REG - Secured Income Fd - Half-year Report
16/03/2023 07:00
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RNS Number : 1145T Secured Income Fund PLC 16 March 2023
16 March 2023
Secured Income Fund plc
("SSIF" or the "Company")
Half-Yearly Financial Report
For the six months ended 31 December 2022
A copy of the Company's Half-Yearly Report and Condensed Financial Statements
for the six months ended 31 December 2022 will shortly be available to view
and download from the Company's website,
http://www.securedincomefundplc.co.uk/
(http://www.securedincomefundplc.co.uk/) . Neither the contents of the
Company's website nor the contents of any website accessible from hyperlinks
on the Company's website (or any other website) is incorporated into or forms
part of this announcement.
Enquiries to:
Directors
David Stevenson (Chair) tel: +44 7973 873785
Susan Gaynor Coley tel: +44 7977 130673
Brett Miller tel: +44 7770 447338
finnCap Ltd. tel: +44 20 7220 0500
Corporate Finance: William Marle
Sales: Mark Whitfeld
http://www.securedincomefundplc.co.uk/
(http://www.securedincomefundplc.co.uk/)
The following text is extracted from the Half-Yearly Report and Unaudited
Condensed Financial Statements of the Company for the six months ended 31
December 2022.
Strategic Report
Key Points
31 December 2022 31 December 2021 30 June 2022 (audited)
(unaudited) (unaudited)
Net assets ( 1 ) £9,686,000 £13,218,000 £10,916,000
NAV per Ordinary Share 18.39p 25.10p 20.73p
Share price 12.00p 18.50p 12.00p
Discount to NAV (34.8)% (26.3)% (42.1)%
Profit/(loss) for the period £745,000 £(1,412,000) £(554,000)
Dividend per share declared in respect of the period 0.75p - 0.75p
B Share issue and redemption per Ordinary Share declared in respect of the 14.50p
period
3.00p 8.50p
Total return per Ordinary Share (based on NAV) ( 2 ) 6.8% -7.4% -2.9%
Total return per Ordinary Share (based on share price) ( 2 ) 31.3% -36.5% -37.6%
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 2021 and 30 June 2022: 1) (see note 18).
( 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 2022 to 31 December 2022. 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 £24.4 million (equivalent to
46.25p per Ordinary Share) through a combination of dividends and a B Share
Scheme.
Performance
For the interim period ended 31 December 2022, the Company generated a net
profit of £0.7 million and earnings per Ordinary Share of 1.41p (compared to
a loss of £1.4 million and loss per Ordinary Share of 2.68p for the period
ended 31 December 2021).
The Company's NAV at 31 December 2022 was £9.7 million (18.39p (cum income)
per Ordinary Share) compared to £10.9 million (20.73p per Ordinary Share) as
at 30 June 2022. The change in the NAV relates to the £1.6 million B Share
distribution and £0.4 million dividend payment made during the period, with
the balance being attributable to the net profit of £0.7 million.
During the reporting period, the IFRS 9 provision for the SME loan company has
been increased as the Borrower has failed to secure a refinance of the
facility thus far. The Borrower entered administration on 19 December 2022,
however it is noted that the Company continues to receive monthly capital
repayments along with interest payments. This position will be closely
monitored by the Company through regular dialogue to assess the ongoing
status.
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 41.6%.
No foreign exchange hedging has been employed during the reporting period.
Non-Sterling cash balances are converted into Sterling at the earliest
opportunity. A table showing the FX exposure in the portfolio as at 31
December 2022 has been included in note 21.
The portfolio exposure by maturity, geography, type and currency are presented
in the Company Analytics on.
Corporate Activity
The Company has focused on the expeditious return of capital to investors.
Costs have been monitored carefully.
As part of its ongoing management of the Company's running costs, a Special
Resolution was proposed and approved at the Company's General Meeting held on
16 December 2021. Once the Company's NAV falls below £7 million, the Board
will notify the London Stock Exchange of its intention to cancel the Company's
admission to trading on the Specialist Fund Segment of the Main Market (the
"Cancellation of Trading").
On 15 December 2022, a further Special Resolution was proposed and approved at
the Company's General Meeting which involved the cancellation of the Company's
capital redemption reserve (the "Reduction of Capital"). This was approved by
the High Court of Justice in London and the Reduction of Capital taking effect
on 28 February 2023, the amount cancelled was credited to the Company's
distributable reserves on 10 March 2023. This improves the Company's
distributable reserves position and will allow the Company to continue to
operate the B Share scheme.
Dividends
Following the decision to proceed with a managed wind-down, the Board reviewed
the dividend policy and decided to cease paying monthly dividends and is
instead returning excess capital as and when the Company has excess cash
reserves available for distribution. However, it is the Board's intention
that the Company will pay sufficient dividends each financial year to maintain
investment trust status under the Corporation Tax Act 2010 for so long as the
Company remains listed. In line with this, on 2 September 2022, the Board
declared a dividend of 0.75p per Ordinary Share for the year ended 30 June
2022, which was paid on 7 October 2022.
Capital Distributions
The Company adopted a B Share scheme, following approval by Shareholders at
the General Meeting held on 23 March 2021. The Company is therefore able to
issue redeemable B Shares to Shareholders which are subsequently redeemed for
cash, this allows the capital returns to be made in a more tax efficient
manner for some Shareholders.
During this reporting period, the Board distributed £1.6 million using the B
Share Scheme, which is equivalent to 3.0p per Ordinary Share.
To date, a total of £19.5 million has been distributed to Shareholders via
the B share scheme since the commencement of the managed wind down, this is
equivalent to 37p per Ordinary Share. Moreover, an additional £4.9 million,
equivalent to 9.25p per Ordinary Share, had been distributed in the form of
dividends.
The quantum and timing of a Return of Capital to Shareholders following
receipt by the Company of the net proceeds of realisations of investments will
be dependent on the Company's liabilities and general working capital
requirements. Accordingly, any future Return of Capital will continue to be at
the discretion of the Board, which will announce details of each Return of
Capital, including the relevant Record Date, Redemption Price and Redemption
Date, through an RNS Announcement, whilst the Company remains listed, a copy
of which will be posted to Shareholders. The Board intends for a further
capital return to be made within the next three months.
Shareholder Engagement
The Board has engaged with Shareholders over the reporting period, taking
feedback and responding to their recommendations where appropriate. Brett
Miller has led this activity and will continue to do so as we continue to wind
down the Company.
Outlook
Achieving a balance between maximising the value of the remaining assets and
ensuring timely returns of capital to Shareholders remains at the forefront
for the Company. With the cancellation of the Company's capital redemption
reserve, improving the Company's distributable reserves position, the Board
remains committed to the progressive return of capital through the B Share
scheme. The Company is efficiently positioned to finalise the realisation of
the remaining assets, which the Board expects to be largely achieved within
the next 12 to 18 months.
