------------ ------------
Current liabilities
Other payables and accruals 18 (243) (143) (148)
------------ ------------ ------------
Total liabilities (243) (143) (148)
------------ ------------ ------------
------------ ------------ ------------
Net assets 13,218 41,262 19,106
------------ ------------ ------------
Capital and reserves attributable to owners of the Company
Called up share capital 20 527 577 527
Other reserves 21 12,691 40,685 18,579
------------ ------------ ------------
Equity attributable to the owners of the Company 13,218 41,262 19,106
------------ ------------ ------------
Net asset value per Ordinary Share 22 25.10p 78.26p 36.28p
------------ ------------ ------------
These unaudited condensed half-yearly financial statements of Secured Income
Fund plc (registered number 09682883) were approved by the Board of Directors
on 24 March 2022 and were signed on its behalf by:
David Stevenson Gaynor Coley
Chairman Director
24 March 2022 24 March 2022
The accompanying notes form an integral part of the unaudited condensed
half-yearly financial statements.
Unaudited Condensed Statement of Cash Flows
for the six months ended 31 December 2021
Period from 1 July 2021 to 31 December 2021 Period from 1 July 2020 to 31 December 2020 Year ended 30 June 2021 (audited)
(unaudited) (unaudited)
£'000 £'000 £'000
Cash flows from operating activities
Net (loss)/profit before taxation (1,412) 820 (11,017)
Adjustments for:
Movement in unrealised gains and losses on loans due to movement in foreign 210 977 1,283
exchange on non-Sterling loans
Impairment losses on financial assets (or loans) (715) (1,020) 9,657
Movement in unrealised gain on investments at fair value through profit or - (4) 92
loss
Movement in unrealised gain on derivative financial instruments - (6) (6)
Realised loss on disposal of loans 2,183 1,410 2,544
Realised gain on disposal of investments at fair value through profit or loss - - (94)
Realised gain on derivative financial instruments - (269) (269)
Amortisation of transaction fees 17 24 46
Interest received and reinvested by platforms - (1) (1)
Capitalised interest - (748) (1,174)
Decrease in investments 2,258 4,184 16,131
------------ ------------ ------------
Net cash inflow from operating activities before working capital changes 2,541 5,367 17,192
Decrease in other receivables and prepayments 36 1,051 1,436
Increase/(decrease) in other payables and accruals 95 (21) (16)
------------ ------------ ------------
Net cash inflow from operating activities 2,672 6,397 18,612
Cash flows from financing activities
Dividends paid - (5,090) (5,090)
B Share scheme redemptions (4,476) - (10,269)
Management share buy backs - - (50)
------------ ------------ ------------
Net cash outflow from financing activities (4,476) (5,090) (15,409)
------------ ------------ ------------
(Decrease)/increase in cash and cash equivalents in the period/year (1,804) 1,307 3,203
Cash and cash equivalents at the beginning of the period/year 4,396 1,193 1,193
------------ ------------ ------------
Cash and cash equivalents at 31 December 2021 2,592 2,500 4,396
------------ ------------ ------------
Supplemental cash flow information
Non-cash transaction - interest income - 749 1,175
The accompanying notes form an integral part of the unaudited condensed
half-yearly financial statements.
Notes to the Unaudited Condensed Half-Yearly Financial Statements
for the six months ended 31 December 2021
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 1 January 2022, the
Company has been approved by the FCA as a Small Registered UK AIFM.
Investment objective and policy
The Company is managed with the intention of realising all remaining assets in
the Portfolio in a prudent manner consistent with the principles of good
investment management and with a view to returning cash to Shareholders in an
orderly manner.
The Company pursues its investment objective by effecting an orderly
realisation of its assets in a manner that seeks to achieve a balance between
maximising the value received from those assets and making timely returns of
capital to Shareholders. This process might include sales of individual
assets, mainly structured as loans, or running off the Portfolio in accordance
with the existing terms of the assets, or a combination of both.
As part of the realisation process, the Company may also exchange existing
debt instruments for equity securities where, in the opinion of the Board, the
Company is unlikely to be able to otherwise realise such debt instruments or
will only be able to realise them at a material discount to the outstanding
principal balance of that debt instrument.
The Company has ceased to make any new investments or to undertake capital
expenditure except where, in the opinion of both the Board and, until the date
its contract was terminated, the Investment Manager (or, where relevant, the
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.
Any cash received by the Company as part of the realisation process prior to
its distribution to Shareholders will be held by the Company as cash on
deposit and/or as cash equivalents.
