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RNS Number : 2843Q
SQN Secured Income Fund PLC
11 September 2017
 

11 September 2017

SQN Secured Income Fund plc

("SSIF" or the "Company")

 

Annual Financial Report

For the year ended 30 June 2017

 

 

A copy of the Company's Annual Report and Financial Statements for the year ended 30 June 2017 will shortly be available to view and download from the Company's website, www.thesmeloanfund.com.  Neither the contents  of  the  Company's  website nor  the  contents  of  any  website accessible from hyperlinks on the Company's website (or any other website)  is incorporated into or forms part of this announcement.

 

 

Enquiries to:

 

 

Richard Hills, Chairman

c/o Cantor Fitzgerald Europe

 

 

SQN Asset Management Limited

Neil Roberts/Jeremiah Silkowski/Dawn Kendall

 

tel: +44 1932 575 888

 

 

Cantor Fitzgerald Europe

Sue Inglis

 

tel: +44 20 7894 8016

 

 

Buchanan Communications

Charles Ryland/Vicky Hayns/Henry Wilson

 

tel: +44 20 7466 5000

 

www.thesmeloanfund.com

 

 

 

The  following  text  is  extracted  from  the  Annual  Report  and  Financial Statements of the Company for the year ended 30 June 2017.

       

 

Strategic Report

 

Highlights

 

 

30 June 2017

30 June 2016

 

Net assets [1]

£52,048,000

£53,400,000

 

NAV per Ordinary Share

98.74p

101.31p

 

Share price at 30 June 2017

97.75p

89.75p

 

Discount to NAV

1.0%

11.4%

 

Profit for the year

£2,440,000

£3,655,000

 

Dividend per share declared in respect of the period [2]

6.375p

4.95p

 

Total return per Ordinary Share (based on NAV)

+4.6%

+7.1%

 

Total return per Ordinary Share (based on share price)

+16.0%

-6.5%

 

Ordinary Shares in issue

52,660,350

52,660,350

 

 

 

 

[1]

In addition to the Ordinary Shares in issue, 50,000 Management Shares of £1 each are in issue (see Note 21).

 

 

[2]

Only 5.33p of the 6.375p per Ordinary Share dividends declared out of the profits for the year ended 30 June 2017 had been deducted from the 30 June 2017 NAV as the twentieth and twenty first dividends of 0.525p per Ordinary Share each had not been provided for at 30 June 2017 as, in accordance with IFRS, they were not deemed to be liabilities of the Company at that date.

On 21 August 2017, the Company declared a dividend of 0.525p per Ordinary Share for the period from 1 July 2017 to 31 July 2017.  This dividend will be paid on 29 September 2017.

 

 

Overview and Investment Strategy

 

General information

SQN Secured Income Fund plc (the "Company" or "SSIF") was incorporated in England and Wales under the Companies Act 2006 on 13 July 2015 with registered number 09682883.  It is an investment company, as defined in s833 of the Companies Act 2006.  Its shares were listed on the London Stock Exchange Specialist Fund Segment on 23 September 2015 ("Admission").  On 28 April 2017, the Company changed its name from The SME Loan Fund plc to SQN Secured Income Fund plc.  In order to reflect the new name of the Company, the ticker for the Ordinary Shares was changed to SSIF, with effect from 2 May 2017.

 

Following the passing of resolutions at a general meeting held on 27 April 2017, the investment objective and investment policy was changed to the following:

 

Investment objective

The investment objective of the Company is to provide Shareholders with attractive risk adjusted returns, principally in the form of regular, sustainable dividends, through investment predominantly in a range of secured loans and other secured loan-based instruments originated through a variety of channels and diversified by way of asset class, geography and duration.

 

Investment policy

The Company intends to achieve its investment objective by investing in a range of secured loan assets mainly through wholesale secured lending opportunities, secured trade and receivable finance and other collateralised lending opportunities.  Loan assets will include both direct loans as well as other instruments with loan-based investment characteristics (for example, but not limited to, bonds, loan participations, syndicated loans, structured notes, collateralised obligations or hybrid securities) and may include (subject to the limit set out below) other types of investment (for example, equity or revenue- or profit-linked instruments).  The Company may make investments through alternative lending platforms that present suitable investment opportunities identified by the Manager.

 

The Company will seek to ensure that diversification of its portfolio is maintained, with the aim of spreading investment risk.

 

Geography

The Company will invest in loan assets in a broad range of jurisdictions (although weighted towards the UK, Continental Europe and North America) in order to build a global portfolio of loan assets.

 

Asset classes

The Company will invest in a wide range of loan assets, including: short-term lending such as invoice and supply chain financing; mid-term lending such as trade or short-term bridge finance; and long-term lending such as the provision of fixed term loans with standard covenants and subject to monthly or quarterly interest payments.