It is noted that the Company will shortly be approaching the £7 million NAV
target which will activate the Special Resolution approved in December 2021
that triggers the cancellation of the Company's admission to trading on the
Specialist Fund Segment of the Main Market.
We thank investors for their continued support throughout this period and hope
to deliver investors total proceeds as close as possible for the remaining
NAV. The Board will keep Shareholders updated regarding any upcoming changes
over the next few months.
David Stevenson
Chairman
15 March 2023
Investment Report
Overview
The Company is continuing to work closely with Borrowers, whilst optimising
the return of capital to Shareholders in as expeditious a way as possible.
Since the wind-down of the Company commenced in September 2020, 9.25 pence per
Ordinary share has been returned to Shareholders via dividend distribution and
37 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 2022, with an
average carrying value of £0.6 million per loan. A direct secured term loan
to a LED manufacturer in Ireland that had been in place since May 2017 was
fully repaid in December 2022.
A follow-on direct investment was made in October 2022 for a loan formerly
classified as a legacy loan in previous reports. This broadband company merged
with its competitor and the Company believe that this combined entity will
yield superior results than the original standalone company and therefore hope
to recoup some of the initial investment that was previously fully impaired in
the process.
The IFRS 9 impairment provision for the SME loan company increased during the
period due to further delays in obtaining refinancing. There have been
marginal changes in provision across the remaining direct loans.
The legacy loans are fully impaired under IFRS 9 and therefore have zero
carrying value assigned to them. This is due to various factors such as
continuous delays in repayment and depleted borrower assets. The Company has
continued to engage with each of these Borrowers for updates and will reassess
the positions should there be any changes in circumstances.
Direct Loans
Principal Balance Outstanding as at 31 December 2022 ECL provision at 31 December 2022 Loan Carrying Value at Amortised Cost ( 1 ) at 31 December 2022 Amortisation/ Bullet repayment/ other
Borrower £ £ £ Asset Type Currency Yield
Borrower 1 £2,555,019 £7,665 £2,547,354 Pass-through amortisation SME and Leasing Fund EUR Variable
Borrower 2 £2,721,318 £1,089,233 £1,632,085 Bullet repayment/other Wholesale Lending GBP 10%
Borrower 3 £2,482,827 £1,241,414 £1,241,413 Interest only for 12 months, then amortisation Medical Services USD 12%
Borrower 4 £1,630,082 £1,309,241 £320,841 Cash sweep Film Production Financing USD 12%
Borrower 5 £413,805 £115,865 £297,940 Bullet repayment Technology USD 5%
Borrower 6 £1,624,925 £1,482,702 £142,223 Cash sweep Film Production Financing GBP 11%
Borrower 7 £506,945 £445,703 £61,242 Cash sweep Film Production Financing GBP 12%
Borrower 8 £632,877 £594,209 £38,668 Cash sweep Film Production Financing GBP 12%
Borrower 9 £1,418,401 £1,380,057 £38,344 Cash sweep Film Production Financing GBP 11%
Borrower 10 £2,395,295 £2,363,437 £31,858 Cash sweep Film Production Financing GBP 12%
Direct Loans Total £16,381,494 £10,029,526 £6,351,968
( 1 ) The carrying values of loans at amortised cost disclosed in the table
above do not include capitalised transaction fees, which totalled £6,133 at
31 December 2022.
The following provides a narrative relating to our direct loan investments.
Names of counterparties have been omitted for commercial and business
sensitivity reasons.
Irish SME and Leasing Fund investment (Borrower 1) - 26.3% of NAV
This portfolio of 17 underlying loans has continued to perform well. Most of
the underlying loans are delivering income and the manager has continued to
make healthy distributions to the Company during the reporting period. As the
Fund is in its harvest phase, the capital distributions are expected to
accelerate as the loans mature or are refinanced.
During the reporting period, the Company has received €560,041 in capital
repayments.
SME Loan company (Borrower 2) - 16.8% of NAV
This loan has been in place since May 2017 and is secured against a wholesale
portfolio of working capital SME loans.
The Borrower was initially due to make a bullet repayment at the end of
September 2021. An extension was granted until the end of 2021 so the Borrower
could source new funding to refinance the facility, however at the time of
writing nothing has come to fruition. There has been an increase in the IFRS
9 provision assigned to the loan over the period.
The portfolio is in run off as the Borrower entered administration in December
2022. The Company is currently working with the administrator to collect the
outstanding loan.
During the period, the Company received £1,280,186 by way of capital
repayments as a result of active collection efforts undertaken. A further
£216,946 has been received in capital repayments post year end whilst monthly
interest on the loan continues to be serviced.
US healthcare services company (Borrower 3) - 12.8% of NAV
This loan was made to a company specialising in ancillary medical services to
a number of hospitals in the American Midwest including optometry, audiology,
dentistry and podiatry. A key aspect of the security package is that there is
a parent company guarantee in place over all scheduled interest and principal
repayments.
The Borrower is in default as it sold its core business assets in June 2021,
rendering the business economically unviable. Several Reservations of Rights
letters have been issued to the Borrower and Guarantor in relation to this.
The latest monthly payments of principal and interest have been made in line
with the schedule by the Guarantor. At the time of writing, payments are up to
date but we will be continuing to monitor these receivables very closely.
Whilst there is necessarily a sizeable IFRS 9 provision against this position
as it is in unremedied default, we believe it is in the Guarantor's best
interest to ensure the loan is repaid in full as per the schedule. All
rights over the Guarantor have been reserved.
Media financing (Borrowers 4, 6, 7, 8, 9 and 10) - 6.5% of NAV
The Film Production Financing portfolio, comprising of six film financings,
has been heavily impacted by the changes in operating practises resulting from
the Covid-19 pandemic. This has resulted in significant delays in recouping
the outstanding balances within the "contracted cash flow" element (comprising
Tax Credit, Receipts and Presold Income), hampered further by the political
uncertainty across some of the remaining territories. Moreover, the level of
uncertainty across the "non-contractual Future Sales" element, which is
considered mezzanine in nature and carries a higher risk profile, has
continued to increase.
The Company remains in regular dialogue with the borrower to closely monitor
receipts, expectations of future sales and assess any changes to the
cashflows.
External specialists have been engaged by the Company to independently value
these positions and provide assistance in identifying the best approach in
realising maximum value for Shareholders given the specialist nature of the
sector.
UK Venture Debt (Borrower 5) - 3.1% of NAV
This loan note is assigned to a merged entity; a previous Borrower within the
portfolio (Borrower 11 as at June 2022) and its competitor.
This entity leverages from the existing customer base gathered over time and
with experience combined with the development of a new generation product,
which together should accelerate sales. The Company has made a follow-on loan
with an 18 month term in this combined entity in the hope of achieving a
positive resolution for its Shareholders with regards to both the legacy and
follow-on investments.
