TIDMPSSL
RNS Number : 4276O
Pollen Street Secured Lending PLC
29 May 2020
POLLEN STREET SECURED LING PLC
Annual Financial Report for the year ended to 31 December
2019
The Directors are pleased to present the Annual Financial Report
of Pollen Street Secured Lending plc (the "Company") for the year
ended 31 December 2019, a copy of the Company's Annual Report will
shortly be available to view and download from the Company's
website https://pollenstreetsecuredlending.com. 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.
The information set out below does not constitute the Company's
statutory accounts for the year ended 31 December 2019 but is
derived from those accounts. Statutory accounts for the year ended
31 December 2019 will be delivered to the Registrar of Companies in
due course. The report of the auditor for the year ended 31
December 2019 contains no qualification or statement under Section
498(2) or (3) of the Companies Act 2006.
Strategic Report
Investment Objective
The investment objective of Pollen Street Secured Lending plc
(the "Company") and its subsidiaries (together, the "Group") is to
provide shareholders with an attractive level of dividend income
through exposure to investments in alternative finance and related
instruments. The Company wants to achieve investment
diversification across originators, geographies, loan asset classes
and credit grades and allow shareholders to access equity assets
that are aligned with the Company's Investment Policy. The policy
was updated on 19 December 2017, with the aim of using the
Company's revised strategy to capitalise opportunities that present
themselves to enhance the Company's returns.
Financial and Operational Highlights
31 December 2019 31 December 2018
=========================================== ================= =================
NET ASSET VALUE
NET ASSET VALUE (CUM INCOME) (GBP'000)(1) 718,245 733,449
NET ASSET VALUE (EX INCOME) (GBP'000)(2
3) 703,198 721,711
MARKET CAPITALISATION (GBP'000)(4) 617,539 610,229
=========================================== ================= =================
PER SHARE METRICS
SHARE PRICE (AT CLOSE)(5) 830.0p 802.0p
NAV PER SHARE (CUM INCOME) 965.4p 963.9p
NAV PER SHARE (EX INCOME)(3) 945.1p 948.5p
INTERIM DIVIDS PAID(6) 48.0p 48.0p
SHARES IN ISSUE 74,402,289 76,088,401
SHARE BUYBACK IN YEAR 1,686,112 3,747,148
=========================================== ================= =================
KEY RATIOS
(DISCOUNT)(3 7) (14.0%) (16.8)%
ANNUAL NAV PER SHARE RETURN(3
8) 5.3% 5.2%
ITD TOTAL NAV PER SHARE RETURN(3
9 10) 26.8% 20.5%
CONTINUING PORTFOLIO(11) 93% 84%
LEGACY PORTFOLIO(12) 7% 16%
ONGOING CHARGES(13) 1.5% 1.4%
=========================================== ================= =================
1 NET ASSET VALUE (CUM INCOME): The value of investments, cash
and other assets, including current year revenue, less
liabilities.
2 NET ASSET VALUE (EX INCOME): The value of investments and cash
and other assets, excluding current year revenue, less
liabilities.
3 ALTERNATIVE PERFORMANCE MEASURES: Reconciliations to amounts
appearing in the financial statements can be found on page 142.
4 MARKET CAPITALISATION: the closing mid-market share price
multiplied by the number of shares outstanding at month end.
5 SHARE PRICE (AT CLOSE): closing mid-market share price at
month end (excluding dividends reinvested).
6 INTERIM DIVIDS: dividends relating to 2019 financial year were
paid in June 2019, September 2019, December 2019 and March 2020.
Dividends relating to 2018 financial year were paid in June 2018,
September 2018, December 2018 and March 2019.
7 PREMIUM/(DISCOUNT): the amount by which the price per share of
an investment trust is either higher (at a premium) or lower (at a
discount) than the net asset value per share (cum income),
expressed as a percentage of the net asset value per share.
8 ANNUAL NAV PER SHARE RETURN: is calculated as Net Asset Value
(Cum Income) at the end of the year, plus dividends declared during
the year, divided by NAV (Cum Income) calculated on a per share
basis at the start of the year.
9 ITD: inception to date - excludes issue costs.
10 TOTAL NAV PER SHARE RETURN: is calculated as Net Asset Value
(Cum Income) at the end of the year, plus dividends declared during
the year, divided by NAV (Cum Income) calculated on a per share
basis at the start of the year.
11 CONTINUING PORTFOLIO: portfolio of platforms that the Group
has originated through in 2018 and 2019 calculated based on NAV
exposure to investment assets as a percentage of total NAV before
deducting topco debt, excluding cash, working capital and equity
positions.
12 LEGACY PORTFOLIO: portfolio of platforms that the Group has
not originated through in 2018 and 2019 (predominately Consumer
platforms) calculated based on NAV exposure to investment assets as
a percentage of total NAV before deducting topco debt excluding
cash, working capital and equity positions.
13 ONGOING CHARGES: The Annualised Ongoing Charge is calculated
using the Association of Investment Companies recommended
methodology. It is calculated as a percentage of annualised ongoing
charge over average reported Net Asset Value. Ongoing charges are
those expenses of a type which are likely to recur in the
foreseeable future, whether charged to capital or revenue, and
which relate to the operation of the investment company as a
collective fund, excluding the costs of acquisition/disposal of
investments, financing charges and gains/losses arising on
investments. Ongoing charges are based on costs incurred in the
year as being the best estimate of future costs. The AIC excludes
performance fees from the Ongoing Charges calculation. This is also
an alternative performance measure.
Investment Characteristics
THE COMPANY IS AN INVESTMENT TRUST FOCUSING ON SPECIALIST
LING
The Company is a FTSE 250 company listed on the London Stock
Exchange and dedicated to investing in credit assets originated by
non-bank lending platforms and other originators of alternative
credit assets globally. The Company believes that this asset class
has the potential to provide attractive returns for investors on a
risk-adjusted basis
MANAGED BY POLLEN STREET CAPITAL, A DEDICATED INVESTOR IN
FINANCIAL AND BUSINESS SERVICES BUSINESSES
PSC Credit Holdings LLP (the "Investment Manager") serves as the
Company's investment manager. The Investment Manager is a member of
the Pollen Street Capital group ("PSC"). PSC is an investment
management group focused on investing in financial and business
services. The Investment Manager has also appointed a sub
Investment Manager ("Sub-Manager"), Pollen Street Capital (US) LLC,
an affiliate of the Investment Manager and an SEC registered
investment adviser.
LONG-TERM OPPORTUNITY TO DELIVER ATTRACTIVE RETURNS
A large opportunity exists for non-bank capital to earn
attractive returns from lending across a broad origination
universe, largely as banks retrench to serve mainstream, vanilla
markets. The banks' structural re-positioning together with the
advancements in data and technology and a change in customer
behaviour provide an opportunity for non-bank lenders to offer high
quality products to those markets that are not well served by the
large banks.
PARTNERING WITH STRONG ORIGINATORS
Specialist players offer attractive products based upon
expertise and understanding of particular sectors and target
customer groups. These players are often better at servicing
specialist markets based upon focus, expertise, efficiency and
entrepreneurialism. In many cases, they also share risk by putting
their own balance sheet capital at risk. The Investment Manager
aims to partner with the highest quality originators in order to
access exciting investment opportunities in direct lending assets
and, where there is an aligned strategic opportunity, certain
minority equity stakes.
6.0 to 8.0 PER CENT PER ORDINARY SHARE PER ANNUM TARGET DIVID,
PAYABLE QUARTERLY
The Company targets the payment of dividends which equate to a
net yield of 6.0 to 8.0 per cent per ordinary share per annum on
the issue price for the Company's IPO placing, payable in quarterly
instalments (the "Target Dividend") based upon the average number
of non-treasury shares in issue during a given period. Investors
should note that the Target Dividend, including its declaration and
payment dates, is a target only and not a profit forecast.
How the Business Works
SPECIALIST LING PARTNERS
The Investment Manager, on behalf of the Group, actively
identifies sub-segments of the consumer, property and small and
medium-sized enterprises ("SMEs") lending market that it believes
deliver attractive risk adjusted returns. It then targets
origination partners through which to originate Credit Assets. The
Investment Manager adopts three principles when selecting partners
- control, alignment and partnership. It seeks to work with high
quality partners with diversity across asset class and geography to
build a high quality portfolio with attractive returns with
controlled risk.
RIGOROUS CREDIT PROCESS
The Investment Manager has a rigorous investment process to
provide a consistent approach to risk-based pricing to ensure the
weighted risk adjusted return provides an attractive level of
dividend income with an acceptable risk profile for shareholders of
the Company. The Investment Manager is of the belief that,
irrespective of origination source or the convenience of the
product to the borrower, credit performance will vary depending on
the quality of verification, underwriting, servicing and the
ability to construct diversified portfolios of selective loans. The
Investment Manager conducts rigorous due diligence on each
origination partner and a continuous program of compliance
monitoring and retains tight control of underwriting standards
across all partners.
STRUCTURING CAPABILITIES
The Investment Manager is focused on assessing opportunities in
a variety of forms and lending structures, that provides
significant protection should the credit performance of the
underlying assets deteriorate ensuring that the direct or indirect
exposure subscribed to in each case offers suitable risk adjusted
returns for investors. The exposure may be direct lending to the
borrower but in other cases, the Investment Manager has partnered
up with originators and provided financing that sits senior to the
originator's position allowing the Company to benefit from first
loss protection on its capital. The Investment Manager will assess
the best risk-adjusted return in each case. It will also place
significant focus on ensuring that debt financing can be sourced in
an efficient and low-cost way to enhance returns where
appropriate.
CAPITAL PRESERVATION AND INCOME STABILITY
The Investment Manager is focused on delivering a combination of
strong income with relatively low duration and volatility. The
Investment Manager has partnered with high quality originators
across target customer groups, asset classes and geography. In that
way, the exposure to any single loan asset or market is reduced.
This provides strong risk mitigation across the portfolio. The
diversification across tens of thousands of individual credit
assets and the short duration of the overall portfolio should allow
the Company to deliver a level of stability in its income and
protect the Company from capital losses.
Chairman's Statement
INTRODUCTION
I am pleased to present the Annual Report of Pollen Street
Secured Lending plc, for the year to 31 December 2019.
The Company's original strategy was to acquire interests in
assets originated by peer-to-peer lenders. Pollen Street Capital
was appointed as Investment Manager in 2017 and the strategy was
changed to focus on alternative lending assets, which is a
considerably larger market. This offered access to credit assets
with more downside protection. On 18 September 2019, the name of
the Company was changed from P2P Global Investments plc to Pollen
Street Secured Lending plc to better reflect the new strategy.
Over 2019 the Company has maintained its business and strategic
discipline in its investment strategy. The legacy run-off
portfolio, which was predominately unsecured US and UK consumer
loans that were originated before the change in Investment Manager,
is now only 7 per cent(1) of the total investment assets and is
reducing on a monthly basis. Further, the legacy equity portfolio
has also been reduced to GBP23.6 million at 31 December 2019
(GBP32.6 million 31 December 2018).
This has been delivered at the same time as repositioning the
Company to have more downside protection through a combination of
increased seniority of lending and increased security packaging.
Property backed and structured lending now make up over 66 per cent
of credit asset NAV.
In March 2020, the World Health Organisation recognised as a
pandemic an outbreak of a new virus that causes coronavirus disease
2019 ("COVID-19"). COVID-19 has caused severe disruption to
businesses and economic activity which has been reflected in recent
fluctuations in global stock markets and noted in recent months by
our peer group. The Board considers the emergence and spread of
COVID-19 to be a non-adjusting post balance sheet event. Given the
inherent uncertainties, it is not possible at this time to provide
a quantitative estimate of the impact of this on the Company. We
provide further commentary on the Company's approach in these
circumstances below. The Company will continue to monitor portfolio
developments closely and keep shareholders updated accordingly.
INVESTMENT PERFORMANCE AND DIVIDS
The Company delivered a Net Asset Value ("NAV") return of 5.25
per cent (2018: 5.21 per cent) and paid dividends of 48.0 pence
(2018: 48.0 pence) per ordinary share in relation to the 2019
calendar year. The dividend payments were fully covered by revenue
earnings and the special distributable reserve was not utilised.
The dividend return was 4.8 per cent (2018: 4.8 per cent) on the
original issue price.
The impairment charge for the year was GBP18.0 million (2018:
GBP35.7 million), which is 50 per cent lower than the prior period.
The key driver of this is UK consumer lending which has seen the
impairment charge reduce from GBP12.3 million to GBP2.7 million
which is a 78 per cent reduction. The significant reduction shows
the continued progress that has been made in transitioning the
portfolio to a lower risk position.
SHARE PRICE AND BUYBACKS
The Company's share price (at 31 December 2019) was 830 pence,
representing a discount to NAV of 14.0 per cent. The discount to
NAV was in the range of 10.8 per cent to 16.3 per cent over the
course of the year. As part of its revised investment strategy, the
Company has continued with its share buyback program and during
2019 1,686,112 ordinary shares in issue were repurchased (2018:
3,747,148 shares) at an average price of 823.4 pence per ordinary
share (2018: 800.4 pence per ordinary share).
RISK MANAGEMENT AND OVERSIGHT
The Board plays a key role in supporting and challenging the
Group's long-term strategic planning. This includes a rigorous
assessment of both the risks and opportunities presented by the
evolving market environment and considering the interests of key
stakeholders. The oversight is exercised through the board's
committee structure and further information is provided in each
board committee report.
During 2019, the Directors considered the application of the new
Corporate Governance Code to the Company and introduced a series of
measures to strengthen the governance arrangements. In addition,
the Board considered the Company culture and stakeholder
engagement. Further detail on how the Board has regard to its
various stakeholders is set out on pages 19 and 20.
BOARD COMPOSITION
After 6 years on the Board as Chairman, Stuart Cruickshank
resigned, with effect from 1 January 2020. Following Stuart's
decision to step down, I was invited by the Board to become
Chairman with effect from the same date. Mahnaz Safa was appointed
as Senior Independent Director following my appointment as
Chairman.
The Board would like to thank Mr Cruickshank for his significant
and valuable contribution to the Company over the past 6 years and
wish him well going forward. The Board continues to keep under
review the appropriate size of the Board.
OUTLOOK
The COVID-19 virus has had a major impact on the markets in
which the Company operates. In response the Company has adopted a
prudent strategy with the focus being on managing the existing
portfolio and ensuring that cash collections remain robust. The
Manager is not proposing to re-invest the vast majority of cash
generated by the portfolio in new investments for the foreseeable
future and expects the Company to generate significant cash over
the coming months as loans amortise and repay.
On 25 February 2020, the Board announced it was in discussions
regarding a possible cash offer for the entire share capital of the
Company. As a result of the Board not receiving the support
expected of the Investment Manager during the due diligence process
resulting from the discussions the Board also announced that it had
served 12 months' notice on the Investment Manager to terminate the
Investment Management Agreement. Discussions regarding a possible
cash offer are continuing but there can be no certainty that a firm
offer will be made.
In these difficult and unprecedented circumstances, protecting
shareholders' interests remains the Board's key priority. Therefore
the Board is reviewing all of its strategic options including the
possible cash offer, the timing and process for the appointment of
a new Investment Manager, the bringing forward of the Company's
Continuation Vote (currently to be proposed at the 2021 Annual
General Meeting), and the appropriate use of the cash currently
being generated by the portfolio. The Board will consult with
shareholders on these matters at the appropriate time. The Board
will continue to monitor the Company's dividend policy in the
context of the market environment and portfolio performance
Simon King
Chairman
29 May 2020
(1) Run-off investment credit assets less debt but before the
PSSL topco facility and deferred Castlehaven cash as a percentage
of total investment assets
Investment Manager's Report
The Investment Manager is a member of the Pollen Street Capital
group ("Pollen Street"). Pollen Street is an independent asset
manager that has GBP2.5 billion (2018: GBP2.6 billion) of
assets-under-management ("AUM") across private equity and credit
strategies. The Group was formed in 2013 and possesses a strong and
consistent track record within the financial and business services
sectors.
Pollen Street has significant experience in lending markets with
GBP1.6 billion of AUM within its credit strategies. It works with
the specialty finance market, which the Investment Manager believes
is underserved by the banking industry, capital markets and more
generalist credit funds. The strategy is supported by changes in
the focus of mainstream lenders together with the implementation of
new models that utilise data, analytics and technology more
effectively. It provides an opportunity to deliver better products
to borrowers while generating attractive risk adjusted returns for
investors.
The platforms are typically better than mainstream lenders at
servicing their markets based upon focus, expertise, efficiency and
entrepreneurialism. In many cases, they also share the risk
exposure with their own balance sheet and capital. The Investment
Manager partners with the highest quality originators in order to
access exciting investment opportunities in direct lending assets
and, where there is an aligned strategic opportunity, certain
minority equity stakes.
This Investment Manager provides the Company with access to an
established network of specialist lenders, market leading
underwriting capabilities and strategic insight into the optimal
collection strategy. The relationship with the platforms extends
beyond Pollen Street being simply providers of capital. Pollen
Street leverages its expertise to enable the platforms it partners
with to outperform across all stages of the credit cycle. The
relationships and expertise created are difficult to replicate and
help provide more stable and attractive returns. The Investment
Manager is deeply involved in the underwriting decisions, the
customer journey, and collections.
2019 HIGHLIGHTS
2019 has been a successful year for the Company. The Investment
Manager has:
-- Doubled earnings per share over the last two years, from 20.7
pence per share in 2017 to 46.8 pence per share in 2019;
-- Delivered the target NAV return of 6.0 per cent pa in every
month between August 2019 and December 2019, prior to the effect of
the one-off write down of the Zopa equity position, which occurred
in November; and
-- Repositioned the portfolio to have better downside protection and less volatile returns.
FINANCIAL PERFORMANCE
The successful implementation of the strategy has seen the
Company increase profit after tax by 13 percent to GBP34.8 million
(2018: GBP30.7 million). This is reflective of the improved
performance of the continuing portfolio driven by the new
relationships that have been put in place throughout the period.
These benefit from downside protection which has led to a
significant decrease in expected credit losses in the year.
The impairment charge for the year was GBP18.0 million (2018:
GBP35.7 million), which is 50 per cent lower than the prior period.
The key driver of this is UK consumer lending which has seen the
impairment charge drop from GBP12.3 million to GBP2.7 million which
is a 78 per cent reduction as the value of assets in Stage 3 has
reduced. The significant reduction shows the continued progress
that has been made in transitioning the portfolio to a lower risk
position.
The NAV per share (cumulative of income) is 965 pence per
ordinary share at 31 December 2019, which, including dividends
declared or paid, is equivalent to a NAV return of 26.8 per cent
since inception (taking into account 2.49 per cent reduction for
the introduction of IFRS 9 on 1 January 2018). Additionally, the
share price of the Company at 31 December 2019 was 830.0 pence per
share, representing a 14.0 per cent discount to NAV (cumulative of
income).
The Investment Manager is acutely aware of the continued
dislocation between the current share price and the underlying
value of the portfolio. On this basis the Company continued its
share buyback program throughout 2019, with 1,686,112 (2018:
3,747,148) ordinary shares in issue being repurchased at an average
price of 823.4 pence per ordinary share (2018: 800.4 pence) which
contributed 0.32 per cent to the NAV return. As well as being
accretive to NAV, it is expected to assist in reducing the
magnitude of the discount.
RISK MANAGEMENT
Over the course of 2019, the Investment Manager has worked hard
to reposition the portfolio to have better downside protection and
less volatile returns. This means the company is well positioned
for 2020. There have been four main activities.
Firstly, the Company's discontinued portfolio has been managed
down so that it is now only 7 per cent of investment assets at 31
December 2019 (52 per cent, 31 December 2017) and continues to
reduce on a monthly basis. This portfolio was predominately
unsecured US and UK consumer mainstream Platforms that were
originated before Pollen Street took over as Investment Manager and
suffered from higher and volatile impairments. This has been
achieved through the disposal of nonperforming loans, which have
been executed at a modest premium to the carrying value, active
management of collections and ordinary amortisation.
Secondly, the legacy equity portfolio has also been managed down
to GBP23.6 million at 31 December 2019 (GBP32.6 million 31 December
2018). This was achieved through the sale of two positions this
year totalling GBP12.1 million with an additional sale completing
in Q1 2020. We continue to look to realise these equity positions
where possible.
Thirdly, on the 23 August 2019 the Investment Manager executed a
sale of the Company's interests in Castlehaven Finance, which is an
alternative development and bridging finance lender in Ireland, to
Avenue Capital Group. The transaction was completed at a modest
premium to the Company's holding and removed the company's exposure
to the relatively highly geared Irish development and bridging
finance market.
Finally, we have been prudent in our underwriting of new deals
over the course of the year. New originations have been focused on
more secured asset classes with structural protection in the form
of either the platform equity covering the first loss or the
customer equity covering the first loss. These assets exhibit lower
volatility and a better coverage ratio of income to expected credit
losses and has allowed for a steady reduction of the cost and
complexity of the facilities in place. Further the Investment
Manager has ensured the Company maintains its diversification
across US and UK geographies. Consequently, we have modestly
reduced the leverage of the Company over the period to GBP302
million at 31 December 2019 (GBP378 million, 31 December 2018).
Portfolio
The continuing portfolio consists of 23 per cent SME lending, 33
per cent consumer lending, 41 per cent of real estate lending and 3
per cent equity. The majority of the Consumer loan exposure is in
the form of structured loans where the originator has first loss
equity ahead of the Company's exposure. The remainder is exposure
to unsecured loans in markets that have demonstrated consistent and
attractive risk adjusted margins. This portfolio consists of UK,
European, US and Australasian assets. The SME portfolios are
domestically focused and reflect the underlying performance of the
UK economy and our credit risk appetite. The Real Estate sector has
been underwritten with conservative LTVs to high credit quality
underlying borrowers and proven management teams.
OUTLOOK
The outbreak of COVID-19 has caused major disruption across the
globe. The principal effects of the outbreak in the UK started in
March and therefore it has not had a material effect on the
financial year under review. We have seen that a number of the
structured borrowers have asked for temporary amendments to their
facility to reflect the regulatory guidance on forbearance requests
as well as a deterioration in underlying economic conditions. We
are assessing these individually.
Given the uncertain economic environment the Investment Manager
has adopted a prudent approach with the focus on the existing
portfolio and ensuring cash collections remain robust as the
appropriate strategies are in place. The Investment Manager
continues to have faith in the strength of the performance of the
asset class despite the unprecedented conditions. The portfolio and
underlying asset security benefits from much of the portfolio being
asset backed with 66 per cent at year end benefiting from some
structural protection, while a significant majority of the
underlying assets are amortising and generate strong levels of
cash. The Company is well diversified with the underlying loan
portfolios being highly granular with low concentration risk. The
portfolio has demonstrated in 2019 that it delivers strong yields
with high levels of bad debt coverage.
The Investment Manager is not proposing to re-invest the cash
generated by the portfolio in new investments for the foreseeable
future. In the structured portfolio where the Company provides
finance to nonbank lenders, the Investment Manager is working with
the borrowers to help them navigate the difficult environment
whilst ensuring most of the cash generated by their portfolio is
utilised to repay loans due to the Company. We expect the Company
to generate significant cash over the coming months as the loans
amortise and repay.
The monthly newsletter includes the latest information about the
performance of the Group.
Top Ten Holdings
As at 31 December 2019
Investment Investment Country Sector Value as % of
Type at 31 Net assets
Dec-19
GBP'000
===================== ================ ================ ========== ========= ============
Rapid Financial
Services, LLC Structured USA SME 49,506 6.9%
===================== ================ ================ ========== ========= ============
CapitalFlow Group Structured Ireland SME 43,047 6.0%
===================== ================ ================ ========== ========= ============
P F Capital Finance
Limited Structured United Kingdom Consumer 28,893 4.0%
===================== ================ ================ ========== ========= ============
Madison CF UK
Limited Structured United Kingdom Consumer 22,036 3.1%
===================== ================ ================ ========== ========= ============
Secured Loan
Zorin Real Estate to underlying
Loan borrower United Kingdom Property 20,544 2.9%
===================== ================ ================ ========== ========= ============
SPV Naga Funding
Limited Structured United Kingdom Property 18,432 2.6%
===================== ================ ================ ========== ========= ============
Equifinance Limited Structured United Kingdom Property 16,822 2.3%
===================== ================ ================ ========== ========= ============
IWOCA Limited Structured United Kingdom SME 16,356 2.3%
===================== ================ ================ ========== ========= ============
Creditfix Limited Structured United Kingdom Consumer 15,551 2.2%
===================== ================ ================ ========== ========= ============
Secured Loan
Zorin Real Estate to underlying
Loan borrower United Kingdom Property 13,926 1.9%
===================== ================ ================ ========== ========= ============
As at 31 December 2019, the value of the top 10 assets totalled
GBP245,113,010 (2018: GBP166,028,417) which equated to 34.2 per
cent (2018: 22.63 per cent) of net assets.
Business Review
The strategic report on pages 3 to 29 has been prepared to help
shareholders assess how the Group and Company works and how it has
performed. The strategic report has been prepared in accordance
with the requirements of Section 414 A to 414 D of the Companies
Act 2006 (the "Act"). The business review section of the strategic
report discloses the Group's and Company's key risks and
uncertainties as identified by the Board, the key performance
indicators used by the Board to measure the Group and Company's
performance, the strategies used to implement the Group's and
Company's objectives, its environmental, social and ethical policy
and future developments.
KEY INFORMATION
Pollen Street Secured lending plc (the "Company") is a
closed-ended investment company incorporated and domiciled in the
United Kingdom on 6 December 2013 with registered number 08805459.
On the 18 September 2019 the Company was renamed from P2P Global
Investments plc to Pollen Street Secured Lending plc. The Company
is a publicly listed company and commenced operations on 30 May
2014. The registered office is 6th Floor, 65 Gresham Street,
London, EC2V 7NQ, United Kingdom.
PRINCIPAL ACTIVITY
The Company carries on business as an investment trust and its
principal activity is investing in small size private credit assets
across SME, consumer (secured and unsecured), real estate and trade
finance asset classes through strategic partnerships which
encompass marketplace lending platforms, balance sheet lenders and
other non-bank loan originators. The Company invests in the USA,
Europe and Australasia and actively seeks opportunities in other
markets. Investment companies are a way for investors to make a
single investment that gives a share in a much larger portfolio. A
type of collective investment, they allow investors opportunities
to spread risk and diversify in investment opportunities which may
not otherwise be easily accessible to them. For more information,
please see:
http://www.theaic.co.uk/guide-to-investment-companies.
PERFORMANCE REVIEW
The Group's NAV as at 31 December 2019 was GBP718.2 million
(2018: GBP733.4 million) (cum income). Reduction in NAV was driven
by share buybacks with improved underlying performance meaning all
dividend payments were fully covered by earnings and the special
distributable reserve was not utilised. Profit after taxation for
the year after tax was GBP34.8 million (2018: GBP30.7 million). The
improved performance over 2019 is driven by the Investment
Manager's continued progress on repositioning the portfolio away
from predominately unsecured US and UK consumer mainstream
Platforms that were originated before Pollen Street took over as
Investment Manager to structured facilities that have better
downside protection and less volatile returns.
IMPAIRMENT REVIEW
As at 31 December 2019, the Expected Credit Loss ("ECL") balance
was GBP52.8 million (31 December 2018: GBP51.2 million). The
consumer portfolio makes up over 59 per cent of the ECL, split
GBP11.6 million in the UK, GBP19.3 million in the US and GBP1.6
million from other consumer lending. SME lending of GBP19.1 million
and Real Estate lending GBP1.2 million make up the remainder of the
ECL.
The Company had GBP13.7 million of write offs, with SME lending
contributing GBP6.2 million, UK consumer portfolios contributing
GBP2.9 million and US consumer GBP3.4 million. The Company managed
to release GBP7.5 million of ECL from the sale of Castlehaven and a
UK consumer portfolio.
These releases have been offset by an increase in the ECL charge
which was GBP18.0 million. The key driver of the charge is the
Stage 3 provision on defaulted loans, with UK SME contributing a
charge of GBP9.8 million, Consumer UK GBP4.9 million and US
consumer GBP3.8 million. These have been offset by releases in
Stage 1 and 2 as loans roll through to defaulted status.
The outbreak of COVID-19 has caused major disruption across the
globe. The principal effects of the outbreak in the UK and US
occurred in March and therefore it has not had a material effect on
the financial year under review. However, by end of Q1 2020 we have
started to see some requests for forbearance.
The Investment Manager continues to have faith in the strength
of the performance of the asset class despite the unprecedented
conditions. The Group is well diversified with the underlying loan
portfolios being highly granular with low concentration risk. It
has maintained a close and proactive engagement with all platform
partners and forbearance has been applied sensitively and
proportionately. It believes that this approach together with the
structural protection and asset backing of the portfolio will
robustly position the Group. The unsecured component of the
portfolio is seasoned and stable such that the Investment Manager
believes that the Company is well positioned to perform solidly
throughout the crisis.
However, given the Group's UK and US focus, its performance is
linked to the health of these economies. We expect the Group could
experience further impairments and consequently reduced profits,
particularly if economic expectations deteriorate further. However,
the overall effect of this cannot be quantified reliably because
the impact of the UK government's various support initiatives and
the US government's COVID-19 Stimulus Bill is not yet known, but
they are expected to reduce the potential expected credit loss
impact. The Investment Manager has adopted a prudent approach with
the focus on the existing portfolio and ensuring cash collections
remain robust as the appropriate strategies are in place. The
legacy book continues to run off, whilst performance of this book
has been poor to date and it is expected that impairments will
increase over the coming months, the loans are now well
seasoned.
The longer-term financial impact of coronavirus is not yet clear
and given the significant change in the operating environment and
economic expectations the Investment Manager is proposing to
re-invest the cash generated by the portfolio very selectively
during this period of uncertainty with the majority of cash going
to reduce net debt.
The Board considers the emergence and spread of COVID-19 to be a
non-adjusting post balance sheet event.
The ultimate impact of COVID-19 is not clear however the
economic outlook has materially changed, the Group has updated its
estimate of ECL to allocate 100 per cent of the weight to the
downside scenario. This scenario was set as a downside in the Q4
2019 review of the impairment model and is broadly consistent with
the economic outlook indicated by our third-party economic
advisers. This revised outlook resulted in an impairment charge of
GBP2.0 million in the NAV calculation for 31 March 2020 that was
released on 5 May 2020.
STRATEGIC AND INVESTMENT POLICY
The Company's investment objective is to provide shareholders
with an attractive level of dividend income and capital growth
through investment in the acquisition of:
(i) loans to consumers, loans to SMEs and other counterparties,
corporate loans, real estate loans and advances and loans against
corporate trade receivables and other assets, together with related
investments ("Credit Assets"); and
(ii) equity assets that are aligned with the Company's strategy
and that present opportunities to enhance the Company's returns
from its investments ("Equity Assets").
The Group may invest in Credit Assets and Equity Assets relating
to a broad range of sectors, provided that such investment is in
accordance with the Company's investment strategy.
When the Group has incurred borrowings in line with its
borrowing policy, the Group will target the payment of dividends
which equate to a yield of 6.0 - 8.0 per cent per ordinary share
per annum on the issue price for the Company's IPO placing, based
upon the average number of non-treasury shares in issue for the
period, payable in quarterly instalments (the "Target Dividend").
Investors should note that the Target Dividend, including its
declaration and payment dates, is a target only and not a profit
forecast.
The Group believes that certain sub-segments linked to these
Credit Assets have the potential to provide attractive returns for
investors on a risk-adjusted basis, and that changes in the focus
of mainstream lenders together with the implementation of new
models that make the best use of data, analytics and technology,
provide an opportunity to deliver attractive products to borrowers
while generating attractive returns for the Company.
The Group enters into loan origination and service agreements
with selected third parties, originators, platforms and partners.
The Group and the Investment Manager also actively seek
opportunities to acquire portfolios from third parties and make
investments in loans to specialist lenders.
ASSET ALLOCATION AND RISK DIVERSIFICATION
Credit Assets invested in by the Group will consist of debt
obligations, both secured and unsecured, within a range of
sub-sectors selected based on their risk/return characteristics.
These sub-categories may include, but are not limited to, personal
loans, loans against corporate trade receivables and other assets,
as well as loans secured against real estate and investments in
loans to specialist lenders to provide structured finance for
consumer, SME and other counter party lending.
The Group's investment in Credit Assets encompasses the
following investment models:
(i) investment, or acquisition of interests, in Credit Assets,
whether offered to the Group by origination platforms that allow
non-bank capital to: (a) lend or advance capital to consumers, SME
borrowers or corporate borrowers; and/or (b) advance capital
against corporate trade receivables ("Platforms") or by other third
parties;
(ii) investment, or acquisition of interests, in loans (which
may be secured or unsecured) to specialist lenders for the purpose
of providing structured finance to those specialist lenders,
secured against (amongst other things) granular portfolios of
Credit Assets; and
(iii) the acquisition by the Group of interests in portfolios of
Credit Assets from third parties.
The Group may undertake such investments directly, or through
its subsidiaries or special purpose vehicles ("SPVs"). It is also
possible that the Group may use alternative investment structures
which achieve comparable commercial results to the investments
described above (such as, without limitation, sub-participations in
loans, credit-linked securities or fund structures), but which
offer enhanced returns for the Group or other efficiencies (such
as, without limitation, efficiencies as to origination, funding,
servicing or administration of the relevant Credit Assets). Any
such use of alternative investment structures will be subject
always to the diversification requirements of this investment
policy.
The Company may also invest (in aggregate) up to 10.0 per cent
of Gross Assets in Equity Assets, calculated, in each case, at the
time of acquisition of any relevant Equity Assets based on the
consideration payable for those Equity Assets and the aggregate
consideration paid for all previous investments in Equity Assets
which form part of the Company's investments. This restriction
shall not apply to any consideration paid by the Company for the
issue to it of any convertible securities by a Platform. However,
it will apply to any consideration payable by the Company at the
time of exercise of any such convertible securities or any
warrants.
PLATFORM RESTRICTIONS
The Group will not invest more than 33.0 per cent of Gross
Assets via any single Platform or single counterparty. This limit
may be increased to 66.0 per cent of Gross Assets via any single
Platform or single counterparty, provided that where this limit is
so increased in respect of any Platform or counterparty, the Group
does not invest an amount which is greater than 25.0 per cent (by
value) of the total loan origination or investment of the preceding
calendar year via such Platform or counterparty.
ASSET CLASS RESTRICTIONS
The Group will invest in Credit Assets originated across various
sectors and across credit risk bands to ensure diversification and
to seek to mitigate concentration risks. The following investment
limits and restrictions apply to the Group to ensure that the
diversification of the portfolio is maintained that concentration
risk is limited and that limits are placed on risk associated with
borrowings.
The Group will not invest more than 20.0 per cent of Gross
Assets, at the time of investment, via any single investment fund
investing in Credit Assets. The Group will not invest, in
aggregate, more than 60.0 per cent of Gross Assets, at the time of
investment, in other investment funds that invest in Credit
Assets.
The Group will not invest more than 10.0 per cent of its Gross
Assets, at the time of investment, in other listed closed-ended
investment funds, whether managed by the Investment Manager or not,
except that this restriction shall not apply to investments in
listed closed-ended investment funds which themselves have stated
investment policies to invest no more than 15.0 per cent of their
gross assets in other listed closed-ended investment funds.
The following apply, in each case at the time of investment by
the Group, to both Credit Assets acquired by the Group directly and
on a look-through basis to any Credit Assets held by another
investment fund which is managed by the Investment Manager, the
Sub-Manager or their affiliates in which the Group invests
(proportionate to the percentage interest the Company has in such
investment fund). It is intended that:
-- No single consumer loan shall exceed 0.25 per cent of Gross Assets;
-- No single SME loan shall exceed 5.0 per cent of Gross Assets;
-- No single advance or loan against a trade receivable asset
shall exceed 5.0 per cent of Gross Assets;
-- No single corporate loan shall exceed 5.0 per cent of Gross Assets; and
-- No single facility, security or other interest backed by a
portfolio of loans, assets or receivables (excluding any borrowing
ring-fenced within any SPV which would be without recourse to the
Company) shall exceed 20 per cent of Gross Assets.
At any given time, not more than 50.0 per cent of Gross Assets
will be maintained in SME Credit Assets and not more than 50.0 per
cent of Gross Assets will be maintained in trade receivable assets
(taking into account both Credit Assets acquired by the Group
directly and, on a look-through basis, any Credit Assets held by
another investment fund managed by the Investment Manager, the
Sub-Manager or their affiliates in which the Company invests
(proportionate to the percentage interest the Group has in such
investment fund)).
OTHER RESTRICTIONS
The Group may invest in cash, cash equivalents and fixed income
instruments for cash management purposes and with a view to
enhancing returns to Shareholders or mitigating credit exposure.
However, for cash management purposes the Group will only invest in
fixed income instruments of investment grade.
The Group will not invest in collateralised debt
obligations.
BORROWING
Borrowings may be employed (through banks or other facilities on
a secured or unsecured basis) at the level of the Company and/or at
the level of any investee entity (including, without limitation,
any other investment fund in which the Company invests or any SPV
that may be established by the Company in connection with obtaining
leverage against any of its assets or any issuer vehicle of
facilities, securities or other interests backed by a portfolio of
Credit Assets).
The aggregate leverage of the Company, whether incurred directly
or indirectly through a subsidiary or an SPV established by the
Company (in each case calculated at the time of drawdown under any
facility the Company, subsidiary or SPV has entered into), and any
investment fund which is managed by the Investment Manager, the
Sub-Manager or their affiliates and in which the Company invests
(on a look-through basis, proportionate to the percentage interest
the Company retains in the most junior tranche of such investment
fund) shall not exceed 1.5 times NAV.
The Company may seek to securitise portfolios of Credit Assets
and may establish one or more SPVs in connection with any such
securitisation. The Company may also use SPVs in connection with
obtaining leverage against Credit Assets to seek to protect the
levered portfolio from group level bankruptcy or financing risks.
The Company may also, in connection with seeking such leverage or
securitising its loans, seek to assign existing assets to one or
more SPVs and/or seek to acquire loans using an SPV.
HEDGING
Fluctuations in interest rates are influenced by factors outside
the Group's control and can adversely affect the Group's results of
operations and profitability in a number of ways. The Group intends
to invest in Credit Assets which may be subject to a fixed rate of
interest, or a floating rate of interest (which may be linked to
base rates or LIBOR). The Group expects that its borrowings will
typically be subject to a floating rate of interest. Any mismatches
the Group has between the income generated by its Credit Assets, on
the one hand, and the liabilities in respect of its borrowings, on
the other hand, may be managed, in full or in part, by matching any
floating rate borrowings with investments in Credit Assets that are
also subject to a floating rate of interest. The Group may use
derivative instruments, including interest rate swaps, to reduce
its exposure to fluctuations in interest rates.
To the extent that the Group does rely on derivative instruments
to hedge interest rate risk, it will be subject to counterparty
risk. Any failure by a hedging counterparty of the Company to
discharge its obligations could have a material adverse effect on
the Company's results, operations and financial condition.
The Group intends to hedge currency exposure between Sterling
and any other currency in which the Group's assets may be
denominated, including US Dollars and Euros.
The Group will, to the extent it is able to do so on terms that
the Investment Manager considers to be commercially acceptable,
seek to arrange suitable hedging contracts, such as currency swap
agreements, futures contracts, options and forward currency
exchange and other derivative contracts (including, but not limited
to, interest rate swaps and credit default swaps) in a timely
manner and on terms acceptable to the Company.
CASH MANAGEMENT
Whilst it is intended that the Group will be close to fully
invested in normal market conditions, the Group may invest surplus
capital in cash deposits, cash equivalent instruments and fixed
income instruments. While, as noted above, there are restrictions
as on the type of instruments that may be held to support cash
management activity, there is no restriction on the amount of cash
or cash equivalent instruments that the Group may hold and there
may be times when it is appropriate for the Group to have a
significant cash position instead of being fully or near fully
invested. As at 31 December 2019, the Group held 9.9 per cent
(2018: 9.4 per cent) of its portfolio in cash.
BUSINESS MODEL
The management of the Group's assets and the Group's
administration has been outsourced to third-party service
providers, however, the Board implements key elements of the
Group's strategy, including the following:
-- changes to the Company's capital structure or its status as
an investment company, investment trust and a listed public limited
company;
-- the effectiveness and implementation by the Investment
Manager of the investment policy of the Company and the
appointment, amendment or removal of the Company's third-party
service providers;
-- an effective system of oversight over the Company's risk
management and corporate governance; and
-- premium and discount management.
In order to effectively undertake its duties, the Board may seek
expert legal advice. It can also call upon the advice of the
Company Secretary.
Based on the Group's current position and the performance of the
assets acquired the principal risks that it faces and their
potential impact on its future development and prospects, the
Directors have concluded that there is a reasonable expectation
that the Group will be able to continue its business model and meet
its liabilities as they fall due over the three-year period to the
AGM in 2022. Please see the viability statement on page 28 for more
detail.
DIRECTORS' DUTIES
Section 172 of the Companies Act 2006
Under Section 172 of the Companies Act 2006 ("S.172") the
Directors have a general duty to act in a way they consider, in
good faith, would be most likely to promote the success of the
company for the benefit of its shareholders. S.172 also requires
directors, in making their decisions and choices and in setting
policies and strategy, to have regard to a non-exhaustive list of
factors, comprising:
-- the likely long-term consequences of any decision;
-- the interests of the Company's employees (the Company has no
other than its Directors who are all non-executives);
-- the need to foster the Company's business relationships with
suppliers, customers and others;
-- the impact of the company's operations on the community and the environment;
-- the desirability of the Company's to maintain a reputation
for high standards of business conduct; and
-- the need to act fairly between members of the Company.
Fulfilling this duty naturally supports the Company in achieving
its Investment Objective and helps to ensure that all decisions are
made in a responsible and sustainable way. In accordance with the
requirements of the Companies (Miscellaneous Reporting) Regulations
2018, the Group explains how the Directors have discharged their
duty under Section 172 below.
To ensure that the Directors are aware of and understand their
duties they are provided with pertinent information when they first
join the Board as well as receive regular and ongoing updates and
training on the relevant matters. The Directors also have continued
access to the advice and services of the Company Secretary, and
when deemed necessary, the Directors have the opportunity to seek
independent professional advice. The schedule of matters reserved
for the Board and the terms of reference of its Committees, which
are reviewed on at least an annual basis, further describe
Directors' responsibilities and obligations, including any
statutory and regulatory duties. The Risk Committee has the
responsibility for the ongoing review of the Company's risk
management systems and internal controls. This includes reasonably
satisfying itself that relevant systems and controls in place
remain effective and appropriate and that the Manager puts in place
appropriate policies including whistleblowing procedures, Anti --
Bribery and Anti-Corruption and reports to the Board on these
matters when necessary.
Decision-making
The importance of the stakeholder considerations, in particular
in the context of decision-making, is taken into account at every
Board meeting. All discussions involve careful considerations of
the longer-term consequences of any decisions and their
implications for stakeholders. For example, the Board discusses in
detail the portfolio's performance and forecasts; asset allocation
within the portfolio investment realisations, acquisitions and
pipeline; as well as financial performance, liquidity and balance
sheet management. In addition, the Board and the Investment Manager
hold separate strategy focused sessions at least once per annum to
consider and analyse the investment strategy.
Stakeholders
The Board aims to recognise and understand the needs and
priorities of the Company's stakeholder and these are taken into
account during all its discussions and as part of its
decision-making. As the Company is an externally managed investment
firm, the Company does not have any employees (other than its
Directors who are all non-executives ) or customers, nor does it
have a direct impact on the community or environment in the
conventional sense. The description of the way the Company operates
on page 6 explains the various stakeholders in the lending market
involved in the investment strategy of the Company. The table below
explains why these stakeholders are considered important to the
Company and the actions taken to ensure that their interests are
taken into account.
SHAREHOLDERS
Importance
Continued shareholder support and engagement are critical to
existence of the business and the delivery of the long-term
strategy of the business.
A resolution to continue the life of the Company is put to the
shareholders every five years. Having last been approved by
shareholders in 2016, the next vote is scheduled to take place at
the Company's 2021 AGM.