The Company will not undertake new borrowing.
Any material change to the investment policy would require Shareholder
approval.
2. Statement of compliance
a) Basis of preparation
These unaudited condensed half-yearly financial statements present the results
of the Company for the six months ended 31 December 2021. These unaudited
condensed half-yearly financial statements have been prepared in accordance
with UK-adopted International Accounting Standard ("IAS") 34: Interim
Financial Reporting.
The unaudited condensed half-yearly financial statements for the period ended
31 December 2021 do not constitute statutory financial statements, as defined
in s434 of the Companies Act 2006. The unaudited condensed half-yearly
financial statements have been prepared on the same basis as the Company's
annual financial statements.
Non-Going Concern
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, 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 unaudited condensed half-yearly financial
statements.
The ongoing Covid-19 pandemic and Russian invasion of Ukraine 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 and Russian invasion of Ukraine, thereby enabling the
Company to realise its assets in an orderly manner.
b) Basis of measurement
The unaudited condensed half-yearly 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 unaudited condensed half-yearly financial statements in
conformity with International Financial Reporting Standards ("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 unaudited condensed half-yearly 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 Unaudited Condensed
Statement of Comprehensive Income. Translation differences on non-monetary
financial assets and liabilities are recognised in the Unaudited Condensed
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 Unaudited Condensed 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 Unaudited Condensed
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 (prior to 31 December 2021, the Former
Investment Manager) requests data and management information from the
platform. The Board (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
(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 distributable reserve) are charged through the Unaudited Condensed
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 Unaudited Condensed 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 period 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 period:
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 Unaudited Condensed Statement of Comprehensive Income, Unaudited
Condensed Statement of Financial Position or equity.
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
unaudited condensed half-yearly 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 unaudited condensed half-yearly financial
statements requires the Directors to make judgements, estimates and
assumptions that affect the reported amounts recognised in the unaudited
condensed half-yearly 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 judgement, which has had a significant effect on the amounts
recognised in the unaudited condensed half-yearly 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 at the current
time 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.
The impact of the various vaccines is being seen, and there is light at the
end of the Covid-19 pandemic tunnel. It is expected that the risk to the
Company from the pandemic will continue to decrease over the next 12 months.
However, the Board recognises the possibility that there will be further
future "waves" and variants of the Covid-19 virus and it will be some time
before the pandemic can be declared "over".
Russian Invasion of Ukraine
Russia's invasion of Ukraine is a new emerging 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 may well
have 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 will 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.
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 unaudited condensed half-yearly 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 unaudited condensed half-yearly 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 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 will be 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.
The following borrower information 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, coverage ratios between 130% to 150%, and an average LTV of 85%.
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 £1,878,000 were written off in the period (31 December
2020: £1,410,000; 30 June 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 31 December 2021.
There were no new assets originated during the period 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 period to an amount
equal to 12-month expected credit losses.
There were no financial assets for which cash flows were modified in the
period while they had a loss allowance measured at an amount equal to the
lifetime expected credit loss.
Please see note 3b, note 13 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.
To date, the Company has not declared any dividends in respect of earnings for
the period ended 31 December 2021. The Company elected to designate all of the
dividends for the year ended 30 June 2021 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.
In accordance with IFRS, dividends are only provided for when they become a
contractual liability of the Company. Therefore, during the period a total
of £nil (31 December 2020: £5,090,000, 30 June 2021: £5,090,000) was
incurred in respect of dividends, none of which was outstanding at the
reporting date (31 December 2020 and 30 June 2021: none).
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 two B Share Scheme redemptions in the period, totalling
£4,476,000 (31 December 2020: nil, 30 June 2021: £10,269,000), equivalent to
8.50p per Ordinary Share (31 December 2020: nil, 30 June 2021: 19.50p).
The Board also intends to make quarterly dividend payments, where possible, in
accordance with the Company's dividend policy and 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 that applies to any transaction which it may
enter into with any Director 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.
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 period, a total of £133,000 (31 December 2020: £190,000, 30 June
2021: £309,000) was incurred in respect of management fees, of which £21,000
was payable at the reporting date (31 December 2020: £53,000, 30 June 2021:
£25,000).