Legacy portfolio
Borrower Principal Balance Outstanding at 31 December 2022 ECL provision at 31 December 2022 Loan Carrying Value at Amortised Cost at 31 December 2022 Currency Yield
£ £ £
Borrower 11 £1,000,000 £1,000,000 - GBP -
Borrower 12 £415,714 £415,714 - GBP -
Borrower 13 £329,705 £329,705 - EUR -
Legacy Loans Total £1,745,419 £1,745,419 -
The following provides a narrative relating to the legacy loans within the
portfolio.
UK Offshore platform (Borrower 11) - 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.
The platform has recently instructed legal counsel to pursue the Company's
claim and press for repayment. We remain uncertain of the balance that will be
recovered.
Small company bond platform (Borrower 12) - 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 13) - 0.0% of NAV
We have assigned zero probability of any further collections on the remaining
loans within the portfolio. The platform is engaged in ongoing legal
proceedings with the borrowers of the four remaining loans on the platform.
Outlook
The Company has continued to make good progress with the realisation of the
portfolio to date. We expect that within the next 12-18 months the wind down
will be largely complete.
The Company is working closely with the relevant borrowers to ensure all
parties remain aligned to our objective of achieving the maximum returns for
Shareholders from the outstanding loans. The Company has also engaged
specialists to enhance returns where possible for the remaining loans.
We would like to thank Shareholders for their continued support and will share
any updates on the progress over the upcoming months.
Brett Miller
Director
15 March 2023
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;
· Russian invasion of Ukraine and the subsequent energy crisis;
· 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 2022.
The Board believes that these risks are applicable to the six month period
ended 31 December 2022 and the remaining six months of the current financial
year.
COVID-19
COVID-19 was a principal risk in the Company's Annual Report for the year
ended 30 June 2022, and although the impact of COVID-19 continues to be seen
across the world, the Directors do not believe that COVID-19 continues to pose
a significant threat to the Company and therefore, it is no longer classified
as a principal risk. Should another new variant lead to further lockdowns,
however, this could change again.
On behalf of the Board.
David Stevenson
Chairman
15 March 2023
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
15 March 2023
Unaudited Condensed Statement of Comprehensive Income
for the six months ended 31 December 2022
Note Period from 1 July 2022 to 31 December 2022 Period from 1 July 2021 to 31 December 2021 Year ended
(unaudited) (unaudited) 30 June 2022
(audited)
£'000 £'000 £'000
Income
Investment income 607 1,354 2,600
Impairment of interest income (2) (591) (1,195)
Other income 4 - -
------------ ------------ ------------
Net interest income 609 763 1,405
------------ ------------ ------------
Total revenue 609 763 1,405
------------ ------------ ------------
Operating expenses
Directors' remuneration 8 (122) (72) (195)
Other expenses 10 (119) (146) (243)
Legal and professional fees (107) (69) (109)
Consultancy fees 7c (70) (23) (71)
Administration fees 7b (59) (56) (118)
Management fees 7a - (133) (133)
------------ ------------ ------------
Total operating expenses (477) (499) (869)
------------ ------------ ------------
Investment gains and losses
Movement in unrealised gains and losses on loans due to movement in foreign 13 (77) (210) 363
exchange on non-Sterling loans
Movement in impairment losses on financial assets (or loans) 13 1,599 715 720
Realised loss on disposal of loans (936) (2,183) (2,186)
Movement in carrying value of other receivables 13 - -
------------ ------------ ------------
Total investment gains and losses 599 (1,678) (1,103)
------------ ------------ ------------
Net profit/(loss) from operating activities before gain on foreign currency 731 (1,414) (567)
exchange
Net foreign exchange gain 14 2 13
------------ ------------ ------------
Profit/(loss) and total comprehensive income for the period/year attributable 745 (1,412) (554)
to the owners of the Company
------------ ------------ ------------
Earnings/(loss) per Ordinary Share (basic and diluted) 12 1.41p (2.68)p (1.05)p
------------ ------------ ------------
There were no other comprehensive income items in the period/year.
Except for unrealised 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 2022
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 2022 527 17,955 7,997 (15,563) 10,916
Profit for the period 19 - - - 745 745
Transactions with Owners in their capacity as owners:
Dividends paid 5, 19 - - (395) - (395)
B Shares issued during the period 5, 18, 19 1,580 - (1,580) - -
B Shares redeemed during the period 5, 18, 19 (1,580) 1,580 (1,580) - (1,580)
------------ ------------ ------------ ------------ ------------
At 31 December 2022 527 19,535 4,442 (14,818) 9,686
------------ ------------ ------------ ------------ ------------
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 19 - - - (1,412) (1,412)
Transactions with Owners in their capacity as owners:
B Shares issued during the period 5, 18, 19 4,476 - (4,476) - -
B Shares redeemed during the period 5, 18, 19 (4,476) 4,476 (4,476) - (4,476)
------------ ------------ ------------ ------------ ------------
At 31 December 2021 527 14,795 14,317 (16,421) 13,218
------------ ------------ ------------ ------------ ------------
Audited Statement of Changes in Equity
for the year ended 30 June 2022
Note Called up share capital Capital redemption reserve Special distributable reserve Profit and loss account Total
Audited
£'000 £'000 £'000 £'000 £'000
At 1 July 2021 527 10,319 23,269 (15,009) 19,106
Loss for the year 19 - - - (554) (554)
Transactions with Owners in their capacity as owners:
B Shares issued during the year 5, 18, 19 7,636 - (7,636) - -
B Shares redeemed during the year 5, 18, 19 (7,636) 7,636 (7,636) - (7,636)
------------ ------------ ------------ ------------ ------------
At 30 June 2022 527 17,955 7,997 (15,563) 10,916
------------ ------------ ------------ ------------ ------------
There were no other comprehensive income items in the 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 2022
Note 31 December 2022 31 December 2021 30 June 2022
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Non-current assets
Loans at amortised cost 13 2,845 4,743 3,440
Other receivables and prepayments 15 277 - -
------------ ------------ ------------
Total non-current assets 3,122 4,743 3,440
------------ ------------ ------------
Current assets
Loans at amortised cost 13 3,513 5,974 4,807
Other receivables and prepayments 15 155 152 65
Cash and cash equivalents 3,041 2,592 2,770
------------ ------------ ------------
Total current assets 6,709 8,718 7,642
------------ ------------ ------------
Total assets 9,831 13,461 11,082
------------ ------------ ------------
Current liabilities
Other payables and accruals 16 (145) (243) (166)
------------ ------------ ------------
Total liabilities (145) (243) (166)
------------ ------------ ------------
------------ ------------ ------------
Net assets 9,686 13,218 10,916
------------ ------------ ------------
Capital and reserves attributable to owners of the Company
Called up share capital 18 527 527 527
Other reserves 19 9,159 12,691 10,389
------------ ------------ ------------
Equity attributable to the owners of the Company 9,686 13,218 10,916
------------ ------------ ------------
Net asset value per Ordinary Share 20 18.39p 25.10p 20.73p
------------ ------------ ------------
These unaudited condensed half-yearly financial statements of Secured Income
Fund plc (registered number 09682883) were approved by the Board of Directors
on 15 March 2023 and were signed on its behalf by:
David Stevenson Gaynor Coley
Chairman Director
15 March 2023 15 March 2023
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 2022
Period from 1 July 2022 to 31 December 2022 Period from 1 July 2021 to 31 December 2021 Year ended 30 June 2022 (audited)
(unaudited) (unaudited)
£'000 £'000 £'000
Cash flows from operating activities
Net profit/(loss) before taxation 745 (1,412) (554)
Adjustments for:
Movement in unrealised gains and losses on receivables (13) - -
Movement in unrealised gains and losses on loans due to movement in foreign 77 210 (363)
exchange on non-Sterling loans