Board Engagement
The Company's shareholders at 31 December 2019 consist of
institutional investors, professional and professionally advised
and knowledgeable investors. The Board is committed to maintaining
open channels of communication and engagement with shareholders, in
a manner which they find most meaningful to gain an understanding
of the views of shareholders. These include:
-- Annual General Meeting ("AGM") - In normal circumstances the
Group welcomes and encourages attendance and participation from
shareholders at the AGM. Shareholders have the opportunity to meet
the Directors and Investment Manager and to address questions to
them directly. The Board values any feedback and questions it may
receive from shareholders ahead of and during the AGM and will
endeavour to take action, when appropriate;
-- Publications - The Annual Report and Half-Year results are
made available on the Company's website and the Annual Report is
circulated to shareholders. These reports provide shareholders with
a clear understanding of the Company's portfolio and financial
position. This information is supplemented by the monthly
calculation and publication of the NAV per share and a monthly
factsheet which are available on the website, the publication of
which is announced via the stock exchange. Feedback and questions
received by the Company and the Manager receive from the
shareholders assist the Company to improve its reporting;
-- Shareholder meetings - Shareholder meetings often take the
form of a meeting with the Investment Manager rather than members
of the Board. Shareholders are able to meet with the Investment
Manager throughout the year. Feedback from meetings between the
Investment Manager and shareholders is shared with the Board. The
Chairman, the Chairman of the Audit Committee or other members of
the Board are available to meet with shareholders to understand
their views on governance and the Company's performance where they
wish to do so. With assistance from the Investment Manager, the
Chairman seeks meetings with shareholders who might wish to meet
with him;
-- Working with external partners - the Investment Manager and
the Broker maintain an active dialogue with shareholders and
potential investors at scheduled meetings or analyst briefings
following financial results and provide the Board with regular
updates at Board meetings or more frequently if required
OTHER STAKEHOLDERS
The Manager
Importance
The Manager's performance is critical for the Company to
successfully deliver its investment strategy and meet its objective
to provide shareholders with an attractive level of dividend income
and capital growth through investing in primarily asset secured
loans ("Credit Assets") and selected equity investments that are
aligned with the Company's strategy and that present opportunities
to enhance the Group's returns from its investments ("Equity
Assets").
Engagement
Maintaining a constructive and effective working relationship
with the Manager is crucial as the Board and the Manager both aim
to continue to achieve attractive returns in line with its
investment objective. The following are important elements in the
effective collaboration with the Manager:
-- Encouraging open discussion with the Manager;
-- Adopting a tone of constructive challenge;
-- Drawing on Board Members' individual experience and knowledge
to support the Manager in its monitoring the portfolio of
investments; and
-- That the Board and the Manager should act within the agreed
investment restrictions and risk appetite statement and not seek to
add further investment risk.
The Company Secretary, the Administrator, the Registrar, the
Depositary and the Broker
Importance
In order to function as an investment trust and a constituent of
the specialist fund segment on the London Stock Exchange, the Group
relies on a diverse range of advisors for support with meeting all
relevant obligations.
Engagement
The Board maintains contact with its key external providers at
the Board and Committee meetings, as well as through the Manager
from its own interactions with the external providers outside of
the regular meeting cycle when required. In addition, the
Management and Engagement Committee reviews their performance, fees
and continuing appointment at least annually to ensure that service
continues at an acceptable level and they are appropriately
remunerated to deliver the expected level of service.
Lenders
Importance
Availability of funding and liquidity are crucial to the
Company's ability to take advantage of investment opportunities as
they arise.
Engagement
The Company aims to demonstrate to lenders that it is a
well-managed business, capable of consistently delivering long-term
returns.
Regulators
Importance
The Company can only operate with the approval of its regulators
who have a legitimate interest in how the Company operates in the
market and treats its shareholders.
Engagement
The Company regularly considers how it meets various regulatory
and statutory obligations and follows voluntary and best-practice
guidance, including how any governance decisions it makes can have
an impact on its stakeholders, both in the shorter and in the
longer-term.
CULTURE
The Directors agree that establishing and maintaining a healthy
corporate culture among the Board and in its interaction with the
Manager, shareholders and other stakeholders will support the
delivery on its purpose, values and strategy. The Board seeks to
promote a culture of openness, debate and integrity through ongoing
dialogue and engagement with its service providers, principally the
Investment Manager.
The Board strives to ensure that its culture is in line with the
Company's purpose, values and strategy. The Company has a number of
policies and procedures in place to assist with maintaining a
culture of good governance including those relating to Directors'
conflicts of interest and Directors' dealings in the Company's
shares. The Board assesses and monitors compliance with these
policies as well as the general culture of the Board during Board
meetings and in particular through the annual performance
evaluation process which is undertaken by each Director (for more
information see the performance evaluation section on page 38).
The Board seeks to appoint the best possible service providers
and evaluates their service on a regular basis as described on
pages 23 and 24. The Board considers the culture of the Manager and
other service providers, including their policies, practices and
behaviour, through regular reporting from these stakeholders and in
particular during the annual review of the performance and
continuing appointment of all service providers.
PREMIUM/DISCOUNT MANAGEMENT
The Company may seek to address any significant discount to NAV
at which its Ordinary Shares may be trading by purchasing its own
Ordinary Shares in the market on an ad hoc basis.
The Directors have the authority to make market purchases of up
to 14.99 per cent of the Ordinary Shares. The maximum price
(exclusive of expenses) which may be paid for an Ordinary Share
must not be more than the higher of (i) 5.0 per cent above the
average of the mid-market values of the Ordinary Shares for the
five Business Days before the purchase is made, or (ii) the higher
of the price of the last independent trade and the highest current
independent bid for the Ordinary Shares. Ordinary Shares will be
repurchased only at prices below the prevailing NAV per Ordinary
Share, which should have the effect of increasing the NAV per
Ordinary Share for remaining Shareholders. A renewal of the
authority to make market purchases will be sought from Shareholders
at each AGM of the Company. Purchases of Ordinary Shares will be
made within guidelines established from time to time by the Board.
Any purchase of Ordinary Shares would be made only out of the
available cash resources of the Company. Ordinary Shares purchased
by the Company may be held in treasury or cancelled.
Purchases of Ordinary Shares may be made only in accordance with
the Companies Act 2006 ("the Act"), the Listing Rules and the
Disclosure and Transparency Rules.
As part of its revised investment strategy, the Company
continued its share buyback program. During 2019, 1,686,112
Ordinary Shares (2018: 3,747,148 Ordinary Shares) were repurchased
at an average price of 823.4 pence per ordinary share (2018: 800.4
pence per ordinary share).
CORPORATE AND OPERATIONAL STRUCTURE
Corporate structure
There have been several changes in the structure of the Group in
2019. The Group's entered into several new debt facilities in 2019,
including its third SME unsecured lending securitisation in April
2019 which resulted in a cheaper cost of funding for the Company.
Small Business Origination Loan Trust 2019-1 DAC ("SBOLT 2019"),
the entity relating to this facility was consolidated in the
financial statements for the period April to December 2019. This
was a GBP187 million transaction that was collateralised by
unsecured loans to SMEs originated through the online lending
platform operated by Funding Circle Limited ("Funding Circle"). The
transaction reduced the cost of funding, and offered matched
duration funding which will enhance the Company's returns. The
Company ceased purchasing loans from Funding Circle in Q4 2018 as
part of the strategy to focus on asset secured lending. The Company
incorporated CH Mercury Note Issuer DAC ("CH") in November 2018
which became active in February 2019 when a pool of development and
bridging finance loans were transferred in as well as asset
specific leverage which resulted in a cheaper cost of funding for
the Company. CH was consolidated in the financial statements for
the period from February to August 2019 and then unwound in August
2019.
During the period, all remaining loans from P2P BL-2 PLC ("P2P
BL-2"), P2P BL-3 Limited ("P2P BL-3") and Marketplace Originated
Consumer Assets 2016-1 PLC ("MOCA 2016") were novated out of these
Companies to Pollen Street Secured Lending plc and these Companies
are not in the process of liquidation. The Company consolidated P2P
BL-2 in the financial statements for the period January to
September 2019, P2L BL-3 for the period January to April 2019 and
MOCA 2016 for the period January to August 2019.
The Company also controls and consolidates a number of trusts
("Trusts") through its control of Eaglewood SPV I LP (the "SPV" or
the "Subsidiary") and Eaglewood Income Fund I, LP (the "Eaglewood
Fund"). The SPV and Eaglewood Fund control a Trust if they are
exposed to, or have the rights to, variable returns from their
involvement with the Trust and have the ability to affect those
returns through its power over the Trust. During the year, the SPV
became the sole beneficial owner of an LLC; PSC 2019P LLC.
Operational and portfolio management
The Company has outsourced its operations and portfolio
management to various service providers as detailed below:
-- PSC Credit Holdings LLP is the Company's investment manager
and Alternative Investment Fund Manager ("AIFM") for the purposes
of the Alternative Investment Fund Managers Directive
("AIFMD");
-- Link Asset Services acts as the Company's registrar;
-- Link Company Matters Limited acts as the Company Secretary;
-- Citco Fund Services (Ireland) Limited is the Company's administrator and external valuer;
-- Citco Custody (UK) Limited acts as the Company's depositary and custodian; and
-- Liberum Capital Limited acts as the Company's corporate broker and financial adviser.
Principal Risks and Uncertainties
The Group is exposed to a number of potential risks and
uncertainties which could have a material impact on the Group
performance and could cause actual results to differ materially
from expected and/or historical results.
The Board has in place a robust process to assess and monitor
the risks of the Group. A core element of this is the Group's risk
register, which identifies the risks facing the Company and
assesses the likelihood and potential impact of each risk, and the
quality of the controls operating to mitigate the risk.
The register, its method of preparation and the operation of the
key controls in the Investment Manager's systems of internal
control are reviewed and reported on to the Board on a regular
basis. In order to gain a more comprehensive understanding of the
Investment Manager's risk management processes and how these apply
to the Group's business, the Board periodically receives on-site
presentations from the Investment Manager.
The Investment Manager also has responsibility for day-to-day
risk management for the Group and it works with the Board to
identify and manage the principal risks facing the Group.
The Board has undertaken a robust assessment of the principal
risks facing the Group, including those that would threaten its
business model, future performance, solvency and liquidity. Those
principal risks have been described below together with an
explanation of how they are managed and mitigated. The Board will
continue to assess these risks on an ongoing basis.
OPERATIONAL RISKS
Third-Party Service Providers
The Group has no employees (other than its Directors who are all
non-executives) and relies on the services provided by third
parties. Accordingly, it is dependent on the control systems of
third parties such as the Investment Manager, the depositary and
the fund administrator, who maintain the Group's assets and
accounting records.
In addition, the Group predominantly uses originators and
third-party servicers to acquire and service loans. Accordingly, it
is dependent on the originators' credit underwriting and control
systems and collection capabilities.
The security of the Group's assets, dealing procedures,
accounting records and adherence to regulatory and legal
requirements depend on the effective operation of the systems of
the third-party service providers.
Failure by any service provider, or originator, to carry out its
obligations to the Group in accordance with the terms of its
appointment could have a materially adverse effect on the operation
of the Group.
The Group is reliant on the Investment Manager's relationships
with originators. Should the Investment Manager cease to continue
to be investment manager there is a risk that the Group will not be
able to successfully pursue its investment management objective and
policy.
Resilient IT systems and associated infrastructure are essential
for maintaining high service levels to the Group by the originators
and other third-party service providers. These service levels are
at risk from cyber-attack, component failure or unplanned
disasters.
Mitigation
The Company has appointed third party service providers who are
experienced in their field and have a reputation for high standards
of business conduct.
Due diligence is undertaken before contracts are entered into
with third party service providers and originators and oversight of
the performance of these parties is conducted by the Investment
Manager and reported to the Board periodically.
In order to gain a more comprehensive understanding of the
Investment Manager's internal processes, controls and risk
management, the Board periodically receives on-site presentations
from the Investment Manager and periodically reviews the controls
reports.
The Board reviews the overall performance of the Investment
Manager and all other third-party service providers on a regular
basis. The Board also considers the business continuity
arrangements of the Company's key service providers. The Board
reviews arrangements that the Investment Manager has put in place
to ensure that back up loan servicers are available and able to
take on the Group's loans. The Investment Manager has a robust
cyber security and disaster recovery ("DR") policy. The Investment
Manager also assesses cyber security and DR of the Group's
third-party service providers and Platforms. The Board regularly
reviews these arrangements.
As part of the response to Covid-19 all outsourced third party
service providers have successfully implemented business continuity
processes such as working from home. This has meant that the
service levels received by the Group have been maintained in this
difficult time.
Reliance on key individuals
The Group relies on key individuals at the Investment Manager to
identify and select investment opportunities and to manage the
day-to-day affairs of the Group. There can be no assurance as to
the continued service of these key individuals at the Investment
Manager. The departure of key individuals from the Investment
Manager without adequate replacement may have a material adverse
effect on the Group's business prospects and results of operations.
Accordingly, the ability of the Group to achieve its investment
objective depends heavily on the experience of the Investment
Manager's team, and more generally on the ability of the Investment
Manager to attract and retain suitable staff.
Mitigation
The interests of the Investment Manager are closely aligned with
the performance of the Group through the management and performance
fee structures in place and direct investment by certain key
individuals of the Investment Manager. Furthermore, investment
decisions are made by a team of professionals, mitigating the
impact of a loss of any single key professional within the
Investment Manager's organisation. The performance of the
Investment Manager in its duties to the Group is subject to ongoing
review by the Board on a quarterly basis.
Fluctuations in the market price of Issued Shares
The market price of the Company's shares may fluctuate widely in
response to different factors and there can be no assurance that
the Company's shares will be repurchased by the Company even if
they trade materially below their Net Asset Value. Similarly, the
shares may trade at a premium to Net Asset Value whereby the shares
can trade on the open market at a price that is higher than the
value of the underlying assets. There can be no assurance, express
or implied, that shareholders will receive back the amount of their
investment in the Company's shares.
Mitigation
The Investment Manager and the Board closely monitor the level
of discount or premium at which the Company's shares trade on the
open market. The Company may purchase its shares in the market with
the intention of enhancing the NAV per ordinary share, however
there can be no assurance that any purchases will take place or
that any purchases will have the effect of narrowing any discount
to NAV at which the Company's ordinary shares may trade.
In the first instance, the Company's Board and Investment
Manager believe the best defence against the share price trading at
a discount to NAV is an attractive dividend policy, with quarterly
distributions driven from the pursuit of attractive risk adjusted
returns in Credit Assets and Equity Assets.
With regard to repurchasing shares, the Board may use its
discretion during periods of market dislocation to
opportunistically buyback shares where it believes such a purchase
would be accretive over and above the long term attractions of
investing in further loan and equity portfolios and it is in the
best long term interest of all shareholders to do so.
INVESTMENTS
Achievement of the Investment Objective
There can be no assurance that the Investment Manager will be
successful in implementing the Group's investment objective.
Mitigation
The Group's investment decisions are delegated to the Investment
Manager. Performance of the Company against its investment
objectives is closely monitored on an ongoing basis by the
Investment Manager and is reviewed in detail at each Board meeting
by its members. In the event it is required, any action required to
mitigate underperformance is taken as deemed appropriate by the
Investment Manager.
The Board has set investment restrictions and guidelines which
the Investment Manager monitors and reports on quarterly to the
Board. The Board also receives from the Investment Manager a
quarterly explanation of portfolio allocation decisions, large
exposures, leverage levels and any changes in leverage and the
rationale for the composition of the investment portfolio.
Borrowing
The Group may use borrowings in connection with its investment
activities including, where the Investment Manager believes that it
is in the interests of shareholders to do so, for the purposes of
seeking to enhance investment returns. Such borrowings may subject
the Group to interest rate risk and additional losses if the value
of its investments fall. Whilst the use of borrowings should
enhance the Net Asset Value of the Company's shares when the value
of the Company's underlying assets is rising, it will have the
opposite effect where the underlying asset value is falling. In
addition, in the event that the Company's income falls for whatever
reason, the use of borrowings will increase the impact of such a
fall on the Company's return and accordingly will have an adverse
effect on the Company's ability to pay dividends to shareholders.
There is a risk that the Company will breach the covenants set by
the lender which could have an adverse effect of the Company
continuing as a going concern.
Mitigation
The Investment Manager and the Board closely monitors the level
of gearing of the Group. The Group has a maximum limitation on
borrowings of 1.5 times of NAV (calculated at the time of draw
down) which the Investment Manager may affect at its discretion
when conditions and opportunities exist to enhance investment
returns. All covenants are monitored on a monthly basis and any
Group wide transactions are appraised against their impact on any
debt related covenant.
Exposure to Credit Risk
As a lender to small businesses, property lenders and
individuals, the Group is exposed to credit losses if customers or
counterparties are unable to repay loans and outstanding interest
and fees or through fraud. The Group is expected to invest a
significant proportion of its assets in Credit Assets which, by
their nature, are exposed to credit risk and may be impacted by
adverse economic and market conditions, including through higher
impairment charges, increased capital losses and reduced
opportunities for the Group to invest in Credit Assets.
Additionally, competition could serve to reduce yields and lower
the volume of loans generated by the Group.
The outbreak of COVID-19 has caused major disruption across the
globe. At the time of writing the portfolio has not seen a material
impact in payment performance yet albeit some end borrowers have
requested and been granted payment holidays. However, given the
Group's UK and US focus, its performance is linked to the health of
these economies. We expect the Group could experience further
impairments and consequently reduced profits, particularly if
economic expectations deteriorate further. However, the overall
effect of this cannot be quantified reliably because the impact of
the UK government's various support initiatives and the US
governments COVID-19 Stimulus Bill is not yet known, but they are
expected to reduce the potential expected credit loss impact. The
Investment Manager has adopted a prudent approach with the focus on
the existing portfolio and ensuring cash collections remain robust
as the appropriate strategies are in place. The legacy book
continues to run off, whilst performance of this book has been poor
to date and it is expected that impairments will increase over the
coming months, the loans are now well seasoned.
Mitigation
The Group will invest in a granular portfolio of assets across
various originators, asset classes, geographies (primarily Europe
and United States), levels of collateral and credit bands in order
to ensure diversification and to seek to mitigate concentration
risks.
Origination rates and performance of the underlying assets of
the Group are closely monitored on an ongoing basis by the
Investment Manager and the Board and are reviewed in detail at each
Board meeting.
The Group has focused on increasing its exposure to structured
lending and lending with asset backing, which both mitigate the
credit risk through the provision of collateral or structural
protection in the form of either the platform equity covering the
first loss or the customer equity covering the first loss.
In relation to Covid-19 the impact is being mitigated where
possible through the Investment Manager proposing not to re-invest
the cash generated by the portfolio in new investments until there
is more visibility on the impact of the lockdown restrictions on
performance and a return to some level of normality in the economy.
In the structured portfolio where the Group provides finance to
non-bank lenders, the Investment Manager is working with the
borrowers to help them navigate the difficult environment whilst
ensuring most of the cash generated by their portfolio is utilised
to repay the Group's loan.
Interest Rate Risk
The Group invests in Credit Assets which may be subject to a
fixed rate of interest, or a floating rate of interest (which may
be linked to base rates or LIBOR) and expects that its borrowings
will be typically subject to a floating rate of interest. Any
mismatches the Group has between the income generated by its Credit
Assets, on the one hand, and the liabilities in respect of its
borrowings, on the other hand, may subject the Group to interest
rate risk.
Following the recommendations of the Financial Stability Board,
a fundamental review and reform of the major interest rates
benchmarks, including Interbank offered rate ("Ibors"), are
underway across the world's largest financial markets. In some
cases, the reform will include replacing interest rate benchmarks
with alternative risk-free rates ('RFRs'). This replacement process
is at different stages, and is progressing at different speeds,
across several major currencies.
Mitigation
Interest rate risk exposures may be managed, in part, by
matching any floating rate borrowings with investments in Credit
Assets that are also subject to a floating rate of interest. The
Group may use derivative instruments, including interest rate
swaps, to reduce its exposure to fluctuations in interest rates,
however some unmatched risk may remain.
With the Ibor transition there is inherent uncertainty as to the
basis, method and timing of transition and their implications on
the participants in the financial markets. Until there is market
acceptance on the form of alternative RFRs for different products,
the legal mechanisms to effect transition cannot be confirmed, and
the impact cannot be determined nor any associated costs accounted
for. Going forward the Group needs to assess the potential effects
of these Ibor replacements and has the intention of minimising
disruption through appropriate mitigating actions.
The current Covid-19 outbreak has seen the Bank of England lower
interest rates on 19 March 2020 to 0.1 per cent, the lowest they
have been in its 325-year history. The Board will continue to
monitor this development.
Foreign Exchange Rate Risk
Brexit has been a driver for exchange rate volatility and the
devaluation of Sterling. The Group's policy is to hedge exchange
rate risk where appropriate. This in turn can create liquidity risk
due to the potential for large cash margin calls in relation to any
derivative contracts entered into.
Mitigation
The Investment Manager monitors the fluctuations in foreign
currency exchange rates and may use forward foreign exchange
contracts to hedge the currency exposure of the Group's
non-Sterling denominated investments. The Investment Manager
re-examines the currency exposure on a regular basis in each
currency and manages the Group's currency exposure in accordance
with market expectations. The Investment Manager as part of this
monitoring ensures it has the required liquidity to cover any cash
margin calls.
Liquidity of Investments
The Group may invest in Equity Assets that are aligned with the
Group's strategy and that present opportunities to enhance the
Company's return on its investments. Such Equity Assets are likely
to be predominantly in the form of unquoted equity securities.
Investments in unquoted equity securities, by their nature, involve
a higher degree of valuation and performance uncertainties and
liquidity risks than investments in listed securities and therefore
may be more difficult to realise.
Mitigation
The Group has established investment restrictions on the extent
to which it can invest in Equity Assets, such that no more than
10.0 per cent of the net proceeds of any placing are invested in
Equity Assets. Compliance with these restrictions is monitored by
the Investment Manager on an ongoing basis and by the Board
quarterly.
REGULATIONS
The Group is subject to extensive laws, regulations, corporate
governance practice and disclosure requirements, administrative
actions and policies in each jurisdiction in which it operates.
Many of these have been introduced or amended recently and are
subject to further material changes, which may increase compliance
and conduct risks. The Group expects government and regulatory
intervention in the financial services industry to remain high for
the foreseeable future.
Tax
Any changes in the Company's tax status or in taxation
legislation could affect the value of investments held by the
Group, affect the Company's ability to provide returns to
shareholders and the tax treatment for shareholders of their
investments in the Company.
Mitigation
At all times, the Company intends to conduct its affairs so as
to enable it to qualify as an investment trust for the purposes of
Chapter 4 of Part 24 of the Corporation Tax Act 2010. Both the
Board and the Investment Manager are aware of the requirements,
which are to be fulfilled in any accounting period for the Company
to maintain its investment trust status. The conditions required to
satisfy the investment trust criteria are monitored by the
compliance function of the Investment Manager.
Breach of Applicable Legislative Obligations
The Group and its third-party service providers are subject to
various legislative and regulatory regimes, including, but not
limited to, the Consumer Credit Act and the Data Protection Act.
Any breach of applicable legislative and/or regulatory obligations
could have a negative impact on the Company and impact returns to
shareholders.
Mitigation
The Group engages only with third-party service providers which
hold the appropriate regulatory approvals for the function they are
to perform and can demonstrate that they can adhere to the
regulatory standards required of them. Each appointment is governed
by agreements which contain the ability to terminate each of these
counterparties with limited notice should they continually or
materially breach any of their legislative obligations, or their
obligations to the Group more broadly.
EMERGING RISKS
The Group utilises an established framework to monitor its
portfolio for emerging risks, supporting organisational readiness
for external volatility.
This incorporates input and insight from both a top-down and
bottom-up perspective:
-- Top-down: Emerging risks identified by directors at a group
level via the Audit and Risk Committee and the Board.
-- Bottom-up: Emerging risks identified at a business level and
escalated, where appropriate by the Investment Manager, via risk
updates into the Audit and Risk Committee and the Board.
-- Emerging risks are monitored by the Group Audit and Risk
Committee on an ongoing basis, with agreed actions tracked to
ensure the Group's preparedness should an emerging risk
crystallise.
-- The most significant emerging risk is the ongoing outbreak of
the COVID-19. We are monitoring the situation carefully as it
evolves. The Group's business model aims to ensure that it is able
to continue to trade and support its clients in all economic
conditions.
GOING CONCERN
The Directors have reviewed the financial projections of the
Group from the date of this report, which have been updated to take
into account the economic disruption caused by the COVID-19
pandemic. These show that the Group will be able to generate
sufficient cash flows in order to meet its liabilities as they fall
due and for the foreseeable future, and that all relevant
conditions such as covenants under the Group's external borrowings
will be met over that period
The Directors have considered the risks arising of economic
disruption caused by the COVID-19 pandemic. The Investment Manager
has performed suitable stress tests which show that even on a
severe but plausible basis the Group is expected to be able to meet
its liabilities for the foreseeable period.
There are a number of other developments which are relevant to
the future of the Group and Company, and which may affect the
continued use of going concern accounting principles.
The Directors of the Company announced on 25 February 2020 that
the Company was in discussions regarding a possible offer by
Waterfall Asset Management LLC ("Waterfall") for the acquisition of
the entire share capital of the Company. They also announced that
the possible offer was supported by the largest shareholder of the
Company at that time. The offer period has since been extended, and
on 19 May 2020, a further extension to 16 June 2020 was announced.
The intentions of Waterfall, as to their plans for the Company
should an offer be made and be successful, have not been announced.
The announcement made by the Company on 19 May 2020, indicated also
that The Board is also reviewing all options in the event that the
possible offer does not proceed.
In addition, Article 167 of the Company's Articles of
Association stipulates that at the Annual General Meeting to be
held in 2021 the Directors shall propose an ordinary resolution
that the Company continues to operate as an investment company (the
"continuation vote"). If this resolution does not receive approval
from a majority of shareholders, the Articles stipulate that the
Directors shall, within three months of the date of the resolution,
put forward proposals to shareholders to the effect that the
Company be wound up or similarly restructured. The outcome of the
continuation vote cannot at this stage be determined with any
certainty.
The potential consequences of the possible offer, and the
continuation vote, are conditions that indicate the existence of a
material uncertainty which may cast significant doubt about the
Group's and Company's plans or ability to continue as a going
concern. The Group and Company financial statements do not include
the adjustments that would result if the Group and Parent Company
were no longer to be considered a going concern.
Notwithstanding this uncertainty, the Directors are satisfied
that the going concern basis remains appropriate for the
preparation of the financial statements.
VIABILITY STATEMENT
In accordance with UK Corporate Governance Code, published by
the Financial Reporting Council in July 2018 (the "UK Code"), the
Directors have assessed the prospects of the Group over the
two-year period to the Annual General Meeting ("AGM") in 2022.
The Directors of the Company announced on 25 February 2020 that
the Company was in discussions regarding a possible offer by
Waterfall Asset Management LLC ("Waterfall") for the acquisition of
the entire share capital of the Company. They also announced that
the possible offer was supported by the largest shareholder of the
Company at that time. The offer period has since been extended, and
on 19 May 2020, a further extension to 16 June 2020 was announced.
The intentions of Waterfall, as to their plans for the Company
should an offer be made and be successful, have not been announced.
The announcement made by the Company on 19 May 2020, indicated also
that The Board is also reviewing all options in the event that the
possible offer does not proceed. The Directors have assumed for the
purposes of this viability statement that if a firm offer were to
be made and be successful, that the Group would continue to operate
and be able to meet its obligations, based on its current financial
position over the period.
The Directors will be required by the Articles of Association to
put a proposal for the continuation of the Group at the 2021 AGM,
and note that, based on the current position, performance and
prospects of the Group they have no reason to believe that
shareholders will vote against continuation. However, the outcome
of the continuation vote cannot at this stage be determined with
any certainty and therefore this is a key assumption. If this
resolution does not receive approval from a majority of
shareholders, the Articles stipulate that the Directors shall,
within three months of the date of the resolution, put forward
proposals to shareholders to the effect that the Company be wound
up or similarly restructured.
The Directors note that, even if there were to be a firm offer
made, and that offer were to be successful, or there were to be a
vote against continuation at the 2021 AGM, the Group would be
likely to continue to operate for at least a year thereafter, due
to the Group's investments not comprising readily realisable
securities.
In their assessment of the viability of the Group, the Directors
have considered each of the Group's principal risks and
uncertainties and mitigating factors are detailed on pages 23 to
24. The Directors have also considered the Group's revenue and
expenditure projections, working capital requirements, which have
been updated to take into account the economic disruption caused by
the COVID-19 pandemic, and as noted above) the fact that the
Group's investments do not comprise readily realisable securities
which can be sold to meet funding requirements if necessary.
Analysis has also focused on the risks in delivery of the
business model, including consideration of the proposed change in
Investment Manager, and the continued satisfactory operation of the
other service providers, and the platforms through which the Group
operates its activities, as well as a series of projections
addressing changing funding levels, origination volumes and the
performance of the assets acquired.
The Board are aware that a decision to proceed with a potential
change of Manager (following the notice to that effect issued on
25th February 2020) could result in financial consequences for the
Company arising from the exercise by third parties of rights to
terminate loan and other facilities that are currently in place. It
is not considered that such consequences, if they occur, will be of
an amount that could not be accommodated within the available
resources of the Company at the relevant time or call into question
the Board's view on Going concern or viability in this Report.
Based on the Group's current position, the principal risks that
it faces and their potential impact on its future development and
prospects, the Directors have concluded that there is a reasonable
expectation that the Group will be able to continue in operation
and meet its liabilities as they fall due over the two-year period
to the AGM in 2022.
Key Performance Indicators (KPIs)
The Board monitors success in implementing the Group's strategy
against a range of key performance indicators (KPIs), which are
viewed as significant measures of success over the longer term.
Although performance relative to the KPIs is also monitored over
shorter periods, it is success over the long-term that is viewed as
more important, given the inherent volatility of short-term
investment returns. The principal KPIs are set out below:
-- The movement in Net Asset Value per ordinary share (please see page 4);
-- Dividend per share (please see page 4);
-- The share price premium/(discount) to NAV (please see page 4);
-- The movement in the share price (please see page 4);
-- Ongoing charges ratio (please see page 4); and
-- Annual NAV per share return (please see page 4).
APPROVAL
The Strategic Report was approved by the Board of Directors on
29 May 2020 and signed on its behalf by:
Simon King
Chairman
Directors' Report
Board of Directors
SIMON KING
Chairman of the Board*, the Nomination Committee, Insider Committee
and Management Engagement Committee
Appointed: 12 February 2014
Simon has many years of experience of managing investment companies
and trusts. He is currently Chief Investment Officer of Vermeer
Partners, a private wealth management company. Following a career
in stockbroking, Simon joined Gartmore Fund Managers in 1994
and in 2000, he became a Senior Investment Manager on Gartmore's
UK Equities team. He established, managed and co-managed a series
of funds including the Gartmore UK Focus Fund, the Alphagen Avior
Hedge Fund and the Alphagen Octanis Hedge Fund. From 2009 to
2012, Simon worked at Premier Asset Management where he managed
UK unit trusts. Simon was also previously a part time Director
at Numis Asset Management. Simon brings a wealth of experience
in the areas of fund management, regulation and adherence to
investment mandates.
MICHAEL CASSIDY
Chairman of the Audit Committee
Appointed: 12 February 2014
Michael has had over 40 years' experience as a qualified lawyer,
principally engaged in investment work for a large pension fund
and most recently as a consultant to DLA Piper. He had a career
in City Local Government, with senior roles at Guildhall including
Leader of the Council and Planning Chairman, and also the Museum
of London and Property Investment Board. He has also been a non-executive
director of British Land and Crossrail and is currently the Chairman
of Ebbsfleet Urban Development Corporation. He was awarded CBE
in 2004 for services to the City of London.
MAHNAZ SAFA
Chair of the Remuneration Committee and Senior Independent Director**
Appointed: 10 June 2016
Mahnaz was Head of Markets, Europe and America at Australia and
New Zealand Bank Group. She was also previously Managing Director
of Citi EMEA Banking, having joined in 2013 after 19 years at
UBS, where she co-headed the EMEA Debt Capital Markets business,
leading a team responsible for bond and loan origination, securitisation,
liability management, derivatives and pension risk management.
She was chosen as one of Financial News' Top 100 Women in Finance
in 2010, 2013 and 2015. Mahnaz has previously served on the British
Business Bank's investment committee, which provides capital
to non-traditional SME loan providers, including peer-to-peer
platforms. She has co-chaired UBS and Citi's women's leadership
executive committees. Mahnaz holds a PhD in engineering from
Imperial College and is a member of the Council of Imperial College.
DAVID FISHER
Chairman of the Risk Committee
Appointed: 19 April 2018
David has nearly 30 years' experience within financial services,
beginning his career with Halifax Building Society. He is currently
a non-executive director of Leeds Building Society where he is
Chair of the Board Risk Committee. Previously he was Chief Executive
of Sainsbury's Bank and has held non-executive directorships
with The Scottish Government, Amicus Finance plc and was chairman
of the Business and Oversight Board at The Law Society of England
and Wales. During his career, he has developed a wealth of knowledge
in retail financial services and has a strong understanding of
risk management.
* Simon King was appointed as Chairman of the Board, with effect
from 1 January 2020 following Stuart Cruickshank's retirement.
** Mahnaz Safa was appointed as Senior Independent director following
Simon King's appointment as Chairman, with effect from 1 January
2020
PREVIOUS DIRECTORS
STUART CRUICKSHANK
Mr Cruickshank was appointed in 2014 as non-executive Director,
Chairman of the Company, the Nomination Committee and Insider
Committee and a member of the Audit Committee, Management &
Engagement Committee, Risk Committee and Remuneration Committee. Mr
Cruickshank resigned as a member of the Audit Committee, Risk
Committee and Remuneration Committee with effect from 13 June 2019
and resigned as non-executive Director, Chairman of the Company,
the Nomination Committee and Insider Committee with effect from 1
January 2020.
Report of the Directors
The Directors of Pollen Street Secured Lending plc (Reg:
08805459) present their annual report and audited financial
statements of the Company and its subsidiaries (together, the
"Group") for the year ended 31 December 2019.
DIRECTORS
The Directors in office at the date of this report are shown on
page 30.
Directors Remuneration and Interests
The remuneration and beneficial interests of the Directors in
the securities of the Company are set out in the Directors'
Remuneration Report on pages 49 to 52.
DIVIDS AND SHARE BUYBACKS
No final dividend is being recommended. The Company's policy is
to pay dividends on a quarterly basis, as set out in the Company's
prospectus dated 30 June 2015. The dividends paid or payable in
respect of the year ended 31 December 2019 are set out in Note 22
to the financial statements. A reconciliation of movements in
reserves is presented in the Consolidated and Parent Company
Statement of Changes in Shareholders' Funds on pages 70 and 71 of
the financial statements. The Company may make distributions from
the revenue reserve, the special distributable reserve and from
realised capital gains.
An interim dividend of 12 pence per Ordinary Share was declared
by the Board on 24 February 2020 in respect of the three-month
period to 31 December 2019, which was paid on 27 March 2020 to
shareholders on the register as of 5 March 2020.
The Company continued its share buyback program in 2020 and as
at 28 May 2020, 12,303,792 shares are held in treasury.
AUDIT INFORMATION
As required by section 418 of the Companies Act 2006, the
Directors who held office at the date of the Annual Report confirm
that, so far as they are aware, there is no relevant audit
information of which the Company's Auditors is unaware; and each
Director has taken all the steps that he ought to have taken as a
Director to make himself aware of any relevant audit information
and to establish that the Company's Auditors are aware of that
information.
OUTLOOK
The Group's anticipated future developments and outlook are
discussed in more detail in the Chairman's Statement on pages 7 and
8 and the Investment Manager's Report on pages 9 to 11.
AUDITORS
The Company's independent auditors, PricewaterhouseCoopers LLP
("PwC") have indicated their willingness to continue in office as
Auditor of the Company for the forthcoming financial year, and
resolutions for their re-appointment and for the Audit Committee to
determine their remuneration will be proposed at the forthcoming
AGM.
The Audit Committee has carefully considered the auditors'
appointment, as required in accordance with its terms of reference,
and, having regard to its effectiveness and the services it has
provided the Company during the year under review, has recommended
to the Board that the independent auditors be appointed at the
forthcoming 2020 AGM. In reaching its decision, the Audit Committee
considered the points detailed on page 46 of the Audit Committee's
report.
FINANCIAL RISK MANAGEMENT
The principal risks and the Company's policies for managing
these risks are set out in Note 8 to the financial statements and
pages 23 and 24 of the Strategic Report.
SUBSEQUENT EVENT
An interim dividend of 12 pence per Ordinary Share was declared
by the Board on 24 February 2020 in respect of the three-month
period to 31 December 2019, which was paid on 27 March 2020 to
shareholders on the register as of 5 March 2020.
An interim dividend of 12 pence per Ordinary Share was declared
by the Board on 4 May 2020 in respect of the three-month period to
31 March 2020, which will be paid on 19 June 2020 to shareholders
on the register as of 15 May 2020.
The Company continued its share buyback program in 2020 and as
at 28 May 2020, 12,303,792 shares are held in treasury.
The Company received an approach to acquire all of its issued
share capital at 900 pence per share from Waterfall Asset
Management, LLC ("Waterfall"), subject to confirmatory due
diligence and certain other standard conditions.
The Board announced on 25 February 2020 that it served 12
months' notice in writing on the Manager to terminate the
Investment Management Agreement ("IMA").
In March 2020, the World Health Organisation recognised an
outbreak of a new virus that causes coronavirus disease 2019
("COVID-19") as a pandemic. COVID-19 has caused disruption to
businesses and economic activity which has been reflected in recent
fluctuations in global stock markets. There are no comparable
recent events which may provide guidance as to the effect of the
spread of COVID-19 and a potential pandemic, and, as a result, the
ultimate impact of the COVID-19 outbreak or a similar health
epidemic is highly uncertain and subject to change.
The Investment Manager continues to have faith in the strength
of the performance of the asset class despite the unprecedented
conditions. The Group is well diversified with the underlying loan
portfolios being highly granular with low concentration risk. It
has maintained a close and proactive engagement with all platform
partners and forbearance has been applied sensitively and
proportionately. The Investment Manager believes that the company
is well positioned to perform solidly throughout the crisis.
However, given the Group's UK and US focus, its performance is
linked to the health of these economies. We expect the Group could
experience further impairments and consequently reduced profits,
particularly if economic expectations deteriorate further. However,
the overall effect of this cannot be quantified reliably because
the impact of the UK government's various support initiatives and
the US government's COVID-19 Stimulus Bill is not yet known, but
they are expected to reduce the potential expected credit loss
impact. The Investment Manager has adopted a prudent approach with
the focus on the existing portfolio and ensuring cash collections
remain robust as the appropriate strategies are in place. The
legacy book continues to run off, whilst performance of this book
has been poor to date and it is expected that impairments will
increase over the coming months, the loans are now well
seasoned.
The longer-term financial impact of coronavirus is not yet clear
and given the significant change in the operating environment and
economic expectations the Investment Manager is proposing to
re-invest the cash generated by the portfolio very selectively
during this period of uncertainty with the majority of cash going
to reduce net debt.
The Board considers the emergence and spread of COVID-19 to be a
non-adjusting post balance sheet event.
The NAV for 31 March 2020 was released on 5 May 2020 and
included a GBP2.0 million one-off provision arising from the change
to the economic scenarios due to the COVID-19 situation.
As at 27 May 2020, the Company's latest published NAV per
Ordinary Share as at 31 March 2020 was 963.0 pence and the latest
share price was 708.0 pence per share.
GREENHOUSE GAS EMISSIONS
The Group has no greenhouse gas emissions to report from its
operations, nor does it have responsibility for any other emissions
producing sources under the Companies Act 2006 (Strategic Report
and Directors' Report) Regulations 2013, including those within its
underlying investment portfolio.
REQUIREMENTS OF THE LISTING RULES
Listing Rule 9.8.4 requires the Group to include specified
information in a single identifiable section of the Annual Report
or a cross reference table indicating where the information is set
out.
Listing Rule
9.8.4 (1) - capitalised The Group has not capitalised any interest
interest in the year under review.
======================== =======================================================
9.8.4(2) - unaudited The Group publishes a monthly NAV statement.
financial information The Group also published an interim report
and unaudited financial statements for the
period from 1 January 2019 to 30 June 2019.
It did not constitute a profit forecast or
profit estimate in accordance with listing
rule 9.2.18.
======================== =======================================================
9.8.4 (4) - incentive The Company has no incentive schemes in operation.
schemes
======================== =======================================================
9.8.4 (5) and (6) No Director of the Company has waived or agreed
- waiver to waive any current or future emoluments from
the Company.
======================== =======================================================
9.8.4 (7), (8) and During the year under review, the Company did
(9) not issue any shares.
======================== =======================================================
9.8.4 (8) and 9.8.4 During the year no shares were issued by any
(9) - relate to unquoted major subsidiary undertaking of the
companies that are Company and Company is not a subsidiary undertaking
part of a group of another company.
of companies
======================== =======================================================
9.8.4 (10) - contract During the year under review, there were no
of significance contracts of significance subsisting to which
the Company is a party and in which a Director
of the Company is or was materially interested
or between the Company and a controlling shareholder.
======================== =======================================================
9.8.4 (11) The Company is not party to any contracts for
the provision of services to the Company by
a controlling shareholder.
======================== =======================================================
9.8.4 (12) and (13) During the year under review, there were no
- waiving dividends arrangements under which a shareholder has
waived or agreed to waive any dividends or
future dividends,
======================== =======================================================
9.8.4 (14) The Company has complied with this given that
there is no controlling shareholder under LR
9.2.2AD and therefore no FCA notification required.
======================== =======================================================
CORPORATE GOVERNANCE
The Corporate Governance Statement on pages 36 to 44 forms part
of the Report of the Directors.
ARTICLES OF ASSOCIATION
Any amendments to the Company's Articles must be made by special
resolution passed at a general meeting.
ANNUAL GENERAL MEETING
The AGM will be held on 30 June 2020 and explanations of the
business proposed at the AGM will be contained in the Notice of the
AGM, which is being posted to shareholders with this Annual
Report.
GENERAL MEETING
The Board may convene a general meeting of the shareholder at
whatever time it deems necessary or when such a meeting is required
under applicable laws or regulations. Under the principles of the
Association of Investment Companies Code of Corporate Governance
(the "AIC Code") notice of that general meeting should be sent to
shareholders 14 days in advance.
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE
In accordance with the AIFMD, the Company has appointed PSC
Credit Holdings LLP to act as the Company's AIFM for the purposes
of the AIFMD. The AIFM ensures that the Company's assets are valued
appropriately in accordance with the relevant regulations and
guidance. Citco Custody (UK) Limited acts as the Company's
Depositary and Citco Fund Services (Ireland) Limited provides
custody services to the Company as required by the AIFMD.
DONATIONS
The Company made no political or charitable donations during the
year under review to organisations either within or outside the EU
(2018: none).
ANTI-BRIBERY AND CORRUPTION POLICY
The Company has no employees (other than its Directors who are
all non-executives) or operations but uses the anti-bribery and
corruption policy of the Investment Manager, ensuring compliance
with all applicable anti-bribery and corruption laws and
regulations, including the UK Bribery Act 2010.
ENVIRONMENT, HUMAN RIGHTS, EMPLOYEE, SOCIAL AND COMMUNITY
ISSUES
The Company is required by law to provide details of
environmental matters (including the impact of the Company's
business on the environment), employee, human rights, social and
community issues (including information about any policies it has
in relation to these matters and the effectiveness of those
policies). The Company does not have any employees other than its
Directors which are all independent non-executive Directors. As an
investment trust, the Company does not have any direct impact on
the environment. The Company aims to minimise any detrimental
effect that its actions may have by adhering to applicable social
legislation, and as a result does not maintain specific policies in
relation to these matters.
The Company has no operations and therefore no greenhouse gas
emissions to report nor does it have responsibility for any other
emissions producing sources under the Companies Act 2006 (Strategic
Report and Directors' Reports) Regulations 2013, including those
within its underlying investment portfolio. During the period, the
Board considered the Energy Savings Opportunity Scheme ("ESOS")
reporting requirement and confirmed that it had no energy reporting
responsibilities.
In carrying out its investment activities and in relationships
with suppliers, the Company aims to conduct itself responsibly,
ethically and fairly.