 

Duration

The Company will hold a portfolio of loans and other loan-based instruments with a range of durations to maturity.  This is intended to provide the Company with both a liquid pool of assets ready for realisation, as well as a reliable stream of longer-term income.

 

Security

The Company will seek to invest in loan assets with a range of different types of security.  Typically, such security will be over a range of assets, including, but not limited to, property, intellectual property, tax credits, receivables, future income streams, pledges of shares or other specific assets, ownership of special purpose vehicles, personal or group company guarantees or via credit insurance, or a combination of these.  Loan assets will be unsecured only in the case of short-term lending or investment, where the perceived level of risk in respect of the particular asset is low given the quality of the counterparty, credit assessment and design of the credit contract.

 

Sector

The Company will be indifferent to sector when allocating funds for investment and, instead, will adhere to the investment restrictions which apply to the Company's loan portfolio as a whole in order to spread investment risk.

 

Investment restrictions

The following investment restrictions (calculated based on the Company's gross assets at the time of investment or, if earlier, the date on which the Company commits to making the relevant investment) in respect of the deployment of the Company's capital have been established in pursuit of its aim to maintain a diversified investment portfolio and thus mitigate concentration risks:

·     

Geography

 

 

-      Minimum exposure to loan assets invested in UK

60%

 

-      Minimum exposure to loan assets in other jurisdictions around the world

20%

·     

Duration

 

 

-    Minimum exposure to loan assets with a duration of less than 18 months

10%

 

-    Maximum exposure to loan assets with a duration of more than 36 months

50%

·     

Maximum single investment

10%

·     

Maximum exposure to a single borrower or group

10%

·     

Maximum exposure to loan assets sourced through a single alternative lending platform or other third party originator

25%

·     

Maximum exposure to any individual wholesale loan arrangement

25%

·     

Maximum exposure to working capital loans to alternative lending platforms

5%

·     

Maximum exposure to loan asset which are neither sterling-denominated nor hedged back to sterling

15%

·     

Maximum exposure to unsecured loan assets

25%

·     

Maximum exposure to assets (excluding cash and cash-equivalent investments) which are not loans or investments with loan-based investment characteristics

10%

 

The Company will not invest in other listed closed-end investment funds.

 

Borrowing

The Company (including, for this purpose, any special purpose vehicles that may be established by the Company in connection with obtaining leverage against any of its assets) may employ borrowings (through bank or other facilities) of up to 35% of the Company's net asset value (calculated at the time of draw down), which includes, on a look-through basis, borrowings of any investee entity.

 

Hedging

The Company intends, to the extent it is able to do so on terms that the Manager considers to be commercially acceptable, to seek to arrange suitable hedging contracts, such as currency swap agreements, futures contracts, options and forward currency exchange and other derivative contracts (including, but not limited to, interest rate swaps and credit default swaps) with the sole intention of hedging the Company's non-Sterling currency exposure back to Sterling.

 

Cash management

The Company's un-invested or surplus capital or assets may be invested in cash or cash equivalents (including government or public securities (as defined in the rules of the FCA), money market instruments, bonds, commercial paper or other debt obligations with banks or other counterparties having a "single A" (or equivalent) or higher credit rating as determined by any internationally recognised rating agency selected by the Board (which may or may not be registered in the EU)).  There is no limit on the amount of cash or cash equivalents that the Company may hold.

 

Changes to the investment policy

No material change will be made to the investment policy without the approval of Shareholders by ordinary resolution.

 

Chairman's Statement

 

Introduction

SQN Secured Income Fund plc is an investment company listed on the LSE and domiciled in the UK.  It invests on a secured basis in and through small and medium sized companies in the UK and the rest of the world using fundamental credit skills.

 

I am pleased to update Shareholders with my second Chairman's statement, covering the period under review from 1 July 2016 to 30 June 2017.  Over the last year, the Company has undergone significant change, following a strategic review.  These changes include diversifying the Shareholder base through a successful secondary placing of the Ordinary Shares previously held by GLI Finance Limited, the appointment of SQN Capital Management, LLC and its UK subsidiary, SQN Asset Management Limited, (together "SQN"), as manager of the Company from 1 April 2017, a change of name and changes to the Company's investment objective and policy/strategy.  Under SQN's stewardship, the Company has been re-energised with the commencement of a direct lending programme.

 

Performance and Markets

During the early part of the reporting period, despite continuing to make platform investments, the Board acknowledged that dividend income would not be able to meet our previous expectations.  In April 2017, after the appointment of SQN as manager, we took steps to adjust the dividend policy for a short period whilst amendments were made to the portfolio.    By the end of the reporting period, SQN had made progress in rebalancing the portfolio and committing the surplus cash with the majority of investments being direct rather than via platforms, and with sufficient earnings from interest payments to support a regular dividend payment of 6.25p for the current financial year.