Performance fee
From 17 September 2020, the Former Investment Manager was entitled to a
performance fee. The performance fee was calculated using the most recent NAV
prior to the Company failing the June 2020 Continuation Vote (being the NAV as
at 31 May 2020) as the benchmark NAV (the "Benchmark NAV"). If 99% of the
Benchmark NAV was returned to Shareholders by way of dividend, share buy backs
or other methods of return of capital within 12 months from 17 September 2020
then a performance fee of 0.6% of the value returned to Shareholders would
have been payable to KKV. This would have been reduced by 0.1% for every 1%
less than 99% of Benchmark NAV that was returned to Shareholders.
Should the time taken to realise the Portfolio exceed 12 months from 17
September 2020, then for the period from 17 September 2021 to 17 September
2022, the incentive fee would have reduced by 33% (so that, for example if 99%
of Benchmark NAV is returned by month 17, the performance fee would be
two-thirds of 0.6%).
The introduction of an outperformance fee, under the terms of the amended
Investment Management Agreement, stated that KKV would have been entitled to
10% of all funds returned to Shareholders in excess of the Benchmark NAV
within 12 months from 17 September 2020, reducing to 5% within 12-24 months.
During the period, no performance fee was paid, or payable, to the Former
Investment Manager (31 December 2020 and 30 June 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 by the Previous
Investment Manager when pricing a transaction. When structuring services were
provided by the Previous Investment Manager 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 Previous
Investment Manager, the funds they managed or where they or their affiliates
did not provide such structuring advice.
The Previous Investment Manager agreed to bear all the broken and abortive
transaction costs and expenses incurred on behalf of the Company.
Accordingly, the Company agreed that the Previous Investment Manager may
retain any commitment commissions received by the Previous Investment Manager
in respect of investments made by the Company, save that if such commission on
any transaction were to exceed 1.0% of the transaction value, the excess would
be paid to the Company.
During the period, transaction costs of £17,000 (31 December 2020: £24,000,
30 June 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 period, a total of £56,000
(31 December 2020: £57,000, 30 June 2021: £130,000) was incurred in respect
of administration fees, of which £28,000 (31 December 2020: £28,000, 30 June
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 will be 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 these unaudited condensed half-yearly financial statements and
a further £15,000 exclusive of VAT (if applicable) upon the publication of
the 30 June 2022 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 period, a total of £23,000 (31 December 2020 and 30 June 2021:
nil) was incurred in respect of consultancy fees, all of which (31 December
2020 and 30 June 2021: nil) had been accrued but was not yet payable at the
reporting date.
8. Directors' remuneration
The Directors are paid such remuneration for their services as determined by
the Remuneration and Nomination Committee, which comprises all of the
Directors of the Company and is chaired by Gaynor Coley. Under the terms of
their appointments, with effect from 17 September 2020, the Chairman of the
Company receives £45,000 (prior to 17 September 2020: £37,500) per annum,
the chairman of the Audit and Valuation Committee receives £40,000 (prior to
17 September 2020: £31,250) per annum, and other non-executive Directors
receive £40,000 (prior to 17 September 2020: £27,500) per annum.
During the period, an additional £10,000 was paid to Brett Miller in
recognition of his additional time commitment during the period in relation to
the investments.
During the period, a total of £72,000 (31 December 2020: £56,000, 30 June
2021: £119,000) was incurred in respect of Directors' remuneration, none of
which was payable at the reporting date (31 December 2020 and 30 June 2021:
none). No bonus or pension contributions were paid or payable on behalf of
the Directors.
9. Key management and employees
The Company had no employees during the period (31 December 2020 and 30 June
2021: none). Therefore, there were no key management (except for the
Directors) or employees during the period (31 December 2020 and 30 June 2021:
none).
The following distributions were paid to the Directors during the period by
virtue of their holdings of Ordinary Shares (these distributions were not
additional remuneration):
Period from 1 July 2021 to 31 December 2021 Period from 1 July 2020 to 31 December 2020 (unaudited) Year ended 30 June 2021 (audited)
(unaudited)
Dividends £ £ £
David Stevenson - 1,958 1,958
Gaynor Coley - 206 206
Brett Miller - - -
B Share Scheme Redemptions
David Stevenson 1,722 - 3,950
Gaynor Coley 181 - 417
Brett Miller - - -
10. Other expenses
Period from 1 July 2021 to 31 December 2021 Period from 1 July 2020 to 31 December 2020 (unaudited) Year ended 30 June 2021 (audited)
(unaudited)
£'000 £'000 £'000
Audit fees 45 20 46
Registrar fees 25 17 49
Other expenses 10 11 15
Directors' national insurance 10 7 12
Website costs 10 - -
Listing fees 7 10 16
Accountancy and taxation fees 4 3 9
------------ ------------ ------------
111 68 147
------------ ------------ ------------
11. 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".
