TIDMSCRF
RNS Number : 8395T
SME Credit Realisation Fund Limited
27 July 2022
NOT FOR RELEASE, DISTRIBUTION OR PUBLICATION, IN WHOLE OR IN
PART, IN OR INTO THE UNITED STATES OR TO US PERSONS
*****
27 July 2022
SME Credit Realisation Fund Limited
(the "Company")
Annual Financial Report
SME Credit Realisation Fund Limited (the "Company") has
published its results for the year ended 31 March 2022.
The Annual Report and Accounts are attached to this release and
are available on the Company's website (
www.smecreditrealisation.com ).
CONTACTS
Richard Boleat, Chairman
+44 (0) 1534 615 656
Richard.Boleat@smecreditrealisation.com
Secretary and Administrator
Sanne Group ( Guernsey ) Limited
+44 (0) 1481 739810
smecreditrealisation@sannegroup.com
Corporate Broker
Numis Securities
Nathan Brown
George Shiel
+44 (0) 207 260 1000
n.brown@numis.com
Investor Relations
IR@smecreditrealisation.com
Website
www.smecreditrealisation.com
The ISIN number of the Ordinary Shares is GG00BNDB1G36, the
SEDOL code is BNDB1G3 and the TIDM is SCRF.
The LEI number of the Company is 549300ZQIYQVNIZGOW60.
*****
ABOUT SME Credit Realisation Fund Limited
The Company is a registered closed-ended collective investment
scheme registered pursuant to the Protection of Investors
(Bailiwick of Guernsey ) Law, 1987, as amended and the Registered
Collective Investment Scheme Rules 2018 issued by the Guernsey
Financial Services Commission ("GFSC").
*****
IMPORTANT NOTICES
This announcement contains "forward-looking" statements, beliefs
or opinions. These forward-looking statements involve known and
unknown risks and uncertainties, many of which are beyond the
control of the Company and all of which are based on its directors'
current beliefs and expectations about future events.
Forward-looking statements are sometimes identified by the use of
forward-looking terminology such as "believes", "expects", "may",
"will", "could", "should", "shall", "risk", "intends", "estimates",
"aims", "plans", "predicts", "projects", "continues", "assumes",
"positioned" or "anticipates" or the negative thereof, other
variations thereon or comparable terminology, or by discussions of
strategy, plans, objectives, goals, future events, assumptions or
intentions. These forward-looking statements include all matters
that are not historical facts. Forward-looking statements may and
often do differ materially from actual results. They appear in a
number of places throughout this announcement and include
statements regarding the intentions, beliefs or current
expectations of the Board or the Company with respect to future
events and are subject to risks relating to future events and other
risks, uncertainties and assumptions relating to the Company's
business concerning, amongst other things, the financial
performance, liquidity, prospects, growth and strategies of the
Company. These forward-looking statements and other statements
contained in this announcement regarding matters that are not
historical facts involve predictions. No assurance can be given
that such future results will be achieved; actual events or results
may differ materially as a result of risks and uncertainties facing
the Company. Such risks and uncertainties could cause actual
results to vary materially from the future results indicated,
expressed or implied in such forward-looking statements. The
forward-looking statements contained in this announcement speak
only as of the date of this announcement. Nothing in this
announcement is, or should be relied on as, a promise or
representation as to the future. The Company disclaims any
obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained in this
announcement to reflect any change in its expectations or any
change in events, conditions or circumstances on which such
statements are based unless required to do so by applicable law,
the Prospectus Rules, the Listing Rules or the Disclosure Rules and
Transparency Rules of the FCA. No statement in this announcement is
intended as a forecast or profit estimate.
Neither this announcement nor any copy of it may be made or
transmitted into the United States of America (including its
territories or possessions, any state of the United States of
America and the District of Columbia ) ( the "United States "), or
distributed, directly or indirectly, in the United States or to US
Persons (as such term is defined in Regulation S under the US
Securities Act of 1933, as amended (the "Securities Act"). Neither
this announcement nor any copy of it may be taken or transmitted
directly or indirectly into Australia , Canada , Japan or South
Africa or to any persons in any of those jurisdictions, except in
compliance with applicable securities laws. Any failure to comply
with this restriction may constitute a violation of United States ,
Australian, Canadian, Japanese or South African securities laws.
The distribution of this announcement in other jurisdictions may be
restricted by law and persons into whose possession this
announcement comes should inform themselves about, and observe, any
such restrictions. This announcement does not constitute or form
part of any offer or invitation to sell or issue, or any
solicitation of any offer to purchase or subscribe for securities
in the United States , Australia , Canada , Japan or South Africa
or in any jurisdiction to whom or in which such offer or
solicitation is unlawful.
SME CREDIT REALISATION FUND LIMITED
ANNUAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARED 31 MARCH 2022
FORWARD-LOOKING STATEMENTS
This report includes statements that are, or may be considered,
"forward-looking statements". The forward-looking statements can be
identified by the use of forward-looking terminology, including the
terms "believes", "estimates", "anticipates", "expects", "intends",
"may", "will" or "should" or, in each case, their negative, or
other variations or comparable terminology. These statements are
made by the Directors in good faith based on the information
available to them up to the time of their approval of this report
and such statements should be treated with caution due to the
inherent uncertainties, including both economic and business risk
factors, underlying any such forward-looking information.
FINANCIAL HIGHLIGHTS
-- Total comprehensive income for the year amounted to GBP13.13
million (2021: GBP4.58 million) which included a release of
impairment loss provision on Credit Assets of GBP7.34 million
(2021: additional provision of GBP11.94 million) and a loss on the
movement in fair value of the Credit Assets of GBP2.25 million
(2021: gain of GBP2.51 million) as presented in the consolidated
statement of comprehensive income.
-- Aggregate dividends of 5.25 pence per Ordinary share declared
for the year ended 31 March 2022 (2021: 5.25 pence).
-- The Company redeemed a total of 82,414,359 (2021:
124,126,432) shares for a total amount of GBP76,199,759 (2021:
GBP105,499,718) during the year.
-- In October 2021, the Company received cash of GBP1,568,666
and a portfolio of SME loans valued at GBP5,824,315 as settlement
of its investment in the EIB transaction (discussed in more detail
in note 4 and 5). This resulted in a net gain of on assets measured
at fair value through profit and loss of GBP2,251,764 recognised in
the consolidated statement of comprehensive income.
The information below is presented for the year ended 31 March
2022 or as at 31 March 2022 unless expressly stated to cover a
different period.
Description Performance
-------------------------------------- ------------
NAV per Ordinary share 100.62p
Total Net Assets GBP52mil
Ordinary share price 90.0p
Market Capitalisation GBP47mil
Premium/(Discount) (10.6%)
Annualised Dividends per Ordinary
share 5.25p
Earnings per Ordinary share 18.19p
Share Price Total Return (inception
to date) 32.6%
NAV Total Return (inception to date) 43.1%
-------------------------------------- ------------
SUMMARY INFORMATION
About the Company
SME Credit Realisation Fund Limited (the "Company" or the
"Fund") is a closed-ended investment company incorporated with
liability limited by shares in Guernsey under The Companies
(Guernsey) Law, 2008 (as amended), on 22 July 2015.
Group Structure
The Company holds a number of its investments in loans through
Special Purpose Vehicles ("SPVs"). This annual report for the year
ended 31 March 2022 (the "Annual Report") includes the results of
Basinghall Lending Designated Activity Company ("Basinghall"),
Tallis Lending Designated Activity Company ("Tallis"), and
Queenhithe Lending Designated Activity Company ("Queenhithe"). The
Company, Basinghall, Tallis, and Queenhithe are collectively
referred to in this report as the "Group".
In the previous years, the Group included Lambeth Lending
Designated Activity Company ("Lambeth"). Lambeth was put into
liquidation in October 2020 and was fully dissolved in July 2021.
Queenhithe was put into liquidation in December 2020. The
proceedings for Queenhithe are still ongoing at the time of signing
of these consolidated financial statements.
Refer to Business review on the Directors report for further
information.
Capital Management
As at 31 March 2022 the total number of shares in issue was
51,750,563 (2021: 134,164,922).
The Company has been conducting a managed wind-down of its
operations since 2019, and is in the process of returning capital
through compulsory redemptions of shares and distributions of
dividends, as the Group's portfolio of Credit Assets amortises.
The Company has redeemed a total of 82,414,359 (2021:
124,126,432) shares for a total amount of GBP76,199,759 (2021:
GBP105,499,718) throughout the year. All shares redeemed throughout
the year were redeemed at the prevailing NAV per share at the date
of declaration.
CHAIRMAN'S STATEMENT
Dear Shareholder,
I am pleased to write to you to provide an update on the
Company's progress for the year ended 31 March 2022. The Company
continues to conduct a managed wind-down of its activities, with
the objective of returning capital to shareholders promptly, whilst
seeking to maximise returns.
COVID-19 Preponderance and Ukraine
Investors will be well aware that the global economy continues
to be affected by these ongoing events. Quite apart from the human
tragedies that these events have wrought, they have combined to
generate macro conditions which could have barely been foreseen
when I wrote this statement last year. In particular, dislocations
to the global supply chain of raw and manufactured materials and
the dramatic impact on the price of hydrocarbons have conspired to
create an inflationary environment which has clearly wrong-footed
central banks. These macro conditions, and central bank monetary
policy responses, will inevitably have consequences for a great
many businesses both large and small as 2022 develops into 2023,
creating a highly uncertain macro outlook. The speed of change of
impacting factors and range of possible outcomes mean that
forecasting the future outlook for the Company is exceptionally
challenging. However, the short weighted average life of the
Company's remaining portfolio of Credit Assets means that these
factors are likely to have a limited impact on the Company's net
asset value or its managed wind-down process.
Performance Review and Net Asset Value ("NAV")
This report presents the financial position of the Company as at
31 March 2022.
You will have noted the announcement made by the Company on 20
April 2022 disclosing the Company's NAV at 31 March 2022 at GBP52
million (31 December 2021: GBP67 million) and NAV per Share at that
date at 100.62 pence (31 December 2021: 96.26 pence). The
improvement in NAV per Share was driven principally by a better
than anticipated credit market environment compared to expectations
as the pandemic continued and the demonstrably resilient
performance of the Company's investments, which has also led to an
upwards revaluation of the Company's interest in the EIB
transaction that, as at 31 March 2021 attributed a value of
GBP5,141,217 (2020: GBPnil). The EIB transaction has been settled
during the 31 March 2022 financial year.
An analysis of the performance of the Company for the 6 month
period to 31 March 2022 (with the 6 month period to 30 September
2021 for comparative purposes) is set out below:
Performance Since 31 March 2021
Return Attribution
----------------------- --------------------- -----------------------------
1 October 2021 to 31 1 April 2021 to 30 September
March 2022 2021
Gross Income 5.44% 3.14%
Impairment*** 6.73% 2.40%
FVTPL Adjustment* (2.29%) (0.33%)
FVTOCI Adjustment** 1.56% 1.52%
Gain on sale of NPLs - -
Servicing Fees (0.28%) (0.31%)
----------------------- --------------------- -----------------------------
8.04% 6.42%
Operating Expenses (0.71%) (0.42%)
FX Hedging Costs 0.09% 0.05%
Loan Interest Expense - -
Share Buybacks - -
Share Redemption 3.28% 1.86%
Net NAV Return 10.70% 7.91%
----------------------- --------------------- -----------------------------
*FVTPL Adjustment includes fair value movements on the Fund's
interest in the EIB transaction
**FVTOCI Adjustment includes fair value movements on the
portfolio of the credit assets held by the Fund, which moved to
fair value accounting from 1 April 2020
***Positive figures represent release of previous impairment
loss provisions
Data shows a largely positive outcome, quarter to quarter,
compared to the expectations reflected in the Company's net asset
value at 31 March 2021. The Board continues to closely monitor data
points within the Company's loan portfolio to assess the extent to
which borrowers continue to be impacted by the economic
consequences of the pandemic and newly arising risk factors in
their ability to satisfy their loan repayment obligations.
Return of Capital
You will note that the Company's net asset value has reduced
from GBP79 million at 30 September 2021 to GBP52 million at 31
March 2022, as the Company continues to make distributions to
shareholders. In the 6 month period to 31 March 2022, GBP32 million
was distributed to shareholders through compulsory share
redemptions and GBP1.5 million through dividend payments. The
balance of the movement between the two period ends is reconciled
by positive performance.
The Company will continue to return capital to investors
predominantly by way of compulsory redemption of shares as
liquidity arises through loan repayments or by other means. The
directors may also seek to apply free cash to on-market share
repurchases if such a strategy is deemed to be in the best
interests of shareholders as a whole.
Potential Portfolio Sales and Basis Other Than Going Concern
In light of the rapid run off of the loan portfolio, the
repayment of the leverage in the structure and in the interest of
maximising returns to shareholders before the running costs of the
structure become disproportionate to the NAV and while the loans
remain at an attractive size to potential buyers, the Company will
actively seek to enter discussion for the potential disposal of its
loan portfolios in whole where pricing levels are attractive. There
is therefore potential that the Company will sell some or all of
its remaining loan portfolios and begin a liquidation process
within twelve months of signing this report and as a result the
accompanying consolidated financial statements have been prepared
on a basis other than going concern, under which the assets are
measured at their net realisable value, which continues to be their
fair value.
Conclusion
As the Company draws towards the end of its life, it is pleasing
to see the managed wind-down process having a positive net asset
value outcome whilst enabling structural simplification. Credit for
this goes to the team at Funding Circle who have worked hard to
achieve a positive outcome for shareholders throughout the
wind-down process. The board's attention is now focussed on
optimising the exit of the remaining Credit Assets, and I will
report to you further on this as circumstances develop.
My thanks go particularly to the Funding Circle team for their
focus and diligence, and I would also like to thank my fellow
directors and our service providers and advisers for their support
and wise counsel throughout the year.
Yours faithfully
RICHARD BOLÉAT
Chairman of the Board of Directors
26 July 2022
STRATEGIC REPORT
Strategy and Business Model
The Group was established to provide shareholders with a
sustainable and attractive level of dividend income, primarily by
way of investment in Credit Assets originated both directly through
the platform operated by Funding Circle and indirectly, in each
case as detailed in the Company's original investment policy. The
Group identified the Funding Circle platform as a leader in the
growing direct lending space to small and medium sized enterprises
("SMEs") with its established infrastructure, scale of origination
volumes and expertise in accurately assessing loan
applications.
On 11 June 2019, the Company changed its Investment Objective
and Policy to facilitate a managed wind-down of the Company in a
prudent manner consistent with the principles of good investment
management as required by the Listing Rules.
Investment Objective and Policy
In order to implement the managed wind-down, it was necessary to
amend the Company's Investment Objective and Policy to reflect the
objective of realising the Company's portfolio, as follows:
"The Company will be managed with the intention of realising all
remaining assets in the portfolio in a prudent manner which
achieves a balance between maximising the value from the
realisation of the Company's investments and making timely returns
of capital to shareholders."
The managed wind-down is being effected with a view to the
Company realising all of its investments in accordance with the
Investment Objective. Such realisations will comprise natural
amortisation of the Company's investments in Credit Assets as well
as potentially opportunistic portfolio sales.
As a result of the Company's change in investment objective and
policy, for the purposes of accounting, the Company's business
model changed from "hold to collect" to "hold to collect and sell"
during the year ended 31 March 2020. The Company therefore
reclassified the valuation of Credit Assets from amortised cost to
fair value through other comprehensive income ("FVTOCI") from 1
April 2020.
The Company continues to explore opportunities for the disposal
of its performing and non-performing loan portfolios as a whole, in
light of the rapidly reducing size of the performing portfolios
through natural loan amortisation.
The Company no longer allocates capital to Credit Assets,
directly or indirectly via Leveraged Transactions or SPVs, or
undertakes capital expenditure except where necessary in the
reasonable opinion of the Board in order to protect or enhance the
value of any existing investments or to facilitate orderly
disposals.
As at 31 March 2022, the Company held indirect investments in
Credit Assets through the following investing companies:
Investing Company Jurisdiction of Loans
------------------ -------------------------
Basinghall United Kingdom
Tallis Germany, the Netherlands
and Spain
The following analyses of the Group's investments in Credit
Assets are provided as reference.
Region Split
----------------- --- --------------- --- ---------------- ---
UK Investment % US Investment % CE Investment %
----------------- --- --------------- --- ---------------- ---
South East 25 Other 39 Germany 55
London 15 California 16 The Netherlands 44
North East 12 Texas 9 Spain 1
North West 12 Florida 8
Midlands 11 Illinois 7
South West 8 Michigan 5
Scotland 6 Ohio 4
Wales 5 New York 4
East Anglia 4 Arizona 4
Norther Ireland 2 South Carolina 4
----------------- --- --------------- --- ---------------- ---
Industry Split
--------------------------- --- ------------------------ --- ------------------------ ---
UK Investment % US Investment % CE Investment %
--------------------------- --- ------------------------ --- ------------------------ ---
Prof, Scientific
and Technical Wholesale and Retail
Property and Construction 20 Services 17 Trade 32
Wholesale and
Retail 20 Other 15 Construction 12
Manufacturing Prof, Scientific
and Engineering 11 Retail trade 15 and Technical Services 12
Health Care and
Other 12 Social Assistance 11 Other 9
Professional and Accommodation
business support 10 and Food Services 10 Transport and Storage 8
I.T. & Telecommunications 7 Construction 9 Manufacturing 7
Other Services Administrative and
Leisure & Hospitality 7 (ex. Public Admin) 8 Support Activities 7
Transport and Administrative Accommodation and
Logistics 5 and Support Activities 7 Food Service 6
Information and
Healthcare 4 Manufacturing 5 Communication 4
Arts, Entertainment
Automotive 4 Educational Services 3 and Recreation 3
--------------------------- --- ------------------------ --- ------------------------ ---
Basinghall, Tallis and Queenhithe were formed solely in
connection with the implementation of the previous investment
policy of the Company. Loans acquired by Basinghall, Tallis and
Queenhithe were funded, in whole or in part, by advances made by
the Company under the note programmes.
The notes issued by Basinghall, Tallis and Queenhithe to the
Company are listed on the Euronext Dublin.
The assets held by each of Basinghall, Tallis and Queenhithe are
ring-fenced from other entities or SPV's and there is no
cross-collateralisation between the SPV's in which the Company
invests.
Borrowing Limitation
All of the Group's leverage facilities have been fully repaid as
at 31 March 2022 and the loans that were previously held indirectly
through the Fund's interest in the EIB SPV have been transferred to
the Group's balance sheet at fair value in satisfaction of the
Company's investment in the transaction SPV and are now
consolidated directly.
Principal Risks and Risk Management
There are a number of actual, present and emerging risks and
uncertainties which could have a material impact on the Group's
actual results which may differ materially from expected and
historical results, particularly given the ongoing managed
wind-down of the Company, the impact of COVID-19 and the economic
and inflationary pressures that have been exacerbated by the recent
events in Ukraine.
The Board of Directors have overall responsibility for risk
management and internal control within the context of achieving the
Company's objectives. The Board agrees the strategy for the
Company, approves the Company's risk appetite and monitors the risk
profile of the Company. The Company also maintains a risk register
to identify, monitor and control risk concentration, which has been
updated to reflect the managed wind-down.
The Company maintains a risk matrix, consisting of the principal
and emerging risks and the controls in place to mitigate those
risks. The risk matrix provides a basis for the Audit Committee and
the Board to regularly monitor the effective operation of the
controls and to update the matrix when new risks are identified.
The Board's responsibility for conducting a robust risk assessment
are embedded in the Company's risk matrix and stress testing which
helps position the Company to ensure compliance with The
Association of Investment Companies Code of Corporate Governance's
("the AIC Code") requirements.
The Board continues to monitor the Company's systems of risk
management and internal control and will continue to receive
updates from the Company's external service providers to ensure
that the principal risks and emerging risks faced by the Group are
fully understood and managed appropriately. The Board did not
identify any significant weaknesses during the year and up to the
date of this Annual Report.
An overview of the principal risks and uncertainties that the
Board considers to be currently faced by the Company are provided
below, together with the mitigating actions being taken. The
Directors have also linked the key performance indicators to the
risks where relevant. Risks arising from the Group's use of
financial instruments are set out in note 16 of the consolidated
financial statements.
Principal risk Mitigation and update Company's financial
of risk assessment Alternative Performance
Measures ("APM")
affected by risk
COVID-19
The COVID-19 pandemic The Directors continue Total distributions
continues to have a to monitor delinquency to the shareholders.
significant economic and default levels on
and societal impact each of the separate Credit losses.
across the world. There loan portfolios closely,
remains uncertainty as well as the impact
around future performance of government initiatives
of the Company's portfolio and forbearance measures
but better than expected implemented by Funding
performance during the Circle.
onset and duration of
the pandemic have lifted
lifetime performance
expectations relative
to expectations at the
onset of the pandemic.
The ability of SME borrowers
to satisfy their loan
repayment obligations,
and therefore the performance
of the Company, will
continue to be affected
by, inter alia, the
path of COVID-19, the
continued re-opening Total distributions
of economies following to the shareholders.
local and national lockdowns
as well as fiscal and The Directors have limited Credit losses.
monetary response, about options available to
which uncertainty remains, them that will minimise
albeit lesser than prior the impact of the risk
year. as the measures and initiatives
being put in place are
Default risk outside of their control.
Borrowers' ability to
comply with their payment
obligations in respect Economic uncertainties
of loans may deteriorate or developments, as well
due to adverse changes as unemployment may impact
in economic and political upon default rates. The
factors, including the Board continues to monitor
COVID-19 pandemic discussed default rates closely
above. on a monthly basis in
line with developments
Actual defaults may with the pandemic and Total distributions
be different than indicated measures and initiatives to the shareholders.
by historical data and being implemented.
the timing of defaults NAV total return.
may vary significantly
from historical observations.
Wind-down risk
Below are the key risks
associated with the The Board continues to
managed wind-down of monitor the impact of
the Company, beyond the COVID-19 pandemic,
those inherent in the and inflation and supply
holding of amortising chain impacts and changes
Credit Assets. in the valuation of the
different loan portfolios
The macro risk in jurisdictions before considering pursuing
where the Group operates further price discovery
continues to evolve processes and opportunistic
with inflationary pressures, portfolio sales.
supply chain issues
and rising interest
rates which have been
exacerbated by the developments
in Ukraine. The Board The board actively monitors
considers this as a and controls price discovery
key risk in the orderly processes to seek to
wind down of the Company. ensure that they are
The market volatility operationally and economically
it creates may lead optimised, however the Total distributions
to increased probability board is aware that given to the shareholders.
of disorderly pricing the shortened timeline
of assets or higher available for portfolio
than acceptable default sales, due to the managed
on loans. wind-down and the ongoing
amortisation of the portfolio,
the macro-economic environment
Price discovery processes could negatively impact
associated with potential the price that assets
"en bloc" sales of credit could be sold for. Independent Share price volatility.
assets are likely to valuation specialists
be affected by such provide regular updates
factors. to the Board on the loan
portfolios which ensures
they are priced relative
to current market conditions.