Movement in impairment losses on financial assets (or loans) (1,599) (715) (720)
Realised loss on disposal of loans 936 2,183 2,186
Amortisation of transaction fees 10 17 28
Decrease in investments 2,465 2,258 5,291
------------ ------------ ------------
Net cash inflow from operating activities before working capital changes 2,621 2,541 5,868
(Increase)/decrease in other receivables and prepayments (354) 36 124
(Decrease)/increase in other payables and accruals (21) 95 18
------------ ------------ ------------
Net cash inflow from operating activities 2,246 2,672 6,010
Cash flows from financing activities
B Share scheme redemptions (1,580) (4,476) (7,636)
Dividends paid (395) - -
------------ ------------ ------------
Net cash outflow from financing activities (1,975) (4,476) (7,636)
------------ ------------ ------------
Increase/(decrease) in cash and cash equivalents in the period/year 271 (1,804) (1,626)
Cash and cash equivalents at the beginning of the period/year 2,770 4,396 4,396
------------ ------------ ------------
Cash and cash equivalents at 31 December 2022 3,041 2,592 2,770
------------ ------------ ------------
Supplemental cash flow information
Non-cash transaction - interest income - - -
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 2022
1. General information
The Company is a public company (limited by shares) and was incorporated and
registered in England and Wales under the Companies Act 2006 on 13 July 2015
with registered number 09682883. The Company's shares were admitted to trading
on the London Stock Exchange Specialist Fund Segment on 23 September 2015
("Admission"). The Company is domiciled in England and Wales.
The Company is an investment company as defined in s833 of the Companies Act
2006.
The Investment Management Agreement between the Company and KKV Investment
Management Ltd was terminated on 31 December 2021. There was a smooth
transition of management back to the Company, which had been facilitated by
retaining key personnel. Furthermore, with effect from 1 January 2022, the
Company was 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 the Board:
- 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 is 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 2022. 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 2022 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.
Financial statements prepared on a non-going concern basis
On 19 June 2020, the Company held a continuation vote (the "Continuation
Vote") that, in line with the Directors' recommendation, did not pass. This
vote was required under the Articles as the Company did not have a Net Asset
Value of at least £250 million as at 31 December 2019. As this vote did not
pass, the Directors (as required under the Articles) convened a further
general meeting of the Company on 17 September 2020 at which a special
resolution approved the managed wind-down of the Company and the adoption of
the new investment policy of the Company 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 Russian invasion of Ukraine and the subsequent energy crisis is a risk 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
Russian invasion of Ukraine and the subsequent energy crisis, thereby enabling
the Company to realise its assets in an orderly manner.
b) Basis of measurement
The unaudited condensed half-yearly financial statements have been prepared on
a historical cost basis, except for investments at fair value through profit
or loss, 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 UK-adopted International Accounting Standards 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 UK-adopted International
Accounting Standards 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 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.
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. 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 receivables and financial assets 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 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)
IAS 37 Provisions, Contingent Liabilities and Contingent Assets - Amendments
regarding the costs to include when assessing whether a contract is onerous
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
IAS 1 Presentation of Financial Statements - amendments regarding the classification
of liabilities
1 January 2024
Presentation of Financial Statements - amendments regarding the disclosure of
accounting policies
Presentation of Financial Statements - amendments regarding the classification 1 January 2023
of debt and covenants
1 January 2024
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors - Amendments
regarding the definition of accounting estimate
1 January 2023
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 judgements, which have had a significant effect on the amounts
recognised in the unaudited condensed half-yearly financial statements:
COVID-19
The impact of COVID-19 continues to be seen across the world. However, the
Directors do not believe that COVID-19 continues to pose a significant threat
to the Company. Should another new variant lead to further lockdowns, however,
this could change again.
Russian Invasion of Ukraine and the subsequent energy crisis
Russia's invasion of Ukraine is a risk to the global economy. The invasion
itself and resulting international sanctions on Russia are believed to have
already caused substantial economic damage to that country, which is likely to
worsen the longer the sanctions are in place, and has had some wider global
effect on the supply and prices of certain commodities and consequently on
inflation and general economic growth of the global economy. The effects
vary from country to country, depending, for example, on their dependence on
Russian energy supplies, particularly gas, which cannot be so easily
transported and substituted as oil. The full effects will take time to flow
through fully and manifest themselves in the balance sheets of companies and
impact their ability to repay loans. In this context, we can only express
reservations on the near-term impact on credit risk and the impairment of
securities, which may be more volatile as a result of the Russian invasion and
the subsequent energy crisis.
Classification of B Shares
The B Shares pay a fixed rate cumulative preferential cash dividend of 1% per
annum of the nominal value of £1, and have limited rights, including that:
the holders of the B Shares shall not be entitled to any further right of
participation in the profits or assets of the Company; and the B Shares are
redeemable at the Company's option.
However, as the potential indicator of a liability, being the fixed rate
cumulative dividend, is immaterial given the B Shares are allotted and
redeemed on the same day, the B Shares are classified as equity.
B Shares, which are redeemed immediately following issue, are measured at the
redemption amount.
Estimates and assumptions
The Company based its assumptions and estimates on parameters available when
the 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 impact of the Russian invasion of Ukraine and the resultant energy
crisis, 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 the Russian
invasion of Ukraine and the subsequent energy crisis.
The determination of whether a specific factor is relevant and its weight
compared with other factors depends on the type of product, the
characteristics of the financial instrument and the borrower, and the
geographical region. It is not possible to provide a single set of criteria
that will determine what is considered to be a significant increase in credit
risk. Events that the Company will assess when deciding if a financial asset
is credit impaired include:
· significant financial difficulty of the borrower;
· a breach of contract, such as a default or past-due event; and
· it becoming probable that the borrower will enter bankruptcy or
other financial reorganisation.
Although it may not always be the case (e.g. if discussions with a borrower
are ongoing), generally a loan is deemed to be in default if the borrower has
missed a payment of principal or interest by more than 180 days, unless the
Company has good reason not to apply this rule. If the Company has evidence to
the contrary, it may make an exception to the 180 day rule to deem that a
borrower is, or is not, in default. Therefore, the definitions of credit
impaired and default are aligned as far as possible so that Stage 3 represents
all loans that are considered defaulted or otherwise credit impaired.
