UK Mortgages Limited
INTERIM MANAGEMENT REPORT AND UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
For the period from 1 July 2017 to
31 December 2017
Legal Entity Identifier: 549300388LT7VTHCIT59
(Classified Regulated Information, under DTR 6 Annex 1 section
1.2)
The Company has today, in accordance with DTR 6.3.5, released
its Interim Management Report and Unaudited Condensed Financial
Statements for the period ended 31 December
2017. The Report will shortly be available via the
Company's Portfolio Manager’s website
www.ukmortgageslimited.com and will shortly be available for
inspection online at www.morningstar.co.uk/uk/NSM website.
SUMMARY INFORMATION
The Company
UK Mortgages Limited (“UKML”) was incorporated with limited
liability in Guernsey, as a
closed-ended investment company on 10 June
2015. The Company’s shares were admitted to trading on the
Specialist Fund Segment of the London Stock Exchange on
7 July 2015.
UKML and the affiliate structure has been designed by the Board
of Directors, the Portfolio Manager, the Corporate Broker and legal
advisors to ensure the most efficient structure for regulatory and
tax purposes.
UKML established an Acquiring Entity, UK Mortgages Corporate
Funding Designated Activity Company (“DAC”) for the purpose of
acquiring and securitising mortgages via Special Purpose Vehicles
(“SPVs”). UKML, the Acquiring Entity, the Issuer SPV and the
Warehouse SPVs (collectively, the “Company”) are treated on a
consolidated basis for the purpose of the Interim Condensed
Financial Statements.
Investment Objective
The Company’s investment objective is to provide Shareholders
with access to stable income returns through the application of
relatively conservative levels of leverage to portfolios of UK
mortgages. In accordance with the Listing Rules, the Company can
only make a material change to its investment policy with the
approval of its Shareholders by Ordinary Resolution.
The Company expects that income will constitute the vast
majority of the return to Shareholders and that the return to
Shareholders will have relatively low volatility and demonstrate a
low level of correlation with broader markets.
Shareholders’ Information
Maitland Institutional Services Limited (“Maitland”) is
responsible for calculating the NAV per share of the Company.
Maitland has delegated this responsibility to Northern Trust
International Fund Administration Services (Guernsey) Limited (the “Administrator”)
however Maitland still performs an oversight function. The
unaudited NAV per Ordinary Share is calculated as at the last
business day of every month by the Administrator and is announced
through a Regulatory Information Service on, or within 2 weeks
following, the last business day of the following month.
Financial Highlights
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For
the period |
For
the |
For
the period |
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from
01.07.2017 |
year ended |
from
01.07.2016 |
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to
31.12.2017 |
30.06.2017 |
to
31.12.2016 |
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Total Net Assets at
period/year end |
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£218,489,263 |
£223,388,138 |
£229,246,078 |
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Net Asset Value per
ordinary share at period/year end |
87.39p |
89.36p |
91.70p |
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Share price at
period/year end |
|
90.10p |
96.40p |
95.25p |
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|
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Premium to Net Asset
Value at period/year end |
3.09% |
7.88% |
3.87% |
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Dividends declared and
paid in the period/year |
3.00p |
4.50p |
3.00p |
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Total dividends declared
in relation to the period/year |
3.00p |
6.00p |
3.00p |
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Ongoing
Charges |
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- UKML |
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0.92% |
1.07% |
1.06% |
- DAC and subsidiaries |
|
1.24% |
1.11% |
0.59% |
Total ongoing charges
for the Company |
2.16% |
2.18% |
1.65% |
CHAIRMAN’S STATEMENT
for the period from 1 July 2017 to
31 December 2017
I am pleased to present the results of the Company for the
period from 1 July 2017 to
31 December 2017, which has seen encouraging progress
from the three components of UKML’s portfolio, all of which are
performing in line with, or beyond expectations. The success of the
Company over the long-term will be correlated with its underlying
loan performance, therefore this solid foundation is
encouraging.
Malt Hill No. 1, the oldest of the Company’s mortgage portfolios
was bought from the Coventry Building Society in 2015 and continues
to demonstrate exemplary performance. The portfolio currently
consists of 1,301 loans and 1,256 accounts and, remarkably, at the
end of December none were greater than one month in arrears.
Following the end of the initial 2 year fixed rate period, 904
loans either refinanced with Coventry to a new rate or reverted to the SVR,
whilst 345 loans prepaid but returns from the residual portfolio
remain in-line with the Portfolio Manager’s expectations and we
would anticipate a further boost to returns when this portfolio is
refinanced next year.
UKML’s second investment was Cornhill Mortgages No. 2, which
finances the origination of loans for The Mortgage Lender (“TML”).
After an understandably slow start for this new mortgage lender,
TML’s loan book has grown steadily to £115 million at the end of
December, with a further £35 million in its pipeline for
completion. TML operates in a very competitive market and the
Portfolio Manager has spent a great deal of time with TML refining
the product mix and its pricing. Nevertheless, it is pleasing to
report that to date the performance of these assets has also been
strong, with only one loan in arrears at the period end. As TML’s
portfolio grows beyond £150m, the next step is to prepare for its
securitisation and the Portfolio Manager is currently exploring the
options for a transaction later this year.
Oat Hill No.1 is the Company’s most recent investment and is a
mature portfolio of 4,697 loans, mostly originated in the 2004 to
2008 period. This was successfully securitised in May 2017, just before the start of the period
under review and its performance continues to meet our
expectations; specifically the realised losses of £331,121 in the
period are within the Portfolio Manager’s model numbers. The
headline percentage of loans in arrears at 0.42% may appear
relatively high. However, this percentage relates to the gross
amount of any mortgage that has had any arrears marked against it
over time. For example, a £200,000 mortgage might have seen one
missed payment of a few hundred pounds, which would most likely be
added back at the end of the mortgage term. Yet the methodology
means that this results in the full £200,000 being classified as
“in arrears”. A closer inspection of the figures reveals that the
actual arrears balances are very small at an average of £882. The
maturity of the portfolio gives our investors a higher level of
asset coverage which further reduces the likelihood of future
credit losses.
Outlook
The strong performance of the Company’s investments, with
arrears well below the levels initially modelled by the Portfolio
Manager, provides a solid foundation for future returns. These
returns are also dependent upon further securitisations, although a
feature of securitisations is that the more attractive the
financing terms, the greater the amounts of cash that is released
back to UKML in the process. This was the case with the Oat Hill
transaction last May, which generated approximately £40m of capital
release. The priority for the Portfolio Manager remains to reinvest
this cash and there has been a considerable amount of work on
potential purchases in the period, some of which were ultimately
declined as being unsuitable or overvalued and others where bids
were unsuccessful. In those examples, our view is that the bidders’
assessment of the target portfolios was too aggressive, or that
there was a willingness to assume higher levels of gearing than
UKML is comfortable with. It is important to emphasise that the
board and Portfolio Manager are unwilling to compromise on credit
quality simply to invest in a hurry. The exceptional credit
performance of the portfolio to date is something we wish to see
continue.
To that end it is encouraging to note that there are potential
projects in discussion that will meet UKML’s investment criteria
and further details will be made available when negotiations have
passed any commercially sensitive hurdles.
The start of calendar year 2018 marked the introduction of a new
version of IFRS 9, an accounting standard that is intended to give
investors greater clarity over potential future losses from credit
risk. The standard is mandatory for new financial reporting years
that start in 2018 so we will publish our Net Asset Value (“NAV”)
and financial statements in accordance with this standard with
effect from 1 July 2018, when our new
financial year begins. As many of our peers in the London Stock
Exchange (“LSE”) listed Investment Company sector have financial
years that start on 1 January 2018, they have commenced
reporting under the standard already. To enable our investors to
get greater clarity on the impact of this standard, we have
published in our January fact sheet an unaudited estimate of the
credit impairment provision that the standard will require us to
deduct from our NAV. The estimated impact of adopting IFRS 9 is
expected to be less than 0.5% of the Company’s NAV.
Dividend
The regular dividend remains uncovered, although as the more
detailed analysis later in this report shows, this will
increasingly be covered by current year income, especially as the
TML portfolio moves towards securitisation. Cash flow has also
improved following the reduction in investment management fees in
this financial year. However, it is worth repeating that an
uncovered dividend is not something the Board takes lightly and it
continues to be paid solely on the basis of the regular modelling
of cash flows by the Portfolio Manager which are periodically
updated and published on our website. These indicate that the
profile of ‘back-loaded’ cash flows remains intact and with it the
expectation of long term returns with a very low correlation to
traditional financial assets.
Thank you for your continuing support.
Christopher Waldron
Chairman
20 March
2018
PORTFOLIO MANAGER’S REPORT
for the period from 1 July 2017 to
31 December 2017
Market Commentary
Central bank policy changes, political uncertainty and technical
drivers were the major influences on macro market behaviour through
the second half of 2017.
The unwinding of QE, and the pace of interest rate normalisation
were at the heart of central bank activity globally. Overall,
the US saw three interest rate rises in 2017, broadly in line with
expectations, and US Treasury yields began to rise steadily from
the end of the summer and beyond into 2018, as the Fed announced
the beginning of its balance sheet reduction programme. Meanwhile,
President Trump finally saw the Senate pass his tax reform package,
despite a turbulent summer punctuated by ongoing friction between
him and both US political parties, sparring with the press and
in-fighting within his own cabinet and staff, along with concerns
that the escalating war of words and inflammatory actions between
the US and North Korea would
develop into a far worse reality. The passing of the tax reforms
did give the current credit cycle an additional boost, but added
volatility to Treasury yields as markets interpreted the reforms as
having the potential to cause rising inflation.
In Europe, yields were more
volatile, as despite Draghi’s talk of “reflationary dynamics slowly
taking hold” and a €30bn per month tapering of asset purchases, a
dovish extension to the programme until at least September 2018 and confirmation that Euro
interest rates will not rise at least until QE has ended, kept
markets guessing. The weakened position of Angela Merkel’s party in
the German elections and uncertainty on the formation of a future
government, along with fears of unrest in Spain following the “illegal” Catalonian
independence referendum also contributed to yield volatility
throughout the period.
In the UK, sentiment also turned quite sharply after the summer,
as strong economic data and continuing high inflation numbers saw
the Bank of England (“BoE”) hint
at, and then execute, a reversal of the emergency 25bp rate cut
that had followed the Brexit vote more than a year previously. The
view that further rate increases would follow in mid-2018 became
more ingrained early in the new year. In addition, it was confirmed
that the end of the Term Funding Scheme (“TFS”) would take place on
schedule in early 2018. In the aftermath of the
near-disastrous general election earlier in the year, the
government was forced to move forward with its Brexit negotiations
with a far weaker hand, and despite finally having been deemed to
have progressed sufficiently to start discussions on transition and
future trade agreements, multiple issues are still outstanding. The
waters were further muddied when the government lost a key vote on
the Brexit bill as part of a Tory “Bremainer” revolt, forcing a
parliamentary vote on the final deal with Brussels, whilst pressure from Brexiteer
hardliners on the other side of the party continues to frustrate
any attempts to parley a softer outcome.
Much of this political and Brexit-driven uncertainty has fed
through to the broader UK mortgage and housing markets, where a
somewhat nervous – albeit consistent – picture has emerged
throughout the second half of the year at a national level.
Something of a stalling point now appears to have been reached,
although at a regional level the picture continues to be more
mixed. The various house price indicators have oscillated over H2
2017 but in general have shown a very small increase overall, with
prices in London and the South
East continuing to suffer, but being balanced by stronger price
action in other regions. Meanwhile, re-mortgage borrowers and
first-time buyers in particular, who are also likely to be buoyed
further by the stamp-duty incentives announced in the November
budget, continue to sustain volumes of mortgage origination, which
remain subdued overall. Additionally, Buy-to-Let (“BTL”) lending
remains in negative territory year-on-year due to last year’s stamp
duty changes and with further tax and regulatory changes coming
down the line.
However, UK Finance, now incorporating the former Council of
Mortgage Lenders (“CML”), reported first time buyer numbers have
increased 130% since the post-crisis low of mid-2009.
Competition amongst lenders has been intense, with margins being
squeezed across the high street lenders over the last two years. It
was notable however that as the expectation of a November interest
rate rise increased after the summer several highly competitive
shorter-term fixed rate products were pulled from the shelves after
very short periods, possibly because they proved highly popular and
sold out, or perhaps in response to swap markets repricing ahead of
the change in rates.
Despite the competition between lenders, overall volumes
continue to be subdued, and whilst the Chancellor’s Autumn
Statement allocated resources to housing and affordability, its
focus on first time buyers and Help-to-Buy means it’s likely this
will mostly be felt at the lower end of the spectrum. Mercifully
for BTL borrowers, there were no further changes to this sector
following the multiple blows it has suffered at the hands of the
authorities in the past couple of years. However, given the ongoing
Brexit uncertainty, a dearth of new enquiries is equally matched by
a shortage of new instructions coming on to the market and the
stalemate looks set to continue for the time being.
On a positive note, re-mortgaging continues to be among the
strongest portions of the market, with the number of new loans for
re-mortgaging higher than in any period since 2009. This is
partially because uncertainty has driven home owners to extend or
improve their properties rather than risk losing money by selling,
but also because many borrowers took the opportunity to lock in
their mortgage rate ahead of the rate hike. The hike was almost
seamlessly passed on to borrowers by the high street banks and
building societies, but at least initially, saw little or no
reaction from the specialist lenders with a few cases where rates
were actually marginally reduced, no doubt driven by different
funding structures and larger margins.
Despite the broad stagnation, the UK housing market does remain
relatively insulated compared to other parts of the economy and
more macro events affecting stock markets, as most activity is
driven domestically, with some prime London areas probably being something of an
exception.
Along with the technical factors driving all credit fixed income
markets, encouragingly on the funding side of the equation, the
picture is much rosier. ABS supply in Europe saw a record post-crisis year in 2017
as the market continues to rebuild. In addition, long awaited new
regulation, much of it designed specifically to help to further
revive the use of securitisation as a funding tool for banks and
financial assets, was finally signed into EU law and will come into
effect from 2019, with much of the new framework centred around
promoting the type of high quality product that is at the heart of
the Company’s investments.