MODERN SLAVERY ACT
The Board is aware of its responsibilities and obligations under
the Modern Slavery Act and other relevant legislation relating to
the detection and prevention of modern slavery and human
trafficking. The Board is committed to implementing and enforcing
effective systems and controls that seek to ensure that modern
slavery is not taking place anywhere in its business or in its
supply chains.
Further details of our compliance with the Modern Slavery Act
can be found on our website.
BOARD DIVERSITY
The Board places great emphasis on ensuring that its membership
reflects diversity in its broadest sense. A combination of
demographics, skills, experience, race, age, gender, educational
and professional background and other relevant personal attributes
on the Board is important in providing a range of perspectives,
insights and challenge needed to support good decision making.
New appointments are made on merit, taking account of the
specific skills and experience, independence and knowledge needed
to ensure a rounded Board and the diversity benefits each candidate
can bring to the overall Board composition.
The Board consists of four non-executive Directors, one of whom
is female. The Board seeks to appoint new Directors on the basis of
merit as a primary consideration, with the aim of bringing an
appropriate range of skills and experience to the Board.
By order of the Board
Link Company Matters Limited
Company Secretary
29 May 2020
Corporate Governance Statement
STATEMENT OF COMPLIANCE
This Corporate Governance Statement explains how the Board has
sought to protect shareholders' interest by protecting and
enhancing shareholder value. The Board has considered the
principles and recommendations of the AIC Code of Corporate
Governance (the "AIC Code") issued in February 2019.
The AIC Code, as explained by the AIC Guide, addresses all the
principles set out in the UK Corporate Governance Code issued by
the Financial Reporting Council ("FRC") in July 2018 and applicable
for the year under review (the "UK Code"), as well as setting out
additional principles and recommendations on issues that are of
specific relevance to investment trusts.
The Board considers that reporting against the principles and
recommendations of the AIC Code (which incorporates the Corporate
Governance Code), provides better information to shareholders.
The AIC Code of Corporate Governance
The FRC, the UK's independent regulator for corporate reporting
and governance responsible for the Corporate Governance Code, has
endorsed the AIC Code. The terms of the FRC's endorsement mean that
AIC members who report against the AIC Code and the AIC Guide meet
fully their obligations under the UK Code and the related
disclosure requirements contained in the Listing Rules. The UK Code
is available on the FRC website www.frc.org.uk.
The Company has complied with the recommendations of the AIC
Code and the relevant provisions of the Corporate Governance Code,
except as set out below:
The role of the Chief Executive
For the reasons set out in the AIC Guidance, and as explained in
the UK Code, the Board considers that the post of Chief Executive
is not relevant for the Company, being an externally managed
investment company.
Executive Directors' Remuneration
As the Board has no executive Directors, it is not required to
comply with the principles of the AIC Code in respect of executive
Directors' remuneration.
Internal Audit Function
The Group delegates all of its day-to-day operations to third
parties and has no employees, other than its Directors who are all
non-executives. These third parties have their own internal audit
function and the Board has therefore determined that there is no
need for the Group to have its own internal audit function, but
this is reviewed on an annual basis. The Directors consider
semi-annually the principal risks relating to the operations of the
Group. Such a review includes the consideration of whether the
Company's third parties have adequate internal controls in
place.
Chairman's Membership of the Audit Committee
Simon King is also a member of the Audit Committee. The Board
believes that it is appropriate for Mr King to be a member of the
Audit Committee, given the size of the Board and Mr King's relevant
financial experience. The Board is also satisfied that the combined
knowledge and experience of its members within the Company's sector
enable the Committee to exercise its duties effectively.
Tenure of the Chair Policy
During the period, the Board has determined and approved a
policy governing Board members' tenure and reappointment. The Board
does not feel that it would be appropriate to set a specific tenure
limit for individual Directors or the Chairman of the Board or its
Committees. In line with the supplementary AIC guidance, the Board
has opted to take a more flexible approach to chair tenure to
manage succession. Accordingly, the Board will seek to recruit a
new Director promptly when appropriate so as to regularly to bring
the challenge of fresh thinking into the Board's discussions.
ROLE OF THE BOARD AND ITS COMMITTEES
The Board is responsible for the effective stewardship of the
Company's affairs, including corporate strategy, corporate
governance, risk assessment and overall investment policy. It
provides overall leadership, sets out the strategic aims of the
Company and ensures that the necessary resources are in place for
the Company to meet its objective and fulfil its obligations to
shareholders within a framework of high standards of corporate
governance and effective internal controls.
Composition of the Board
During the year to 31 December 2019, the Board consisted of five
independent non-executive Directors. Following the retirement of
Stuart Cruickshank, with effect from 1 January 2020, the Board
consists of four independent non-executive Directors. Biographies
of the Directors in office at the date of this report are provided
on page 30 and demonstrate the wide range of skills and experience
each Director brings to the Board.
Each Director has a signed letter of appointment to formalise
the terms of their engagement as a Director and are appointed for
an initial three-year term which is then extended for a further
three-year term. The Board believes that a stable Board composition
is fundamental to run the Company properly. The Board has not
stipulated a maximum term of any directorship, however the Board
has approved a Policy governing Board members' tenure and
reappointment which provides that the Board intends to maintain a
broad range of experience in the Board, with Directors who have
served a range of periods on the Board of the Company. This is
likely to result in an average tenure of around 6-9 years, thus
ensuring that on each occasion that the Board enters into new
investment commitments at least half the members have direct
personal experience of negotiating previous commitments with the
Manager.
Copies of the letters of appointment are available on request
from the Company Secretary and will be available at the AGM.
No individuals other than the Committee chairman and its members
are entitled to be present at Committee meetings unless invited to
attend by its members. The Board has a formal schedule of matters
specifically reserved to it to ensure effective control of
strategic, financial, operational and compliance issues.
There is an agreed procedure for Directors to take independent
professional advice if necessary and at the Company's expense. This
is in addition to the access to Link Company Matters Limited as
Company Secretary for advice.
The rules concerning the appointment and replacement of
Directors are contained in the Company's Articles of Association
(the "Articles") and the Act.
The Company has taken out Directors' and Officers' Liability
Insurance at what is considered to be an appropriate limit of
liability, such cover is to be maintained for the full term of each
Director's appointment. Save for such indemnity provisions in the
Company's Articles and in the Directors' letters of appointment,
there are no qualifying third-party indemnity provisions in
force.
Board Operation
The Board holds formal meetings on a quarterly basis and
additional ad-hoc meetings are held when necessary. Attendance at
the quarterly Board and committee meetings is displayed in the
table on page 38 under the heading "Meetings".
Responsibilities of the Chair and Senior Independent Director
& Chairman
In accordance with Provision 6.2.8 of the AIC Code, during the
period the Board reviewed and approved a memorandum setting out the
responsibilities of the Chairman and the Senior Independent
Director. This document is available on the Company's website.
COMMITTEES
The Board has delegated certain responsibilities to its Audit,
Management Engagement, Nomination, Remuneration, Risk and Insider
Committees. Given the size and nature of the Board it is felt
appropriate and practical that all Directors are members of the
Committees. The Board has established formal terms of reference for
each of its Committees which were reviewed and updated during the
period, in accordance with the AIC Code. The terms of reference are
available on the Company website,
https://pollenstreetsecuredlending.com or upon request from the
Company Secretary.
An outline of the remit of each of the Audit, Management
Engagement, Nomination, Remuneration, and Risk Committees and their
activities during the year are set out on pages 45 to 54. A brief
overview of the Insider Committee is set out below.
Insider Committee
The Insider Committee was formed by the Board following the
introduction of the Market Abuse Regulations in July 2016 and has
responsibility for identifying price sensitive information and
determining on a timely basis the disclosure treatment of such
information.
The Insider Committee is chaired by Simon King.
The Chairman and Senior Independent Director
During the financial period, Mr Cruickshank was the Chairman and
was deemed by his fellow Board members to be independent and to
have no conflicting relationships. He considered himself to have
sufficient time to commit to the Company's affairs.
During the financial period, Mr King was the Senior Independent
Director of the Company and provided an alternative channel for
shareholder communications and leading the annual evaluation of the
Chairman by the Independent Directors
With Effect from 1 January 2020, Simon King was appointed as the
Chairman, and is considered by his fellow Board members to be
independent and to have no conflicting relationships. He considers
himself to have sufficient time to commit to the Company's
affairs.
With effect from 1 January 2020, Mahnaz Safa was appointed as
the Senior Independent Director of the Company, providing an
alternative channel for shareholder communications and leading the
annual evaluation of the Chairman by the Independent Directors.
Independence of Directors
The Board has reviewed the independence of each Director in
accordance with the guidance set out under provision 13 of the AIC
Code. Each of the Directors is considered to be independent and
free from any business or other relationship that could materially
interfere with the exercise of their independent judgement. There
are no relationships or circumstances relating to the Company that
are likely to affect their judgement.
Care will be taken at all times to ensure that the Board is
composed of members who, as a whole, have the required knowledge,
abilities, and expert experience to properly fulfil their role and
are sufficiently independent.
Meetings
The Board of Directors meets at least six times a year and more
often if required. The table below sets out the Directors'
attendance at scheduled Board and Committee meetings during the
year to 31 December 2019.
Management
Engagement Remuneration Nomination
Board Audit Committee Committee Committee Committee Risk Committee
=============== ===== =============== =========== ============ ========== ===============
S Cruickshank* 31 2 1 2 2 2
M Cassidy 30 3 2 5 2 2
D Fisher 29 3 2 3 2 2
S King 29 3 2 5 2 2
M Safa 28 3 2 5 2 2
=============== ===== =============== =========== ============ ========== ===============
A Sub-Committee of the Board was established to approve the
annual and the half yearly financial statements. There were also a
significant number of additional board and committee board meetings
held during the financial period in order for the Board to
discharge their duties in relation to one-off projects.
*Resigned from the Board, with effect from 1 January 2020 and
resigned from the Audit Committee, Risk Committee and Remuneration
Committee with effect from 13 June 2019.
Board Performance Evaluation
The Directors are aware of the need to continually monitor and
improve performance and recognise this can be achieved through
regular Board evaluation, which provides a valuable feedback
mechanism for improving Board effectiveness. In addition to regular
discussions in the course of Board meetings, a formal performance
evaluation of the Board, its Committees and the Chairman was
carried out during the year.
Following the externally facilitated evaluation conducted in
2018 in accordance with the AIC code, it was considered appropriate
to conduct an internal Chairman led evaluation of the Board,
individual Directors the performance of its Committees during
2019.
The 2019 evaluation was comprised of a three-stage process. For
the first stage, detailed questionnaires specifically designed to
assess the strengths and independence of the Board and the
Chairman, individual Directors and the performance of its
Committees were circulated and completed. In the second stage, the
Chairman met with each of the Directors, facilitated by the Company
Secretary, to discuss their responses to the questionnaire to
explore and to identify common themes and actions required to
improve performance. In the final stage, the results of the
questionnaire and interviews would be combined in a paper and would
be reported to and discussed by both the Nomination Committee and
the Board.
Director Induction
The Board, or the Investment Manager upon request of the Board,
shall offer induction training to new Directors about the Company,
its key service providers, the Directors' duties and obligations
and other matters as may be relevant from time to time.
Appointment and Re-election of Directors
In accordance with the provisions of the Company's Articles, the
Directors are required to retire at the first Annual General
Meeting following their appointment and thereafter, at each Annual
General Meeting, each Director will retire and, if appropriate,
seek re-election after each three years' service.
Beyond these requirements, the Board has agreed a policy whereby
all Directors will seek annual re-election at the Company's Annual
General Meeting, in line with the recommendations of the AIC Code.
In accordance with this policy, all the Directors who are in office
at the date of this Report will stand for re-election at the
forthcoming AGM. The Board considers that, following the board
performance evaluations conducted during 2019, all of the current
Directors contribute effectively to the operation of the Board and
the strategy of the Company. The Board therefore believes that it
is in the best interests of shareholders that each of the Directors
is re-elected.
BOARD RESPONSIBILITIES AND RELATIONSHIP WITH THE INVESTMENT
MANAGER
The Board is responsible for the determination of the Company's
investment policy and strategy and has overall responsibility for
the Company's activities, including the review of investment
activity and performance and the control and supervision of all
suppliers of services to the Company including the Investment
Manager. The Board is also responsible for the Company's system of
internal and financial controls and for ensuring that commercial
risks and financing needs are properly considered and that the
obligations of a public limited company are adhered to.
To assist the Board in the day-to-day operations of the Company,
arrangements have been put in place to delegate authority for the
performance of day-to-day operations of the Company to the
Investment Manager and other third-party service providers.
The Investment Manager is responsible for the discretionary
management of the Company's portfolio of investments manages the
Company's investment portfolio within guidelines set by the Board.
The Investment Manager is in frequent contact with the Board and
supplies the Directors with regular updates on the Company's
activities and detailed reports at each Board meeting.
The existing sub-management agreement, pursuant to which the
Investment Manager has delegated certain elements of its
responsibilities and functions to Pollen Street capital (US) LLC,
continues in force.
Details of the management fees are set out in Note 12 to the
financial statements.
By notice dated 25 February 2020, the Company served 12 months'
notice in writing on the Investment Manager to terminate the
Investment Management Agreement with effect from 25 February
2021.
The Board keeps the performance of the Investment Manager under
continual review and it is the current opinion of the Directors
that the continuing appointment of the Investment Manager for the
balance of the notice period referred to above is in the interests
of the shareholders as a whole.
CONFLICTS OF INTEREST
The Company's Articles provide that the Directors may authorise
any actual or potential conflict of interest that a Director may
have, with or without imposing any conditions that they consider
appropriate on the Director. Directors are not able to vote in
respect of any contract, arrangement, or transaction in which they
have a material interest, and, in such circumstances, they are not
counted in the quorum. A process has been developed to identify any
of the Directors' potential or actual conflicts of interest. This
includes each Director completing a detailed conflict of interest
questionnaire. The matters disclosed in the questionnaires are
reviewed by the Board following the Directors' appointments and
annually thereafter and, if considered appropriate, authorised in
accordance with the Act and the Articles. There were no actual or
potential conflicts of interest which were required to be
authorised by the Board during the period under review.
STEWARDSHIP RESPONSIBILITIES AND THE USE OF VOTING RIGHTS
Pursuant to its Investment Policy, the Company may invest (in
aggregate) up to 10.0 per cent of gross assets (at the time of
investment) in the listed or unquoted securities issued by one or
more Platforms.
The Investment Manager, in the absence of explicit instruction
from the Board, is empowered to exercise discretion in the use of
the Company's voting rights. The UK Stewardship Code (the
"Stewardship Code") applies on a 'comply or explain' basis.
Although the Investment Manager broadly supports the objectives of
the Code, it has determined that it will not commit to the Code's
principles because the investment strategies it employs do not
generally involve listed equities. In the event of a material
change to any investment strategy such that the Stewardship Code's
principles become relevant, the Investment Manager will reconsider
its commitment to the Stewardship Code.
COMPANY SECRETARY
The Board has direct access to the advice and services of the
Company Secretary, Link Company Matters Limited, which is
responsible for ensuring that the Board and Committee procedures
are followed and that applicable regulations are complied with.
SHARE CAPITAL & SHAREHOLDERS
As at 31 December 2019, there were 86,306,803 ordinary shares of
GBP0.01 each in issue, of which 11,904,514 were held by the Company
as treasury shares. Therefore, the total number of voting rights in
the Company at the year-end was 74,402,289. The share capital and
rights attaching to the shares are set out in Note 21 to the
financial statements.
There is a total of 86,306,803 ordinary shares of GBP0.01 each
in issue as of 28 May 2020, of which 12,303,792 ordinary shares
were held by the Company as treasury shares.
Purchase of Own Shares
At the AGM held on 6 June 2019 ("2019 AGM"), the Directors were
granted the authority to buyback up to 11,735,994 ordinary shares,
representing 14.99 per cent of the ordinary shares in issue as at
the date of the notice. As part of its discount management strategy
to opportunistically buyback shares where it believes such a
purchase would be accretive over and above the long term
attractions of investing in its loan and equity portfolios and is
in the best long term interest of all shareholders to do so. The
Board utilised the authority granted at the AGM 2019 to buyback
shares. The Company appointed Liberum Capital Limited ("Liberum")
to manage the share buyback program (the "Program"). During the
term of the Program, Liberum are authorised to independently of and
without influence of the Company, effect purchases of ordinary
shares from time to time, within certain pre-agreed parameters.
Further details on the Company's Discount Management Policy are
contained on the Company's website,
https://pollenstreetsecuredlending.com.
Since the authority granted at the 2019 AGM on 6 June 2019, the
Company has bought back 588,450 ordinary shares (2018: 1,751,727)
at an average price of 834.0 pence per ordinary share (2018: 795.7
pence per ordinary share). At 31 December 2019, the unused
authority to buyback ordinary shares as granted by shareholders at
the Company's 2019 AGM, was therefore 11,147,544 ordinary shares
(2018: 9,984,267). The nominal value of ordinary shares repurchased
during this period was GBP5,884.50 (2018: GBP17,517.27), being 0.7
per cent of the issued ordinary share capital at 31 December 2019
(2018: 2.03 per cent). In total for the period from 1 January 2019
up to and including 31 December 2019, the Company bought back
1,686,112 ordinary shares (1 January to 31 December 2018:
3,747,148). The nominal value of these ordinary shares repurchased
during the year was GBP16,861.12 (2018: GBP37,471.48) being 2.0 per
cent of the issued ordinary share capital at 31 December 2019
(2018: 4.3 per cent). Further information on the buybacks
undertaken during the year can be found in Note 21 to the financial
statements.
From 31 December 2019 to 28 May 2020, the Company has
repurchased a further 399,278 ordinary shares to hold in treasury,
with a nominal value of GBP0.01 and being 0.5 per cent of the
issued ordinary share capital at 31 December 2019. The total
consideration for these repurchases was GBP2,873,479.
The buybacks described above were utilised both to manage the
share price discount to NAV and to be accretive for shareholders.
The average price paid was approximately a 14.7 per cent discount
to year end NAV (2018: 20.4 per cent discount to year end NAV). The
impact of the buyback activity for the year ended 31 December 2019
was an enhancement of 3.1 pence to NAV per ordinary share (2018:
7.5 pence to NAV per ordinary share ) and 0.7 pence to earnings per
ordinary share (2018: 1.9 pence to earnings per ordinary
share).
The existing authority to buyback ordinary shares will expire at
the forthcoming AGM in 2020, where a resolution for its renewal
will be proposed.
Under Rule 9 of the City Code on Takeovers and Mergers (the
"Code"), to which the Company is subject, when:
1. a person acquires an interest in shares which (taken together
with shares in which he and persons acting in concert (as defined
in the Code) with him are interested) carry 30.0 per cent or more
of the voting rights of a company subject to the Code; or
2. any person who, together with persons acting in concert with
him, is interested in shares which in aggregate carry not less than
30.0 per cent of the voting rights of a company subject to the
Code, but does not hold shares carrying more than 50.0 per cent of
the voting rights of the company, and such person, or any persons
acting in concert with him, acquires an interest in any shares
which increase the percentage of shares carrying voting rights in
which he is interested, that person together with the persons
acting in concert with him, is normally required to extend offers
in cash, at the highest price paid by him (or any persons acting in
concert with him) for shares in the company within the preceding 12
months, to the holders of any class of equity share capital whether
voting or non-voting and also to the holders of any other class of
transferable securities carrying voting rights.
Rule 37 of the Code states that when a company redeems or
purchases its own voting shares, any resulting increase in the
percentage of shares carrying voting rights in which a person or
group of persons acting in concert is interested will be treated as
an acquisition for the purposes of Rule 9. However, Note 1 to Rule
37.1 states that a person who comes to exceed the limits in Rule
9.1 in consequence of a company's redemption or purchase of its own
shares will not normally incur an obligation to make a mandatory
offer unless that person is a director, or the relationship of the
person with any one or more of the directors is such that the
person is, or is presumed to be, acting in concert with any of the
directors. A person who has appointed a representative to the Board
of the company, and investment managers of investment trusts, will
be treated for these purposes as a director.
The Panel on Takeovers and Mergers (the "Panel") must be
consulted in advance in any case where Rule 9 of the Code might be
relevant. The Company has consulted with the Panel in relation to
its buyback program and, following discussions during February
2017, the Panel confirmed on an ex-parte basis that the funds
managed by Invesco Asset Management Limited ("Invesco") would not
be obliged to make a mandatory offer for the Company under Rule 9
of the Code in the event of an increase to Invesco's percentage
shareholding in the Company caused by repurchases by the Company of
its own shares.
Share Issues
At the AGM held on 6 June 2019, the Directors, in accordance
with Section 551 of the Act, were granted the authority to allot
ordinary shares up to an aggregate nominal value of GBP75,091.61,
representing approximately 10.0 per cent of the issued ordinary
share capital at the time. No shares have been issued under this
authority. The Directors will seek approval to renew this authority
at the Company's AGM to be held on 30 June 2020.
There are no restrictions concerning the transfer of securities
in the Company or on voting rights; no special rights with regard
to control attached to securities; no agreements between holders of
securities regarding their transfer known to the Company; and no
agreements which the Company is party to that might affect its
control following a successful takeover bid.
Substantial Shareholdings
The Company has been informed of the following notifiable
interests of 3 per cent or more in the Company's voting rights as
at 31 December 2019:
Shareholder Number of ordinary % of voting rights
shares
================= =================== ===================
Quilter plc 12,084,295 16.19%
================= =================== ===================
Invesco Limited 18,271,712 24.49%
================= =================== ===================
Since 31 December 2019, to the date of this report, the Company
has received the following notifiable interests of 3 per cent or
more in the Company's voting rights:
Shareholder Number of ordinary % of voting rights
shares
============================== =================== ===================
Pentwater Capital Management
LP 3,637,500 4.90%
============================== =================== ===================
JPMorgan Chase & Co 3,912,472 5.28%
============================== =================== ===================
RELATIONS WITH SHAREHOLDERS
All shareholders have the opportunity to attend and vote, in
person or by proxy, at the AGM. The Notice of the AGM, which has
been sent out within this Report, contains separate resolutions in
respect of each substantive issue.
Shareholders are encouraged to attend the AGM and to participate
in proceedings. The Chairman of the Board and the Directors,
together with representatives of the Investment Manager, will be
available to answer shareholders' questions at the AGM.
The Investment Manager holds regular discussions with major
shareholders, the feedback from which is provided to and greatly
valued by the Board. The Directors are available to enter into
dialogue and correspondence with shareholders regarding the
progress and performance of the Company. The section of this
report, entitled 'Shareholder Information', is intended to provide
information which would be useful to shareholders. General
enquiries about the Company should be directed to the Company
Secretary.
INTERNAL CONTROL REVIEW
The Board is responsible for ensuring the maintenance of a
robust system of internal control and risk management and for
reviewing the effectiveness of the Company's overall internal
control arrangements and processes following recommendations from
the Risk Committee.
The Board confirms that there is an ongoing process for
identifying, evaluating and managing the significant risks faced by
the Company and for reviewing the effectiveness of the Company's
system of internal controls including financial, operational,
compliance and risk management. The Company has established a risk
register consisting of the key risks and controls in place to
mitigate those risks. This risk register provides a basis for the
Audit Committee and the Board to regularly monitor the effective
operation of the controls and to update the register when new risks
are identified.
The Board has reviewed the effectiveness of the Investment
Manager's, Administrator's and the Depository's system of internal
control and risk management to ensure the safekeeping and accurate
valuation on the Group's assets. For the year under review, the
Board has not identified any significant failings or weaknesses in
the internal control systems.
Risk is inherent in the Company's activities, but it is managed
through a process of ongoing identification, measurement and
monitoring, subject to risk limits and other controls. The Company
is exposed to market risk (which includes currency risk, interest
rate risk and other price risk), credit risk and liquidity risk
arising from the financial instruments held by the Company. These
risks are further disclosed in Note 8 to the financial
statements.
As the Company has no employees, other than its Directors who
are all non-executives, it does not have a whistleblowing policy
and procedure in place. The Audit Committee reviews the
whistleblowing procedures of the Investment Manager to ensure that
the concerns of their staff may be raised in a confidential
manner.
The following are the key components which the Company has in
place to provide effective internal control:
-- The Board has agreed clearly defined investment criteria and
Platform restrictions, which specify levels of authority and
exposure limits. The Investment Manager regularly reports to the
Board on compliance with these criteria;
-- The Board has a procedure to ensure that the Company can
continue to be approved as an investment company by complying with
sections 1158/1159 of the Corporation Tax Act 2010;
-- The Investment Manager and Administrator prepare forecasts
and management accounts, covering investment activities and
financial matters, which allow the Board to assess the Company's
activities and review its performance;
-- Contractual arrangements with the Investment Manager and
other third-party service providers are in place which specifically
define their roles and responsibilities to the Company;
-- The services and controls of the Investment Manager and other
third-party service providers are subject to review by the
Management Engagement Committee on an ongoing basis. Regular
reports are provided to the Board by the Administrator and the
Depositary; and
-- The Investment Manager's Management Committee and compliance
departments continually review the Investment Manager's controls
and procedures and report to the Audit Committee.
The system of internal control and risk management is designed
to meet the Company's particular needs and the risks to which it is
exposed. The Board recognises that these control systems can only
be designed to manage, rather than eliminate, the risk of failure
to achieve business objectives and to provide reasonable, but not
absolute, assurance against material misstatement or loss.
ALTERNATIVE INVESTMENT FUND MANAGEMENT DIRECTIVE DISCLOSURE
Quantitative remuneration disclosure
In accordance with 3.3.5 (5) of the FCA's Investment Funds
Sourcebook ("FUND") and in accordance with FCA Finalised guidance -
General guidance on the AIFM Remuneration Code (SYSC 19B) ("the
Guidelines"), dated January 2014, the total remuneration paid by
Pollen Street Capital Group companies which include the AIFM during
the year was GBP19.4 million, split GBP10.6 million into variable
and GBP8.8 million in fixed remuneration. During the year, the
average number of beneficiaries at the Group which includes the
AIFM were 77 and the aggregate amount of remuneration paid in
relation to the Senior Management of the firm was GBP6.4 million.
Fixed remuneration is amounts paid as salaries. Variable
remuneration is amounts paid under bonus arrangements and
distributions. The AIFM does not consider that any individual
member of staff of the AIFM has the ability to materially impact
the risk profile of the Company.
Other disclosures
The AIFMD requires that the AIFM ensures that certain other
matters are actioned and or reported to investors. Each of these is
set out below.
-- Provision and content of an Annual Report (FUND 3.3.2 and
3.3.5). The publication of the Annual Report and audited financial
statements of the Group satisfies these requirements.
-- Material change of information. The AIFMD requires certain
information to be made available to investors in the Company before
they invest and requires that material changes to this information
be disclosed in the Annual Report.
Periodic disclosure (FUND 3.2.5 and 3.2.6)
There are no assets subject to special arrangements due to their
illiquid nature and no new arrangements for the managing of the
liquidity of the Group.
There is no change to the arrangements, as set out in the
prospectus, for managing the Group's liquidity.
The current risk profile of the Group is set out in the
Strategic Report: Principal Risks and Uncertainties on pages 23 and
24 and in note 8 Financial instruments and associated risks.
The Company is permitted to be leveraged and the table below
sets out the current maximum permitted and actual leverage under
the gross and commitment method in accordance with Annex IV Article
8 of the AIFMD.
As a percentage of net asset Gross method Commitment method
value
============================== ============= ==================
Maximum level of leverage 350% 250%
Leverage as at 31 December
2019 235% 136%
============================== ============= ==================
In accordance with the prospectus the actual leverage employed
by the Group as a percentage of NAV was 42 per cent. The Group has
a maximum limit of 1.5 times of NAV in aggregate (calculated at the
time of draw down under any facility that the Group has entered
into) as detailed in the Company's prospectuses dated 30 May 2014,
29 January 2015 and 28 July 2015. There have been no breaches of
the permitted leverage limits within the reporting period and no
changes to maximum level of leverage employed by the Group.
Other matters
The Investment Manager has confirmed that required reporting to
the FCA has been undertaken in accordance with FUND 3.4.
By order of the Board
Link Company Matters Limited
Company Secretary
29 May 2020
Report of the Audit Committee
As Chairman of the Audit Committee, I am pleased to present the
Audit Committee report for the year ended 31 December 2019.
SUMMARY
The Committee operates within a clearly defined Terms of
Reference, a copy of which is available from the Company's
website.
MEMBERSHIP OF THE AUDIT COMMITTEE
The Audit Committee comprises all Directors, is chaired by
Michael Cassidy and meets at least twice a year. The AIC Code
stipulates that the Chairman of the Company should not be a member
of the Audit Committee. However, the Board believes that it is
appropriate for Mr King to be a member of the Audit Committee,
given the size of the Board and Mr King's relevant financial
experience. The Board is also satisfied that the combined knowledge
and experience of its members within the Company's sector enable
the Committee to exercise its duties effectively. Representatives
of the Auditors, PricewaterhouseCoopers LLP ('PwC') also attend
meetings of the Committee at least twice a year.
THE ROLE OF THE AUDIT COMMITTEE
The primary role of the Audit Committee is to monitor the
integrity of the financial statements of the Company, keep under
review the internal controls, manage the relationship with the
external auditor and monitor the external audit process including
the independence and objectivity of the external auditor.
MATTERS CONSIDERED IN THE YEAR
The Audit Committee met twice during the year under review and
during those meetings it has:
-- reviewed the internal controls and risk management systems of
the Company and its third-party service providers;
-- considered the requirement for an internal audit function;
-- considered the prospects for the Company and concluded on the
viability of the Company over the two-year period to the AGM in
2022;
-- assessed the appropriateness of the Group's provision for credit losses under IFRS 9;
-- approved the audit plan with the Auditors, including the
principal areas of focus and the Auditors' fees;
-- reviewed the Group's Audited Annual Report and Financial
Statements for the year ended 31 December 2018 and advised the
Board accordingly;
-- reviewed the Group's half-year financial statements for the
period ended 30 June 2019 and advised the Board accordingly;
-- met with the Auditor without the presence of the Investment Manager;
-- reviewed the Whistleblowing Policy of the Investment Manager;
-- reviewed the Auditor's appointment and independence and
considered their re-appointment; and
-- reviewed and updated the terms of reference of the Committee.
A number of similar matters will be considered again during 2020
as set out in the pre-determined schedule of items for discussion
during the year.
INTERNAL AUDIT
The Board has considered the need for an internal audit function
and it has decided that the systems and procedures employed by the
Investment Manager and the other third-party providers in relation
to the Company give sufficient assurance that a sound system of
internal control, which safeguards the Company's assets, is
maintained. An internal audit function specific to the Company is
therefore considered unnecessary. The requirement, however, will
regularly be re-visited in accordance with the Committee's terms of
reference.
AUDIT FEES AND NON-AUDIT SERVICES
The breakdown of fees between audit services and non-audit
services for the year ended 31 December 2019 are provided in Note
12 of the financial statements. The fees for the non-audit service
work carried out by PwC were 7.0 per cent of the audit fee (2018:
7.0 percent) and related to assurance services in relation to the
Group. The Committee considered that engaging PwC to provide these
services was in the best interests of the Company due to their
expertise and their knowledge and understanding of the business. To
maintain the external auditor's independence and objectivity, an
independent partner was appointed to lead on these services.
EXTERNAL AUDIT
The Committee monitors the Company's relationship with the
Auditor and has discussed and considered their independence and
objectivity. The Committee is satisfied that PwC are independent
considering the term of appointment to date and have been reassured
that no conflicts arose during the year and will continue to
monitor this position.
The Audit Committee has met with the audit partner and reviewed
and assessed PwC's performance to date. The review has involved an
examination of the auditor's remuneration, the quality of its work
including the quality of the audit report, the quality of the audit
partner and audit team, the expertise of the audit firm and the
resources available to it, the identification of audit risk, the
planning and execution of the audit and the terms of engagement.
Following completion of the external audit, the Committee obtains
feedback on the conduct of the audit. The Auditor is also invited
to attend Committee meetings and also meets with the Committee and
its Chairman without the presence of the Investment Manager.
The Committee recommends to the Board that, subject to
shareholders' approval at the 2020 AGM, PwC be re-appointed as the
Auditor for the Company.
The Company has complied throughout 2019 with the provisions of
The Statutory Audit Services Order 2014, issued by the Competition
and Markets Authority.
SIGNIFICANT AREAS CONSIDERED BY THE AUDIT COMMITTEE
After discussion with the Investment Manager and the Auditors,
the Committee determined that the key risks in relation to the
Company's financial statements and how they were addressed
were:
Issue Considered How the Issue was Addressed
=========================== =======================================================
The risk of material The valuation is in accordance with the accounting
misstatement due policy set out in Note 2 of the financial statements.
to the valuation Fair Value has been assessed across all unquoted
of unquoted investments equity positions; the Valuation Committee has
determined that the Investment Manager has
followed the agreed valuation policy and that
the valuations for the unquoted equity investments
are reasonable and supportable.
=========================== =======================================================
Going concern and The Committee reviewed a paper from the Investment
viability statement Manager in support of the going concern basis
and the longer-term viability of the Group.
The Committee noted the growing stability of
the Group's business model, the Company's two-year
business plan and the results of internal stress
testing in relation to COVID-19 and concluded
this provided sufficient evidence to support
the Board's viability statement set out on
page 28.
There are however a number of other developments
which are relevant to the future of the Group,
and which may affect the continued use of the
going concern principles. The offer from Waterfall
Asset Management LLC ("Waterfall") for the
acquisition of the entire share capital of
the Company has been extended to 16 June 2020.
The intentions of Waterfall, as to their plans
should an offer be made and be successful,
have not been announced. The Directors have
assumed for the purposes of going concern and
the longer term viability that if a firm offer
were to be made and be successful, that the
Group would continue to operate and be able
to meet its obligations, based on its current
financial position over the period. In addition,
Article 167 of the Company's Articles of Association
stipulates that at the AGM to be held in 2021
the Directors shall propose an ordinary resolution
that the Company continues to operate as an
investment company (the "continuation vote").
The outcome of the continuation vote cannot
at this stage be determined with any certainty.
The potential consequences of the possible
offer, and the continuation vote, are conditions
that indicate the existence of a material uncertainty
which may cast significant doubt about the
Group's and Company's plans or ability to continue
as a going concern. The Group and Company financial
statements do not include the adjustments that
would result if the Group and Parent Company
were no longer to be considered a going concern.
=========================== =======================================================
The risk of material The Committee views credit provisioning as
misstatement of the key accounting judgement area for the Company.
expected credit As in previous years, it received presentations
losses under IFRS from the Investment Manager explaining key
9 - Financial instruments judgement areas, consistency of approach and
the Company's business mix. After challenging
the Investment Manager, the Committee concluded
that the provisioning approach and key judgements
were reasonable. The Investment Manager also
reviews impairment performance on a monthly
basis and reviews its impairment policy for
appropriateness and accuracy on a regular basis
to ensure they meet the accounting policy set
out in Note 2 of the financial statements.
As the Group enters the 2020 financial year,
the Committee will continue to monitor this
area closely given the expected material impact
of Covid-19 on expected credit losses. Expected
credit losses are anticipated to increase however
this cannot be accurately quantified as the
effect and length of UK and US government's
measures around lockdown, the government economic
stimulus and the resultant impact on underlying
borrower's ability to pay are currently all
unknown. The Board considers the emergence
and spread of COVID-19 to be a non-adjusting
post balance sheet event.
=========================== =======================================================
Retention of Investment The Committee receives a report from the Company's
Trust Status administrators and Investment Manager confirming
if the Company has remained compliant with
the requirements to maintain its Investment
Trust status. HMRC approved the investment
status of the Company. The Directors regularly
review the investments and their mix to ensure
they remain diversified, its retained income
levels to ensure sufficient distributions are
made and the Company's shareholdings to determine
if the Company has become a close company.
=========================== =======================================================
For and on behalf of the Audit Committee
Michael Cassidy
Audit Committee Chairman
29 May 2020
Risk Committee Report
As Chairman of the Risk Committee, I am pleased to present the
report for the year ended 31 December 2019. Full details of the
number of committee meetings and attendance by individual committee
members can be found on page 38.
SUMMARY
The Committee operates within a clearly defined Terms of
Reference, a copy of which is available from the Company's
website.
MEMBERSHIP AND ROLE OF THE RISK COMMITTEE
The Risk Committee comprises all Directors and is chaired by
David Fisher and meets at least twice a year. Senior
representatives of the Manager also attend meetings of the
Committee to present risk related management information. The Board
is satisfied that the combined knowledge and experience of its
members enables the Committee to exercise its duties effectively.
The Board is ultimately responsible for the risk management of the
Company. It seeks to achieve an appropriate balance between
mitigating risk and generating attractive risk-adjusted returns for
shareholders. Integrity and responsibility are embedded in the
Company's approach to risk management.
MATTERS CONSIDERED IN THE YEAR
The Risk Committee met twice during the year under review and
during those meetings it has:
-- reviewed the internal controls and risk management systems of
the Company and its third-party service providers;
-- assessed the principal risks of the Company and how they are managed and mitigated;
-- received and review risk related management information;
-- monitored the Group's risk appetite;
-- reviewed the policies and process for identifying and
assessing business risks and the management of those risks by the
Company;
-- received regular reports from key service providers on their own controls;
-- monitored and ensured adherence to best practice in corporate governance; and
-- reviewed and updated the terms of reference of the Committee.
Risk management
During the year the committee reviewed and updated the risk
matrix, where appropriate, to reflect the Company's key risks and
considered risk related matters.
For and on behalf of the Risk Committee
David Fisher
Risk Committee Chairman
29 May 2020
Directors' Remuneration Report
The Directors' Remuneration Report for the year ended 31
December 2019 has been prepared in accordance with Schedule 8 of
the Large and Medium-sized Companies and Groups (Accounts and
Reports) (Amendment) Regulations 2008 (as amended). An ordinary
resolution for the approval of the Directors' Remuneration Report
will be put to shareholders at the forthcoming Annual General
Meeting.
Full details of the number of attended committee meetings by
individual committee members can be found on page 38.
STATEMENT FROM THE CHAIRMAN OF THE REMUNERATION COMMITTEE
Remuneration Committee
The Remuneration Committee is chaired by Mahnaz Safa and
consists of all the Directors. It is the responsibility of the
Committee to determine the remuneration of each Director and to
consider the skills, competence and independence of candidates in
the context of the overall Board composition and to nominate
candidates to the Board. No Director is involved in deciding their
own remuneration.
During the year under review, the Committee met five times and
reviewed and considered:
-- market remuneration trends against a comparison of its peer group;
-- the size, composition and structure of the Board, time
commitment required of the Directors and the leadership and
succession needs of the Company;
-- the level of the Directors' fees;
-- the level of Directors' fees in relation one-off projects in
order for the Board to discharge their duties in relation to
one-off projects; and
-- The Board have also considered and agreed upon a formal
policy for the approval of Directors' expenses.
VOTING AT ANNUAL GENERAL MEETING
The Directors' Remuneration Report for the year ended 31
December 2018 and the Directors' Remuneration Policy was approved
by shareholders at the AGM's held on 6 June 2019 and 15 June 2018
respectively. The votes cast by proxy were as follows:
AGM held on 6 June 2019 AGM held on 15 June 2018
Directors' Remuneration Directors' Remuneration
Report Policy
========================== ===========================
Number of % of votes Number of votes % of votes
votes cast cast
============ ============ =============== ==========
For 56,796,778 99.97 35,397,446 99.20
Against 19,126 0.03 286,552 0.80
Total votes cast 56,815,904 100.00 35,683,998 100.00
Number of votes
withheld 1,148 - 998 -
================= ============ ============ =============== ==========
DIRECTORS' REMUNERATION POLICY
The Remuneration Policy set out below was approved at the AGM
held on 15 June 2018 and will apply until it is put to shareholders
for renewal at intervals of not more than three years, or the
Remuneration Policy is varied, in which event shareholder approval
for the new Remuneration Policy will be sought.
The Company has no employees other than its Directors who are
all non-executives. When deciding the level of fees the Committee
considers the amount of time expected to be spent on the Company's
affairs and each Director's associated responsibilities to the
Company. It also takes into account the remuneration of Directors
of other investment companies of similar size and/or mandate and
gives due regard to the limits set out in the Company's Articles of
Association, which prohibits the total aggregate annual fees
payable to the Directors in respect of any financial year to exceed
GBP500,000.
The Directors do not participate in any discussions relating to
their own fee which is determined by the Board.
Directors are not eligible for bonuses, share options or
long-term incentives schemes or other performance-related benefits.
There are no pension arrangements in place for the Directors of the
Company. No Director has a service contract with the Company and as
such is not entitled to compensation payments upon termination of
their appointment or loss of office.
Under the Articles, if any Director is called upon to perform
extra or special services of any kind, he or she is entitled to
receive such sum as the Board may think fit for expenses, and also
such remuneration as the Board may think fit, either as a fixed sum
or as a percentage of profits or otherwise, and such remuneration
may, as the Board shall determine, be either in addition to or in
substitution for any other remuneration he or she may be entitled
to receive.
Directors are also entitled to receive all expenses properly
incurred by them in attending general meetings or separate meetings
of the holders of any class of shares or meetings of the Board or
Committees of the Board or otherwise in or with a view to the
performance of their duties.
Fees of any new Director appointed will be on the above basis.
Fees payable in respect of subsequent periods will be determined
following an annual review. Any views expressed by shareholders on
the fees being paid to Directors would be taken into consideration
by the Board.
TOTAL REMUNERATION PAID TO EACH DIRECTOR (AUDITED)
The Directors who served during the year earned the following
remuneration set out in the table below. The highest paid director
for the year was Stuart Cruickshank GBP64,000 (2018: Stuart
Cruickshank GBP49,000).
Directors Remuneration Total Remuneration Total Remuneration
2019** 2018
GBP GBP
======================== =================== ===================
Stuart Cruickshank* 64,000 49,000
Simon King 50,000 40,000
Michael Cassidy 50,000 40,000
Mahnaz Safa 50,000 40,000
David Fisher 50,000 27,897
======================== =================== ===================
Total Remuneration 264,000 196,897
======================== =================== ===================
*Stuart Cruickshank resigned from the Board, with effect from 1
January 2020.
**The total remuneration was increased by GBP10,000 for
Directors and GBP15,000 for the Chairman as a result of additional
work undertaken for one-off projects during the financial period.
The base Directors' fee was unchanged during the financial
period.
The table below sets out a breakdown of Director's remuneration
for 2019:
Directors Remuneration Breakdown Total
of 2019 2019
remuneration remuneration
GBP GBP
=============================================== ============== ==============
Stuart Cruickshank 64,000
Directors fee 49,000
Fee work in relation to one off project 15,000
Simon King 50,000
Directors fee 40,000
Fee work in relation to one off project 10,000
Michael Cassidy 50,000
Directors fee 40,000
Fee work in relation to one off project 10,000
Mahnaz Safa 50,000
Directors fee 40,000
Fee work in relation to one off project 10,000
David Fisher 50,000
Directors fee 40,000
Fee work in relation to one off project 10,000
Total Remuneration 264,000 264,000
=============================================== ============== ==============
Following the 31 December 2019 year end, the Board's
remuneration for the year ending 31 December 2020 was reviewed in
April 2020 and it was agreed that no changes would be made to the
Directors' fees. As part of the review it was agreed to make a
payment to each Director of GBP15,000 and GBP25,000 to the Chairman
in respect of one-off project work already undertaken in respect of
the year ending 31 December 2020.
RELATIVE IMPORTANCE OF SP ON PAY
The table below shows the total amount paid out in remuneration
and distribution to shareholders for the financial years 2019 and
2018.
2019 2018 Change (%)
============================== =========== ============ ==========
Total Directors' Remuneration
(GBP) 264,000 196,897 34.1%
Total Dividend Payments
(GBP) 35,832,443* 36,920,472** (2.9)%
Cost of Shares repurchased 13,886,947 29,990,884 (53.7)%
Shares Repurchased 1,686,112 3,747,148 (55.0)%
============================== =========== ============ ==========
* This figure includes the interim dividends to 31 March 2019,
30 June 2019, 30 September 2019 and 31 December 2019 which were
paid to ordinary shareholders on 14 June 2019, 30 September 2019,
13 December 2019 and 27 March 2020 respectively.
** This figure includes the interim dividends to 31 March 2018,
30 June 2018, 30 September 2018 and 31 December 2018 which were
paid to ordinary shareholders on 18 June 2018, 19 September 2018,
19 December 2018 and 27 March 2019 respectively
DIRECTORS' SERVICE CONTRACTS
No Director has a service contract with the Company and as such
is not entitled to compensation payments upon termination of their
appointment or loss of office.