The Board continues to
actively seek to "right
size" the Company's overhead
base as net asset value
reduces, through renegotiation Total distributions
with counterparties and to the shareholders.
potential restructuring
of the Group to minimise
As the managed wind-down unnecessary costs.
proceeds, and capital
is returned to shareholders,
the Company's fixed Share price volatility
and variable costs, and total distributions
some of which are not The Board seeks to manage to shareholders.
capable of material the use of various capital
mitigation due to the return techniques so
publicly listed status as to seek to fairly
of the Company, are balance the differing
likely to rise as a outcomes of those techniques.
proportion of the Company's
net asset value, prior
to dissolution of the
Company.
The Company deploys
surplus liquidity arising
from portfolio amortisation
and, potentially, portfolio
sales, by way of capital The Board seeks to maintain
return to shareholders. and enhance banking counterparty
This capital return relationships to seek
may take the form of to retain access to institutional
dividends, share buybacks pricing.
and compulsory redemptions
of shares or any combination
of these techniques.
The balance of techniques The Board will review
used may result in greater any adjustment required
or lesser share price to the values of the
volatility and varied Group's assets and liabilities
tax treatments for investors. when the basis of accounting
changes to a basis other
As the size of the Company's than going concern. In
non-UK portfolios decrease light of this assessment
through amortisation the Board has decided
(in the absence of portfolio that an asset sale and
sales), the Company's subsequent commencement
ability to deploy foreign of liquidation procedures
currency hedges at appropriate is likely within twelve
cost may be impaired. months of the date of
signing the accounts
As the Company moves and the financial statements
through the wind-down have thus been prepared
process, accounting on a basis other than
standards will require going concern. The values
the Company to prepare in the balance sheet
its accounts on a basis at the date of these
other than going concern. financial statements
are deemed to be realisable
values, based on fair
value.
------------------------------------ --------------------------
As part of the process of evaluating principal risks, the Board
also identifies emerging risks and how they impact on the Group's
managed wind-down process. The likelihood of occurrence of each
risk and the extent of financial effect to the Group are considered
when the Board makes economic decisions. Along with the update on
the principal risks to take into account the alleviating impact of
the COVID-19 pandemic and the ongoing circumstances between Ukraine
and Russia to the Group, the Board identified the following as
other key operational risks:
Changes in the tax regulation in jurisdictions where the Group
operates could have an impact on the treatment of income generated
from loans held in subsidiaries
The Company holds assets indirectly through subsidiaries
established in Ireland.
There is currently no indication that this will become a
principal risk to the Group but the Board will continue to monitor
any changes made in tax regulation across all jurisdictions in
which the Group operates.
The Group has no employees and is reliant on the performance of
third party service providers
The Company's investment administration functions have been
outsourced to external service providers. Any failure by any
external service provider to carry out its obligations could have a
materially detrimental impact on the effective operation, reporting
and monitoring of the Company's financial position. This may have
an effect on the Company's ability to meet its investment objective
successfully. The Board receives and reviews quarterly reports from
its principal external service providers and also performs an
annual quality review on the services provided by the external
service providers. The results of the Board's review are reported
to the Audit Committee.
Cybersecurity breaches
The Group is reliant on the functionality of Funding Circle's
software and IT infrastructure to facilitate the process of
servicing the Group's remaining Credit Assets. The Group is also
reliant on the functionality of the IT infrastructure of its other
service providers. These systems may be prone to operational,
information security and related risks resulting from failures of,
or breaches in, cybersecurity.
Along with other holders of risk assets generally, the Group is
exposed to a range of macroeconomic, geopolitical and regulatory
factors which could, in certain circumstances either individually
or in combination have a negative effect on carrying values,
portfolio returns, delinquencies and operating costs. The board
acknowledges that there is an emerging risk from the lack of
visibility of macro risk which may impact on performance of the
remaining loan portfolio. These factors are kept under review by
the Board and relevant Board committees as appropriate.
Hedging
The Board's policy is to seek to fully hedge currency exposure
between Sterling and any other currency in which the Group's assets
are denominated. During the year, the Company entered into forward
foreign exchange contracts to minimise the risk of loss due to
fluctuation of the Sterling to US Dollar exchange rate and the
Sterling to Euro exchange rate in pursuance of this policy. The
interest rate differential between Sterling and US Dollars moved
favourably in the period while the hedging instrument offset some
of this impact in order to reduce volatility in the Group's
results.
Foreign currency hedging activity is carried out by a specialist
third party on behalf of the Group, in accordance with the hedging
policy that the Board maintains.
Financial Performance
The key transactions and events that had an impact on the
Group's performance are set out in the Directors' Report.
The Board continues to monitor the following which are
considered as the Group's alternative performance measures in the
context of the managed wind-down:
-- Share price total return
-- NAV total return
-- Share price premium or discount to NAV
-- Dividend per share
-- Fair value movements on Credit Assets
Refer to the definitions of each of the above included in the
Glossary.
The Board notes that some or all of the key performance
indicators used in the past are less relevant now that the Company
has started the process of the managed wind-down.
Total return and share price premium/(discount)
For the period from inception to 31 March 2022, the total return
on the ordinary share price was 32.6% and the NAV total return was
43.1%. The ordinary share was trading at a discount of 10.6% to the
NAV per ordinary share as at 31 March 2022.
Dividend per share
The Board declared dividends during the year totalling 5.25
(2021: 5.25) pence per Ordinary share.
In addition to distributions made by way of the Compulsory
Redemption process, or by means otherwise determined appropriate by
the Directors, the Company currently intends to maintain quarterly
dividend payments of 5.25 pence per Ordinary Share on an annualised
basis, which may be partially uncovered. The Directors will
continue to periodically review the Company's dividend policy in
response to shareholder feedback and the progression of the managed
wind-down.
Credit losses
The Board carefully monitors the level of defaults arising
within the Group's portfolios. The credit loss provision prior to
any fair value adjustments as at 31 March 2022 was GBP70.8m against
outstanding principal and interest amounts of the loan portfolios
of GBP107.4m (31 March 2021: provision of GBP61.2m against
outstanding principal and interest amounts of the loan portfolio of
GBP141.5m).
During the current financial year, a macroeconomic scenario
continued to be utilised specifically for COVID-19 and consistent
with portfolio modelling, however as the events unfolded and
government support schemes began to wind-down, the timing of such
stress was pushed to later periods as the performance remained
resilient in the Company's loans. Additionally, multipliers are
applied to individual loan probability of defaults ("PD") such that
overall gross losses for the portfolio are anchored to portfolio
model expectations.
For further information on the movement in credit losses, refer
to note 4 of the consolidated financial statements.
Viability Statement
On 11 June 2019, the Company changed its Investment Objective
and Policy to facilitate a managed wind-down of the Company in a
prudent manner consistent with the principles of good investment
management as required by the Listing Rules. In light of the
limited weighted average life of the loans, and in the interests of
returning capital to shareholders in a cost-effective manner it is
anticipated that some or all the loans held by the entities of the
Group will be sold and the Company will be placed into a formal
liquidation process within twelve months of the publication of this
report. Accordingly, the financial statements are prepared on a
basis other than going concern and consequently it is considered
unnecessary to prepare a Viability Statement.
Employees, Social, Human Rights and Environmental Issues
The Company has no employees and the Board comprises five
non-executive Directors, all of whom, except Sachin Patel, are
independent of Funding Circle. As an investment company, the
Company has no direct impact on the community and as a result does
not maintain specific policies in relation to these matters.
The Company operates by outsourcing significant parts of its
operations to reputable professional companies, who are required to
comply with all relevant laws and regulations and take account of
social, environmental, ethical and human rights factors, where
appropriate.
The Company's directors acknowledge the importance of operating
responsibly and support the objectives of the Paris Agreement 2020
to substantially reduce greenhouse gas emissions. The Company has
no greenhouse gas emissions to report from its operations, nor does
it have responsibility for any other emissions-producing sources,
including those within its underlying investment portfolio.
In carrying out its investment activities and in relationships
with suppliers, the Company aims to conduct itself responsibly,
ethically and fairly.
Diversity and Inclusion
The Board of Directors of the Company comprises five male
directors.
The Remuneration and Nominations Committee and the Board are
committed to diversity at Board level and is supportive of
increased gender and ethnic diversity but recognises that it may
not always be in the best interest of shareholders to prioritise
this above other factors. The Remuneration and Nominations
Committee regularly reviews the structure, size and composition
required of the Board, taking into account the challenges and
opportunities facing the Company. In considering future candidates,
appointments will be made on merit, including taking account of the
specific skills, experience, independence, and knowledge needed to
ensure a rounded Board and the diversity benefits each candidate
can bring to the overall Board composition. The commencement of the
managed wind-down is inevitably limiting in the Board's ability to
implement enhanced diversity and inclusion strategies, given the
limited future life of the Company.
Stakeholder Engagement
The AIC Code requires that matters set out in section 172 of the
Companies Act, 2006 ("s172 of the Companies Act") are reported
notwithstanding the Company is incorporated in Guernsey. As an
investment company, the Company does not have any employees and
conducts its core activities through third-party service providers.
Each service provider is subjected to oversight and control, is
required to have in place suitable policies to ensure they maintain
high standards of business conduct, treat customers fairly, and
employ corporate governance best practice. The Board considers the
view of the Company's other key stakeholders as part of its
discussions and decision making process. The Board's commitment to
maintaining the high-standards of corporate governance recommended
in the AIC Code, combined with the directors' duties incorporated
into The Companies (Guernsey) Law, 2008, the constitutive
documents, the Disclosure Guidance and Transparency Rules, and
Market Abuse Regulation, ensures that shareholders are provided
with frequent and comprehensive information concerning the Company
and its activities. Whilst the primary duty of the Directors is
owed to the Company as a whole consideration being given, the Board
considers as part of its decision making process the interests of
all stakeholders. Particular to the continued alignment between the
activities of the Company and those that contribute to delivering
the Board's strategy, which include the Portfolio Administrator.
The Board respects and welcomes the views of all stakeholders. Any
queries or areas of concern regarding the Company's operations can
be raised with the Company Secretary and Administrator.
DIRECTORS' REPORT
The Directors present their annual report and audited
consolidated financial statements for the year ended 31 March 2022.
In the opinion of the Directors, the annual report and audited
consolidated financial statements are fair, balanced and
understandable and provide the information necessary for
Shareholders to assess the Group's performance, business model and
strategy.
Incorporation
The Company is a limited liability company registered in
Guernsey under The Companies (Guernsey) Law, 2008 (as amended) with
registered number 60680.
Activities
The Company is a registered and closed-ended collective
investment scheme in Guernsey pursuant to The Protection of
Investors (Bailiwick of Guernsey) Law, 1987, as amended. Prior to
the amendment of the Company's Investment Objective and Policy, the
primary activity of the Company was investment in loans to small
and medium sized enterprises in the United Kingdom, the United
States and Continental Europe, in order to seek to provide
shareholders with a sustainable and attractive level of dividend
income. Following the result of the EGM on 11 June 2019, the
Company has ceased investment into Credit Assets as the Company's
Investment Objective and Policy were updated to facilitate the
managed wind-down of the Company.
Results and dividends
The total comprehensive income for the year, determined under
International Financial Reporting Standards ("IFRS"), amounted to
GBP13.13 million (2021: GBP4.58 million). The payment of any
dividend by the Company is subject to the satisfaction of a
solvency test as required by The Companies (Guernsey) Law, 2008 (as
amended). Following the result of the EGM, the Directors expect to
maintain quarterly dividend payments of 5.25 pence per Ordinary
Share on an annualised basis, which may be partially uncovered by
income. Dividends declared during the year are disclosed in note
13.
Business review
The Strategic Report includes further information about the
Company's principal activities, financial performance during the
year and indications of likely future developments.
The Company redeemed a total of 82,414,359 shares (2021:
124,126,432) for a total amount of GBP76,199,758 (2021:
GBP105,499,718) throughout the year.
In the previous years, the Group's results and financial
position included Lambeth, a Company incorporated in Ireland.
Lambeth was put into liquidation in October 2020 and the final
proceedings to wind up its operations were completed in July
2021.
On 17 August 2020, Queenhithe fully repaid the remaining amount
owed on its loan with Fleetbank. The remaining portfolio of Credit
Assets held within Queenhithe were transferred to Basinghall on the
same date for an amount equal to the principal and interest
outstanding at 31 July 2020 being the economic cut-off date for the
transaction. In December 2020, liquidators were formally appointed
and commenced proceedings to wind up Queenhithe in an orderly
manner. The proceedings are still ongoing as at the date of signing
of these consolidated financial statements.
In October 2021, the Company received cash of GBP1,568,666 and a
portfolio of SME loans valued at GBP5,824,315 as full repayment of
its investment in the EIB transaction. The portfolio of loans was
subsequently recognised in the Basinghall subsidiary of the Group
in return for notes issued between the parent company and
Basinghall. During the year, due to the resilient performance of
the underlying loan portfolio, a net gain of GBP2,251,764 was
recognised in the consolidated statement of comprehensive income
and the SME loans were subsequently consolidated directly on the
Group's balance sheet.
The Board continues to closely monitor the impact of COVID-19
and the emerging risk from the evolving lack of visibility of macro
risk to the performance of the loan portfolio held by the Group.
The Board receives updates on a regular basis from Funding Circle
on current delinquency and default trends by geographic exposure.
The Risk Committee also reviews a comprehensive range of other
risks that may be impacted by COVID-19 and emerging economic
risks.
From 2020, the impact of the COVID-19 pandemic led to the use of
forbearance measures for eligible borrowers, including short term
payment plans and payment holidays, to assist creditworthy
borrowers whose businesses suffered a short-term liquidity shock as
a result of the ongoing pandemic environment.
Borrowers that went on forbearance measures implemented by
Funding Circle have demonstrated resilient performance since coming
off their plan. The directors have seen a large proportion of
borrowers returning to making full contractual repayments which has
assisted in the stronger than expected performance by each of the
portfolios in the latter stages of the year. All forbearance
measures have been discontinued as businesses go back to normal
operations.
The ongoing military operation in Ukraine, the related sanctions
targeted against Russia and certain Russian nationals and the
consequential impacts on European energy supply volumes and pricing
is already impacting both the European and global economies. The
Group does not have any direct exposure to Ukraine, Russia or
Belarus. However, the impact on the general economic situation and
exacerbation of other macroeconomic impacts such as rising
inflation in particular, could impact certain assumptions and
estimates in relation to the fair valuation and impairment
assessment on Credit Assets in the future. This could lead to
material adjustments to the carrying value of these assets within
the next financial year. At this stage management is not able to
reliably estimate the impact as events continue to unfold.
We remain vigilant in monitoring the macroeconomic environment
and will adjust our business and risk strategy as required.
Going concern
The Directors are continuing with the managed wind-down of the
Group's operations.
The Directors have considered the state of the wind-down and the
average remaining contractual term of the loan portfolio and
determined that the use of the going concern basis in preparing the
financial statements of the Group is no longer appropriate. As
such, the financial statements have been prepared on a basis other
than going concern, under which the assets are measured at their
net realisable value, which continues to be their fair value.
There were no adjustments made to the carrying values of the
assets and liabilities of the Group in the current year as a result
of this change in basis of preparation. The Directors consider the
carrying values to be a reasonable approximate of their net
realisable values.
There were no provisions for winding up costs recognised in the
current financial year as these will be charged on an accruals
basis as they are incurred or as the Group becomes obligated to
make payments in the future. Any such costs are considered to be
immaterial to the Group at the date of these financial
statements.
The Directors confirm that they have a reasonable expectation
that the Company will continue to be able to pay its liabilities as
they fall due over the period of the managed wind-down.
Alternative Investment Fund Managers Directive ("AIFMD")
The AIFMD requires Alternative Investment Fund Managers ("AIFM")
to comply with certain disclosure, reporting and transparency
obligations for Alternative Investment Funds ("AIF") that it
markets in the EU. The Company is a self-managed AlF for the
purposes of the AIFMD and therefore has to comply with the
disclosure requirements of the AIFMD.
The Company regularly publishes updates on the website in the
form of factsheets. These, along with the regular announcements
made through the Regulatory News Service ("RNS") of the FCA, cover
the disclosures required by AIFMD.
The Directors consider that any change in respect of which a
reasonable investor, becoming aware of such information, would
reconsider its investment in the Company, including because the
information could impact on the investor's ability to exercise its
rights in relation to its investment, or otherwise prejudice that
investor's (or any other investor's) interest in the Company should
be considered material. In setting this threshold, the Directors
have had regard to the current risk profile of the Company which
outlines the relevant measures to assess the Company's exposure or
potential exposure to those risks. As required by the Listing
Rules, any material change to the investment policy of the Company
will be made only with the approval of the shareholders and as
such, shareholders' approval was sought at the EGM on 11 June 2019
to implement the modification of the Company's Investment Objective
and Policy as noted in the Strategic Report.
The AIFMD also requires the Company to disclose the remuneration
of its investment manager (if any) providing analysis between fixed
and variable fees along with the information of how much of such
remuneration was paid to senior management at the investment
manager and how much was paid to members of staff. As a
self-managed AIF, the Company has no investment manager and thus
has no information to report.
United States of America Foreign Account Tax Compliance Act
("FATCA")
Guernsey has entered into an Intergovernmental Agreement ("IGA")
with the US Treasury in order to comply with FATCA and has also
entered into an IGA with the UK in order to comply with the UK's
requirements for enhanced reporting of tax information in
accordance with FATCA principles. Under such IGAs, the Company is
regarded as a Foreign Financial Institution ("FFI") resident in
Guernsey. The Board continues to monitor developments in the rules
and regulations arising from the implementation of FATCA in
conjunction with its tax advisors.
Common Reporting Standard ("CRS")
On 13 February 2014, the Organisation for Economic Co-operation
and Development released the Common Reporting Standard ("CRS")
designed to create a global standard for the automatic exchange of
financial account information, similar to the information to be
reported under FATCA. On 29 October 2014, 51 jurisdictions signed
the multilateral competent authority agreement ("Multilateral
Agreement") that activates this automatic exchange of FATCA-like
information in line with the CRS.
Pursuant to the Multilateral Agreement, certain disclosure
requirements may be imposed in respect of certain investors in the
Company who are, or are entities that are controlled by one or
more, residents of any of the signatory jurisdictions. It is
expected that, where applicable, information that would need to be
disclosed will include certain information about investors, their
ultimate beneficial owners and/or controllers, and their investment
in and returns from the Company and its subsidiaries.
Guernsey, along with 60 other jurisdictions, including some EU
Member States, has adopted the CRS with effect from 1 January 2016,
with the first reporting completed in 2017. The Group continues to
comply with the requirements of CRS.
Corporate governance
The Company has been fully compliant with the AIC code of
corporate governance throughout the year which is publicly
available at
https://www.theaic.co.uk/aic-code-of-corporate-governance.
Refer to the corporate governance report for further
information.
Directors
The Directors who held office during the financial year end and
up to the date of approval of this report were:
Date of
appointment
-------------------- -------------
Frederic Hervouet 12 August
2015
Jonathan Bridel 19 August
2015
Richard Boléat 19 August
2015
Richard Burwood 12 August
2015
Sachin Patel 18 May 2017
Tom Parachini, Global Head of Legal and Regulatory at Funding
Circle, has been appointed as Alternate Director for Sachin
Patel.
Directors' shares and interests
A list of all Directors who served during the year and up to the
date of this report and their biographies are included at the back
of this report.
The appointment and replacement of Directors is governed by the
Company's Articles of Incorporation, The Companies (Guernsey) Law
2008 (as amended) and related legislation. The Articles of
Incorporation themselves may be amended by special resolution of
the Shareholders.
As at 31 March 2022, the Directors and/or their connected
parties held the following Ordinary shares of the Company:
Number of shares
2022 2021
--------------------- --------------- ------------------
Frederic Hervouet 35,504 92,041
Jonathan Bridel 25,286 65,552
Richard Boléat 5,231 13,554
Richard Burwood 13,409 24,784
Sachin Patel - -
79,430 1 95,931
--------------------- --------------- ------------------
During the year, no Director had a material interest in a
contract to which the Company was a party (other than his own
letter of appointment). Mr. Patel is an employee of Funding Circle
Ltd.
Movement in the number of shares held by each of the directors
and/or connected parties during the year relates to the redemptions
paid by the Company.
Substantial shareholdings
As at 31 March 2022, the Company had been informed of the
following notifiable interests of 5% or more in the Company's
voting rights in accordance with Disclosure and Transparency Rule
5.1.2:
Shareholder Number of Ordinary Percentage
shares holding %
---------------------------------- ------------------- -----------
Railways Pension Trustee Company
Limited 14,703,565 28.41
Rocket Internet 12,749,496 24.64
BlackRock Investment Management
(UK) Limited 9,521,059 18.40
Amiral Gestion 6,062,498 11.71
Almitas Capital 3,090,025 5.97
Significant agreements
The Company is not a party to any significant agreements which
take effect after or terminate upon a change of control of the
Company, nor has the Company entered into any agreements with its
Directors to provide for compensation for loss of office as a
result of a takeover bid.
Information to be disclosed in accordance with UK Listing Rule
9.8.4
A statement of the amount of interest The Company has not capitalised
capitalised by the Company during any interest in the year under
the period under review with an review.
indication of the amount and treatment
of any related tax relief.
Any information required in relation Not applicable.
to the publication of unaudited
financial information.
Details of any long-term incentive Not applicable.
schemes.
Details of any arrangements under Sachin Patel has waived his right
which a director of the Company to remuneration.
has waived or agreed to waive
any emoluments from the Company.
----------------------------------
Details of any pre-emptive issues Not applicable.
of equity not for cash.
----------------------------------
Details of any non-pre-emptive Not applicable.
issues of equity for cash by any
unlisted major subsidiary undertaking.
----------------------------------
Details of parent participation Not applicable.
in a placing by a listed subsidiary.
----------------------------------
Details of any contract of significance Sachin Patel and Tom Parachini
in which a director is or was are both employees of Funding
materially interested. Circle Ltd.
Sachin Patel and Tom Parachini
are both Directors of Funding
Circle Global Partners Limited
("FCGPL").
----------------------------------
Details of any contract of significance Not applicable.
between the Company (or one of
its subsidiaries) and a controlling
shareholder.
----------------------------------
Details of waiver of dividends Not applicable.
by a shareholder.
----------------------------------
Board statement in respect of Not applicable.
relationship agreement with the
controlling shareholder.
----------------------------------
Disclosure of information to the Auditor
The Directors who held office at the date of approval of this
Directors' Report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company's
Auditor is unaware and each Director has taken all the steps that
he ought to have taken as a Director to make himself aware of any
relevant audit information and to establish that the Company's
Auditor is aware of that information.
Independent Auditor
PricewaterhouseCoopers CI LLP ("PwC CI") served as independent
auditor during the financial year and has expressed its willingness
to continue in office. A resolution to re-appoint PwC CI as
independent auditor was approved in the Annual General Meeting.