These changes are also designed to help expand the investor
base, and accordingly increase demand. This, perhaps also buoyed by
an attraction to the floating rate nature of bonds as rates are now
expected to rise, has meant the cost of funding for RMBS issuance
has continued to come down, in spite of expectations of increased
issuance as the high street banks are expected to return to the
sector more regularly now that the BoE’s TFS and Funding for
Lending Scheme (“FLS”) have come to an end. Deals have
continued to see significant oversubscription levels and to price
at the tighter end of pricing guidance and expectations,
overflowing strongly into the new year which saw record levels of
UK RMBS issuance, and bodes well for the future of 2018.
Portfolio Review
Whilst no new transactions were completed during the period, a
number of opportunities of different types were assessed in order
to redeploy the capital released from the Oat Hill No.1
securitisation. Some of these potential investments were progressed
further than others, depending on their suitability, quality, size
and prospective economic value to the Company. We were disappointed
not to win one particularly suitable opportunity, which was very
sensitive to assumptive inputs and where the ultimate bid winner’s
assumptions may have been overly optimistic. Other opportunities
are still in the process of being analysed, and whilst these are
mostly more medium-term projects, they appear at this early stage
to be good fits for our investment strategy, although will of
course be subject to agreement on pricing that is acceptable to all
parties.
The reduction in investment management fees announced in
June 2017 was implemented from the
beginning of the Company’s new financial year and this, along with
the improved income from the CHL portfolio following the Oat Hill
No.1 securitisation has seen improved cashflow, although the
Portfolio Manager (“PM”) is still working hard to reinvest the
released capital from this as soon as possible in order to progress
towards a fully covered dividend and grow the NAV.
Aside from analysing potential investments, alongside the
monitoring and administration of the Company’s existing investments
and the maintenance of the funding vehicles, the portfolio
management team undertook a considerable amount of work in order to
maximise the efficiency of the existing transactions, specifically
relating to those loans in the Malt Hill No.1 (Coventry Building
Society) securitisation that were coming to the end of their
initial fixed rate period, and separately finessing the drawing
process under the Cornhill Mortgages No.2 (The Mortgage Lender)
warehouse facility in order to achieve a number of cost
savings.
With the majority (80% of the original pool) of loans in the
Malt Hill No.1 portfolio reaching the end of their initial two-year
fixed rate period, the PM identified a possibility that for purely
technical reasons, some loans, upon re-fixing may no longer be
eligible to remain in the pool, which would potentially lead to an
acceleration of the amortisation of the senior notes. This could
have caused something of a reinvestment predicament for RMBS
noteholders with spreads now at tighter levels, and consequently
also could have locked in a reduction of the Company’s investment
leverage, thereby potentially reducing its returns.
We developed a proposed solution during the summer, and
following legal engagement to analyse and document the potential
changes efficiently and with the support of other transaction
parties such as the issue’s trustee, senior noteholders were then
consulted to seek support for the amendments and ultimately a
bondholders’ vote of approval. The proposed amendments were duly
approved in October 2017, meaning
that those loans which, having switched to a new fixed-rate product
and no longer meeting certain pre-established conditions within the
original structure, now continue to comply and therefore remain
within the notes’ collateral pool. Notably, there were no votes
against the proposed amendments, demonstrating the support of the
RMBS investor base for a highly performing, well-received
transaction.
Subsequent prepayments of the Class A notes have proven to be
broadly in line with or even slightly below our initial
expectations, representing the small proportion of borrowers who,
following the end of their initial fixed-rate period, have chosen
to migrate to another lender rather than refinancing their loan
with Coventry.
Separately, as the TML portfolio grew in size beyond the initial
capital commitment, the drawing process under the facility provided
by Natwest Markets (“NWM”) began, and it was identified that some
elements of the process and the facility terms could be streamlined
so as to ensure they are carried out in the most timely and more
importantly, cost-efficient manner. A number of players are
involved for each drawing and for the renewal of NWM commitments,
and the amendments, all of which were small but were numerous, have
delivered excellent results so far alongside significant cost
savings.
Malt Hill No.1 Portfolio (Coventry
Building Society)
The loan portfolio continues to exhibit strong performance,
generally in line with our expectations at the time of purchase in
terms of principal prepayment activity and even better than our
best expectations in terms of credit performance. In the lifetime
of the portfolio, just two loans have fallen into arrears and both
of these were quickly cured, meaning the portfolio is performing at
100%, with none of the 1,301 loans in the portfolio overdue as at
the end of December 2017.
At origination, the Malt Hill No.1 portfolio comprised loans
with either an initial two-year fixed rate period (approx. 80%) or
an initial five-year period. At the end of the fixed rate periods
the loans revert to a floating rate (typically the SVR). Borrowers
then have the option to either remain on the SVR, prepay without
penalty (likely switching to a loan with another lender) or switch
to a new fixed rate period with Coventry Building Society (a
“product switch”).
Given that the loan portfolio was predominantly originated
between May and July of 2015, those loans with an initial two-year
fixed rate period reached the end of that term during 2017. As is
typical origination practice at Coventry and other similar lenders, the
“two-year” period is usually offered for a short period of time
(e.g. three months) to a specific date (e.g. a month end). In this
case the initial two-year loans all reached their reset date in
either May 2017 or August 2017.
Prior to May 2017, a combination
of scheduled repayments from the loans and unscheduled prepayments
on other loans (e.g. as borrowers sold a property) meant the
initial £302m pool had amortised by £17m. In the subsequent months,
approximately £222m of loans reached their reset date. Of these
around £55m prepaid or switched to a product that was no longer
eligible for the portfolio, £139m reset to a new Coventry product (in most cases a new fixed
rate for 2 or 5 years) and the remaining £28m have reverted to the
SVR.
The cut in UK interest rates and the introduction of the TFS in
August 2016 following the Brexit
vote, along with increased competition in the UK mortgage market
means that mortgage lending margins have compressed considerably.
As a result, and unsurprisingly, the rates that were being offered
on new fixed rate loans during 2017 were much lower than those
offered two years previously. Prior to their reset date, the
initial two-year loans had a weighted average rate of 3.27%; by the
end of the period, those that had reset to a new product had a
weighted average rate of 2.21%.This was somewhat offset by those
that had moved to the SVR with a rate of 4.74%, and by product
switch fees (typically either £999 or £1,999) which, for example,
boost a two-year rate by between 25bps and 50bps respectively on an
average size loan.
Whilst a further small amount of those loans remaining on the
SVR may prepay (for example, borrowers who are currently selling
their properties will pay off their loan once the sale completes)
and others, where borrowers are still weighing up their options may
ultimately switch to a new term product with Coventry, it’s likely the vast majority of
prepayments have now occurred. As a high quality lender with
a significant focus on customer service and retention, we expected
Coventry to retain approximately
65%-70% of loans following the initial round of re-fixes.
Encouragingly, the actual retention figure is currently slightly
above 75%, which means that whilst the weighted average rate has
fallen, the greater retention level helps to retain higher leverage
and therefore returns for the Company.
Key Performance Indicators
The Malt Hill No.1 portfolio is an exceptionally high quality
pool of loans. The pool is well diversified with low (and therefore
lower-risk) Loan to Value (“LTV”) ratios, loan balances and,
importantly for BTL properties, generally high Debt Service
Coverage Ratios (“DSCR” – being the level of rental income versus
the contractual monthly payment on the loan).
As the end of the period, 1,301 loans with a value of
approximately £226m (down from 1,561 loans worth £270m in
June 2017) remain outstanding. The
Weighted Average Indexed LTV fell slightly from 63.8% to 63.5%, and
there are no loans >80% LTV.
The vast majority of the pool has a very healthy DSCR with 65%
of the loans having more than 2x coverage, up from 52% in
June 2017 and a benefit of the lower
rate re-fixes discussed above. Most loans in the UK BTL mortgage
market are interest-only loans, as given the intention to rent the
property on an ongoing basis, the loan can ultimately be repaid
either by refinancing the loan or from a property sale. In this
portfolio, approximately 13% of the loans are repayment mortgages,
further enhancing the quality of the pool. Of those loans at the
lower end of the coverage spectrum (<1.25x), 122 out of 126
loans, including all 35 of the loans with <1x coverage are
repayment mortgages, reflecting that the interest portion of the
contractual monthly payment is lower than the actual payment
amount, and therefore for those loans the interest coverage ratio
is actually higher.
Cornhill No.2 Portfolio (The Mortgage
Lender – TML)
Completions and pipeline reached around £150m at the end of
December 2017, with completed
origination at approximately £115m. The portfolio continues to show
underlying asset performance that beats the most optimistic
expectations, with only one loan currently in arrears; the first
and only occurrence since lending began.
Other than a slight seasonal dip in the pipeline in December,
the pace of completions and origination has been relatively stable
and is expected to pick up with the traditional first quarter
momentum in the housing and mortgage markets, albeit increased
competition and subdued volumes across the lending market has
imposed pressure on loan rates. However, with the expectation of
further interest rate rises in the UK through 2018 and beyond some
of the rate and margin pressure is expected to be released as rates
move up.
Given the volume now originated, the PM is beginning the early
stages of preparing the securitisation structure, to ensure
readiness for deployment when the pool is expected to reach a
suitable size later in the year.
As might be expected with a relatively new and growing business,
the product range, pricing, funding strategies etc., are reviewed
on an ongoing basis. In particular as UK interest rates begin to
move upwards after a long period of stability at record low levels,
regular pricing and product offering reviews are key to developing
the portfolio. Since launching the business, TML has
originated loans graded by quality into tiers numbering from 1
(highest) to 9 (lowest). These tiers are then further grouped into
3 categories, 1-3, 4-6 and 7-9, where borrowers in each category
share similar characteristics, but are differentiated by credit
score and thereby pricing. The quality of the portfolio continues
to be higher than initially expected, with a greater proportion of
lending and applications seen in the highest quality credit
category, albeit with the consequence that these loans pay a lower
interest rate. Feedback from the distribution networks and
intermediaries who generate borrower introductions for TML, along
with competitor analysis has shown that the complexity of the
9-tier model is constraining origination volumes. Therefore, early
in 2018 TML will be simplifying their product range, initially
focusing essentially on the 3 broader current categories, with a
blended interest rate in each category. This should help to boost
returns going forward (as historically more loans have fallen
towards the higher end of each category), whilst still retaining a
similarly strong focus on credit.
Key Performance
Indicators
Due to the risk-priced nature of loans there is a wide spread of
mortgage rates across the portfolio. However, as noted above, the
portfolio has a high concentration of loans in the higher credit
quality categories and therefore the majority of loans are
concentrated in the 2% - 4% range, with a weighted average interest
rate for the whole pool at 3.60%, up from 3.51% in June 2017.
As can be seen in the chart below, the base rate increase in
November has moved almost all of the loans that were previously
paying less than 2% out of that band. Given that most of the
floating rate loans in the portfolio are from the higher credit
quality categories, a consequent move up the rate curve in the 3 or
4 subsequently higher bands can also be noted. As might be expected
of the loans from the higher risk category they generate a higher
interest rate and are concentrated in the bands with an interest
rate of 5% or more.
Around 61% of the loans have an initial two-year fixed rate
period, 18% have a five-year initial fixed rate period and the
balance (around 21%) are floating rate loans, tracking 3 month
Libor. The two-year loans have a current average interest rate of
3.41%, with the five-year loans at 4.25% and the floating rate
loans at 3.59%.
Oat Hill No.1 Portfolio (Capital Home
Loans – CHL)
This investment remains very much in line with expectations, and
therefore set to deliver the strongest returns of all the Company’s
current investments.
It comprises a pool of vintage loans (mostly originated between
2004 and 2008). Therefore any initial short term fixed-rate periods
have long since expired and all the loans now pay a floating rate
of interest, with almost all of them linked to the Bank of
England base rate, and thereby
also set to benefit from any further interest rate rises in the UK,
as are now widely expected.
However, this characteristic also means that most loans are
paying a relatively low rate of interest, with the current weighted
average interest rate at 1.79%, although this has risen from 1.54%
when the pool was purchased due to the recent increase in the UK
base rate. As a result of the low rate, the pool was
purchased at discount, and much of the return from this portfolio
will be derived from that. The realisation of this discount will be
in steps, as firstly the current securitisation and then subsequent
ones are refinanced, typically every three years, with the leverage
essentially locked-in during the interim periods and then
re-levered, and therefore revalued, at each refinancing. The
age of the pool means the weighted average life of the loans is
currently only 12 years.
Key Performance
Indicators
Given the age of this pool, it’s not surprising that the
portfolio contains some loans in arrears, especially given that the
financial crisis reached its peak shortly after many of the loans
were originated. Encouragingly, data from the December loan-by-loan
report shows just 63 loans are one month or more in arrears, from a
current pool of 4,697 loans and with an average arrears amount of
only £882.
It’s also not surprising that many of these arrears are actually
historic, dating from the time of the financial crisis. As with
many lenders, borrowers who fall into arrears, perhaps due to a
period of unemployment, but who are subsequently able to resume
making payments, are encouraged by the lender to put a plan in
place to help reduce the balance of arrears whilst maintaining
their current scheduled payment (i.e. making an overpayment each
month, which will reduce the arrears balance back to zero over
time). In this pool, almost 60% of the loans in arrears already
have such an arrangement plan in place, half of which have been in
place for more than 5 years. Of the remainder, the average arrears
balance is just £673.
The table below shows the major contributors to the performance
of the NAV since that time. The longer time taken for the portfolio
to become fully invested and the ongoing payment of the dividend of
6p per annum have been the major drivers of NAV performance,
although the drag has reduced following the securitisation of the
Oat Hill No.1 transaction. The 0.7p fair value movement in the swap
valuation, is unchanged from June
2017 given the expiry last summer of the swaps hedging the
original two-year loans in the Coventry portfolio (approximately 80% of the
pool). With the change to hedge accounting from July 2017, this will naturally unwind over the
subsequent three years as the remaining 20% of the loans in the
pool had an initial five year term.
NAV inception to end December 2017 |
Start NAV (pence per
share) |
98.0 |
Net Interest |
6.8 |
Dividends Paid |
-10.5 |
Costs (Servicing,
Operating, Warehouse) |
-6.4 |
Swap
Mark-to-Market |
-0.5 |
End NAV |
87.4 |
Market and Investment
Outlook
With the US buoyed by the new tax reforms and the first round of
Brexit talks ending on a positive note, credit markets began 2018
in relatively good shape, and whilst valuations are at tight
levels, the supportive backdrop and positive technicals should
point to a continuation of 2017’s performance. However, the
inflation worries and volatility that began to dog equity markets
in the early part of the new year developed pushed yields in rates
markets higher and present uncertainties that may warrant a prudent
approach.