Period from 1 July 2021 to 31 December 2021 Period from 1 July 2020 to 31 December 2020 Year ended 30 June 2021 (audited)
(unaudited) (unaudited)
£'000 £'000 £'000
Reconciliation of tax charge:
(Loss)/profit before taxation (1,412) 820 (11,017)
------------ ------------ ------------
Tax at the standard UK corporation tax rate of 19% (268) 156 (2,093)
Effects of:
- Non-taxable investment gains and losses 319 207 2,509
- Interest distributions ( 1 ) (51) (363) (416)
------------ ------------ ------------
Total tax expense - - -
------------ ------------ ------------
( 1 ) Although no dividends have yet been paid for the year ending 30 June 2022, it
is the intention for dividends for the year to be paid in future, or for tax
losses to be used, to minimise tax due for the year ending 30 June 2022.
Domestic corporation tax rates in the jurisdictions in which the Company
operated were as follows:
Period from 1 July 2021 to 31 December 2021 Period from 1 July 2020 to 31 December 2020 (unaudited) Year ended 30 June 2021 (audited)
(unaudited)
United Kingdom 19% 19% 19%
Guernsey nil 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.
12. (Loss)/earnings per Ordinary Share
The (loss)/earnings per Ordinary Share of (2.68)p (31 December 2020: 1.56p, 30
June 2021: (20.92)p) is based on a (loss)/profit attributable to the owners of
the Company of £(1,412,000) (31 December 2020: £820,000, 30 June 2021:
£(11,017,000)) and on a weighted average number of 52,660,350 (31 December
2020 and 30 June 2021: 52,660,350) Ordinary Shares in issue since Admission.
There is no difference between the basic and diluted earnings per share.
13. Loans at amortised cost
31 December 2021 31 December 2020 30 June 2021
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Loans 24,463 41,344 28,920
Unrealised loss* (13,746) (3,268) (14,251)
------------ ------------ ------------
Balance at period/year end 10,717 38,076 14,669
------------ ------------ ------------
Loans: Non-current 4,743 23,149 7,336
Current 5,974 14,927 7,333
------------ ------------ ------------
Loans at amortised cost 10,717 38,076 14,669
------------ ------------ ------------
*Unrealised loss:
Foreign exchange on non-Sterling loans (368) 148 (158)
Impairments of financial assets (13,378) (3,416) (14,093)
------------ ------------ ------------
Unrealised loss (13,746) (3,268) (14,251)
------------ ------------ ------------
The movement in unrealised gain/loss on loans comprises:
31 December 2021 31 December 2020 30 June 2021
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Movement in foreign exchange on non-Sterling loans (210) (977) (1,283)
Movement in impairment losses on financial assets (or loans) 715 1,020 (9,657)
------------ ------------ ------------
Movement in unrealised gains and losses on loans 505 43 (10,940)
------------ ------------ ------------
The movement in the impairment for the period/year comprised:
31 December 2021 31 December 2020 30 June 2021
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Impairment of interest income (591) - (877)
Impairment losses on financial assets (or loans) 715 1,020 (9,657)
------------ ------------ ------------
Total movement in impairment in the year 124 1,020 (10,534)
------------ ------------ ------------
The weighted average interest rate of the loans as at 31 December 2021 was
10.18% (31 December 2020: 10.55%, 30 June 2021: 6.48%).
The table below details expected credit loss provision ("ECL") of financial
assets in each stage at 31 December 2021:
Stage 1 Stage 2 Stage 3 Total
£'000 £'000 £'000 £'000
31 December 2021
Direct loans ( 1 ) 3,819 - 17,299 21,118
ECL on direct loans (11) - (10,417) (10,428)
------------ ------------ ------------ ------------
Direct loans net of the ECL 3,808 - 6,882 10,690
------------ ------------ ------------ ------------
Platform loans ( 1 ) - - 2,950 2,950
ECL on platform loans - - (2,950) (2,950)
------------ ------------ ------------ ------------
Platform loans net of the ECL - - - -
------------ ------------ ------------ ------------
Accrued interest 117 - 6 123
------------ ------------ ------------ ------------
Total loans ( 1 ) 3,819 - 20,249 24,068
Total ECL (11) - (13,367) (13,378)
------------ ------------ ------------ ------------
Total net of the ECL 3,808 - 6,882 10,690
------------ ------------ ------------ ------------
( 1 ) These are the principal amounts outstanding at 31 December 2021 and do not
include the capitalised transaction fees, which are not subject to credit
risk. At 31 December 2021, the amortised cost of the capitalised transaction
fees totalled £27,000.