IFRS 9 confirms that a Probability of Default ("PD") must never be zero as
everything is deemed to have a risk of default; this has been incorporated
into the assessment of expected credit losses. All PDs 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.
12-month PD is 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%.
All assessment is based on reasonable and supportive information available at
the time.
12-month ECL is 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
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 the Russian
invasion of Ukraine and the subsequent energy crisis.
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, and a personal
guarantee.
Loans written off
Financial assets (and the related impairment allowances) are normally written
off, either partially or in full, when there is no realistic prospect of
recovery. Where loans are secured, this is generally after receipt of any
proceeds from the realisation of security. In circumstances where the net
realisable value of any collateral has been determined and there is no
reasonable expectation of further recovery, write-off may be earlier. No
platform loans were written off in the period (31 December 2021: £1,878,000;
30 June 2022: £1,880,000), but the carrying value of the remaining platform
loans was £nil at 31 December 2022 (31 December 2021 and 30 June 2022:
£nil).
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 2022.
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 21 for further information on the loans
at amortised cost and credit risk.
5. Dividends
The Company distributes at least 85% of its distributable income earned in
each financial year by way of dividends.
The Company elected to designate all of the dividends for the period ended 31
December 2022 as interest distributions to its Shareholders. In doing so,
the Company took advantage of UK tax treatment by "streaming" income from
interest-bearing investments into dividends that will be taxed in the hands of
Shareholders as interest income.
To date, the Company has declared the following dividends in respect of
earnings for the period ended 31 December 2022:
Total dividend declared in respect of earnings in the year Amount per
Ordinary Share
£'000 pence
Dividends declared (to date) for the period - -
Add, dividends paid in the period in respect of the prior year 395 0.75p
------------ ------------
Dividends paid in the period 395 0.75p
------------ ------------
In accordance with UK-adopted International Accounting Standards, dividends
are only provided for when they become a contractual liability of the
Company. Therefore, during the period a total of £395,000 (31 December 2021
and 30 June 2022: £nil) was incurred in respect of dividends, none of which
was outstanding at the reporting date (31 December 2021 and 30 June 2022:
none).
All dividends in the year were paid out of revenue (and not capital) profits.
Mechanics for returning cash to Shareholders
The Board carefully considered the potential mechanics for returning cash to
Shareholders and the Company's ability to do so. The Board believes it is in
the best interests of Shareholders as a whole to make distributions to
Shareholders without a significant delay following realisations of a material
part of the Portfolio (whether in a single transaction or through multiple,
smaller transactions concluded on similar timing), whether by dividend or
other method.
After careful consideration and discussions with a number of Shareholders, the
Board believes that one of the fairest and most cost-efficient ways of
returning substantial amounts of cash to Shareholders is by adopting a B Share
Scheme, whereby the Company will be able to issue redeemable B Shares to
Shareholders. These are then redeemed on a Redemption Date without further
action being required by Shareholders.
The B Shares are issued out of the special distributable reserve, then the
special distributable reserve is utilised again when the B Shares are redeemed
- the B Share capital is cancelled and an equal amount credited to the capital
redemption reserve.
The Company made one B Share Scheme redemption in the period, totalling
£1,580,000 (31 December 2021: £4,476,000, 30 June 2022: £7,636,000),
equivalent to 3.00p per Ordinary Share (31 December 2021: 8.50p, 30 June 2022:
14.50p).
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, the Investment Consultant and (prior to 1
January 2022), the Former Investment Manager, or any of their affiliates which
would constitute a "related party transaction" as defined in, and to which
would apply, Chapter 11 of the Listing Rules. In accordance with its related
party policy, the Company obtained: (i) the approval of a majority of the
Directors; and (ii) a third-party valuation in respect of these transactions
from an appropriately qualified independent adviser.
See notes 7 and 8 for further details.
7. Key contracts
a) Former Investment Manager
The Former Investment Manager had responsibility for managing the Company's
portfolio until 31 December 2021, and was entitled to a management fee and
performance fee for their services.
On 20 August 2021, the Company agreed with the Former Investment Manager and
its AIFM to amend the Investment Management Agreement and for the agreement to
terminate with effect from midnight on 31 December 2021. The Board believed
that the revised Agreement provided the Company with certainty over the level
of future management fees payable to the Former Investment Manager with the
added flexibility of facilitating the Company becoming self-managed, whilst
providing for the ongoing management of the portfolio to 31 December 2021.
Overall, it allowed for an orderly transition of the management of the
portfolio to the Company.
During the period, no management fees were incurred (31 December 2021:
£133,000, 30 June 2022: £133,000) and nothing was payable in respect of
management fees at the reporting date (31 December 2021: £21,000, 30 June
2022: £nil).
The performance fee ceased with effect from 1 January 2022, following the
termination of the Investment Management Agreement on 31 December 2021, and
during the period, no performance fee was paid, or payable, to the Former
Investment Manager (31 December 2021 and 30 June 2022: none).
Transaction costs
Prior to the change in the investment policy, the Company incurred transaction
costs for the purposes of structuring investments for the Company. These
costs formed part of the overall transaction costs that were capitalised at
the point of recognition and were taken into account when pricing a
transaction. When structuring services were provided by the Investment Manager
(incumbent at the time of the transaction) or an affiliate of them, they were
entitled to charge an additional fee to the Company equal to up to 1.0% of the
cost of acquiring the investment (ignoring gearing and transaction expenses).
This cost was not charged in respect of assets acquired from the Investment
Manager (incumbent at the time of the transaction), the funds they managed or
where they or their affiliates did not provide such structuring advice.
During the period, transaction costs of £10,000 (31 December 2021: £17,000,
30 June 2022 £28,000) were amortised.
b) Administration fees
Elysium Fund Management Limited ("Elysium") is entitled to an administration
fee 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 £59,000 (31 December 2021:
£56,000, 30 June 2022: £118,000) was incurred in respect of administration
fees, of which £29,000 (31 December 2021: £28,000, 30 June 2022: £33,000)
was payable at the reporting date.
c) Consultancy fees
With effect from 1 January 2022, the Company entered into a consultancy
agreement to secure the services of one of the individuals previously employed
by KKV.
During the period, a total of £70,000 (31 December 2021: £23,000, 30 June
2022: £71,000) was incurred in respect of consultancy fees, of which £7,000
(31 December 2021: £nil, 30 June 2022: £7,000) was payable at the reporting
date and a further £27,000 (31 December 2021: £23,000, 30 June 2022:
£18,000) 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, the Chairman of the Company receives £45,000 per annum,
the chairman of the Audit and Valuation Committee receives £40,000 per annum,
and other non-executive Directors receive £40,000 per annum.
The Remuneration and Nominations Committee agreed to pay Brett Miller an
additional £10,000 per month, with effect from 1 January 2022, when he took
over management of the Company's portfolio and became an Executive Director.
The additional fee is reviewed every six months and, to date, has been
extended on the same terms.