A letter of appointment was issued to the Directors at the
beginning of their term of office which details their initial
three-year appointment, subject to retirement by rotation in
accordance with the Company's Articles of Association.
ADVISORS TO THE REMUNERATION COMMITTEE
The Board has not sought the advice or service by any outside
person in respect of its consideration of the Directors'
remuneration.
DIRECTORS' INTERESTS (AUDITED)
There is no requirement under the Company's Articles or letters
of appointment for Directors to hold shares in the Company. The
interests of the Directors (who served during the year) in the
shares of the Company, at the end of the year under review were as
follows:
No. of ordinary shares
Director of GBP0.01 each
=================== ======================
Stuart Cruickshank -
Simon King 29,895
Michael Cassidy 21,000
David Fisher -
Mahnaz Safa -
=================== ======================
There have been no other changes to the Directors' share
interests between 31 December 2019 and the date of this report.
On behalf of the Board
Mahnaz Safa
Chairman of the Remuneration Committee
29 May 2020
Nomination Committee Report
Full details of the number of committee meetings and attendance
by individual committee members can be found on page 38.
New appointments will be identified against the requirements of
the Company's business and the need to have a balanced Board with
the best range of skills and experience to complement existing
Directors. Appointments will be made on merit, taking into account
the benefits of diversity, including gender.
The Board acknowledges the benefits of greater diversity,
including gender diversity and remains committed to ensuring that
the Company's directors bring a wide range of skills, knowledge,
experience, backgrounds and perspectives. The Board decided it
would not be appropriate to set targets as all appointments must be
made on merit. It established the following measurable objectives
for achieving diversity on the Board:
-- All Board appointments will be made on merit, in the context
of the skills, knowledge and experience that are needed for the
Board to be effective;
-- Long lists of potential non-executive directors should
include diverse candidates of appropriate merit; and
-- Only engage executive search firms who have signed up to the
voluntary Code of Conduct on gender diversity and best
practice.
MEMBERSHIP AND ROLE OF THE NOMINATION COMMITTEE
The Nomination Committee is chaired by Simon King and consists
of all the Directors. The Board is satisfied that the combined
knowledge and experience of its members enables the Committee to
exercise its duties effectively. The Committee is primarily
responsible for keeping the composition of the Board under review
and to lead the process for appointments to the Board and its
Committees. It is also responsible for keeping the structure, size
and composition of the Board under regular review, and for making
recommendations to the Board with regard to any changes necessary.
The Committee also considers succession planning for the Board,
taking into account the skills and expertise that will be needed on
the Board in the future.
DIVERSITY POLICY
The Board has approved and adopted a diversity policy. The
policy acknowledges the importance of diversity, including gender
diversity, for the Company. The Board acknowledges the benefits of
greater diversity, including gender diversity and remains committed
to ensuring that the Company's directors bring a wide range of
skills, knowledge, experience, backgrounds and perspectives. There
has been no further recruitment of Directors post year end as the
Board have decided not to appoint another Director.
MATTERS CONSIDERED IN THE YEAR
The Nomination Committee met twice during the year under review
and during those meetings it has:
-- considered and agreed upon a formal policy on tenure;
-- considered and agreed upon a formal policy the
responsibilities of the chairman and the senior independent
director;
-- considered and enacted its succession plan by appointing
Simon King as Chairman of the Company;
-- agreed the appointment of Mahnaz Safa as the Senior Independent Director;
-- undertook a performance evaluation of the Board, its
Committees and individual Directors; and
-- reviewed and agreed upon the decision to not appoint another Director
On behalf of the Board
Simon King
Chairman of the Nomination Committee
29 May 2020
Management Engagement Committee Report
MEMBERSHIP AND ROLE OF THE COMMITTEE
All of the Directors are members of the Committee and the Board
is satisfied that the combined knowledge and experience of its
members enables the Committee to exercise its duties
effectively.
Full details of the number of committee meetings and attendance
by individual committee members can be found on page 38.
The Management Engagement Committee is primarily responsible for
reviewing the appropriateness of the continuing appointment of the
Investment Manager, ensuring the terms and conditions of the
Investment Manager's continuing appointment align with the
investment policy and investment objective of the Company.
PERFORMANCE OF INVESTMENT MANAGER
The Committee keeps under review the performance of the
Investment Manager and the level and terms of the management fee.
Following a formal review carried out by the Committee, on 25
February 2020, the Board announced that it had served 12 months'
notice on the Manager to terminate the Investment Management
Agreement.
On behalf of the Board
Simon King
Chairman of the Management Engagement Committee
29 May 2020
Management Report and Statement of Directors'
Responsibilities
Listed companies are required by the Financial Conduct
Authority's Disclosure Guidance and Transparency Rules (the
'Rules') to include a management report in their annual Financial
statements. The information required to be in the management report
for the purpose of the Rules is included in the Chairman's
Statement (pages 7 and 8), the Investment Manager's Report (pages 9
to 11), Top Ten Holdings (pages 12), Portfolio composition (page
13), the Business Review (pages 14 to 22) and the Report of the
Directors (pages 32 to 35). Therefore, a separate management report
has not been included.
Directors' Responsibilities Statement in Relation to the
Financial Statements
The Directors are responsible for preparing the Annual Report
and the Group and Company Financial statements in accordance with
applicable United Kingdom law and those International Financial
Reporting Standards ("IFRS") as adopted by the European Union. The
Directors are also required to prepare a Strategic Report,
Directors' Report, Directors' Remuneration Report and Corporate
Governance Statement. Under company law, the Directors must not
approve the Financial statements unless they are satisfied that
they present a fair, balanced and understandable report and provide
the information necessary for shareholders to assess the Company's
performance, business model and strategy. In preparing the
Financial statements, the Directors are required to:
-- select suitable accounting policies in accordance with IAS 8:
'Accounting Policies, Changes in Accounting Estimates and Errors'
and then apply them consistently;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the Company's financial position and financial
performance;
-- state that the Company has complied with IFRS, subject to any
material departures disclosed and explained in the financial
statements;
-- make judgements and estimates that are reasonable and
prudent; and
-- prepare the financial statements on a going concern basis
unless it is inappropriate to assume that the Company will continue
in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
Company's transactions and disclose with reasonable accuracy at any
time the Financial position of the Group and Company and enable
them to ensure that the Group and Company's Financial statements
and Directors' Remuneration Report comply with the Companies Act
2006. They are also responsible for safeguarding the assets of the
Group and Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
Responsibility Statements under the Disclosure Guidance and
Transparency Rules Each of the Directors confirms that to the best
of his or her knowledge:
-- the Group and Company's Financial statements, prepared in
accordance with IFRS as adopted by the European Union, give a true
and fair view of the assets, liabilities, Financial position and
profit or loss of the Company;
-- the Strategic Report (comprising the Chairman's Statement,
Manager's Report, top ten largest Holdings, Analysis of Investment
Portfolio by Sector and Business Model and Strategy) and the Report
of the Directors include a fair review of the development and
performance of the business and the position of the Company
together with a description of the principal risks and
uncertainties that it faces;
-- taken as a whole, the Annual Report and Financial statements
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's position and
performance, business model and strategy; -- the Financial
statements include details on related party transactions; and
-- having assessed the principal risks and other matters
discussed in connection with the Viability Statement, it is
appropriate to adopt the going concern basis in preparing the
Financial statements.
The Annual Report and Accounts were approved by the Board and
the above responsibility statement was signed on its behalf by:
Simon King
Chairman
29 May 2020
Financial Statements
Consolidated Statement of Financial Position
AS AT 31 DECEMBER 2019
Group Notes 31 December 31 December
2019 2018
GBP'000 GBP'000
======================================= ===== =========== ===========
Assets
Cash and cash equivalents 9 70,884 106,358
Cash pledged as collateral 10 3,970 -
Investment assets at fair value
through profit or loss 4 24,357 35,156
Derivative financial instruments 5 3,586 2,103
Credit assets at amortised cost 4 912,091 959,147
Interest receivable 13 12,149 23,200
Prepaid expenses and other assets 13,895 3,327
Total Assets 1,040,932 1,129,291
Liabilities
Management fees payable 12 (1,202) (1,226)
Performance fees payable 12 (6,541) (6,462)
Accrued expenses and other liabilities (9,382) (9,361)
Cash received as collateral 5 (720) (782)
Derivative financial instruments 5 (2,643) -
Borrowings 14 (302,199) (378,011)
======================================= ===== =========== ===========
Total liabilities (322,687) (395,842)
Net assets 718,245 733,449
======================================= ===== =========== ===========
Equity attributable to Shareholders
of the Company
Called-up share capital 21 863 863
Share premium account 21 27,792 27,792
Capital reserves (2,950) 1,693
Revenue reserve 15,373 (7,723)
Special distributable reserve 21 677,167 710,824
======================================= ===== =========== ===========
Total shareholders' funds 718,245 733,449
======================================= ===== =========== ===========
Net Asset Value per Ordinary share 20 965.35p 963.94p
======================================= ===== =========== ===========
There have been presentational changes to the Consolidated
Statement of Financial position please see note 25 for details.
The financial statements on pages 66 to 136 were approved by the
Board of Directors on 29 May 2020 and signed on its behalf by:
Simon King
Chairman
29 May 2020
Company Statement of Financial Position
AS AT YEARED 31 DECEMBER 2019
Company Notes 31 December 31 December
2019 2018
GBP'000 GBP'000
======================================= ===== =========== ===========
Assets
Cash and cash equivalents 9 49,481 72,762
Cash pledged as collateral 3,970 -
Investment assets at fair value
through profit or loss 4 240,834 170,444
Derivative financial instruments 5 3,509 2,103
Credit assets at amortised cost 4 620,831 724,621
Interest receivable 13 9,914 22,241
Prepaid expenses and other assets 11,869 5,715
Total Assets 940,408 997,886
Liabilities
Management fees payable 12 (840) (1,021)
Performance fees payable 12 (6,541) (6,462)
Accrued expenses and other liabilities (7,692) (6,595)
Cash received as collateral (720) (782)
Derivative financial instruments 5 (2,643) -
Borrowings 14 (67,966) (97,388)
Deemed Loan 15 (135,761) (152,189)
======================================= ===== =========== ===========
Total liabilities (222,163) (264,437)
Net assets 718,245 733,449
======================================= ===== =========== ===========
Equity attributable to Shareholders
of the Company
Called-up share capital 21 863 863
Share premium account 21 27,792 27,792
Capital reserves (2,950) 1,693
Revenue reserve 15,373 (7,723)
Special distributable reserve 21 677,167 710,824
======================================= ===== =========== ===========
Total shareholders' funds 718,245 733,449
======================================= ===== =========== ===========
Net Asset Value per Ordinary share 20 965.35p 963.94p
======================================= ===== =========== ===========
Advantage has been taken of the exemption under section 408 of
the Companies Act 2006 and accordingly the Company has not
presented a Statement of Comprehensive Income for the Company
alone. The profit after taxation of the Company for the year ended
31 December 2019 was GBP34,823,000 (2018: GBP30,727,000).
There have been presentational changes to the Company Statement
of Financial position please see note 25 for details.
The financial statements on pages 66 to 136 were approved by the
Board of Directors on 29 May 2020 and signed on its behalf by:
Simon King
Chairman
29 May 2020
Consolidated Statement of Comprehensive Income 2019
FOR THE YEARED 31 DECEMBER 2019
Group Notes Revenue Capital Total
GBP'000 GBP'000 GBP'000
================================= ===== ======== ======== ========
Interest Income on credit assets
at amortised cost 6 99,415 - 99,415
Losses on equity assets at fair
value through profit and loss 6 - (4,647) (4,647)
Credit impairment losses 11 (18,003) - (18,003)
Third Party Servicing Costs (9,648) - (9,648)
Net operating income before
financing and fund costs 71,764 (4,647) 67,117
================================= ===== ======== ======== ========
Finance costs 14 (14,691) - (14,691)
Net operating income before
fund costs 57,073 (4,647) 52,426
================================= ===== ======== ======== ========
Management fee 12 (7,272) 4 (7,268)
Performance fee 12 (6,541) - (6,541)
Other Fund expenses 12 (3,794) - (3,794)
================================= ===== ======== ======== ========
Total fund expenses (17,607) 4 (17,603)
================================= ===== ======== ======== ========
Profit before tax 39,466 (4,643) 34,823
================================= ===== ======== ======== ========
Tax expense 19 - - -
================================= ===== ======== ======== ========
Profit after tax 7 39,466 (4,643) 34,823
================================= ===== ======== ======== ========
Profit per Ordinary Share (basic
and diluted) 7 53.04p (6.24)p 46.80p
================================= ===== ======== ======== ========
The total column of this statement represents the Group's
Consolidated Statement of Comprehensive Income, prepared in
accordance with International Financial Reporting Standards
("IFRS") as adopted by the European Union. The supplementary
revenue and capital columns are both prepared under guidance
published by the Association of Investment Companies ("AIC"). All
items in the above Statement derive from continuing operations.
There is no other comprehensive income.
There have been presentational changes to the Consolidated
Statement of Comprehensive Income please see note 25 for
details.
Consolidated Statement of Comprehensive Income 2018
FOR THE YEARED 31 DECEMBER 2018
Group Notes Revenue Capital Total
GBP'000 GBP'000 GBP'000
================================= ===== ======== ======== ========
Interest Income on credit assets
at amortised cost 6 120,903 - 120,903
Income on equity assets at fair
value through profit and loss 6 - (1,725) (1,725)
Credit impairment losses 11 (35,696) - (35,696)
Third Party Servicing Costs (13,680) - (13,680)
Net operating income before
financing and fund costs 71,527 (1,725) 69,802
================================= ===== ======== ======== ========
Finance costs 14 (18,355) - (18,355)
Net operating income before
fund costs 53,172 (1,725) 51,447
================================= ===== ======== ======== ========
Management fee 12 (7,476) 1 (7,475)
Performance fee 12 (6,462) - (6,462)
Other Fund expenses 12 (6,783) - (6,783)
================================= ===== ======== ======== ========
Total fund expenses (20,721) 1 (20,720)
================================= ===== ======== ======== ========
Profit before tax 32,451 (1,724) 30,727
================================= ===== ======== ======== ========
Tax expense 19 - - -
================================= ===== ======== ======== ========
Profit after tax 7 32,451 (1,724) 30,727
================================= ===== ======== ======== ========
Profit per Ordinary Share (basic
and diluted) 7 41.77p (2.22)p 39.55p
================================= ===== ======== ======== ========
The total column of this statement represents the Group's
Consolidated Statement of Comprehensive Income, prepared in
accordance with International Financial Reporting Standards
("IFRS") as adopted by the European Union. The supplementary
revenue and capital columns are both prepared under guidance
published by the Association of Investment Companies ("AIC"). All
items in the above Statement derive from continuing operations.
There is no other comprehensive income.
There have been presentational changes to the Consolidated
Statement of Comprehensive Income please see note 25 for
details.
Consolidated Statement of Changes in Shareholders' Funds
FOR THE YEARED 31 DECEMBER 2019
Group Called
up Special
share Share Capital Revenue distributable
capital premium reserve reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
======================== ======== ======== ======== ======== ============== ========
Net assets attributable
to Shareholders
at the beginning
of the year 863 27,792 1,693 (7,723) 710,824 733,449
Re-allocation
in relation to
initial application
of IFRS 9 - - - 19,641 (19,641) -
Amounts paid on
buyback of Ordinary
Shares - - - - (14,016) (14,016)
Profit after tax - - (4,643) 39,466 - 34,823
Dividends declared
and paid - - - (36,011) - (36,011)
Net assets attributable
to Shareholders
at the end of
the year 863 27,792 (2,950) 15,373 677,167 718,245
======================== ======== ======== ======== ======== ============== ========
FOR THE YEARED 31 DECEMBER 2018
Group Called
up Special
share Share Capital Revenue distributable
capital premium reserve reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
======================== ======== ======== ======== ======== ============== ========
Net assets attributable
to Shareholders
as originally
presented 863 27,792 3,417 (835) 758,618 789,855
Changes on initial
application of
IFRS 9 - - - (19,641) - (19,641)
Updated balance
at
1 January 2018 863 27,792 3,417 (20,476) 758,618 770,214
Amounts paid on
buyback of Ordinary
Shares - - - - (30,171) (30,171)
Profit after tax - - (1,724) 32,451 - 30,727
Dividends declared
and paid - - - (19,698) (17,623) (37,321)
Net assets attributable
to Shareholders
at the end of
the year 863 27,792 1,693 (7,723) 710,824 733,449
======================== ======== ======== ======== ======== ============== ========
Company Statement of Changes in Shareholders' Funds
FOR THE YEARED 31 DECEMBER 2019
Company Called
up Special
share Share Capital Revenue distributable
capital premium reserve reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
======================== ======== ======== ======== ======== ============== ========
Net assets attributable
to Shareholders
at the beginning
of the year 863 27,792 1,693 (7,723) 710,824 733,449
Re-allocation
in relation to
initial application
of IFRS 9 - - - 19,641 (19,641) -
Amounts paid on
buyback of Ordinary
Shares - - - - (14,016) (14,016)
Profit after tax - - (4,643) 39,466 - 34,823
Dividends declared
and paid - - - (36,011) - (36,011)
Net assets attributable
to Shareholders
at the end of
the year 863 27,792 (2,950) 15,373 677,167 718,245
======================== ======== ======== ======== ======== ============== ========
FOR THE YEARED 31 DECEMBER 2018
Company Called
up Special
share Share Capital Revenue distributable
capital premium reserve reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
======================== ======== ======== ======== ======== ============== ========
Net assets attributable
to Shareholders
as originally
presented 863 27,792 3,417 (835) 758,618 789,855
Changes on initial
application of
IFRS 9 - - - (19,641) - (19,641)
Updated balance
at
1 January 2018 863 27,792 3,417 (20,476) 758,618 770,214
Amounts paid on
buyback of Ordinary
Shares - - - - (30,171) (30,171)
Profit after tax - - (1,724) 32,451 - 30,727
Dividends declared
and paid - - - (19,698) (17,623) (37,321)
Net assets attributable
to Shareholders
at the end of
the year 863 27,792 1,693 (7,723) 710,824 733,449
======================== ======== ======== ======== ======== ============== ========
Consolidated Cash Flow Statement
FOR THE YEARED 31 DECEMBER 2019
31 December 31 December
2019 2018
GBP'000 GBP'000
=============================================== ========================== ==========================
Cash flows from operating activities:
Net profit after taxation 34,823 30,727
Adjustments to reconcile profit after tax
to net cash inflow / (outflow) from operating
activities:
Unrealised loss on equity assets 5,927 1,361
Realised (gain) on equity assets (1,221) -
(Increase) / decrease in cash pledged or
received as collateral (4,032) 4,772
(Increase) / decrease in interest receivable 11,051 (6,764)
(Increase) / decrease in prepaid expenses
and other assets (12,051) 3,427
Increase / (decrease) in accrued expenses
and other liabilities 2,719 4,522
Changes in estimated credit losses 18,003 35,696
=============================================== ========================== ==========================
Net cash inflow from operating activities 55,219 73,741
=============================================== ========================== ==========================
Capital expenditure and financial investments
Sale of equity assets 3,686 7,866
Net sale / (purchase) of loans 31,429 181,117
Net cash inflow from capital expenditure
and financial investments 35,115 188,893
=============================================== ========================== ==========================
Net cash inflow / (outflow) from operating
activities 90,334 262,724
=============================================== ========================== ==========================
Cash flows from financing activities:
Proceeds from debt issued 315,285 287,575
Principal payments on debt issued (391,445) (525,925)
(Decrease) / increase in interest payable 379 (1,226)
Amounts paid on buyback of Ordinary Shares (14,016) (30,171)
Dividends declared and paid (36,011) (37,321)
=============================================== ========================== ==========================
Net cash (used in) by financing activities (125,808) (307,068)
=============================================== ========================== ==========================
Net change in cash and cash equivalents (35,474) (44,344)
Cash and cash equivalents at the beginning
of the year 106,358 150,702
=============================================== ========================== ==========================
Net cash and cash equivalents 70,884 106,358
=============================================== ========================== ==========================
Company Cash Flow Statement
FOR THE YEARED 31 DECEMBER 2019
31 December 31 December
2019 2018
GBP'000 GBP'000
=============================================== ========================== ==========================
Cash flows from operating activities:
Net profit after taxation 34,823 30,727
Adjustments to reconcile profit after tax
to net cash inflow / (outflow) from operating
activities:
Unrealised gain / (loss) on equity assets (8,105) 1,660
Realised loss / (gain) on equity assets (1,031) 629
Decrease / (increase) in interest receivable 12,327 (16,719)
Decrease in cash pledged and received as
collateral (4,032) 2,970
(Increase) in prepaid expenses and other
assets (7,559) (2,337)
Decrease / (increase) in accrued expenses
and other liabilities 3,639 (8,112)
Changes in estimated credit losses 15,327 (1,675)
Net cash inflow from operating activities 45,389 7,143
=============================================== ========================== ==========================
Capital expenditure and financial investments
Purchase of equity assets (119,194) (40,862)
Sale of equity assets 57,940 172,965
Net purchases and sales of money market funds - -
Net sale / (purchase) of credit assets 88,463 196,704
(Purchase) / receipt from deemed loans (16,429) (182,910)
=============================================== ========================== ==========================
Net cash inflow from capital expenditure
and financial investments 10,780 145,897
=============================================== ========================== ==========================
Net cash inflow from operating activities 56,169 153,040
=============================================== ========================== ==========================
Cash flows from financing activities:
Proceeds from debt issued 36,845 97,259
Principal payments on debt issued (66,361) (200,000)
(Decrease) / increase in interest payable 93 (1,089)
Amounts paid on buyback of Ordinary Shares (14,016) (30,171)
Dividends declared and paid (36,011) (37,321)
=============================================== ========================== ==========================
Net cash (used in by) financing activities (79,450) (171,322)
=============================================== ========================== ==========================
Net change in cash and cash equivalents (23,281) (18,282)
Cash and cash equivalents at the beginning
of the year 72,762 91,044
=============================================== ========================== ==========================
Net cash and cash equivalents 49,481 72,762
=============================================== ========================== ==========================
Notes to the Consolidated Financial Statements
1. GENERAL INFORMATION
Pollen Street Secured Lending plc (the "Company") is a
closed-ended investment company incorporated and domiciled in the
United Kingdom on 6 December 2013 with registered number 08805459.
On the 18 September 2019 the Company was renamed from P2P Global
Investments plc. The Company is a publicly listed company and
commenced operations on 30 May 2014. The registered office is 6th
Floor, 65 Gresham Street, London, EC2V 7NQ, United Kingdom.
The investment objective of the Company is to provide
shareholders with an attractive level of dividend income and
capital growth through exposure to investments in alternative
finance and related instruments.
The Company's investment manager is PSC Credit Holdings LLP (the
"Investment Manager"). Pollen Street Capital (US) LLC, an affiliate
of the Investment Manager and an SEC registered investment adviser,
was appointed as sub investment manager (the "Sub-Manager") to the
Company. The Investment Manager has, pursuant to the Sub-Management
Agreement, delegated certain of its responsibilities and functions,
including those in relation to its discretionary management of the
Company's portfolio of credit assets, to the Sub-Manager.
The Investment Manager is authorised as an Alternative
Investment Fund Manager ("AIFM") under the Alternative Investment
Fund Managers Directive ("AIFMD"). The Company is defined as an
Alternative Investment Fund and is subject to the relevant articles
of the AIFMD.
The Company invests, directly and indirectly, in consumer loans,
small and medium sized enterprises ("SME") loans, advances against
corporate trade receivables and/or purchases of corporate trade
receivables ("Credit Assets") which have been originated via
Platforms. The Company will typically seek to invest in Credit
Assets with targeted net annualised returns of 5 to 15 per cent.
The Company will seek to purchase Credit Assets directly (via
Platforms or via other originators) and may also invest in such
assets indirectly via funds, partnerships or special purpose
vehicles (including those managed by the Investment Manager, the
Sub-Manager or their affiliates) that it deems suitable with a view
to enhancing Shareholder returns and providing diversification of
the Company's assets.
As at 31 December 2019, the Company had total issued equity in
the form of 86,306,803 ordinary shares (2018: 86,306,803) of which
74,402,289 (2018: 76,088,401) were outstanding and 11,904,514
(2018: 10,218,402) were held as treasury shares. These shares are
listed on the Premium listing segment of the Official List of the
UK Listing Authority and trade on the London Stock Exchange's main
market for listed securities.
Citco Fund Services (Ireland) Limited (the "Administrator") has
been appointed as the Administrator of the Company. The
Administrator is responsible for the Company's general
administrative functions, such as the calculation and publication
of the Net Asset Value ("NAV") and maintenance of the Company's
accounting records.
All values are rounded to the nearest thousand pounds unless
otherwise indicated.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Basis of preparation and consolidation
The consolidated financial statements for the Company are
prepared in accordance with International Financial Reporting
Standards ("IFRS") as adopted by the European Union ("EU"). They
comprise standards and interpretations approved by the
International Accounting Standards Board ("IASB") and International
Financial Reporting Committee, including interpretations issued by
the IFRS Interpretations Committee and interpretations issued by
the International Accounting Standard Committee ("IASC") that
remain in effect, to the extent they have been adopted by the EU.
The consolidated financial statements are also in compliance with
relevant provisions of the Companies Act 2006 as applicable to
companies reporting under IFRS. The accounting policies have been
applied consistently year on year.
Where presentational guidance set out in the Statement of
Recommended Practice ("SORP") for investment trusts issued by the
Association of Investment Companies ("AIC") in July 2018 is
consistent with the requirements of IFRS, the Directors have sought
to prepare the consolidated financial statements on a basis
compliant with the recommendations of the SORP.
Accounting standards effective
IFRS 16 Leases
IFRS 16 establishes principles for the recognition, measurement,
presentation and disclosure of leases, with the objective of
ensuring that lessees and lessors provide relevant information that
faithfully represents those transactions. The standard provides a
single lessee accounting model, requiring lessees to recognise
assets and liabilities for all leases unless the lease term is 12
months or less or the underlying asset has a low value. Lessors
continue to classify leases as operating or finance, with IFRS 16's
approach to lessor accounting substantially unchanged from its
predecessor, IAS 17. IFRS 16 was issued in January 2016 and applies
to annual reporting periods beginning on or after 1 January
2019.
The adoption of this standard and interpretations does not have
a material impact on the financial statements, given the nature of
the Group's business being that it has no leases.
Accounting standards issued but not yet effective
IFRS 17 Insurance Contract
IFRS 17 establishes the principles for the recognition,
measurement, presentation and disclosure of insurance contracts.
The objective of IFRS 17 is to ensure that an entity provides
relevant information that faithfully represents those contracts.
This information gives a basis for users of financial statements to
assess the effect that insurance contracts have on the entity's
financial position, financial performance and cash flows. IFRS 17
was issued in May 2017 and applies to annual reporting periods
beginning on or after 1 January 2023.
The Directors do not anticipate that the adoption of this
standard and interpretations will have a material impact on the
financial statements, given the nature of the Group's business
being that it has no insurance contracts.
IFRS 3 Amendments regarding the definition of a business
The IASB has issued 'Definition of a Business (Amendments to
IFRS 3)' aimed at resolving the difficulties that arise when an
entity determines whether it has acquired a business or a group of
assets. The amendments are effective for business combinations for
which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after 1 January
2020.
Other future developments include the IASB undertaking a
comprehensive review of existing IFRSs. The Group will consider the
impact of these new standards as they are finalised.
Consolidation
Subsidiaries are investees controlled by the Company. The
Company controls an investee if it is exposed to, or has the rights
to, variable returns from its involvement with the investee and has
the ability to affect those returns through its power over the
investee. The Company reassesses whether it has control if there
are changes to one or more elements of control. The Company does
not consider itself to be an investment entity for the purposes of
IFRS 10, as it does not hold substantially all of its investments
at fair value. Consequently, it consolidates its subsidiaries
rather than treating its subsidiaries as investments at fair value
through profit or loss. At the Company level, the Company's
investments in its subsidiaries are measured at fair value which is
determined with reference to the underlying net asset value of the
subsidiary.
Associates are entities over which the Group has significant
influence, but does not control, generally accompanied by a
shareholding of between 20 per cent and 50 per cent of the voting
rights.
No associates are presented on the Statement of Financial
Position using the equity accounting method as the Group elects to
hold such investments at fair value through profit and loss. This
treatment is permitted by International Accounting Standard ("IAS")
28 Investment in Associates and Joint Ventures, which also permits
investments held by entities that are venture capital
organisations, mutual funds or similar entities to be excluded from
its measurement methodology requirements where those investments
are designated, upon initial recognition, as at fair value through
profit or loss and accounted for in accordance with IFRS 9
Financial Instruments. Changes in fair value of associates are
recognised in the Statement of Comprehensive Income in the period
in which the change occurs.
The disclosures required by Section 409 of the Companies Act
2006 for associated undertakings are included in Note 2 to the
financial statements.
As at 31 December 2019, the Company controls four legal entities
listed below as well as nine Trusts which are subsidiaries that the
Company controls (together "the Group").
Name of entity Registered Office
=================================== ====================================
Eaglewood SPV I LP 747 Third Avenue, 19th Floor,
New York,
NY 10017, USA
=================================== ====================================
Eaglewood Income Fund I, LP 747 Third Avenue, 19th Floor,
New York,
NY 10017, USA
=================================== ====================================
Marketplace Originated Consumer 1 Bartholomew Lane, London,
Assets 2017-1 PLC United Kingdom, EC2N 2AX
=================================== ====================================
EW-PFL Trust 500 Delaware Avenue, 11th
Floor, Wilmington,
DE, 19801, USA
=================================== ====================================
SPV I Loan Trust 500 Delaware Avenue, 11th
Floor, Wilmington,
DE 19801, USA
=================================== ====================================
Payoff Consumer Loan Trust 500 Delaware Avenue, 11th
Floor, Wilmington,
DE 19801, USA
=================================== ====================================
BFCL Trust 500 Delaware Avenue, 11th
Floor, Wilmington,
DE 19801, USA
=================================== ====================================
Eaglewood LC Trust 500 Delaware Avenue, 11th
Floor, Wilmington,
DE 19801, USA
=================================== ====================================
PSC 1803 Autoloan Trust 1100 North Market Street Wilmington,
DE 19801, USA
=================================== ====================================
PSC Rocketloans Prime Consumer Loan 1100 North Market Street Wilmington,
Trust DE 19801, USA
=================================== ====================================
PSC 2018F Loan Trust 1100 North Market Street Wilmington,
DE 19801, USA
=================================== ====================================
PSC 2019P LLC 1013 Centre Road, Suite 403-B,
Wilmington
DE 19805, USA
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Small Business Origination Loan 1st Floor, 1-2 Victoria Buildings,
Trust 2019-1 DAC Haddington Road, Dublin 4,
Ireland
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During 2019, the Company controlled four legal entities listed
below as well as one Trust which were subsidiaries that the Company
controlled at some point in the year, which however were not
controlled at year end.
Name of entity Registered Office
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CH Mercury Note Issuer DAC Fourth Floor, 3 George's Dock,
Dublin 1, Ireland
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Marketplace Originated Consumer 35 Great St. Helen's, London
Assets 2016-1 PLC EC3A 6AP,
United Kingdom
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P2P BL-2 Limited 35 Great St. Helen's, London
EC3A 6AP,
United Kingdom
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P2P BL-3 PLC Winchester House, 1 Great
Winchester St,
London, EC2N 2DB, United Kingdom
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Eaglewood Consumer Loan Trust 2014-1 500 Delaware Avenue, 11th
Floor, Wilmington,
DE 19801, USA
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The Company invests in a special purpose vehicle, Eaglewood SPV
I LP (the "SPV") and at 31 December 2019 is the sole Limited
Partner in that SPV and controls it. The principal activity of
Eaglewood SPV I LP is to invest in alternative finance investments
and related instruments, including marketplace loans, which is
aligned with the Company's investment objective. The Company's
position with regards to the SPV is that of an investor where its
maximum loss is restricted to its investment in the vehicle and in
return for this receives a quarterly income distribution.
The Company controls Eaglewood Income Fund I, LP (the "Eaglewood
Fund"), a Delaware limited partnership established on 3 February
2012, through the control of the SPV. As at 31 December 2019, the
SPV is the sole limited partner in the Eaglewood Fund. The
Eaglewood Fund is an open ended private investment fund, offering
monthly subscriptions and quarterly redemptions, with 90 days'
notice. The Eaglewood Fund is managed by the Investment Manager,
Pollen Street Capital (US), LLP. It employs a strategy that
primarily involves leveraged investment in monthly amortising
unsecured US consumer loans originated by a single Platform with
terms of three to five years.
The Company also controls Marketplace Originated Consumer Assets
2017-1 PLC ("MOCA 2017") a public limited company incorporated
under the Law of England and Wales. MOCA 2017 is a securitisation
vehicle for UK consumer loans and operates in a pre-determined
manner. The Company is considered to control MOCA 2017 by virtue of
being its sponsor whilst having exposure to the variable returns of
the vehicle through the holding of junior notes issued by it. MOCA
2017 was incorporated in November 2017. MOCA 2017 has issued senior
debt, which is listed on Irish Stock Exchange.
The Company also controls Small Business Origination Loan Trust
2019-1 DAC ("SBOLT 2019") a public limited company incorporated in
Ireland, SBOLT 2019 is a securitisation vehicle for unsecured loans
made to small and medium-sized enterprises ("SMEs") incorporated in
the UK and operates in a pre-determined manner. The Company is
considered to control SBOLT 2019 from April 2019 by virtue of being
its sponsor whilst having exposure to the variable returns of the
vehicle through the holding of junior notes issued by it. SBOLT
2019 was incorporated in April 2019. SBOLT 2019 has issued senior
debt, which is listed on Irish Stock Exchange.
The Company also controls a number of trusts ("Trusts") through
its control of the SPV and the Eaglewood Fund. The SPV and the
Eaglewood Fund control a Trust if they are exposed to, or have the
rights to, variable returns from their involvement with the Trust
and have the ability to affect those returns through its power over
the Trust. As at 31 December 2019, the SPV is the sole beneficial
owner of EW-PFL Trust, SPV I Loan Trust, Payoff Consumer Loan
Trust, PSC 1803 Autoloan Trust, PSC Rocketloans Prime Consumer Loan
Trust and PSC 2018F loan Trust while the Eaglewood Fund is the sole
beneficial owner of Eaglewood LC Trust. During the year, the SPV
became the sole beneficial owner of an LLC; PSC 2019P LLC.
During the period, P2P BL-3 PLC ("P2P BL-3"), a public limited
company incorporated with limited liability under the Law of
England and Wales was liquidated. The Company was previously
considered to control P2P BL-3 by virtue of being its sponsor while
having exposure to the variable returns of the vehicle through the
holding of junior note issued by it. During the period all loans
were novated from the Company as part of the liquidation process
and therefore the Company is no longer exposed to variable returns
from April 2019.
During the period, the Company controlled CH Mercury Note Issuer
DAC ("CH") a public limited company incorporated in Ireland, CH is
a special purpose vehicle for development and bridging finance
loans. The Company was considered to control CH through holding 100
per cent of the issued shares. The Company was formed in November
2018 but only became active in February 2019. The pool of
development and bridging finance loans were sold in August 2019 and
CH was liquidated. CH was consolidated from February 2019 until
August 2019.
During the period, Marketplace Originated Consumer Assets 2016-1
PLC ("MOCA 2016"), a public limited company incorporated under the
Law of England and Wales is in the process of being liquidated.
MOCA 2016 was a securitisation vehicle for UK consumer loans and
operates in a pre-determined manner. The Company was previously
considered to control MOCA 2016 by virtue of being its sponsor
whilst having exposure to the variable returns of the vehicle
through the holding of junior notes issued by it. During the period
all loans were novated from the Company and it is in the process of
liquidation therefore the Company is no longer exposed to variable
returns from August 2019.
During the period, P2P BL-2 Limited ("P2P BL-2"), a public
limited company incorporated with limited liability under the Law
of England and Wales is in the process of liquidation. The Company
was previously considered to control P2P BL-2 by virtue of being
its sponsor while having exposure to the variable returns of the
vehicle through the holding of junior note issued by it. During the
period all loans were novated from the Company and it is in the
process of liquidation therefore the Company is no longer exposed
to variable returns from September 2019.
All entities within the Group have co-terminus reporting
dates.
Intra-group balances and transactions, and any unrealised income
and expenses (except for currency transaction gains or losses)
arising from intra-group transactions, are eliminated in preparing
the Consolidated Financial Statements.
The consolidated financial statements have been prepared on a
going concern basis under the historical cost convention, as
modified by the valuation of investments and derivative financial
instruments at fair value. The Directors consider that the Group
and the Company have adequate financial resources to enable them to
continue operations for a period of no less than 12 months from the
reporting date. The Directors have reviewed the financial
projections of the Group from the date of this report, which have
been updated to take into account the economic disruption caused by
the COVID-19 pandemic. These show that the Group will be able to
generate sufficient cash flows in order to meet its liabilities as
they fall due and for the foreseeable future, and that all relevant
conditions such as covenants under the Group's external borrowings
will be met over that period
There are a number of other developments which are relevant to
the future of the Group and Company, and which may affect the
continued use of going concern accounting principles.
The Directors of the Company announced on 25 February 2020 that
the Company was in discussions regarding a possible offer by
Waterfall Asset Management LLC ("Waterfall") for the acquisition of
the entire share capital of the Company. They also announced that
the possible offer was supported by the largest shareholder of the
Company at that time. The offer period has since been extended, and
on 19 May 2020, a further extension to 16 June 2020 was announced.
The intentions of Waterfall, as to their plans for the Company
should an offer be made and be successful, have not been announced.
The announcement made by the Company on 19 May 2020, indicated also
that The Board is also reviewing all options in the event that the
possible offer does not proceed.
In addition, Article 167 of the Company's Articles of
Association stipulates that at the Annual General Meeting to be
held in 2021 the Directors shall propose an ordinary resolution
that the Company continues to operate as an investment company (the
"continuation vote"). If this resolution does not receive approval
from a majority of shareholders, the Articles stipulate that the
Directors shall, within three months of the date of the resolution,
put forward proposals to shareholders to the effect that the
Company be wound up or similarly restructured. The outcome of the
continuation vote cannot at this stage be determined with any
certainty.
The potential consequences of the possible offer, and the
continuation vote, are conditions that indicate the existence of a
material uncertainty which may cast significant doubt about the
Group's and Company's plans or ability to continue as a going
concern. The Group and Company financial statements do not include
the adjustments that would result if the Group and Parent Company
were no longer to be considered a going concern.
Notwithstanding this uncertainty, the Directors are satisfied
that the going concern basis remains appropriate for the
preparation of the financial statements.
(b) Foreign currency
The Group's presentational and functional currency is Pounds
Sterling (GBP). Pounds Sterling is the denomination of the
Company's share capital and the primary economic environment of its
shareholders. Foreign currency exposures arising from its
investments are hedged back into Pounds Sterling.
Transactions in foreign currencies are translated into sterling
at the rate of exchange ruling on the date of each transaction.
Monetary assets, liabilities and equity investments in foreign
currencies at the Consolidated Statement of Financial Position date
are translated into sterling at the rates of exchange ruling on
that date. Profits or losses on exchange, together with differences
arising on the translation of foreign currency assets, including
loans at amortised cost, or liabilities, are taken to the capital
return column of the Consolidated Statement of Comprehensive
Income. Foreign exchange gains and losses arising on investments
held at fair value are included within changes in fair value.
(c) Presentation of Consolidated Statement of Comprehensive Income
In order to better reflect the activities of an investment trust
company and in accordance with the guidance set out by the AIC,
supplementary information which analyses the Consolidated Statement
of Comprehensive Income between items of revenue and capital nature
has been presented alongside the Consolidated Statement of
Comprehensive Income. Net profit on ordinary activities before
finance costs and taxation in the revenue column is the measure the
Directors believe appropriate in assessing the Group's compliance
with certain requirements set out in section 1158 of the
Corporation Taxes Act 2010.
In respect of the analysis between revenue and capital items
presented within the Consolidated Statement of Comprehensive
Income, all expenses and finance costs, which are accounted for on
an accruals or effective interest rate basis as relevant, have been
presented as revenue items except those items listed below:
-- expenses are allocated to capital where a direct connection
with the maintenance or enhancement of the value of the investments
can be demonstrated; and
-- expenses which are incidental to the disposal of an
investment are deducted from the disposal proceeds of the
investment.
The following are presented as capital items:
-- realised gains and losses on the disposal of investments;
-- unrealised gains and losses arising from the valuation of investments held at the year-end;
-- realised and unrealised gains and losses on transactions
undertaken to hedge an exposure of a capital nature;
-- realised and unrealised exchange differences of a capital nature; and
-- expenses, together with the related taxation effect,
allocated to capital in accordance with the above policies.
(d) Income
For financial instruments measured at amortised cost the
effective interest rate ("EIR") method is used to measure the
carrying value of a financial asset or liability and to allocate
associated interest income or expense over the relevant period. The
EIR is the rate that exactly discounts estimated future cash
payments or receipts through the expected life of the financial
instrument or, when appropriate, a shorter period to the net
carrying amount of the financial asset or financial liability.
In calculating the EIR, the Group estimates cash flows
considering all contractual terms of the financial instrument (for
example, early redemption penalty charges) but does not consider
future credit losses. The calculation includes all fees received
and paid and costs borne that are an integral part of the EIR and
all other premiums or discounts above or below market rates.
Once a financial asset or a group of similar financial assets
becomes credit impaired, interest income is recognised using the
rate of interest used to discount the future cash flows for the
purpose of measuring the impairment loss and is recognised over the
period to which the expected cash flows relate.
Dividend income from investments is taken to the revenue column
of the Consolidated Statement of Comprehensive Income on an
ex-dividend basis.
Bank interest and other income receivable are accounted for on
an accruals basis.
Fair value gains and losses arising from derivative instruments
are credited or charged to the Consolidated Statement of
Comprehensive Income.
(e) Expenses
Expenses are recognised on an accruals basis, on-going
operational expenses are detailed in Note 12. The basis of
calculation for the investment management and performance fees is
set out in Note 12 to the financial statements.
Following a review of the Consolidated Statement of
Comprehensive Income and Consolidated Statement of Financial
Position and the associated knock on effect on the Cashflow
Statement, the Directors have decided to re-present these
statements for 2018 and incorporate them in 2019. The changes made
to the face of these financial statements are to make them easier
to read and understand for the end user and to tie in with how the
Company Group monitors and reviews performance internally and
externally in other outputs. There have been no changes to the
basis on which the items are estimated or measured. This has
involved third party servicing being split out on the face of the
Consolidated Statement of Comprehensive Income given it is a
material number and better reflects how the business operates.
(f) Dividends payable to shareholders
Dividends to shareholders are accounted for in the period in
which the ex-dividend date falls. Dividends payable to shareholders
are recognised in the Consolidated Statement of Changes in Equity
on the ex-dividend date. Only revenue reserves and those from the
special distributable reserve will be distributed.
(g) Taxation
The tax payable is based on the taxable profit for the year.
Taxable profit differs from profit as reported in the Consolidated
Statement of Comprehensive Income because it excludes items of
income or expense that are taxable or deductible in other years and
it further excludes items that are never taxable or deductible. The
Group's liability for current tax is calculated using tax rates
that have been enacted or substantively enacted at the reporting
date.
In line with the recommendations of the SORP, the allocation
method used to calculate tax relief on expenses presented against
capital returns in the supplementary information in the
Consolidated Statement of Comprehensive Income is the "marginal
basis". Under this basis, if taxable income is capable of being
offset entirely by expenses presented in the revenue return column
of the Consolidated Statement of Comprehensive Income, then no tax
relief is transferred to the capital return column.
Deferred tax is the tax expected to be payable or recoverable on
temporary differences between the carrying amounts of assets and
liabilities in the consolidated financial statements and the
corresponding tax bases used in the computation of taxable profit,
and is accounted for using the liability method. Deferred tax
liabilities are recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised.