The table below details the movements in the period 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)
- stage 2 to stage 3 - 451 5,633 (451) - -
Net new and further lending/repayments, and foreign exchange movements (1,121) 3 - - (1,651) (1,166) (2,772) (1,163)
Loans written-off in the period - - - - (1,878) 1,878 (1,878) 1,878
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31 December 2021 3,819 (11) - - 20,249 (13,367) 24,068 (13,378)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
( 1 ) These are the principal amounts outstanding at 31 December 2021 and do not
include the capitalised transaction fees, which are not subject to credit
risk. At 31 December 2021, the amortised cost of the capitalised transaction
fees totalled £27,000.
The table below details expected credit loss provision ("ECL") of financial
assets in each stage at 31 December 2020:
Stage 1 Stage 2 Stage 3 Total
£'000 £'000 £'000 £'000
31 December 2020
Direct loans ( 1 ) 32,956 - - 32,956
ECL on direct loans (233) - - (233)
------------ ------------ ------------ ------------
Direct loans net of the ECL 32,723 - - 32,723
------------ ------------ ------------ ------------
Platform loans ( 1 ) 5,128 - 3,342 8,470
ECL on platform loans (48) - (3,135) (3,183)
------------ ------------ ------------ ------------
Platform loans net of the ECL 5,080 - 207 5,287
------------ ------------ ------------ ------------
Accrued interest 547 - - 547
------------ ------------ ------------ ------------
Total loans ( 1 ) 38,084 - 3,342 41,426
Total ECL (281) - (3,135) (3,416)
------------ ------------ ------------ ------------
Total net of the ECL 37,803 - 207 38,010
------------ ------------ ------------ ------------
( 1 ) These are the principal amounts outstanding at 31 December 2020 and do not
include the capitalised transaction fees, which are not subject to credit
risk. At 31 December 2020, the amortised cost of the capitalised transaction
fees totalled £66,000.
The table below details the movements in the period 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)
Net new and further lending/repayments, and foreign exchange movements (3,549) (257) - - (594) (133) (4,143) (390)
Loans written-off in the period - - - - (1,410) 1,410 (1,410) 1,410
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31 December 2020 38,084 (281) - - 3,342 (3,135) 41,426 (3,416)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
( 1 ) These are the principal amounts outstanding at 31 December 2020 and do not
include the capitalised transaction fees, which are not subject to credit
risk. At 31 December 2020, the amortised cost of the capitalised transaction
fees totalled £66,000.
The table below details expected credit loss provision ("ECL") of financial
assets in each stage at 30 June 2021:
Stage 1 Stage 2 Stage 3 Total
£'000 £'000 £'000 £'000
30 June 2021
Direct loans ( 1 ) 4,940 5,633 12,637 23,210
ECL on direct loans (14) (451) (8,228) (8,693)
------------ ------------ ------------ ------------
Direct loans net of the ECL 4,926 5,182 4,409 14,517
------------ ------------ ------------ ------------
Platform loans ( 1 ) - - 5,508 5,508
ECL on platform loans - - (5,400) (5,400)
------------ ------------ ------------ ------------
Platform loans net of the ECL - - 108 108
------------ ------------ ------------ ------------
Accrued interest 175 - 7 182
------------ ------------ ------------ ------------
Total loans ( 1 ) 4,940 5,633 18,145 28,718
Total ECL (14) (451) (13,628) (14,093)
------------ ------------ ------------ ------------
Total net of the ECL 4,926 5,182 4,517 14,625
------------ ------------ ------------ ------------
( 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.
The table below details the movements in the year 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 £33,000 (31 December
2020: An increase of 1% of total gross exposure into stage 2 (from stage 1)
would result in an increase in ECL impairment allowance of £43,000, 30 June
2021: An increase of 1% of total gross exposure into stage 3 (from stage 1)
would result in an increase in ECL impairment allowance of £43,000) based on
applying the difference in average impairment coverage ratios to the movement
in gross exposure.