The maintenance and integrity of the Group and Company's website
is the responsibility of the Directors. The work carried out by the
independent auditor does not involve consideration of these matters
and accordingly, the auditor accepts no responsibility for any
changes that may have occurred to the consolidated financial
statements since they were initially presented on the website.
Legislation in Guernsey governing the preparation and dissemination
of financial statements may differ from legislation in other
jurisdictions.
Company Secretary
The Company Secretary is Sanne Group (Guernsey) Limited of De
Catapan House, Grange Road, St Peter Port, Guernsey GY1 2QG.
Taxation
The Company is subject to taxation under The Income Tax (Exempt
Bodies) (Guernsey) Ordinance 1989 act and the investing companies
are subject to taxation in Ireland under the Irish Finance Act
2021. During the year, the interest limitation rule ("ILR") as
contemplated by Article 4 of the Anti-Tax Avoidance Directive which
was adopted as Council Directive (EU) 2016/1164 on 12 July 2016 was
introduced in Ireland by the Finance Act 2021. The ILR will apply
to Irish taxable entities with respect to accounting periods
commencing on or after 1 January 2022. We do not expect the ILR to
apply negatively to Basinghall, Tallis and Queenhithe as each
entity earns only income which is expected to be treated as
interest equivalent income for Irish tax purposes, together with
future potential income. See note 11 for further information.
On behalf of the Board
RICHARD BOLÉAT
Chairman of the Board of Director
CORPORATE GOVERNANCE REPORT
The Financial Reporting Council ("FRC"), the UK's independent
regulator for corporate reporting and governance responsible for
the Corporate Governance Code, has endorsed the AIC Code meaning
that companies who report in accordance with the AIC Code fully
meet their obligations under the UK Corporate Governance Code (the
"Code") and the related disclosure requirements contained in the
Listing Rules.
Statement of how the principles of the AIC Code are applied
Throughout the financial year ended 31 March 2022 the Company
has been in compliance with the relevant provisions set out in the
AIC Code and the relevant provisions of the Code. The Code includes
provisions relating to: the roles of the chief executive, executive
directors' remuneration; and the need for an internal audit
function, each of which is not considered by the Board to be
relevant to the Company. The Company has therefore not reported
further in respect of these provisions. The financial statements
have not complied with the requirement to prepare a Viability
Statement, this is discussed in more detail in the Strategic
Report.
Board of Directors
The Board is comprised of five Directors, all of whom are
non-executive. All the Directors are independent except for Sachin
Patel who is an employee of Funding Circle Ltd. Richard Boléat is
the Chairman of the Board and Jonathan Bridel is the Senior
Independent Director. The Company did not use an external search
consultancy nor any open advertising in the selection of the
Chairman and the non-executive Directors. The Company was satisfied
that the formal selection process from a pool of candidates with
the relevant expertise and skills was appropriate for the needs of
the Company. Biographies of the Directors are shown at the back of
this report and demonstrate the range and depth of skills and
experience each brings to the Board.
The Directors ensure that, at all times, the Board is composed
of members who, as a whole, have the required knowledge, abilities
and expert experience to properly complete their tasks and are
sufficiently independent. A Board member is considered independent
if he has no business or personal relations which cause a conflict
of interest with those of the Company. Every member of the Board
ensures that he has sufficient time to perform his mandate. The
Board considers the skills, competence and independence of
candidates in the context of the overall board composition. The
Board has put in place appropriate insurance cover in respect of
any legal action against the Directors.
The Board has not stipulated a maximum term of any directorship,
including the tenure of the Chairman given the annual
election/re-election process discussed below and commencement of
the managed wind-down.
Copies of the letters of appointment are available on request
from the Company Secretary.
Independence of Directors
In accordance with the AIC Code, the Board has reviewed the
independence of the individual directors and the Board as a whole.
Each of the Directors except Sachin Patel is considered
independent.
Board evaluation
A formal Board evaluation process has been put in place in line
with the Board's policy to monitor and improve performance of the
Directors. The Board previously carried out a formal evaluation
process on an annual basis. The Directors completed self-assessment
forms which were reviewed and discussed with the Chairman. The
Senior Independent Director performed an annual review of the
Chairman's performance. The Directors carried out an annual review
of the Board as a whole discussing its composition, size and
structure and ensuring that there is a good balance of skills and
experience. The answers to these questionnaires were discussed by
the Remuneration and Nominations Committee. However, given the
Company's change in investment objective, managed wind-down and the
limited future life of the Company, the annual board evaluations
are no longer taking place or being discussed by the Remuneration
and Nominations Committee.
The Board shall offer induction training to any new Directors
about the Company, its key service providers, the Directors' duties
and obligations and other matters as may be relevant from time to
time. A regular review will be undertaken by the Board to ensure
that the Directors' ongoing training and development needs are
met.
Election/Re-election of Directors
It is the Company's policy that at each Annual General Meeting
of the Company all Directors shall retire from office, but, subject
to the Articles, shall be eligible for re-appointment.
Committees of the Board
Audit, Risk, Management Engagement and Remuneration and
Nominations Committees have been established by the Board and each
Committee has formally delegated duties, responsibilities and terms
of reference, which are available from the Company Secretary upon
request.
An outline of the responsibilities of each of the Committees is
set out below.
Audit Committee
The Board has established an Audit Committee comprising of all
the Directors except for Sachin Patel and is chaired by Jonathan
Bridel. The Audit Committee meets at least three times a year and
is responsible for ensuring, inter alia, that the financial
performance of the Company is properly reported on and monitored
and provides a forum through which the Company's external auditor
may report to the Board. The Audit Committee reviews and recommends
to the Board the adoption and approval of the annual and half
yearly consolidated financial statements, results, internal control
systems and procedures and accounting policies of the Company.
Risk Committee
The Company has established a risk committee, which comprises of
all of the Directors, with Frederic Hervouet as chairman. The risk
committee meets four times a year or more often if required. The
risk committee takes responsibility for the risk management
policies of the Company's operations and oversight of the operation
of the Company's risk management framework as well as completing
all risk reporting for regulatory purposes.
Management Engagement Committee
The Company has established a Management Engagement Committee
which is chaired by Richard Burwood and comprises of all the
Directors except for Sachin Patel. The Management Engagement
Committee meets at least once a year or more often if required. The
principal duties of the Committee are to review the actions and
judgments of Funding Circle and also the terms of agreements
appointing each of them. The Committee is also responsible for
monitoring the compliance of other service providers with the terms
of their respective agreements.
Remuneration and Nominations Committee
The Company has established a Remuneration and Nominations
Committee which is chaired by Richard Boléat and comprises all of
the Directors. The Directors believe that the appointment of the
chairman of the Remuneration and Nominations Committee does not
affect his independence.
The Board believes it is appropriate for all Directors to be a
member of the Remuneration and Nominations Committee as Sachin
Patel has waived his right to remuneration from the Company and all
other Directors are independent non-executive Directors.
The Remuneration and Nominations Committee meets at least once a
year or more often if required. The duties of the Committee
include:
-- determining and agreeing with the Board the framework or
broad policy for the remuneration of the Company's Chairman and
non-executive Directors pursuant to the Company's Articles of
Incorporation;
-- reviewing the structure, size and composition (including the
skills, knowledge and experience) required of the Board compared to
its current position and make recommendations to the Board with
regard to any changes necessary; and
-- giving full consideration to succession planning of
Directors, taking into account the challenges and opportunities
facing the Company.
Meetings and attendance
There were 5 Board meetings held during the financial year ended
31 March 2022. The attendance record of each of the Directors was
as follows:
Number of attendances
during the year
-------------------------------------- ----------------------
Frederic Hervouet 3
Jonathan Bridel 5
Richard Boléat 5
Richard Burwood 5
Sachin Patel or designated alternate 5
---------------------------------------- ----------------------
There were 4 Risk Committee meetings and 5 Audit Committee
meetings held during the financial year ended 31 March 2022. A
Management Engagement Committee meeting was held subsequent to the
year end in April 2022.This meeting was fully attended by the above
Directors.
The attendance record of each of the Committee members was as
follows:
Number of attendances during the
year
------------------------------------
Audit Committee Risk Committee
--------------------- ------------------ ---------------
Frederic Hervouet 3 3
Jonathan Bridel 5 4
Richard Boléat 5 4
Richard Burwood 5 4
Sachin Patel N/A 4
---------------------- ------------------ ---------------
Board Observers
Funding Circle Limited has the right (pursuant to the Services
Agreement) to nominate up to two observers to attend meetings of
the Board. Those nominees may (other than in limited circumstances)
attend each such meeting as observers, but do not have any rights
to participate in the conduct of the business of the Company or to
vote on any matter.
The Board may require that those nominees not attend the part of
any Board meeting which considers (i) the termination of any
agreement to which Funding Circle is party, or (ii) any dispute or
litigation between Funding Circle and the Company.
Company Secretary
The Board appointed Sanne Group (Guernsey) Limited to act as
Company Secretary on 22 July 2015. The principal duties of the
Company Secretary are to monitor compliance with the established
corporate governance framework, report to the Board and to arrange
and host Board and Committee meetings.
Internal Control Review
The Board is responsible for ensuring the maintenance of a
robust system of internal control and risk management and for
reviewing the effectiveness of the Company's overall internal
control arrangements and processes following recommendations from
the Audit Committee. In performing their duties, the Board
considered the relevant guidance published by the FRC as they apply
to the Group. The systems and controls in place have been in place
for the year under review and up to the date of signing of this
annual report and audited consolidated financial statements. The
results of the Board's review of the systems and controls are
presented within the Audit Committee Report.
The Directors may delegate certain functions to other parties
such as Funding Circle UK, Funding Circle US, Funding Circle CE,
FCGPL, the Administrator and other service providers. In
particular, the Directors have appointed Funding Circle UK, Funding
Circle US and Funding Circle CE to service the Company's
investments in loans and FCGPL to provide corporate services to the
Company. Notwithstanding these delegations, the Directors have
responsibility for exercising overall control and supervision of
the services provided by Funding Circle UK, Funding Circle US and
Funding Circle CE, for the risk management of the Company and
otherwise for the Company's management and operations.
The Management Engagement Committee carries out regular reviews
of the performance of Funding Circle UK, Funding Circle US and
Funding Circle CE together with other service providers appointed
by the Company.
Investor Relations
All shareholders have the opportunity to attend and vote, in
person or by proxy, at the AGM or other meetings of shareholders.
The notice of the AGM, which is sent out at least fourteen days in
advance, sets out the business of the meeting. Shareholders are
encouraged to attend the AGM and to participate in proceedings. The
Chairman of the Board and the Directors, together with
representatives of Funding Circle, will be available to answer
shareholders' questions at the AGM.
Shareholders and other interested parties are able to contact
the Company through a dedicated investor relations function.
Contact details are as follows:
Email: ir@smecreditrealisation.com
Shareholders are also able to contact the Company via the
Chairman or Company Secretary as follows:
Richard Boléat
Tel: +44 (0) 1534 615 656
Email: Richard.Boleat@smecreditrealisation.com
Sanne Group (Guernsey) Limited
Tel: +44 (0) 1481 739 810
Email: smecreditrealisation@sannegroup.com
AUDIT COMMITTEE REPORT
Membership
Jonathan Bridel - Chairman (Independent non-executive
Director)
Richard Burwood (Independent non-executive Director)
Fred Hervouet (Independent non-executive Director)
Richard Boléat (Company Chairman* and Independent non-executive
Director)
* The Board believes it is appropriate for the Company Chairman
to be a member of the Audit Committee as he is a Fellow of the
Institute of Chartered Accountants in England & Wales and is an
independent Director.
Key Objectives
The provision of effective governance over the appropriateness
of the Company's financial reporting, taking into account the
consolidation of its subsidiaries, including the adequacy of
related disclosures, the performance of the external auditor and
the management of the Company's systems of internal controls and
business risks.
Responsibilities
The primary responsibilities of the Audit Committee are:
-- reviewing the Company's financial results announcements and
financial statements and monitoring compliance with relevant
statutory and listing requirements;
-- reporting to the Board on the appropriateness of the
Company's accounting policies and practices including critical
accounting policies and practices;
-- advising the Board on whether the Committee believes the
annual report and financial statements, taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the Company's performance, business
model and strategy;
-- scrutiny of the loans held at fair value through other comprehensive income;
-- compiling a report on its activities to be included in the Company's annual report;
-- overseeing the relationship with and appointment of the external auditor;
-- agreeing with the external auditor the audit plan including
discussions on the key risk areas within the consolidated financial
statements;
-- considering the financial and other implications on the
independence of the auditor arising from any non-audit services to
be provided by the auditor; and
-- considering the appropriateness of appointing the auditor for non-audit services.
The Audit Committee members have a wide range of financial and
commercial expertise necessary to fulfil the Committee's duties.
The Chairman of the Committee, Jonathan Bridel, is a Fellow of the
Institute of Chartered Accountants in England and Wales, and has
recent and relevant financial experience, as required by the AIC
Code. He serves as Audit Chairman on other listed companies and
previously worked in senior positions in banking and finance and
investment management including SME lending. The Board is satisfied
he has recent and relevant financial experience and has designated
him as its financial expert on the Committee. The Committee as a
body has the competence and experience relevant to the sector. The
qualification of the members of the committee are noted in the
biographies section at the back of this report.
Committee Meetings
The Committee meets formally at least three times a year. Only
members of the Audit Committee have the right to attend Audit
Committee meetings. However, other Directors and representatives of
Funding Circle and the Administrator are invited to attend Audit
Committee meetings on a regular basis and other non-members may be
invited to attend all or part of the meetings as and when
appropriate and necessary. The Company's external auditor,
PricewaterhouseCoopers CI LLP ("PwC CI"), is also invited to
meetings as is appropriate.
Main Activities during the year
The Committee assists the Board in carrying out its
responsibilities in relation to financial reporting requirements,
risk management and the assessment of internal controls and key
procedures adopted by the Company's service providers. The
Committee also manages the Company's relationship with the external
auditor and considers the appointment of external auditor,
discusses with the external auditor the nature and scope of the
audit, keeps under review the scope, results, cost and
effectiveness of the audit and reviews the independence of the
external auditor. The Committee also considers the objectivity of
the auditor and reviews the external auditor's letter of engagement
and management letter.
Meetings of the Committee generally take place prior to a
Company Board meeting. The Committee reports to the Board, as part
of a separate agenda item, on the activity of the Committee and
matters of particular relevance to the Board in the conduct of
their work. The Board requires that the Committee advise it on
whether it believes the annual report and financial statements,
taken as a whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the Company's
performance, business model and strategy.
At its meetings during the year, the Committee focused on:
Financial reporting
The primary role of the Committee in relation to financial
reporting is to review with Funding Circle, the Administrator and
the external auditor the appropriateness of the half-yearly and
annual consolidated financial statements concentrating on, amongst
other matters:
-- The quality and acceptability of accounting policies and practices;
-- The clarity of the disclosures and compliance with financial
reporting standards and relevant financial and governance reporting
requirements including the application of IFRS 9 and IFRS 10;
-- Material areas in which significant judgments have been
applied or where there has been discussion with the external
auditor;
-- Appropriateness of the going concern basis of preparation;
-- Whether the annual report and consolidated financial
statements, taken as a whole, are fair, balanced and understandable
and provide the information necessary for shareholders to assess
the Company's performance, business model and strategy; and
-- Any correspondence from regulators and listing authorities in
relation to financial reporting.
To aid its review, the Committee considers reports from Funding
Circle and the Administrator.
Significant issues
In relation to the annual report and consolidated financial
statements for the year ended 31 March 2022, the following
significant issues were considered by the Audit Committee as they
are most relevant to the nature of the Group's business:
-- Valuation of loans advanced
Loans advanced recorded at fair value through other
comprehensive income ("FVTOCI") represent the largest balance in
the statement of financial position. Furthermore, the FVTOCI basis
of measurement under IFRS 9 mandates that management evaluate the
expected credit losses on the loan portfolio and account for them
through the profit and loss, with movement on fair value going
through the OCI. Valuation of the loans advanced is received from a
third party valuation expert on a quarterly basis. The Audit
Committee regularly reviews and has satisfied itself as to the
inputs used in the valuation methodology of the loans advanced in
the consolidated financial statements at 31 March 2022.
-- Fraud risk in income recognition
The presumed risk of fraud in revenue recognition in relation to
pressure management may feel to achieve the forecast results. The
directors acknowledge that there is a rebuttable risk of fraud in
income recognition. Mitigating factors were reviewed through the
risk register and internal controls framework which is reviewed and
approved by the Committee on a regular basis. The Committee has
considered and challenged as appropriate the assessment of risks
within these documents and obtained evidence about the effective
operation of the internal controls in place, including critically
assessing reporting provided by Funding Circle. The Audit Committee
is satisfied that the accounting policy for recognition of the
interest earned on loans is in line with the relevant accounting
standards.
-- Use of going concern assumption
The Directors have considered the state of the wind-down and the
average remaining contractual term of the loan portfolio and
determined that the use of the going concern basis in preparing the
financial statements of the Group is no longer appropriate. Whilst
this has not been considered a significant risk it is a significant
issue that needed due consideration in relation to the preparation
of this Annual Report and hence is included here for
completeness.
The Committee in conjunction with the Board and Funding Circle
continue to monitor the impact of COVID-19, and new risk factors
such as inflation and the events in Ukraine on the consolidated
financial statements of the Group.
Internal Control and Risk Management
The Committee along with the Risk Committee has established a
process for identifying, evaluating and managing all major risks
faced by the Group. The process is subject to regular review by the
Board and accords with the AIC Code of Corporate Governance. The
Board is responsible overall for the Group's system of internal
control and for reviewing its effectiveness. However, such a system
is designed to manage rather than eliminate risks of failure to
achieve the Company's business objectives and can only provide
reasonable and not absolute assurance against material misstatement
or loss.
The Committee receives reports from the Risk Committee on the
Group's risk evaluation process and reviews changes to significant
risks identified. The Committee has undertaken a full review of the
Group's business risks, which have been analysed and recorded in a
risk report, which is reviewed and updated regularly. Each quarter
a Funding Circle report outlines the steps taken to monitor the
areas of risk including those that are not directly the
responsibility of Funding Circle and reports the details of any
known internal control failures.
Separately, Funding Circle has established an internal control
framework to provide reasonable but not absolute assurance on the
effectiveness of the internal controls operated on behalf of its
clients. The effectiveness of the internal controls is assessed by
Funding Circle's compliance and risk department on an on-going
basis. Funding Circle's controls processes have also been outlined
to the Board. The Board's assessment of the Company's principal
risks and uncertainties is set out in the Strategic Report. By
means of the procedures set out above, the Board confirms that it
has reviewed the effectiveness of the Group's system of internal
controls for the year ended 31 March 2022 and subsequently and that
no material issues have been noted.
External Audit
The effectiveness of the external audit process is dependent on
appropriate audit risk identification at the start of the audit
cycle. The Committee received a detailed audit plan from PwC CI,
identifying their assessment of these audit risks. For the year
ended 31 March 2022 significant risks were identified in relation
to the valuation of loans advanced and the risk of fraud in revenue
recognition (in addition to the risk of management override of
controls). These risks are tracked through the year and the
Committee challenged the work done by the auditor to test
management's assumptions and estimates around these areas. The
Committee has assessed the effectiveness of the audit process
addressing these matters through the reporting received for the
year-end consolidated financial statements. In addition, the
Committee will seek feedback from the Administrator on the
effectiveness of the audit process. For the year ended 31 March
2022, the Committee was satisfied that there had been appropriate
focus and challenge on the primary areas of audit risk and assessed
the quality of the audit process to be good.
Appointment and Independence
The Committee considers the reappointment of PwC CI, including
the rotation of the Audit Engagement Leader, and assesses their
independence on an annual basis. The external auditor is required
to rotate the Audit Engagement Leader responsible for the Company's
audit every five years. The Audit Engagement Leader has not yet
served on the external audit for this defined period and as such
continues as Audit Engagement Leader for the current year's audit.
In its assessment of the independence of the auditor, the Committee
receives details of any relationships between the Company and PwC
CI that may have a bearing on their independence and receives
confirmation that they are independent of the Company. The
Committee approved the fees for audit services for the year ended
31 March 2022 after a review of the level and nature of work to be
performed and after being satisfied that the fees were appropriate
for the scope of the work required.
Non-audit Services
To safeguard the objectivity and independence of the external
auditors from becoming compromised, the Committee has a formal
policy governing the engagement of the external auditors to provide
non-audit services. No material changes have been made to this
policy during the year. The auditor and the Directors have agreed
that all non-audit services require the pre-approval of the Audit
Committee prior to commencing any work. Fees for non-audit services
are tabled annually so that the Audit Committee can consider the
impact on auditor's objectivity. The auditor (and their affiliated
network firms) was remunerated GBP210,448 (2021: GBP264,792) for
their audit and non-audit services rendered for the year ended 31
March 2022. The Committee assessed whether PwC should be appointed
in relation to certain tax and other non-audit services related
services and concluded that it would be in the best interest of the
Group to do so.
PwC were remunerated as follows for the year ended 31 March
2022:
2022 2021
---------------------- ----------------------
Type of service PwC CI PwC Ireland PwC CI PwC Ireland
GBP GBP GBP GBP
-------------------------- -------- ------------ -------- ------------
Audit of the financial
statements 114,330 72,218 126,030 77,234
Review of half yearly
financial statements 23,900 - 22,000 -
Tax related services - - - 38,328
Other non-audit services - - 1,200 -
138,230 72,218 149,230 115,562
-------------------------- -------- ------------ -------- ------------
The current length of PwC's tenure is 7 years and the last time
tendering took place was in October 2015.
The Committee is satisfied with the effectiveness of the audit
provided by PwC CI and is satisfied with the auditor's
independence. The Committee has therefore recommended to the Board
that PwC CI be reappointed as external auditor for any succeeding
audits required until the Company's wind down process has been
completed. Accordingly, a resolution proposing the reappointment of
PwC as auditor will be put to the shareholders at the 2022 AGM.
Committee Evaluation
The Committee's activities form part of the performance
evaluation that will be carried out by the Board.
Jonathan Bridel
Chairman of the Audit Committee
26 July 2022
DIRECTORS' REMUNERATION REPORT
The Board has established a Remuneration and Nominations
Committee which met once during the current financial year.
Composition
The Remuneration and Nominations Committee was formed on 28
September 2015, comprising all the members of the Board. The Board
has appointed Richard Boléat as Chairman of the Committee.
The Directors and Company Secretary are the only officers of the
Company. Copies of the Directors' letters of appointment are
available upon request from the Company Secretary at the registered
office and will be available for inspection at the AGM. The Company
Secretary is engaged under a Company Secretarial Agreement with the
Company. The Company has no employees.
The Directors are each entitled to serve as non-executive
Directors on the boards of other companies and to retain any
earnings from such appointments.