Investment trusts which have approval as such under section 1158
of the Corporation Taxes Act 2010 are not liable for taxation on
capital gains. The carrying amount of deferred tax assets is
reviewed at each reporting date and reduced to the extent that it
is no longer probable that sufficient taxable profits will be
available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset is
realised based on tax rates that have been enacted or substantively
enacted at the reporting date.
Deferred tax is charged or credited in the Consolidated
Statement of Comprehensive Income, except when it relates to items
charged or credited directly to equity, in which case the deferred
tax is also dealt with in equity.
(h) Financial assets and financial liabilities
(i) Financial assets
Classification and measurement
Financial assets and financial liabilities are recognised in the
Statement of Financial Position when the Group becomes a party to
the contractual provisions of the instrument. The Group shall
offset financial assets and financial liabilities if it has a
legally enforceable right to set off the recognised amounts and
interests and intends to settle on a net basis. Financial assets
and liabilities are derecognised when the Group settles its
obligations relating to the instrument.
IFRS 9 involves a principle-based approach and applies one
classification approach for all types of debt instruments. For Debt
Instruments, two criteria are used to determine how they should be
classified and measured: (a) the entity's business model (i.e. how
an entity manages its debt instruments in order to generate cash
flows by collecting contractual cash flows, selling debt
instruments or both); and (b) the contractual cash flow
characteristics of the financial asset (i.e. whether the
contractual cash flows are solely payments of principal and
interest).
A debt instrument is measured at amortised cost if it meets both
of the following conditions and is not designated as at fair value
through profit and loss ("FVTPL"): (a) it is held within a business
model whose objective is to hold assets to collect contractual cash
flows; and (b) its contractual terms give rise on specified dates
to cash flows that are solely payments of principal and interest on
the principal amount outstanding. The carrying amount of these
assets is adjusted by any expected credit loss allowance recognised
and measured as described further in this note.
A debt instrument is measured at fair value through other
comprehensive income ("FVOCI") if it meets both of the following
conditions and is not designated as at FVTPL: (a) it is held within
a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets; and (b) its
contractual terms give rise on specified dates to cash flows that
are solely payments of principal and interest on the principal
amount outstanding. Movements in the carrying amount are taken
through the Other Comprehensive Income ("OCI"), except for the
recognition of impairment gains or losses, interest revenue and
foreign exchange gains and losses on the investments amortised cost
which is recognised in the Consolidated Statement of Comprehensive
Income. When the financial asset is derecognised, the cumulative
gain or loss previously recognised in OCI is reclassified from
equity to the Consolidated Statement of Comprehensive Income and
recognised in 'Income'. Interest income from these financial assets
is included in 'Income' using the effective interest rate method
("EIRM").
The EIRM is a method of calculating the amortised cost of a
financial asset or financial liability and of allocating the
interest income or interest expense over the relevant period. The
effective interest rate ("EIR") is the rate that exactly discounts
estimated future cash flows through the expected life of the
financial instrument or, when appropriate, a shorter period to the
net carrying amount of the financial asset or financial liability.
When calculating the effective interest rate, the Group takes into
account all contractual terms of the financial instrument, for
example prepayment options, but does not consider future credit
losses. The calculation includes all fees paid or received between
parties to the contract that are an integral part of the effective
interest rate, transaction costs and all other premiums or
discounts. Fees and commissions which are not considered integral
to the EIRM and deposit interest income are recognised on an
accruals basis when the service has been provided or received.
Equity instruments are measured at FVTPL, unless they are not
held for trading purposes, in which case an irrevocable election
can be made on initial recognition to measure them at FVOCI with no
subsequent reclassification to the Consolidated Statement of
Comprehensive Income. This election is made on an investment by
investment basis. Equity instruments are instruments that meet the
definition of equity from the issuer's perspective; that is,
instruments that do not contain a contractual obligation to pay and
that evidence a residual interest in the issuer's net assets.
Examples of equity instruments include basic ordinary shares.
All financial assets not classified as measured at amortised
cost or FVOCI as described above are measured at FVTPL. Financial
assets measured at FVTPL are recognised in the Consolidated
Statement of Financial Position at their fair value. Fair value
gains and losses together with interest coupons and dividend income
are recognised in the income statement within net trading income in
the period in which they occur. The fair values of assets and
liabilities traded in active markets are based on current bid and
offer prices respectively. If the market is not active the Group
establishes a fair value by using valuation techniques. In
addition, on initial recognition the Group may irrevocably
designate a financial asset that otherwise meets the requirements
to be measured at amortised cost or at FVOCI as FVTPL if doing so
eliminates or significantly reduces an accounting mismatch that
would otherwise arise. Refer to Note 2(h)(ii) for further details
on financial liabilities.
Business model assessment
The Group has made an assessment of the objective of the
business model in which a financial asset is held at a portfolio
level in order to generate cash flows because this best reflects
the way the business is managed and information is provided to the
Board by the Investment Manager. That is, whether the Group's
objective is solely to collect the contractual cash flows from the
assets or is to collect both the contractual cash flows and cash
flows arising from the sale of assets. If neither of these are
applicable, then the financial assets are classified as part of the
other business model and measured at FVTPL.
The information considered by the Group in determining the
business model includes:
-- The stated policies and objectives for the portfolio and the
operation of those policies in practice, including whether the
strategy focuses on earning contractual interest revenue,
maintaining a particular interest rate profile, matching duration
of the financial assets to the duration of the liabilities that are
funding those assets or realising cash flows through the sale of
assets;
-- Past experience on how the cash flows for these assets were collected;
-- How the performance of the portfolio is evaluated and reported to the Board;
-- The risks that affect the performance of the business model
(and the financial assets held within that business model) and how
those risks are managed; and
-- The frequency, volume and timing of sales in prior periods,
the reasons for such sales and expectations about future sales
activity. However, information about sales activity is not
considered in isolation, but as part of an overall assessment of
how the Investment Manager's stated objective for managing the
financial assets is achieved and how cash flows are realised.
Assessment whether contractual cash flows are solely payments of
principal and interest
For the purposes of this assessment, 'principal' is defined as
the fair value of the financial asset on initial recognition.
'Interest' is defined as consideration for the time value of money,
for the credit risk associated with the principal amount
outstanding during a particular period of time and for other basic
lending risks and costs (e.g. liquidity risk and administrative
costs), as well as a reasonable profit margin.
In assessing whether the contractual cash flows are solely
payments of principal and interest, the contractual terms of the
instrument are considered to see if the contractual cash flows are
consistent with a basic lending arrangement. In making the
assessment, the following features are considered:
-- Contingent events that would change the amount and timing of cash flows;
-- Leverage features;
-- Prepayment and extension terms;
-- Terms that limit the Group's claim to cash flows from specified assets e.g. non-recourse asset arrangements; and
-- Features that modify consideration for the time value of
money, e.g. periodic reset of interest rates.
The Group reclassifies debt investments when and only when its
business model for managing those assets changes. The
reclassification that has taken place forms the start of the first
reporting period following the change. Such changes are expected to
be very infrequent.
Deemed loans
The deemed loans are a non-derivative financial liability with
fixed or determinable repayments that are not quoted in an active
market. Deemed loans in relation to the Company relate to loans
originated by the Company and subsequently securitised in a special
purpose entity to reduce the cost of borrowing. Although the loans
are no longer legally owned by the Company, the Company maintains
the economic risk and reward of the underlying assets and therefore
does not meet the criteria to derecognise. Derecognition cannot be
achieved by merely transferring the legal title of a financial
asset to another party. The substance of the arrangement must be
assessed in order to determine whether an entity has transferred
the economic exposure associated with the rights inherent in the
asset.
Loans and related transaction costs are measured at initial
recognition at fair value and are subsequently measured at
amortised cost using the EIRM. International accounting standards
("IAS") makes it clear that assets should only appear on one
statement of financial position. IFRS require a reporting entity,
as part of the derecognition assessment, to consider whether the
transfer includes a transfer to a consolidated subsidiary.
Derecognition cannot be achieved by merely transferring the legal
title to a financial asset to another party. The substance of the
arrangement must be assessed in order to determine whether an
entity has transferred the economic exposure associated with the
rights inherent in the asset (i.e., its risks and rewards) and, in
some cases, control of those rights.
In the case of the Company, it has not met the requirements of
derecognition in relation to the deemed loans given the economic
exposure associated with the rights inherent in the assets (i.e.,
its risks and rewards), have been retained. As such the Company
fails to meet the requirements for derecognition and continues to
recognise the financial assets and as such has a deemed loans
liability to the to the relevant special purpose entity. At a
consolidated Group level, the deemed liability is eliminated.
Purchases and sales of financial assets
Purchases and sales of financial assets are accounted for at
trade date. Financial assets are derecognised when the rights to
receive cash flows have expired or where the assets have been
transferred and substantially all of the risks and rewards of
ownership have been transferred.
Impairment
The impairment charge in the consolidated statement of
comprehensive income includes the change in expected credit losses
which are recognised for loans and advances to customers, other
financial assets held at amortised cost and certain loan
commitments.
IFRS 9 applies a single impairment model to all financial
instruments subject to impairment testing. Impairment losses are
recognised on initial recognition, and at each subsequent reporting
period, even if the loss has not yet been incurred. In addition to
past events and current conditions where there has been a change in
credit risk, reasonable and supportable forecasts affecting
collectability are also considered when determining the amount of
impairment in accordance with IFRS 9.
At initial recognition, allowance is made for expected credit
losses resulting from default events that are possible within the
next 12 months (12-month expected credit losses). In the event of a
significant increase in credit risk, allowance (or provision) is
made for expected credit losses resulting from all possible default
events over the expected life of the financial instrument (lifetime
expected credit losses). Financial assets where 12-month expected
credit losses are recognised are considered to be Stage 1;
financial assets which are considered to have experienced a
significant increase in credit risk are in Stage 2; and financial
assets which have defaulted or are otherwise considered to be
credit impaired are allocated to Stage 3.
The measurement of expected credit losses is primarily based on
the product of the instrument's probability of default ("PD"), loss
given default ("LGD"), and exposure at default ("EAD"), taking into
account the value of any collateral held or other mitigants of loss
and including the impact of discounting using the EIR.
-- The PD represents the likelihood of a borrower defaulting on
its financial obligation, either over the next 12 months ("12M
PD"), or over the remaining lifetime ("Lifetime PD") of the
obligation.
-- EAD is based on the amounts the Group expects to be owed at
the time of default, over the next 12 months ("12M EAD") or over
the remaining lifetime ("Lifetime EAD"). For example, for a
revolving commitment, the Group includes the current drawn balance
plus any further amount that is expected to be drawn up to the
current contractual limit by the time of default, should it
occur.
-- LGD represents the Group's expectation of the extent of loss
on a defaulted exposure. LGD varies by type of counterparty, type
and seniority of claim and availability of collateral or other
credit support. LGD is expressed as a percentage loss per unit of
exposure at the time of default. LGD is calculated on a 12-month or
lifetime basis, where 12-month LGD is the percentage of loss
expected to be made if the default occurs in the next 12 months and
Lifetime LGD is the percentage of loss expected to be made if the
default occurs over the remaining expected lifetime of the
loan.
The estimated credit loss ("ECL") is determined by estimating
the PD, LGD, and EAD for each individual exposure or collective
segment. These three components are multiplied together and
adjusted for the likelihood of survival (i.e. the exposure has not
prepaid or defaulted in an earlier month). This effectively
calculates an ECL, which is then discounted back to the reporting
date and summed. The discount rate used in the ECL calculation is
the original EIR or an approximation thereof. The Lifetime PD is
developed by applying a maturity profile to the current 12M PD. The
maturity profile looks at how defaults develop on a portfolio from
the point of initial recognition throughout the lifetime of the
loans. The maturity profile is based on historical observed data
and is assumed to be the same across all assets within a portfolio
and credit grade band where supported by historical analysis. The
12-month and lifetime EADs are determined based on the expected
payment profile, which varies by product type.
-- For revolving products, the exposure at default is predicted
by taking current drawn balance and adding a "credit conversion
factor" which allows for the expected drawdown of the remaining
limit by the time of default. These assumptions vary by product
type and current limit utilisation band, based on analysis of the
Group's recent default data;
-- The 12-month and lifetime LGDs are determined based on the
factors which impact the recoveries made post default. These vary
by product type;
-- For secured products, this is primarily based on collateral
type and projected collateral values, historical discounts to
market/book values due to forced sales, time to repossession and
recovery costs observed; and
-- For unsecured products, LGD's are typically set at product
level due to the limited differentiation in recoveries achieved
across different borrowers. These LGD's are influenced by
collection strategies, including contracted debt sales and
price.
The main difference between Stage 1 and Stage 2 is the
respective PD horizon. Stage 1 estimates use a maximum of a
12-month PD, while Stage 2 estimates use a lifetime PD. The main
difference between Stage 2 and Stage 3 is Stage 3 is effectively
the point at which there has been a default event. For financial
assets in stage 3, entities continue to recognise lifetime ECL but
they now recognise interest income on a net basis. This means that
interest income is calculated based on the gross carrying amount of
the financial asset less ECL.
Movements between Stage 1 and Stage 2 are based on whether an
instrument's credit risk as at the reporting date has increased
significantly relative to the date it was initially recognised.
Where the credit risk subsequently improves such that it no longer
represents a significant increase in credit risk since origination,
the asset is transferred back to Stage 1.
In assessing whether a borrower has a significant increase in
credit risk the following indicators are considered:
-- Unsecured
- Short-term forbearance; and
- Extension of terms granted.
-- Structured and Property
- Significant increase in credit spread;
- Significant adverse changes in business, financial and/or
economic conditions in which the borrower operates;
- Actual or expected forbearance or restructuring;
- Actual or expected significant adverse change in operating results of the borrower;
- Significant change in collateral value (secured facilities
only) which is expected to increase the risk of default; and
- Early signs of cashflow/liquidity problems such as delay in servicing of trade creditors.
However, as a backstop, unless identified at an earlier stage,
the credit risk of financial assets is deemed to have increased
significantly when repayments are more than 30 days past due.
Movements between Stage 2 and Stage 3 are based on whether
financial assets are credit-impaired as at the reporting date.
Assets can move in both directions through the stages of the
impairment model.
In assessing whether a borrower is credit impaired the following
qualitative indicators are considered:
-- Unsecured
- Long-term forbearance;
- Borrower deceased; and
- Borrower insolvent.
-- Structured and Property
- Borrower in breach of financial covenants;
- Concessions have been made by the lender relating to the borrower's financial difficulty;
- Significant adverse changes in business, financial or economic
conditions on which the borrower operates; and
- Long-term forbearance or restructuring.
In assessing whether a borrower is credit impaired the following
quantitative indicator is considered:
- The remaining lifetime PD at the reporting date has increased,
compared to the residual lifetime PD expected at the reporting date
when the exposure was first recognised.
The criteria for determining whether credit risk has increased
significantly varies by portfolio and includes a backstop based on
delinquency. IFRS 9 contains a rebuttable presumption that default
occurs no later than when a payment is 90 days past due. The Group
uses this 90 day backstop for all its non-real estate and
non-structured lending as these assets typically show low recovery
rates past this point. For structured and real-estate lending the
key identifiable presumption for default occurring is a breach of
covenant or another event of default (e.g. deterioration in
underlying assets or corporate) and this is analysed on a case by
case basis.
These criteria have been applied to all financial instruments
held at amortised cost and are consistent with the definition of
default used for internal credit risk management purposes. The
default definition has been applied consistently to model the PD,
EAD and LGD throughout the Group's expected credit loss
calculations. Inputs into the assessment of whether a financial
instrument is in default and their significance may vary over time
to reflect changes in circumstances.
The measurement of expected credit losses for each stage and the
assessment of significant increases in credit risk considers
information about past events and current conditions as well as
reasonable and supportable forward-looking information. A 'Base
case' view of the future direction of relevant economic variables
and a representative range of other possible forecasts scenarios
have been developed. The process has involved developing two
additional economic scenarios and considering the relative
probabilities of each outcome.
The Base case represents a most likely outcome and is aligned
with information used for other purposes, such as strategic
planning and budgeting. The number of scenarios and their
attributes are reassessed at each reporting date. At 31 December
2019, all the portfolios of the Group use one positive, more
optimistic and one downside, more pessimistic outcome. The scenario
weightings are determined by a combination of statistical analysis
and expert credit judgement, taking account of the range of
possible outcomes each chosen scenario is representative of.
The estimation and application of forward-looking information
requires significant judgement. PD, LGD and EAD inputs used to
estimate Stage 1 and Stage 2 credit loss allowances, are modelled
and adjusted based on the macroeconomic variables (or changes in
macroeconomic variables) that are most closely correlated with
credit losses in the relevant portfolio. The Group has utilised
macroeconomic scenarios for each relevant jurisdiction (the most
important of which are the UK and the US) prepared and provided by
Oxford Economics. Oxford Economics combines two decades of forecast
errors with the quantitative assessment of the current and future
risks facing the global and domestic economy to produce robust
forward-looking distributions for the economy. Oxford Economics
construct three alternative scenarios at specific percentile points
in the distribution. In any distribution, the probability of a
given discrete scenario is close to zero. Therefore, scenario
probabilities represent the probability of that scenario or similar
scenarios occurring. In effect, a given scenario represents the
average of a broader bucket of similar severity scenarios and the
probability reflects the width of that bucket. Given that it is
known where the IFRS 9 scenarios sit in the distribution (the
percentiles), their probability (the width of the bucket of similar
scenarios) will depend on how many scenarios are chosen. Scenario
probabilities must add up to 100 per cent so the more scenarios
chosen, the smaller the section of the distribution, or bucket,
each scenario represents and therefore the smaller the probability.
This allows the probabilities to be calculated according to
whichever subset of scenarios chosen to use in the ECL calculation.
The scenarios are generated at the year-end and are only updated
during the year if economic conditions change significantly. The
Base case is given a 40 per cent weighting and the downside and
upside a 30 per cent weighting each. These weightings specifically
relate to the period 1 January 2019 to 31 December 2019.
As with any economic forecasts, the projections and likelihoods
of occurrence are subject to a high degree of inherent uncertainty
and therefore the actual outcomes may be significantly different to
those projected. The Group considers these forecasts to represent
its best estimate of the possible outcomes and has analysed the
non-linearities and asymmetries within the Group's different
portfolios to establish that the chosen scenarios are appropriately
representative of the range of possible scenarios.
Other forward-looking considerations not otherwise incorporated
within the above scenarios, such as the impact of any regulatory,
legislative or political changes, have also been considered, but
are not deemed to have a material impact and therefore no
adjustment has been made to the ECL for such factors. This is
reviewed and monitored for appropriateness on an annual basis. The
impact of the downside scenario can be seen on page 121.
COVID-19 has caused disruption to businesses and economic
activity which has been reflected in recent fluctuations in global
stock markets. There are no comparable recent events which may
provide guidance as to the effect of the spread of COVID-19 and a
potential pandemic, and, as a result, the ultimate impact of the
COVID-19 outbreak or a similar health epidemic is highly uncertain
and subject to change. The Board considers the emergence and spread
of COVID-19 to be a non-adjusting post balance sheet event. Given
the Group's UK and US focus, its performance is linked to the
health of these economies. We expect the Group could experience
further impairments and consequently reduced profits, particularly
if economic expectations deteriorate further. However, the overall
effect of this cannot be quantified reliably because the impact of
the UK government's various support initiatives and the US
government's COVID-19 Stimulus Bill is not yet known, but they are
expected to reduce the potential expected credit loss impact. The
Investment Manager has adopted a prudent approach with the focus on
the existing portfolio and ensuring cash collections remain robust
as the appropriate strategies are in place. The legacy book
continues to run off, whilst performance of this book has been poor
to date and it is expected that impairments will increase over the
coming months, the loans are now well seasoned.
Write offs
The Group is not in possession of personal identifiable
information on borrowers and therefore generally restricts itself
to writing off on the basis of observed payment records (or lack
thereof). The assumption is that even after a loan has been placed
into default, there will likely be ongoing collections efforts.
Also, any sales to debt collection agencies typically take some
time to execute. Therefore, an unsecured consumer loan is normally
written off when 120 days have elapsed without a payment being
made, and the loan has been in a defaulted state throughout this
period. Unsecured SME loans often have a lengthier legal process
before collections can be made from any guarantors, so such a loan
is written off when 240 days have elapsed without a payment being
made, and the loan has been in a defaulted state throughout this
period. Secured loans are written off when the proceeds from
realising any available collateral have been received or where
there is no realistic prospect of recovery and the amount of the
loss has been determined. Subsequent recoveries of amounts
previously written off decrease the amount of impairment losses
recorded in the Consolidated Statement of Comprehensive Income.
When the Group becomes aware of special circumstances that make
any further collections unlikely (such as fraud, insolvency, or
deceased with no known executors or next of kin), a decision may be
made to write off a loan earlier than after the periods indicated
above.
Collateral and other credit enhancements
The Group employs a range of policies to mitigate credit risk.
The most common of these is accepting collateral for funds
advanced.
The Group has internal policies of the acceptability of specific
classes of collateral or credit risk mitigation.
The Group prepares a valuation of the collateral obtained as
part of the loan origination process. This assessment is reviewed
periodically. The principal collateral types for loans and advances
are:
-- Mortgages over residential properties;
-- Margin agreement for derivatives, for which the Group has
also entered into master netting agreements;
-- Charges over business assets such as premises, inventory and accounts receivable; and
-- Charges over financial instruments such as debt securities and equities.
Longer-term finance and lending to corporate entities are
generally secured; revolving individual credit facilities are
generally unsecured.
Collateral held as security for financial assets other than
loans and advances depends on the nature of the instrument.
Derivatives are also collateralised.
The Group's policies regarding obtaining collateral have not
significantly changed during the reporting period and there has
been a focus on increasing the quality and quantity of the
collateral held by the Group.
The Group closely monitors collateral held for financial assets
considered to be credit-impaired, as it becomes more likely that
the Group will take possession of collateral to mitigate potential
credit losses.
Modification of financial assets
The Group sometimes modifies the terms or loans provided to
customers due to commercial renegotiations, or for distressed
loans, with a view to maximising recovery.
Such restructuring activities include extended payment term
arrangements, payment holidays and payment forgiveness.
Restructuring policies and practice are based on indicators or
criteria which, in the judgement of management, indicate that
payment will most likely continue. These policies are kept under
continuous review. Restructuring is most commonly applied to term
loans.
The risk of default of such assets after modification is
assessed at the reporting date and compared with the risk under the
original terms at initial recognition, when the modification is not
substantial and so does not result in derecognition of the original
assets. The Group monitors the subsequent performance of modified
assets. The Group may determine that the credit risk has
significantly improved after restructuring, so that the credit loss
Stage the asset sits in is reduced.
Modification of loans
The Group sometimes renegotiates or otherwise modifies the
contractual cash flows of loans to customers. When this happens,
the Group assesses whether or not the new terms are substantially
different to the original terms. The Group does this by
considering, among others, the following factors:
-- If the borrower is in financial difficulty, whether the
modification merely reduces the contractual cash flows to amounts
the borrower is expected to be able to pay;
-- Whether any substantial new terms are introduced, such as a
profit share/equity-based return that substantially affects the
risk profile of the loan;
-- Significant extension of the loan term when the borrower is not in financial difficulty;
-- Significant change in the interest rate;
-- Change in the currency the loan is denominated in; and
-- Insertion of collateral, other security or credit
enhancements that significantly affect the credit risk associated
with the loan.
If the terms are substantially different, the Group derecognises
the original financial asset and recognises a 'New' asset at fair
value and recalculates a new EIR for the asset. The date of
renegotiation is consequently considered to be the date of initial
recognition for impairment calculation purposes, including for the
purpose of determining whether a significant increase in credit
risk has occurred. However, the Group also assesses whether the new
financial asset recognised is deemed to be credit-impaired at
initial recognition, especially in circumstances where the
renegotiation was driven by the debtor being unable to make the
originally agreed payments. Differences in the carrying amounts are
also recognised in the Consolidated Statement of Comprehensive
Income as a gain or loss on derecognition.
If the terms are not substantially different, the renegotiation
or modification does not result in derecognition, and the Group
recalculates the gross carrying amount based on the revised cash
flows of the financial asset and recognises a modification gain or
loss in the Consolidated Statement of Comprehensive Income. The new
gross carrying amount is recalculated by discounting the modified
cash flows at the original EIR (or credit-adjusted EIR for
purchased or originated credit-impaired financial assets).
Derecognition other than a modification
Financial assets, or a portion thereof, are derecognised when
the contractual rights to receive the cash flows from the assets
have expired, or when they have been transferred and either (i) the
Group transfers substantially all the risks and rewards of
ownership, or (ii) the Group has not retained control.
The Group enters into transactions where it retains the
contractual rights to receive cash flows from assets but assumes a
contractual obligation to pay those cash flows to other entities
and transfers substantially all of the risks and rewards. These
transactions are accounted for as 'pass through' transfers that
result in derecognition if the Group:
-- Has no obligation to make payments unless it collects equivalent amounts from the assets;
-- Is prohibited from selling or pledging the assets; and
-- Has an obligation to remit any cash it collects from the assets without material delay.
Collateral (cash, shares and bonds) furnished by the Group under
standard repurchase agreements and securities lending and borrowing
transactions are not derecognised because the Group retains
substantially all the risks and rewards on the basis of the
predetermined repurchase price, and the criteria for derecognition
are therefore not met. This also applies to certain securitisation
transactions in which the Group retains a subordinated residual
interest.
(ii) Financial liabilities
Classification and subsequent measurement
In both the current year and prior year, financial liabilities
are classified and subsequently measured at amortised cost, except
for:
-- Financial liabilities at fair value through profit or loss:
this classification is applied to derivatives, financial
liabilities held for trading (e.g. short positions in the trading
booking) and other financial liabilities designated as such at
initial recognition. Gains or losses on financial liabilities
designated at fair value through profit or loss are presented
partially in other comprehensive income (the amount of change in
the fair value of the financial liability that is attributable to
changes in the credit risk of that liability, which is determined
as the amount that is not attributable to change in market
conditions that give rise to market risk) and partially profit or
loss (the remaining amount of change in the fair value of the
liability). This is unless such a presentation would create, or
enlarge, an accounting mismatch, in which case the gains and losses
attributable to changes in the credit risk of the liability are
also presented in the Consolidated Statement of Comprehensive
Income. There were none in the year ended 31 December 2019 (2018:
none);
-- Financial liabilities arising from the transfer of financial
assets which did not qualify for derecognition, whereby a financial
liability is recognised for the consideration received for the
transfer. In subsequent periods, the Group recognises any expense
incurred on the financial liability; and
-- Financial liabilities are derecognised when the obligation is
discharged, cancelled or has expired.
Modification of a financial liability
The Group sometimes renegotiates or otherwise modifies the
contractual cash flows of its financial liabilities. When this
happens, the Group assesses whether or not the new terms are
substantially different to the original terms. The Group does this
by considering, among others, the following factors:
-- Whether the modification merely reduces the contractual cash flows;
-- Whether any substantial new terms are introduced that
substantially affects the risk profile of the liability;
-- Significant extension of the term;
-- Significant change in the interest rate;
-- Change in the currency the liability is denominated in; and
-- Insertion of collateral, other security or credit
enhancements that significantly affect the credit risk associated
with the liability.
If the terms are substantially different, the Group derecognises
the original financial liability and recognises a 'New' liability
at fair value and recalculates a new EIR for the liability. If the
terms are not substantially different, the renegotiation or
modification does not result in derecognition, and the Group
recalculates the gross carrying amount based on the revised cash
flows of the financial liability and recognises a modification gain
or loss in the Consolidated Statement of Comprehensive Income.
(iii) Derivatives
Derivatives are entered into to reduce exposures to fluctuations
in interest rates, exchange rates, market indices and credit risk
and are not used for speculative purposes.
Derivatives are carried at fair value with movements in fair
values recorded in the Consolidated Statement of Comprehensive
Income. Derivative financial instruments are valued using
discounted cash flow models using yield curves that are based on
observable market data or are based on valuations obtained from
counterparties.
All derivatives are classified as assets where their fair value
is positive and liabilities where their fair value is negative.
Where there is the legal ability and intention to settle net, then
the derivative is classified as a net asset or liability, as
appropriate.
(iv) Other receivables
Other receivables do not carry any interest and are short-term
in nature and are accordingly stated at their nominal value as
reduced by estimated credit losses for irrecoverable amounts (if
any). Given their short-term nature a lifetime ECL is not deemed
material as expected life is less than a month.
(i) Cash and cash equivalents
Cash comprises cash on hand and demand deposits. Cash
equivalents are short-term, highly liquid investments with a
maturity of 3 months or less that are readily convertible to known
amounts of cash and are subject to insignificant changes in fair
value.
(j) Current liabilities
Current liabilities, other than derivatives, are not
interest-bearing and are stated at the nominal value.
(k) Shares
Ordinary and treasury shares are classified as equity. The costs
of issuing or acquiring equity are recognised in equity (net of any
related income tax benefit), as a reduction of equity on the
condition that these are incremental costs directly attributable to
the equity transaction that otherwise would have been avoided.
The costs of an equity transaction that is abandoned are
recognised as an expense. Those costs might include registration
and other regulatory fees, legal fees, accounting and other
professional advisers, printing costs and stamp duties.
The Group's equity NAV per unit is calculated by dividing the
equity less net assets attributable to the holder of redeemable
shares divided by the total number of outstanding shares.
Treasury shares have no entitlements to vote and are held
directly by the Company.
(l) Capital reserves
Capital reserve arising on investments sold includes:
-- gains/losses on disposal of investments;
-- exchange differences on currency balances and on settlement of loan balances;
-- cost of own shares bought back; and
-- other capital charges and credits charged to this account in
accordance with the accounting policies above.
Capital reserve arising on investments held includes:
-- increases and decreases in the valuation of investments held at the year end.
All of the above are accounted for in the Consolidated Statement
of Comprehensive Income except the cost of own shares bought back
which is accounted for directly against reserves, and reported in
the Consolidated Statement of Changes in Shareholders' Funds.
(m) Segmental reporting
The Board and Investment Manager consider investment activity in
Credit Assets and selected Equity Assets as the single operating
segment of the Group, being the sole purpose for its existence. No
other activities are performed. Whilst visibility over
originations, portfolios, structured facilities and equity assets
is afforded at an operational level, all are considered 'routes to
market' for acquiring interests in credit assets, and thus act
merely as indicators of the key drivers of financial performance
and position of the Group. The four routes to market are not
determinants of resource allocations, rather each investment
opportunity is considered on its own merits. Additionally, there
are no segment managers directly accountable for the individual
routes to market. The Directors are of the opinion that the Group
is engaged in a single segment of business.
3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES
The preparation of financial statements in conformity with IFRS
adopted in the EU requires the Group to make judgements and
estimates that affect the application of accounting policies and
the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and
expenses during the reporting period. UK company law and IFRS
require the Directors, in preparing the Group's consolidated
financial statements, to select suitable accounting policies, apply
them consistently and make judgements and estimates that are
reasonable. The Group's estimates and assumptions are based on
historical experience and expectations of future events and are
reviewed on an ongoing basis. Although these estimates are based on
the Directors' best knowledge of the amount, actual results may
differ ultimately from those estimates.
The critical judgements relate to the application of
consolidation accounting principles, and within the Company, the
treatment of asset derecognition and deemed loans. These have been
explained below as well as in the accounting policies section of
the Notes.
The estimates of most significance to the financial statements,
are in relation to EIR, expected credit losses and investments at
fair value through profit or loss. These are detailed below.
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the
period in which the estimates are revised and in any future periods
affected.
ECL allowance for financial assets measured at amortised cost
(estimate)
The calculation of the Group's ECL allowances and provisions
against loan commitments and guarantees under IFRS 9 involves the
use of a significant degree of estimation. This includes the
formulation and incorporation of multiple forward-looking economic
conditions into ECL to meet the measurement objective of IFRS 9.
The most significant areas are set out below.
Definition of default
The PD of an exposure, both over a 12-month period and over its
lifetime, is a key input to the measurement of the ECL allowance.
Default has occurred when there is evidence that the customer is
experiencing significant financial difficulty which is likely to
affect the ability to repay amounts due. The Group has not rebutted
the presumption in IFRS 9 that default occurs no later than when a
payment is 90 days past due except for structured or real estate
instruments. The definition has been rebutted in these cases based
on the Group's historical loss experiences of these instruments and
the underlying collateral available to the Group.
The lifetime of an exposure
To derive the PDs necessary to calculate the ECL allowance it is
necessary to estimate the expected life of each financial
instrument. A range of approaches has been adopted across different
product groupings including the full contractual life and taking
into account behavioural factors such as expected early repayments
and refinancing. The Group has defined the lifetime for each
product by analysing the time taken for all losses to be observed
and for a material proportion of the assets to fully resolve
through either closure or write-off.
Significant increase in credit risk ('SICR')
Assets are transferred from Stage 1 to Stage 2 when there has
been an SICR since initial recognition. As described further above,
the Group uses a quantitative test together with qualitative
indicators and a backstop of 30 days past due for determining
whether there has been a SICR for all instruments that are not
structured or real-estate backed. The setting of precise SICR
thresholds for when an asset displays a SICR combined with risk
indicators requires judgement. The use of different SICR thresholds
may have a material impact upon the size of the ECL allowance.
Forward looking information
The measurement of ECL's is required to reflect an unbiased
probability-weighted range of possible future outcomes. In order to
do this the Group uses a model to project a number of key variables
to generate future economic scenarios. These are ranked according
to severity of loss and three economic scenarios have been selected
to represent an unbiased and full loss distribution. They represent
a 'most likely outcome' (the Base case scenario) and two, less
likely, 'outer' scenarios, referred to as the 'Upside' and
'Downside' scenarios. These scenarios are used to produce a
weighted average PD for each product grouping which is used to
determine stage allocation and calculate the related ECL allowance.
This weighting scheme is deemed appropriate for the computation of
unbiased ECL. Key scenario assumptions are set using the average of
forecasts from external economists, Oxford Economics, helping to
ensure the IFRS 9 scenarios are unbiased and maximise the use of
independent information. Using externally available forecast
distributions helps ensure independence in scenario construction.
While key economic variables are set with reference to external
distributional forecasts, we also align the overall narrative of
the scenarios to the macroeconomic risks faced by the Group.
The choice of alternative scenarios and probability weighting is
a combination of quantitative analysis and judgemental assessments,
designed to ensure that the full range of possible outcomes and
material non-linearity are captured. Paths for the two outer
scenarios are benchmarked to the Base scenario and reflect the
economic risk assessment. Scenario probabilities reflect management
judgement and are informed by data analysis of past recessions,
transitions in and out of recession, and the current economic
outlook. The key assumptions made, and the accompanying paths,
represent our 'best estimate' of a scenario at a specified
probability. Suitable narratives are developed for the Central
scenario and the paths of the two outer scenarios. Using three
scenarios will be insufficient in certain economic environments.
Additional analysis may be requested at management's discretion,
including the production of extra scenarios. We anticipate there
will be only limited instances when the standard approach will not
apply. The Base case, Upside and Downside scenarios are generated
annually and those described herein reflect the conditions in place
at the balance sheet date, and are only updated during the year if
economic conditions change significantly.
UK mild Upside scenario can be seen as an alternative base case
in which the cyclical momentum in demand in the UK and other
economies is stronger than currently thought, reflecting in part
improved business, household and investor sentiment and more
buoyant global trade. The scenario sees UK GDP growth rate rise to
2.3 per cent over the next five years. With a key driver being a
swift resolution of ongoing Brexit uncertainty, especially should
that entail a significant shift toward a "soft" Brexit where the UK
opts to remain a member of the single market. Consequently,
unemployment falls slightly to around 3.2 per cent.
Against this backdrop, gearing in the economy remains at
comfortable levels and asset prices appreciate significantly. The
benign probability of default and loss given default mean that loan
losses are likely to remain well below long run averages.
The Company's UK Downside scenario sees UK GDP growth averaging
0.5 per cent per annum over the next five years. The UK enters
recession during 2020, but the 1.6 per cent contraction in output
is very mild by historical standards and the UK economy then
gradually recovers.
In the scenario, unemployment rises to just above 6 per cent by
2022 Q4, wage growth slows and inflation falls well below target.
Despite lower interest rates, increased unemployment introduces
forced sellers into the residential property market. House prices
fall sharply, by over 16 per cent peak-to-trough. While commercial
property prices also fall, the peak to trough adjustment is around
one third of the size of that seen for residential house prices.
The relative magnitude of the falls in this scenario, reflect the
relative valuation positions of the two markets - whereas aggregate
UK house prices remain dear when compared to incomes, commercial
property prices are more in line with fair value having peaked in
end-2015.
2019 Base Upside Downside
===================== ===== ====== ========
UK Real GDP Growth 1.61% 2.85% (0.43)%
UK unemployment rate 3.92% 3.78% 4.96%
UK HPI 0.15% 3.78% (7.13)%
UK Base Rate 1.86% 2.60% 0.52%
2018 Base Upside Downside
===================== ===== ====== ========
UK Real GDP Growth 1.84% 2.54% 1.02%
UK unemployment rate 4.02% 3.34% 5.30%
UK HPI 2.32% 5.08% (0.86%)
UK Base Rate 1.50% 1.77% 0.61%
Please see Note 11 for sensitivity analysis.
Valuation of unquoted investments (estimate)
The valuation of unquoted investments and investments for which
there is an inactive market is a key area of estimation and may
cause material adjustment to the carrying value of those assets and
liabilities. These are valued in accordance with the techniques set
out in Note 2(h). The unquoted equity assets are valued on periodic
basis using techniques including a market approach, costs approach
and/or income approach. The valuation process is collaborative,
involving the finance and investment functions within the
Investment Manager with the final valuations being reviewed by the
Audit Committee. The specific techniques used typically include
earnings multiples, discounted cash flow analysis, the value of
recent transactions, and, where appropriate, industry rules of
thumb. The valuations often reflect a synthesis of a number of
different approaches in determining the final fair value estimate.
The individual approach for each investment will vary depending on
relevant factors that a market participant would take into account
in pricing the asset. These might include the specific industry
dynamics, the company's stage of development, profitability, growth
prospects or risk as well as the rights associated with the
particular security. Please see Note 5 for sensitivity analysis.
Investments in subsidiaries are also held at fair value on the
Company's Statement of Financial Position. These subsidiaries are
calculated on a net asset value. This involves directly measuring
the fair value of the recognised and unrecognised assets and
liabilities.
Consolidation (judgement)
Determining whether the Group has control of an entity is
generally straightforward when based on ownership of the majority
of the voting capital. However, in certain instances, this
determination will involve significant judgement, particularly in
the case of structured entities such as MOCA 2017 and SBOLT 2019
where voting rights are often not the determining factor in
decisions over the relevant activities. This judgement may involve
assessing the purpose and design of the entity. It will also often
be necessary to consider whether the Group, or another involved
party with power over the relevant activities, is acting as a
principal in its own right or as an agent on behalf of others.
4. FAIR VALUE MEASUREMENT
Financial instruments measured and reported at fair value are
classified and disclosed in one of the following fair value
hierarchy levels based on the significance of the inputs used in
measuring its fair value:
Level 1 - Quoted prices (unadjusted) in active markets for
identical assets and liabilities.
Level 2 - Inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly (as
prices) or indirectly (derived from prices).
Level 3 - Pricing inputs for the asset or liability that are not
based on observable market data (unobservable inputs).
An investment is always categorised as Level 1, 2 or 3 in its
entirety. In certain cases, the fair value measurement for an
investment may use a number of different inputs that fall into
different levels of the fair value hierarchy. In such cases, an
investment's level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement. The assessment of the significance of a particular
input to the fair value measurement requires judgement and is
specific to the investment.
Level 3 investment in a fixed income security issued by a fund
is valued based on the NAV as calculated by the fund's
Administrator at the balance sheet date. The constitutional and
offering documentation of the fund sets out the valuation
methodology, the applicable generally accepted accounting
principles and the frequency, by which its assets are to be valued
and the NAV are to be calculated. No adjustments have been
determined to be necessary to the NAV as supplied by the
Administrator as this reflects the fair value of the underlying
investments under the relevant valuation methodology. The NAV is
the value of all the assets of the fund less its liabilities to
creditors (including provisions for such liabilities) determined in
accordance with applicable accounting standards. The NAV of the
fund is sensitive to movements in interest rates due to its
investment in fixed rate loans.
The other investments in fixed income securities included within
Level 3 of the hierarchy are valued based on, if available, recent
transactions and otherwise broker quotes. The investments in
unquoted equities are valued using several different techniques,
primarily recent transactions and recent rounds of funding by the
investee entities.
The Group's Level 2 positions are valued by the Administrator,
acting in their capacity as the External Valuer, in accordance with
the valuation policy. Fixed income positions are valued using
prices from an independent market data provider. Forward foreign
exchange contracts are valued using interpolated FX forward points
from Bloomberg. The option contracts are valued using yield curves
from Bloomberg.
The following table analyses within the fair value hierarchy the
Group's assets and liabilities measured at fair value at 31
December 2019:
Group Total Level 1 Level 2 Level 3
GBP'000 GBP'000 GBP'000 GBP'000
=========================== ======== ======== ======== ========
Investment assets
at fair value through
profit or loss
Fixed income 773 - - 773
Unquoted equities 22,578 - - 22,578
Equities 1,006 1,006 - -
=========================== ======== ======== ======== ========
Total 24,357 1,006 - 23,351
=========================== ======== ======== ======== ========
Derivative financial
assets
Forward foreign
exchange contracts 3,509 - 3,509 -
Interest rate derivatives 77 - 77 -
Total 3,586 - 3,586 -
=========================== ======== ======== ======== ========
Derivative financial
liabilities
Forward foreign
exchange contracts (384) - (384) -
Interest rate derivatives (2,259) - (2,259) -
Total (2,643) - (2,643) -
=========================== ======== ======== ======== ========
The following table analyses within the fair value hierarchy the
Group's assets and liabilities measured at fair value at 31
December 2018:
Group Total Level 1 Level 2 Level 3
GBP'000 GBP'000 GBP'000 GBP'000
======================= ======== ======== ======== ========
Investment assets
at fair value through
profit or loss
Fixed income 2,550 - - 2,550
Unquoted equities 32,328 - - 32,328
Equities 278 278 - -
======================= ======== ======== ======== ========
Total 35,156 278 - 34,878
======================= ======== ======== ======== ========
Derivative financial
assets
Forward foreign
exchange contracts 2,103 - 2,103 -
Total 2,103 - 2,103 -
======================= ======== ======== ======== ========
The following table presents the movement in the Group's Level 3
positions for the year ended 31 December 2019.
Group Unquoted
Fixed income equities Total
GBP '000 GBP '000 GBP '000
========================================== ============ ============= ========= =========
Opening balance 2,550 3 32,328 34,878
Transfer - - -
Purchases - - -
Sales - (2,834) (2,834)
Distributions (2,142) - (2,142)
Realised gains 234 1,743 1,977
Net change in unrealised gains / (losses) 131 (8,659) (8,528)
========================================== ============ ============= ========= =========
Closing balance 773 22,578 23,351
========================================== ============ ============= ========= =========
Change in unrealised gains/(losses)
on investments still held as at
31 December 2019 693 ( (7,080) (6,387)
========================================== ============ ============= ========= =========
The following table presents the movement in the Group's Level 3
positions for the year ended 31 December 2018.
Group Unquoted
Fixed income equities Total
GBP '000 GBP '000 GBP '000
==================================== ============ ========= =========
Opening balance 66,919 32,682 99,601
Transfer* (54,819) 301 (54,518)
Purchases - - -
Sales - - -
Distributions (7,587) - (7,587)
Realised (losses) (2,500) - (2,500)
Net change in unrealised gains
/ (losses) 537 (655) (118)
==================================== ============ ========= =========
Closing balance 2,550 32,328 34,878
==================================== ============ ========= =========
Change in unrealised gains/(losses)
on investments still held as at
31 December 2018 537 (655) (118)
==================================== ============ ========= =========
* On 1 January 2018 there was a reclassification of
GBP54,819,000 from fixed income to loans at amortised cost on the
adoption of IFRS 9.
The net change in realised/unrealised gains and losses is
recognised within gains / (losses) on investments in the
Consolidated Statement of Comprehensive Income.