UK housing market uncertainty and subdued mortgage lending, at
least to home movers other than first time buyers, is set to
continue whilst the Brexit uncertainty remains. In ABS markets,
whilst there is no expectation of a tidal wave of issuance, there
is a belief that new issuance levels will grow further again in
2018. The impending end of the TFS in the UK brings hope of renewed
issuance from the UK bank and building society sector, and tapering
in Europe along with the new
‘simple, transparent and standardised’ (“STS”) securitisation
regulations should also help more widely.
TwentyFour Asset Management LLP
20 March
2018
PORTFOLIO OF INVESTMENTS
As at 31 December 2017
Portfolio Summary
as at 31 December 2017 |
Malt
Hill No. 1 Plc |
Cornhill No. 2 Limited |
Oat
Hill No. 1 Plc |
Originator |
Coventry
Building Society |
The
Mortgage Lender |
Capital
Home Loans |
Outstanding Notional
Balance |
£226m |
£147m* |
£561m |
Number of Loans |
1,301 |
785* |
4,697 |
Average Mortgage
Size |
£180k |
£187k |
£129k |
WA Current Indexed
LTV |
63.45% |
66.93% |
66.83% |
WA Interest Rate |
2.92% |
3.59% |
1.79% |
WA Remaining Term
(mth) |
219 |
295 |
143 |
WA Seasoning
(mth) |
29 |
6 |
131 |
3mth + Arrears (%
balance) |
0.00% |
0.00% |
0.42% |
|
|
|
|
* includes
completions and pipeline |
|
|
BOARD MEMBERS
Biographical details of the Directors are as follows:
Christopher
Waldron (Chairman) - Independent Non-Executive Director –
Guernsey resident
Mr Waldron is the Chairman of Ranger Direct Lending Fund Plc and
a director of a number of listed companies, including Crystal Amber
Fund Limited and JZ Capital Partners Limited. He has over 30 years'
experience as an investment manager, specialising in fixed income,
hedging strategies and alternative investment mandates and until
2013 was Chief Executive of the Edmond de Rothschild Group in the
Channel Islands. Prior to joining
the Edmond de Rothschild Group in 1999, Mr Waldron held investment
management positions with Bank of Bermuda, the Jardine Matheson Group and
Fortis. Mr Waldron is also a member of the States of Guernsey’s
Policy and Resources Investment and Bond Sub-Committee and a Fellow
of the Chartered Institute of Securities and Investment. Mr Waldron
was appointed to the Board on 10 June
2015.
Richard
Burrows - Senior Independent Non-Executive Director – UK
resident
Mr Burrows works as Head of Treasury for Bank of China, London
Branch following a role as Senior Regulatory Policy Adviser to Bank
of China UK Ltd. He previously worked as a Capital and Liquidity
Risk Consultant at Grant Thornton and before that at the
Co-operative Bank plc, taking the role of Chief of Staff to the CEO
appointed to lead the process of recapitalisation. Before
Co-operative Bank plc Mr Burrows worked in the Technical Specialist
Prudential Risk Division – Liquidity and ALM of the Financial
Services Authority and led the on-site review of BIPRU firms’
Supervisory Liquidity Review Process and subsequent panel
submission to agree Individual Liquidity Guidance. In 2009 – 2010,
before joining the Financial Services Authority Mr Burrows worked
at Northern Rock plc as Assistant Director, Marketing and Liquidity
Risk as the firm prepared for and completed its formal split of the
balance sheet into core banking and non-core assets. From 1994 to
2008, Mr Burrows was Director, Head of Funding at Citi Alternative
Investments and was responsible for efficient funding via debt
issuance from Euro and US domestic programmes and hedging of all
market risk via derivatives. Mr Burrows was appointed to the Board
on 12 June 2015.
Paul Le
Page (Audit Committee Chairman) - Independent Non-Executive
Director –
Guernsey resident
Mr Le Page is a director of Man
Fund Management Guernsey Limited, Man Group Japan Limited and FRM
Investment Management Limited which are subsidiaries of Man Group
Plc. He is responsible for managing hedge fund portfolios, and is a
director of a number of FRM and GLG funds. Mr Le Page is currently the Audit Committee
Chairman for Bluefield Solar Income Fund Limited and was formerly
the Audit Committee Chairman for Cazenove Absolute Equity Limited
and Thames River Multi Hedge PCC Limited. He has extensive
knowledge of, and experience in, the fund management and the hedge
fund industry. Prior to joining FRM, he was an Associate Director
at Collins Stewart Asset Management from January 1999 to July
2005, where he was responsible for managing the firm’s hedge
fund portfolios and reviewing fund managers. He joined Collins
Stewart in January 1999 where he
completed his MBA in July 1999. He
originally qualified as a Chartered Electrical Engineer after a
12-year career in industrial research and development, latterly as
the Research and Development Director for Dynex Technologies
(Guernsey) Limited, having
graduated from University College London in Electrical and
Electronic Engineering in 1987. Mr Le
Page was appointed to the Board on 10
June 2015.
Helen
Green - Independent Non-Executive Director - Guernsey resident
Mrs Green is a chartered accountant and has been employed by
Saffery Champness, a top 20 firm of chartered accountants, since
1984. She qualified as a chartered accountant in 1987 and became a
partner in the London office in
1997. Since 2000 she has been based in the Guernsey office where she is client liaison
director responsible for trust and company administration. Mrs
Green serves as a Non-Executive Director on the boards of a number
of companies in various jurisdictions, including Aberdeen Emerging
Markets Investment Company Limited, Landore Resources Limited, John
Laing Infrastructure Fund Limited, City Natural Resources High
Yield Trust plc and Acorn Income Fund Limited, of which she is
Chairman. Mrs Green was appointed to the Board on 16 June 2016.
STATEMENT OF PRINCIPAL RISKS AND
UNCERTAINTIES
Principal Risks and Uncertainties
In respect to the Company’s system of Internal Controls and
reviewing its effectiveness, the Directors:
· are satisfied that they
have carried out a robust assessment of the principal risks facing
the Company, including those that would threaten its business
model, future performance, solvency or liquidity; and
· have reviewed the
effectiveness of the risk management and Internal Control systems
including material financial, operational and compliance controls
(including those relating to the financial reporting process) and
no significant failings or weaknesses were identified.
When considering the total return of the Company, the Board
takes account of the risk which has been taken in order to achieve
that return. The Board considers the following principal risks,
which are consistent with those disclosed in the Annual Report and
Audited Financial Statements for the year ended 30 June 2017, to be relevant for the next six
month period ending 30 June 2018:
· The risk of the Company being unable to pay
target dividends to investors due to a shortfall in income received
on the portfolio. The risk is controlled by the Board receiving
quarterly reports from the Portfolio Manager, in conjunction with
the Company’s Administrator, which monitor the Company’s cash flow
and income position, as well as the macro economic environment,
paying particular attention to movements in the house price index,
unemployment levels and interest rates as well as loan level and
portfolio attributes such as prepayment rates and the possibility
and timing of defaults, all of which could reduce cash flow to the
Company. The Company can also pay dividends from capital with Board
agreement.
· The risk of the Company being unable to
invest or reinvest capital repaid from mortgage loans to purchase
additional mortgage portfolios in a timely manner. The risk is
mitigated by the Board monitoring the portfolio pipeline in regular
communication with the Portfolio Manager, and in quarterly and ad
hoc Board meetings.
· The risk of investor dissatisfaction leading
to a weaker share price, causing the Company to trade at a discount
to its underlying asset value and a potential lack of market
liquidity. The risk is mitigated by regular updates to Shareholders
from the Portfolio Manager, and regular shareholder engagement both
directly and via the Company’s brokers.
· The risk of failing to securitise purchased
mortgage portfolios. If there is any significant delay in the
ability to securitise a portfolio, the interest rates payable by
the Warehouse SPV to third party providers of loan finance are
likely to increase over time leading to falls in the value and/or
yield of the instruments held by the Acquiring Entity, the value of
which will impact the yield of the Company. In addition, the
underlying portfolios will need to be re-financed periodically in
order to maintain optimal levels of leverage. Failure to
re-securitise at a suitable rate and/or reinvest the proceeds of
subsequent securitisations may also adversely impact the yield of
the Company. The risk has been mitigated by the Portfolio Manager
hiring additional team members with extensive securitisation
experience and by being engaged with the UK RMBS market and service
providers. This enables the Company to optimise the timing of its
securitisation transactions.
· The risk of the Company’s hedges being
deemed ineffective following the adoption of hedge accounting which
has been applied since 1 July 2017.
With the adoption of hedge accounting, the Company is required to
assess the historic and future effectiveness of the Company’s
hedges in accordance with IAS 39. Should prospective testing show
the hedges to be ineffective, the Company may continue to hedge
account up till the point that the Board can prove the hedges to be
effective. Thereafter the Company would need to cease hedge
accounting, meaning that the fair value movements on the derivative
instruments are taken through the Statement of Comprehensive Income
in full.
Going Concern
Under the 2016 UK Corporate Governance Code (the “Code”) and
applicable regulations, the Directors are required to satisfy
themselves that it is reasonable to assume that the Company is a
going concern and to identify any material uncertainties to the
Company’s ability to continue as a going concern for at least 12
months from the date of approving the financial statements. The
Company has voluntarily elected to comply with the Code.
Having reviewed the Company’s current portfolio and pipeline of
investment transactions the Board of Directors believe that it is
appropriate to adopt a going concern basis in preparing the
Unaudited Condensed Consolidated Interim Financial Statements given
the Company’s holdings of cash and cash equivalents and the income
deriving from those investments, meaning the Company has adequate
financial resources to meet its liabilities as they fall due for at
least 12 months from the date of approval of these Unaudited
Condensed Consolidated Financial Statements.
Related Parties
Other than fees payable in the ordinary course of business,
there have been no material transactions with related parties which
have affected the financial position or performance of the Company
in the financial period. Please refer to note 12 for further
details.
RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
· these Unaudited Condensed
Consolidated Interim Financial Statements have been prepared in
accordance with International Accounting Standard 34, "Interim
Financial Reporting" and give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company
as required by the UK Listing Authority’s Disclosure and
Transparency Rule (“DTR”) 4.2.4R.
· the interim management report
includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules,
being an indication of important events that have occurred during
the period from 1 July 2017 to
31 December 2017 and their impact on
the Unaudited Condensed Consolidated Interim Financial Statements;
and a description of the principal risks and uncertainties for the
remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules,
being related party transactions that have taken place during the
period from 1 July 2017 to
31 December 2017 and that have
materially affected the financial position or performance of the
Company during that period as included in note 12.
By order of the Board
Christopher Waldron
Chairman
Paul Le Page
Director
20 March
2018
Independent review report to UK Mortgages Limited
Our conclusion
We have reviewed the accompanying condensed consolidated interim
financial information of UK Mortgages Limited and its subsidiaries
(together the “Company”) as of 31 December 2017. Based on
our review, nothing has come to our attention that causes us to
believe that the accompanying condensed consolidated interim
financial information is not prepared, in all material respects, in
accordance with International Accounting Standard 34, ‘Interim
Financial Reporting’, and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom’s Financial Conduct
Authority.
What we have reviewed
The accompanying condensed consolidated interim financial
information comprise:
· the condensed consolidated
interim statement of financial position as of 31 December 2017;
· the condensed consolidated
statement of comprehensive income for the six-month period then
ended;
· the condensed consolidated
statement of changes in equity for the six-month period then
ended;
· the condensed consolidated
statement of cash flows for the six-month period then ended;
and
· the notes, comprising a summary
of significant accounting policies and other explanatory
information.
The condensed consolidated interim financial information has
been prepared in accordance with International Accounting Standard
34, ‘Interim Financial Reporting’, and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom’s Financial
Conduct Authority.
Our responsibilities and those of the
directors
The Directors are responsible for the preparation and
presentation of this condensed consolidated interim financial
information in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom’s Financial
Conduct Authority.
Our responsibility is to express a conclusion on this condensed
consolidated interim financial information based on our review.
This report, including the conclusion, has been prepared for and
only for the Company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom’s Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements 2410, 'Review of interim financial
information performed by the independent auditor of the entity'
issued by the International Auditing and Assurance Standards Board.
A review of interim financial information consists of making
inquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Interim
Management Report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed consolidated interim financial statements.
PricewaterhouseCoopers CI LLP
Chartered Accountants
Guernsey, Channel Islands
20 March 2018
(a) The maintenance and integrity of the Company’s website
is the responsibility of the directors; the work carried out by the
auditors does not involve consideration of these matters and,
accordingly, the auditors accept no responsibility for any changes
that may have occurred to the Interim Management Report and
Unaudited Condensed Consolidated Interim Financial Statements since
they were initially presented on the website.
(b) Legislation in Guernsey governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the period from 1 July 2017 to
31 December 2017
|
|
|
|
|
|
|
For
the
period from 01.07.2017
to
31.12.2017 |
|
For
the period from 01.07.2016 to 31.12.2016 |
|
|
|
|
|
|
|
(Unaudited) |
|
(Unaudited) |
|
|
|
Note |
|
|
£ |
|
£ |
Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on
mortgage loans |
|
|
|
|
|
|
12,498,485 |
|
4,602,222 |
Interest
income on cash and cash equivalents |
|
|
|
|
|
2,433 |
|
10,009 |
Net
interest expense on financial liabilities at fair value through
profit and loss |
|
|
(1,281,012) |
|
(1,149,012) |
Unrealised
gain on financial liabilities at fair value through profit and
loss |
|
|
- |
|
1,249,700 |
Net gain from
derivative financial instruments |
|
|
7 |
|
|
|
123,814 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income |
|
|
|
|
|
|
11,343,720 |
|
4,712,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on
loan notes |
|
|
11 |
|
|
|
4,185,782 |
|
2,384,147 |
Mortgage loans
servicing fees |
|
|
|
|
|
|
1,019,194 |
|
385,253 |
Loan note issue
fees |
|
|
|
|
|
|
831,735 |
|
487,117 |
Portfolio management
fees |
|
|
12 |
|
|
|
663,464 |
|
881,648 |
Mortgage loan write
offs |
|
|
5 |
|
|
|
333,121 |
|
- |
Legal and professional
fees |
|
|
|
|
|
|
466,610 |
|
72,603 |
General expenses |
|
|
|
|
|
|
243,352 |
|
97,918 |
Interest expense on
borrowings |
|
|
10 |
|
|
|
313,546 |
|
- |
Borrowings facility
fees |
|
|
10 |
|
|
|
230,770 |
|
654,658 |
Audit fees |
|
|
13 |
|
|
|
177,267 |
|
78,126 |
Administration and
secretarial fees |
|
|
13 |
|
|
|
87,111 |
|
89,241 |
Directors' fees |
|
|
12 |
|
|
|
67,500 |
|
53,750 |
Custody fees |
|
|
13 |
|
|
|
12,006 |
|
31,058 |
AIFM fees |
|
|
13 |
|
|
|
48,243 |
|
48,582 |
Depositary fees |
|
|
13 |
|
|
|
38,841 |
|
40,858 |
Corporate broker
fees |
|
|
|
|
|
|
24,053 |
|
25,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses |
|
|
|
|
|
|
8,742,595 |
|
5,330,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive gain/(loss) for the period |
|
|
|
2,601,125 |
|
(617,187) |
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per
ordinary share - |
|
|
|
|
|
|
0.010 |
|
(0.002) |
basic &
diluted |
|
|
3 |
|
|
|
|
All items in the above statement derive from continuing
operations.