Responsibilities
The primary responsibilities of the Committee are:
-- determine and agree with the Board the framework or broad
policy for the remuneration of the Company's Chairman and
non-executive directors pursuant to the Company's Articles of
Incorporation;
-- review the ongoing appropriateness and relevance of the remuneration policy;
-- ensure that contractual terms on termination, and any
payments made, are fair to the individual and the Company, that
failure is not rewarded and that the duty to mitigate loss is fully
recognised;
-- annually review the structure, size and composition
(including the skills, knowledge and experience) required of the
Board compared to its current position and make recommendations to
the Board with regard to any changes as necessary;
-- give full consideration to succession planning of directors,
taking into account the challenges and opportunities facing the
Company, and what skills and expertise are therefore needed on the
Board in the future; and
-- keep under review the leadership needs of the Company with a
view to ensuring the continued ability of the Company to compete
effectively in the Platform.
Remuneration Policy
In setting the Company's remuneration policy, the Remuneration
and Nominations Committee has sought (so far as it considers
appropriate for a company with a non-executive Board) to align the
interests of the Board with those of the Company and to incentivise
the Directors to help the Company to achieve its investment
objective.
The Directors shall be paid such remuneration by way of fees for
their services as is defined in each of the Directors' letters of
appointment. Under the terms of their appointments as non-executive
Directors of the Company, the Directors (other than Sachin Patel
who has waived his entitlement to an annual fee) are entitled to
the following annual fees:
Annual fee Notes
GBP
--------------------- ----------- ----------------------------------
Frederic Hervouet 40,000 Chairman of the Risk
Committee
Jonathan Bridel 40,000 Chairman of the Audit
Committee
Richard Boléat 50,000 Chairman of the Board
and Chairman of the Remuneration
and Nominations Committee
Richard Burwood 30,000 Chairman of the Management
Engagement Committee
Sachin Patel - Waived annual Director's
fee
--------------------- ----------- ----------------------------------
160,000
--------------------- ----------- ----------------------------------
The Directors are not entitled to any other fixed or variable
remuneration.
No Director has a service contract with the Company, nor are any
such contracts proposed. The retirement, disqualification and
removal provisions relating to the Directors (in their capacity as
Directors) are set out in their letters of appointment.
No annual bonus will be paid to any Director and the Company
does not operate a long-term incentive plan.
The Directors are entitled to be repaid by the Company all
properly incurred out-of-pocket expenses reasonably incurred in the
execution of their duties.
In setting the level of each non-executive Director's fees, the
Company has had regard to; the time commitments expected, the level
of skill and experience of each Director, the current market, the
fee levels of companies of similar size and complexity.
On termination of their appointment, Directors shall only be
entitled to such fees as may have accrued to the date of
termination, together with reimbursement in the normal way of any
expenses properly incurred prior to that date. If the Board
considers it appropriate to appoint a new director, the new
director remuneration will comply with the current policy.
Directors' remuneration and Share interests
The total remuneration of the Directors for the year ended 31
March 2022 was as follows:
31 March 31 March
2022 2021
GBP GBP
--------------------- --------- ---------
Frederic Hervouet 40,000 40,000
Jonathan Bridel 40,000 40,000
Richard Boléat 50,000 50,000
Richard Burwood 30,000 37,257
160,000 167,257
--------------------- --------- ---------
There were no other items in the nature of remuneration, pension
entitlements or incentive scheme arrangements which were paid or
accrued to the Directors during this year.
As at 31 March 2022, the Director held the following Ordinary
shares, representing the below voting rights.
31 March 31 March 31 March 31 March
2022 2021 2022 2021
Shares held Shares held Voting Rights Voting Rights
% %
--------------------- ------------ ------------ -------------- --------------
Frederic Hervouet 35,504 92,041 0.0686 0.0316
Jonathan Bridel 25,286 65,552 0.0489 0.0225
Richard Boléat 7,025 13,554 0.0136 0.0047
Richard Burwood 13,409 24,784 0.0259 0.0085
81,224 195,931 0.1570 0.0673
--------------------- ------------ ------------ -------------- --------------
Directors who held shares during the year have received
dividends in line with the distribution made by the Company as
shown in note 13.
During the year no remuneration was received by any Director in
a form other than cash. Furthermore, no payments were made for loss
of office, other benefits or other compensation for extra services
to any Director or former Director of the Company.
The Company has no employees other than its Directors who are
all non-executive. When periodically considering the level of fees,
the Remuneration and Nominations Committee evaluates the
contribution and responsibilities of each Director and the time
spent on the Company's affairs. Following this evaluation, the
Committee will determine whether the fees as set out in the
Remuneration Policy continue to be appropriate. Although the
Company has not to date consulted shareholders on remuneration
matters, it has reviewed the remuneration of Directors of other
investment companies of similar size and complexity and to the
limits set out in the Company's Articles of Incorporation. The
Company welcomes any views the shareholders may have on its
remuneration policy.
Richard Boléat
Chairman of the Remuneration and Nominations Committee
26 July 2022
STATEMENT OF DIRECTORS' RESPONSIBILITIES
IN RESPECT OF THE FINANCIAL STATEMENTS
The Directors are responsible for preparing the Directors'
Report and the consolidated financial statements in accordance with
applicable law and regulations.
The Companies (Guernsey) Law, 2008 (as amended) requires the
Directors to prepare financial statements for each financial year
and under that law they have elected to prepare the consolidated
financial statements in accordance with IFRS as issued by the
International Accounting Standards Board ("IASB").
The consolidated financial statements are required by law to
give a true and fair view of the state of affairs of the Group and
of the profit or loss of the Group for that year.
In preparing these consolidated financial statements, the
Directors are required to:
-- Select suitable accounting policies and then apply them consistently;
-- Make judgements and estimates that are reasonable and prudent;
-- State whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the consolidated financial statements; and
-- Prepare the consolidated financial statements on the going
concern basis unless it is inappropriate to presume that the Group
will continue in business. As explained in note 2 to the financial
statements, the Directors do not believe the going concern basis to
be appropriate for the preparation of the financial statements of
the Group and accordingly the financial statements of the Group
have not been prepared on a going concern basis. No provision has
been made for the costs of winding up the Company as these will be
charged to the income statement on an accruals basis as they are
incurred or as the Company becomes obligated to make such payments
in the future. In the view of the Directors, such costs are likely
to be immaterial.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Group and to enable them to ensure that
the consolidated financial statements comply with The Companies
(Guernsey) Law, 2008 (as amended). They have general responsibility
for taking such steps as are reasonably open to them to safeguard
the assets of the Group and to prevent and detect fraud and other
irregularities.
The Directors confirm that they have complied with the above
requirements in preparing the consolidated financial statements and
that to the best of their knowledge and belief:
-- This annual report includes a fair review of the development
and performance of the business and the position of the Group
together with a description of the principal risks and
uncertainties that the Group faces;
-- The consolidated financial statements, prepared in accordance
with IFRS issued by the IASB and interpretations issued by the IFRS
Interpretations Committee, give a true and fair view of the assets,
liabilities, financial position and results of the Group; and
-- The annual report and consolidated financial statements,
taken as a whole, provide the information necessary to assess the
Group's position and performance, business model and strategy and
is fair, balanced and understandable.
Richard Boléat Jonathan Bridel
Chairman Chairman of the Audit Committee
26 July 2022 26 July 2022
Independent auditor's report to the members of SME Credit
Realisation Fund Limited
Report on the audit of the consolidated financial statements
Our opinion
In our opinion, the consolidated financial statements give a
true and fair view of the consolidated financial position of SME
Credit Realisation Fund Limited (the "company") and its
subsidiaries (together the "group") as at 31 March 2022, and of
their consolidated financial performance and their consolidated
cash flows for the year then ended in accordance with International
Financial Reporting Standards and have been properly prepared in
accordance with the requirements of The Companies (Guernsey) Law,
2008.
What we have audited
The group's consolidated financial statements comprise:
-- the consolidated statement of financial position as at 31 March 2022;
-- the consolidated statement of comprehensive income for the year then ended;
-- the consolidated statement of changes in shareholders' equity for the year then ended;
-- the consolidated statement of cash flows for the year then ended; and
-- the notes to the consolidated financial statements, which
include significant accounting policies and other explanatory
information.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing ("ISAs"). Our responsibilities under those
standards are further described in the Auditor's responsibilities
for the audit of the consolidated financial statements section of
our report.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the group in accordance with the ethical
requirements that are relevant to our audit of the consolidated
financial statements of the group, as required by the Crown
Dependencies' Audit Rules and Guidance. We have fulfilled our other
ethical responsibilities in accordance with these requirements.
Emphasis of matter - consolidated financial statements prepared
on a basis other than going concern
In forming our opinion on the consolidated financial statements,
which is not modified, we draw attention to note 2(c) of the
consolidated financial statements, the Directors' Report and to the
Viability Statement which describe the directors' reasons why the
consolidated financial statements have been prepared on a basis
other than going concern.
Our audit approach
Our audit of the group for the year ended 31 March 2022 was
planned and executed having considered the key activities of the
group during the year.
At the Extraordinary General Meeting on 11 June 2019 the
shareholders of the company voted to amend the company's investment
objective and policy to implement a managed wind-down of the
company by means of natural amortisation of the company's
investments in loans advanced as well as potential, opportunistic
portfolio sales.
Considering the stage of the wind-down and the average remaining
contractual term of the loan portfolio the use of the going concern
basis in preparing the consolidated financial statements was
determined to no longer be appropriate by the directors.
The Group's investment in the EIB structured finance transaction
that had been classified as a financial asset at fair value through
profit or loss was also settled during the year after the leverage
in the structure was paid down and settled through consideration of
the transfer of the loan assets at their fair value to the group
(the "EIB transaction"). The transferred loan assets have been
subsequently measured at fair value through other comprehensive
income in the consolidated financial statements at 31 March
2022.
Other than the key activities noted above our assessment is that
the primary operations of the group remained largely unchanged from
the prior year up until 31 March 2022.
Overview
Audit scope
-- The company is based in Guernsey, with subsidiaries located
in Ireland, and engages Funding Circle Ltd (the "Portfolio
Administrator") to administer its loan portfolio. The consolidated
financial statements are a consolidation of the company and all its
subsidiaries.
-- We conducted our audit of the consolidated financial
statements using information provided by Sanne Group (Guernsey)
Limited (the "Administrator"), to whom the board of directors has
delegated the provision of certain functions. We also had
significant interaction with the Portfolio Administrator in
completing aspects of our overall audit work.
-- We conducted our audit work in Guernsey and we tailored the
scope of our audit, taking into account the types of investments
within the group, the involvement of the third parties referred to
above, the accounting processes and controls, and the industry in
which the group operates.
Key audit matters
Valuation of loans advanced
Materiality
-- Overall group materiality: GBP 1.3 million (2021: GBP 3
million) based on 2.5% of consolidated net assets (2021: 2.5% of
consolidated net assets).
-- Performance materiality: GBP 1.0 million (group).
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the consolidated
financial statements. In particular, we considered where the
directors made subjective judgements; for example, in respect of
significant accounting estimates that involved making assumptions
and considering future events that are inherently uncertain. As in
all of our audits, we also addressed the risk of management
override of internal controls, including among other matters,
consideration of whether there was evidence of bias that
represented a risk of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the
consolidated financial statements of the current period and include
the most significant assessed risks of material misstatement
(whether or not due to fraud) identified by the auditors, including
those which had the greatest effect on: the overall audit strategy;
the allocation of resources in the audit; and directing the efforts
of the engagement team. These matters, and any comments we make on
the results of our procedures thereon, were addressed in the
context of our audit of the consolidated financial statements as a
whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters.
This is not a complete list of all risks identified by our
audit.
Key audit matter How our audit addressed the
key audit matter
Valuation of loans advanced We understood and assessed the
Refer to Note 2 to the consolidated methodology and assumptions applied
financial statements, Note 3 in determining the fair value
to the consolidated financial of loans advanced and related
statements, Note 4 to the consolidated expected credit losses, by reference
financial statements and Audit to accounting standards and industry
Committee Report. practice.
Loans advanced are recorded at We obtained an understanding
fair value through other comprehensive of the design of the fair value
income ("FVTOCI") in the consolidated models developed by management's
statement of financial position experts and assessed whether
and amounted to GBP37.4 million the approach is in accordance
as at 31 March 2022. with recognised industry methodology.
They represent the largest balance We understood and evaluated the
in the consolidated statement internal controls relating to
of financial position. Furthermore, the reconciliation, accounting
the FVTOCI basis of measurement and reporting of loans advanced.
under IFRS 9 mandates that the
directors evaluate the expected Our procedures related to the
credit losses on the loan portfolio data used in the determination
and account for them through of the fair value of loans included:
the profit and loss, with movements * testing the integrity of the data used in the fair
on fair value going through other value and expected credit loss models and its
comprehensive income. completeness and accuracy, including loans advanced
which were transferred as part of the EIB
The valuation of loans advanced, transaction;
and related expected credit losses
are subject to significant estimates
and judgements applied by the * discussing the logic of the fair value models to
directors such that changes to understand the application of discounted cash flow
key inputs to the estimates and methodology;
judgements made can result in
material changes to their valuation.
* assessing the accuracy of forecasting by comparing
the historical forecasted cash flows in the valuation
models to the actual figures, as well as considering
expected credit losses and default history compared
to previous assumptions; and
* testing the inputs in the loan models, including
interest rates and loan maturity, and agreeing to the
legal loan documentation on a sample basis.
With the assistance of PwC valuation
experts, we assessed whether
the valuation approach used by
management's expert is in accordance
with recognised industry methodology
and recalculated the net present
value of the loan portfolios
by applying the assumptions used
by management's expert in our
own valuation model.
We then analysed the performance
reports of the loan portfolio
to better understand the performance
of the underlying loans to identify
and consider the key
assumptions used to determine
the fair value of the loans and
the related expected credit loss.
Our testing included the following:
* reviewed and challenged, as appropriate,
reasonableness of macroeconomic assumptions,
selection of economic scenarios, prepayment rates,
probabilities of default rates, loss given default,
exposure at default, recovery rates and discount
margins applied in the various models by benchmarking
these to independent market data and knowledge;
* assessed key assumptions used, such as those relating
to when a significant increase in credit risk has
occurred; and
* reviewed and analysed macroeconomic scenarios
developed by management, and assessed whether they
are consistent with the loan portfolio modelling and
evaluated multipliers applied to individual loan
probability of default rates such that overall gross
losses for the portfolio are in line with portfolio
model expectations.
We concluded that the recording
of loans advanced at fair value
through other comprehensive income
was consistent with the accounting
policies and that the models
and assumptions used to calculate
the expected credit loss provision
(recognised in profit or loss)
and the movement in fair value
(recognised in other comprehensive
income) was supported by appropriate
evidence.
------------------------------------------------------------------
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the consolidated
financial statements as a whole, taking into account the structure
of the group, the accounting processes and controls, and the
industry in which the group operates.
We have considered whether the consolidated subsidiary entities
included within the group comprise separate components for the
purpose of our audit scope. However, we have taken account of the
group's financial reporting system and the related controls in
place at the Administrator and Portfolio Administrator, and based
on our professional judgement have tailored our audit scope to
account for the group's consolidated financial statements as a
single component.
The company is based in Guernsey with three underlying
subsidiaries located in Ireland. The consolidated financial
statements are a consolidation of the company and all underlying
subsidiaries.
Scoping was performed at the group level, irrespective of
whether the underlying transactions took place within the company
or within the subsidiaries. The group audit was led, directed and
controlled by PricewaterhouseCoopers CI LLP and audit work for
material items within the consolidated financial statements was
performed in Guernsey by PricewaterhouseCoopers CI LLP. All
subsidiaries and the parent that make up the group were in scope
for our audit procedures over the consolidated financial
statements.
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating
the effect of misstatements, both individually and in aggregate on
the consolidated financial statements as a whole.
Based on our professional judgement, we determined materiality
for the consolidated financial statements as a whole as
follows:
Overall group materiality GBP 1.3 million (2021: GBP 3 million).
How we determined 2.5% of consolidated net assets
it
---------------------------------------------
Rationale for benchmark We believe that consolidated net assets are
applied the most appropriate benchmark
because this is the key metric of interest
to investors. It is also a generally
accepted measure used for companies in this
industry.
---------------------------------------------
We use performance materiality to reduce to an appropriately low
level the probability that the aggregate of uncorrected and
undetected misstatements exceeds overall materiality. Specifically,
we use performance materiality in determining the scope of our
audit and the nature and extent of our testing of account balances,
classes of transactions and disclosures, for example in determining
sample sizes. Our performance materiality was 75% (2021: 75%) of
overall materiality, amounting to GBP 1.0 million (2021: GBP 2.2
million) for the group financial statements.
In determining the performance materiality, we considered a
number of factors - the history of misstatements, risk assessment
and aggregation risk and the effectiveness of controls - and
concluded that an amount at the upper end of our normal range was
appropriate.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP 65,000 (2021:
GBP 149,000) as well as misstatements below that amount that, in
our view, warranted reporting for qualitative reasons.
Reporting on other information
The other information comprises all the information included in
the Annual Report and Audited Consolidated Financial Statements
(the "Annual Report") but does not include the consolidated
financial statements and our auditor's report thereon. The
directors are responsible for the other information.
Our opinion on the consolidated financial statements does not
cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is
materially inconsistent with the consolidated financial statements
or our knowledge obtained in the audit, or otherwise appears to be
materially misstated. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report based on these responsibilities.
Responsibilities for the consolidated financial statements and
the audit
Responsibilities of the directors for the consolidated financial
statements
As explained more fully in the Statement of Directors'
Responsibilities, the directors are responsible for the preparation
of the consolidated financial statements that give a true and fair
view in accordance with International Financial Reporting
Standards, the requirements of Guernsey law and for such internal
control as the directors determine is necessary to enable the
preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the
directors are responsible for assessing the group's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but
to do so. See note 2 c) to the consolidated financial statements,
which refers to the directors' conclusion on preparing the
consolidated financial statements on a basis other than going
concern.
Auditor's responsibilities for the audit of the consolidated
financial statements
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue
an auditor's report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated
financial statements.
Our audit testing might include testing complete populations of
certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited
number of items for testing, rather than testing complete
populations. We will often seek to target particular items for
testing based on their size or risk characteristics. In other
cases, we will use audit sampling to enable us to draw a conclusion
about the population from which the sample is selected.
As part of an audit in accordance with ISAs, we exercise
professional judgement and maintain professional scepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide
a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal
control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the group's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by the directors.
-- Conclude on the appropriateness of the directors' use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the group's
ability to continue as a going concern over a period of at least
twelve months from the date of approval of the consolidated
financial statements. If we conclude that a material uncertainty
exists, we are required to draw attention in our auditor's report
to the related disclosures in the consolidated financial statements
or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date
of our auditor's report.
-- Evaluate the overall presentation, structure and content of
the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair
presentation.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the group to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for
our audit opinion.
We communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide those charged with governance with a statement
that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with those charged with
governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements
of the current period and are therefore the key audit matters. We
describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in
extremely rare circumstances, we determine that a matter should not
be communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
Use of this report
This report, including the opinions, has been prepared for and
only for the members as a body in accordance with Section 262 of
The Companies (Guernsey) Law, 2008 and for no other purpose. We do
not, in giving these opinions, 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.
Report on other legal and regulatory requirements
Corporate Law exception reporting
Under The Companies (Guernsey) Law, 2008 we are required to
report to you if, in our opinion:
-- we have not received all the information and explanations we require for our audit;
-- proper accounting records have not been kept; or
-- the consolidated financial statements are not in agreement with the accounting records.
We have no exceptions to report arising from this
responsibility.
Corporate governance Statement
The Listing Rules require us to review the directors' statements
in relation to going concern, longer-term viability and that part
of the corporate governance statement relating to the company's
compliance with the provisions of the UK Corporate Governance Code
specified for our review. Our additional responsibilities with
respect to the corporate governance statement as other information
are described in the Reporting on other information section of this
report.
The company has reported compliance against the 2019 AIC Code of
Corporate Governance (the "Code") which has been endorsed by the UK
Financial Reporting Council as being consistent with the UK
Corporate Governance Code for the purposes of meeting the company's
obligations, as an investment company, under the Listing Rules of
the FCA.
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the corporate
governance statement, included within the Strategic Report and the
Directors' Report is materially consistent with the consolidated
financial statements and our knowledge obtained during the audit,
and, other than the matter referred to in the Emphasis of matter
paragraph above which impacts on the directors' statements about
going concern and their assessment of the group's prospects, we
have nothing material to add or draw attention to in relation
to:
-- The directors' confirmation that they have carried out a
robust assessment of the emerging and principal risks;
-- The disclosures in the Annual Report that describe those
principal risks, what procedures are in place to identify emerging
risks and an explanation of how these are being managed or
mitigated;
-- The directors' statement in the consolidated financial
statements about whether they considered it appropriate to adopt
the going concern basis of accounting in preparing them, and their
identification of any material uncertainties to the group's ability
to continue to do so over a period of at least twelve months from
the date of approval of the consolidated financial statements;
-- The directors' explanation as to their assessment of the
group's prospects, the period this assessment covers and why the
period is appropriate; and
-- The directors' statement as to whether they have a reasonable
expectation that the company will be able to continue in operation
and meet its liabilities as they fall due over the period of its
assessment, including any related disclosures drawing attention to
any necessary qualifications or assumptions.
In addition, based on the work undertaken as part of our audit,
we have concluded that each of the following elements of the
corporate governance statement is materially consistent with the
consolidated financial statements and our knowledge obtained during
the audit:
-- The directors' statement that they consider the Annual
Report, taken as a whole, is fair, balanced and understandable, and
provides the information necessary for the members to assess the
group's position, performance, business model and strategy;
-- The section of the Annual Report that describes the review of
effectiveness of risk management and internal control systems;
and
-- The section describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to
report when the directors' statement relating to the company's
compliance with the Code does not properly disclose a departure
from a relevant provision of the Code specified under the Listing
Rules for review by the auditors.
Other matter
As required by the Financial Conduct Authority Disclosure
Guidance and Transparency Rule 4.1.14R, these consolidated
financial statements will form part of the ESEF-prepared annual
financial report filed on the National Storage Mechanism of the
Financial Conduct Authority in accordance with the ESEF Regulatory
Technical Standard ("ESEF RTS"). This auditor's report provides no
assurance over whether the annual financial report will be prepared
using the single electronic format specified in the ESEF RTS.