Quantitative information regarding the unobservable inputs for
the Group's Level 3 positions as at 31 December 2019 is given
below:
Group Fair value at
31 December 20% change
2019 Valuation in price
GBP'000 technique GBP'000
Unquoted equities 17,832 Recent transactions 3,566
Unquoted equities 1,348 Residual value 270
================== ============= =================== ==========
Fair value at
31 December 5% change
2019 Valuation in discount
Group GBP'000 technique GBP'000
Discounted cash
Junior debt 773 flow 22
============ ============= =============== ============
Group Fair value at Multiple
31 December changed by
2019 Valuation 1
GBP'000 technique GBP '000
Unquoted equities 3,398 Earnings multiple 553
================== ============= ================= ===========
Quantitative information regarding the unobservable inputs for
the Group's Level 3 positions as at 31 December 2018 is given
below:
Group Fair value at
31 December 20% change
2018 Valuation in price
GBP'000 technique GBP'000
Unquoted equities 27,582 Recent transactions 5,516
Unquoted equities 1,348 Residual value 270
================== ============= =================== ==========
Group Fair value at
31 December 5% change
2018 Valuation in discount
GBP'000 technique GBP'000
Discounted cash
Junior debt 2,550 flow 48
============ ============= =============== ============
Group Fair value at Multiple
31 December changed by
2018 Valuation 1
GBP'000 technique GBP '000
Unquoted equities 3,398 Earnings multiple 523
================== ============= ================= ===========
Assets and liabilities not carried at fair value but for which
fair value is disclosed
The following table presents the fair value of the Group's
assets and liabilities (by class) not measured at fair value
through profit and loss at 31 December 2019 but for which fair
value is disclosed:
Group Amortised Fair Value Level 1 Level 2 Level 3
Cost Value Total GBP'000 GBP'000 GBP'000
GBP'000 GBP'000
============================ =========== ========== ======== ========= ========
Assets
Cash and cash equivalents 70,884 70,884 70,884 - -
Cash pledged as collateral 3,970 3,970 3,970 - -
Credit assets at amortised
cost 912,091 911,313 23,973 - 887,340
Interest receivable 12,149 12,149 - 12,149 -
Prepaid expenses and
other assets 13,895 13,895 - 13,895 -
============================ =========== ========== ======== ========= ========
Total 1,012,989 1,012,211 98,827 26,044 887,340
============================ =========== ========== ======== ========= ========
Liabilities
Management fees payable (1,202) (1,202) - (1,202) -
Performance fees payable (6,541) (6,541) - (6,541) -
Accrued expenses and
other liabilities (9,382) (9,382) - (9,382) -
Cash received as collateral (720) (720) (720) - -
Borrowings (302,199) (302,199) - (302,199) -
Total (320,044) (320,044) (720) (319,324) -
============================ =========== ========== ======== ========= ========
The following table presents the fair value of the Group's
assets and liabilities (by class) not measured at fair value
through profit and loss at 31 December 2018 but for which fair
value is disclosed:
Group Amortised Fair Value Level 1 Level 2 Level 3
Cost Value Total GBP'000 GBP'000 GBP'000
GBP'000 GBP'000
============================ =========== ========== ======== ========= ========
Assets
Cash and cash equivalents 106,358 106,358 106,358 - -
Cash pledged as collateral - - - - -
Credit assets at amortised
cost 959,147 959,147 - - 959,147
Interest receivable 23,200 23,200 - 23,200 -
Prepaid expenses and
other assets 3,327 3,327 - 3,327 -
Total 1,092,032 1,092,032 106,358 26,527 959,147
============================ =========== ========== ======== ========= ========
Liabilities
Management fees payable (1,226) (1,226) - (1,226) -
Performance fees payable (6,462) (6,462) - (6,462) -
Accrued expenses and
other liabilities (9,361) (9,361) - (9,361) -
Cash received as collateral (782) (782) - (782) -
Borrowings (378,011) (378,011) - (378,011) -
Total (395,842) (395,842) - (395,842) -
============================ =========== ========== ======== ========= ========
The table below provides details of the credit assets at
amortised cost held by the Group at 31 December 2019.
Group Amortised
cost before Expected Amortised Carrying
impairment Credit Losses cost value
GBP'000 GBP'000 GBP'000 GBP'000
================= ====================== ============== ========= ========
Credit assets at
amortised cost 964,926 (52,835) 912,091 912,091
================= ====================== ============== ========= ========
Total 964,926 (52,835) 912,091 912,091
================= ====================== ============== ========= ========
The table below provides details of the credit assets at
amortised cost held by the Group at 31 December 2018.
Group Amortised
cost before Amortised Carrying
impairment Expected cost value
GBP'000 Credit LossesGBP'000 GBP'000 GBP'000
================= ====================== ===================== ========= ========
Credit assets at
amortised cost 1,010,350 (51,203) 959,147 959,147
================= ====================== ===================== ========= ========
Total 1,010,350 (51,203) 959,147 959,147
================= ====================== ===================== ========= ========
Further details on the expected credit losses included in the
Consolidated Statement of Financial Position for the year is
reported in Note 11.
The following table analyses within the fair value hierarchy the
Company's assets and liabilities measured at fair value at 31
December 2019:
Company Total Level 1 Level 2 Level 3
=============
GBP'000 GBP'000 GBP'000 GBP'000
============= ========================== ========================== ========================== ==========================
Investment
assets
at fair value
through
profit or
loss
Investment in
subsidiaries 221,863 - - 221,863
Unquoted
equities 17,965 - - 17,965
Equities 1,006 1,006 - -
============= ========================== ========================== ========================== ==========================
Total 240,834 1,006 - 239,828
============= ========================== ========================== ========================== ==========================
Derivative
financial
assets
Forward
foreign
exchange
contracts 3,509 - 3,509 -
============= ========================== ========================== ========================== ==========================
Total 3,509 - 3,509 -
============= ========================== ========================== ========================== ==========================
Derivative
financial
liabilities
Forward
foreign
exchange
contracts (384) - (384) -
Interest rate
derivatives (2,259) - (2,259) -
============= ========================== ========================== ========================== ==========================
Total (2,643) - (2,643) -
============= ========================== ========================== ========================== ==========================
The following table analyses within the fair value hierarchy the
Company's assets and liabilities measured at fair value at 31
December 2018:
Company Total Level 1 Level 2 Level 3
=============
GBP'000 GBP'000 GBP'000 GBP'000
============= ========================== ========================== ========================== ==========================
Investment
assets
at fair value
through
profit or
loss
Investment in
subsidiaries 144,045 - - 144,045
Unquoted
equities 26,120 - - 26,120
Equities 278 278 - -
============= ========================== ========================== ========================== ==========================
Total 170,443 278 - 170,165
============= ========================== ========================== ========================== ==========================
Derivative
financial
assets
Forward
foreign
exchange
contracts 2,103 - 2,103 -
============= ========================== ========================== ========================== ==========================
Total 2,103 - 2,103 -
============= ========================== ========================== ========================== ==========================
The following table presents the movement in the Company's Level
3 positions for the year ended 31 December 2019.
Company Unquoted Investment Investment Total
equities in the in P2P GBP'000
GBP'000 SPV BL-3
GBP'000 GBP'000
============================== ==================== ================== ========== ============================
Opening balance 26,120 108,185 35,860 170,165
Purchases - 119,194 - 119,194
Sales (1,199) (19,887) (35,860) (56,946)
Net change in realised/
unrealised gains/(losses) (6,956) 14,371 - 7,415
============================== ==================== ================== ========== ============================
Closing balance 17,965 221,863 - 239,828
============================== ==================== ================== ========== ============================
Change in unrealised gains/
(losses) on investments
still held as at 31 December
2019 (6,965) 6,324 - (641)
============================== ==================== ================== ========== ============================
The following table presents the movement in the Company's Level
3 positions for the year ended 31 December 2018.
Company Fixed Unquoted Investment Investment Total
income equities in the in P2P GBP'000
GBP'000 GBP'000 SPV BL-3
GBP'000 GBP'000
=============== ========================== =================== ================== ========== ===========================
Opening balance 57,319 26,603 269,055 - 352,977
Transfer* (54,819) 301 - - (54,518)
Purchases - - 4,703 35,860 40,563
Sales - - (173,322) - (173,322)
Net change in
realised/
unrealised
gains/(losses) (2,500) (784) 7,749 - 4,465
=============== ========================== =================== ================== ========== ===========================
Closing balance - 26,120 108,185 35,860 170,165
=============== ========================== =================== ================== ========== ===========================
Change in
unrealised
gains/
(losses)
on investments
still held as
at 31 December
2018 - (784) 8,566 - 7,782
=============== ========================== =================== ================== ========== ===========================
* On 1 January 2018 there was a reclassification of
GBP54,819,000 from fixed income to loans at amortised cost on the
adoption of IFRS 9.
The net change in realised/unrealised gains is recognised within
gains on investments in the Consolidated Statement of Comprehensive
Income.
Quantitative information regarding the unobservable inputs for
the Company's Level 3 positions as at 31 December 2019 is given
below:
Company Fair Value at Valuation 20% change
31 December 2019 technique in price
GBP'000 GBP'000
=========================== ================= =================== ==========
Unquoted equities 13,219 Recent transactions 2,644
Unquoted equities 1,348 Residual value 270
Investment in subsidiaries 221,863 Net Asset Value 44,373
=========================== ================= =================== ==========
Company Fair Value at Valuation Earnings multiple
31 December 2019 technique changed by
GBP'000 1
GBP'000
================== ================= ================= =================
Unquoted equities 3,398 Earnings multiple 523
================== ================= ================= =================
Quantitative information regarding the unobservable inputs for
the Company's Level 3 positions as at 31 December 2018 is given
below:
Company Fair Value at Valuation 20% change
31 December 2018 technique in price
GBP'000 GBP'000
=========================== ================= =================== ==========
Unquoted equities 21,374 Recent transactions 4,275
Unquoted equities 1,348 Residual value 270
Investment in subsidiaries 144,045 Net Asset Value 28,809
=========================== ================= =================== ==========
Company Fair Value at Valuation Earnings multiple
31 December 2018 technique changed by
GBP'000 1
GBP'000
================== ================= ================= =================
Unquoted equities 3,398 Earnings multiple 523
================== ================= ================= =================
The Company's investment in subsidiaries is fair valued based on
the NAV as calculated by the Administrator at the balance sheet
date. The constitutional and offering documentation of the
subsidiaries sets out the valuation methodology, the applicable
generally accepted accounting principles and the frequency, by
which their assets are to be valued and the NAVs are to be
calculated. No adjustments have been determined to be necessary to
the NAVs as supplied by the Administrator as this appropriately
reflects the fair value of the underlying investments under the
relevant valuation methodology. The NAV is the value of all the
assets of the subsidiaries less its liabilities to creditors
(including provisions for such liabilities) determined in
accordance with applicable accounting standards. The net asset
value of the subsidiaries is sensitive to movements in interest
rates due to their investment in fixed rate loans.
The investments in unquoted equities are valued using several
different techniques, primarily recent transactions and recent
rounds of funding by the investee entities.
The investments in fixed income securities included within Level
3 of the above hierarchy are valued based on, if available, recent
transactions and otherwise counterparty valuations.
The following table presents the fair value of the Company's
assets and liabilities (by class) not measured at fair value
through profit and loss at 31 December 2019 but for which fair
value is disclosed:
Company Amortised Fair Value Level 1 Level 2 Level 3
Cost Value Total GBP'000 GBP'000 GBP'000
GBP'000 GBP'000
=========================== =========== ========== ======== ======== =========
Assets
Cash and cash equivalents 49,481 49,481 49,481 - -
Cash pledged as collateral 3,970 3,970 3,970 - -
Credit assets at
amortised cost 620,831 620,053 23,973 - 596,080
Interest receivable 9,914 9,914 - 9,914 -
Prepaid expenses
and other assets 11,869 11,868 - 11,868 -
=========================== =========== ========== ======== ======== =========
Total 695,286 695,286 77,424 21,782 596,080
=========================== =========== ========== ======== ======== =========
Liabilities
Management fees payable (840) (840) - (840) -
Performance fees
payable (6,541) (6,541) - (6,541) -
Accrued expenses
and other liabilities (7,692) (7,692) - (7,692) -
Cash received as
collateral (720) (720) (720) - -
Borrowings (67,966) (67,966) - (67,966) -
Deemed loan (135,761) (135,761) - - (135,761)
=========================== =========== ========== ======== ======== =========
Total (219,520) (219,520) (720) (83,040) (135,761)
=========================== =========== ========== ======== ======== =========
The following table presents the fair value of the Company's
assets and liabilities (by class) not measured at fair value
through profit and loss at 31 December 2018 but for which fair
value is disclosed:
Company Amortised Fair Value Level 1 Level 2 Level 3
Cost Value Total GBP'000 GBP'000 GBP'000
GBP'000 GBP'000
=========================== =========== ========== ======== ========= =========
Assets
Cash and cash equivalents 72,762 72,762 72,762 - -
Cash pledged as collateral - - - - -
Credit assets at
amortised cost 724,621 724,621 - - 724,621
Interest receivable 22,241 22,241 - 22,241 -
Prepaid expenses
and other assets 5,715 5,715 - 5,715 -
=========================== =========== ========== ======== ========= =========
Total 825,339 825,339 72,762 27,956 724,621
=========================== =========== ========== ======== ========= =========
Liabilities
Management fees payable (1,021) (1,021) - (1,021) -
Performance fees
payable (6,462) (6,462) - (6,462) -
Accrued expenses
and other liabilities (6,595) (6,595) - (6,595) -
Cash received as
collateral (782) (782) - (782) -
Borrowings (97,388) (97,388) - (97,388) -
Deemed loans (152,189) (152,189) - - (152,189)
=========================== =========== ========== ======== ========= =========
Total (264,437) (264,437) - (112,248) (152,189)
=========================== =========== ========== ======== ========= =========
The table below provides details of the loans at amortised cost
held by the Company at 31 December 2019.
Company Amortised Accumulated Amortised Carrying
cost before impairment cost value
impairment GBP'000 GBP'000 GBP'000
GBP'000
================= ============ =========== ========= ========
Credit assets at
amortised cost 651,289 (30,458) 620,831 620,831
================= ============ =========== ========= ========
Total 651,289 (30,458) 620,831 620,831
================= ============ =========== ========= ========
The table below provides details of the loans at amortised cost
held by the Company at 31 December 2018.
Company Amortised Accumulated Amortised Carrying
cost before impairment cost value
impairment GBP'000 GBP'000 GBP'000
GBP'000
================= ============ =========== ========= ========
Credit assets at
amortised cost 754,386 (29,765) 724,621 724,621
================= ============ =========== ========= ========
Total 754,386 (29,765) 724,621 724,621
================= ============ =========== ========= ========
Investments in subsidiaries measured at fair value
The Company's investments in subsidiaries, measured at fair
value, as at 31 December 2019 and 31 December 2018, consist of:
Company 31 December 31 December
2019 2018
GBP'000 GBP'000
======================================= =========== ===========
Investment in SPV partnership interest
held at fair value 221,863 108,186
Investment in P2P BL-3 - 35,860
5. DERIVATIVES
Typically, derivative contracts serve as components of the
Group's investment strategy and are utilised primarily to structure
and hedge investments to enhance performance and reduce risk to the
Group (the Group does not currently designate any derivatives as
hedges for hedge accounting purposes as described under IFRS 9).
Derivative instruments may also be used for trading purposes where
the Investment Manager believes this would be more effective than
investing directly in the underlying financial instruments. The
derivative contracts that the Group currently holds are forward
foreign exchange contracts and option contracts.
The Group records its derivative activities on a fair value
basis. See Note 2(h)(iii) for valuation of financial
instruments.
Forward contracts
Forward contracts entered into by the Group represent a firm
commitment to buy or sell an underlying asset, or currency at a
specified value and point in time based upon an agreed or
contracted quantity. The realised/unrealised gain or loss is equal
to the difference between the value of the contract at the onset
and the value of the contract at settlement date/year end date and
is included in the Consolidated Statement of Comprehensive
Income.
As of 31 December 2019, the following forward foreign exchange
contracts were included in the Group's Consolidated Statement of
Financial Position as liabilities measured at fair value through
profit or loss:
Assets
Settlement Purchase Purchase Sale Sale Fair value
date currency amount GBP'000 currency amount GBP'000
GBP'000
============= === =========== ================ ========= ======== ==========
08 January
2020 GBP 40,574 EUR (47,000) 743
21 January
2020 GBP 56,893 USD (75,000) 308
18 February
2020 GBP 64,528 USD (85,000) 447
24 February
2020 GBP 53,576 EUR (62,000) 948
24 February
2020 GBP 3,857 USD (5,000) 88
6 March 2020 GBP 66,495 USD (87,000) 936
23 March
2020 GBP 4,881 EUR (5,700) 39
============== === =========== =============== ========= ======== ============
3,509
============== === =========== =============== ========= ======== ============
Liabilities
Settlement Purchase Purchase Sale Sale Fair value
date currency amount GBP'000 currency amount GBP'000
GBP'000
============ ========== =============== ========= ======== ==========
28 February
2020 GBP 16,279 NZD (32,700) (360)
28 February
2020 GBP 2,364 AUD (4,500) (24)
============= =========== =============== ========= ======== ==========
(384)
======================= =============== ========= ======== ==========
As of 31 December 2018, the following forward foreign exchange
contracts were included in the Group's Consolidated Statement of
Financial Position at fair value through profit or loss:
Assets
Settlement Purchase Purchase Sale Sale Fair value
date currency amount GBP'000 currency amount GBP'000
GBP'000
=========== ====================== =============== ==================== ========= ==========
04 January
2019 GBP 204,118 EUR (227,000) 362
04 January
2019 GBP 33,002 NZD (62,000) 361
04 January
2019 GBP 63,462 USD (80,000) 651
04 January
2019 GBP 29,804 AUD (52,600) 729
============ ======================= =============== ==================== ========= ==========
2,103
======================================================================================= ==========
All forward contracts held by the Group are held at the Company
level, therefore no separate tables are presented for the
Company.
Interest Rate Hedges
Interest Rate Hedges may be entered into by the Group in order
to reduce its exposure to fluctuations in interest rate swaps. The
realised/unrealised gain or loss is equal to the difference between
the value of the contract at the onset and the value of the
contract at settlement date/year end date and is included in the
Consolidated Statement of Comprehensive Income.
As of 31 December 2019, the following interest rate hedging
contracts were included in the Group's Consolidated Statement of
Financial Position as liabilities measured at fair value through
profit or loss:
Assets
Type Notional Notional Maturity Date Fair value
Currency Amount GBP'000
============== === ============ =========== ============= ==========
Interest rate 15 February
cap USD 105,000,000 2025 72
Interest rate 20 February
cap GBP 84,632,366 2022 1
Interest rate
cap GBP 130,028,366 15 May 2023 4
77
=============== === =============== =========== ============= ==========
Liabilities
Settlement date Notional Notional Maturity Date Fair value
Currency Amount GBP'000
================ ========== =========== ============== ==========
Interest rate 8 February
swap GBP 100,000,000 2020 (133)
Interest rate 14 December
swap GBP 100,000,000 2020 (128)
Interest rate 6 February
swap GBP 60,000,000 2021 (197)
Interest rate
swap GBP 25,000,000 4 May 2021 (126)
Interest rate
swap GBP 100,000,000 1 January 2021 (1,186)
Interest rate 15 February
floor USD 100,000,000 2025 (489)
================== ========= =========== ============== ==========
(2,259)
=========================== =========== ============== ==========
As at 31 December 2018 there was nil value in the Group's
consolidated Statement of Financial Position for interest rate
hedging.
Option contracts
The option contracts presented in the tables in Note 5 are
interest rate caps entered into by the Group. An interest rate cap
is an interest rate agreement in which the seller agrees to
compensate the buyer for the amount by which the reference rate
exceeds a specified rate on a series of dates during the life of
the contract. There were no option contracts open at 31 December
2019.
Offsetting
The Group may be eligible to present net on the Consolidated
Statement of Financial Position, certain financial assets and
financial liabilities according to criteria described in Note
2(h)(iii).
As at 31 December 2019 and 31 December 2018, none of the
financial assets and financial liabilities met the eligibility
criteria and therefore none were presented net on the Consolidated
Statement of Financial Position. Accordingly, the amounts disclosed
in the following tables as "Net amounts of recognised assets
presented in the Consolidated Statement of Financial Position" are
the same as the gross amounts.
The following tables provide information on the financial impact
of netting for instruments subject to an enforceable master netting
arrangement or similar agreement at 31 December 2019 and 31
December 2018.
The columns "related amounts not eligible to be set-off in the
Consolidated Statement of Financial Position" disclose the amounts
with respect to derivative financial instruments which are subject
to master netting arrangements but were not offset due to not
meeting the net settlement/simultaneous settlement criteria or
because the rights to set-off are conditional upon the default of
the counterparty only.
Financial assets and collateral received by counterparty
31 December Related amounts not
2019 eligible to be set-off
Derivatives in the Consolidated
held Statement of Financial
Position
================ =================== ========================= ==========
Net amounts of
recognised assets
presented in
the Consolidated
Statement of Financial Collateral
Financial Position instruments received Net amount
GBP'000 GBP '000 GBP '000 GBP'000
================ =================== ============= ========== ==========
Counterparty
Deutsche Bank 265 265 - 265
Natwest Markets
plc 3,321 3,321 (720) 2,601
================ =================== ============= ========== ==========
Total 3,586 3,586 (720) 2,866
================ =================== ============= ========== ==========
Financial assets and collateral received by counterparty
31 December Related amounts not
2018 eligible to be set-off
Derivatives in the Consolidated
held Statement of Financial
Position
============== =================== ========================= ==========
Net amounts of
recognised assets
presented in
the Consolidated
Statement of Financial Collateral
Financial Position instruments received Net amount
GBP'000 GBP '000 GBP '000 GBP'000
============== =================== ============= ========== ==========
Counterparty
Deutsche Bank 2,103 - - 2,103
============== =================== ============= ========== ==========
Total 2,103 - - 2,103
============== =================== ============= ========== ==========
Financial liabilities and collateral pledged by counterparty
31 December Related amounts not
2019 eligible to be set-off
Derivatives in the Consolidated
held Statement of Financial
Position
================ ======================= ========================= ==========
Net amounts of
recognised liabilities
presented in
the Consolidated
Statement of Financial Collateral
Financial Position instruments pledged Net amount
GBP'000 GBP'000 GBP'000 GBP'000
================ ======================= ============= ========== ==========
Counterparty
Deutsche Bank (2,619) (2,619) 3,970 1,351
Natwest Markets
plc (24) (24) - (24)
================ ======================= ============= ========== ==========
Total (2,643) (2,643) 3,970 1,327
================ ======================= ============= ========== ==========
6. INCOME AND GAINS ON INVESTMENTS
As of 31 December 2019, income and gains on investments were
split as follows:
31 December 31 December
2019 2018
GBP'000 GBP'000
============================================== =========== ===========
Interest Income on credit assets at amortised
cost*
Net loss on foreign exchange** (3,021) (1,269)
Interest income on loans at amortised
cost 104,799 118,539
(Loss) / gain on IR swaps (2,511) (629)
Other income 148 4,262
============================================== =========== ===========
99,415 120,903
============================================== =========== ===========
Income on equity assets at fair value
through profit*
Loss on investment in unquoted equities (5,464) (1,621)
Gain / (loss) on listed equities 758 100
(Loss) / gain on foreign exchange 59 (204)
============================================== =========== ===========
Total (4,647) (1,725)
============================================== =========== ===========
* Header has been renamed from prior year financial statements
please see note 25 for further information on the
reclassification.
** Loss on foreign exchange also includes fair value movements
on derivatives taken out to economically hedge fair value
exposures.
Please see Note 2c for the basis on how income is allocated
between the revenue and capital accounts.
Realised and unrealised gains and losses on financial
instruments are shown in the table below:
31 December 2019
=================================================================================
Gains Losses Total
GBP'000 GBP'000 GBP'000
=============================== ========================== ======================= ============================
Realised on financial
instruments 41,700 (31,234) 10,466
Unrealised on financial
instruments 3,583 (4,746) (1,162)
=============================== ========================== ======================= ============================
31 December 2018
=================================================================================
Gains Losses Total
GBP'000 GBP'000 GBP'000
=============================== ========================== ======================= ============================
Realised on financial
instruments 20,745 (22,020) (1,275)
Unrealised on financial
instruments 5,895 (6,345) (450)
=============================== ========================== ======================= ============================
7. EARNINGS PER SHARE
Basic earnings per share is calculated using the number of
shares held at year end, excluding the number of shares purchased
by the Company and held as treasury shares.
31 December 31 December
2019 2018
======================================== =========== =======================
Group profit for year (GBP'000) 34,823 30,727
Weighted Number of ordinary shares held
during the year 74,412,289 77,700,483
Earnings per ordinary share (basic and
diluted) (pence per share) 46.80p 39.55p
======================================== =========== =======================
The Company has not issued any shares or other instruments that
are considered to have dilutive potential.
8. FINANCIAL INSTRUMENTS AND ASSOCIATED RISKS
Management of risk
The general risk analysis undertaken by the Board and its
overall policy approach to risk management are set out in the
Strategic Report on pages 23 and 24. This note is incorporated in
accordance with IFRS 7 and refers to the identification,
measurement and management of risks potentially affecting the value
of financial instruments.
The Group's financial instruments may comprise:
-- Loans;
-- Listed and unquoted equities and investment funds held in
accordance with the Group's investment objective and policies;
-- Derivative instruments which could include forward currency contracts and options; and
-- Cash, liquid resources and short-term debtors and creditors that arise from its operations.
The risks identified by IFRS 7 arising from the Group's
financial instruments are market risk (which comprises market price
risk, interest rate risk and foreign currency risk), liquidity
risk, and credit risk.
The sensitivity analysis in this note is used by management to
measure the Group and Company's exposure to these risks. The Board
reviews and agrees policies for managing each of these risks, which
are summarised below. These policies have remained unchanged since
the beginning of the accounting period.
The investment objective and operating environment of the
Subsidiaries are consistent with that of the Company. Therefore the
risks and uncertainties detailed below are applicable to both the
Company and the Group.
In seeking to implement the investment objectives of the Group
while limiting risk, the Group is subject to the investment limits
restrictions set out in the Credit Risk section of this note.
Market risk
Market risk is the risk of loss arising from movements in
observable market variables such as foreign exchange rates, equity
prices and interest rates. The Group is exposed to market risk
primarily through its Financial Instruments.
The Investment Manager regularly reviews the investment
portfolio and industry developments to ensure that any events which
may impact the Group are identified and considered. This also
ensures that any risks affecting the investment portfolio are
identified and mitigated to the fullest extent possible.
Market price risk
Price risk is the risk that the fair value of future cash flows
of a financial instrument will fluctuate because of changes in
market prices (other than those arising from interest rate risk or
currency risk), whether those changes are caused by factors
specific to the individual financial instrument or its issuer, or
factors affecting similar financial instruments traded in the
market. Local, regional or global events such as war, acts of
terrorism, the spread of infectious illness or other public health
issue, recessions, or other events could have a significant impact
on the Group and market prices of its investments. The Group is
exposed to price risk primarily through its exposure from
investments in money market funds, fixed income products and
equities. Refer to Note 4 for further details on the sensitivity of
the Group's Level 3 investments to price risk.
The value of certain investments held by the Group is determined
by market forces and there is accordingly a risk that market prices
can change in a way that is adverse to the Group's performance.
COVID-19 has caused disruption to businesses and economic activity
which has been reflected in recent fluctuations in global stock
markets. There are no comparable recent events which may provide
guidance as to the effect of the spread of COVID-19 and a potential
pandemic, and, as a result, the ultimate impact of the COVID-19
outbreak or a similar health epidemic is highly uncertain and
subject to change. The Board considers the emergence and spread of
COVID-19 to be a non-adjusting post balance sheet event and the
pricing of the group's equity investments have not been updated for
this. The Group has adopted a number of investment restrictions
which are set out in the prospectus which limit the exposure of the
Group to market risk.
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 Group is exposed to risks associated with the effects of
fluctuations in the prevailing levels of market interest rates on
its financial position and cash flows.
Loans held by the Group at amortised cost, with a fixed interest
rate, are not exposed to interest rate changes. Fixed income
securities with fixed interest rates are exposed to fair value
interest rate risk. As at 31 December 2019, the Group had nil per
cent (2018: nil per cent) of the total assets classified as bonds
with a fixed interest rate.
Financial instruments with a floating interest rate that resets
as market rates change are exposed to cash flow interest rate risk.
As at 31 December 2019, the Group had 6.81 per cent (2018: 9.42 per
cent) of total assets classified as cash and cash equivalents and
nil per cent (2018: nil per cent) of fixed income securities with
floating interest rates. As at 31 December 2019, if interest rates
had increased/decreased by 1 per cent with all other variables held
constant, the change in the value of future expected interest cash
flows of these assets would have been GBP709,000 (2018:
GBP1,064,000). 1 per cent is considered to be a reasonably possible
movement in interest rates.
The Group has entered into various borrowing facilities which
are subject to a variable interest rate. As at 31 December 2019,
the Group had GBP302,199,000 (2018: GBP378,011,000) drawn down
under these facilities. Please see Note 14 for further details. A 1
per cent increase/decrease, with all other variables held constant,
the change in the value of future expected cash flows of these
liabilities with a floating rate would have been GBP7,917,000
(2018: GBP3,144,000).
The Group does not intend to hedge interest rate risk on a
regular basis. However, where it enters into floating-rate
liabilities against fixed-rate loans, it may at its sole discretion
seek to hedge out the interest rate exposure, taking into
consideration amongst other things the cost of hedging and the
general interest rate environment.
Currency risk
Currency risk is the risk that the value of net assets will
fluctuate due to changes in foreign exchange rates. Relevant risk
variables are generally movements in the exchange rates of
non-functional currencies in which the Group holds financial assets
and liabilities.
The assets of the Group are invested in Credit Assets and other
investments including unquoted equities which are denominated in US
Dollars, Euros, Pounds Sterling and other currencies. Accordingly,
the value of such assets may be affected favourably or unfavourably
by fluctuations in currency rates. The Group hedges currency
exposure between Pounds Sterling and any other currency in which
the Group's assets may be denominated, in particular US Dollars and
Euros.
Concentration of foreign currency exposure
The Investment Manager monitors the fluctuations in foreign
currency exchange rates and may use forward foreign exchange
contracts to hedge the currency exposure of the Group's non GBP
denominated investments. The Investment Manager re-examines the
currency exposure on a regular basis in each currency and manages
the Group's currency exposure in accordance with market
expectations.
The below table presents the net exposure to foreign currency at
31 December 2019. The table includes forward foreign exchange
contracts at their notional exposure value and excludes all GBP
assets and liabilities recorded on the Consolidated Statement of
Financial Position.
Net exposure
after forward
Total asset Total liability Forward Contract contract
GBP'000 GBP'000 GBP'000 GBP'000
=================== =========== =============== ================ ==============
Australian Dollar 2,194 (239) (2,387) (432)
Euro 101,003 (1,238) (97,302) 2,463
US Dollar 232,041 (38,232) (189,993) 3,816
New Zealand Dollar 16,011 (1,669) (16,639) (2,297)
=================== =========== =============== ================ ==============
If the GBP exchange rate simultaneously increased/decreased by
10 per cent against the above currencies, the impact on profit
would be an increase/decrease of GBP355,000. 10 per cent is
considered to be a reasonably possible movement in foreign exchange
rates. The total GBP exposure as of 31 December 2019 is
GBP408,375,000.
The below table presents the net exposure to foreign currency at
31 December 2018. The table includes forward foreign exchange
contracts at their notional exposure value and excludes all GBP
assets and liabilities recorded on the Consolidated Statement of
Financial Position.
Net exposure
after forward
Total asset Total liability Forward Contract contract
GBP'000 GBP'000 GBP'000 GBP'000
=================== =========== =============== ================ ==============
Australian Dollar 30,615 (305) (29,075) 1,235
Euro 227,656 (4,542) (203,756) 19,358
US Dollar 116,132 (39,259) (62,811) 14,062
New Zealand Dollar 36,641 (1,744) (32,641) 2,256
=================== =========== =============== ================ ==============
If the GBP exchange rate simultaneously increased/decreased by
10 per cent against the above currencies, the impact on profit
would be an increase/decrease of GBP3,691,000. 10 per cent is
considered to be a reasonably possible movement in foreign exchange
rates. The total GBP exposure as of 31 December 2018 is
GBP368,226,000.
Liquidity risk
Liquidity risk is defined as the risk that the Group may not be
able to settle or meet its obligations on time or at a reasonable
price. Ordinary shares are not redeemable at the holder's
option.
The Investment Manager manages the Group's liquidity risk
through active capital management, including monitoring of covenant
conditions, amortising cash flows, monitoring of debt requirements
and monitoring and forecasting of cash flows.
Financial liabilities consisting of forward foreign exchange
contracts, cash received as collateral, dividends and interest
payable, broker fees payable, and accrued expenses and other
liabilities are all due within three months.
The liquidity profile of the Group's borrowings is detailed in
Note 14.
The outbreak of COVID-19 has seen the manager speak to its
clients daily and actively reviewing the impact on the portfolio to
ensure the correct actions are being taken to mitigate the impact
where possible. As part of this the manager is not proposing to
re-invest the cash generated by the portfolio in new investments
until there is more visibility on the impact of the lockdown
restrictions on performance and a return to some level of normality
in the economy. In the structured portfolio where the Company
provides finance to non-bank lenders, the manager is working with
the borrowers to help them navigate the difficult environment
whilst ensuring most of the cash generated by their portfolio is
utilised to repay our loan.
Credit risk
Credit risk is the risk that one party to a financial instrument
will cause a financial loss for the other party by failing to
discharge an obligation. The Group's credit risks arise principally
through exposures to loans acquired by the Group, which are subject
to risk of borrower default and disclosed as loans held at
amortised cost on the Statement of Financial Position. The ability
of the Group to earn revenue is completely dependent upon payments
being made by the borrower of the loan acquired by the Group
through a Platform. The Group (as a lender member) will receive
payments under any loans it acquires through a Platform only if the
corresponding borrower through that Platform (borrower member)
makes payments on the loan.
Consumer loans are typically unsecured obligations of borrowers.
They are not secured by any collateral, not guaranteed or insured
by any third party and not backed by governmental authority in any
way. Secured consumer loans will be secured against collateral. SME
loans are typically not secured against collateral but are backed
by personal guarantees of the business' director(s). Real estate
loans and structured facilities are secured against collateral. The
Group must rely on the collection efforts of the Platforms and
their designated collection agencies and has no direct recourse
against borrower members.
The Platforms undertake the primary credit risk assessment when
originating loans or receivables. The investment manager, in
selecting Platforms from which to acquire loan exposures, conducts
detailed initial due diligence on, including but not limited to,
their credit risk assessment processes, their operational systems
and controls plus their ongoing viability. It also conducts due
diligence on an ongoing basis and monitors the performance of
acquired loans and the entire platform loan book if available. The
investment manager also re-underwrites some loans originated by
Platforms. As at 31 December 2019, this comprises all secured real
estate loans only. This is due to the bespoke nature of the
underlying collateral and their large size.
As at 31 December 2019, the Group has not directly originated
any loans that do not involve platforms.
The Group will invest across various Platforms, asset classes,
geographies (primarily United States and Europe) and credit bands
in order to ensure diversification and to seek to mitigate
concentration risks.
The outbreak of COVID-19 has caused major disruption across the
globe. At the time of writing the portfolio has seen some request
for payment holidays. The impacts of the UK government's various
support initiatives and the US government's COVID-19 Stimulus Bill
are yet unknown , but are expected to reduce the potential expected
credit loss impact. Depending on the evolution of the COVID-19
situation, this could result in a severe economic downturn and
potentially a material increase in credit risk.
Loans at amortised cost
The disclosure below presents the gross carrying amount of
financial instruments to which the impairment requirements in IFRS
9 are applied and the associated allowance for ECL. The following
table provides an overview of the Group's credit risk by stage and
industry, and the associated ECL coverage.
The financial assets recorded in each stage have the following
characteristics:
Stage Characteristics
Stage Unimpaired and without significant increase in credit
1 risk on which a 12-month allowance for ECL is recognised.
Stage A significant increase in credit risk has been experienced
2 since initial recognition on which a lifetime ECL is
recognised. Unless identified at an earlier stage, all
financial assets are deemed to have suffered a significant
increase in credit risk when they are 30 days past due
and are transferred from Stage 1 to Stage 2.
Stage Objective evidence of impairment and are therefore considered
3 to be in default or otherwise credit-impaired on which
a lifetime ECL is recognised.
===== =============================================================
The following tables analyse loans by type of exposure and
geography and represent the concentration of exposures on which
credit risk is managed as at 31 December 2019 and at 31 December
2018 for the Group.
Group as Real SME SME Consumer Consumer Consumer Total
at Estate UK Other UK US Other GBP'000
31 December GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2019
================ ======== ======== =================== ======== ======== ======== ========
Stage 1 247,793 157,773 91,218 168,686 211,103 13,568 890,141
Stage 2 961 2,758 - 1,312 11,142 596 16,769
Stage 3 8,682 15,986 3,620 12,026 16,348 1,354 58,016
================ ======== ======== =================== ======== ======== ======== ========
Gross 257,436 176,517 94,838 182,024 238,593 15,518 964,926
================ ======== ======== =================== ======== ======== ======== ========
Allowance
for credit
losses
Stage 1 (1,076) (2,305) - (676) (2,844) (262) (7,163)
Stage 2 (1) (1,536) - (700) (1,886) (202) (4,325)
Stage 3 (133) (12,391) (2,906) (10,183) (14,557) (1,177) (41,347)
================ ======== ======== =================== ======== ======== ======== ========
Total allowance
for credit
losses (1,210) (16,232) (2,906) (11,559) (19,287) (1,641) (52,835)
================ ======== ======== =================== ======== ======== ======== ========
Net loans
at amortised
cost 256,226 160,285 91,932 170,465 219,306 13,877 912,091
================ ======== ======== =================== ======== ======== ======== ========
Credit Loss
Coverage
Stage 1 0.4% 1.5% - 0.4% 1.3% 1.9% 0.8%
Stage 2 0.1% 55.7% - 53.4% 16.9% 33.9% 25.8%
Stage 3 1.5% 77.5% 80.3% 84.7% 89.0% 86.9% 71.3%
================ ======== ======== =================== ======== ======== ======== ========
Total 0.5% 9.2% 3.1% 6.4% 8.1% 10.6% 5.5%
================ ======== ======== =================== ======== ======== ======== ========
Group as Real SME SME Consumer Consumer Consumer Total
at Estate UK Other UK US Other GBP'000
31 December GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2018
================ ======== ======== =================== ======== ======== ======== ==========
Stage 1 358,285 222,666 12,822 224,242 64,344 59,868 942,227
Stage 2 - 1,341 - 3,160 16,299 1,060 21,860
Stage 3 - 13,496 4,016 14,608 13,317 826 46,263
================ ======== ======== =================== ======== ======== ======== ==========
Gross 358,285 237,503 16,838 242,010 93,960 61,754 1,010,350
================ ======== ======== =================== ======== ======== ======== ==========
Allowance
for credit
losses
Stage 1 (1,698) (3,552) - (1,885) (1,242) (689) (9,066)
Stage 2 - (763) - (1,654) (2,342) (586) (5,345)
Stage 3 - (7,722) (2,795) (13,127) (12,434) (714) (36,792)
================ ======== ======== =================== ======== ======== ======== ==========
Total allowance
for credit
losses (1,698) (12,037) (2,795) (16,666) (16,018) (1,989) (51,203)
================ ======== ======== =================== ======== ======== ======== ==========
Net loans
at amortised
cost 356,587 225,466 14,043 225,344 77,942 59,765 959,147
================ ======== ======== =================== ======== ======== ======== ==========
Credit Loss
Coverage
Stage 1 0.5% 1.6% - 0.8% 1.9% 1.2% 1.0%
Stage 2 - 56.9% - 52.3% 14.4% 55.2% 24.4%
Stage 3 - 57.2% 69.6% 89.9% 93.4% 86.5% 79.5%
================ ======== ======== =================== ======== ======== ======== ==========
Total 0.5% 5.1% 16.6% 6.9% 17.0% 3.2% 5.1%
================ ======== ======== =================== ======== ======== ======== ==========
The following tables analyse loans by type of exposure and
geography and represent the concentration of exposures on which
credit risk is managed as at 31 December 2019 and at 31 December
2018 for the Company.
Company as Real SME SME Consumer Consumer Consumer Total
at Estate UK Other UK US Other GBP'000
31 December GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2019
================ ======== ======== =================== ======== ======== ======== ========
Stage 1 234,440 157,773 42,790 168,685 - 13,568 617,256
Stage 2 - 2,759 - 1,313 - 596 4,668
Stage 3 - 15,985 - 12,026 - 1,354 29,365
================ ======== ======== =================== ======== ======== ======== ========
Gross 234,440 176,517 42,790 182,024 - 15,518 651,289
================ ======== ======== =================== ======== ======== ======== ========
Allowance
for credit
losses
Stage 1 (1,026) (2,305) - (676) - (262) (4,269)
Stage 2 - (1,536) - (700) - (202) (2,438)
Stage 3 - (12,391) - (10,183) - (1,177) (23,751)
================ ======== ======== =================== ======== ======== ======== ========
Total allowance
for credit
losses (1,026) (16,232) - (11,559) - (1,641) (30,458)
================ ======== ======== =================== ======== ======== ======== ========
Net loans
at amortised
cost 233,414 160,285 42,790 170,465 - 13,877 620,831
================ ======== ======== =================== ======== ======== ======== ========
Credit Loss
Coverage
Stage 1 0.4% 1.5% - 0.4% - 1.9% 0.7%
Stage 2 - 55.7% - 53.3% - 33.9% 52.2%
Stage 3 - 77.5% - 84.7% - 86.9% 80.9%
================ ======== ======== =================== ======== ======== ======== ========
Total 0.4% 9.2% - 6.4% - 10.6% 4.7%
================ ======== ======== =================== ======== ======== ======== ========
Company as Real SME SME Consumer Consumer Consumer Total
at Estate UK Other UK US Other GBP'000
31 December GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2018
================ ======== ======== =================== ======== ======== ======== ========
Stage 1 344,013 79,392 12,727 224,242 - 59,868 720,242
Stage 2 - 1,099 - 3,160 - 1,060 5,319
Stage 3 - 13,391 - 14,608 - 826 28,825
================ ======== ======== =================== ======== ======== ======== ========
Gross 344,013 93,882 12,727 242,010 - 61,754 754,386
================ ======== ======== =================== ======== ======== ======== ========
Allowance
for credit
losses
Stage 1 (1,674) (1,177) - (1,885) - (689) (5,425)
Stage 2 - (611) - (1,653) - (586) (2,850)
Stage 3 - (7,648) - (13,128) - (714) (21,490)
================ ======== ======== =================== ======== ======== ======== ========
Total allowance
for credit
losses (1,674) (9,436) - (16,666) - (1,989) (29,765)
================ ======== ======== =================== ======== ======== ======== ========
Net loans
at amortised
cost 342,339 84,446 12,727 225,344 - 59,765 724,621
================ ======== ======== =================== ======== ======== ======== ========
Credit Loss
Coverage
Stage 1 0.5% 1.5% - 0.8% - 1.2% 0.8%
Stage 2 - 55.6% - 52.3% - 55.2% 53.6%
Stage 3 - 57.1% - 89.9% - 85.5% 74.6%
================ ======== ======== =================== ======== ======== ======== ========
Total 0.5% 10.1% - 6.9% - 3.2% 3.9%
================ ======== ======== =================== ======== ======== ======== ========
Credit quality of loans
The credit quality of loans is assessed through evaluation of
various factors, including credit scores, payment data and other
information calculated at origination. Set out below is the
analysis of the Group's loans at amortised cost by grade.
Grade Description
A Highest quality with minimal indicators of credit risk
B High quality, subject to low credit risk, minor adverse
indicators.
C Medium-grade, moderate credit risk, may have some adverse
credit risk indicators.
D Elevated credit risk, significant adverse indicators.