The notes form an integral part of these Unaudited Condensed
Consolidated Interim Financial Statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 31 December 2017
|
|
|
31.12.2017 |
|
30.06.2017 |
|
|
|
(Unaudited) |
|
(Audited) |
Assets |
Note |
|
£ |
|
£ |
Non-current
assets |
|
|
|
|
|
Mortgage loans |
5 |
|
831,853,806 |
|
829,201,473 |
Reserve fund |
6 |
|
13,157,350 |
|
13,157,350 |
Total non-current
assets |
|
|
845,011,156 |
|
842,358,823 |
|
|
|
|
|
|
Current
assets |
|
|
|
|
|
Mortgage loans |
5 |
|
12,140,626 |
|
12,674,700 |
Trade and other
receivables |
8 |
|
2,848,110 |
|
3,522,323 |
Cash and cash
equivalents |
|
|
76,921,528 |
|
86,022,869 |
Total current
assets |
|
|
91,910,264 |
|
102,219,892 |
|
|
|
|
|
|
Total
assets |
|
|
936,921,420 |
|
944,578,715 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Non-current
liabilities |
|
|
|
|
|
Borrowings |
10 |
|
66,000,000 |
|
- |
Loan notes |
11 |
|
648,651,676 |
|
715,734,468 |
Total non-current
liabilities |
|
|
714,651,676 |
|
715,734,468 |
|
|
|
|
|
|
Current
liabilities |
|
|
|
|
|
Financial liabilities
at fair value through profit and loss |
7 |
|
1,217,194 |
|
1,808,049 |
Trade and other
payables |
9 |
|
2,563,287 |
|
3,648,060 |
Total current
liabilities |
|
|
3,780,481 |
|
5,456,109 |
Total
liabilities |
|
|
718,432,157 |
|
721,190,577 |
|
|
|
|
|
|
Net assets |
|
|
218,489,263 |
|
223,388,138 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
Share capital
account |
|
|
245,000,000 |
|
245,000,000 |
Other reserves |
|
|
(26,510,737) |
|
(21,611,862) |
|
|
|
|
|
|
Total
equity |
|
|
218,489,263 |
|
223,388,138 |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares in
issue |
|
|
250,000,000 |
|
250,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value per
ordinary share |
4 |
|
0.8739 |
|
0.8936 |
|
|
|
|
|
|
The Unaudited Condensed Consolidated Interim Financial
Statements were approved and authorised for issue by the Board of
Directors on 20 March 2018 and signed
on its behalf by:
Christopher Waldron
Chairman
Paul Le Page
Director
The notes form an integral part of these Unaudited Condensed
Consolidated Interim Financial Statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the period from 1 July 2017 to
31 December 2017
|
|
|
Share
capital |
|
Other |
|
Total |
|
|
|
account |
|
reserves |
|
equity |
|
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
|
|
£ |
|
£ |
|
£ |
Balance
at 1 July 2017 |
|
245,000,000 |
|
(21,611,862) |
|
223,388,138 |
|
|
|
|
|
|
|
|
Dividends
paid |
|
- |
|
(7,500,000) |
|
(7,500,000) |
Total
comprehensive gain for the period |
|
- |
|
2,601,125 |
|
2,601,125 |
|
|
|
|
|
|
|
|
Balance
at 31 December 2017 |
|
245,000,000 |
|
(26,510,737) |
|
218,489,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
capital |
|
Other |
|
Total |
|
|
|
account |
|
reserves |
|
equity |
|
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
|
|
£ |
|
£ |
|
£ |
Balance
at 1 July 2016 |
|
245,000,000 |
|
(7,636,735) |
|
237,363,265 |
|
|
|
|
|
|
|
|
Dividends
paid |
|
- |
|
(7,500,000) |
|
(7,500,000) |
Total
comprehensive loss for the period |
|
- |
|
(617,187) |
|
(617,187) |
|
|
|
|
|
|
|
|
Balance
at 31 December 2016 |
|
245,000,000 |
|
(15,753,922) |
|
229,246,078 |
|
|
|
|
|
|
|
|
The notes form an integral part of these Unaudited Condensed
Consolidated Interim Financial Statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS
for the period from 1 July 2017 to
31 December 2017
|
|
|
For
the period from 01.07.2017 to 31.12.2017 |
|
For
the period from 01.07.2016 to 31.12.2016 |
|
|
|
(Unaudited) |
|
(Unaudited) |
|
|
Note |
£ |
|
£ |
Cash flows from
operating activities |
|
|
|
|
|
Total comprehensive
gain/(loss) for the period |
|
|
2,601,125 |
|
(617,187) |
|
|
|
|
|
|
Adjustments for: |
|
|
|
|
|
Amortisation
adjustment under effective interest rate method |
|
5 |
(3,000,425) |
|
436,019 |
Decrease in trade and
other receivables |
|
|
674,213 |
|
2,305,919 |
Unrealised gain on
financial liabilities at fair value through profit and loss |
|
|
- |
|
(1,249,700) |
Net gain from
derivative financial instruments |
|
7 |
(123,814) |
|
- |
Decrease in trade and
other payables |
|
|
(1,084,773) |
|
(2,085,498) |
Mortgage loans written
off |
|
5 |
333,121 |
|
- |
Amortised borrowing
charges released |
|
5 |
98,420 |
|
19,825 |
Loan note issue fees
amortised |
|
11 |
573,999 |
|
326,825 |
Purchase of mortgage
loans |
|
5 |
(61,812,863) |
|
(11,563,225) |
Mortgage loans
repaid |
|
5 |
61,796,447 |
|
6,981,435 |
|
|
|
|
|
|
Net cash
inflow/(outflow) from operating activities |
|
55,450 |
|
(5,445,587) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
borrowings |
|
10 |
66,000,000 |
|
- |
Repayments of loan
notes |
|
11 |
(67,612,589) |
|
(9,409,310) |
Loan note issue fees
paid |
|
11 |
(44,202) |
|
- |
Dividends paid |
|
|
(7,500,000) |
|
(7,500,000) |
|
|
|
|
|
|
Net cash outflow from
financing activities |
|
|
(9,156,791) |
|
(16,909,310) |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash
and cash equivalents |
|
|
(9,101,341) |
|
(22,354,897) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at beginning of period |
|
|
86,022,869 |
|
194,218,249 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period |
|
|
76,921,528 |
|
171,863,352 |
|
|
|
|
|
|
The notes form an integral part of these Unaudited Condensed
Consolidated Interim Financial Statements.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
for the period from 1 July 2017 to
31 December 2017
1. General Information
UKML was incorporated with limited liability in Guernsey, as a closed-ended investment company
on 10 June 2015. UKML’s Shares were
listed with the UK Listing Authority and admitted to trading on the
Specialist Fund Segment of the London Stock Exchange on
7 July 2015.
The Unaudited Condensed Consolidated Interim Financial
Statements comprise the financial statements of UK Mortgages
Limited, UK Mortgages Corporate Funding Designated Activity
Company, Malt Hill No.1 Plc (UK based company), Oat Hill No.1 Plc
(UK based company) and the Warehouse SPVs; Cornhill Mortgages No.1
Limited, until being placed into liquidation on 4 May 2017 (UK based company), Cornhill Mortgages
No.2 Limited (UK based company) and Cornhill Mortgages No.3
Limited, placed into liquidation on 9
February 2018 (UK based company) as at 31 December
2017, together referred to as the “Company”. The Warehousing SPVs
are placed into liquidation on the transfer of the mortgage loans
to the Issuer SPVs.
The Company’s investment objective is to provide Shareholders
with access to stable income returns through the application of
relatively conservative levels of leverage to portfolios of UK
mortgages.
The Company expects that income will constitute the vast
majority of the return to Shareholders and that the return to
Shareholders will have relatively low volatility and demonstrate a
low level of correlation with broader markets.
The Portfolio Manager to the Company and Portfolio Adviser to
the UK Mortgages Corporate Funding Designated Activity Company is
TwentyFour Asset Management LLP.
2. Accounting Policies
a) Statement of compliance
The Unaudited Condensed Consolidated Interim Financial
Statements for the period from 1 July 2017 to
31 December 2017 have been prepared
on a going concern basis in accordance with IAS 34 “Interim
Financial Reporting”, the Listing Rules of the London Stock
Exchange and applicable legal and regulatory requirements.
The Unaudited Condensed Consolidated Interim Financial
Statements should be read in conjunction with the Annual
Consolidated Financial Statements for the year ended
30 June 2017 which were prepared in accordance with
International Financial Reporting Standards (“IFRS”) and which
received an unqualified audit report.
The Company adopted hedge accounting from 1 July 2017 to reduce volatility in the
Consolidated Statement of Comprehensive Income. No prior period
restatement has been made as the Company only became eligible to
hedge account from that date.
b) Changes in accounting policy
In the current financial period, there have been no other
changes to the accounting policies from those applied in the most
recent audited annual financial statements and listed below.
Financial Assets
Loans and receivables are initially recognised at fair value and
subsequently carried at amortised
cost using the effective interest rate method, other than where
an adjustment is made as part of a fair value hedging
arrangement.
Hedge accounting
The Company uses derivatives only for interest rate risk
management purposes. It does not use derivatives for trading
purposes. All derivatives entered into by the Company are to
provide an economic hedge of the exposure to changes in fair value
of a recognised asset or liability (such as fixed rate mortgages)
or an unrecognised firm commitment that is attributable to a
particular risk (changes in benchmark interest rates impacting the
fair value of fixed coupons) and could affect profit or loss. All
hedge relationships designated by the Company are therefore
classified as fair value hedges.
When transactions meet the criteria specified in IAS 39, the
Company applies fair value hedge accounting so that changes in the
fair value of the underlying mortgage loan cash flows (“the hedged
item”) that are attributable to the hedged risk are recorded in the
Consolidated Statement of Comprehensive Income to offset the fair
value movement of the related derivative (“the hedging
instrument”).
To qualify for hedge accounting, the hedge relationship must be
formally designated and documented. Additionally, there must be an
expectation that the hedging instrument will be highly effective in
offsetting the changes in the fair value of the hedged item.
Effectiveness must then be tested on an ongoing basis over the life
of the hedge relationship.
Derivatives are initially recognised at fair value on the date
on which a derivative contract is entered into, and are
subsequently remeasured at their fair value. Fair values of
derivative financial instruments are calculated by discounted cash
flow models using yield curves and counterparty credit risk
assumptions that are based on observable market data. All
derivatives are carried as assets when their fair value is positive
and as liabilities when their fair value is negative. Changes in
the fair value of derivatives are recognised immediately in the
Consolidated Statement of Comprehensive Income together with
changes in the fair value of the hedged item that are attributable
to the hedged risk within net gain from derivative financial
instruments.
All derivatives entered into by the Company are for the purposes
of providing an economic hedge. Hedge accounting is an optional
treatment but the specific rules and conditions in IAS39 have to be
complied with before it can be applied. The Company has classified
all of its derivatives as fair value hedges. To qualify for hedge
accounting at inception the hedge relationship must be clearly
documented. At inception the derivative must be expected to be
highly effective in offsetting the hedged risk, and effectiveness
must be tested throughout the life of the hedge relationship.
If a hedging relationship is designated at a point where the
fair value of the hedged item is not nil, an additional adjustment
(known as a “pull to par” adjustment) is typically required to
ensure that the fair value hedge adjustment fully reverses over the
remaining life of the hedged item.
If the hedging derivative expires or is sold, terminated, or
exercised, or the hedge no longer meets the criteria for fair value
hedge accounting, or the hedge designation is revoked, hedge
accounting is discontinued prospectively. If the underlying
instrument is sold or repaid, the unamortised fair value adjustment
is immediately recognised in the Consolidated Statement of
Comprehensive Income. A summary of the effects of hedging and the
associated fair value adjustments can be found in note 7.
c) Critical judgements and
estimates
In the current financial period, there have been no changes to
the significant critical accounting judgements, estimates and
assumptions from those applied in the most recent audited annual
financial statements.
d) Standards, amendments and
interpretations issued but not yet effective
IFRS 9 Financial Instruments
The Company is currently preparing to implement credit
impairment calculations based on the expected credit loss model as
required under IFRS 9. IFRS 9 is effective for all new financial
years commencing on or after 1 January
2018. As the Company’s financial year starts on 1 July, all
net asset values will be calculated and reported in accordance with
the standard from 1 July 2018.
The Portfolio Manager already incorporates loan loss provisions
within their portfolio pricing models and intends to use these
models to calculate an unaudited estimated impairment provision for
the portfolio. The expected changes to the impairment provision
calculation methodology and the quantified expected impact of
adopting IFRS 9 will be disclosed in the annual report for the year
end 30 June 2018.
The Company has satisfactorily completed its assessments of
solely payment of principal and interest compliance that reviews
the cash flow characteristics of financial assets to ensure they
can continue to be classified within an amortised cost model under
IFRS 9. These are still subject to external audit.
The Company has reviewed the financial reporting implications of
IFRS 9 impairment accounting with its auditors and service
providers and has concluded that three separate methodologies will
be required to cover (1) purchased portfolios with existing
impairments which are already incorporated in the Effective
Interest Rate valuation; (2) purchased portfolios with limited
impairment history and (3) loans that the group originates.
Hedge accounting will become more closely aligned with risk
management practices under IFRS 9. The Company’s existing hedge
relationships appear to qualify as continuing hedges upon the
adoption of IFRS 9. Thus, the Company does not expect a significant
impact on accounting for its hedging relationships.