Tony Corbin
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
26 July 2022
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARED 31 MARCH 2022
2022 2021
Notes GBP GBP
---------------------------------- ------ -------------- ------------
Operating income
Interest income on loans
advanced 4 6,398,665 14,715,117
Interest income on class
B notes 5 1,691,666 -
Net realised gain on financial
assets at fair value through
profit or loss 5 560,098 5,141,217
Unrealised gain on foreign
exchange 16 1,057,767 -
Bank interest income 3,452 21,409
Gain on sale of non-performing
loans - 605,402
----------------------------------- ------ -------------- ------------
Total operating income 9,711,648 20,483,145
----------------------------------- ------ -------------- ------------
Operating expenditure
(Reversal of)/additional
impairment of loans 4 (7,342,224) 11,936,141
Net realised losses on foreign
currency derivatives 16 - 2,742,932
Loan servicing fees 15 596,575 1,319,418
Company administration and
secretarial fees 15 215,303 314,229
Directors' remuneration
and expenses 14 160,425 167,267
Audit, audit-related and
non-audit related fees 15 210,448 260,546
Corporate broker services 35,000 50,000
Corporate services fees 15 91,257 184,969
Registrar fees 75,516 86,796
Regulatory fees 51,141 59,060
Loan interest expense - 63,600
Legal and professional fees 16,014 304,548
Commitment fee - 187,500
Other operating expenses 218,779 385,611
----------------------------------- ------ -------------- ------------
Total operating expenditure (5,671,766) 18,062,617
----------------------------------- ------ -------------- ------------
Operating income for the
year before taxation 15,383,414 2,420,528
Taxation for the year 11 (500) (348,809)
----------------------------------- ------ -------------- ------------
Operating income after
taxation for the year 15,382,914 2,071,719
----------------------------------- ------ -------------- ------------
Other comprehensive income:
Items that may be reclassified
to profit or loss
(Loss)/gain on movement
in fair value of loans advanced 4 (2,248,378) 2,507,892
----------------------------------- ------ -------------- ------------
Total comprehensive income
for the year 13,134,536 4,579,611
----------------------------------- ------ -------------- ------------
Other comprehensive income
The other comprehensive income recognised above relates to the
unrealised (loss)/gain on the movement in fair valuation of the
Group's portfolio of loans advanced.
There were no other items of other comprehensive income in the
current or prior year.
The accompanying notes form part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2022
31 March 31 March 2021
2022
Notes GBP GBP
---------------------------------------- ------ -------------- --------------
ASSETS
Cash and cash equivalents 7 15,183,371 30,784,718
Other receivables and prepayments 23,550 9,870
Fair value of currency derivatives 8 - 768,964
Financial asset at fair value
through profit or loss 5 - 5,141,217
Loans advanced 4 37,403,665 83,355,445
TOTAL ASSETS 52,610,586 120,060,214
---------------------------------------- ------ -------------- --------------
EQUITY AND LIABILITIES
CAPITAL AND RESERVES
Share capital 10 81,313,389 157,513,148
Retained deficit (29,500,141) (40,782,264)
Other reserves 259,514 2,507,892
---------------------------------------- ------ -------------- --------------
TOTAL SHAREHOLDERS' EQUITY 52,072,762 119,238,776
---------------------------------------- ------ -------------- --------------
LIABILITIES
Fair value of currency derivatives 8 191,363 -
Accrued expenses and other liabilities 9 346,461 821,438
---------------------------------------- ------ -------------- --------------
TOTAL LIABILITIES 537,824 821,438
---------------------------------------- ------ -------------- --------------
TOTAL EQUITY AND LIABILITIES 52,610,586 120,060,214
---------------------------------------- ------ -------------- --------------
NAV per share outstanding 100.62p 88.87p
---------------------------------------- ------ -------------- --------------
The consolidated financial statements were approved and
authorised for issue by the Board of Directors on 26 July 2022 and
were signed on its behalf by:
Richard Boléat Jonathan Bridel
Chairman Chairman of the Audit Committee
The accompanying notes form part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARED 31 MARCH 2022
Retained
Share capital Other reserves deficit Total
Notes GBP GBP GBP GBP
------------------- ------ -------------- ----------------------------------------- -------------- --------------
Balance at 1 April
2021 157,513,148 2,507,892 (40,782,264) 119,238,776
Operating profit
after
taxation - - 15,382,914 15,382,914
Other
comprehensive
loss - (2,248,378) - (2,248,378)
Transactions with
owners in their
capacity
as owners:
Compulsory
redemption
of ordinary
shares 10 (76,199,759) - - (76,199,759)
Dividends
declared 13 - - (4,100,791) (4,100,791)
Balance at 31
March
2022 81,313,389 259,514 (29,500,141) 52,072,762
------------------- ------ -------------- ----------------------------------------- -------------- --------------
Balance at 1 April
2020 263,017,723 - (33,007,021) 230,010,702
Operating profit
after taxation - - 2,071,719 2,071,719
Other comprehensive
income - 2,507,892 - 2,507,892
Transactions
with owners in
their capacity
as owners:
Compulsory
redemption
of ordinary shares 10 (105,499,718) - - (105,499,718)
Share repurchases 10 (4,857) - - (4,857)
Dividends declared 13 - - (9,846,962) (9,846,962)
Balance at 31
March 2021 157,513,148 2,507,892 (40,782,264) 119,238,776
--------------------- ------ -------------- --------------------------------------- -------------- --------------
The accompanying notes form part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARED 31 MARCH 2022
2022 2021
Notes GBP GBP
--------------------------------------------- ------ ------------- --------------
Operating activities
Operating income for the year before
taxation 15,383,414 2,420,528
Adjustments for:
Foreign exchange (gain)/loss 16 (3,731,985) 5,295,103
Interest income on loans advanced 4 (6,398,665) (14,715,117)
Interest income on class B notes 5 (1,691,666) -
Net gain on financial assets at fair
value through profit or loss 5, 16 (560,098) (5,141,217)
(Reversal of impairment)/impairment
of loans 4 (7,342,224) 11,936,141
Fair value movement of currency derivatives 16 960,327 (4,169,664)
--------------------------------------------- ------ ------------- --------------
Operating cash flows before movements
in working capital (3,380,897) (4,374,226)
Loans advanced - -
Principal and interest collections
on loans advanced 4 64,543,722 118,670,288
Principal and interest collections
on financial asset at fair value
through profit or loss 5* 1,568,666 -
(Increase)/decrease in other receivables
and prepayments (13,682) 38,663
Decrease in accrued expenses and
other liabilities (475,476) (1,329,795)
Net cash generated from operating
activities 62,242,333 113,004,930
--------------------------------------------- ------ ------------- --------------
Financing activities
Loans issued - -
Loans repayment paid - (11,531,076)
Dividends paid 13 (4,100,791) (9,846,962)
Repurchase of shares 10 - (4,857)
Compulsory redemption of shares 10 (76,199,759) (105,499,718)
--------------------------------------------- ------ ------------- --------------
Net cash used in financing activities (80,300,550) (126,882,613)
--------------------------------------------- ------ ------------- --------------
Net decrease in cash and cash equivalents (18,058,217) (13,877,683)
Cash and cash equivalents at the
beginning of the year 30,784,718 46,602,238
Foreign exchange gain on cash and
cash equivalents 2,456,870 (1,939,837)
Cash and cash equivalents at the
end of the year 15,183,371 30,784,718
--------------------------------------------- ------ ------------- --------------
Reconciliation of movement in net debt
Liabilities Cash Net Debt
-------------------------- ------------- ------------- -------------
Opening balance as at
1 April 2021 - 30,784,718 30,784,718
Cash movement during the
year - (15,601,347) (15,601,347)
-------------------------- ------------- ------------- -------------
Closing balance as at
31 March 2022 - 15,183,371 15,183,371
-------------------------- ------------- ------------- -------------
*In October 2021, the Company was eligible for a GBP1,691,666
interest distribution from the EIB transaction after settlement of
the senior leverage in the vehicle. The payment received was net of
GBP123,000 which was retained in the vehicle to cover liquidation
costs of Finch Lending Designated Activity Company Limited and a
portfolio of SME loans valued at GBP5,824,315 as settlement of its
investment in the EIB transaction. This portfolio of loans was
allocated within Basinghall loans advanced in return for notes
issued in Basinghall. (discussed in more detail in note 4 and
5)
The accompanying notes form part of these consolidated financial
statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARED 31 MARCH 2022
1. GENERAL INFORMATION
The Company is a closed-ended limited liability company
incorporated under The Companies (Guernsey) Law, 2008 (as amended)
with registration number 60680. The Company is a registered and
closed ended investment scheme in Guernsey and admitted to trading
on the London Stock Exchange's Main Market and listed on the United
Kingdom Listing Authority ("UKLA's") premium segment. The Company's
home member state for the purposes of the EU Transparency Directive
is the United Kingdom. As such, the Company is subject to
regulation and supervision by the Financial Conduct Authority,
being the financial markets supervisor in the United Kingdom. The
registered office of the Company is De Catapan House, Grange Road,
St Peter Port, Guernsey GY1 2QG.
The Company was established to provide shareholders with
sustainable and attractive levels of dividend income, primarily by
way of investment in loans originated both directly through the
Platforms operated by Funding Circle and indirectly, in each case
as detailed in the investment policy. The Company identified
Funding Circle as a leader in the growing Platform lending space
with its established infrastructure, scale of origination volumes
and expertise in accurately assessing loan applications.
On 21 May 2019, the Company published a circular and notice of
extraordinary general meeting ("EGM") which sets out details of,
and sought shareholder approval for, certain Proposals. The
Proposals involved modifying the Company's Investment Objective and
Policy to reflect a realisation strategy and amending its Articles
to include a mechanism to enable the Company to redeem shares in
the Company compulsorily so as to return cash to shareholders.
On 11 June 2019, the Proposals were approved at the EGM as
discussed in detail in the Strategic Report.
The Company publishes net asset value statements on its website
at www.smecreditrealisation.com.
2. BASIS OF PREPARATION
a) Statement of compliance
The consolidated financial statements, which give a true and
fair view, have been prepared in accordance with International
Financial Reporting Standards ("IFRS") as promulgated by the
International Accounting Standards Board and are in compliance with
The Companies (Guernsey) Law, 2008 (as amended).
The Directors of the Company have elected to only prepare
consolidated financial statements for the year under Section 244 of
The Companies (Guernsey) Law 2008 (as amended).
Assets and liabilities of the Group have been presented in the
Statement of Financial Position in their order of liquidity as
permitted by International Accounting Standard 1, Presentation of
Financial Statements.
On 5 April 2019, the Company announced that following
consultation with shareholders accounting for over two thirds of
the register, the Board acknowledged their preference to cease
investment in new Credit Assets and commence a process to return
capital in an orderly and expeditious manner with the objective of
optimising returns to shareholders.
As noted above, the Company published a circular and notice of
EGM which sets out details of, and sought shareholder approval for,
certain Proposals. On 11 June 2019, the shareholders approved the
Proposals which resulted in, amongst other things, the change to
the Company's Investment Policy and Objective to achieve a managed
wind-down of the Company.
As a result of the Company's managed wind-down and exploration
of portfolio sales, for the purposes of accounting, the Company's
business model was deemed to have changed from hold to collect to
hold to collect and sell during the 31 March 2020 financial year
end. The Company is therefore required to report under fair value
accounting for the valuation of Credit Assets from 1 April 2020.
This change in methodology is discussed further in note 16.
The Directors have considered the state of the wind-down and the
average remaining contractual term of the loan portfolio and
determined that the use of the going concern basis in preparing the
financial statements of the Group is no longer appropriate. Please
refer to the Going Concern section of Note 2 for further detail on
the conclusion reached above.
In light of the rapid run off of the loan portfolio, the
repayment of the leverage in the structure and in the interests of
maximising returns to shareholders before the running costs of the
structure become disproportionate to the NAV and while the loans
remain at an attractive size to potential buyers, the Company will
actively seek to enter discussions for the potential disposal of
its loan portfolios in whole where pricing levels are attractive.
In light of this it is expected that the Company will sell the loan
portfolio and begin a liquidation process within twelve months of
signing this report and as a result the Company's results have been
prepared on a basis other than going concern. At the date of these
financial statements the carrying value of the assets and
liabilities are representative of the net realisable value and
therefore no adjustments are needed to reflect the managed
wind-down and preparation on a basis other than going concern.
New Accounting Standards, amendments to existing Accounting
Standards and/or interpretations of existing Accounting Standards
(separately or together, "New Accounting Requirements") adopted in
the current year
In the Directors' opinion, all non-mandatory New Accounting
Requirements are either not yet permitted to be adopted, or would
have no material effect on the reported performance, financial
position or disclosures of the Group and consequently have neither
been adopted nor listed.
b) Basis of measurement and consolidation
These consolidated financial statements have been prepared on a
historical cost basis, as modified by the valuation of derivative
financial instruments and the Company's investment in the EIB
transaction at fair value through profit or loss and for the period
beginning 1 April 2020, the loans advanced at fair value through
other comprehensive income. The methods used to measure fair value
are further disclosed in note 16.
The Company owns 100% of the Profit Participating Notes issued
by Basinghall, Tallis and Queenhithe . Basinghall, Tallis and
Queenhithe are companies incorporated in the Republic of
Ireland.
Basinghall used to own the Notes issued by Lambeth and
Queenhithe. In 2020, both Lambeth and Queenhithe transferred their
portfolios of Credit Assets to Basinghall for amounts equal to the
outstanding amount of principal and accrued interest, with EUR 1
principal amount outstanding on the class B Notes issued. The
liquidation process was completed for Lambeth in July 2021 whilst
this remains ongoing for Queenhithe as at 31 March 2022. Any
residual cash remaining after the settlement of all outstanding
liabilities for each entity is payable to Basinghall.
The Directors believe that the Company's ownership of the Profit
Participating Notes issued by Basinghall, Tallis and Queenhithe
constitute control as it exposes the Company to variability of
returns from its involvement with the financial and operating
activities of these entities. Therefore, these financial statements
have been prepared on a consolidated basis.
Intercompany transactions including intercompany gains and
losses on currency translation between the Company and its
subsidiaries were eliminated in the consolidation process.
c) Going concern
In addition to the detail in Note 2(a), The Directors have
considered the state of the wind-down and the average remaining
contractual term of the loan portfolio and determined that the use
of the going concern basis in preparing the financial statements of
the Group is no longer appropriate. As such, the financial
statements have been prepared on a basis other than going concern,
under which the assets are measured at their net realisable
value.
There were no adjustments made to the carrying values of the
assets and liabilities of the Group in the current year as a result
of this change in basis of preparation. The Directors consider the
carrying values in the balance sheet at the date of these financial
statements are deemed to be realisable values, based on fair
value.
There were no provisions for winding up costs recognised in the
current financial year as these will be charged on an accruals
basis as they are incurred or as the Group becomes obligated to
make payments in the future.
d) Functional and presentation currency
These consolidated financial statements are presented in Pound
Sterling, which is the functional currency of each of the entities
in the Group and the presentation currency of the Group. In the
Directors' opinion, Pound Sterling is the functional currency of
the Company, Basinghall, Lambeth and Queenhithe because
substantially all their financing and operating activities are
carried out in Pound Sterling. The Directors believe that the
functional currency of Tallis is Pound Sterling as its operations
are carried out as an extension of the Company's operations. The
Group hedges the projected cash flows from its US dollar and Euro
investments such that its principal exposure is to Pound
Sterling.
e) Use of estimates and judgements
The preparation of financial statements in accordance with IFRS
requires the Board to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts of
assets and liabilities and income and expenses. The estimates and
associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making the
judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates.
The estimates and underlying assumptions are reviewed on a
quarterly basis by the Board. Revisions to accounting estimates are
recognised in the year in which the estimate is revised if the
revision affects only that year, or in the year of the revision and
future years if the revision affects both current and future
years.
In particular, information about significant areas of estimation
uncertainty and critical judgements in applying accounting policies
that have the most significant effect on the amounts recognised in
the consolidated financial statements are included in the
following:
Judgements
-- Note 2(b) - The assumption that the Company's business model
of holding Credit Assets to collect is no longer deemed
appropriate. As a result of the Company's managed wind-down and
potential portfolio disposals, the Company's business model has
changed from hold to collect to hold to collect and sell from 1
April 2020.
-- Note 2(c) - The basis of preparation being that other than going concern.
-- Note 2(d) - Tallis has its primary assets and liabilities
denominated in Euro. The Directors assessed whether the functional
currency is the Euro or Pound Sterling. The subsidiary's operations
are considered to be an extension of the operations of the Company
and therefore the Directors believe that the appropriate functional
currency for the subsidiary is Pound Sterling, the functional
currency of the Company.
-- Note 2(b) - The accounting treatment of Queenhithe as
consolidated subsidiary based on the assessment that the Company
still maintains an element of control following the transfer of the
entity's loan portfolio to Basinghall and still maintains the right
to variability of returns from its involvement with the financial
and operating activities indirectly of Queenhithe throughout the
process of liquidation.
-- Note 3(k) - The Directors assessed whether the Group had a
single operating segment based on its original business model
(origination of loans) or several operating segments based on the
jurisdictions where loans were originated. After consideration of
the financial information that the Board regularly reviews in
making economic decisions, the Board concluded that operating
segments based on jurisdiction is a more appropriate basis.
Estimates
-- Note 2(b) - The Company has reported under fair value
accounting for the valuation of Credit Assets from 1 April 2020.
Therefore, these portfolios are recognised at fair value through
other comprehensive income and have been estimated by discounting
future cash flows expected to be received from the Credit Assets
(note 16).
-- Note 3(b) - The estimation of impairment of loans requires
judgement based on the model set out above. This utilises a
macroeconomic scenario developed specifically for COVID-19 and
consistent with portfolio modelling. Additionally, multipliers are
applied to individual loan PDs such that overall gross losses for
the portfolio are anchored to portfolio model expectations.
-- Note 16 - The determination of fair value of the Group's
investment in the EIB transaction requires estimation of future
cash flows and judgement on the appropriate market discount rate to
apply. The fair value of the EIB transaction had been estimated by
discounting future cash flows expected from the investment (note
16). However the EIB transaction was fully settled during the
current financial year.
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied
consistently throughout the year and the prior year.
a) Foreign transactions
Transactions in foreign currencies are initially translated at
the foreign currency exchange rate ruling at the date of the
transaction. Monetary assets and monetary liabilities denominated
in foreign currencies are translated to Pound Sterling at the
foreign currency closing exchange rate ruling at the reporting
date.
None of the Group entities have a functional currency different
to presentation currency.
b) Financial instruments
i) Classification and measurement
IFRS 9 requires financial assets to be classified into the
following measurement categories: (i) those measured at fair value
through profit or loss; (ii) those measured at fair value through
other comprehensive income; and, (iii) those measured at amortised
cost. The determination is made at initial recognition. Unless the
option to designate a financial asset as measured at fair value
through profit or loss is applicable, the classification depends on
the entity's business model for managing its financial instruments
and the contractual cash flow characteristics of the
instrument.
The Group classifies its financial instruments in the following
measurement categories:
-- fair value through profit or loss; or
-- amortised cost; or
-- fair value through other comprehensive income.
The Group holds debt instruments and derivative financial
instruments. Debt instruments are those that meet the definition of
a financial liability from the issuer's perspective, such as the
Group's loans advanced, investment in the EIB structured finance
transaction and loans payable. Classification and subsequent
measurement of these debt instruments depend on:
-- the Group's business model for managing the instrument; and
-- cash flow characteristics of the instrument.
Derivative financial instruments relate to the Group's forward
foreign exchange transactions that are covered in more detail later
in this note.
Amortised cost
Financial assets that are held for collection of contractual
cash flows where those cash flows represent solely payments of
principal and interest ("SPPI"), and that are not designated at
fair value through profit or loss, are measured at amortised cost.
The carrying amount of these assets is adjusted by any expected
credit loss allowance measured as described below. Interest income
from these financial assets is included in the 'interest income on
loans advanced'.
The Group's cash and cash equivalents and other receivables are
included in this category.
b) Financial instruments
Fair value through other comprehensive income
Financial assets that are held for collection of contractual
cash flows and for selling the assets, where the assets' cash flows
represent solely payments of principal and interest, and that are
not designated at fair value through profit or loss, are measured
at fair value through other comprehensive income. Movements in the
carrying amount are taken through other comprehensive income,
except for the recognition of impairment gains or losses, interest
revenue and foreign exchange gains and losses on the instrument's
amortised cost which are recognised in profit or loss.
Reclassification of loans advanced from financial assets at
amortised cost to financial assets at fair value through other
comprehensive income
For financial assets, reclassification is required between fair
value through other comprehensive income ("FVTOCI") and amortised
cost, if and only if the entity's business model objective for its
financial assets changes so its previous model assessment would no
longer apply.
If reclassification is appropriate, it must be done
prospectively from the reclassification date which is defined as
the first date of the first reporting year following the change in
business model. An entity does not restate any previously
recognised gains, losses, or interest.
The Group's loans advanced have been reclassified and now fall
within this category from 1 April 2020 due to the change in
business model during the year ended 31 March 2020. This is the
second reporting year showing the loans advanced at fair value
through other comprehensive income.
The fair value of the loans advanced has been estimated by
discounting expected future cash flows from the loans advanced
using a discount rate determined by the Directors based on
appropriate market comparatives and conditions. Refer to note 16
for further information.
Disposals
On disposal of any financial asset measured at FVTOCI, any
related balance within the FVTOCI reserve is reclassified to other
gains/(losses) within profit or loss.
Fair value through profit or loss
Assets that do not meet the criteria for amortised cost or fair
value through other comprehensive income are measured at fair value
through profit or loss. A gain or loss on a debt investment that is
subsequently measured at fair value through profit or loss and is
not part of a hedging relationship is recognised in profit or loss
within 'net income on financial asset at fair value through profit
or loss'. Interest income from these financial assets is included
within the same line using the effective interest rate method.
The Group's investment in the EIB structured finance transaction
fell within this category and was measured at fair value through
profit or loss as this investment had exposure to returns that were
affected by the profitability of the underlying SPV. The Directors
believe that the contractual cash flows were not solely linked to
payments of principal and interest consistent with a basic lending
arrangement.
ii) Impairment of financial assets
At initial recognition, an impairment allowance is required for
expected credit losses ("ECL") on financial assets measured at
amortised cost and debt instruments measured at FVTOCI resulting
from possible default events within the next 12 months. When an
event occurs that increases the credit risk of the counterparty, an
allowance is required for ECL for possible defaults over the term
of the financial instrument. The change in credit risk of the
counterparty will also have an impact on the recognition of income
on the financial asset.
The model for estimating impairment losses calculates the ECL on
either a 12-month or lifetime basis depending on whether
significant increase in credit risk has occurred since initial
recognition or whether an asset is considered to be
credit-impaired.
These metrics used to calculate the 12-month and lifetime
expected credit losses are forecast for each loan for the next 12
months and to maturity, then a 12-month and lifetime expected
credit loss can be calculated. These future losses are discounted
at the Effective Interest Rate (EIR) individually for each
loan.
Probability of default scores are not updated for individual
loans post origination and thus cannot be used to indicate a
significant increase in credit risk, therefore stage 2 criteria is
based on loan payment performance. As a result, lifetime expected
credit losses are taken as an impairment for loans which have
missed a single payment within the last 6 months and are less than
91 days late.