At 31 December 2021, the Board considered £13,378,000 (31 December 2020:
£3,416,000, 30 June 2021: £14,093,000) of loans to be impaired:
31 December 2021 31 December 2020 30 June 2021
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Direct SME loans 10,428 233 8,693
Platform loans 2,950 3,183 5,400
------------ ------------ ------------
Total impairment 13,378 3,416 14,093
------------ ------------ ------------
During the period, £1,878,000 (31 December 2020: £1,410,000, 30 June 2021:
£1,887,000) of loans were written off and included within realised loss on
disposal of loans in the Unaudited Condensed 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.
14. Investments at fair value through profit or loss
Period from 1 July 2021 to 31 December 2021 Period from 1 July 2020 to 31 December 2020 (unaudited) Year ended 30 June 2021 (audited)
(unaudited)
£'000 £'000 £'000
Balance brought forward - 251 251
Disposals in the period/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
- 4 (92)
------------ ------------ ------------
Balance at period/year end - 255 -
------------ ------------ ------------
Cost at period/year end - 159 -
------------ ------------ ------------
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. For
further information on the investments at fair value through profit or loss,
see note 15.
15. Fair value of financial instruments
The following table shows financial instruments recognised at fair value,
analysed between those whose fair value is based on:
- Quoted prices in active markets for identical assets or
liabilities (Level 1);
- Those involving inputs other than quoted prices included in
Level 1 that are observable for the asset or liability, either directly (as
prices) or indirectly (derived from prices) (Level 2); and
- Those with inputs for the asset or liability that are not based
on observable market data (unobservable inputs) (Level 3).
Financial assets and liabilities designated as at fair value through profit or
loss
At 31 December 2021, the financial instruments designated at fair value
through profit or loss were as follows:
31 December 2021 (unaudited)
Level 1 Level 2 Level 3 Total
Financial assets £'000 £'000 £'000 £'000
Unlisted equity shares - - - -
------------ ------------ ------------ ------------
Total financial assets designated as at fair value through profit or loss - - - -
------------ ------------ ------------ ------------
At 31 December 2020, the financial instruments designated at fair value
through profit or loss were as follows:
31 December 2020 (unaudited)
Level 1 Level 2 Level 3 Total
Financial assets £'000 £'000 £'000 £'000
Unlisted equity shares - - 255 255
------------ ------------ ------------ ------------
Total financial assets designated as at fair value through profit or loss - - 255 255
------------ ------------ ------------ ------------
At 30 June 2021, the financial instruments designated at fair value through
profit or loss were as follows:
30 June 2021 (audited)
Level 1 Level 2 Level 3 Total
Financial assets £'000 £'000 £'000 £'000
Unlisted equity shares - - - -
------------ ------------ ------------ ------------
Total financial assets designated as at fair value through profit or loss - - - -
------------ ------------ ------------ ------------
Level 3 financial instruments included unlisted equity shares. Net asset value
was considered to be an appropriate approximation of fair value as, if the
Company were to dispose of the holdings, it would expect to do so at, or
around, net asset value.
Transfers between levels
There were no transfers between levels in the period (31 December 2020 and 30
June 2021: none).
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 (31 December 2020: gain of £269,000, 30 June
2021: gain of £269,000) on forward foreign exchange contracts that settled
during the period.
As at 31 December 2021, there were no open forward foreign exchange contracts
(31 December 2020 and 30 June 2021: none).
17. Other receivables and prepayments
31 December 2021 31 December 2020 30 June 2021
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Accrued interest 123 547 182
Other receivables 15 16 1
Prepayments 14 11 6
------------ ------------ ------------
152 574 189
------------ ------------ ------------
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
31 December 2021 31 December 2020 30 June 2021
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Audit fee 78 36 62
Legal fees 50 - -
Other payables and accruals 32 20 20
Administration fee 28 28 37
Consultancy fee 23 - -
Management fee 21 53 25
Directors' national insurance 11 6 4
------------ ------------ ------------
243 143 148
------------ ------------ ------------
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 31 December 2021, the Company had no liabilities that would give rise to
cash flows from financing activities (31 December 2020 and 30 June 2021:
none).
20. Share capital
31 December 2021 31 December 2020 30 June 2021
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Authorised share capital:
Unlimited number of Ordinary Shares of 1 pence each - - -
43,857,133 B Shares of £1 each (31 December 2020: nil, 30 June 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 Shares of £1 each 50 50 50
------------ ------------ ------------
Called up share capital:
52,660,350 Ordinary Shares of 1 pence each 527 527 527
1 Management Share of £1 (31 December 2020: 50,000, 30 June 2021: 1)
- 50 -
------------ ------------ ------------
527 577 527
------------ ------------ ------------
Management Shares
The Management Shares are 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 Shares.