E High credit risk, with serious adverse indicators (e.g.
lower affordability, credit history, existing debt)
===== =========================================================
Group as
at
31 December
2019 SME SME Consumer Consumer Consumer
Internal Real Estate UK Other UK US Other Total
grade GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============= =========== ======== ======== ======== ======== ======== ========
Stage 1
A 247,793 31,643 91,218 137,004 97,454 4,239 609,351
B - 105,708 - 19,850 74,789 5,318 205,665
C - 17,421 - 1,651 31,597 3,535 54,204
D - 3,001 - 10,181 7,073 398 20,653
E - - - - 190 78 268
============= =========== ======== ======== ======== ======== ======== ========
247,793 157,773 91,218 168,686 211,103 13,568 890,141
============= =========== ======== ======== ======== ======== ======== ========
Stage 2
A 961 - - 172 1,190 - 2,323
B - 946 - 606 7,280 236 9,068
C - 1,490 - 29 2,288 291 4,098
D - 322 - 505 365 58 1,250
E - - - - 19 11 30
============= =========== ======== ======== ======== ======== ======== ========
961 2,758 - 1,312 11,142 596 16,769
============= =========== ======== ======== ======== ======== ======== ========
Stage 3
A 8,682 - - 2,137 1,887 - 12,706
B - 9,376 - 8,036 3,796 519 21,727
C - 4,873 3,620 383 5,479 627 14,982
D - 1,737 - 1,470 4,307 187 7,701
E - - - - 879 21 900
============= =========== ======== ======== ======== ======== ======== ========
8,682 15,986 3,620 12,026 16,348 1,354 58,016
============= =========== ======== ======== ======== ======== ======== ========
Total
A 257,436 31,643 91,218 139,313 100,531 4,239 624,380
B - 116,030 - 28,492 85,865 6,073 236,460
C - 23,784 3,620 2,063 39,364 4,453 73,284
D - 5,060 - 12,156 11,745 643 29,604
E - - - - 1,088 110 1,198
============= =========== ======== ======== ======== ======== ======== ========
Total 257,436 176,517 94,838 182,024 238,593 15,518 964,926
============= =========== ======== ======== ======== ======== ======== ========
Group as
at
31 December
2018 SME SME Consumer Consumer Consumer
Internal Real Estate UK Other UK US Other Total
grade GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============= =========== ======== ======== ======== ======== ======== =========
Stage 1
A 333,647 13,950 12,728 141,929 7,174 37,374 546,802
B 24,638 170,584 94 52,734 14,765 12,963 275,778
C - 31,368 - 4,027 23,136 8,392 66,923
D - 6,764 - 25,548 17,640 990 50,942
E - - - 5 1,629 149 1,783
============= =========== ======== ======== ======== ======== ======== =========
358,285 222,666 12,822 224,243 64,344 59,868 942,228
============= =========== ======== ======== ======== ======== ======== =========
Stage 2
A - - - 347 18 - 365
B - 498 - 925 15,373 433 17,229
C - 548 - 138 454 517 1,657
D - 296 - 1,750 380 91 2,517
E - - - - 74 19 93
============= =========== ======== ======== ======== ======== ======== =========
- 1,342 - 3,160 16,299 1,060 21,861
============= =========== ======== ======== ======== ======== ======== =========
Stage 3
A - 6,747 - 2,052 1,112 - 9,911
B - 4,013 - 8,688 3,242 322 16,265
C - 2,278 4,016 1,392 3,589 367 11,642
D - 458 - 2,463 4,393 125 7,439
E - - - 13 981 12 1,003
============= =========== ======== ======== ======== ======== ======== =========
- 13,496 4,016 14,608 13,317 826 46,263
============= =========== ======== ======== ======== ======== ======== =========
Total
A 333,647 20,698 12,728 144,327 8,303 37,374 557,077
B 24,638 175,093 94 62,347 33,380 13,718 309,270
C - 34,194 4,016 5,557 27,180 9,275 80,222
D - 7,518 - 29,761 22,412 1,207 60,898
E - - - 18 2,685 180 2,883
============= =========== ======== ======== ======== ======== ======== =========
Total 358,285 237,503 16,838 242,010 93,960 61,754 1,010,350
============= =========== ======== ======== ======== ======== ======== =========
Company
as at
31 December
2019 SME SME Consumer Consumer Consumer
Internal Real Estate UK Other UK US Other Total
grade GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============= =========== ======== ======== ======== ======== ======== ========
Stage 1
A 234,440 31,643 42,790 137,003 - 4,239 450,115
B - 105,708 - 19,850 - 5,318 130,876
C - 17,421 - 1,651 - 3,535 22,607
D - 3,001 - 10,181 - 398 13,580
E - - - - - 78 78
============= =========== ======== ======== ======== ======== ======== ========
234,440 157,773 42,790 168,685 - 13,568 617,256
============= =========== ======== ======== ======== ======== ======== ========
Stage 2
A - - - 172 - - 172
B - 946 - 606 - 236 1,788
C - 1,491 - 29 - 291 1,811
D - 322 - 506 - 58 886
E - - - - - 11 11
============= =========== ======== ======== ======== ======== ======== ========
- 2,759 - 1,313 - 596 4,668
============= =========== ======== ======== ======== ======== ======== ========
Stage 3
A - - - 2,137 - - 2,137
B - 9,375 - 8,037 - 519 17,931
C - 4,873 - 383 - 627 5,883
D - 1,737 - 1,469 - 187 3,393
E - - - - - 21 21
============= =========== ======== ======== ======== ======== ======== ========
- 15,985 - 12,026 - 1,354 29,365
============= =========== ======== ======== ======== ======== ======== ========
Total
A 234,440 31,643 42,790 139,312 - 4,239 452,424
B - 116,029 - 28,493 - 6,073 150,595
C - 23,785 - 2,063 - 4,453 30,301
D - 5,060 - 12,156 - 643 17,859
E - - - - - 110 110
============= =========== ======== ======== ======== ======== ======== ========
Total 234,440 176,517 42,790 182,024 - 15,518 651,289
============= =========== ======== ======== ======== ======== ======== ========
Company
as at
31 December
2018 SME SME Consumer Consumer Consumer
Internal Real Estate UK Other UK US Other Total
grade GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============= =========== ======== ======== ======== ======== ======== ========
Stage 1
A 319,375 13,951 12,727 141,929 - 37,375 525,357
B 24,638 54,126 - 52,733 - 12,963 144,460
C - 9,635 - 4,027 - 8,391 22,053
D - 1,681 - 25,548 - 990 28,219
E - - - 5 - 149 154
============= =========== ======== ======== ======== ======== ======== ========
344,013 79,393 12,727 224,242 - 59,868 720,243
============= =========== ======== ======== ======== ======== ======== ========
Stage 2
A - - - 347 - - 347
B - 497 - 926 - 433 1,856
C - 411 - 138 - 517 1,066
D - 191 - 1,749 - 91 2,031
E - - - - - 19 19
============= =========== ======== ======== ======== ======== ======== ========
- 1,099 - 3,160 - 1,060 5,319
============= =========== ======== ======== ======== ======== ======== ========
Stage 3
A - 6,747 - 2,052 - - 8,799
B - 3,986 - 8,688 - 322 12,996
C - 2,199 - 1,392 - 367 3,958
D - 458 - 2,463 - 125 3,046
E - - - 13 - 12 25
============= =========== ======== ======== ======== ======== ======== ========
- 13,390 - 14,608 - 826 28,824
============= =========== ======== ======== ======== ======== ======== ========
Total
A 319,375 20,698 12,727 144,328 - 37,374 534,502
B 24,638 58,609 - 62,347 - 13,718 159,312
C - 12,245 - 5,557 - 9,275 27,077
D - 2,330 - 29,760 - 1,207 33,297
E - - - 18 - 180 198
============= =========== ======== ======== ======== ======== ======== ========
Total 344,013 93,882 12,727 242,010 - 61,754 754,386
============= =========== ======== ======== ======== ======== ======== ========
Collateral held as security for financial assets
Consumer loans are typically unsecured obligations of borrowers.
They are not secured by any collateral, not guaranteed or insured
by any third party and not backed by any governmental authority in
any way. SME Loans are typically not secured against collateral but
are backed by personal guarantees of the business' director(s).
The Group originates real estate loans through platforms and
also has a portfolio of structured facilities and bonds totalling
GBP106,140,000 (2018: GBP43,628,000) that are classed as real
estate. The originated whole loans through platforms that are
secured against collateral have loan to values as follows:
Loan to value 31 December 31 December
2019 2018
GBP'000 GBP'000
================== =========== ===========
Less than 70% 137,970 223,717
Between 70% - 75% 7,947 102,831
Between 75% - 80% 5,379 684
Greater than 80% - -
================== =========== ===========
Maximum credit exposure loan commitments
The Company has provided credit facilities that are undrawn as
at 31 December 2019. These primarily relate to structured
facilities and secured real estate loans. The undrawn balance as at
31 December 2019 was GBP419,038,000 (31 December 2018:
GBP218,172,000).
Platform restrictions
The Group will not invest more than 33 per cent of gross assets
via any single Platform, as at 31 December 2019 this is a limit of
GBP343.5 million (2018: GBP372.6 million). This limit may be
increased to 66 per cent of Gross Assets, as at 31 December 2019
this is a limit of GBP687.0 million (2018: GBP745.2 million) via
any single Platform, provided that where this limit is so increased
in respect of any Platform the Group does not invest an amount
which is greater than 25 per cent (by value) of the total loan
origination or investment of the preceding calendar year via such
Platform or counterparty.
Asset class restrictions
The Company will invest in Credit Assets originated across
various sectors and across credit risk bands to ensure
diversification and to seek to mitigate concentration risks. The
following investment limits and restrictions apply to the Company
to ensure that the diversification of the portfolio is maintained
that concentration risk is limited and that limits are placed on
risk associated with borrowings.
The Company will not invest more than 20 per cent of gross
assets, at the time of investment, via any single investment fund
investing in Credit Assets. The Group will not invest, in
aggregate, more than 60 per cent of gross assets, at the time of
investment, in other investment funds that invest in Credit
Assets.
The Company will not invest more than 10 per cent of its gross
assets, at the time of investment, in other listed closed-ended
investment funds, whether managed by the Investment Manager or not,
except that this restriction shall not apply to investments in
listed closed-ended investment funds which themselves have stated
investment policies to invest no more than 15 per cent of their
gross assets in other listed closed-ended investment funds.
The following apply, in each case at the time of investment by
the Company, to both Credit Assets acquired by the Company directly
and on a look-through basis to any Credit Assets held by another
investment fund which is managed by the Investment Manager, the
Sub-Manager or their affiliates in which the Company invests
(proportionate to the percentage interest the Company has in such
investment fund). It is intended that:
-- No single consumer loan shall exceed 0.25 per cent of gross assets;
-- No single SME loan shall exceed 5.0 per cent of gross assets;
-- No single advance or loan against a trade receivable asset
shall exceed 5.0 per cent of gross assets;
-- No single corporate loan shall exceed 5 per cent of gross assets; and
-- No single facility, security or other interest backed by a
portfolio of loans, assets or receivables (excluding any borrowing
ring-fenced within any SPV which would be without recourse to the
Company) shall exceed 20 per cent of gross assets.
At any given time, not more than 50 per cent of Gross Assets
will be maintained in SME Credit Assets and not more than 50 per
cent of Gross Assets will be maintained in trade receivable assets
(taking into account both Credit Assets acquired by the Company
directly and, on a look-through basis, any Credit Assets held by
another investment fund managed by the Investment Manager, the
Sub-Manager or their affiliates in which the Company invests
(proportionate to the percentage interest the Company has in such
investment fund)).
Other restrictions
The Company may invest in cash, cash equivalents and fixed
income instruments for cash management purposes and with a view to
enhancing returns to shareholders or mitigating credit exposure.
However, for cash management purposes the Company will only invest
in fixed income instruments of investment grade.
The Company will not invest in collateralised debt obligations
("CDOs"). CDO's are pooled debt obligations where pooled assets
serve as collateral.
The Group's maximum exposure to credit risk (not taking into
account the value of any collateral or other security held) in the
event that counterparties fail to perform their obligations as at
31 December 2019 and 31 December 2018 in relation to each class of
recognised financial assets, is the carrying amount of those assets
as indicated in the Consolidated Statement of Financial
Position.
9. CASH AND CASH EQUIVALENTS
Group Group Group
31 December 31 December
2019 2018
GBP'000 GBP'000
================== ============================== ==============================
Cash held at bank 70,884 106,358
================== ============================== ==============================
Total 70,884 106,358
================== ============================== ==============================
Company Company Company
31 December 31 December
2019 2018
GBP'000 GBP'000
================== ======================= =======================
Cash held at bank 49,481 72,762
================== ======================= =======================
Total 49,481 72,762
================== ======================= =======================
10. CASH PLEDGED AS COLLATERAL
Group Group Group
31 December 31 December
2019 2018
GBP'000 GBP'000
================ ============================== ==============================
Cash collateral 3,970 -
================ ============================== ==============================
Total 3,970 -
================ ============================== ==============================
Company Company Company
31 December 31 December
2019 2018
GBP'000 GBP'000
================ ======================= =======================
Cash collateral 3,970 -
================ ======================= =======================
Total 3,970 -
================ ======================= =======================
Cash collateral refers to cash posted, on a daily basis, to
cover the net exposure between counterparties by enabling the
collateral to be realised in an event of default or if other
predetermined results occur.
11. EXPECTED CREDIT LOSS ALLOWANCE OF INVESTMENTS AT AMORTISED COST
Under the expected credit loss model introduced by IFRS 9
impairment provisions are driven by changes in credit risk of
instruments, with a provision for lifetime expected credit losses
recognised where the risk of default of an instrument has increased
significantly since initial recognition.
During the year changes in the gross carrying amount of
financial instruments held at amortised cost contributed to changes
in the expected credit loss allowance. Repayments across the Group
and the sale of a small UK consumer loan portfolio have offset new
originations in the year hence there has been a reduction in the
credit assets at amortised cost from GBP1,010 million at 31
December 2018 to GBP964.9 million at 31 December 2019. Although the
credit assets at amortised cost have reduced there has not been an
associated reduction in expected credit losses as write offs have
largely stopped due to expected future non-performing loan
sales.
Breakdown of expected credit loss allowance as at 31 December
2019 as below:
Group 2019 Real SME SME Consumer Consumer Consumer Total
Estate UK Other UK US Other GBP'000
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============================ ======== ======== ======== ======== ======== ======== ========
Impairment allowance
as at
31 December
2018 1,698 12,037 2,795 16,666 16,018 1,989 51,203
ECL charge to
the statement of
comprehensive income
Stage 1 366 (1,246) - (1,209) 1,713 (411) (787)
Stage 2 1 772 - (953) (379) (369) (928)
Stage 3 187 9,755 (53) 4,867 3,769 1,193 19,718
============================ ======== ======== ======== ======== ======== ======== ========
Total ECL charge
for 2019 554 9,281 (53) 2,705 5,103 413 18,003
============================ ======== ======== ======== ======== ======== ======== ========
Loans and receivables
written off (408) (6,238) - (2,902) (3,436) (721) (13,705)
Loans and receivables
sold (949) - - (6,548) - - (7,497)
Loans and receivables - - - - - - -
removed on deconsolidation
Recoveries of
amounts written
off in previous
years 359 1,152 280 1,638 2,369 23 5,821
Foreign exchange
impact (44) - (116) - (767) (63) (990)
============================ ======== ======== ======== ======== ======== ======== ========
As at 31 December
2019 1,210 16,232 2,906 11,559 19,287 1,641 52,835
============================ ======== ======== ======== ======== ======== ======== ========
Group 2018 Real SME SME Consumer Consumer Consumer Total
Estate UK Other UK US Other GBP'000
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============================ ======== ======== ======== ======== ======== ======== ========
Impairment allowance
as at
31 December
2017 - 6,912 3,557 22,773 23,315 1,657 58,214
Changes on initial
application
of IFRS 9
Stage 1 2,227 2,837 - 5,886 5,873 306 17,129
Stage 2 - - - - 2,512 - 2,512
Stage 3 - - - - - - -
============================ ======== ======== ======== ======== ======== ======== ========
Restated ECL
allowance as
at
1 January 2018 2,227 9,749 3,557 28,659 31,700 1,963 77,855
============================ ======== ======== ======== ======== ======== ======== ========
ECL charge to
the statement of
comprehensive income
Stage 1 (530) 4,296 - (3,819) (3,823) 416 (3,460)
Stage 2 - (1,113) (225) (2,087) (9,687) (165) (13,277)
Stage 3 - 10,669 3,178 18,157 18,010 2,419 52,433
============================ ======== ======== ======== ======== ======== ======== ========
Total ECL charge
for 2018 (530) 13,852 2,953 12,251 4,500 2,670 35,696
============================ ======== ======== ======== ======== ======== ======== ========
Loans and receivables
written off - (5,904) (3,893) (14,168) (22,551) (2,666) (49,182)
Loans and receivables
sold - - - (10,413) (2,723) - (13,136)
Loans and receivables
removed on deconsolidation - (5,743) - - - - (5,743)
Recoveries of
amounts written
off in previous
years - 83 - 337 3,921 64 4,405
Foreign exchange
impact 1 - 178 - 1,171 (42) 1,308
============================ ======== ======== ======== ======== ======== ======== ========
As at 31 December
2018 1,698 12,037 2,795 16,666 16,018 1,989 51,203
============================ ======== ======== ======== ======== ======== ======== ========
The following tables analyse how the expected credit loss
provision as at 31 December 2019 and at 31 December 2018 for the
Group has moved.
ECL Allowance Principal Balance
Group as at Stage Stage Stage Total Stage Stage Stage Total
31 December 1 2 3 GBP'000 1 2 3 GBP'000
2019 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
=================== ======== ======== ======== ======== ========= ======== ======== =========
Opening Balance (9,066) (5,345) (36,792) (51,203) 942,227 21,860 46,263 1,010,350
Stage 1 to
Stage 2 228 (5,317) - (5,089) (14,576) 14,576 - -
Stage 1 to
Stage 3 460 - (21,578) (21,118) (37,210) - 37,210 -
Stage 2 to
Stage 1 (15) 356 - 341 638 (638) - -
Stage 2 to
Stage 3 - 2,592 (3,916) (1,324) - (4,588) 4,588 -
Stage 3 to
Stage 1 (2) - 110 108 126 - (126) -
Stage 3 to
Stage 2 - (12) 18 6 - 21 (21) -
Changes in
model assumptions 508 603 (682) 429 - - - -
Repayments 4,394 2,709 4,367 11,470 (789,544) (13,939) (7,347) (810,830)
Originations (4,788) - - (4,788) 1,057,177 - - 1,057,177
Loans sold 979 - 6,518 7,497 (255,104) - (7,664) (262,768)
Write-offs - - 9,846 9,846 - - (13,705) (13,705)
FX 139 89 762 990 (13,593) (523) (1,182) (15,298)
=================== ======== ======== ======== ======== ========= ======== ======== =========
Total (7,163) (4,325) (41,347) (52,835) 890,141 16,769 58,016 964,926
=================== ======== ======== ======== ======== ========= ======== ======== =========
ECL Allowance Principal Balance
Group as at Stage Stage Stage Total Stage Stage Stage Total
31 December 1 2 3 GBP'000 1 2 3 GBP'000
2018 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
=================== ======== ======== ======== ======== ========= ======== ======== =========
Opening Balance (19,677) (17,313) (40,864) (77,854) 1,174,856 23,881 47,702 1,246,439
Stage 1 to
Stage 2 2,821 (9,526) - (6,705) (56,541) 56,541 - -
Stage 1 to
Stage 3 985 - (42,417) (41,432) (68,381) - 68,381 -
Stage 2 to
Stage 1 (120) 2,553 - 2,433 3,464 (3,464) - -
Stage 2 to
Stage 3 - 12,184 (15,146) (2,962) - (16,876) 16,876 -
Stage 3 to
Stage 1 (3) - 142 139 144 - (144) -
Stage 3 to
Stage 2 - (12) 16 4 - 19 (19) -
Changes in
model assumptions 1,456 215 4,138 5,809 - - - -
Repayments 10,037 7,863 3,683 21,583 (700,574) (32,382) (30,444) (763,400)
Originations (11,717) - (1,538) (13,255) 885,835 - 4,435 890,270
Loans sold
or deconsolidated 6,898 15 11,964 18,877 (306,126) (6,858) (12,461) (325,445)
Write-offs - - 43,466 43,466 - - (49,183) (49,183)
FX 254 (1,324) (238) (1,308) 9,550 999 1,120 11,669
=================== ======== ======== ======== ======== ========= ======== ======== =========
Total (9,066) (5,345) (36,792) (51,203) 942,227 21,860 46,263 1,010,350
=================== ======== ======== ======== ======== ========= ======== ======== =========
The following tables analyse how the expected credit loss as at
31 December 2019 and at 31 December 2018 for the Company is made
up.
ECL Allowance Principal Balance
Company as Stage Stage Stage Total Stage Stage Stage Total
at 1 2 3 GBP'000 1 2 3 GBP'000
31 December GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2019
=================== ======== ======== ======== ======== ========= ======== ======== =========
Opening Balance (5,425) (2,850) (21,490) (29,765) 720,242 5,319 28,825 754,386
Stage 1 to
Stage 2 118 (3,954) - (3,836) (7,091) 7,091 - -
Stage 1 to
Stage 3 334 - (16,431) (16,097) (21,287) - 21,287 -
Stage 2 to
Stage 1 (20) 518 - 498 937 (937) - -
Stage 2 to
Stage 3 - 2,372 (3,616) (1,244) - (4,369) 4,369 -
Stage 3 to
Stage 1 (2) - 110 108 126 - (126) -
Stage 3 to
Stage 2 - (5) 8 3 - 9 (9) -
Changes in
model assumptions 767 136 (249) 654 - - - -
Repayments 3,104 1,333 4,648 9,085 (470,724) (2,417) (7,397) (480,538)
Originations (4,149) - - (4,149) 653,224 - - 653,224
Loans sold 979 - 6,518 7,497 (255,104) - (7,664) (262,768)
Write-offs - - 6,634 6,634 - - (9,811) (9,811)
FX 25 12 117 154 (3,067) (28) (109) (3,204)
=================== ======== ======== ======== ======== ========= ======== ======== =========
Total (4,269) (2,438) (23,751) (30,458) 617,256 4,668 29,365 651,289
=================== ======== ======== ======== ======== ========= ======== ======== =========
ECL Allowance Principal Balance
Company as Stage Stage Stage Total Stage Stage Stage Total
at 1 2 3 GBP'000 1 2 3 GBP'000
31 December GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2018
=================== ======== ======== ======== ======== ========= ======== ======== =========
Opening Balance (14,669) (6,514) (21,414) (42,597) 920,532 10,584 26,202 957,318
Stage 1 to
Stage 2 156 (5,035) - (4,879) (8,613) 8,613 - -
Stage 1 to
Stage 3 524 - (27,929) (27,405) (53,150) - 53,150 -
Stage 2 to
Stage 1 (23) 754 - 731 1,221 (1,221) - -
Stage 2 to
Stage 3 - 4,510 (6,486) (1,976) - (7,420) 7,420 -
Stage 3 to - - - - - - - -
Stage 1
Stage 3 to
Stage 2 - (12) 16 4 - 19 (19) -
Changes in
model assumptions 1,672 198 3,310 5,180 - - - -
Repayments 11,242 89 2,950 14,281 (461,959) (134) (27,480) (489,573)
Originations (7,435) - (1,540) (8,975) 597,219 - 4,435 601,654
Loans sold
or deconsolidated 3,123 3,158 9,875 16,156 (276,101) (5,119) (11,999) (293,219)
Write-offs - - 19,607 19,607 - - (22,794) (22,794)
FX (15) 2 121 108 1,093 (3) (90) 1,000
=================== ======== ======== ======== ======== ========= ======== ======== =========
Total (5,425) (2,850) (21,490) (29,765) 720,242 5,319 28,825 754,386
=================== ======== ======== ======== ======== ========= ======== ======== =========
Measurement uncertainty and sensitivity analysis of expected
credit loss
The recognition and measurement of expected credit losses
("ECL") is highly complex and involves the use of significant
judgement and estimation. This includes the formulation and
incorporation of multiple forward-looking economic conditions into
ECL to meet the measurement objective of IFRS 9.
The ECL recognised in the financial statements reflect the
effect on expected credit losses of a range of possible outcomes,
calculated on a probability-weighted basis, based on the economic
scenarios described above, including management overlays where
required. The probability-weighted amount is determined as at the
balance sheet date and is typically a higher number than would
result from using only the Base (most likely) economic scenario.
Expected credit losses typically have a non-linear relationship to
the many factors which influence credit losses, such that more
favourable macroeconomic factors do not reduce defaults as much as
less favourable macroeconomic factors increase defaults. The ECL
calculated for each of the scenarios represent a range of possible
outcomes that have been evaluated to estimate ECL. As a result, the
ECL calculated for the Upside and Downside scenarios should not be
taken to represent the upper and lower limits of possible actual
ECL outcomes. There is a high degree of estimation uncertainty in
representing tail risk scenarios when assigned a 100 per cent
weighting. A wider range of possible ECL outcomes reflects
uncertainty about the distribution of economic conditions and does
not necessarily mean that credit risk on the associated loans is
higher than for loans where the distribution of possible future
economic conditions is narrower.
For most portfolios, the Company has adopted the use of three
economic scenarios, representative of our view of forecast economic
conditions, sufficient to calculate unbiased ECL. They represent a
'most likely outcome' (the Base scenario) and two, less likely,
'outer' scenarios, referred to as the 'Upside' and 'Downside'
scenarios. The Company has developed a shortlist of the upside and
downside economic and political risks most relevant to the Company
and the IFRS 9 measurement objective. These include economic and
political risks which together affect economies that materially
matter to the Company.
For stage 3 impaired loans, LGD estimates take into account
independent recovery valuations provided by external consultants
where available, or internal forecasts corresponding to anticipated
economic conditions.
The table below shows a sensitivity analysis for ECL based on
changing the weighting of the scenarios to allocate a 100 per cent
weight to the downside scenario. The scenarios are applicable to 31
December 2019 and subsequent to year end the outlook has materially
changed following the COVID-19 situation. The analysis shows that
the ECL would have been GBP0.7 million higher under this
sensitivity. The ultimate impact of COVID-19 is not yet clear
however the economic outlook has materially changed, the Group has
updated its estimate of ECL to allocate 100 per cent of the weight
to the downside scenario. This scenario was set as a downside in
the Q4 2019 review of the impairment model and is broadly
consistent with the economic outlook indicated by our third-party
economic advisers. This revised outlook resulted in an impairment
charge of GBP2.0 million in the NAV calculation for 31 March
2020.
31 December 2019 31 December 2018
============ ================================== ==================================
100% Downside 100% Downside
Weighted Scenario's Scenario Weighted Scenario's Scenario
GBP'000 GBP'000 GBP'000 GBP'000
============ =================== ============= =================== =============
Real Estate 1,210 1,287 1,698 2,188
SME (UK) 16,232 16,398 12,037 12,852
SME (Other) 2,906 2,906 2,795 2,795
Consumer
(UK) 11,559 11,864 16,666 17,995
Consumer
(US) 19,287 19,320 16,018 16,392
Consumer
(Other) 1,641 1,744 1,989 2,214
============ =================== ============= =================== =============
Total 52,835 53,519 51,203 54,436
============ =================== ============= =================== =============
The ECL has been further sensitised by assessing the impact of
GBP10.0 million of credit assets at amortised cost moving from
Stage 1 to Stage 2. The analysis shows that the ECL would have been
GBP2.9 million higher under this sensitivity.
12. FEES AND EXPENSES
Investment management and performance fees
Under the terms of the Management Agreement, the Investment
Manager is entitled to a management fee and a performance fee
together with reimbursement of reasonable expenses incurred by it
in the performance of its duties.
The management fee is payable monthly in arrears and is at the
rate of 1/12 of 1.0 per cent per month of NAV (the "Management
Fee"). For the period from admission to trading on the London Stock
Exchange's main market for listed securities (the "Admission")
until the date on which 90 per cent of the net proceeds of the
Issue have been invested or committed for investment, directly or
indirectly, in Credit Assets, the value attributable to any assets
of the Group other than Credit Assets (including any cash) will be
excluded from the calculation of NAV for the purposes of
determining the Management Fee.
The Investment Manager shall not charge a management fee or
performance fee twice. Accordingly, if at any time the Group
invests in or through any other investment fund or special purpose
vehicle and a management fee or advisory fee is charged to such
investment fund or special purpose vehicle by the Investment
Manager, the Sub-Manager or any of their affiliates, the value of
such investment shall be excluded from the calculation of NAV for
the purposes of determining the Management Fee payable.
Notwithstanding the above, the Investment Manager may charge a
fee based on a percentage of gross assets (such percentage not to
exceed 1.0 per cent) to any entity which is within the same group
of companies of which the Company forms part, provided that such an
entity employs leverage for the purpose of its investment policy or
strategy. Effective from 1 January 2017, the Investment Manager
waived the management fee charged on leverage.
Management fees charged for the year ended 31 December 2019
totalled GBP7,268,000 (2018: GBP7,475,000) of which GBP1,202,000
was payable at the year-end (2018: GBP1,226,000).
The management fees are allocated between the revenue and
capital accounts based on the prospective split of NAV between
revenue and capital. The percentage of management expenses
allocated to capital is less than 1 per cent of the total.
The performance fee is calculated in respect of each twelve
month starting on 1 January and ending on 31 December in each
calendar year (the "Calculation Period"), save that the first
Calculation Period was the period commencing on admission and
ending on 31 December 2014 and provided further that if at the end
of what would otherwise be a Calculation Period no performance fee
has been earned in respect of that period, the Calculation Period
shall carry on for the next 12 month period and shall be deemed to
be the same Calculation Period and this process shall continue
until a performance fee is next earned at the end of the relevant
period.
The performance fee is calculated by reference to the movements
in the Adjusted Net Asset Value (as defined below) since the end of
the Calculation Period in respect of which a performance fee was
last earned or Admission if no performance fee has yet been earned
(the "High Water Mark").
The performance fee will be a sum equal to 15 per cent of such
amount (if positive) and will only be payable if the Adjusted NAV
at the end of a Calculation Period exceeds the High-Water Mark.
From 1 January 2018, the performance fee will be subject to a
hurdle of 5 per cent with full catch up. The performance fee shall
be payable to the Investment Manager in arrears within 30 calendar
days of the end of the relevant Calculation Period.
Performance fees for the year ended 31 December 2019 totalled
GBP6,541,000 (2018: GBP6,462,000) of which GBP6,541,000 was payable
at the year-end (2018: GBP6,462,000).
"Adjusted Net Asset Value" means the NAV adjusted for: (i) any
increases or decreases in NAV arising from issues or repurchases of
ordinary or C shares during the relevant Calculation Period; (ii)
adding back the aggregate amount of any dividends or distributions
(for which no adjustment has already been made under (i)) made by
the Group at any time during the relevant Calculation Period; (iii)
before deduction for any accrued performance fees; and (iv) to the
extent that the Group invests in any other investment fund or via
any special purpose vehicle or via any separate managed account
arrangement which is managed or advised by the Investment Manager,
the Sub-Manager or any of their affiliates, if the Investment
Manager, the Sub-Manager or such affiliate is entitled to
(including where it is not yet earned) receive a performance fee or
performance allocation at the level of that investee entity or
under such separate managed account arrangement, excluding any gain
or loss attributable to those investments during the relevant
Calculation Period.
Administration
The Company has entered into an administration agreement with
Citco Fund Services (Ireland) Limited. The Company pays to the
Administrator out of the assets of the Company an annual
administration fee based on the Company's net assets subject to a
monthly minimum charge. Administration fees are now presented in
aggregate under 'Other Fund expense' on the face of the
Consolidated Statement of Comprehensive Income.
The Administrator shall also be entitled to be repaid out of the
assets of the Company all of its reasonable out-of-pocket expenses
incurred on behalf of the Company.
Other expenses
31 December 31 December
2019 2018
GBP'000 GBP '000
======================== =========== =============
Auditors' remuneration 385 375
Assurance & Tax* 206 347
Administration fees 530 526
Directors' fees 256 197
Regulatory costs 248 270
Other 2,169 5,068
======================== =========== =============
Total 3,794 6,783
======================== =========== ===========
* Of the assurance and tax work only GBP27,000 relates to PwC
please see table below.
Auditors' remuneration
Remuneration for all work carried out for the Group by the
statutory audit firm in each of the following categories of work is
disclosed below:
-- the statutory audit of the Group financial statements;
-- the non-statutory audit of the financial statements for the SPV and the Eaglewood Fund; and
-- other non-audit services.
2019 2018
================================ ================================
Company Subsidiaries Group Company Subsidiaries Group
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
==================== ======== ============ ======== ======== ============ ========
Statutory Audit 280 20 300 240 70 310
Non-statutory Audit - 85 85 - 65 65
Non-audit services
Other assurance
services 27 - 27 27 - 27
==================== ======== ============ ======== ======== ============ ========
Total 307 105 412 267 135 402
==================== ======== ============ ======== ======== ============ ========
Company Secretary
Under the terms of the Company Secretarial Agreement, Link
Company Matters Limited is entitled to an annual fee of GBP55,000
(exclusive of VAT and disbursements).
Registrar
Under the terms of the Registrar Agreement, the Registrar is
entitled to an annual maintenance fee of GBP1.25 per Shareholder
account per annum, subject to a minimum fee of GBP2,500 per annum
(exclusive of VAT).
Depositary
On 21 July 2017, the Company appointed Citco Custody (UK)
Limited as Depositary to replace Deutsche Bank Luxemburg, S.A.
Under the terms of the Depositary Agreement, the Depositary is
entitled to be paid a fee of up to 0.04 per cent per annum of NAV,
subject to a minimum monthly fee of GBP3,000 (exclusive of VAT).
Prior to 21 July 2017, Deutsche Bank Luxemburg was entitled to be
paid a fee of up to 0.025 per cent per annum of NAV, subject to a
minimum monthly fee of GBP3,000 (exclusive of VAT).
Other operational expenses
Other on-going operational expenses (excluding fees paid to
service providers as detailed above) of the Group will be borne by
the Group including printing, audit, finance costs, due diligence
and legal fees. All reasonable out of pocket expenses of the
Investment Manager, the Administrator, the Company Secretary, the
Registrar, the Depositary, the Custodian, and the Directors
relating to the Group will be borne by the Group.
Following a review of the Consolidated Statement of
Comprehensive Income the Directors have decided to re-present these
statements for 2018 and incorporate them in 2019. The changes made
to the face of these financial statements are to make them easier
to read and understand for the end user and to tie in with how the
Group monitors and reviews performance internally and externally in
other outputs. There have been no changes to the basis on which the
items are estimated or measured. As part of this the cost of
third-party platform service costs has been presented on the face
of the Consolidated Statement of Comprehensive Income.
13. INTEREST RECEIVABLE
Interest income is earned from investments in fixed income
securities and loans and broker balances. Below tables show the
interest receivables of the Group and the Company as at 31 December
2019 and at 31 December 2018.
Group Group Group
31 December 31 December
2019 2018
GBP'000 GBP'000
==================== ============ ============
Interest receivable 12,149 23,200
==================== ============ ============
Total 12,149 23,200
==================== ============ ============
Company Company Company
31 December 31 December
2019 2018
GBP'000 GBP'000
==================== ============ ============
Interest receivable 9,914 22,241
==================== ============ ============
Total 9,914 22,241
==================== ============ ============
14. NON-CURRENT LIABILITIES
Group Group Group
31 December 31 December
2019 2018
GBP'000 GBP'000
========================== ============ ============
Revolving bank facilities 83,707 202,287
Principal protected notes 150,678 116,167
Term facilities 67,814 59,557
========================== ============ ============
Total borrowings 302,199 378,011
========================== ============ ============
Company Company Company
31 December 31 December
2019 2018
GBP'000 GBP'000
========================== ============ ============
Term facility 67,814 49,696
Revolving bank facilities 152 47,692
========================== ============ ============
Total 67,966 97,388
========================== ============ ============
The Company entered into a 30-month debt facility in December
2018 that had both a term and a revolving element. The facility has
the ability to draw down in multiple currencies to align with the
underlying assets of the Group, reducing the need for foreign
currency hedging. It also provides both term and revolving debt
that will allow the Group to repay part of the debt when it has a
strong liquidity position. The facility has a day-1 committed size
of GBP150,000,000, with the ability to increase further in the
future. The facility is secured by way of fixed and floating
charges; interest on the loan is paid quarterly and is charged on
LIBOR plus margin. As at 31 December 2019 the facility is
GBP67,814,000 drawn (2018: GBP97,259,000).
During the year ended 31 December 2016, MOCA 2016 issued notes
as securitisations of loans. These were issued in the form of
principal protected notes ("PPNs"). The PPNs amortise, in order of
seniority, on a monthly basis based on the receipts arising on the
underlying loan assets. Consequently, the weighted average life of
the PPNs is expected to be significantly shorter than the
contractual maturity of October 2024. The PPNs held by third
parties pay interest at one month LIBOR plus a range of margins.
The original principal balance on the underlying assets was
GBP129,000,000 and as at 31 December 2019 was GBPnil (31 December
2018: GBP30,380,000). As at 31 December 2019 the outstanding issued
PPN was GBPnil (31 December 2018: GBP14,302,000).
During the year ended 31 December 2017, MOCA 2017 issued notes
as securitisations of loans. These were issued in the form of PPNs.
The PPNs amortise, in order of seniority, on a monthly basis based
on the receipts arising on the underlying loan assets.
Consequently, the weighted average life of the PPNs is expected to
be significantly shorter than the contractual maturity of December
2027. The PPNs held by third parties pay interest at one month
LIBOR plus a range of margins. The original principal balance on
the underlying assets was GBP216,481,000 and as at 31 December 2019
was GBP61,402,000 (31 December 2018: GBP114,329,000). As at 31
December 2019 the outstanding issued PPN was GBP46,446,000 (31
December 2018: GBP101,865,000).
During the year ended 31 December 2019, SBOLT 2019 issued notes
as securitisations of loans. These were issued in the form of
principal protected notes ("PPNs"). The PPNs amortise, in order of
seniority, on a monthly basis based on the receipts arising on the
underlying loan assets. Consequently, the weighted average life of
the PPNs is expected to be significantly shorter than the
contractual maturity. The PPNs held by third parties pay interest
at one month LIBOR plus a range of margins. The original principal
balance on the underlying assets was GBP202,441,146 and as at 31
December 2019 was GBP180,259,528. As at 31 December 2019 the
outstanding issued PPN was GBP104,232,000.
During July 2017, the Group entered into a revolving facility
with a European Bank to fund its SME loan originations. The maximum
size of the facility is GBP160,000,000 and matures within 3 years
from its closing date. Its interest is paid on a monthly basis
linked to 1-month LIBOR plus margin. The facility has been fully
repaid during the year, the balance as at 31 December 2018 was
GBP154,384,000 drawn.
The Company entered into a 30-month, EUR50.0 million debt
facility in February 2019. I nterest on the loan is a fixed margin
paid monthly. As at 31 December 2019 the facility had been fully
repaid. The Company also entered into a $120.0 million debt
facility loan with a 1-year drawdown period and a further 2-year
life, in February 2019. I nterest on the loan is charged monthly on
a 3-month LIBOR plus margin. As at 31 December 2019 the facility is
$110.4 million drawn (31 December 2018: $Nil). These new facilities
al lowed the Company to align the currency of the underlying assets
of the Group with the currency of the leverage, reducing the need
for foreign currency hedging.
The below tables analyse the Group's borrowings into relevant
maturity groupings based on the remaining period at the Statement
of Financial Position date to the final scheduled maturity
date.
Group 2019 <1 year 1 - 3 years 3 - 5 years > 5 years Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
==================== ======== =========== =========== ========= ========
Revolving bank
facilities - 152 - 83,555 83,707
Principal protected
notes - - - 150,678 150,678
Term facilities - 67,814 - - 67,814
==================== ======== =========== =========== ========= ========
Total - 67,966 - 234,233 302,199
==================== ======== =========== =========== ========= ========
Group 2018 <1 year 1 - 3 years 3 - 5 years > 5 years Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
==================== ======== =========== =========== ========= ========
Revolving bank
facilities - 202,287 - - 202,287
Principal protected
notes - - - 116,167 116,167
Term facilities - 49,696 9,861 - 59,557
==================== ======== =========== =========== ========= ========
Total - 251,983 9,861 116,167 378,011
==================== ======== =========== =========== ========= ========
The below table analyses the Company's borrowings into relevant
maturity groupings based on the remaining period at the Statement
of Financial Position date to the final scheduled maturity
date.
Company 2019 <1 year 1 - 3 years 3 - 5 years > 5 years Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================= ======== =========== =========== ========= ========
Term facilities - 67,814 - - 67,814
Revolving
bank facilities - 152 - - 152
================= ======== =========== =========== ========= ========
Total - 67,966 - - 67,966
================= ======== =========== =========== ========= ========
Company 2018 <1 year 1 - 3 years 3 - 5 years > 5 years Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================= ======== =========== =========== ========= ========
Term facilities - 49,696 - - 49,696
Revolving
bank facilities - 47,692 - - 47,692
================= ======== =========== =========== ========= ========
Total - 97,388 - - 97,388
================= ======== =========== =========== ========= ========
As part of IAS 7, "Statement of Cash Flows" an entity is
required to disclosure changes in liabilities arising from
financing activities, including both changes arising from cash
flows and non-cash changes. As at the 31 December 2019 the below
changes occurred:
Group 2019 Opening Closing
balance balance
as Foreign as at 31
at 1 January Acquisitions/ Interest Exchange December
2019 Payments Drawdowns Expense movements 2019
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================== ============= ========= ============= ======== ========== =========
Borrowings 378,011 (401,099) 315,286 14,691 (4,690) 302,199
================== ============= ========= ============= ======== ========== =========
Total liabilities
from financing
activities 378,011 (401,099) 315,286 14,691 (4,690) 302,199
================== ============= ========= ============= ======== ========== =========
Group 2018 Opening Closing
balance balance
as Foreign as at 31
at 1 January Acquisitions/ Interest Exchange December
2018 Payments Drawdowns Expense movements 2018
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================== ============= ========== ============= ======== ========== =========
Borrowings 615,850 (545,536) 286,416 18,355 2,926 378,011
================== ============= ========== ============= ======== ========== =========
Total liabilities
from financing
activities 615,850 ( 545,536) 286,416 18,355 2,926 378,011
================== ============= ========== ============= ======== ========== =========
Company Opening Closing
2019 balance balance
as Foreign as at 31
at 1 January Acquisitions/ Interest Exchange December
2019 Payments Drawdowns Expense movements 2019
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================== ============= ======== ============= ======== ========== =========
Borrowings 97,388 (69,228) 36,845 4,479 (1,518) 67,966
================== ============= ======== ============= ======== ========== =========
Total liabilities
from financing
activities 97,388 (69,228) 36,845 4,479 (1,518) 67,966
================== ============= ======== ============= ======== ========== =========
Company Opening Closing
2018 balance balance
as Foreign as at 31
at 1 January Acquisitions/ Interest Exchange December
2018 Payments Drawdowns Expense movements 2018
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================== ============= ========= ============= ======== ========== =========
Borrowings 200,000 (205,072) 97,259 5,201 - 97,388
================== ============= ========= ============= ======== ========== =========
Total liabilities
from financing
activities 200,000 (205,072) 97,259 5,201 - 97,388
================== ============= ========= ============= ======== ========== =========
15. DEEMED LOANS
The Group has no deemed loans as at 31 December 2019 and 31
December 2018. Deemed loans can only relate to the Company as they
relate to loans originated by the Company and subsequently sold,
but without meeting relevant derecognition requirements. Although
the loans are no longer legally owned by the Company, the Company
maintains the economic benefit of the underlying assets and
therefore does not meet the criteria to derecognise as the economic
exposure associated with the rights inherent in the asset are
maintained. As the requirements of derecognition have not been met
the Company has a deemed loan liability to the relevant special
purpose entity.
The below tables show the Company's deemed loans as at 31
December 2019 and 31 December 2018.