The Group classifies that loans are 91 or more days late as
credit impaired or defaulted for which lifetime expected loss is
taken as an impairment charge. Stage 3 includes loans that have
fallen 91 or more days late as a result of forbearance measures
introduced in April 2020 as a response to COVID-19, which have not
been contractually defaulted. The treatment of defaulted loans is
the same as the Group's policy before adoption of IFRS 9 on 1 April
2018.
I f, in a subsequent year, the amount of the default allowance
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised (such as an
improvement in the debtor's credit rating), the reversal of the
previously recognised default allowance is recognised in the
Consolidated Statement of Comprehensive Income.
Where a loan is not recoverable, it is written off within the
related provision for loan impairment. Subsequent recoveries of
amounts previously written off are reflected against the impairment
losses recorded in the Consolidated Statement of Comprehensive
Income.
Use of forward-looking information
Forecast Probability of Default ("PD") for loans are adjusted to
take into account the current and future macroeconomic environment.
This method was previously based on a modelled relationship with
key macroeconomic variables, with forecasts for a base case
scenario and for multiple alternative scenarios.
iii) Financial asset at fair value through profit or loss
The Group's investment in the EIB structured finance transaction
was classified as a financial asset at fair value through profit or
loss. This investment had exposure to returns that were affected by
the profitability of the underlying SPV. This investment was
measured initially and subsequently at fair value with changes in
fair value recognised in the Consolidated Statement of
Comprehensive Income. During the year, the Group's investment in
the EIB structure was settled after the leverage in the structure
was paid down and was settled through consideration of the transfer
of the loan assets at their fair value to the Group, which are
subsequently measured at FVTOCI.
iv) Derivative financial instruments
The Group holds derivative financial instruments to minimise its
exposure to foreign exchange risks. Derivatives are classified as
financial assets or financial liabilities (as applicable) at fair
value through profit or loss. They are initially recognised at fair
value with attributable transaction costs recognised in the
Consolidated Statement of Comprehensive Income when incurred.
Subsequent to initial recognition, derivatives are measured at fair
value and changes therein are recognised in the Consolidated
Statement of Comprehensive Income. The fair values of derivative
transactions are measured at their market prices at the reporting
date.
v) Offsetting of financial instruments
Financial assets and financial liabilities are offset and the
net amount is reported within assets and liabilities where there is
a legally enforceable right to set-off the recognised amounts and
there is an intention to settle on a net basis, or realise the
asset and settle the liability simultaneously.
vi) Derecognition of financial instruments
Financial assets, or a portion thereof, are derecognised when
the contractual rights to receive the cash flows from the assets
have expired, or when they have been transferred and either (i) the
Group transfers substantially all the risks and rewards of
ownership, or (ii) the Group neither transfers nor retains
substantially all the risks and rewards of ownership and the Group
has not retained control.
There may be instances when the Group renegotiates or otherwise
modifies the contractual cash flows of loans to customers. When
this happens, the Group assesses whether or not the new terms are
substantially different to the original terms. If the terms are
substantially different, the Group derecognises the original
financial asset and recognises a 'new' asset initially at fair
value and recalculates a new effective interest rate for the
asset.
Financial liabilities and derivative financial instruments are
derecognised when they are extinguished or when the obligation
specified in the contract is discharged, cancelled or expired.
vii) Financial liabilities
In both the current and prior year, the Group's loans payable
and accrued expenses and other liabilities are classified as
subsequently measured at amortised cost. The Group does not hold
any financial liabilities that meet the criteria for subsequent
measurement at fair value through profit or loss.
c) Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and
highly liquid interest-bearing securities with original maturities
of three months or less.
d) Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of Ordinary shares are
recognised as a deduction from the proceeds.
Shares purchased by the Company during the year are held in
Treasury until cancelled and formally withdrawn on a quarterly
basis throughout the year.
e) Treasury shares
Treasury shares are classified as equity and are measured at
cost.
f) Earnings per share
The Company presents basic and diluted earnings per share
("EPS") data for its Ordinary shares. Basic EPS is calculated by
dividing the profit or loss attributable to Ordinary shareholders
by the weighted average number of Ordinary shares outstanding
during the year. The diluted EPS is calculated by adjusting the
profit or loss attributable to Ordinary shareholders for the
effects of all dilutive potential Ordinary shares. For further
details, see note 12.
g) Income
Income on loans held at FVTOCI is recognised under the effective
interest rate method, by reference to the principal outstanding and
at the effective interest rate applicable, which is the rate that
exactly discounts estimated future cash receipts through the
expected life of the loan to its net carrying amount on initial
recognition.
In calculating the effective interest rate, the Group estimates
cash flows considering all contractual terms of the financial
instrument but does not consider future credit losses. The
calculation includes all fees received and paid and costs borne
that are an integral part of the effective interest rate and all
premiums or discounts above or below market rates.
Bank interest and other income receivable are accounted for on
an accrual basis.
h) Expenses and fees
Expenses are accounted for on an accrual basis and are
recognised in the Consolidated Statement of Comprehensive
Income.
i) Taxation
The Company is classified as exempt for taxation purposes under
the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 (as
amended) and as such incurs a flat fee (presently GBP1,200 per
annum). No other taxes are incurred in Guernsey.
Basinghall, Tallis and Queenhithe are Irish resident companies
that are subject to corporation tax in Ireland at a rate of 25% on
their profits.
The tax currently payable by Basinghall, Tallis and Queenhithe
is based on the taxable profit of the companies for the year.
Taxable profit differs from net profit as reported in the
Consolidated Statement of Comprehensive Income because it excludes
items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or
deductible. The Group's liability for current tax is calculated
using tax rates that have been enacted or substantively enacted at
the reporting date.
Deferred tax is the tax expected to be payable or recoverable on
temporary differences between the carrying amounts of assets and
liabilities in the consolidated financial statements and the
corresponding tax bases used in the computation of taxable profit,
and is accounted for using the liability method. Deferred tax
liabilities are recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset is
realised based on tax rates that have been enacted or substantively
enacted at the Consolidated Statement of Financial Position
date.
The carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered.
j) Dividends payable
Dividends payable on the Company's shares are recognised in the
Consolidated Statement of Changes in Shareholders' Equity when
declared by the Directors or, where applicable, when approved by
the Shareholders. The Directors consider declaration of a dividend
on a quarterly basis, having regard to various considerations,
including the financial position of the Company. The payment of any
dividend by the Company is subject to the satisfaction of a
solvency test as required by The Companies (Guernsey) Law, 2008 (as
amended).
k) Segment reporting
An operating segment is a component of the Group that engages in
business activities from which it may earn revenues and incur
expenses. The Group has three operating segments based on
jurisdiction: UK, US and CE.
4. LOANS ADVANCED
31 March 2022 31 March 2021
At FVTOCI At FVTOCI
GBP GBP
-------------------------------------------------------------------------- -------------- -------------
Balance at the beginning of the year 83,355,445 200,094,129
Additions from settlement of EIB transaction* 5,824,315 -
Interest income 6,398,665 14,715,117
Principal and interest collections** (64,543,722) (118,670,288)
Impairment release/(allowance) for the year 7,342,224 (11,936,141)
Foreign exchange losses/(gains) 1,275,116 (3,960,666)
(Loss)/gain on movement in fair value through other comprehensive income (2,248,378) 2,507,892
Realised gain on sale of NPL loans - 605,402
--------------------------------------------------------------------------- -------------- -------------
Balance at the end of the year 37,403,665 83,355,445
--------------------------------------------------------------------------- -------------- -------------
*Loans consolidated within the EIB transaction are made up of
GBP22,808,956 principal and GBP16,984,641 expected credit
losses.
**The sale of non-performing loans by Basinghall in October 2020
is included within the principal and interest collections line.
The Group predominantly made unsecured loans in previous years
and prior to the modification of the Company's investment policy
during the prior year. The carrying value of loans secured by
charges over properties are valued at nil in the current and prior
years.
Information about the gain recognised on the movement of the
loans at FVTOCI and information about the methods and assumptions
used in determining the fair value is provided in note 16.
Each loan has a contractual payment date for principal and
interest. The Group classifies loans that are 91 or more days late
as credit impaired or defaulted for which lifetime expected loss
are taken as an impairment charge.
The following table shows the movement in impairment allowance
during the year.
31 March 2022 31 March 2021
GBP GBP
---------------------------------------------- -------------- -------------
Impairment allowance at beginning of the
year 61,204,749 59,019,908
Impairment (release)/allowance for the year (7,342,224) 11,936,141
Additions from loans consolidated following
settlement of EIB transaction* 16,984,641 -
Sale of Non-performing loans during the year - (9,751,300)
Impairment allowance at the end of the year 70,847,166 61,204,749
---------------------------------------------- -------------- -------------
*Loans consolidated within the EIB transaction are made up of
GBP22,808,956 principal and GBP16,984,641 expected credit
losses.
During the year the loans from the EIB transaction were
transferred to the Group in consideration of the Group's interest
in the structure which was settled as a result. The assets were
transferred at an initial fair value of GBP5,824,315. Refer to Note
5 for further detail surrounding the EIB transaction. Within the
impairment allowance table above the addition of loans from the EIB
transaction represents the impairment allowance relative to the
gross outstanding principal and interest on initial recognition
which on a net basis equalled the fair value. This initial
recognition within the impairment allowance did not impact the
consolidated statement of comprehensive income, however subsequent
movements in the allowance did.
While the gross impairment allowance has increased as a result
of the recognition of the EIB transaction loans at fair value, the
balance of the allowance has decreased for the year due to ongoing
amortisation of the loan portfolio and better than anticipated
performance of loans across the Group's portfolio of loans
advanced, particularly those that went into stage 3 as a result of
forbearance measures but were subsequently able to continue making
contractual repayments. Impairment losses impacting the
consolidated statement of comprehensive income decreased by
GBP7,342,224 during the year, while the initial recognition of the
ECL from the loans received as settlement of the EIB transaction of
GBP16,984,641 did not impact the consolidated statement of
comprehensive income, resulting in a balance of GBP70,847,166.
The table below shows an analysis of the principal and interest
of the loans along with the amount recognised as an impairment
allowance analysed by the stages described within IFRS 9:
31 March 2022
----------------------------
Principal Impairment
and interest allowance
GBP GBP
---------------------------------------------------- -------------- ------------
Stage 1 - 1 to 30 days late and no missed payments 27,732,405 2,704,168
Stage 2 - 31+ days late/missed a payment in
last 6 months 6,945,481 767,111
Stage 3 - Legally defaulted & 90+ days late 72,685,086 67,375,887
107,362,972 70,847,166
---------------------------------------------------- -------------- ------------
Stage 3 includes loans that have fallen 91 or more days late as
a result of forbearance measures introduced in April 2020 as a
response to COVID-19, which have not been contractually
defaulted.
The table below shows an analysis of the principal and interest
of the loans along with the amount recognised as an impairment
allowance as at 31 March 2021:
31 March 2021
----------------------------
Principal Impairment
and interest allowance
GBP GBP
---------------------------------------------------- -------------- ------------
Stage 1 - 1 to 30 days late and no missed payments 62,728,086 5,747,801
Stage 2 - 31+ days late/missed a payment in
last 6 months 23,195,119 1,815,713
Stage 3 - Legally defaulted & 90+ days late 55,523,697 53,641,235
141,446,902 61,204,749
---------------------------------------------------- -------------- ------------
In October 2020, Basinghall received proceeds of GBP2,203,183
for the sale of a pool of UK non-performing loans to a third party
at a recovery rate which is consistent with historical recovery
rates observed on the portfolio.
Structured Finance Transactions
In June 2016, the Company entered into a structured finance
transaction with the European Investment Bank (the "EIB
transaction"). The transaction involved the Company participating
in the financing of an Irish domiciled special purpose vehicle
("EIB SPV"). The Company invested GBP25 million into the junior
Class B Note issued by the EIB SPV whilst the European Investment
Bank ("EIB") committed GBP100 million in a senior loan to the EIB
SPV.
In August 2018, the Group entered into a transaction to provide
lending to a special purpose vehicle, Queenhithe, which makes loans
to UK small businesses. The Group, through Basinghall, provided an
initial funding of approximately GBP9.2 million through
subscription into the Class B note issued by Queenhithe.
Queenhithe has been accounted for in these consolidated
financial statements as a subsidiary consolidated into the results
of the Group. In November 2018, the transaction was updated whereby
the Department for Business, Energy and Industrial Strategy
("BEIS") - the British Business Bank's ("BBB") sole shareholder -
agreed to provide up to GBP150 million of funding via a senior
floating rate, loan to Queenhithe. Following the result of the EGM
on 11 June 2019, the Group has ceased any further investment
through Queenhithe
5. FINANCIAL ASSET AT FAIR VALUE THROUGH PROFIT OR LOSS
31 March 2022 31 March
2021
GBP GBP
-------------------------------- ------------- ---------
Balance at the beginning of
the year 5,141,217 -
Interest collections (1,691,666) -
Net gain on the change in fair
value of financial asset at
fair value through profit or
loss during the year* 2,251,764 5,141,217
Cash left in Finch vehicle
for liquidation 123,000 -
Non-cash repayment (5,824,315) -
Balance at the end of the year - 5,141,217
---------------------------------- ------------- ---------
*Presented gross of interest distributions of class B note of
GBP1,691,666.
In June 2016, the Company entered into a structured finance
transaction with the European Investment Bank (the "EIB
transaction"). The transaction involved the Company participating
in the financing of an Irish domiciled special purpose vehicle
("EIB SPV"). The Company invested GBP25 million into the junior
Class B Note issued by the EIB SPV whilst the European Investment
Bank ("EIB") committed GBP100 million in a senior loan to the EIB
SPV.
In October 2021, a portfolio of SME loans valued at GBP5,824,315
was received as settlement of the Company's investment in the EIB
transaction (discussed in more detail in note 4) by Basinghall.
This was by way of an issue of notes from Basinghall to the Company
to the value of the portfolio received. During the current year a
net gain of GBP2,251,764 has been recognised in the consolidated
statement of comprehensive income driven by upwards valuation of
the loans from their resilient performance. The Company received
net cash of GBP1,568,666, made up of GBP1,691,666 in respect of
interest accrued and GBP123,000 of cash to remain within Finch
Lending Designated Activity Company Limited in order to settle
anticipated liquidation costs.
6. SEGMENTAL REPORTING
The Group holds assets in the UK, US, Germany, Spain and the
Netherlands. For financial reporting purposes, Germany, Spain and
the Netherlands combine to make up the Continental Europe operating
segment.
The measurement basis used for evaluating the performance of
each segment is consistent with the policies used for the Group as
a whole. Assets, liabilities, profits and losses for each
reportable segment are recognised and measured using the same
accounting policies as the Group.
Except for the EIB transaction, all of the Group's investments
are loans to SMEs. Each individual SME loan does not generate
income that exceeds 10% of the Group's total income.
The structured finance transaction and the corresponding income
have been reported under the 'UK' segment below. All items of
income and expenses not directly attributable to specific
reportable segments have been included in 'Other income and
expenses' column.
Segment performance for the year ended 31 March 2022
UK US CE Other income Consolidated
and expenses
GBP GBP GBP GBP GBP
----------------------------- ------------ ----------- ---------- ----------------- -------------
Total revenue 3,718,092 2,204,093 1,537,699 (1,670,958) 5,788,926
Release of impairment
of loans 5,752,838 1,029,831 559,555 - 7,342,224
Net gain on the change
in fair value of financial
asset at fair value
through profit or loss - 2,251,764 - - 2,251,764
Net loss on change
in fair value of loans
advanced (701,385) (904,856) (642,137) - (2,248,378)
Total comprehensive
income 8,769,545 4,580,832 1,455,117 (1,670,958) 13,134,536
UK US CE Other assets Consolidated
and liabilities
GBP GBP GBP GBP GBP
----------------------------- ------------ ----------- ---------- ----------------- -------------
Assets 29,204,092 14,506,658 8,899,836 - 52,610,586
Liabilities (95,659) (364,252) (77,913) - (537,824)
Segment performance for the year ended 31 March 2021
UK US CE Other income Consolidated
and expenses
GBP GBP GBP GBP GBP
----------------------------- ------------ ------------ ------------ ----------------- -------------
Total revenue 9,254,957 1,684,813 1,637,817 21,409 12,598,996
Impairment of loans (8,424,952) (1,265,682) (2,245,507) - (11,936,141)
Net gain on the change
in fair value of financial
asset at fair value
through profit or loss 5,141,217 - - - 5,141,217
Net gain on change
in fair value of loans
advanced 889,003 1,330,180 288,709 - 2,507,892
Total comprehensive
income 4,537,154 1,139,121 (1,118,072) 21,409 4,579,611
UK US CE Other assets Consolidated
and liabilities
GBP GBP GBP GBP GBP
----------------------------- ------------ ------------ ------------ ----------------- -------------
Assets 83,967,266 15,735,112 20,357,836 - 120,060,214
Liabilities (487,118) (145,039) (189,281) - (821,438)
7. CASH AND CASH EQUIVALENTS
31 March 2022 31 March
2021
GBP GBP
-------------------------------- -------------- ------------
Cash at bank 11,490,415 7,969,502
Cash equivalents 3,692,956 22,815,216
Balance at the end of the year 15,183,371 30,784,718
-------------------------------- -------------- ------------
Cash equivalents are term deposits held with different banks
with maturities between overnight and 90 days.
8. DERIVATIVES
Foreign exchange swaps are held to hedge the currency exposure
generated by US dollar assets and Euro assets held by the Group
(see note 16). The hedges have been put in place taking into
account the fact that derivative positions, such as simple foreign
exchange swaps, could cause the Group to require cash to fund
margin calls on those positions. The Group negotiated the terms of
the contracts with each counterparty such that no collateral is
required on the initial transaction and in instances of temporary
negative fair value positions.
Fair value of currency derivatives
Fair value Fair value
31 March 2022 31 March
2021
GBP GBP
------------------------------------ ---------------- -------------
Valuation of currency derivatives (191,363) 768,964
(191,363) 768,964
------------------------------------ ---------------- -------------
Fair value Fair value
31 March 2022 31 March
GBP 2021
GBP
----------------------------------- ---------------- -------------
Euro 4,960 (33,918)
USD 9,607 1,780
GBP (205,930) 801,102
----------------------------------- ---------------- -------------
Total (191,363) 768,964
----------------------------------- ---------------- -------------
9. ACCRUED EXPENSES AND OTHER LIABILITIES
31 March 31 March 2021
2022
GBP GBP
----------------------------- --------- -------------
Service fees payable 83,050 145,785
Audit fees payable 183,971 252,807
Legal fees payable 13,817 12,154
Administration fees payable 31,303 -
Taxation payable 500 348,130
Directors' fees payable - 5,416
Other liabilities 33,820 57,146
346,461 821,438
----------------------------- --------- -------------
10. SHARE CAPITAL
Issued and fully Number of shares Shares issued Issue costs Net Shares
paid amount amount
Ordinary shares GBP GBP GBP
------------------ --------------------------- -------------- ------------- -------------
At 1 April 2021 134,164,922 163,258,048 (5,744,900) 157,513,148
Shares redeemed (82,414,359) (76,199,759) - (76,199,759)
------------------- --------------------------- -------------- ------------- -------------
At 31 March 2022 51,750,563 87,058,289 (5,744,900) 81,313,389
------------------- --------------------------- -------------- ------------- -------------
Issued and fully Number of Shares issued Issue costs Net Shares
paid shares amount amount
Ordinary shares GBP GBP GBP
------------------- --------------- --------------- ------------- --------------
At 1 April 2020 258,301,354 268,762,623 (5,744,900) 263,017,723
Share repurchases (10,000) (4,857) - (4,857)
Shares redeemed (124,126,432) (105,499,718) - (105,499,718)
-------------------- --------------- --------------- ------------- --------------
At 31 March 2021 134,164,922 163,258,048 (5,744,900) 157,513,148
-------------------- --------------- --------------- ------------- --------------
In the prior years, the Company purchased a total of 43,746,667
shares from the market. Following the COVID-19 pandemic and the
uncertainty around its impact, the directors resolved to suspend
the programme of repurchases of the Company's shares on 2 April
2020 until further notice.
The Company has redeemed a total of 82,414,359 (2021:
124,126,432) shares for a total amount of GBP76,199,759 (2021:
GBP105,499,718) throughout the year. All shares redeemed throughout
the year were redeemed at the prevailing NAV per share at the date
of declaration.
As at the balance sheet date, there was 51,750,563 ordinary
shares in issue of with a nominal value of 100p each. The excess of
the Net Share Amount of GBP29,562,826 is recognised as share
premium.
Rights attaching to the Ordinary share class
All shareholders have the same voting rights in respect of the
share capital of the Company. Every member who is present in person
or by a duly authorised representative or proxy shall have one vote
on a show of hands and on a poll every member present shall have
one vote for each share of which he is the holder, proxy or
representative. All shareholders are entitled to receive notice of
the Annual General Meeting and any other General meetings.
Each Ordinary share will rank in full for all dividends and
distributions declared after their issue and otherwise pari passu
in all respects with each existing Ordinary share and will have the
same rights (including voting and dividend rights and rights on a
return of capital) and restrictions as each existing Ordinary
share.
11. TAXATION
31 March 31 March 2021
2022
GBP GBP
--------------------------------------------- -------------- -------------------
Operating income for the year before
taxation 15,382,914 2,420,528
---------------------------------------------- -------------- -------------------
Tax at the standard Guernsey income - -
tax rate of 0%
Effects of tax rates in other jurisdictions (500) (348,809)
Taxation expense (500) (348,809)
---------------------------------------------- -------------- -------------------
The Group may be subject to taxation under the tax rules of the
jurisdictions in which it invests. During the year, Basinghall,
Tallis and Queenhithe , which are consolidated into the Group's
results were subject to a corporation tax rate of 25% in
Ireland.
From 1 January 2020 new tax rules were applicable under the
legislative changes made to the Irish Finance Act 2019. These rules
included changes to the anti-hybrid and anti-avoidance rules in
section 110 TCA of the legislation.
Basinghall paid class B profit participating note interest to
the Company in February 2020 totaling GBP1,392,467, which were
considered disallowable for tax purposes in Ireland following the
legislative changes discussed above and so a 25% tax charges were
levied totaling GBP348,117. This charge relates to the financial
year ended 31 March 2020 and was accrued in the prior year due to
the timing of the completion of the impact assessment. The Group
has been advised by its legal advisors that changes made to its
structural arrangements have caused Basinghall to fall outside the
scope of the legislative changes discussed above with effect from 1
April 2020.
During the year, the interest limitation rule ("ILR") as
contemplated by Article 4 of the Anti-Tax Avoidance Directive which
was adopted as Council Directive (EU) 2016/1164 on 12 July 2016 was
introduced in Ireland by the Finance Act 2021. The ILR will apply
to Irish taxable entities with respect to accounting periods
commencing on or after 1 January 2022. We do not expect the ILR to
apply negatively to the Basinghall or Tallis as each entity earns
only income which is expected to be treated as interest equivalent
income for Irish tax purposes, together with future potential
income.