IFRS 15 Revenue from Contracts with
Customers
The Directors anticipate that the adoption of IFRS 15 effective
in a future period will not have a material impact on the financial
statements of the Company.
3. Earnings/(loss) per Ordinary Share - basic
& diluted
The gains per Ordinary Share of £0.010 (31 December 2016: loss £0.002) - basic and
diluted are equivalent and have been calculated based on the
weighted average number of Ordinary Shares of 250,000,000
(31 December 2016: 250,000,000) and a net gain of £2,601,125
(31 December 2016: a net loss of
£617,187).
4. Net Asset Value per Ordinary Share
The Net Asset Value of each share of £0.8739 (30 June 2017: £0.8936) is determined by dividing
the net assets of the Company £218,489,263 (30 June 2017: £223,388,138) by the number of
shares in issue at 31 December 2017
of 250,000,000 (30 June 2017:
250,000,000).
5. Mortgage loans
|
|
|
|
|
|
|
For
the period from 01.07.2017 to 31.12.2017 |
|
For
the year from 01.07.2016 to 30.06.2017 |
|
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
|
|
|
|
|
|
|
£ |
|
£ |
Mortgage
loans at start of the period/year |
|
841,876,173 |
|
303,585,700 |
Mortgage
loans purchased |
|
|
|
61,812,863 |
|
576,732,728 |
Amortisation adjustment under effective interest rate method* |
3,000,425 |
|
1,626,884 |
Mortgage loans
repaid |
|
|
|
|
|
|
(61,796,447) |
|
(40,035,931) |
Borrowings
charges amortised |
|
- |
|
424,709 |
Amortised
borrowing charges released |
|
(98,420) |
|
(52,218) |
Fair value
adjustment for hedged risk** |
|
(467,041) |
|
- |
Mortgage
loans written off |
|
|
(333,121) |
|
(405,699) |
|
|
|
|
|
|
|
|
|
|
Mortgage
loans at end of the period/year |
|
843,994,432 |
|
841,876,173 |
|
|
|
|
|
|
|
|
|
|
Amounts
falling due after more than one year |
831,853,806 |
|
829,201,473 |
Amounts
falling due within one year |
|
12,140,626 |
|
12,674,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
843,994,432 |
|
841,876,173 |
|
|
|
|
|
|
|
|
|
|
*Net premium unwind on the Malt Hill No.1 portfolio and pull to
par on the Oat Hill No.1 portfolio.
** Please refer to note 7 which explains how the fair value
adjustment is calculated and note 14 sets out the liquidity and
credit risk profile of the mortgage loans.
Mortgage loans at 31 December 2017
comprise of two securitised mortgage portfolios legally held in
Malt Hill No.1 Plc and Oat Hill No.1 Plc and one mortgage portfolio
held with Cornhill Mortgages No.2 Limited. Please refer to the
Portfolio of Investments for breakdown of portfolios.
The Company does not experience any seasonality or cyclicality
in its investment activities.
6. Reserve fund
The reserve fund is held with Citibank N.A. London Branch within the securitisation
structure. The Company is required to maintain this reserve and it
is not readily available to the Company and may only be used in
accordance with the Issue and Programme Documentation.
7. Financial liabilities
held at fair value through profit and loss
Derivative instruments – Malt Hill
No.1 Plc
On 3 November 2015, the Company
entered into an Interest Rate Swap (under an ISDA agreement) at the
point of the initial mortgage loan portfolio purchase to convert
the fixed rate loan exposure into 3 Month Libor. The notional value
of the swap is balance guaranteed in order to track the principal
balance of the mortgage loan portfolio and changes thereto
quarterly in line with the movement in the mortgage loan
portfolio.
Derivative instruments – Cornhill
Mortgages No.2 Limited
On 7 July 2016, the Company
entered into an Interest Rate Swap (under an ISDA agreement) to
hedge the fixed rate loan exposure of the mortgages in the
portfolio into 1 Month Libor. The notional value of the swap is
balance guaranteed in order to track the new originations and the
amortisation of the mortgage loan portfolio and changes on a
monthly basis to reflect the principal balance of the
portfolio.
Notional and fair value balances:
|
|
|
|
|
|
|
Malthill
No. 1 Plc |
|
Cornhill No. 2 Limited |
|
31.12.2017 Total |
Notional
amount of Interest Rate Swap |
|
177.8m |
|
82.6m |
|
260.4m |
Fair value
of Interest Rate Swap |
|
|
(1,078,772) |
|
(138,422) |
|
(1,217,194) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Malthill
No. 1 Plc |
|
Cornhill No. 2 Limited |
|
30.06.2017 Total |
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
Notional
amount of Interest Rate Swap |
|
288.5m |
|
35.5m |
|
324.0m |
Fair value
of Interest Rate Swap |
|
|
(1,734,294) |
|
(73,755) |
|
(1,808,049) |
|
|
|
|
|
|
|
|
|
|
|
|
On 1 July 2017, the Directors
designated both derivatives as fair value hedges and began hedge
accounting from that date.
Net gain from derivative financial
instruments:
|
|
|
|
|
|
|
Malthill No. 1 Plc |
|
Cornhill No. 2 Limited |
|
31.12.2017 Total |
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
Movement
on derivatives in designated fair value hedge
relationships |
655,522 |
|
(64,667) |
|
590,855 |
Adjustment
to mortgage loans |
|
|
|
|
|
|
|
|
in fair value hedge relationship |
|
|
|
|
(537,527) |
|
70,486 |
|
(467,041) |
|
|
|
|
|
|
|
|
|
|
|
|
Net
ineffectiveness |
|
|
|
|
117,995 |
|
5,819 |
|
123,814 |
|
|
|
|
|
|
|
|
|
|
|
|
The net gain from derivative financial instruments represents
the net fair value movement on derivative instruments that are
matching risk exposure on an economic basis. Some accounting
volatility arises on these items due to accounting ineffectiveness
on designated hedges.
The movement is primarily due to timing differences in income
recognition between derivative instruments and the hedged assets.
This gain or loss will tend to zero over time and this is taken
into account by the Board when considering the Company’s underlying
performance.
8. Trade and other
receivables
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
|
|
|
31.12.2017 |
|
30.06.2017 |
|
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
|
|
|
|
|
|
|
£ |
|
£ |
Interest
receivable on mortgage loans |
|
1,113,884 |
|
1,343,479 |
Capitalised formation expenses |
|
1,116,625 |
|
1,431,138 |
Other
receivables and prepayments |
|
617,601 |
|
747,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,848,110 |
|
3,522,323 |
|
|
|
|
|
|
|
|
|
|
Capitalised expenses are the set up costs of Cornhill Mortgages
No. 2 Limited, which are being amortised over 3 years.
9. Trade and other
payables
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
|
|
|
31.12.2017 |
|
30.06.2017 |
|
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
|
|
|
|
|
|
|
£ |
|
£ |
Interest due on loan
notes |
|
|
|
|
|
|
848,598 |
|
398,870 |
Loan note
issue fees payable |
|
|
596,425 |
|
1,707,580 |
Portfolio
management fees payable |
|
|
|
330,504 |
|
832,816 |
Mortgage
loans servicing fees payable |
|
283,214 |
|
104,054 |
Audit fees
payable |
|
|
|
|
|
200,424 |
|
199,316 |
Legal and
professional fees payable |
|
108,917 |
|
81,201 |
General
expenses payable |
|
|
|
81,034 |
|
63,376 |
Administration and secretarial fees payable |
|
|
|
41,737 |
|
176,533 |
Directors'
fees payable |
|
|
|
|
33,750 |
|
26,875 |
AIFM fees
payable |
|
|
|
|
|
24,091 |
|
48,148 |
Depositary
fees payable |
|
|
|
|
10,952 |
|
5,498 |
Custody
fees payable |
|
|
|
|
3,641 |
|
3,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,563,287 |
|
3,648,060 |
|
|
|
|
|
|
|
|
|
|
10. Borrowings
Cornhill Mortgages No.2 Limited was paying a commitment fee for
£150m until 1 June 2017. The facility
was restructured in June 2017, in
order to improve the cost efficiency of the structure, with changes
involving reduction of commitment fees and drawn margins on the
facility. Any increase to the commitment amount is subject to
NatWest Markets approval and the total facility size remains at
£250m. The facility fees of £230,770 were expensed in the period
(31 December 2016: £654,658). At the
period end the Company had utilised £66,000,000 of the borrowing
facility (30 June 2017: nil). The
interest expense charged on borrowings of £313,546 was expensed in
the period (31 December 2016:
£nil).
11. Loan notes
The Malt Hill No.1 Plc and Oat Hill No.1 Plc mortgage portfolio
acquisitions are partially financed by the issue of notes. The
notes are repaid as the underlying mortgage loans repay. The terms
and conditions of the notes provide that the note holders will
receive interest and principal only to the extent that sufficient
funds are generated from the underlying mortgage loans. The
priority and amount of claims on the portfolio proceeds are
determined in accordance with strict priority of payments. Note
holders have no recourse to the Company in any form.
Malt Hill No.1 Plc completed the public sale of £263.3m of
AAA-rated bonds on 26 May 2016. The
AAA notes were issued with a coupon of 3 month LIBOR plus 1.35%
which is payable quarterly and are listed on the Irish Stock
Exchange. The issue fees on loan notes will be amortised over the
expected life of the loan notes, which is 3 years, being the call
date.
Oat Hill No.1 Plc completed the public sale of £477.1m of
AAA-rated bonds on 26 June 2017. The
AAA notes were issued with a coupon of 3 month LIBOR plus 0.65% and
a step up margin of 1.30% which is payable quarterly and are listed
on the Irish Stock Exchange. The issue fees on loan notes will be
amortised over the expected life of the loan notes, which is 3
years, being the call date.
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
|
|
|
31.12.2017 |
|
30.06.2017 |
|
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
|
|
|
|
|
|
|
£ |
|
£ |
Loan notes
at start of the period/year |
|
715,734,468 |
|
261,784,493 |
Loan notes
issued |
|
- |
|
474,695,416 |
Loan notes
repaid |
|
(67,612,589) |
|
(19,433,084) |
Loan note
issue fees paid |
|
(44,202) |
|
(1,795,120) |
Loan note
issue fees amortised |
|
573,999 |
|
482,763 |
|
|
|
|
|
|
|
|
|
|
Loan notes
at end of the period/year |
|
648,651,676 |
|
715,734,468 |
|
|
|
|
|
|
|
|
|
|
Interest expense on loan notes for the period amounted to
£4,185,782 (31 December 2017:
£2,384,147).
12. Related Parties
a) Directors’ Remuneration &
Expenses
The Directors of the Company are remunerated for their services
at such a rate as the Directors determine. The aggregate fees of
the Directors will not exceed £200,000.
The annual Directors’ fees comprise £40,000 (30 June 2017: £30,000) payable to Mr Waldron, the
Chairman, £35,000 (30 June 2017:
£27,500) to Mr Le Page as Chairman
of the Audit Committee, and £30,000 (30 June
2017: £25,000) each to Mrs Green and Mr Burrows. During the
period ended 31 December 2017,
Directors’ fees of £67,500 (31 December
2016: £53,750) were charged to the Company, of which £33,750
remained payable at the end of the period (30 June 2017:
£26,875).
b) Shares held by related
parties
As at 31 December 2017, Directors
of the Company held the following shares in the Company
beneficially:-
Directors' and Other Interests |
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
|
|
31.12.2017 |
Christopher Waldron |
|
|
5,000 |
Richard
Burrows |
|
|
5,000 |
Paul Le
Page |
|
|
|
20,000 |
Helen
Green |
|
|
|
- |
As at 31 December 2017, the
Portfolio Manager held Nil shares (30 June
2017: Nil) and partners and employees of the Portfolio
Manager held 7,326,004 shares (30 June
2017: 7,040,076), which is 2.93% of the issued share capital
(30 June 2017: 2.81%).
c) Portfolio Manager
With effect from 1 July 2017, the
portfolio management fee is payable to the Portfolio Manager
quarterly on the last business day of the quarter at a rate of
0.60% per annum of the lower of NAV, which is calculated monthly on
each valuation day, or market capitalisation of each class of
shares. Prior to this date the portfolio management fee per annum
was 0.75%.
The Company has also agreed to pay a marketing fee equal to
12.5% of the Placing commission calculated and payable to Numis
Securities Limited (“Numis”) in respect of the issue and each
Placing whether under the Placing Programme or otherwise, to the
Portfolio Manager in respect of its marketing activities.
Total portfolio management fees for the period amounted to
£663,464 (31 December 2016: £881,648)
of which £330,504 (30 June 2017:
£832,816) remained payable at the period end.
The Portfolio Management Agreement dated 23 June 2015 remains in force until determined by
the Company or the Portfolio Manager giving the other party not
less than twelve months' notice in writing. Under certain
circumstances, the Company or the Portfolio Manager are entitled to
immediately terminate the agreement in writing. No placings
occurred in the period and no fees were paid under this
agreement.
13. Material Agreements
a) Alternative Investment Fund
Manager
The Company’s Alternative Investment Fund Manager (the “AIFM”)
is Maitland Institutional Services Limited. In consideration for
the services provided by the AIFM under the AIFM Agreement the AIFM
is entitled to receive from the Company a minimum fee of £20,000
per annum and fees payable quarterly in arrears at a rate of 0.07%
of the NAV of the Company below £50 million, 0.05% on Net Assets
between £50 million and £100 million and 0.03% on Net Assets in
excess of £100 million. During the period ended 31 December 2017, AIFM fees of £48,243
(31 December 2016: £48,582) were
charged to the Company, of which £24,091 (30 June 2017:
£48,148) remained payable at the end of the period.
b) Administrator and Secretary
Administration fees are payable to Northern Trust International
Fund Administration Services (Guernsey) Limited monthly in arrears at a rate
of 0.06% of the NAV of the Company below £100 million, 0.05% on net
assets between £100 million and £200 million and 0.04% on net
assets in excess of £200 million as at the last business day of the
month subject to a minimum £75,000 per annum. These NAV based fees
commenced from 19 November 2015 being
the date the Company acquired its initial investment.
In addition, an annual fee of £45,000 will be charged for
corporate governance and company secretarial services and
accounting services. Total administration and secretarial fees for
the period amounted to £87,111 (31 December
2016: £89,241) of which £41,737 (30
June 2017: £176,533) remained payable at the period end.
c) Depositary and Custodian
Depositary fees are payable to Northern Trust (Guernsey) Limited, monthly in arrears, at a
rate of 0.03% of the NAV of the Company as at the last business day
of the month subject to a minimum £40,000 per annum. Total
depositary fees and charges for the period amounted to £38,841
(31 December 2016: £40,858) of which
£10,952 (30 June 2017: £5,498)
remained payable at the period end.