The Management Shares do 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 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 period, no Management Shares were bought back and cancelled (31
December 2020: none, 30 June 2021: 49,999 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 period, 4,476,000 (31 December 2020: none, 30 June 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 )
Period ended 31 December 2021 (unaudited) Non-distributable
Distributable Total
£'000 £'000 £'000 £'000 £'000
At 30 June 2021 23,269 10,319 (757) (14,252) 18,579
Realised revenue profit - - 266 - 266
Realised investment gains and losses - - (2,183) - (2,183)
Unrealised investment gains and losses - - - 505 505
Dividends paid - - - - -
B Shares issued during the period (notes 5 and 20) (4,476)
- - - (4,476)
B Shares redeemed during the period (notes 5 and 20) ( 3 ) (4,476)
4,476 - - -
------------ ------------ ------------ ------------ ------------
At 31 December 2021 14,317 14,795 (2,674) (13,747) 12,691
------------ ------------ ------------ ------------ ------------
Special distributable reserve ( 1 / 3 ) Capital redemption reserve ( 3 ) Profit and loss account ( 2 )
Period ended 31 December 2020 (unaudited) Non-distributable
Distributable Total
£'000 £'000 £'000 £'000 £'000
At 30 June 2020 48,181 - - (3,226) 44,955
Realised revenue profit - - 1,908 - 1,908
Realised investment gains and losses - - (1,141) - (1,141)
Unrealised investment gains and losses - - - 53 53
Dividends paid (4,323) - (767) - (5,090)
------------ ------------ ------------ ------------ ------------
At 31 December 2020 43,858 - - (3,173) 40,685
------------ ------------ ------------ ------------ ------------
Special distributable reserve ( 1 / 3 ) Capital redemption reserve ( 3 ) Profit and loss account ( 2 )
Non-distributable
Year ended 30 June 2021 (audited) 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
------------ ------------ ------------ ------------ ------------
( 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 £13,218,000 (31 December 2020: £41,262,000,
30 June 2021: £19,106,000), less £1 (31 December 2020: £50,000, 30 June
2021: £1), being amounts owed in respect of Management Shares, and on
52,660,350 (31 December 2020 and 30 June 2021: 52,660,350) Ordinary Shares in
issue at the period 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 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 investments at fair value through profit or loss (see notes
14 and 15) are exposed to price risk and it is not the intention to mitigate
the price risk.
At 31 December 2021, if the valuation of the investments at fair value through
profit or loss had moved by 5% with all other variables remaining constant,
the change in net assets and profit/(loss) would amount to approximately +/-
£nil (31 December 2020: +/- £13,000, 30 June 2021: +/- £nil). The maximum
price risk resulting from financial instruments is equal to the £nil carrying
value of the investments at fair value through profit or loss (31 December
2020: £255,000, 30 June 2021: £nil).
(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 period comprised:
Period ended 31 December 2021 (unaudited) Period ended 31 December 2020 (unaudited) Year ended 30 June 2021 (audited)
£'000 £'000 £'000
Movement in unrealised gains and losses on loans due to movement in foreign (210) (977) (1,283)
exchange on non-Sterling loans
Net foreign exchange gain 2 2 3
------------ ------------ ------------
Foreign currency loss in the period excluding the effect of foreign currency (208) (975) (1,280)
hedging
Movement in unrealised gain on foreign currency derivative financial - 6 6
instruments
Realised gain on foreign currency derivative financial instruments - 269 269
------------ ------------ ------------
Foreign currency loss in the period including the effect of foreign currency (208) (700) (1,005)
hedging
------------ ------------ ------------
As at 31 December 2021, a proportion of the net financial assets of the
Company were denominated in currencies other than Sterling as follows:
Investments at fair value through profit or loss
Loans and receivables Cash and cash equivalents Other payables and accruals
Exposure
£'000 £'000 £'000 £'000 £'000
31 December 2021 (unaudited)
US Dollars - 2,021 1 (11) 2,011
Euros - 3,721 - - 3,721
--------------- --------------- --------------- --------------- ---------------
- 5,742 1 (11) 5,732
--------------- --------------- --------------- --------------- ---------------
31 December 2020 (unaudited)
US Dollars - 6,825 - - 6,825
Euros - 4,600 - - 4,600
--------------- --------------- --------------- --------------- ---------------
- 11,425 - - 11,425
--------------- --------------- --------------- --------------- ---------------
30 June 2021 (audited)
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 31 December 2021, 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 31 December 2021 and the profit/(loss) for
the period ended 31 December 2021 would have increased/(decreased) by
£302,000/£(273,000) (31 December 2020: £601,000/£(544,000), 30 June 2021:
£369,000/£(334,000)), after accounting for the effects of the hedging
contracts mentioned above, where applicable.