12. EARNINGS PER SHARE ("EPS")
The calculation of the EPS is based on the following
information:
31 March 2022 31 March
2021
GBP GBP
------------------------------------- -------------- ------------
Profit for the purposes of EPS 15,382,914 2,071,719
Weighted average number of ordinary
shares 84,586,082 197,065,272
EPS 18.19p 1.05p
-------------------------------------- -------------- ------------
13. DIVIDS
The following table shows a summary of dividends declared during
the year, and previous year, in relation to Ordinary shares.
31 March Date declared Ex-dividend Per share Total
2022 date
Pence GBP
------------------ --------------- --------------- ---------- ----------
Ordinary
shares
Interim dividend 20 April 2021 29 April 2021 1.3125 1,384,312
Interim dividend 20 July 2021 29 July 2021 1.3125 1,124,870
20 October 28 October
Interim dividend 2021 2021 1.3125 912,383
19 January 27 January
Interim dividend 2022 2022 1.3125 679,226
Total 5.250 4,100,791
----------------------------------------------------- ---------- ----------
31 March Date declared Ex-dividend Per share Total
2021 date
Pence GBP
------------------- --------------- --------------- ---------- ----------
Ordinary
shares
Interim dividend 20 April 2020 23 April 2020 1.3125 3,132,722
Interim dividend 24 July 2020 30 July 2020 1.3125 2,805,335
21 October 29 October
Interim dividend 2020 2020 1.3125 2,147,990
20 January 28 January
Interim dividend 2021 2021 1.3125 1,760,915
Total 5.250 9,846,962
------------------------------------------------------ ---------- ----------
14. DIRECTORS' REMUNERATION AND EXPENSES
31 March 2022 31 March 2021
GBP GBP
--------------------- -------------- --------------
Directors' fees 160,000 167,257
Directors' expenses 425 10
---------------------- -------------- --------------
160,425 167,267
--------------------- -------------- --------------
None of the Directors have any personal financial interest in
any of the Group's investments other than indirectly through their
shareholding in the Group.
15. FEES AND EXPENSES
Loan origination and servicing
Funding Circle UK has been appointed pursuant to the UK
Origination Agreement, UK Servicing Agreement and the Services
Agreement. Funding Circle US (as defined in the Prospectus) has
been appointed pursuant to the US Origination Agreement and the US
Servicing Agreement.
Funding Circle Nederlands B.V. ("Funding Circle Netherlands")
has been appointed pursuant to the Dutch Origination Agreement and
the Dutch Servicing Agreement. Funding Circle Espana SLU ("Funding
Circle Spain") has been appointed pursuant to the Spanish
Origination Agreement and the Spanish Servicing Agreement. Funding
Circle CE GmbH ("Funding Circle CE") has been appointed pursuant to
the German Origination Agreement and the German Servicing
Agreement. Each of Funding Circle Netherlands and Funding Circle
Spain has agreed to designate Funding Circle CE as sub-contracting
agent for the purposes of their respective Origination Agreements
and Servicing Agreements.
The Group does not pay Funding Circle any fees on the initial
origination of loans.
Funding Circle UK is entitled to receive loan servicing fees
equal to 1 per cent. Per annum, calculated daily, on the aggregate
outstanding principal balance of the portfolio of loans held by
each of Basinghall, Lambeth and Queenhithe excluding any loans
which have been charged off as defined in the Servicing Agreement.
Servicing fees to Funding Circle UK of GBP316,069 were incurred
during the year (2021: GBP678,191). Servicing fees outstanding as
at 31 March 2022 were GBP36,211 (2021: GBP74,569). Following the
transfer of Credit Assets by Lambeth to Basinghall on 17 June 2020,
Lambeth's servicing agreement in place with Funding Circle UK was
terminated on the same date. Following the transfer of Credit
Assets by Queenhithe to Basinghall on 17 August 2020, Queenhithe's
servicing agreement in place with Funding Circle UK was terminated
on the same date.
FCGPL is also entitled to receive fees under the Services
Agreement at an annual rate of 0.1 per cent. Of net asset value of
the Group. This fee accrued from the date on which the Group made
investments in respect of loans in an amount equal to 80 per cent.
Of the gross IPO issue proceeds of GBP150 million. During the year
ended 31 March 2022, GBP91,257 (2021: GBP184,970) was incurred
under the Services Agreement. Corporate servicing fees outstanding
as at 31 March 2022 was GBPnil (2021: GBPnil).
Funding Circle US is entitled to receive loan servicing fees
equal to 1 per cent. Per annum, calculated daily, on the aggregate
outstanding principal balance of the portfolio of loans held by the
Group which have been originated in the US excluding any loans
which have been charged off as defined in the Servicing Agreement.
Servicing fees to Funding Circle US of GBP125,925 were incurred
during the year (2021: GBP327,599). Servicing fees outstanding as
at 31 March 2022 were GBP6,165 (2021: GBP34,165).
Funding Circle Netherlands is entitled to receive loan servicing
fees equal to 1 per cent. Per annum, calculated daily, on the
aggregate outstanding principal balance of the portfolio of loans
held by Tallis excluding any loans which have been charged off as
defined in the Servicing Agreement.
Funding Circle Spain is entitled to receive loan servicing fees
equal to 1 per cent. Per annum, calculated daily, on the aggregate
outstanding principal balance of the portfolio of loans held by
Tallis excluding any loans which have been charged off as defined
in the Servicing Agreement.
Funding Circle Deutschland GmbH is entitled to receive loan
servicing fees equal to 1 per cent. Per annum, calculated daily, on
the aggregate outstanding principal balance of the portfolio of
loans held by Tallis excluding any loans which have been charged
off as defined in the Servicing Agreement.
Funding Circle CE receives servicing fees for Funding Circle
Netherlands, Funding Circle Spain and Funding Circle Deutschland
GmbH as per the sub-contracting agency agreement. Servicing fees to
Funding Circle CE during the year amounted to GBP154,581 (2021:
GBP313,628). Servicing fees outstanding as at 31 March 2022 were
GBP40,674 (2021: GBP37,051).
Each of the Funding Circle entities is entitled to additional
fees of up to 40 per cent. Of collections received on charged off
assets under each of the relevant Services Agreement in
reimbursement of costs incurred in respect of collection charges
and external legal fees. No such additional fees were charged to
the Group during the current year or the prior year.
Administration, company secretarial and cash management
Sanne Group (Guernsey) Limited ("Sanne Guernsey") has been
appointed as Administrator to the Company pursuant to the
Administration Agreement. The Administrator also acts as Company
Secretary and Cash Manager of the Company.
Sanne Guernsey is entitled to receive an annual fee equal to
five basis points of the net asset value of the Group subject to a
minimum amount of GBP85,000 (2021: GBP85,000). Administration fees
of GBP114,138 were incurred during the year (2021: GBP150,303) of
which GBP31,303 was outstanding as at 31 March 2022 (2021:
GBPnil).
Sanne Capital Markets Ireland Limited ("Sanne Ireland") has been
appointed as Administrator to Basinghall, Tallis and Queenhithe and
is entitled to receive an annual fee for each entity of GBP58,000
(2 021 : GBP58,000). Administration fees (including fees for
out-of-scope work performed) of GBP101,165 were incurred during the
year (2 021 : GBP138,598) of which GBPnil was outstanding as at 31
March 2022 (2021: GBPnil).
Intertrust Management Ireland Limited ("Intertrust Ireland") was
appointed as Administrator to Queenhithe and is entitled to receive
an annual fee of GBP23,000. There were no outstanding
administration fees payable to Intertrust Ireland as at 31 March
2022 and 31 March 2021.
Registrar
Link Asset Services (the "Registrar") has been appointed as the
Company's Registrar to undertake maintenance of the statutory books
of the Company and to perform such related activities as are
required to carry out the registrar function. The Registrar is
entitled to an annual maintenance fee per shareholder subject to a
minimum charge of GBP4,500 (2021: GBP4,500) per annum. Registrar
service fees of GBP75,516 were incurred during the year (2021:
GBP86,796). Registrar service fees outstanding as at 31 March 2022
amounted to GBPnil (2021: GBP13,589).
Currency management fee
Record Currency Management Limited has been appointed as
currency manager. The currency manager is entitled to fees
calculated based on the GBP equivalent amount of the US Dollar and
EUR denominated exposure being hedged within the Group's portfolio.
Fees of GBP29,032 were incurred during the year (2021: GBP43,768).
Fees outstanding as at 31 March 2022 amounted to GBP4,271 (2021:
GBP8,935).
Audit, audit related and non-audit related services
Remuneration for all work carried out for the Group by the
statutory audit firm in each of the following categories of work is
disclosed below:
31 March 2022 31 March 2021
---------------------- ----------------------
Type of service PwC CI PwC Ireland PwC CI PwC Ireland
GBP GBP GBP GBP
-------------------------- -------- ------------ -------- ------------
Audit of the financial
statements 114,330 72,218 126,030 77,234
Review of half-yearly
financial statements 23,900 - 22,000 -
Tax related services - - - 38,328
Other non-audit services - - 1,200 -
138,230 72,218 149,230 115,562
-------------------------- -------- ------------ -------- ------------
16. FINANCIAL RISK MANAGEMENT
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework. The Group's risk management policies are established to
identify and analyse the risks faced by the Group, to set
appropriate risk limits and controls and to monitor risks and
adherence to limits. Risk management policies are reviewed
regularly to reflect changes in market conditions and the Group's
activities, including the basis of preparation being other than
going concern whilst the entity is in managed wind-down. Below is a
summary of the risks that the Group is exposed to as a result of
its use of financial instruments.
i) Operational risk
The directors outsource most of the Company's operations to
third parties which increases the operational risk in which the
Company is exposed to.
The Group is dependent on Funding Circle's resources and on the
ability and judgement of the employees of Funding Circle and its
professional advisers to originate and service the Credit Assets
purchased by the Group. Failure of Funding Circle's Platform or
inconsistent operational effectiveness of the internal controls at
Funding Circle may result in financial losses to the Group.
The Board manages this risk by performing a regular evaluation
of Funding Circle's performance against the terms and conditions of
the Group's agreements with Funding Circle.
ii) Market risk
Market risk is the risk of changes in market rates, such as
interest rates, foreign exchange rates and equity prices, affecting
the Group's income and/or the value of its holdings in financial
instruments.
The Board of Directors regularly reviews the Credit Assets
portfolios and industry developments to ensure that any events
which impact the Group are identified and considered in a timely
manner.
Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair value of
financial instruments.
The Group is exposed to risks associated with the effect of
fluctuations in the prevailing levels of market interest rates on
its cash balances and indirectly on the pricing of and returns from
Credit Assets.
Loans are held by the Group at fair value through other
comprehensive income and bear fixed interest rates. The Board has
not performed an interest rate sensitivity analysis on these loans.
Financial instruments with floating interest rates that reset as
market rates change are exposed to cash flow interest rate risk. As
at 31 March 2022, the Group had GBP15.2 million (31 March 2021:
GBP30.7 million) of the total assets classified as cash and cash
equivalents with floating interest rates. At 31 March 2022, had
interest rates increased or decreased by 100 basis points, in light
of central banks attempts to curb inflationary pressures through
interest rate hikes, with all other variables held constant (2021:
25 basis points), the change in the value of future expected cash
flows of these assets would have been GBP151,757 (31 March 2021:
GBP76,962). The Board of Directors believes that a change in
interest rate of 100 basis points is a reasonable measure of
sensitivity in interest rates based on their assessment of market
interest rates at the year end.
The Group was also previously exposed to interest rate risk in
respect of its external loans payable however no remaining interest
risk exposure in respect to external loans as they were fully
repaid in the prior year.
Currency risk
Currency risk is the risk that the value of the Group's net
assets will fluctuate due to changes in foreign exchange rates.
Aside from GBP, the Group has invested in loans denominated in
US Dollars and Euro and may invest in loans denominated in other
currencies. Accordingly, the value of such assets may be affected
favourably or unfavourably by fluctuations in currency rates. The
Board of Directors monitors the fluctuations in foreign currency
exchange rates and uses forward foreign exchange swaps to seek to
hedge the currency exposure of the Group arising from US Dollar and
Euro denominated investments.
The currency risk of the Group's non-GBP monetary financial
assets and liabilities as at 31 March 2022 including the effect of
a change in exchange rates by 5% is shown below. The effect of a 5%
change is shown below by applying an increase (for favourable
change in currency rates) or a decrease (for unfavourable change in
currency rates) to the reported amounts of the assets and
liabilities of the Group. The Directors believe that a change of 5%
in currency exchange rates is a reasonable measure of sensitivity
based on available data on currency rates at the year end.
Carrying Effect of Carrying Effect of
amount as at a 5% change amount as a 5% change
31 March in currency at in currency
2022 rate 31 March rate
2021
GBP GBP GBP GBP
----------- -------------- ------------- ----------- -------------
US Dollar 5,204,398 197,638 15,256,783 552,902
Euro 8,859,457 374,334 19,986,113 851,259
Total 14,063,855 571,972 35,242,896 1,404,161
----------- -------------- ------------- ----------- -------------
The Group's exposure has been calculated as at the year end and
may not be representative of the year as a whole. Furthermore, the
above currency risk estimate does not take into account the effect
of the Group's foreign exchange hedging policy. The net foreign
exchange gain charged to the Consolidated Statement of
Comprehensive Income during the year was GBP1,057,767 (2021: loss
of GBP2,742,932). The details of the net foreign exchange gain or
loss are shown below.
31 March 2022 31 March 2021
GBP GBP
-------------------------------------------- -------------- --------------
Unrealised foreign currency gains/(losses) 1,181,756 (6,035,985)
Realised gains on currency derivatives 1,022,455 2,930,944
Realised losses on currency derivatives (186,117) (3,807,555)
Unrealised fair value (losses)/gains
on currency derivatives (960,327) 4,169,664
--------------------------------------------- -------------- --------------
1,057,767 (2,742,932)
-------------------------------------------- -------------- --------------
iii) Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due. Substantially all
of the non-cash assets held by the Group are illiquid.
The Board of Directors manages liquidity risk through active
monitoring of amortising cash flows and reviewing the Group cash
flow forecast on a regular basis. Prior to the EGM on 11 June 2019,
the Group was allowed to borrow up to 0.5 times the then-current
net asset value of the Group at the time of borrowing. The Board
will focus on achieving a managed wind-down of the Company and any
further borrowing is not anticipated.
Maturity profile
While the following tables show the contractual maturity of the
financial assets and financial liabilities of the Group, it should
be noted that as the financial statements have been prepared on a
basis other than going concern, the expectation is that the
majority of the assets and liabilities will be liquidated within
twelve months of the signing of these accounts, and so may fall
earlier than they are contractually due:
As at 31 March 2022
Within one One to five Over five Total
year years years
GBP GBP GBP GBP
--------------------------- ------------ ------------ ---------- -------------
Financial assets
Cash and cash equivalents 15,183,371 - - 15,183,371
Loans advanced 76,093,906 31,269,066 - 107,362,972
Other receivables 23,550 - - 23,550
--------------------------- ------------ ------------ ---------- -------------
91,300,827 31,269,066 - 122,569,893
--------------------------- ------------ ------------ ---------- -------------
Within one One to five Over five
year years years Total
GBP GBP GBP GBP
------------------------ ----------- ------------ ---------- --------
Financial liabilities
Accrued expenses and
other liabilities 346,461 - - 346,461
Fair value of currency
derivatives 191,363 - - 191,363
------------------------ ----------- ------------ ---------- --------
537,824 - - 537,824
------------------------ ----------- ------------ ---------- --------
As at 31 March 2021
Within one One to five Over five Total
year years years
GBP GBP GBP GBP
---------------------------- ------------- ------------ ---------- -------------
Financial assets
Cash and cash equivalents 30,784,718 - - 30,784,718
Loans advanced 82,899,529 58,547,373 - 141,446,902
Financial assets at
fair value through profit
and loss 5,141,217 - - 5,141,217
Fair value of currency
derivatives 768,964.00 - - 768,964
Other receivables 9,870 - - 9,870
119,604,298 58,547,373 - 178,151,671
---------------------------- ------------- ------------ ---------- -------------
Within one One to five Over five
year years years Total
GBP GBP GBP GBP
----------------------- ----------- ------------ ---------- --------
Financial liabilities
Accrued expenses and
other liabilities 821,438 - - 821,438
821,438 - - 821,438
----------------------- ----------- ------------ ---------- --------
iv) Credit risk and counterparty risk
Credit risk is the risk of financial loss to the Group if a
counterparty to a financial instrument fails to meet its
contractual obligations. The carrying amounts of financial assets
best represent the maximum credit risk exposure at the reporting
date. Impairment recognised on the loans advanced is disclosed in
note 4.
The Group's credit risks arise principally through exposures to
loans advanced by the Group, which are subject to the risk of
borrower default. As disclosed in note 4, the loans advanced by the
Group are predominantly unsecured, but the Group holds assets as
security for certain property-related loans.
Credit quality
The credit quality of loans is assessed on an ongoing basis
through evaluation of various factors, including credit scores,
payment data and other information related to counterparties. This
information is subject to stress testing on a regular basis.
Set out below is the analysis of the Group's loan investments by
internal grade rating:
% of Carrying % of Carrying
value value
Carrying value 31 March Carrying value 31 March
31 March 2022 2022 31 March 2021 2021
---------------- --------------- -------------- --------------- --------------
Internal grade GBP % GBP %
---------------- --------------- -------------- --------------- --------------
A+ 6,914,473 18.94 8,511,443 10.61
A 12,115,836 33.18 29,407,644 36.64
B 7,939,373 21.74 19,496,527 24.30
C 5,260,953 14.40 12,013,516 14.97
D 3,005,204 8.23 7,621,654 9.50
E 1,279,966 3.51 3,191,367 3.98
36,515,805 100.00 80,242,151 100.00
---------------- --------------- -------------- --------------- --------------
The internal grade risk rating assigned to a borrower is based
on Funding Circle's proprietary credit scoring methodology to
evaluate each loan application. Analysis has regard to all the
relevant application data gathered so far as well as information
obtained from commercial and consumer credit bureaus. It also
includes analysis of the borrower's financial information.
The scale of ratings from A+ to E reflects the relative credit
risk of the asset with A+ considered to have the lowest credit risk
and E rated loan the highest.
Allocation limits
The Board of Directors implemented the following portfolio
limits to manage the concentration risk exposure of the Group:
The proportionate division between loans originated through the
various Platforms must fall within the ranges set out below. The
actual proportion within the ranges will be determined by Funding
Circle UK (and communicated by Funding Circle UK to Funding Circle
US, Funding Circle CE, and other Funding Circle group entities, as
appropriate) pursuant to the Services Agreement:
-- originated through the UK Platform - between 50 per cent. and
100 per cent. of the gross asset value of the Group
-- originated through the US Platform - between 0 per cent. and
50 per cent. of the gross asset value of the Group
-- originated through the CE Platform - between 0 per cent. and
15 per cent. of the gross asset value of the Group
Other limitations
In addition to the allocation limits described above, in no
circumstances will loans be acquired by the Group, nor will
indirect exposure to loans be acquired, if such acquisition or
exposure would result in:
-- excess of 50 per cent. of the gross asset value being
represented by loans in respect of which the relevant borrower is
located in the US; or
-- the amount of the relevant loan or borrowing represented by
any one loan exceeding or resulting in the Group's exposure to a
single borrower exceeding (at the time such investment is made)
0.75 per cent. of the net asset value.
The allocation limits and other limitations shown above no
longer apply after shareholders passed the resolutions at the EGM
on 11 June 2019.
Banking counterparties
The Group is also exposed to credit risk in relation to cash
placed with its banking counterparties. The Directors monitor the
credit quality of these banking counterparties on a regular
basis.
The Group may invest cash held for working capital purposes and
pending investment or distribution in cash or cash equivalents,
government or public securities, money market instruments, bonds,
commercial paper or other debt obligations with banks or other
counterparties having a "BBB" (or equivalent) or higher credit
rating as determined by any internationally recognised rating
agency selected by the Board.
The Group held cash with the following financial
institutions:
Amount as Short term Amount as at Short term
at 31 March credit rating 31 March 2021 credit rating
2022 (S&P) (S&P)
GBP GBP
---------- ------------- --------------- ---------------
HSBC 14,948,118 A-1 6,307,209 A-1
Barclays 185,531 A-2 24,364,947 A-2
AIB 49,722 A-2 112,562 A-2
---------- --------------- ---------------
Total 15,183,371 30,784,718
In addition, the Group uses forward foreign currency
transactions to seek to minimise the Group's exposure to changes in
foreign exchange rates. The Group is exposed to counterparty credit
risk in respect of these transactions. The Board of Directors
employs various techniques to limit actual counterparty credit
risk, including the requirement for cash margin payments or
receipts for foreign currency derivative transactions on a regular
basis. As at year end, the Group's derivative counterparties were
State Street and Northern Trust. The long term-credit rating of
State Street as at 31 March 2022 assigned by Moody's was Aa1 (31
March 2021: Aa1). The long term-credit rating of Northern Trust as
at 31 March 2022 assigned by Moody's was Aa2 (2021: Aa2). The
Directors monitor the credit quality of these banking
counterparties on a regular basis.
v) Fair value estimation
The Group classifies 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:
-- Level 1 - quoted prices (unadjusted) in active markets for
identical assets or liabilities. Investments, whose values are
based on quoted market prices in active markets and are therefore
classified within Level 1, include active listed equities. The
quoted price for these instruments is not adjusted;
-- Level 2 - 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). Financial instruments that trade in markets that are not
considered to be active but are valued based on quoted market
prices, dealer quotations or alternative pricing sources supported
by observable inputs are classified within Level 2. As Level 2
investments include positions that are not traded in active markets
and/or are subject to transfer restrictions, valuations may be
adjusted to reflect illiquidity and/or non-transferability, which
are generally based on available market information; and
-- Level 3 - inputs for the asset or liability that are not
based on observable market data (that is, unobservable inputs).
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined on
the basis of the lowest level input that is significant to the fair
value measurement in its entirety. For this purpose, the
significance of an input is assessed against the fair value
measurement in its entirety. If a fair value measurement uses
observable inputs that require significant adjustment based on
unobservable inputs, that measurement is a Level 3 measurement.
Assessing the significance of a particular input to the fair value
measurement in its entirety requires judgement, considering factors
specific to the asset or liability. The determination of what
constitutes "observable" requires significant judgement by the
Group. The Group considers observable data to be that market data
that is readily available, regularly distributed or updated,
reliable and verifiable, not proprietary and provided by
independent sources that are actively involved in the relevant
market.
The Group's only financial instruments measured at fair value as
at 31 March 2022 are its currency derivatives and its loans
advanced. In the prior year, the Group also had an investment in
the EIB transaction measured at fair value through profit or loss
which was settled before the end of the year.
The fair value of the currency derivatives held by StateStreet
and Northern Trust were estimated by Record Currency Management
Limited based on the GBP-USD forward exchange rate, the GBP-EUR
forward exchange rate, the GBP-USD spot rate and the GBP-EUR spot
rate as at 31 March 2022.