During the period, a total of £122,000 (31 December 2021: £72,000, 30 June
2022: £195,000) was incurred in respect of Directors' remuneration, none of
which was payable at the reporting date (31 December 2021 and 30 June 2022:
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 2021 and 30 June
2022: none). Therefore, there were no key management (except for the
Directors) or employees during the period (31 December 2021 and 30 June 2022:
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 2022 to 31 December 2022 Period from 1 July 2021 to 31 December 2021 (unaudited) Year ended 30 June 2022 (audited)
(unaudited)
Dividends £ £ £
David Stevenson 152 - -
Gaynor Coley 16 - -
Brett Miller - - -
B Share Scheme Redemptions
David Stevenson 608 1,722 2,937
Gaynor Coley 64 181 310
Brett Miller - - -
10. Other expenses
Period from 1 July 2022 to 31 December 2022 Period from 1 July 2021 to 31 December 2021 (unaudited) Year ended 30 June 2022 (audited)
(unaudited)
£'000 £'000 £'000
Registrar fees 29 25 42
Audit fees 24 45 71
Broker fees 18 18 36
Directors' national insurance 18 10 24
Other expenses 20 31 42
Transaction fees (note 7a) 10 17 28
------------ ------------ ------------
119 146 243
------------ ------------ ------------
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 2022 to 31 December 2022 Period from 1 July 2021 to 31 December 2021 Year ended 30 June 2022 (audited)
(unaudited) (unaudited)
£'000 £'000 £'000
Reconciliation of tax charge:
Profit/(loss) before taxation 745 (1,412) (554)
------------ ------------ ------------
Tax at the standard UK corporation tax rate of 19% 142 (268) (105)
Effects of:
- Non-taxable gains and losses (114) 319 209
- Adjustments for disallowable expenses - - 6
- Interest distributions ( 1 ) (28) (51) (75)
- Relief claimed for carried forward losses - - (35)
------------ ------------ ------------
Total tax expense - - -
------------ ------------ ------------
( 1 ) On 2 September 2022, the Board declared a dividend of 0.75p per Ordinary Share
for the year ended 30 June 2022, which was paid on 7 October 2022.
Domestic corporation tax rates in the jurisdictions in which the Company
operated were as follows:
Period from 1 July 2022 to 31 December 2022 Period from 1 July 2021 to 31 December 2021 (unaudited) Year ended 30 June 2022 (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. Earnings/(loss) per Ordinary Share
The earnings per Ordinary Share of 1.41p (31 December 2021: loss per Ordinary
Share of 2.68p, 30 June 2022: loss per Ordinary Share of 1.05p) is based on a
profit attributable to the owners of the Company of £745,000 (31 December
2021: loss of £1,412,000, 30 June 2022: loss of £554,000) and on a weighted
average number of 52,660,350 (31 December 2021 and 30 June 2022: 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 2022 31 December 2021 30 June 2022
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Loans 18,004 24,463 21,415
Unrealised loss* (11,646) (13,746) (13,168)
------------ ------------ ------------
Balance at period/year end 6,358 10,717 8,247
------------ ------------ ------------
Loans: Non-current 2,845 4,743 3,440
Current 3,513 5,974 4,807
------------ ------------ ------------
Loans at amortised cost 6,358 10,717 8,247
------------ ------------ ------------
*Unrealised loss:
Foreign exchange on non-Sterling loans 128 (368) 205
Impairments of financial assets (11,774) (13,378) (13,373)
------------ ------------ ------------
Unrealised loss (11,646) (13,746) (13,168)
------------ ------------ ------------
The movement in unrealised gain/loss on loans comprised:
31 December 2022 31 December 2021 30 June 2022
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Movement in foreign exchange on non-Sterling loans (77) (210) 363
Movement in impairment losses on financial assets (or loans) 1,599 715 720
------------ ------------ ------------
Movement in unrealised gains and losses on loans 1,522 505 1,083
------------ ------------ ------------
The movement in the impairment for the period/year comprised:
31 December 2022 31 December 2021 30 June 2022
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Impairment of interest income (2) (591) (1,195)
Impairment losses on financial assets (or loans) 1,599 715 720
------------ ------------ ------------
Total movement in impairment in the year 1,597 124 (475)
------------ ------------ ------------
The weighted average interest rate of the loans as at 31 December 2022 was
10.40% (31 December 2021: 10.18%, 30 June 2022: 10.68%).
The table below details expected credit loss provision ("ECL") of financial
assets in each stage at 31 December 2022:
Stage 1 Stage 2 Stage 3 Total
£'000 £'000 £'000 £'000
31 December 2022
Direct loans ( 1 ) 2,555 413 13,413 16,381
ECL on direct loans (8) (115) (9,906) (10,029)
------------ ------------ ------------ ------------
Direct loans net of the ECL 2,547 298 3,507 6,352
------------ ------------ ------------ ------------
Platform loans ( 1 ) - - 1,745 1,745
ECL on platform loans - - (1,745) (1,745)
------------ ------------ ------------ ------------
Platform loans net of the ECL - - - -
------------ ------------ ------------ ------------
Accrued interest 124 4 25 153
------------ ------------ ------------ ------------
Total loans ( 1 ) 2,555 413 15,158 18,126
Total ECL (8) (115) (11,651) (11,774)
------------ ------------ ------------ ------------
Total net of the ECL 2,547 298 3,507 6,352
------------ ------------ ------------ ------------
( 1 ) These are the principal amounts outstanding at 31 December 2022 and do not
include the capitalised transaction fees, which are not subject to credit
risk. At 31 December 2022, the amortised cost of the capitalised transaction
fees totalled £6,000.
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 2022 3,245 (9) - - 18,359 (13,364) 21,604 (13,373)
Net new and further lending/repayments, and foreign exchange movements (690) 1 413 (115) (3,201) 1,713 (3,478) 1,599
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31 December 2022 2,555 (8) 413 (115) 15,158 (11,651) 18,126 (11,774)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
( 1 ) These are the principal amounts outstanding at 31 December 2022 and do not
include the capitalised transaction fees, which are not subject to credit
risk. At 31 December 2022, the amortised cost of the capitalised transaction
fees totalled £6,000.
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 Stage 2 to Stage 3 - (5,633)
- 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 30 June 2022:
Stage 1 Stage 2 Stage 3 Total
£'000 £'000 £'000 £'000
30 June 2022
Direct loans ( 1 ) 3,245 - 15,405 18,650
ECL on direct loans (9) - (10,410) (10,419)
------------ ------------ ------------ ------------
Direct loans net of the ECL 3,236 - 4,995 8,231
------------ ------------ ------------ ------------
Platform loans ( 1 ) - - 2,954 2,954
ECL on platform loans - - (2,954) (2,954)
------------ ------------ ------------ ------------
Platform loans net of the ECL - - - -
------------ ------------ ------------ ------------
Accrued interest 57 - 2 59
------------ ------------ ------------ ------------
Total loans ( 1 ) 3,245 - 18,359 21,604
Total ECL (9) - (13,364) (13,373)
------------ ------------ ------------ ------------
Total net of the ECL 3,236 - 4,995 8,231
------------ ------------ ------------ ------------
( 1 ) These are the principal amounts outstanding at 30 June 2022 and do not include
the capitalised transaction fees, which are not subject to credit risk. At
30 June 2022, the amortised cost of the capitalised transaction fees totalled
£16,000.