Company 2019 Opening balance Closing balance
as at 1 January Novations/ as at 31 December
2019 (Redemptions) 2019
GBP'000 GBP'000 GBP'000
=================== ================ ============== ==================
Deemed loans 152,189 (16,428) 135,761
=================== ================ ============== ==================
Total deemed loans 152,189 (16,428) 135,761
=================== ================ ============== ==================
Company 2018 Opening balance Closing balance
as at 1 January Novations/ as at 31 December
2018 (Redemptions) 2018
GBP'000 GBP'000 GBP'000
=================== ================ ============== ==================
Deemed loans 335,099 (182,910) 152,189
=================== ================ ============== ==================
Total deemed loans 335,099 (182,910) 152,189
=================== ================ ============== ==================
16. STRUCTURED ENTITIES
A structured entity is an entity in which voting or similar
rights are not the dominant factor in deciding control. Structured
entities are generally created to achieve a narrow and well defined
objective with restrictions around their ongoing activities.
Structured entities are consolidated when the substance of the
relationship indicates control.
Structured entities are assessed for consolidation in accordance
with the accounting policy set out in Note 2. The following
structured entities are consolidated in the Group's results.
Principal place
of business and
Structured entity Nature of business incorporation
======================= =============================== =================
Eaglewood Income Fund Alternative finance investments Delaware USA
I, LP
======================= =============================== =================
Eaglewood SPV I LP Alternative finance investments Delaware USA
======================= =============================== =================
Marketplace Originated Securitisation of UK England and Wales
Consumer Assets 2016-1 consumer loans
PLC
======================= =============================== =================
Marketplace Originated Securitisation of UK England and Wales
Consumer Assets 2017-1 consumer loans
PLC
======================= =============================== =================
P2P BL-2 Limited Term facility England and Wales
======================= =============================== =================
P2P BL-3 PLC Term facility England and Wales
======================= =============================== =================
EW-PFL Trust Alternative finance investments Delaware USA
======================= =============================== =================
SPV I Loan Trust Alternative finance investments Delaware USA
======================= =============================== =================
Payoff Consumer Loan Alternative finance investments Delaware USA
Trust
======================= =============================== =================
BFCL Trust Alternative finance investments Delaware USA
======================= =============================== =================
Eaglewood Consumer Loan Alternative finance investments Delaware USA
Trust 2014-1
======================= =============================== =================
Eaglewood LC Trust Alternative finance investments Delaware USA
======================= =============================== =================
PSC 1803 Autoloan Trust Alternative finance investments Delaware USA
======================= =============================== =================
PSC Rocketloans Prime Alternative finance investments Delaware USA
Consumer Loan Trust
======================= =============================== =================
PSC 2018F Loan Trust Alternative finance investments Delaware USA
======================= =============================== =================
PSC 2019P LLC Alternative finance investments Delaware USA
======================= =============================== =================
CH Mercury Note Issuer Alternative finance investments Ireland
DAC
======================= =============================== =================
Further details on the activities of these consolidated
structured entities are set out in Note 2.
P2P BL-2 Limited, P2P BL-3 PLC, Marketplace Originated Consumer
Assets 2016-1 PLC and CH Mercury Note Issuer DAC were liquidated
during the year. The following structured entity is not
consolidated in the Group's results, as the Group (through its
interest in Eaglewood Fund) only retained 25 per cent pari passu of
the residual note, the Group does not have control. The structured
entity is treated as an associate. Please see Note 18 for more
details.
Principal place
of business and
Structured entity Nature of business incorporation
===================== =============================== ================
MW-EW Financing Trust Alternative finance investments Delaware USA
===================== =============================== ================
17. SUBSIDIARIES
Accounting for investment in subsidiaries
The Company's investments in subsidiaries, as at 31 December
2019 and 31 December 2018, consist of:
31 December 31 December
2019 2018
Investments in subsidiaries GBP'000 GBP'000
======================================== =========== ===========
Investments in SPV partnership interest 221,863 108,186
Investment in P2P BL-3 - 35,860
The investments in debt securities issued by MOCA 2017 and SBOLT
2019 are not presented in the Company Statement of Financial
Position because the loans held by the subsidiaries are included in
the Company Statement of Financial Position due to the Deemed Loan
accounting. See Note 2h(i). The investments in Trusts and Eaglewood
Fund are consolidated by the SPV and not directly held by the
Company. The debt securities originated in P2P BL-3 have been
presented in the Company Statement of Financial Position as at 31
December 2018 as an investment asset designated as held to fair
value through profit or loss, but not in 31 December 2019 given it
has been liquidated.
18. INVESTMENTS IN ASSOCIATES
Associates are entities over which the Group has significant
influence, but does not control, generally accompanied by a
shareholding of between 20 per cent and 50 per cent of the voting
rights. Given the nature of the below shareholdings these are all
deemed to be associates given that the Company does not have
control.
The below companies are associates within the Group Financial
Statements:
Principal place
Entity Nature of business of business
===================== ================== ===============
Zorin Finance Limited Real Estate UK
===================== ================== ===============
MW-EW Financing Trust Consumer USA
===================== ================== ===============
As at 31 December 2019, the group has two associates, being
Zorin Finance Limited ("Zorin") a UK platform originating secured
real estate loans, and the other being MW-EW-Financing Trust
whereby the Eaglewood Fund holds a 25 per cent residual note. The
investments are accounted for at fair value through profit or loss.
No dividends were declared during the period in respect of the
investments.
The Group has a direct equity ownership of Zorin of 33.3 per
cent. Zorin is a private limited company registered at 1
Knightsbridge Green, London, England, SW1X 7NE and has a registered
number of 07514913. It also has provided GBP6,000,000 (2018:
GBP6,000,000) of debt funding to the platform in the form of
convertible loan notes of which, as at 31 December 2019,
GBP2,000,000 (31 December 2018: 2,500,000) has been drawn.
The Group has entered into an agreement which gives it the right
to participate in qualifying loans originated by the platform.
There are no significant restrictions on the ability of the
associate from repaying loans from, or distributing dividends to,
the Group.
The unaudited net assets of Zorin as at 31 December 2019 were
GBP10,166,000 (31 December 2018: GBP8,279,000), and the profit
after tax was GBP1,473,000 (31 December 2018: GBP2,169,000).
The Group has a residual note in MW-EW Financing Trust. The
Eaglewood Fund is registered at 11(th) Floor 500 Delaware Avenue,
Wilmington, Delaware, 19801. MW-EW Financing Trust was the primary
beneficiary of LC Trust, MW EW Financing Trust, Warehouse I,
Warehouse II and CLT 2014. In October 2017, the SPV became the sole
investor and thus, consolidation of the Eaglewood Fund took place.
Upon consolidation, the loan investments held by Warehouse I and
Warehouse II were transferred to MW EW Financing Trust and the
ineligible loan investments to LC Trust and CLT 2014. To obtain
funding, MW-EW Financing Trust issued asset backed notes ("Notes").
The senior tranche of the Notes ("Senior Note") is held by a bank,
representing 76 per cent of the interest and the residual portion
of the Notes ("Residual Note") was retained by the Eaglewood Fund.
The Eaglewood Fund subsequently sold 75 per cent of the Residual
Note to an external investor and retained 25 per cent. This has
been sold post year end.
The unaudited net assets of MW-EW Financing Trust as at 31
December 2019 were GBP4,649,000 (31 December 2018: GBP14,721,000),
and the loss after tax was GBP6,536,000 (31 December 2018: loss of
GBP2,514,000).
During the year the Company sold the entirety of its interests
in Castlehaven Finance ("Castlehaven"), an alternative development
and bridging finance lender in Ireland, to Avenue Capital Group. As
part of this transaction the Group sold its direct equity ownership
of 25 per cent.
19. TAXATION
Investment trust status
It is the intention of the Directors to conduct the affairs of
the Company so as to satisfy the conditions for approval as an
investment trust. As an investment trust the Company is exempt from
corporation tax on capital gains. The Company's revenue income from
loans and other investments is taxable in the hands of the
Company's shareholders and likewise is not subject to corporation
tax.
Any change in the Company's tax status or in taxation
legislation generally could affect the value of the investments
held by the Group, affect the Company's ability to provide returns
to shareholders, lead the Company to lose its exemption from UK
corporation tax on chargeable gains or alter the post-tax returns
to shareholders. It is not possible to guarantee that the Company
will remain a non-close company, which is a requirement to maintain
status as an investment trust, as the ordinary shares are freely
transferable. The Company, in the unlikely event that it becomes
aware that it is a close company, or otherwise fails to meet the
criteria for maintaining investment trust status, will, as soon as
reasonably practicable, notify shareholders of this fact.
The tax charge for the year differs from the standard rate of
corporation tax in the UK of 19.00 per cent (2018: 19.00 per cent
). There has been no change in the applicable tax rate compared to
the previous period. The differences are explained below:
2019 Revenue Capital Total
GBP'000 GBP'000 GBP'000
======================================== ==================== ======================== ============================
Profit on ordinary activities
before taxation 39,466 (4,643) 34,823
Tax at the standard UK corporation
tax rate of 19.00% 7,499 (882) 6,617
Effects of:
Capital items exempt from corporation
tax - 882 882
Non-taxable income (7,499) - (7,499)
======================================== ==================== ======================== ============================
Total tax charge - - -
======================================== ==================== ======================== ============================
2018 Revenue Capital Total
GBP'000 GBP'000 GBP'000
======================================== ==================== ======================== ============================
Profit on ordinary activities
before taxation 32,451 (1,724) 30,727
Tax at the standard UK corporation
tax rate of 19.00% 6,157 (328) 5,829
Effects of:
Capital items exempt from corporation
tax - 328 328
Non-taxable income (6,157) - (6,157)
======================================== ==================== ======================== ============================
Total tax charge - - -
======================================== ==================== ======================== ============================
Overseas taxation
The Company may be subject to taxation under the tax rules of
the jurisdictions in which it invests, including by way of
withholding of tax from interest and other income receipts.
Although the Company will endeavour to minimise any such taxes this
may affect the level of returns to shareholders.
There was no corporation tax charge incurred during the year
ended 31 December 2019 (2018: GBPnil).
There is also no corporation tax payable or receivable as at 31
December 2019 (2018: GBPnil).
20. NET ASSET VALUE PER ORDINARY SHARE
Group 31 December 31 December
2019 2018
=========================================== =========== =====================
Ordinary Shares
Net assets attributable at end of year
(GBP'000) 718,245 733,449
Shares in issue 74,402,289 76,088,401
Net asset value per ordinary share (pence) 965.35p 963.94p
=========================================== =========== =====================
Company 31 December 31 December
2019 2018
=================================== =========== =====================
Ordinary Shares
Net assets attributable at end of
year (GBP'000) 718,245 733,449
Shares in issue 74,402,289 76,088,401
Net asset value per ordinary share
(pence) 965.35p 963.94p
=================================== =========== =====================
All shares issued are fully paid.
21. SHAREHOLDERS' CAPITAL
Set out below is the issued share capital of the Company as at
31 December 2019, all shares issued are fully paid with none not
fully paid:
Nominal value Number Voting rights
GBP'000 of shares of shares
================================= ============= ========== =============
Ordinary Shares 744 74,402,289 74,402,289
Ordinary Shares held in Treasury 119 11,904,514 -
================================= ============= ========== =============
Total 863 86,306,803 74,402,289
================================= ============= ========== =============
Set out below is the issued share capital of the Company as at
31 December 2018:
Nominal value Number Voting rights
GBP'000 of shares of shares
================================= ============= ========== =============
Ordinary Shares 761 76,088,401 76,088,401
Ordinary Shares held in Treasury 102 10,218,402 -
================================= ============= ========== =============
Total 863 86,306,803 76,088,401
================================= ============= ========== =============
On incorporation, the issued share capital of the Company was
GBP0.01 represented by one ordinary share, held by the subscriber
to the Company's memorandum of association.
Rights attaching to the ordinary shares
The holders of ordinary shares shall be entitled to all of the
Company's net assets.
The holders of ordinary shares are only entitled to receive, and
to participate in, any dividends declared in relation to the
relevant class of shares that they hold.
The ordinary shares shall carry the right to receive notice of,
attend and vote at general meetings of the Company.
The consent of the holders of ordinary shares will be required
for the variation of any rights attached to the relevant class of
shares.
Voting rights
Subject to any rights or restrictions attached to any shares, on
a show of hands every Shareholder present in person has one vote
and every proxy present who has been duly appointed by a
Shareholder entitled to vote has one vote, and on a poll every
Shareholder (whether present in person or by proxy) has one vote
for every share of which he is the holder.
A Shareholder entitled to more than one vote need not, if he
votes, use all his votes or cast all the votes he uses the same
way. In the case of joint holders, the vote of the senior who
tenders a vote shall be accepted to the exclusion of the vote of
the other joint holders, and seniority shall be determined by the
order in which the names of the holders stand in the Register.
No Shareholder shall have any right to vote at any general
meeting or at any separate meeting of the holders of any class of
shares, either in person or by proxy, in respect of any share held
by him unless all amounts presently payable by him in respect of
that share have been paid.
Variation of rights & distribution on winding up
If at any time the share capital of the Company is divided into
different classes of shares, the rights attached to any class may
be varied either in writing of the holders of three-quarters in
nominal value of the issued shares of that class or with the
sanction of an extraordinary resolution passed at a separate
meeting of the holders of the shares of that class.
The Company has no fixed life but, pursuant to the Articles, an
ordinary resolution for the continuation of the Company will be
proposed at the annual general meeting of the Company to be held in
2021 and, if passed, every five years thereafter. Upon any such
resolution not being passed, proposals will be put forward to the
effect that the Company be wound up, liquidated, reconstructed or
unitised.
If the Company is wound up, the liquidator may divide among the
shareholders in specie the whole or any part of the assets of the
Company and for that purpose may value any assets and determine how
the division shall be carried out as between the shareholders or
different classes of shareholders.
The table below shows the movement in shares during the year
ended 31 December 2019:
Shares in issue Shares in issue
at the Buyback of at
For the year ended beginning of Ordinary the end of the
31 December 2019 the year Shares year
=================== ================ ========================= ========================
Ordinary Shares 76,088,401 (1,686,112) 74,402,289
Treasury Shares 10,218,402 1,686,112 11,904,514
=================== ================ ========================= ========================
The table below shows the movement in shares during the period
ended 31 December 2018:
Shares in issue Shares in issue
at the Buyback of at
For the year ended beginning of Ordinary the end of the
31 December 2018 the year Shares year
=================== ================ ========================= ========================
Ordinary Shares 79,835,549 (3,747,148) 76,088,401
Treasury Shares 6,471,254 3,747,148 10,218,402
=================== ================ ========================= ========================
Cash consideration was received for all subscriptions for
shares.
Share Buyback
During the year ended 31 December 2016 the Company commenced a
share buyback program. All shares bought back are held in treasury
at the end of the period. As at 31 December 2019, the Company had
bought back 11,904,514 (2018: 10,218,402) ordinary shares.
The Company has engaged Liberum Capital Limited to effect
on-market purchases of its shares on its behalf. Both parties can
terminate the contract without cause at any point other than during
a closed period (2019 was not a closed period). As a result, no
liability has been recognised as at 31 December 2019 other than in
relation to those shares acquired pending settlement (2018:
nil).
2019 Average Lowest Highest Total
Ordinary price price price Treasury
shares purchased per share per share per share Shares
========== ================= ========== ========== ========== ==========
January 342,584 812.8p 800.0p 825.0p 10,560,986
February 282,503 818.0p 806.0p 827.0p 10,843,489
March 296,697 810.6p 806.0p 816.0p 11,140,186
April 75,000 823.0 812.0 834.0 11,215,186
May 80,878 855.5 848.0 860.0 11,296,064
June 94,371 845.7 840.0 853.0 11,390,435
July 102,250 841.2 834.1 848.0 11,492,685
August 100,428 844.5 838.0 860.0 11,593,113
September 97,500 822.4 800.0 838.0 11,690,613
October 20,000 830.3 835.0 838.0 11,710,613
November 102,021 829.5 800.0 852.0 11,812,634
December 91,880 823.6 814.0 832.0 11,904,514
========== ================= ========== ========== ========== ==========
2018 Average Lowest Highest Total
Ordinary price price price Treasury
shares purchased per share per share per share Shares
========== ================= ======================= ======================= ======================= ==========
January 511,043 820.9p 812.0p 840.0p 6,982,297
February 585,100 813.3p 792.0p 825.0p 7,567,397
March 188,775 784.3p 756.0p 802.0p 7,756,172
April 333,474 784.4p 755.0p 801.0p 8,089,646
May 237,344 800.1p 784.0p 810.0p 8,326,990
June 383,731 791.0p 780.0p 805.0p 8,710,721
July 384,267 821.5p 805.0p 831.0p 9,094,988
August 156,000 784.5p 768.5p 800.0p 9,250,988
September 167,091 775.0p 668.0p 783.0p 9,418,079
October 104,182 775.0p 766.0p 787.0p 9,522,261
November 401,500 788.5p 780.0p 803.0p 9,923,761
December 294,641 800.3p 795.3p 805.0p 10,218,402
========== ================= ======================= ======================= ======================= ==========
Special Distributable Reserve
At a general meeting of the Company held on 15 June 2015,
special resolutions were passed approving the cancellation of the
amount standing to the credit of the Company's share premium
account as at 29 May 2015 and additional share premium following
the issue of new C shares, which occurred on 28 July 2015. These C
shares were subsequently converted so that there were no C shares
as at 31 December 2019 (2018: nil).
Following the approval of the Court and the subsequent
registration of the Court order with the Registrar of Companies on
17 September 2015, the reduction became effective. Accordingly,
GBP832,647,915, previously held in the share premium account, was
transferred to the special distributable reserves of the Group as
disclosed in the Consolidated Statement of Financial Position.
The cost of the buyback of ordinary shares as detailed above has
been funded by the special distributable reserve. Also, dividends
have been paid out of the special distributable reserve in prior
years. Therefore, the closing balance in the special distributable
reserve has been reduced to GBP677,167,000 (2018:
GBP710,824,000).
22. DIVIDS
The following table summarises the year end dividends payable to
equity shareholders in the year:
31 December 31 December
2019 2018
Group and Group and
Company Company
Period to Share Class Amount Payment date GBP'000 GBP'000
============== ============ ====== ============= =========== ===========
31 December
2017 Ordinary 12.0p 16 March 2018 - 9,485
31 March 2018 Ordinary 12.0p 18 June 2018 - 9,374
19 September
30 June 2018 Ordinary 12.0p 2018 - 9,258
30 September 19 December
2018 Ordinary 12.0p 2018 - 9,204
31 December
2018 Ordinary 12.0p 27 March 2019 9,084 -
31 March 2019 Ordinary 12.0p 14 June 2019 9,008 -
30 September
30 June 2019 Ordinary 12.0p 2019 8,972 -
30 September 13 December
2019 Ordinary 12.0p 2019 8,947 -
============== ============ ====== ============= =========== ===========
Dividends recorded in Reserves in period 36,011 37,321
=================================================== =========== ===========
31 December
2019 Ordinary 12.0p 27 March 2020 8,905 -
Total 44,916 37,321
============================ ====== ============= =========== ===========
23. RELATED PARTY TRANSACTIONS
IAS 24 'Related party disclosures' requires the disclosure of
the details of material transactions between the Company and any
related parties. Accordingly, the disclosures required are set out
below:
Directors
The remuneration of the Directors is set out in the Directors'
Remuneration Report on pages 49 to 52. There were no contracts
subsisting during or at the end of the year in which a Director of
the Company is or was interested, and which are or were significant
in relation to the Company's business.
Each of the Directors is entitled to receive a fee from the
Group at such rate as may be determined in accordance with the
Articles. Save for the Chairman of the Board, the fees are
GBP40,000 for each Director per annum. The Chairman's fee is
GBP49,000 per annum.
All of the Directors are also entitled to be paid all reasonable
expenses properly incurred by them in attending general meetings,
Board or Committee meetings or otherwise in connection with the
performance of their duties. The Board may determine that
additional remuneration may be paid, from time to time, to any one
or more Directors in the event such Director or Directors are
requested by the Board to perform extra or special services on
behalf of the Group.
As at 31 December 2019, the Directors' interests in the Group's
shares were as follows:
31 December 31 December
2019 2018
================================== ======================= =======================
Simon King - Ordinary Shares 29,895 29,895
Michael Cassidy - Ordinary Shares 21,000 21,000
================================== ======================= =======================
Total 50,895 50,895
================================== ======================= =======================
Associates
As at 31 December 2019, the Group had several investments in
associates please see Note 18 for details of these related
parties.
Subsidiaries
As at 31 December 2019, the Group had several subsidiaries
please see Note 1 for details of these subsidiaries during the year
and Note 4 for further disclosure on investments in
subsidiaries.
Investment Manager
Investment management fees and performance fees for the year
ended 31 December 2019 and 31 December 2018 are paid by the Group
to the Investment Manager and these are presented on the
Consolidated Statement of Comprehensive Income. Details of
Investment management fees and performance fees paid during the
year are disclosed in Note 12.
Those within the Investment Manager deemed to have significant
influence over the Group held 411,910 (2018: 411,910) ordinary
shares.
The Group considers all transactions with the Manager or
entities that are controlled by the Manager as related party
transactions. The General Partner for the SPV is controlled by the
Investment Manager. CapitalFlow Group ("CapitalFlow") is an
Irish-based specialist business lender. During the year the Company
provided a structured facility to CapitalFlow. CapitalFlow is owned
by a fund that is managed by an affiliate of the Investment
Manager. As at 31 December 2019 the facility was EUR42,790,000
drawn (2018: EUR14,179,774).
24. SUBSEQUENT EVENTS
An interim dividend of 12 pence per Ordinary Share was declared
by the Board on 24 February 2020 in respect of the three-month
period to 31 December 2019, which was paid on 27 March 2020 to
shareholders on the register as of 5 March 2020.
An interim dividend of 12 pence per Ordinary Share was declared
by the Board on 4 May 2020 in respect of the three-month period to
31 March 2020, which will be paid on 19 June 2020 to shareholders
on the register as of 15 May 2020.
The Company continued its share buyback program in 2020 and as
at 28 May 2020, 12,303,792 shares were held in treasury.
The Company received an approach to acquire all of its issued
share capital at 900 pence per share from Waterfall Asset
Management, LLC ("Waterfall"), subject to confirmatory due
diligence and certain other standard conditions.
The Board announced on 25 February 2020 that it served 12
months' notice in writing on the Manager to terminate the
Investment Management Agreement ("IMA").
In March 2020, the World Health Organisation recognised an
outbreak of a new virus that causes coronavirus disease 2019
("COVID-19") as a pandemic. COVID-19 has caused disruption to
businesses and economic activity which has been reflected in recent
fluctuations in global stock markets. There are no comparable
recent events which may provide guidance as to the effect of the
spread of COVID-19 and a potential pandemic, and, as a result, the
ultimate impact of the COVID-19 outbreak or a similar health
epidemic is highly uncertain and subject to change.
The Investment Manager continues to have faith in the strength
of the performance of the asset class despite the unprecedented
conditions. The Group is well diversified with the underlying loan
portfolios being highly granular with low concentration risk. It
has maintained a close and proactive engagement with all platform
partners and forbearance has been applied sensitively and
proportionately. The Investment Manager believes that the company
is well positioned to perform solidly throughout the crisis.
However, given the Group's UK and US focus, its performance is
linked to the health of these economies. We expect the Group could
experience further impairments and consequently reduced profits,
particularly if economic expectations deteriorate further. However,
the overall effect of this cannot be quantified reliably because
the impact of the UK government's various support initiatives and
the US government's COVID-19 Stimulus Bill is not yet known, but
they are expected to reduce the potential expected credit loss
impact. The Investment Manager has adopted a prudent approach with
the focus on the existing portfolio and ensuring cash collections
remain robust as the appropriate strategies are in place. The
legacy book continues to run off, whilst performance of this book
has been poor to date and it is expected that impairments will
increase over the coming months, the loans are now well
seasoned.
The longer-term financial impact of coronavirus is not yet clear
and given the significant change in the operating environment and
economic expectations the Investment Manager is proposing to
re-invest the cash generated by the portfolio very selectively
during this period of uncertainty with the majority of cash going
to reduce net debt. Note 11 includes, for illustrative purposes,
sensitivities for expected credit losses and note 4, includes, for
illustrative purposes, sensitivities for equity valuations. This is
not an estimate or forecast of the impact of COVID-19. The analysis
is designed solely to give an indication of the impact of certain
changes to the Group's net asset value.
The Board considers the emergence and spread of COVID-19 to be a
non-adjusting post balance sheet event.
As at 27 May 2020, the Company's latest published NAV per
Ordinary Share as at 31 March 2020 was 963.0 pence and the latest
share price was 708.0 pence per share.
25. RE-PRESENTATION OF FINANCIAL STATEMENTS
Following a review of the Consolidated Statement of
Comprehensive Income and Consolidated Statement of Financial
Position and the associated knock on effect on the Cashflow
Statement, the Directors have decided to re-present these
statements for 2018 and incorporate them in 2019. The changes made
to the face of these financial statements are to make them easier
to read and understand for the end user and to tie in with how the
Group monitors and reviews performance internally and externally in
other outputs. There have been no changes to the basis on which the
items are estimated or measured.
An adjustment has been made in the current financial year to
move the impact of the initial adoption of IFRS 9 from revenue
reserves to the special distributable reserve, this is purely a
presentational adjustment and does not affect the Groups ability to
pay dividends.
A summary of changes to the Consolidated Statement of
Comprehensive Income can be seen below. The key change is splitting
out other expenses with these costs being allocated to financing
costs being amortised debt facility set up costs, the split out of
credit asset servicing costs, and the allocation of fund expenses
to its own line item. There has also be a renaming of several line
items so they better reflect how these assets are reviewed.
Consolidated Statement of Comprehensive 2018 Re-presentation 2018 Re-stated
Income GBP'000 GBP'000 GBP'000
======================================== ======== =============== ==============
Net losses on investments (1,725) 1,725 -
Interest Income on loans at
amortised cost 118,539 (118,539) -
Other Income 2,364 (2,364) -
Interest Income on credit assets
at amortised cost - 120,903 120,903
Income on equity assets at fair
value through profit and loss - (1,725) (1,725)
Third Party Servicing Costs - (13,680) (13,680)
Finance costs (14,121) (4,234) (18,355)
Administration fee (526) 526 -
Other expenses (24,171) 24,171 -
Other Fund expenses - (6,783) (6,783)
======================================== ======== =============== ==============
A summary of changes to the Consolidated Statement of Financial
Position can be seen below. The key change is reducing the number
of line items by consolidating interest payable on debt facilities
with borrowings and other liabilities with accrued expenses and
other liabilities.
Consolidated Statement of Financial 2018 Re-presentation 2018 Re-stated
Position GBP'000 GBP'000 GBP'000
======================================= ========= =============== ==============
Accrued expenses and other liabilities (7,427) (1,934) (9,361)
Interest payable (511) 511 -
Other liabilities (1,934) 1,934 -
Borrowings (377,500) (511) (378,011)
======================================= ========= =============== ==============
A summary of changes to the Company Statement of Financial
Position can be seen below. The key change is reducing the number
of line items by consolidating interest payable on debt facilities
with borrowings.
Company Statement of Financial 2018 Re-presentation 2018 Re-stated
Position GBP'000 GBP'000 GBP'000
=============================== ======== =============== ==============
Interest payable (129) 129 -
Borrowings (97,259) (129) (97,388)
=============================== ======== =============== ==============
26. APPROVAL OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements were approved and
authorised for issue by the Directors on 29 May 2020.
Annual Report
Printed copies of the Annual Report will be sent to shareholders
shortly. Additional copies may be obtained from the Corporate
Secretary, Link Company Matters Limited, on 0207 7954 9792.
Annual General Meeting
The Annual General Meeting of the Company will be held on 30
June 2020.
National Storage Mechanism
A copy of the Annual Report and audited financial statements
will be submitted shortly to the National Storage Mechanism ("NSM")
and will be available for inspection at the NSM, which is situated
at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Shareholder Information
INVESTMENT OBJECTIVE
The Company's investment objective is to provide Shareholders
with an attractive level of dividend income and capital growth
through exposure to investments in alternative finance and related
instruments.
INVESTMENT POLICY
The below investment objectives were approved at a general
meeting of the Company's Shareholders on 19 December 2017. The new
investment policy as adopted at that meeting is as follows:
The Company's investment objective is to provide shareholders
with an attractive level of dividend income and capital growth
through investment in the acquisition of loans to:
(i) consumers, loans to small and medium-sized enterprises
("SMEs") and other counterparties, corporate loans, real estate
loans and advances and loans against corporate trade receivables
and other assets, together with related investments ("Credit
Assets"); and
(ii) equity assets that are aligned with the Company's strategy
and that present opportunities to enhance the Company's returns
from its investments ("Equity Assets"). The Company may invest in
Credit Assets and Equity Assets relating to a broad range of
sectors, provided that such investment is in accordance with the
Company's investment strategy.
When the Company has incurred borrowings in line with its
borrowing policy, the Company will target the payment of dividends
which equate to a yield of 6.0 - 8.0 per cent per ordinary share
per annum on the issue price for the IPO placing, based upon the
average number of shares in issue for the period, payable in
quarterly instalments (the "Target Dividend"). Investors should
note that the Target Dividend, including its declaration and
payment dates, is a target only and not a profit forecast.
The Company believes that certain sub-segments linked to these
Credit Assets have the potential to provide attractive returns for
investors on a risk-adjusted basis, and that changes in the focus
of mainstream lenders together with the implementation of new
models that make the best use of data, analytics and technology,
provide an opportunity to deliver attractive products to borrowers
while generating attractive returns for the Company.
The Company enters into loan origination and service agreements
with selected third parties, originators, platforms and partners.
The Company and the Investment Manager will also actively seek
opportunities to acquire portfolios from third parties and make
investments in loans to specialist lenders.
Asset allocation and risk diversification
Credit Assets invested in by the Company will consist of debt
obligations, both secured and unsecured, within a range of
sub-sectors selected based on their risk/return characteristics.
These sub-categories may include, but are not limited to, personal
loans, loans against corporate trade receivables and other assets
as well as loans secured against real estate and investments in
loans to specialist lenders to provide structured finance for
consumer, SME and other counter party lending.
The Company's investment in Credit Assets will encompass the
following investment models:
(i) investment, or acquisition of interests, in Credit Assets,
whether offered to the Company by origination platforms that allow
nonbank capital to: (a) lend or advance capital to consumers, SME
borrowers or corporate borrowers; and/or (b) advance capital
against corporate trade receivables ("Platforms") or by other third
parties;
(ii) investment, or acquisition of interests, in loans (which
may be secured or unsecured) to specialist lenders for the purpose
of providing structured finance to those specialist lenders,
secured against (amongst other things) granular portfolios of
Credit Assets; and
(iii) the acquisition by the Company of interests in portfolios
of Credit Assets from third parties.
The Company may undertake such investments directly, or through
its subsidiaries or special purpose vehicles ("SPVs"). It is also
possible that the Company may use alternative investment structures
which achieve comparable commercial results to the investments
described above (such as, without limitation, sub-participations in
loans, credit-linked securities or fund structures), but which
offer enhanced returns for the Company or other efficiencies (such
as, without limitation, efficiencies as to origination, funding,
servicing or administration of the relevant Credit Assets). Any
such use of alternative investment structures will be subject
always to the diversification requirements of this investment
policy.
The Company may also invest (in aggregate) up to 10 per cent of
Gross in Equity Assets, calculated, in each case, at the time of
acquisition of any relevant Equity Assets based on the
consideration payable for those Equity Assets and the aggregate
consideration paid for all previous investments in Equity Assets
which form part of the Company's investments. This restriction
shall not apply to any consideration paid by the Company for the
issue to it of any convertible securities by a Platform. However,
it will apply to any consideration payable by the Company at the
time of exercise of any such convertible securities or any
warrants.
Platform restrictions
The Company will not invest more than 33 per cent of Gross
Assets via any single Platform or single counterparty. This limit
may be increased to 66 per cent of Gross Assets via any single
Platform or single counterparty, provided that where this limit is
so increased in respect of any Platform or counterparty, the
Company does not invest an amount which is greater than 25 per cent
(by value) of the total loan origination or investment of the
preceding calendar year via such Platform or counterparty.
Asset Class restrictions
The Company will invest in Credit Assets originated across
various sectors and across credit risk bands to ensure
diversification and to seek to mitigate concentration risks. The
following investment limits and restrictions apply to the Company
to ensure that the diversification of the portfolio is maintained,
that concentration risk is limited and that limits are placed on
risk associated with borrowings.
The Company will not invest more than 20 per cent of Gross
Assets, at the time of investment, via any single investment fund
investing in Credit Assets. The Company will not invest, in
aggregate, more than 60 per cent of Gross Assets, at the time of
investment, in other investment funds that invest in Credit
Assets.
The Company will not invest more than 10 per cent of its Gross
Assets, at the time of investment, in other listed closed-ended
investment funds, whether managed by the Investment Manager or not,
except that this restriction shall not apply to investments in
listed closed-ended investment funds which themselves have stated
investment policies to invest no more than 15 per cent of their
gross assets in other listed closed-ended investment funds.
The following apply, in each case at the time of investment by
the Company, to both Credit Assets acquired by the Company directly
and on a look-through basis to any Credit Assets held by another
investment fund which is managed by the Investment Manager, the
Sub-Manager or their affiliates in which the Company invests
(proportionate to the percentage interest the Company has in such
investment fund). It is intended that:
-- No single consumer loan shall exceed 0.25 per cent of Gross Assets;
-- No single SME loan shall exceed 5.0 per cent of Gross Assets;
-- No single advance or loan against a trade receivable asset
shall exceed 5.0 per cent of Gross Assets;
-- No single corporate loan shall exceed 5 per cent of Gross Assets; and
-- No single facility, security or other interest backed by a
portfolio of loans, assets or receivables (excluding any borrowing
ringfenced within any SPV which would be without recourse to the
Company) shall exceed 20 per cent of Gross Assets.
At any given time, not more than 50 per cent of Gross Assets
will be maintained in SME Credit Assets and not more than 50 per
cent of Gross Assets will be maintained in trade receivable assets
(taking into account both Credit Assets acquired by the Company
directly and, on a look-through basis, any Credit Assets held by
another investment fund managed by the Investment Manager, the
Sub-Manager or their affiliates in which the Company invests
(proportionate to the percentage interest the Company has in such
investment fund)).
Other restrictions
The Company may invest in cash, cash equivalents and fixed
income instruments for cash management purposes and with a view to
enhancing returns to Shareholders or mitigating credit exposure.
However, for cash management purposes the Company will only invest
in fixed income instruments of investment grade.
The Company will not invest in collateralised debt
obligations.
Borrowing
Borrowings may be employed (through banks or other facilities on
a secured or unsecured basis) at the level of the Company and/or at
the level of any investee entity (including, without limitation,
any other investment fund in which the Company invests or any SPV
that may be established by the Company in connection with obtaining
leverage against any of its assets or any issuer vehicle of
facilities, securities or other interests backed by a portfolio of
Credit Assets).
The aggregate leverage of the Company, whether incurred directly
or indirectly through a subsidiary or an SPV established by the
Company (in each case calculated at the time of drawdown under any
facility the Company, subsidiary or SPV has entered into), and any
investment fund which is managed by the Investment Manager, the
Sub-Manager or their affiliates and in which the Company invests
(on a look-through basis, proportionate to the percentage interest
the Company retains in the most junior tranche of such investment
fund) shall not exceed 1.5 times NAV.
The Company may seek to securitise portfolios of Credit Assets
and may establish one or more SPVs in connection with any such
securitisation. The Company may also use SPVs in connection with
obtaining leverage against Credit Assets to seek to protect the
levered portfolio from group level bankruptcy or financing risks.
The Company may also, in connection with seeking such leverage or
securitising its loans, seek to assign existing assets to one or
more SPVs and/or seek to acquire loans using an SPV. The Company
will ensure that any SPV used by it to acquire or receive (by way
of assignment or otherwise) any loans to UK consumers shall first
obtain any required authorisation from the FCA for consumer credit
business.
No material change will be made to the investment policy without
the approval of Shareholders by ordinary resolution.
SHARE REGISTER ENQUIRIES
The registers for the ordinary shares are maintained by Link
Market Services. In the event of queries regarding your holding,
please contact the Registrar by telephone on 0871 664 0300 (calls
cost 12p per minute plus your phone company's access charge. Calls
outside the United Kingdom will be charged at the applicable
international rate. Lines are open between 09:00-17:30, Monday to
Friday excluding public holidays in England and Wales). If calling
from overseas please use the following number: +44 371664 0300.
Similarly, you can email enquiries@linkgroup.co.uk.
Changes in name or address must be notified in writing to the
Registrar: Shareholder Services, Link Market Services, The
Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU.
CHANGE OF ADDRESS
Communications with shareholders are mailed to the last address
held on the share register. Any change or amendment should be
notified to Link Market Services at the address given above, under
the signature of the registered holder.
SHARE CAPITAL AND NET ASSET VALUE INFORMATION
The Company's Ordinary Shares of GBP0.01 each are listed on the
London Stock Exchange:
SEDOL Number BLP57Y9
ISIN Number GB00BLP57Y95
The codes above may be required to access trading information
relating to the Company.
The Company releases its net asset value per share to the London
Stock Exchange monthly.
ANNUAL AND HALF-YEARLY REPORTS
Copies of the Annual and half-Yearly Reports are available from
the Secretary on telephone +44 (0)207 204 7573 and are available on
the Company's website https://pollenstreetsecuredlending.com
ASSOCIATION OF INVESTMENT COMPANIES
The Company is a member of the Association of Investment
Companies.
PROVISIONAL FINANCIAL CALAR
May 2020 Announcement of annual results
May 2020 Posting of Annual Report
30 June 2020 Annual General Meeting
May 2020 Payment of interim dividend to 31 March 2020
30 June 2020 Half-year End
August 2020 Announcement of half-yearly results
August 2020 Payment of interim dividend to 30 June 2020
November 2020 Payment of interim dividend to 30 September 2020
31 December 2020 Year End
DIVIDS
Shareholders who wish to have dividends paid directly into a
bank account rather than by cheque to their registered address can
complete a mandate from for the purpose. Mandate forms may be
obtained from Link Market Services, The Registry, Beckenham Road,
Beckenham, Kent BR3 4TU. The Company operates the BACS system for
the payment of dividends. Where dividends are paid directly into
shareholders' bank accounts, dividend tax confirmations are sent to
shareholders' registered addresses.
DIVID REINVESTMENT PLAN (DRIP)
A DRIP service is provided by Link Market Services a trading
name of Link Market Services Trustees Ltd. The DRIP allows eligible
shareholders to use the whole of their cash dividend to buy
additional shares in the Company, thereby increasing their
shareholding.
Additional information, including details of how to sign up, can
be obtained from the Company's website at
https://pollenstreetsecuredlending.com and from proxy directly from
the registrars, Link Asset Services (previously called Capita), on
Tel: 0371 664 0300. Calls are charged at the standard geographic
rate and will vary by provider. Calls outside the United Kingdom
will be charged at the applicable international rate. Lines are
open between 09:00 - 17:30, Monday to Friday excluding public
holidays in England and Wales or email Link Market Services at
enquiries@linkgroup.co.uk.
Glossary of Terms
NAV (CUM INCOME)
The value of investments and cash, including current year
revenue, less liabilities.
NAV PER SHARE (CUM INCOME)
The value of investments and cash, including current year
revenue, less liabilities, divided by ordinary shares in issue.
NAV (EX INCOME)
The value of investments and cash, excluding current year
revenue, less liabilities.
NAV PER SHARE (EX INCOME)
The NAV (Cum Income) as described above excluding net income
(both revenue and capital income) that is yet to be transferred to
reserves divided by ordinary shares in issue.
SHARE PRICE
Closing mid-market share price at month end (excluding dividends
reinvested).
DISCOUNT/PREMIUM
The amount by which the price per share of an investment trust
is either lower (at a discount) or higher (at a premium) than the
net asset value per share (cum income), expressed as a percentage
of the net asset value per share.
MARKET CAPITALISATION
Month end closing mid-market share price multiplied by the
number of shares outstanding at month end.
TOTAL NAV RETURN
The theoretical total return on shareholders' funds per share
reflecting the change in Net Asset Value (NAV) assuming that
dividends paid to shareholders were reinvested at NAV at the time
dividend was announced.
ANNUAL NAV PER SHARE RETURN
Net Asset Value (Cum Income) at the end of the year, plus
dividends declared during the year, divided by NAV (Cum Income)
calculated on a per share basis at the start of the year.
DIVIDEND
Reflecting the ex-dividend date during the month.
YTD NAV PER SHARE RETURN
Year to date net asset value per share return including
dividends.
DISCOUNTS TO NAV (CUM INCOME)
Share price divided by NAV per share (cum Income) minus 100 per
cent.
SECURED LENDING
Assets with granular underlying collateral or structured
protection.
GROSS ASSETS
Gross assets.
CHARGED OFF
Assets that have been previously written off.
Reconciliation to Alternative Performance Measures
(unaudited)
Alternative Performance Measures ("APMs") are used to improve
the comparability of information between reporting periods, either
by adjusting for uncontrollable or one-off factors which impact
upon IFRS measures or, by aggregating measures, to aid the user
understand the activity taking place. The Strategic Report includes
both statutory and adjusted measures, the latter of which, reflects
the underlying performance of the business and provides a more
meaningful comparison of how the business is managed. APMs are not
considered to be a substitute for IFRS measures but provide
additional insight on the performance of the business.
Premium / (Discount) to NAV per share
31 December 31 December
2019 2018
====================================== =========== ===========
NAV per share (Cum income) 965.4p 963.9p
Share Price 830.0p 802.0p
====================================== =========== ===========
Premium / (Discount) to NAV per share (14.0%) (16.8%)
====================================== =========== ===========
The premium / (discount) to NAV per share is calculated by
taking the difference between the share price and the NAV per share
(Cum income) and dividing it by the NAV per share. This is
considered an APM as it compares the market value to the underlying
NAV of the fund.
Annual NAV per Share Return & ITD Total NAV per Share
Return
31 December 31 December
2019 2018
=============================== =========== ===========
ITD Total NAV per Share Return 26.77% 20.45%
=============================== =========== ===========
Annual Nav per Share Return 5.25% 5.21%
=============================== =========== ===========
*Opening balance adjusted for initial adoption of IFRS 9
The ITD NAV per Share Return and the annual NAV per share return
are calculated by taking the product of each monthly NAV return
since inception and the last 12 months monthly NAV returns
respectively. Monthly NAV returns are calculated by taking the
closing monthly NAV per share (cum income) and adding the dividends
that go ex-dividend in the month divided by the number of shares at
month end divided by the monthly opening NAV per share (cum
income).
Contact Details of the Advisers
DIRECTORS REGISTRAR
Simon King (Chairman) Link Market Services
Mahnaz Safa (Senior Independent The Registry
Director) 34 Beckenham Road
Michael Cassidy Beckenham
David Fisher Kent BR3 4TU
United Kingdom
SECRETARY AND REGISTERED OFFICE
Link Company Matters Limited INVESTMENT MANAGER AND ALTERNATIVE
6th Floor, 65 Gresham Street INVESTMENT FUND MANAGER
London, EC2V 7NQ PSC Credit Holdings LLP
United Kingdom 11-12 Hanover Square
Telephone: + 44 (0)207 204 7573 London W1S 1JJ
United Kingdom
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP SUB MANAGER
7 More London Pollen Street Capital (US) LLC
Riverside 25th Floor, 350 Park Avenue
London SE1 2RT New York NY10022
United Kingdom USA
SOLICITORS ADMINISTRATOR AND EXTERNAL VALUER
Stephenson Harwood LLP Citco Fund Services (Ireland) Limited
1 Finsbury Circus Custom house Plaza, Block 6
London EC2M 7SH International Financial Services
United Kingdom Centre
Dublin 1
DEPOSITARY Ireland
Citco Custody (UK) Limited
7 Albemarle Street CORPORATE BROKER
W1S 4HQ Liberum Capital Limited
Level 12, Ropemaker Place
FINANCIAL ADVISER 25 Ropemaker Street
Smith Square Partners LLP London EC2Y 9LY
Westminster Tower United Kingdom
3 Albert Embankment,
London SE1 7SP COMMUNICATIONS ADVISER
United Kingdom Brunswick Group
16 Lincoln's Inn Fields
COMPANY NUMBER London WC2A 3ED
08805459 United Kingdom
WEBSITE ADDRESS
https://pollenstreetsecuredlending.com
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR KKCBQPBKDDPB
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