As at 31 March 2021, as a result of resilient performance seen
on the portfolio of loans held by the EIB SPV, it was estimated by
a third party valuation expert that the Company would receive
future cashflows from its investment in the EIB transaction and as
such this resulted in a fair value gain of GBP5,141,217 being
recognised in the consolidated statement of comprehensive income
for the previous year.
In October 2021, the Company received cash of GBP1,568,666 and a
portfolio of SME loans valued at GBP5,824,315 as full repayment of
its investment in the EIB transaction. The portfolio of loans was
subsequently recognised in the Basinghall subsidiary of the Group
in return for notes issued between the parent company and
Basinghall. During the year, due to the resilient performance of
the underlying loan portfolio, a net gain of GBP2,251,764 was
recognised in the consolidated statement of comprehensive income
and the SME loans were subsequently consolidated directly on the
Group's consolidated statement of financial position.
The Company has appointed a third-party valuation expert to
provide quarterly valuations of its Credit Assets. The fair value
of the Credit Assets has been estimated by discounting expected
future cash flows from the loans advanced using a discount rate
determined by the Directors based on appropriate market
comparatives and conditions. The fair value of the Group's Credit
Assets as at 31 March 2022 was GBP37,403,665 (31 March 2021:
GBP83,355,445). The most relevant unobservable input to the fair
valuation was the discount rate, which has been summarised below
based on the geography of each of the Group's portfolios:
31 March 2022 31 March 31 March 31 March 31 March 31 March
2022 2022 2021 2021 2021
UK US CE UK US CE
Discount
rate 9.07% 8.29% 7.55% 7.66% 7.51% 6.90%
Fair value GBP25,205,229 GBP4,209,292 GBP7,989,144 GBP50,896,298 GBP13,678,529 GBP18,780,618
The Board of Directors believe that the fair value of the
currency derivatives falls within Level 2 in the fair value
hierarchy described above. The fair value of the EIB transaction
and the Credit Assets falls within Level 3 in the fair value
hierarchy due to the unobservable inputs used in the valuation
which include discount rate, timing and amounts of cash flows and
performance of the underlying loan portfolios. Refer to notes 4 and
5 for the movement on these financial instruments during the
year.
The Directors have prepared the below sensitivity analysis for
the Credit Assets based on a movement in discount rate of 1% with
an increase in discount rate of 1% causing a GBP233,939 reduction
in fair value and a 1% decrease causing a GBP236,412 increase in
fair value of loans advanced. In light of recent inflationary
pressures, exacerbated by the events in the Ukraine, and central
banks' actions to curb these through raising interest rates, it is
considered likely that increases in the discount rate applied to
Credit Assets is more reasonably possible than decreases, and could
result in a material deviation from management's estimation in the
future.
UK US CE Total
1% decrease in GBP159,561 GBP21,826 GBP55,025 GBP236,412
discount rate
1% increase in (GBP157,884) (GBP21,647) (GBP54,408) (GBP233,939)
discount rate
The following table presents the fair value of the Group's
assets and liabilities not measured at fair value as at 31 March
2022 but for which fair value is disclosed:
31 March 2022
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Cash and cash equivalents 15,183,371 - - 15,183,371
Other receivables and prepayments - 23,550 - 23,550
Accrued expenses and other
liabilities - (346,461) - (346,461)
15,183,371 (322,911) - 14,860,460
------------ ---------- ------- ------------
31 March 2021
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Cash and cash equivalents 30,784,718 - - 30,784,718
Other receivables and prepayments - 9,870 - 9,870
Accrued expenses and other
liabilities - (821,438) - (821,438)
30,784,718 (811,568) - 29,973,150
------------ ---------- ------- ------------
The Board of Directors believe that the carrying values for cash
and cash equivalents, other receivables and prepayments, loans
payable and accrued expenses and other liabilities approximate
their fair values.
In the case of cash and cash equivalents, other receivables and
prepayments, and accrued expenses and other liabilities the amount
estimated to be realised in cash are equal to their value shown in
the Consolidated Statement of Financial Position due to their short
term nature.
There were no transfers between levels during the year or the
prior year.
The managed wind-down of the Company is being operated with a
view to the Company realising all of its investments in accordance
with the Investment Objective. Such realisations will comprise
natural amortisation of the Company's investments in Credit Assets
as well as potentially opportunistic portfolio sales.
During the year ended 31 March 2020, the Company ran an auction
process as the Board explored a potential sale of a portion of the
Company's assets during which it received a high level of interest
from potential buyers. During the year ended 31 March 2021 a sale
of non-performing loans was concluded to the value of GBP605,402.
The Company continues to explore asset sales and considers the
likelihood of a sale within 12 months of the date of signing to be
high. This is due to the composition of the portfolio being more
weighted towards non-performing loans within the next 12
months.
Capital risk management
The Board's policy is to reflect a realisation strategy in line
with the investment objective and policy, with the intention of
realising all remaining assets in the portfolio in a prudent manner
which achieves a balance between maximising the value from the
realisation of the Company's investments and making timely returns
of capital to shareholders. The Group's capital is represented by
Ordinary share capital and retained earnings. The capital of the
Group is managed in accordance with its investment policy, in
pursuit of its investment objectives. The return of capital to
investors is managed in line with the Company's investment
objective and managed wind-down process.
The Company continues to return capital through compulsory
redemptions of shares and distributions of dividends, as the
Group's portfolio of Credit Assets amortises
The Group is not subject to externally imposed capital
requirements. However, certain calculations on the employment of
leverage are required under the AIFMD. This directive requires more
information to be reported if the Group's leverage exceeds three
times its net asset value. All of the Group's leverage facilities
have now been fully repaid.
17. RELATED PARTY DISCLOSURE
The Directors, who are the key management personnel of the
Group, are remunerated per annum as follows:
GBP
-------
Chairman 50,000
Audit Committee Chairman 40,000
Risk Committee Chairman 40,000
Other Directors 30,000
160,000
Sachin Patel has waived his fees as a director of the
Company.
The Directors and/or their connected parties held the following
number of shares as at 31 March 2022 and 31 March 2021:
As at 31 March 2022 As at 31 March 2021
Number % of total Number % of total
of shares shares in of shares shares
issue in issue
Richard Boléat 5,231 0.0101 13,554 0.0069
Jonathan Bridel 25,286 0.0489 65,552 0.0333
Richard Burwood 13,409 0.0259 24,784 0.0126
Frederic Hervouet 35,504 0.0686 92,041 0.0467
Sachin Patel - - - -
79,430 0.1535 195,931 0.0995
Movement in the number of shares held by each of the directors
during the year relates to the redemptions paid by the Company and
the purchase of further shares which were approved and cleared for
issue at the time of purchase.
The Group had no employees during the current year or the prior
year.
The Directors delegate certain functions to other parties. In
particular, the Directors appointed Funding Circle UK , Funding
Circle US and Funding Circle CE to originate and service the
Group's investments in loans and FCGPL to provide corporate
services.
Notwithstanding these delegations, the Directors have
responsibility for exercising overall control and supervision of
the services provided by the Funding Circle entities, for risk
management of the Group and otherwise for the Group's management
and operations.
The transaction amounts incurred during the year and amounts
payable to each of Funding Circle UK, FCGPL, Funding Circle US and
Funding Circle CE are disclosed below.
Expense Payable Expense Payable
during the as at 31 during the as at 31
year ended March 2022 year ended March 2021
31 March 31 March
2022 2021
Transaction GBP GBP GBP GBP
Funding Circle
UK Servicing fee 316,069 36,211 678,191 74,569
Corporate services
FCGPL fee 91,257 - 184,970 -
Reimbursement
FCGPL of expenses - - 24,331 490
Funding Circle
US Servicing fee 125,925 6,165 327,599 34,165
Funding Circle
CE Servicing fee 154,581 40,674 313,628 37,051
18. INVESTMENT IN SUBSIDIARIES
The Company accounts for its interest in the following entities
as subsidiaries, in accordance with the definition of subsidiaries
and control set out in IFRS 10:
Country Principal Transactions Outstanding Outstanding
of incorporation activity amount as amount as
at 31 March at 31 March
2022 2021
GBP GBP
Invested
Basinghall in Credit Subscription
Lending Designated Assets originated of notes
Activity Company Ireland in the UK issued 29,245,042 55,733,625
Invested
in Credit
Assets originated
Tallis Lending in Germany, Subscription
Designated the Netherlands of notes
Activity Company Ireland and Spain issued 9,266,553 19,658,656
Subscription
Invested of notes
Lambeth Lending in Credit issued
Designated Assets originated (through
Activity Company* Ireland in UK Basinghall) - 71,757
Subscription
Invested of notes
Queenhithe in Credit issued
Lending Designated Assets originate (through
Activity Company** Ireland in the UK Basinghall) - 65,682
38,511,595 75,529,720
* Lambeth Lending Designated Activity Company has fully been
liquidated as at the end of the year 31 March 2022.
**Queenhithe Lending Designated Activity Company is, at the date
of these financial statements, still undergoing liquidation.
19. SUBSEQUENT EVENTS
On 20 April 2022, the Company declared a quarterly dividend of
1.3125 pence per share payable on 23 May 2022. The Company also
returned approximately GBP13.4m on 6 May 2022 by way of a
compulsory partial redemption of shares.
The Directors have assessed at the time of the issue of these
consolidated financial statements that there are no other material
subsequent events that require adjustment to the balances as at the
year-end or disclosure in the financial statements.
BOARD OF DIRECTORS
Richard Boléat
Chairman, Remuneration and Nominations Committee Chairman,
Non-executive Director
Richard Boléat was born in Jersey in 1963. He is a Fellow of the
Institute of Chartered Accountants in England & Wales, having
trained with Coopers & Lybrand in Jersey and the United
Kingdom. After qualifying in 1986, he subsequently worked in the
Middle East, Africa and the UK for a number of commercial and
financial services groups before returning to Jersey in 1991. He
was formerly a Principal of Channel House Financial Services Group
from 1996 until its acquisition by Capita Group plc ("Capita") in
September 2005. Mr Boléat led Capita's financial services client
practice in Jersey until September 2007, when he left to establish
Governance Partners, L.P., an independent corporate governance
practice. He currently acts as Chairman of CVC Credit Partners
European Opportunities Limited and Audit Committee Chairman of
M&G Credit Income Investment Trust plc. He also serves on the
board of Third Point Investors Limited, and a number of other
substantial private market collective investment and investment
management entities established in Jersey, the Cayman Islands and
Luxembourg. He is regulated in his personal capacity by the Jersey
Financial Services Commission.
Jonathan Bridel
Audit Committee Chairman, Non-executive Director
Mr Bridel is currently a non-executive Chairman or director of
listed investment funds. These include Sequoia Economic
Infrastructure Income Fund Limited until 3rd August 2022 which is
listed on the premium segment of the London Stock Exchange. He is
also Chairman of DP Aircraft 1 Limited and a director of Fair Oaks
Income Fund Limited. He was until 2011 Managing Director of Royal
Bank of Canada's investment businesses in Guernsey and Jersey. This
role had a strong focus on corporate governance, oversight,
regulatory and technical matters and risk management. He is a
Chartered Accountant and has specialised in Corporate Finance and
Credit. After qualifying as a Chartered Accountant in 1987, Mr
Bridel worked with Price Waterhouse Corporate Finance in London and
subsequently served in a number of senior management positions in
Australia and Guernsey in corporate and offshore banking and
specialised in credit. This included heading up an SME Lending
business for a major bank in South Australia. He was also chief
financial officer of two private multi-national businesses, one of
which raised private equity. He holds qualifications from the
Institute of Chartered Accountants in England and Wales where he is
a Fellow, the Chartered Institute of Marketing and the Australian
Institute of Company Directors. He graduated with an MBA from
Durham University in 1988. Mr Bridel is a Chartered Marketer and a
member of the Chartered Institute of Marketing, a Chartered
Director and a Fellow of the Institute of Directors and is a
Chartered Fellow of the Chartered Institute for Securities and
Investment.
Richard Burwood
Management Engagement Committee Chairman, Non-executive
Director
Mr Burwood is a resident of Guernsey with 30 years experience in
banking and investment management. During his 18 years with
Citibank London, Mr Burwood spent 11 years as a fixed income
portfolio manager spanning both banks/finance investments and Asset
Backed Securities.
Mr Burwood has lived in Guernsey since 2010, initially working
as a portfolio manager for EFG Financial Products, managing the
treasury department's ALCO Fixed Income portfolio. From 2011 to
2013, Mr Burwood worked as the Business and Investment Manager for
Man Investments, Guernsey.
In January 2013, Mr Burwood joined the board of TwentyFour
Income Fund, a London listed closed-ended fund which targets less
liquid, higher yielding asset backed securities. In January 2014,
Mr Burwood joined the board of RoundShield, a Guernsey private
equity fund, focused on European small to mid-cap real estate
opportunities. In August 2015, he became a Board Member of Funding
Circle SME Income Fund, now SME Credit Realisation Fund Limited,
the Company. Mr Burwood also serves on the boards of Habrok, a
Cayman-registered hedge fund specialising in Indian equities, and
EFG International Finance, a structured note issuance vehicle based
in Guernsey.
Frederic Hervouet
Risk Committee Chairman, Non-executive Director
Fred Hervouet is a resident of Guernsey and has dual nationality
with both British and French citizenship. He has more than 20 years
of experience in Hedge Funds and Capital Markets roles.
Until end of 2013, Fred was Managing Director and Head of
Commodity Derivatives Asia for BNP Paribas including Trading,
Structuring and Sales. Prior to BNP Paribas, he also worked for two
multi-billion, multi-strategy hedge funds including Quantitative
strategies (CTAs), Convertible Arbitrage, Event Driven, Fixed
Income Relative Value, Equity & Commodity Long-short, Global
Macro, and Emerging Markets Debt Fund. In the last 20 years, Fred
has worked in different aspects of the Financial Markets and Asset
Management Industry. His experience includes Derivatives Markets,
Structured Finance, Structured Products and Hedge Funds, Trading
and Risk Management.
Fred has worked in Singapore, Switzerland, United Kingdom and
France. Most recently, Mr Hervouet was a member of BNP Paribas
Commodity Group Executive Committee and BNP Paribas Credit
Executive Committees on Structured Finance projects (structured
debt and Trade Finance).
Fred now acts as a full time dedicated Non-executive Director of
a number of listed and non-listed companies. He is the Chairman of
Chenavari Toro Income Fund listed on the Special Fund Market of the
London Stock Exchange and a director of Crystal Amber
Fund Limited. He is also a director of the General Partners of a
number of Guernsey Private Equity Funds (Terra Firma, Lakestar,
Telstra Ventures, LCH Partners).
Fred graduated from the University of Paris Dauphine, France
achieving a Masters (DESS 203) in Financial Markets, Commodity
Markets and Risk Management and an MSc in Applied Mathematics and
International Finance.
Fred has provided investment and risk management services to
corporations and institutions worldwide and worked with CEOs, CFOs
and Head of Investment Divisions. Appearances on financial programs
include CNBC, Bloomberg and other networks. He is a member of
various financial services interest Groups including the UK
Association of Investment Companies.
Sachin Patel
Non-executive Director
Sachin Patel is the Chief Capital Officer at Funding Circle,
leads the Global Capital Markets group and is responsible for
investor strategy. Previously, Sachin was Vice President in the
cross-asset structured products and solutions businesses at
Barclays Capital and, prior to this, at J.P. Morgan, advising a
wide variety of investors including insurance companies, pension
funds, discretionary asset managers and private banks.
By virtue of Sachin's role at Funding Circle Ltd, Sachin is not
an independent Director. Notwithstanding this, Sachin has
undertaken in his service contract with the Company to communicate
to the Board any actual or potential conflict of interest arising
out of his position as a Director and the other Directors have
satisfied themselves that procedures are in place to address
potential conflicts of interest.
Sachin is not entitled to any fee for the services provided and
to be provided in relation to his directorship, although the
Company shall, during the course of his appointment, reimburse all
properly incurred out-of-pocket expenses incurred in the execution
of his duties as a Director.
AGENTS AND ADVISORS
SME Credit Realisation
Fund Limited
Company registration
number: 60680 (Guernsey,
Channel Islands)
Registered office Portfolio Administrator
De Catapan House Funding Circle Ltd
Grange Road 71 Queen Victoria Street
St Peter Port London EC4V 4AY
Guernsey GY1 2QG United Kingdom
Channel Islands
E-mail: ir@smecreditrealisation.com
Website: smecreditrealisation.com
Corporate broker and
Company Secretary and Bookrunner and Sponsor
Administrator Numis Securities Limited
Sanne Group (Guernsey) The London Stock Exchange
Limited Building
De Catapan House 10 Paternoster Square
Grange Road London EC4M 7LT
St Peter Port United Kingdom
Guernsey GY1 2QG
Channel Islands
Legal advisors as to UK Transfer Agent and
Guernsey Law Receiving Agent
Mourant Link Market Services
Royal Chambers Limited
St Julian's Avenue The Registry
St Peter Port 34 Beckenham Road
Guernsey Beckenham
GY1 4HP Kent BR3 4TU
United Kingdom
Legal advisors as to Registrar
English Law Link Market Services
Herbert Smith Freehills (Guernsey) Limited
LLP (London) Mont Crevelt House
Exchange House, Primrose Bulwer Avenue
Street, St Sampson
London EC2A, 2EG Guernsey GY2 4LH
United Kingdom Channel Islands
Legal advisors as to Independent Auditor
Irish Law PricewaterhouseCoopers
Matheson CI LLP
70 Sir John Rogerson's Royal Bank Place
Quay 1 Glategny Esplanade
Dublin 2 St Peter Port
Ireland Guernsey GY1 4ND
Channel Islands
GLOSSARY
Definitions and explanations of methodologies used are shown
below. The Company's prospectus contains a more comprehensive list
of defined terms.
"Administrator" Sanne Group (Guernsey) Limited
"Affiliates" With respect to any specified person means:
(a) any person that directly or indirectly controls,
is directly or indirectly controlled by or is directly
or indirectly under common control with such specified
person;
(b) any person that serves as a director or officer
(or in any similar capacity) of such specified
person;
(c) any person with respect to which such specified
person serves as a general partner or trustee (or
in any similar capacity).
For the purposes of this definition, "control"
(including "controlling", "controlled by" and
"under common control with") means the possession,
direct or indirect, of the power to direct or cause
the direction of the management and policies of
a person, whether through the ownership of voting
securities, by contract or otherwise.
"AGM" Annual General Meeting
"AIC Code" The AIC Code of Corporate Governance
"AIC" The Association of Investment Companies, of which
the Company is a member
"AIFM" Alternative Investment Fund Manager, appointed
in accordance with the AIFMD
"AIFMD" The Alternative Investment Fund Managers Directive
"Available Cash" Cash determined by the Board as being available
for use by the Company in accordance with the Investment
Objective, and, in respect of Basinghall, Tallis
and Queenhithe, cash determined by the Board of
each of Basinghall, Tallis and Queenhithe Board
(having regard to the terms of the Origination
Agreement and the Note) for use by Basinghall,
Tallis and Queenhithe and excluding (without limitation)
amounts held as reserves or pending distribution
"CE" Continental Europe
"Company Secretary" Sanne Group (Guernsey) Limited
"Credit Assets" Loans or debt or credit instruments of any type
originated through any of the Platforms
"Dividend Per Share" A measure of performance showing dividend either
declared or paid for each share issued and outstanding
in the Company
"EGM" The Extraordinary General Meeting on 11 June 2019
"Fair value movement The gain or loss recognised through other comprehensive
on Credit Assets" income relating to the movement in valuation of
Credit Assets
"Funding Circle" FCGPL, Funding Circle UK, Funding Circle US, Funding
Circle CE or either of their respective Affiliates
(as defined in the Prospectus of the Company),
or any or all of them as the context may require
"Funding Circle Funding Circle CE GmbH, Funding Circle Deutschland
CE" GmbH, Funding Circle Nederlands B.V. and Funding
Circle Espa a SLU
"FCGPL" Funding Circle Global Partners Limited
"Funding Circle Funding Circle Ltd
UK"
"Funding Circle FC Platform, LLC
US"
"NAV Total Return" A measure of performance showing how the NAV per
share has performed over a period of time. This
is calculated by comparing the NAV per share at
the beginning of a period to the NAV per share
at the end of a period removing the effect of capital
returns and dividend payments.
"Near Affiliates" The relevant Irish subsidiary of the Company and
any other SPV or entity which, not being an Affiliate
of the Company, has been or will be formed in connection
with the Company's direct or indirect investment
in Credit Assets and which (save in respect of
any nominal amounts of equity capital) is or will
be financed solely by the Company or any Affiliate
of the Company
"Note" or "Profit Notes issued by Basinghall Lending Designated Activity
Participating Note" Company and Tallis Lending Designated Activity
Company under their separate note programmes
"Origination Agreements" The German Origination Agreement, the Dutch Origination
Agreement, the Spanish Origination Agreement, the
UK Origination Agreement, the US Origination Agreement,
and the CE Origination Agreements
"Platforms" The platforms operated in the UK, US and CE by
Funding Circle, together with any similar or equivalent
platform established or operated by Funding Circle
in any jurisdiction.
"Proposals" The proposals contained in the circular issued
on 21 May 2019 which were subsequently approved
at the EGM on 11 June 2019.
These included the proposals to (1) modify the
Company's Investment Objective and Policy to reflect
a realisation strategy; (2) amend its Articles
of Incorporation (the "Articles") to include a
mechanism to enable the Company to redeem shares
in the Company compulsorily so as to return cash
to shareholders; (3) appoint Funding Circle Global
Partners Limited ("FCGPL") to facilitate potential
portfolio sales on behalf of the Company and to
(4) change the name of the Company into SME Credit
Realisation Fund Limited ("SCRF") consistent to
the proposed modification of the Company's Investment
Objective and Policy.
"Prospectus" The prospectus issued on the initial IPO on 30
November 2015 and subsequently revised in February
2017 and in August 2018
"PwC" PricewaterhouseCoopers CI LLP, PricewaterhouseCoopers
Ireland
"PwC CI" PricewaterhouseCoopers CI LLP
"PwC Ireland" PricewaterhouseCoopers Ireland
"Share Price Premium A measure of performance showing difference between
or Discount to NAV" the Group's NAV per share and the prevailing share
price.
"Share Price Total A measure of performance showing how the share
Return" price has performed over a period of time. This
is calculated by comparing the change in NAV per
share (after removing the effect of capital returns
and dividend payments) over a period to the share
price of the Company.
"Share Redemption" A mechanism to enable the Company to redeem shares
compulsorily so as to return cash to Shareholders
as disclosed in the EGM circular published on 21
May 2020.
"Share Repurchases" The Company's programme of repurchasing its own
shares in the secondary market.
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END
FR EAAXKAELAEAA
(END) Dow Jones Newswires
July 27, 2022 02:00 ET (06:00 GMT)
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