The table below details the movements in the year 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 Stage 2 to Stage 3 - - (5,633) 451 5,633 (451) - -
Net re-measurement of ECL arising from transfer of stage - - - - - (1,239) - (1,239)
Net new and further lending/repayments, and foreign exchange movements (1,695) 5 - - (3,539) 74 (5,234) 79
Loans written-off in the year - - - - (1,880) 1,880 (1,880) 1,880
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 June 2022 3,245 (9) - - 18,359 (13,364) 21,604 (13,373)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
( 1 ) These are the principal amounts outstanding at 30 June 2022 and do not include
the capitalised transaction fees, which are not subject to credit risk. At
30 June 2022, the amortised cost of the capitalised transaction fees totalled
£16,000.
An increase of 1% of total gross exposure into Stage 3 (from Stage 1) would
result in an increase in ECL impairment allowance of £23,000 (31 December
2021: £33,000, 30 June 2022: £29,000) based on applying the difference in
average impairment coverage ratios to the movement in gross exposure.
At 31 December 2022, the Board considered £11,774,000 (31 December 2021:
£13,378,000, 30 June 2022: £13,373,000) of loans to be impaired:
31 December 2022 31 December 2021 30 June 2022
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Direct SME loans 10,029 10,428 10,419
Platform loans 1,745 2,950 2,954
------------ ------------ ------------
Total impairment 11,774 13,378 13,373
------------ ------------ ------------
During the period, no loans were written off and included within realised loss
on disposal of loans in the Unaudited Condensed Statement of Comprehensive
Income (31 December 2021: £1,878,000, 30 June 2022: £1,880,000).
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. Fair value of financial instruments
Financial assets designated as at fair value through profit or loss
The carrying value of receivables are deemed to be a reasonable approximation
of their fair values.
Financial assets and liabilities not designated as at fair value through
profit or loss
The carrying values of the loans at amortised cost (excluding capitalised
transaction costs) are deemed to be a reasonable approximation of their fair
values. The carrying values of all other assets and liabilities not
designated as at fair value through profit or loss are deemed to be a
reasonable approximation of their fair values due to their short duration.
15. Other receivables and prepayments
31 December 2022 31 December 2021 30 June 2022
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Non-current
Other receivables 273 - -
Accrued interest 4 - -
------------ ------------ ------------
277 - -
------------ ------------ ------------
Current
Accrued interest 149 123 59
Prepayments 6 14 6
Other receivables - 15 -
------------ ------------ ------------
155 152 65
------------ ------------ ------------
The carrying values of the accrued interest and other receivables are deemed
to be reasonable approximations of their fair values.
16. Other payables and accruals
31 December 2022 31 December 2021 30 June 2022
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Audit fee 40 78 64
Consultancy fee (note 7c) 34 23 25
Administration fee (note 7b) 29 28 33
Other payables and accruals 19 32 13
Legal fees 13 50 21
Directors' national insurance 10 11 10
Management fee (note 7a) - 21 -
------------ ------------ ------------
145 243 166
------------ ------------ ------------
The carrying values of the other payables and accruals are deemed to be
reasonable approximations of their fair values.
17. 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 2022, the Company had no liabilities that would give rise to
cash flows from financing activities (31 December 2021 and 30 June 2022:
none).
18. Share capital
31 December 2022 31 December 2021 30 June 2022
(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 2021 and 30 June 2022:
43,857,133)
43,857 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 2021 and 30 June 2022: 1) - - -
------------ ------------ ------------
527 527 527
------------ ------------ ------------
Management Shares
The Management Share is entitled (in priority to any payment of dividend of
any other class of share) to a fixed cumulative preferential dividend of 0.01%
per annum on the nominal amount of the Management Share.
The Management Share does not carry any right to receive notice of, nor to
attend or vote at, any general meeting of the Company unless no other shares
are in issue at that time. The Management Share does not confer the right to
participate in any surplus of assets of the Company on winding-up, other than
the repayment of the nominal amount of capital.
During the period, no Management Shares were bought back or cancelled (31
December 2021 and 30 June 2022: none).
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, 1,580,000 (31 December 2021: 4,476,000, 30 June 2022:
7,636,000) 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.
19. Other reserves
Special distributable reserve ( 1 / 3 ) Capital redemption reserve ( 3 ) Profit and loss account ( 2 )
Period ended 31 December 2022 (unaudited) Non-distributable
Distributable Total
£'000 £'000 £'000 £'000 £'000
At 30 June 2022 7,997 17,955 (2,394) (13,169) 10,389
Realised revenue profit - - 146 - 146
Realised investment gains and losses - - (936) - (936)
Unrealised gains and losses - - - 1,535 1,535
Dividends paid (395) - - - (395)
B Shares issued during the period (notes 5 and 18) (1,580)
- - - (1,580)
B Shares redeemed during the period (notes 5 and 18) ( 3 ) (1,580)
1,580 - - -
------------ ------------ ------------ ------------ ------------
At 31 December 2022 4,442 19,535 (3,184) (11,634) 9,159
------------ ------------ ------------ ------------ ------------
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
B Shares issued during the period (notes 5 and 18) (4,476)
- - - (4,476)
B Shares redeemed during the period (notes 5 and 18) ( 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 )
Non-distributable
Year ended 30 June 2022 (audited) Distributable Total
£'000 £'000 £'000 £'000 £'000
At 30 June 2021 23,269 10,319 (757) (14,252) 18,579
Realised revenue profit - - 549 - 549
Realised investment gains and losses - - (2,186) - (2,186)
Unrealised investment gains and losses - - - 1,083 1,083
B Shares issued during the year (notes 5 and 18) (7,636) - - - (7,636)
B Shares redeemed during the year (notes 5 and 18) ( 3 ) (7,636) -
7,636 - -
------------ ------------ ------------ ------------ ------------
At 30 June 2022 7,997 17,955 (2,394) (13,169) 10,389
------------ ------------ ------------ ------------ ------------
( 1 ) During the period ended 30 June 2016, and following the approval of the Court,
the Company cancelled the share premium account and transferred £51,143,000
to a special distributable reserve, being premium on issue of shares of
£52,133,000 less share issue costs of £990,000. The special distributable
reserve is available for distribution to Shareholders.
( 2 ) The profit and loss account comprises both distributable and non-distributable
elements, as defined by Company Law. Realised elements of the Company's
profit and loss account are classified as "distributable", whilst unrealised
investment gains and losses are classified as "non-distributable".