The Depositary will charge an additional fee of £20,000 for
performing due diligence on each service provider/administrator
employed.
The Depositary is also entitled to a custody fee at a rate of
0.03% of the NAV of the Company as at the last business day of the
month subject to a minimum of £8,500 per annum. These NAV based
fees commenced on 19 November 2015
being the date Company acquired its initial investment. Total
custody fees for the period amounted to £12,006 (31 December 2016: £31,058) of which £3,641
(30 June 2017: £3,793) remained
payable at the period end.
d) Auditors
Audit fees paid to PwC CI LLP and other PwC member firms
includes amounts charged for the current period of £94,372
(31 December 2016: £78,126) and the
under accruals for previous periods of £82,895. Non audit fees of
£60,000 pertaining to accounting advice is included under legal and
professional fees.
14. Financial Risk
Management
The Company’s objective in managing risk is the creation and
protection of shareholder value. Risk is inherent in the Company’s
activities, but it is managed through an ongoing process of
identification, measurement and monitoring.
The Company’s financial instruments include financial assets or
liabilities at fair value through profit and loss, loans and
receivables, and cash and cash equivalents. The main risks arising
from the Company’s financial instruments are market risk, liquidity
risk, and credit risk. The techniques and instruments utilised for
the purposes of portfolio management are those which are reasonably
believed by the Board to be economically appropriate to the
efficient management of the Company.
Market risk
Market risk embodies the potential for both losses and gains and
includes interest rate risk, price risk and currency risk. The
Company’s strategy on the management of market risk is driven by
the Company’s investment objective. The Company’s investment
objective is to provide investors with access to stable income
returns through the application of relatively conservative levels
of leverage to portfolios of UK mortgage loans.
1.1 Interest rate risk: Interest rate risk is the risk that the
value of financial instruments will fluctuate due to changes in
market interest rates. The current underlying mortgage portfolios
are payable on fixed rates, meaning the current exposure to
interest rate fluctuations on the portfolios are limited. However,
floating rate interest is payable on loan notes. In order to hedge
this differential, interest rate swaps were transacted by the
Warehouse SPVs with a market counterparty to pay the fixed rate and
receive the floating rate payments.
On 1 July 2017 the Directors
designated both derivatives as fair value hedges and began hedge
accounting from that date therefore hedging the interest risk
exposure on the fixed rate mortgage loans shown in the table
below.
The below tables show exposure to interest rate risk:
|
|
|
|
|
|
Non
interest |
|
Total
as at |
|
|
Floating rate |
|
Fixed
rate |
|
bearing |
|
31.12.2017 |
|
|
£ |
|
£ |
|
£ |
|
£ |
Assets |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Mortgage loans |
|
592,220,458 |
|
251,773,974 |
|
- |
|
843,994,432 |
Reserve fund |
|
13,157,350 |
|
- |
|
- |
|
13,157,350 |
Trade and other
receivables |
|
1,113,884 |
|
- |
|
1,734,226 |
|
2,848,110 |
Cash and cash
equivalents |
|
76,921,528 |
|
- |
|
- |
|
76,921,528 |
Total
assets |
|
683,413,220 |
|
251,773,974 |
|
1,734,226 |
|
936,921,420 |
Liabilities |
|
|
|
|
|
|
|
|
Financial liabilities
at fair value through profit and loss |
|
(1,217,194) |
|
- |
|
- |
|
(1,217,194) |
Trade and other
payables |
|
- |
|
- |
|
(2,563,287) |
|
(2,563,287) |
Borrowings |
|
(66,000,000) |
|
- |
|
- |
|
(66,000,000) |
Loan notes (note
11) |
|
(648,651,676) |
|
- |
|
- |
|
(648,651,676) |
Total
liabilities |
|
(715,868,870) |
|
- |
|
(2,563,287) |
|
(718,432,157) |
Total interest
sensitivity gap |
|
(32,455,650) |
|
251,773,974 |
|
(829,061) |
|
218,489,263 |
|
|
|
|
|
|
Non
interest |
|
Total
as at |
|
|
Floating
rate |
|
Fixed rate |
|
bearing |
|
30.06.2017 |
|
|
£ |
|
£ |
|
£ |
|
£ |
Assets |
|
(Audited) |
|
(Audited) |
|
(Audited) |
|
(Audited) |
Mortgage loans |
|
585,541,265 |
|
256,334,908 |
|
- |
|
841,876,173 |
Reserve fund |
|
13,157,350 |
|
- |
|
- |
|
13,157,350 |
Trade and other receivables |
|
1,343,479 |
|
- |
|
2,178,844 |
|
3,522,323 |
Cash and cash equivalents |
|
86,022,869 |
|
- |
|
- |
|
86,022,869 |
Total assets |
|
686,064,963 |
|
256,334,908 |
|
2,178,844 |
|
944,578,715 |
Liabilities |
|
|
|
|
|
|
|
|
Financial liabilities
at fair value through profit and loss |
|
(1,808,049) |
|
- |
|
- |
|
(1,808,049) |
Trade and other payables |
|
- |
|
- |
|
(3,648,060) |
|
(3,648,060) |
Loan notes (note 11) |
|
(715,734,468) |
|
- |
|
- |
|
(715,734,468) |
Total liabilities |
|
(717,542,517) |
|
- |
|
(3,648,060) |
|
(721,190,577) |
Total interest sensitivity
gap |
|
(31,477,554) |
|
256,334,908 |
|
(1,469,216) |
|
223,388,138 |
With the adoption of hedge accounting the Company has reduced
its exposure to interest rate risk as changes in the fair value of
the interest rate swaps are offset by adjustments to the fair value
of the mortgage loans. Consequently there is no material movement
in net assets of the Company arising from interest rate
fluctuations.
1.2 Price risk: An active market does not exist in the
underlying instruments based on the illiquidity of the mortgage
loans, and for this reason the mortgage portfolios are accounted
for on an amortised cost basis by an independent third party
valuation provider. Any such valuation may therefore differ from
the actual realisable market value of the relevant mortgage
portfolio.
The interest rate swap hedge trade is valued on a fair value
mark-to-market basis by the swap counterparty, using the observable
information on swap rates. The difference in fair value of the
interest rate swap and amortised cost valuation of the mortgage
loans could lead to volatility in the Company’s NAV, had hedge
accounting not been adopted.
1.3 Currency risk: As at 31 December
2017, the Company had no material exposure to foreign
exchange fluctuations or changes in foreign currency interest
rates. Consequently there is no material movement in assets and
liabilities arising from foreign exchange fluctuations.
Liquidity Risk
Liquidity risk is the risk that the Company will not have
sufficient resources available to meet its liabilities as and when
they fall due. The Company makes its investments by purchasing
Profit Participating Notes issued by the Acquiring Entity. The
Acquiring Entity is bound by EU securities law and will be unable
to fully liquidate, sell, hedge or otherwise mitigate its credit
risk under or associated with the Retention Notes issued by the
Warehouse SPV or Issuer SPV until such time as the securities of
the relevant Issuer SPV have been redeemed in full (whether at
final maturity or early redemption). This places limitations on the
Company’s ability to redeem the Profit Participating Notes issued
by the Acquiring Entity. It is not expected that any party will
make a secondary market in relation to the Retention Notes, and
that there will usually be a limited market for the Retention
Notes.
Any partial sales of Retention notes would need to be negotiated
on a private counterparty to counterparty basis and could result in
a liquidity discount being applied. There may be additional
restrictions on divestment in the terms and conditions of the
underlying investments. The illiquidity of the Retention Notes may
therefore adversely affect the value of the Profit Participating
Notes in the event of a forced sale which would, in turn, adversely
affect the Company’s business, business prospects, financial
condition, returns to Shareholders including dividends, NAV and/or
the market price of the shares.
During the warehousing phase the Company’s mortgage loans
advanced are illiquid and may be difficult or impossible to realise
for cash at short notice. At the period end, Cornhill Mortgages No.
2 Limited portfolio was in the warehousing phase.
The Company manages its liquidity risk through short term and
long term cash flow forecasts to ensure it is able to meet its
obligations. In addition, the Company is permitted to borrow up
to 10% of NAV for short term liquidity purposes, including
financing share repurchases or redemptions, making investments or
satisfying working capital requirements. This can be either through
a loan facility or other types of collateralised borrowing
instruments including stock lending or repurchase transactions.
|
|
|
|
|
|
|
Less
than |
|
More
than |
|
Total
as at |
|
|
|
|
|
|
|
one
year |
|
one year |
|
31.12.2017 |
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
Assets |
|
|
|
|
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Mortgage loans |
|
|
|
|
|
|
12,140,626 |
|
831,853,806 |
|
843,994,432 |
Reserve fund |
|
|
|
|
|
|
- |
|
13,157,350 |
|
13,157,350 |
Trade and
other receivables |
|
|
|
|
2,848,110 |
|
- |
|
2,848,110 |
Cash and
cash equivalents |
|
|
|
76,921,528 |
|
- |
|
76,921,528 |
Total
assets |
|
|
|
|
|
|
91,910,264 |
|
845,011,156 |
|
936,921,420 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities at fair value through profit and loss |
1,217,194 |
|
- |
|
1,217,194 |
Trade and
other payables |
|
|
|
|
2,563,287 |
|
- |
|
2,563,287 |
Borrowings |
|
|
|
|
|
|
- |
|
66,000,000 |
|
66,000,000 |
Loan notes |
|
|
|
|
|
|
- |
|
648,651,676 |
|
648,651,676 |
Total
liabilities |
|
|
|
|
|
|
3,780,481 |
|
714,651,676 |
|
718,432,157 |
|
|
|
|
|
|
|
Less
than |
|
More
than |
|
Total
as at |
|
|
|
|
|
|
|
one
year |
|
one year |
|
30.06.2017 |
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
Assets |
|
|
|
|
|
|
(Audited) |
|
(Audited) |
|
(Audited) |
Mortgage loans |
|
|
|
|
|
|
12,674,700 |
|
829,201,473 |
|
841,876,173 |
Reserve fund |
|
|
|
|
|
|
- |
|
13,157,350 |
|
13,157,350 |
Trade and
other receivables |
|
|
|
|
3,522,323 |
|
- |
|
3,522,323 |
Cash and
cash equivalents |
|
|
|
86,022,869 |
|
- |
|
86,022,869 |
Total
assets |
|
|
|
|
|
|
102,219,892 |
|
842,358,823 |
|
944,578,715 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities at fair value through profit and loss |
1,808,049 |
|
- |
|
1,808,049 |
Trade and
other payables |
|
|
|
|
3,648,060 |
|
- |
|
3,648,060 |
Loan notes |
|
|
|
|
|
|
- |
|
715,734,468 |
|
715,734,468 |
Total
liabilities |
|
|
|
|
|
|
5,456,109 |
|
715,734,468 |
|
721,190,577 |
Credit risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or commitment that
it has entered into with the Company.
The Company’s primary fundamental credit risk exposure is to
borrowers of the underlying mortgages, with the risk of borrowers
defaulting on interest and principal payments. The Portfolio
Manager manages the reduction of borrower credit risk with
extensive due diligence on portfolios conducted by internal and
external analysts and stress testing.
The Company also has credit risk to the counterparty with which
the Warehouse or Issuer SPV transacts the derivative trades for
hedging purposes, or to gain, increase or decrease exposure to
mortgages. Default by any hedging counterparty in the performance
of its obligations could subject the investments to unwanted credit
risks. The Portfolio Manager manages the reduction of credit risk
exposure to the derivative counterparty through ongoing credit
analysis of the counterparty in addition to implementing clauses
into derivative transactions whereby collateral is required to be
posted upon a downgrade of the counterparty’s credit rating. The
current credit rating of the counterparty is A+.
The Company’s exposure to the credit risk of cash and deposit
holders defaulting is managed through the use of investments into
money market funds, to diversify cash holdings away from single
custodians. Money market fund vehicles are chosen after extensive
due diligence focusing on manager performance, controls and track
record. Currently the cash is held with Northern Trust London
(credit rating A+ per Standards and Poor). The money market fund is
held in a BlackRock-managed institutional money-market fund –
“Institutional Cash Series Plc - Institutional Sterling Liquidity
Fund” and their current rating is AAAm from Standards and Poor. The
reserve fund is held with Citibank N.A. London Branch (credit rating A+ per Standards
and Poor).
Mortgage loans written off during the period amounted to
£333,121 (30 June 2017: £405,699).