(iii) 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 £2,592,000 (31 December 2020:
£2,500,000, 30 June 2021: £4,396,000) were the only interest bearing
financial instruments subject to variable interest rates at 31 December
2021. 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 period would have been £13,000 (31
December 2020: £13,000, 30 June 2021: £22,000).
Fixed interest Variable interest Non-interest bearing Total
31 December 2021 (unaudited)
£'000 £'000 £'000 £'000
Financial assets
Loans ( 1 ) 10,717 - - 10,717
Other receivables - - 138 138
Cash and cash equivalents - 2,592 - 2,592
------------ ------------ ------------ ------------
Total financial assets 10,717 2,592 138 13,447
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (243) (243)
------------ ------------ ------------ ------------
Total financial liabilities - - (243) (243)
------------ ------------ ------------ ------------
Total interest sensitivity gap 10,717 2,592 (105) 13,204
------------ ------------ ------------ ------------
31 December 2020 (unaudited)
Financial assets
Loans ( 1 ) 38,076 - - 38,076
Investments at fair value through profit or loss - - 255 255
Other receivables - - 563 563
Cash and cash equivalents - 2,500 - 2,500
------------ ------------ ------------ ------------
Total financial assets 38,076 2,500 818 41,394
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (143) (143)
------------ ------------ ------------ ------------
Total financial liabilities - - (143) (143)
------------ ------------ ------------ ------------
Total interest sensitivity gap 38,076 2,500 675 41,251
------------ ------------ ------------ ------------
Fixed interest Variable interest Non-interest bearing Total
30 June 2021 (audited)
£'000 £'000 £'000 £'000
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 £10,717,000 (31 December 2020: £38,076,000, 30 June 2021:
£14,669,000), one loan amounting to £3,605,000 (31 December 2020: two loans
amounting to £8,072,000, 30 June 2021: one loan amounting to £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 31 December 2021, credit risk arose principally from cash and cash
equivalents of £2,592,000 (31 December 2020: £2,500,000, 30 June 2021:
£4,396,000) and balances due from the platforms and SMEs of £10,717,000 (31
December 2020: £38,076,000, 30 June 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
13 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 31 December 2021 was low since the ratio
of cash and cash equivalents to unmatched liabilities was 11:1 (31 December
2020: 17:1, 30 June 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, 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:
31 December 2021 31 December 2020 30 June 2021
(unaudited) (unaudited) (audited)
Percentage Percentage Percentage
0 to 6 months 43.9 11.4 54.7
6 months to 18 months 21.7 28.9 7.6
18 months to 3 years 34.4 39.7 27.9
Greater than 3 years - 20.0 9.8
------------ ------------ ------------
100.0 100.0 100.0
------------ ------------ ------------
Capital management
During the period, 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 period ended 31 December 2021, 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 (31 December 2020 and 30 June 2021: none). 49,999
Management Shares were bought back for £49,999 and cancelled during the year
ended 30 June 2021 (see note 20).
During the period ended 31 December 2021, 4,476,000 B Shares were issued and
bought back for £4,476,000 (see note 5) (31 December 2020: none, 30 June
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.
Following the Shareholders' approval of the change to investment policy and
the managed wind-down of the Company, the Board manages the Company's capital
to enable it to make quarterly dividend payments for the time being (instead
of the previous monthly dividends), although this will be kept under review,
and the return of capital via the B Share Scheme. The Company will also look
to structure its dividend payments to maintain investment trust status for so
long as it remains listed.
24. Contingent assets and contingent liabilities
There were no contingent assets or contingent liabilities in existence at the
period end (31 December 2020 and 30 June 2021: none).
25. Events after the reporting period
Following FCA approval of its application, with effect from 1 January 2022,
the Company became a self-managed AIFM.
With effect from 1 January 2022, the Company entered into a consultancy
agreement with Syon Arc Limited to secure the services of one of the
individuals previously employed by KKV.
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 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.
Therefore, in January 2022 and February 2022, the Company increased the
provision by £468,000, for the combined film portfolio.
Russian Invasion of Ukraine
Russia invaded Ukraine in February 2022 and is a new emerging 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
may well have 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 will 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.
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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