( 3 ) The B Shares were issued out of the special distributable reserve, then the
special distributable reserve was utilised again when the B Shares were
redeemed, the B Share capital cancelled and an equal amount credited to the
capital redemption reserve (see notes 5 and 18). On 28 February 2023, the
Court approved the cancellation of the Company's Capital Redemption Reserve,
totalling £19,535,000. The amount cancelled was credited to the Company's
distributable reserves with effect from 10 March 2023 (see note 23).
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.
20. 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 £9,686,000 (31 December 2021: £13,218,000,
30 June 2022: £10,916,000), less £1 (31 December 2021 and 30 June 2022:
£1), being amounts owed in respect of Management Shares, and on 52,660,350
(31 December 2021 and 30 June 2022: 52,660,350) Ordinary Shares in issue at
the period end.
21. 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.
Risk is inherent in the Company's activities, but it is managed through a
process of ongoing identification, measurement and monitoring. The Company
is exposed to market risk (which includes currency risk, interest rate risk
and price risk), credit risk and liquidity risk from the financial instruments
it holds. Risk management procedures are in place to minimise the Company's
exposure to these financial risks, in order to create and protect Shareholder
value.
Risk management structure
The Board (prior to 31 December 2021, the Former Investment Manager) is
responsible for identifying and controlling risks. Prior to 31 December
2021, the Board of Directors supervised the Former Investment Manager and was
ultimately responsible for the overall risk management approach within the
Company.
The Company has no employees and is reliant on the performance of third party
service providers. Failure by the Consultant, 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.
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. At the period end, the Company did not hold any financial
instruments that were exposed to price risk (31 December 2021 and 30 June
2022: none).
(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 from 1 July 2022 to 31 December 2022 Period from 1 July 2021 to 31 December 2021 Year ended 30 June 2022 (audited)
(unaudited) (unaudited)
£'000 £'000 £'000
Movement in unrealised gains and losses on loans due to movement in foreign (77) (210) 363
exchange on non-Sterling loans
Net foreign exchange gain 14 2 13
------------ ------------ ------------
Foreign currency loss in the period (63) (208) 376
------------ ------------ ------------
As at 31 December 2022, a proportion of the net financial assets of the
Company were denominated in currencies other than Sterling as follows:
Loans and receivables Cash and cash equivalents Other payables and accruals
Exposure
£'000 £'000 £'000 £'000
31 December 2022 (unaudited)
US Dollars 2,139 - (12) 2,127
Euros 2,672 - - 2,672
--------------- --------------- --------------- ---------------
4,811 - (12) 4,799
--------------- --------------- --------------- ---------------
31 December 2021 (unaudited)
US Dollars 2,021 1 (11) 2,011
Euros 3,721 - - 3,721
--------------- --------------- --------------- ---------------
5,742 1 (11) 5,732
--------------- --------------- --------------- ---------------
30 June 2022 (audited)
US Dollars 1,836 451 (12) 2,275
Euros 3,188 - - 3,188
--------------- --------------- --------------- ---------------
5,024 451 (12) 5,463
--------------- --------------- --------------- ---------------
At 31 December 2022, if the exchange rates for US Dollars and Euros had
strengthened/weakened by 5% against Sterling with all other variables
remaining constant, net assets at 31 December 2022 and the profit/(loss) for
the period ended 31 December 2022 would have increased/(decreased) by
£253,000/£(229,000) (31 December 2021: £302,000/£(273,000), 30 June 2022:
£288,000/£(260,000)).
(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 £3,041,000 (31 December 2021:
£2,592,000, 30 June 2022: £2,770,000) were the only interest bearing
financial instruments subject to variable interest rates at 31 December
2022. Therefore, if interest rates had increased/decreased by 150 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 £46,000 (31
December 2021: £13,000, 30 June 2022: £14,000, both based on an
increase/decrease in interest rates of 50 basis points).
Fixed interest Variable interest Non-interest bearing Total
31 December 2022 (unaudited)
£'000 £'000 £'000 £'000
Financial assets
Loans ( 1 ) 6,358 - - 6,358
Other receivables - - 426 426
Cash and cash equivalents - 3,041 - 3,041
------------ ------------ ------------ ------------
Total financial assets 6,358 3,041 426 9,825
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (145) (145)
------------ ------------ ------------ ------------
Total financial liabilities - - (145) (145)
------------ ------------ ------------ ------------
Total interest sensitivity gap 6,358 3,041 281 9,680
------------ ------------ ------------ ------------
31 December 2021 (unaudited)
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
------------ ------------ ------------ ------------
Fixed interest Variable interest Non-interest bearing Total
30 June 2022 (audited)
£'000 £'000 £'000 £'000
Financial assets
Loans ( 1 ) 8,247 - - 8,247
Other receivables - - 59 59
Cash and cash equivalents - 2,770 - 2,770
------------ ------------ ------------ ------------
Total financial assets 8,247 2,770 59 11,076
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (166) (166)
------------ ------------ ------------ ------------
Total financial liabilities - - (166) (166)
------------ ------------ ------------ ------------
Total interest sensitivity gap 8,247 2,770 (107) 10,910
------------ ------------ ------------ ------------
( 1 ) Of the loans of £6,358,000 (31 December 2021: £10,717,000, 30 June 2022:
£8,247,000), one loan amounting to £2,547,000 (31 December 2021:
£3,605,000, 30 June 2022: £3,132,000) 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 2022, credit risk arose principally from cash and cash
equivalents of £3,041,000 (31 December 2021: £2,592,000, 30 June 2022:
£2,770,000) and other receivables of £273,000 (31 December 2021 and 30 June
2022: £nil). 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 2022 was low since the ratio
of cash and cash equivalents to unmatched liabilities was 21:1 (31 December
2021: 11:1, 30 June 2022: 17:1).
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 2022 31 December 2021 30 June 2022
(unaudited) (unaudited) (audited)
Percentage Percentage Percentage
0 to 6 months 55.6 43.9 55.1
6 months to 18 months 29.0 21.7 31.0
18 months to 3 years 15.4 34.4 13.9
------------ ------------ ------------
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 2022, the Company did not issue any new
Ordinary or C shares, nor did it buy back any Ordinary Shares for cancellation
or to be held in treasury (31 December 2021 and 30 June 2022: none).
During the period ended 31 December 2022, 1,580,000 B Shares were issued and
bought back for £1,580,000 (see note 5) (31 December 2021: 4,476,000 B Shares
issued and bought back for £4,476,000, 30 June 2022: 7,636,000 B Shares
issued and bought back for £7,636,000).
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.
22. Contingent assets and contingent liabilities
There were no contingent assets or contingent liabilities in existence at the
period end (31 December 2021 and 30 June 2022: none).
23. Events after the reporting period
On 15 December 2022, shareholders approved the reduction of the Company's
share capital by cancelling the entire amount standing to the credit of the
Company's Capital Redemption Reserve. On 28 February 2023, the Court
approved the cancellation of the Company's Capital Redemption Reserve,
totalling £19,535,000. The amount cancelled was credited to the Company's
distributable reserves with effect from 10 March 2023.
There were no other significant events after the reporting period.
24. 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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