The current indexed loan to value ratio in order to give an
indication of credit quality is as follows:
|
|
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
|
|
|
|
|
31.12.2017 |
|
30.06.2017 |
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
Loan to
value |
|
|
|
|
|
|
|
£ |
|
£ |
0-49% |
|
|
|
|
|
|
|
|
112,177,052 |
|
101,602,362 |
50-75% |
|
|
|
|
|
|
|
|
486,627,278 |
|
473,438,989 |
75-100%+ |
|
|
|
|
|
|
|
|
245,190,102 |
|
266,834,822 |
|
|
|
|
|
|
|
|
|
843,994,432 |
|
841,876,173 |
The loans past due but not yet impaired at the period end are
shown in the table below.
|
|
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
|
|
|
|
|
31.12.2017 |
|
30.06.2017 |
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
|
|
|
|
|
|
|
|
|
£ |
|
£ |
>1
month but <2 months |
|
|
|
2,391,124 |
|
1,552,194 |
>2
months but <3 months |
|
|
|
909,902 |
|
1,075,168 |
>3
months but <6 months |
|
|
1,245,851 |
|
1,109,153 |
>6 months |
|
|
|
|
|
|
|
|
772,188 |
|
1,186,031 |
|
|
|
|
|
|
|
|
|
5,319,066 |
|
4,922,546 |
15. Analysis of Financial Assets and Liabilities by
Measurement Basis
|
|
|
|
|
|
|
Financial Assets at
fair value through
profit and loss |
|
Financial Assets
at amortised
cost |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
31
December 2017 |
|
|
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets as per Unaudited Condensed Consolidated
Statement of Financial Position |
|
|
|
|
Mortgage loans |
|
|
|
|
|
|
- |
|
843,994,432 |
|
843,994,432 |
Reserve fund |
|
|
|
|
|
|
- |
|
13,157,350 |
|
13,157,350 |
Cash and
cash equivalents |
|
|
|
- |
|
76,921,528 |
|
76,921,528 |
Trade and
other receivables |
|
- |
|
2,848,110 |
|
2,848,110 |
|
|
|
|
|
|
|
- |
|
936,921,420 |
|
936,921,420 |
|
|
|
|
|
|
|
Financial Liabilities at
fair value through
profit and loss |
|
Financial
Liabilities at
amortised cost |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities as per Unaudited Condensed Consolidated
Statement of Financial Position |
£ |
|
£ |
|
£ |
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Financial
liabilities at fair value through profit and loss |
1,217,194 |
|
- |
|
1,217,194 |
Trade and
other payables |
|
- |
|
2,563,287 |
|
2,563,287 |
Borrowings |
|
|
|
|
|
|
- |
|
66,000,000 |
|
66,000,000 |
Loan notes |
|
|
|
|
|
|
- |
|
648,651,676 |
|
648,651,676 |
|
|
|
|
|
|
|
1,217,194 |
|
717,214,963 |
|
718,432,157 |
|
|
|
|
|
|
|
Financial Assets at
fair value through
profit and loss |
|
Financial Assets
at amortised
cost |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
30 June
2017 |
|
|
|
|
|
(Audited) |
|
(Audited) |
|
(Audited) |
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets as per Audited Consolidated Statement of
Financial Position |
|
|
|
|
Mortgage loans |
|
|
|
|
|
|
- |
|
841,876,173 |
|
841,876,173 |
Reserve fund |
|
|
|
|
|
|
- |
|
13,157,350 |
|
13,157,350 |
Cash and
cash equivalents |
|
|
|
- |
|
86,022,869 |
|
86,022,869 |
Trade and
other receivables |
|
|
- |
|
3,522,323 |
|
3,522,323 |
|
|
|
|
|
|
|
- |
|
944,578,715 |
|
944,578,715 |
|
|
|
|
|
|
|
Financial Liabilities at
fair value through
profit and loss |
|
Financial
Liabilities at
amortised cost |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities as per Audited Consolidated
Statement of Financial Position |
£ |
|
£ |
|
£ |
(Audited) |
|
(Audited) |
|
(Audited) |
Financial
liabilities at fair value through profit and loss |
1,808,049 |
|
- |
|
1,808,049 |
Trade and other
payables |
|
|
|
|
|
|
- |
|
3,648,060 |
|
3,648,060 |
Loan notes |
|
|
|
|
|
|
- |
|
715,734,468 |
|
715,734,468 |
|
|
|
|
|
|
|
1,808,049 |
|
719,382,528 |
|
721,190,577 |
16. Fair Value Measurement
IFRS 13 requires the Company to classify fair value measurements
using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements. The fair value hierarchy
has the following levels:
(i) Quoted prices (unadjusted) in active markets for
identical assets or liabilities (level 1).
(ii) Inputs other than quoted prices included within level
1 that are observable for the asset or liability, either directly
(that is, as prices) or indirectly (that is, derived from prices
including interest rates, yield curves, volatilities, prepayment
speeds, credit risks and default rates) or other market
corroborated inputs (level 2).
(iii) Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs) (level
3).
The following tables analyse within the fair value hierarchy the
Company’s financial assets and liabilities (by class) measured at
fair value for the period ended 31 December
2017 and the year ended 30 June
2017.
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
|
|
£ |
|
£ |
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
Liabilities |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Financial liabilities
at fair value through profit and loss (note 7) |
|
- |
|
(1,217,194) |
|
- |
|
(1,217,194) |
Total liabilities
as at |
|
|
|
|
|
|
|
|
31 December
2017 |
|
- |
|
(1,217,194) |
|
- |
|
(1,217,194) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
|
|
£ |
|
£ |
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
Liabilities |
|
(Audited) |
|
(Audited) |
|
(Audited) |
|
(Audited) |
Financial liabilities
at fair value through profit and loss (note 7) |
|
- |
|
(1,808,049) |
|
- |
|
(1,808,049) |
Total liabilities
as at |
|
|
|
|
|
|
|
|
30 June
2017 |
|
- |
|
(1,808,049) |
|
- |
|
(1,808,049) |
The following table analyses within the fair value hierarchy the
Company’s assets and liabilities not measured at fair value at
31 December 2017 but for which fair
value is disclosed.
|
|
|
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
|
|
|
|
|
31.12.2017 |
|
31.12.2017 |
|
31.12.2017 |
|
31.12.2017 |
|
|
|
|
|
£ |
|
£ |
|
£ |
|
£ |
Assets |
|
|
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Mortgage loans |
|
|
|
|
- |
|
- |
|
880,460,164 |
|
880,460,164 |
Reserve fund |
|
|
|
|
- |
|
13,157,350 |
|
- |
|
13,157,350 |
Cash and
cash equivalents |
|
|
- |
|
76,921,528 |
|
- |
|
76,921,528 |
Trade and
other receivables |
|
- |
|
2,848,110 |
|
- |
|
2,848,110 |
Total |
|
|
|
|
- |
|
92,926,988 |
|
880,460,164 |
|
973,387,152 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Trade and
other payables |
- |
|
2,563,287 |
|
- |
|
2,563,287 |
Borrowings |
|
|
|
|
- |
|
66,000,000 |
|
- |
|
66,000,000 |
Loan notes |
|
|
|
|
- |
|
648,651,676 |
|
- |
|
648,651,676 |
Total |
|
|
|
|
- |
|
717,214,963 |
|
- |
|
717,214,963 |
|
|
|
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
|
|
|
|
|
30.06.2017 |
|
30.06.2017 |
|
30.06.2017 |
|
30.06.2017 |
|
|
|
|
|
£ |
|
£ |
|
£ |
|
£ |
Assets |
|
|
|
|
(Audited) |
|
(Audited) |
|
(Audited) |
|
(Audited) |
Mortgage loans |
|
|
|
|
- |
|
- |
|
881,512,233 |
|
881,512,233 |
Reserve fund |
|
|
|
|
- |
|
13,157,350 |
|
- |
|
13,157,350 |
Cash and
cash equivalents |
|
|
- |
|
86,022,869 |
|
- |
|
86,022,869 |
Trade and
other receivables |
|
- |
|
3,522,323 |
|
- |
|
3,522,323 |
Total |
|
|
|
|
- |
|
102,702,542 |
|
881,512,233 |
|
984,214,775 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Trade and
other payables |
- |
|
3,648,060 |
|
- |
|
3,648,060 |
Loan notes |
|
|
|
|
- |
|
715,734,468 |
|
- |
|
715,734,468 |
Total |
|
|
|
|
- |
|
719,382,528 |
|
- |
|
719,382,528 |
There were no changes between the levels during the period.
The value of the mortgage loans is calculated by the Valuation
Agent through a shadow securitisation structure based on existing
deals with current and transparent pricing.
The other assets and liabilities included in the above table are
carried at amortised cost; their carrying values are a reasonable
approximation of fair value. Cash and cash equivalents include cash
in hand and short-term deposits with original maturities of three
months or less.
Trade and other receivables includes collateral due and interest
receivable due within 3 months.
Trade and other payables represent the contractual amounts and
obligations due by the Company for settlement of trades and
expenses.
Reserve fund includes cash held as part of the securitisation
structure and so can only be used in accordance with the Issue and
Programme Documentation.
17. Dividend Policy
The Company has declared the following interim dividends in
relation to the period to 31 December 2017:
Period to |
Dividend rate per Share (pence) |
|
Net
dividend payable (£) |
|
Record date |
|
Ex-dividend date |
|
Pay
date |
30 September 2017 |
1.5 |
|
3,750,000 |
|
20
October 2017 |
|
19
October 2017 |
|
31
October 2017 |
31 December 2017 |
1.5 |
|
3,750,000 |
|
19
January 2018 |
|
18
January 2018 |
|
31
January 2018 |
In each subsequent financial year, it is intended that dividends
on the Ordinary Shares will be payable quarterly, all in the form
of interim dividends (the Company does not intend to pay any final
dividends). It is intended that the first three interim dividends
of each financial year will be paid at a minimum of 1.5p per
Ordinary Share with the fourth interim dividend of each financial
year including an additional amount such that a significant
majority of the Company’s net income for that financial year is
distributed to Shareholders.
The Board reserves the right to retain within a revenue reserve
a proportion of the Company’s net income in any financial year,
such reserve then being available at the Board’s absolute
discretion for subsequent distribution to Shareholders. The Company
may offer Shareholders the opportunity to elect to receive
dividends in the form of further Ordinary Shares.
Under Guernsey law, companies
can pay dividends in excess of accounting profit provided they
satisfy the solvency test prescribed by The Companies (Guernsey) Law, 2008. The solvency test
considers whether a company is able to pay its debts when they fall
due, and whether the value of a company’s assets is greater than
its liabilities. The Board confirms that the Company passed the
solvency test for each dividend paid.
18. Segment reporting
Operating segments are reported in a manner consistent with the
internal reporting used by the chief operating decision-maker. The
chief operating decision-maker, who is responsible for allocating
resources and assessing performance of the operating segments, has
been identified as the Portfolio Manager. The Portfolio Manager
makes the strategic resource allocations on behalf of the Company.
The Company has determined the operating segments based on the
reports reviewed by the Portfolio Manager that are used to make
strategic decisions.
There are no differences from the last annual financial
statements in the basis of segmentation or in the basis of
measurement of segment profit or loss.
The Portfolio Manager considers the business as three
portfolios, which are managed by separate specialist teams at the
Portfolio Manager. These portfolios comprise of UK mortgages and
consist of a loan portfolio bought at a premium (Malt Hill No.1
Plc), a loan portfolio bought at a discount (Oat Hill No.1 Plc) and
commitment to originate loans up to a limit (Cornhill Mortgages
No.2 Limited).
The reportable operating segments derive their income by seeking
investments to achieve targeted returns consummate with an
acceptable level of risk within each portfolio. These returns
consist of interest and the release of the discount/premium.
The segment information provided to the Portfolio Manager for
the reportable segments is as follows:
|
|
Cornhill Mortgages No.2 Limited |
|
Malt Hill No.1 Plc |
|
Oat Hill
No.1 Plc |
|
Total as at 31.12.2017 |
|
|
£ |
|
£ |
|
£ |
|
£ |
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Interest income on
mortgage loans |
|
1,510,953 |
|
3,069,720 |
|
7,917,812 |
|
12,498,485 |
Net
interest expense on financial liabilities at fair value through
profit and loss |
(100,634) |
|
(1,180,378) |
|
- |
|
(1,281,012) |
Net gain
from derivative financial instruments |
5,819 |
|
117,995 |
|
- |
|
123,814 |
Interest expense on
borrowings |
|
(313,546) |
|
- |
|
- |
|
(313,546) |
Interest expense on
loan notes |
|
- |
|
(1,885,953) |
|
(2,299,829) |
|
(4,185,782) |
Servicer fees |
|
(128,170) |
|
(285,094) |
|
(605,930) |
|
(1,019,194) |
Other expenses |
|
(606,345) |
|
(329,196) |
|
(779,421) |
|
(1,714,962) |
Total net segment
income/(expense) |
|
368,077 |
|
(492,906) |
|
4,232,632 |
|
4,107,803 |
|
|
Cornhill Mortgages No.2 Limited |
|
Malt Hill No.1 Plc |
|
Oat Hill
No.1 Plc |
|
Total as at 31.12.2016 |
|
|
£ |
|
£ |
|
£ |
|
£ |
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Interest
income on mortgage loans |
61,852 |
|
4,540,370 |
|
- |
|
4,602,222 |
Net
interest expense on financial liabilities at fair value through
profit and loss |
(614) |
|
(1,148,398) |
|
- |
|
(1,149,012) |
Unrealised
gain on financial liabilities at fair value through profit and
loss |
5,761 |
|
1,243,939 |
|
- |
|
1,249,700 |
Interest
expense on loan notes |
- |
|
(2,384,147) |
|
- |
|
(2,384,147) |
Servicer fees |
|
(60,809) |
|
(324,444) |
|
- |
|
(385,253) |
Other expenses |
|
(953,378) |
|
(330,855) |
|
- |
|
(1,284,233) |
Total net segment
(expense)/income |
|
(947,188) |
|
1,596,465 |
|
- |
|
649,277 |
A reconciliation of total net segmental income to total
comprehensive gain/(loss) is provided as follows.
|
|
|
|
|
|
31.12.2017 |
|
31.12.2016 |
|
|
|
|
|
|
£ |
|
£ |
|
|
|
|
|
|
(Unaudited) |
|
(Unaudited) |
Total net segment
income |
|
|
|
|
|
4,107,803 |
|
649,277 |
Other fees and
expenses |
|
|
|
|
|
(1,506,678) |
|
(1,266,464) |
Total
comprehensive gain/(loss) for the period |
|
2,601,125 |
|
(617,187) |
There are no transactions between the reportable segments.
Total segment assets:
|
|
Cornhill Mortgages
No.2 Limited |
|
Malt Hill
No.1 Plc |
|
Oat Hill
No.1 Plc |
|
Total as at 31.12.2017 |
|
|
£ |
|
£ |
|
£ |
|
£ |
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Mortgage loans |
|
117,210,663 |
|
229,696,223 |
|
497,087,546 |
|
843,994,432 |
Reserve fund |
|
1,500,000 |
|
4,739,400 |
|
6,917,950 |
|
13,157,350 |
Other |
|
1,412,220 |
|
5,232,130 |
|
7,904,311 |
|
14,548,661 |
|
|
120,122,883 |
|
239,667,753 |
|
511,909,807 |
|
871,700,443 |
|
|
Cornhill Mortgages
No.2 Limited |
|
Malt Hill No.1 Plc |
|
Oat Hill
No.1 Plc |
|
Total as at 30.06.2017 |
|
|
£ |
|
£ |
|
£ |
|
£ |
|
|
(Audited) |
|
(Audited) |
|
(Audited) |
|
(Audited) |
Mortgage loans |
|
57,494,863 |
|
274,567,106 |
|
509,814,204 |
|
841,876,173 |
Reserve fund |
|
1,500,000 |
|
4,739,400 |
|
6,917,950 |
|
13,157,350 |
Other |
|
23,476 |
|
448,454 |
|
1,273,417 |
|
1,745,347 |
|
|
59,018,339 |
|
279,754,960 |
|
518,005,571 |
|
856,778,870 |
|
|
|
|
|
|
31.12.2017 |
|
30.06.2017 |
|
|
|
|
|
|
£ |
|
£ |
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
Segment
assets for reportable segments |
|
|
|
871,700,443 |
|
856,778,870 |
Other |
|
|
|
|
|
65,220,977 |
|
87,799,845 |
Total assets |
|
|
|
|
|
936,921,420 |
|
944,578,715 |
Total segment liabilities:
|
|
Cornhill Mortgages
No.2 Limited |
|
Malt Hill
No.1 Plc |
|
Oat Hill
No.1 Plc |
|
Total as at 31.12.2017 |
|
|
£ |
|
£ |
|
£ |
|
£ |
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Borrowings |
|
66,000,000 |
|
- |
|
- |
|
66,000,000 |
Loan notes |
|
- |
|
191,348,115 |
|
457,303,561 |
|
648,651,676 |
Financial
liabilities at fair value through profit and loss |
138,421 |
|
1,078,772 |
|
- |
|
1,217,193 |
Other |
|
63,259 |
|
756,566 |
|
1,116,622 |
|
1,936,447 |
|
|
66,201,680 |
|
193,183,453 |
|
458,420,183 |
|
717,805,316 |
|
|
Cornhill Mortgages
No.2 Limited |
|
Malt Hill No.1 Plc |
|
Oat Hill
No.1 Plc |
|
Total as at 30.06.2017 |
|
|
£ |
|
£ |
|
£ |
|
£ |
|
|
(Audited) |
|
(Audited) |
|
(Audited) |
|
(Audited) |
Loan notes |
|
- |
|
242,914,405 |
|
472,820,063 |
|
715,734,468 |
Financial liabilities
at fair value through profit and loss |
|
73,755 |
|
1,734,294 |
|
- |
|
1,808,049 |
Other |
|
120,121 |
|
804,552 |
|
1,069,612 |
|
1,994,285 |
|
|
193,876 |
|
245,453,251 |
|
473,889,675 |
|
719,536,802 |
|
|
|
|
|
|
31.12.2017 |
|
30.06.2017 |
|
|
|
|
|
|
£ |
|
£ |
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
Segment
liabilities for reportable segments |
|
|
|
717,805,316 |
|
719,536,802 |
Trade and other
payables |
|
|
|
|
|
626,841 |
|
1,653,775 |
Total liabilities |
|
|
|
|
|
718,432,157 |
|
721,190,577 |
19. Ultimate Controlling
Party
In the opinion of the Directors on the basis of shareholdings
advised to them, the Company has
no ultimate controlling party.
20. Subsequent Events
The second interim dividend for period ending 30 June 2018 of 1.5p per Ordinary Share was
declared on 11 January 2018 and paid
on 31 January 2018.
Cornhill Mortgage No.1 Limited (SPV utilised in the
securitisation of Malt Hill No.1 Plc) and Cornhill Mortgage No.3
Limited (SPV utilised in the securitisation of Oat Hill No.1 Plc)
are currently in liquidation as the mortgage portfolios held have
been securitised. At the date of approval of the Unaudited
Condensed Consolidated Interim Financial Statements, these entities
have not yet been fully liquidated.
These Unaudited Condensed Consolidated Interim Financial
Statements were approved for issuance by the Board on 20 March 2018. There were no subsequent events,
apart from those mentioned above until this date.
GLOSSARY OF TERMS
ABS |
asset-backed security
whose income payments and hence value are derived from and
collateralized (or "backed") by a specified pool of underlying
assets |
Acquiring
Entity |
means UK Mortgages
Corporate Funding Designated Activity Company, a designated
activity company incorporated in Ireland qualifying within the
meaning of section 110 of the Taxes Consolidation Act 1997 to
acquire mortgage portfolios for on-selling to Warehouse SPVs and
issuing PPNs |
Administrator |
Northern Trust
International Fund Administration Services (Guernsey) Limited (a
non-cellular company limited by shares incorporated in the Island
of Guernsey with registered number 15532) |
AIC |
Association of
Investment Companies |
AIC Code |
the AIC Code of
Corporate Governance for companies incorporated in Guernsey |
AIC Guide |
the AIC Guide to
Corporate Governance |
AIFM or
Maitland |
Maitland Institutional
Services Limited, the Company’s alternative investment fund manager
for the purposes of regulation 4 of the AIFM Regulations |
Amortised Cost
Accounting |
The process by which
mortgages in the Company’s portfolio are valued at cost less
capital repayments and any provisions required for impairment. |
Audit
Committee |
an operating committee
of the Board of Directors charged with oversight of financial
reporting and disclosure |
Audited
Consolidated Financial Statements |
Audited Consolidated
Financial Statements of the Company |
BoAML |
the Bank of America
Merrill Lynch |
BTL |
Buy-to-let |
Board of Directors
or Board or Directors |
the Directors of the
Company |
CHL |
Capital Home
Loans |
Class A
Notes |
means the Class A
Mortgage Backed Floating Rate Notes issued by the Issuer and
admitted to trading on the Irish Stock Exchange |
Company |
means UKML, Acquiring
Entity, Issuer SPV and Warehouse SPVs |
Company's Articles
or Articles |
the articles of
incorporation of the Company |
Continuation
Vote |
An ordinary resolution
that gives shareholders the ability to instruct the board to
prepare a proposal to restructure or wind up a company by means of
a simple majority vote. |
Corporate
Broker |
Numis Securities
Limited |
CRS |
The Common Reporting
Standard, a global standard for the automatic exchange of financial
account information developed by OECD |
Custodian and
Depositary |
Northern Trust
(Guernsey) Limited (a non-cellular company limited by shares
incorporated in the Island of Guernsey with registered number
2651) |
Derivative
Instruments |
means instruments used
to gain leveraged exposure to mortgage portfolios, including but
not limited to Credit Linked Notes and Credit Default Swaps |
DAC |
UK Mortgages
Corporate Funding Designated Activity Company an independently
managed, Dublin based, section 110 designated activity company that
is responsible for the warehousing and securitisation of mortgage
portfolios under the supervision of TFAM the investment adviser.
DAC is wholly financed by the Company via Profit Participating
Notes and distributes substantially all of its profits to the
Company thereby qualifying for a reduced rate of taxation, commonly
known as a Eurobond exemption. From a financial reporting
perspective DAC is consolidated with the Company as it provides its
services exclusively to the Company |
DSCR |
Debt Service Coverage
Ratio |
FFI |
Foreign Financial
Institution |
FRC |
the Financial
Reporting Council |
GFSC Code |
Code of Corporate
Governance issued by the Guernsey Financial Services
Commission |
Government and
Public Securities |
means per
the FCA definition, the investment, specified in article 78 of the
Regulated Activities Order (Government and public securities),
which is in summary: a loan stock, bond government and public
security FCA PRA or other instrument creating or acknowledging
indebtedness, issued by or on behalf of:
(a) the government of the United Kingdom; or
(b) the Scottish Administration; or
(c) the Executive Committee of the Northern Ireland Assembly;
or
(d) the National Assembly of Wales; or
(e) the government of any country or territory outside the United
Kingdom; or
(f) a local authority in the United Kingdom or elsewhere; or
(g) a body the members of which comprise: (i) States including the
United Kingdom or another EEA State; or
(ii) bodies whose members comprise States including the United
Kingdom or another EEA State; but excluding: (A) the instruments
specified in article 77(2)(a) to (d) of the Regulated Activities
Order; (B) any instrument creating or acknowledging indebtedness in
respect of: (I) money received by the Director of Savings as
deposits or otherwise in connection with the business of the
National Savings Bank; or (II) money raised under the National
Loans Act 1968 under the auspices of the Director of Savings or
treated as so raised under section 11(3) o |
Hedge
Accounting |
This is the process
by which the change in fair value of a hedging instrument is offset
by a proportionate change in the fair value of the company’s
portfolio to neutralise the volatility of the company’s net asset
value. It requires initial proof and ongoing monitoring of
the hedge effectiveness. |
IFRS |
International
Financial Reporting Standards |
Investment
Company |
a company whose main
business is holding securities for investment purposes |
Internal
Control |
a process for assuring
achievement of an organisation's objectives in operational
effectiveness and efficiency, reliable financial reporting, and
compliance with laws, regulations and policies |
IPO, Initial Public
Offering |
means the initial
public offering of shares in the Company on the specialist fund
segment of the London Stock Exchange |
IPD |
Interest Payment
Date |
IRR |
internal rate of
return |
IRS |
the US Internal
Revenue Service |
Issue |
means together the
Placing and the Offer (or as the context requires both of them |
Issuer
SPVs |
means special purpose
vehicles established for the specific purpose of securitisation and
issuing Retention Notes for purchase by the Acquiring Entity |
Junior
Note |
These notes have the
lowest priority claim on capital and income from the securitisation
SPV and offer the highest potential returns in exchange for bearing
the first loss experienced by the SPV. |
Loan Financing
Facility |
means a facility in
terms of which ongoing finance is provided by Bank of America
Merrill Lynch International Limited for a period of up to
two-years |
LSE |
London Stock Exchange
plc (a company registered in England and Wales with registered
number 2075721) |
LTV |
means Loan to
Value |
Mortgage Pool/
Mortgage Portfolio |
The underlying
mortgage loans that produce the income for the securitised
portfolios. |
NAV |
means net asset
value |
OECD |
the Organisation for
Economic Co-operation and Development |
Offer |
means the offer for
subscription of Ordinary Shares at 1 pence each to the public in
the United Kingdom on the terms and conditions set out in Part 12
of the Prospectus and the Application Form |
Official
List |
in
reference to DAC and Issuer SPV refers to the official list of the
Irish Stock Exchange p.l.c
In reference to the Company refers to the official list of the
London Stock Exchange |
Ordinary
Shares |
ordinary shares of
100p each in the capital of the Company |
Placing |
means the conditional
placing by the Corporate Broker, as agent for the Company, of up to
250 million ordinary shares at 1 pence each on the terms and
conditions set out or referred to in the placing documents, being
the Prospectus, the Presentation, the P Proof, the flyer, the press
announcements, the contract note, any other document prepared in
connection with the pre-marketing of the issue or the placing
programme |
Portfolio
Manager |
TwentyFour Asset
Management LLP (a limited liability partnership incorporated in
England and Wales with registered number OC335015) |
Profit
Participating Notes/PPN |
these are Eurobond
notes issued by DAC to the Company. The capital paid by the Company
to DAC to buy the notes is invested in mortgage pools and DAC in
turn pays income to the Company via coupon payments on the
notes |
QE |
Quantitative easing
(QE), also known as Large Scale Assets Purchases, is an
expansionary monetary policy whereby a central bank buys
predetermined amounts of government bonds or other financial assets
in order to stimulate the economy. |
Rating
Agency |
companies that assess
the creditworthiness of both debt securities and their issuers, for
these purposes Standard and Poor’s, Moody’s and Fitch |
Retention
Notes |
means a Subordinated
tranche of securities which as part of the securitisation issuance
structure are issued for purchase by the Acquiring Entity |
RMBS |
Residential
Mortgage-Backed Security |
RNS |
Regulatory News
Service |
Section
110 |
Section 110 of the
Irish Taxes Consolidation Act 1997 (as amended). A Section 110
company is an Irish resident special purpose vehicle (“SPV”) which
holds and/or manages “qualifying assets” and usually distributes
substantially all of its income net of a fixed annual tax
payment. |
Seasoning |
The weighted average
age of a mortgage portfolio. |
Securitisation
Vehicle |
special purpose
vehicle incorporated in the UK established for the purpose of
issuing notes collateralised by underlying mortgage pool |
Senior
Note |
Senior note holders
receive first priority with respect to income and capital
distributions and effectively provide long term leverage finance to
the Junior note holders. |
Servicer |
Means the entity that
maintains the relationship with the underlying mortgage borrower to
answer questions, collect payments and refinance existing loans if
required. |
Share
Buyback |
the Company purchases
shares in the market |
Shareholders |
holders of Shares |
Specialist Fund
Segment |
the Specialist Fund
Segment of the London Stock Exchange |
SPV |
means a special
purpose vehicle |
SVR |
Standard variable
rate |
TFS |
Term Funding
Scheme |
TML |
The Mortgage
Lender |
UK Code |
The UK Corporate
Governance Code 2016 |
UKML |
UK Mortgages
Limited |
Valuation
Agent |
Kinson Advisors
LLP |
WA LTV |
Weighted average
loan-to-value |
Warehousing |
the process by which
mortgages are acquired in a portfolio prior to securitisation. The
portfolio is typically leveraged by borrowing from a warehouse
credit facility. Three warehouse SPVs; Cornhill Mortgages No. 1
Limited, Cornhill Mortgages No. 2 Limited and Cornhill Mortgages
No. 3 Limited, have been established for the purpose of warehousing
the first and second transactions of the company respectively |
Warehouse
SPV |
a special purpose
vehicle, incorporated in the UK, established for the purpose of
warehousing the mortgage portfolio |
CORPORATE INFORMATION
Directors
Christopher Waldron - Chairman
Richard Burrows
Paul Le Page
Helen Green
|
Custodian,
Principal Banker and Depositary
Northern Trust (Guernsey) Limited
PO Box 71
Trafalgar Court
Les Banques
St Peter Port
Guernsey, GY1 3DA |
Registered
Office
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey, GY1 3QL
|
Secretary and
Administrator
Northern Trust International Fund Administration
Services (Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey, GY1 3QL |
Alternative
Investment Fund Manager
Maitland Institutional Services Limited
Springfield Lodge
Colchester Road
Chelmsford, CM2 5PW
Portfolio Manager
TwentyFour Asset Management LLP
8th Floor
The Monument Building
11 Monument Street
London, EC3R 8AF |
Corporate
Broker
Numis Securities Limited
The London Stock Exchange Building
10 Paternoster Square
London, EC4M 7LT
Independent Auditors
PricewaterhouseCoopers CI LLP
PO Box 321
Royal Bank Place
1 Glategny Esplanade
St Peter Port
Guernsey, GY1 4ND |
UK Legal Advisers to the Company
Eversheds LLP
One Wood Street
London, EC2V 7WS |
Receiving Agent
Computershare Investor Services plc
The Pavilions
Bridgwater Road
Bristol, BS13 8AE |
Guernsey Legal Advisers to the Company
Carey Olsen
Carey House
Les Banques
St Peter Port
Guernsey, GY1 4BZ
|
Registrar
Computershare Investor Services
(Guernsey) Limited
1st Floor
Tudor House
Le Bordage
St Peter Port
Guernsey, GY1 1DB
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