 

For the reporting period ended 30 June 2017, the Company generated a net profit of £2.4 million and earnings per Ordinary Share of 4.63p.  The Company's NAV at 30 June 2017 was £52.0 million and NAV per ordinary share 98.74p (cum income) compared with £53.4 million and 101.31p as at 30 June 2016.  The total return for the reporting period was 4.6%.

 

Foreign exchange exposure on the 21.4% of non-Sterling assets, as a percentage of total assets, was fully hedged and any liquidity calls arising from the hedging strategy are considered manageable within the Company's cash flow.

 

Corporate Activity

On 1 April 2017, management of the investment portfolio was transferred to SQN.  Details of SQN's strong credentials for performing this role are included in the Investment Manager's report.  In conjunction with the changes to the Company's investment management arrangements, our corporate broker also completed a successful secondary placing of the Ordinary Shares previously owned by GLI Finance Limited (representing 48% of the issued share capital) substantially with new investors.

 

At a general meeting held on 27 April 2017, the investment objective and the policy of the Company were adjusted to allow for greater concentration of investments in quality, secured direct loans.  In addition, the Board was authorised to allot up to 250 million Ordinary Shares and/or C Shares pursuant to a share issuance programme.  This share issuance programme will enable the Company to raise additional capital promptly, enabling it to take advantage of new investment opportunities, thereby expanding and diversifying its investment portfolio.  In turn, an increase in the market capitalisation of the Company should help to improve secondary market liquidity in the Ordinary Shares and attract a larger, more diversified Shareholder base.  The Company will be required to publish a prospectus before it can issue Shares pursuant to any Share Issuance Programme.

 

SQN committed to achieving a number of milestones (see Investment Manager's report) following their appointment and I am pleased to report that these have been achieved.  This leaves the Company at the end of this reporting period with a solid foundation on which to support future capital raisings.

           

 

Strategic Review

Following its appointment in April 2017 SQN completed a thorough strategic review of the Company's platform investments, resulting in a rationalisation of platform-originated or related investments.

 

At the time of SQN's appointment, approximately 31% of the Company's assets were in cash with the remainder already invested via platforms and through working capital loans to platforms.  Following the review, a decision was taken by your Board, in conjunction with the Manager, to cease making working capital loans to platforms and to reduce the number of platforms through which the Company conducts business.  The selection of preferred platforms has been made after an in-depth analysis of their credit processes and sector preferences, with a focus on diversification, "best in class" and transparency.  The Company is confident that relationships with these remaining platforms are strong and will continue to provide consistent attractive deal flow.  In the future, the Company expects the percentage of the Company's portfolio represented by platform-originated loans to reduce in favour of direct lending.  However, as the Company grows, it will continue to allocate to platforms meaningfully.

 

Earnings and Dividends

Dividends per Ordinary Share declared in respect of the reporting period were 6.375p (see Note 5).

 

The Company elected to designate all dividends for the year ended 30 June 2017 as interest distributions to its Shareholders.  In doing so, the Company took advantage of UK tax treatment by "streaming" income from interest-bearing investments into dividends that will be taxed in the hands of Shareholders as interest income.

 

The Company intends to distribute at least 85% of its distributable income by way of dividends on a monthly basis.  During any year the Company may retain some of the distributable income to smooth future dividend flows.

 

The Company expects to achieve its annual dividend target of 6.25p, rising to at least 7.00p from July 2018, and a total return target of at least 8.0%.

 

Discount

From the commencement of the reporting period and until the announcement of SQN's appointment and the secondary placing of the Ordinary Share held by GLI Finance Limited on 8 March 2017, the Company traded at an average discount to NAV of 6.9%.  Since then, this discount has closed materially.  Given the substantial improvement in outlook for the performance of the Company and the radical changes undertaken, it is hoped that this discount will continue to narrow.

 

Change of Name

With effect from 28 April 2017, further to the appointment of SQN as the Company's manager and the change of focus to direct loans, it was considered appropriate to change the name of the Company from The SME Loan Fund plc to SQN Secured Income Fund plc.  The ticker for the Ordinary Shares changed from SMEF LN to SSIF LN on 2 May 2017.

 

Board of Directors

I am pleased to report that, after the changes made to the Board in the last reporting period, its composition has remained stable and no changes were made during the current reporting period.

 

The Board has made good progress in engaging with the new management team and have established regular communications in line with governance guidelines.

 

As the Board expects the size of the Company to increase substantially over the coming years it has decided to appoint an additional director. An independent search firm has been employed to find a suitable individual.

 

Outlook

The Board has made significant progress towards both improving corporate governance and the Company's internal control processes. Rationalisation of platform investments and increased secured direct lending have also been addressed.  Meanwhile the outlook for direct lending opportunities remains very promising and the Company has an abundant pipeline of investment opportunities to consider over the coming months.

 

After a period of turbulence, I anticipate that following the appointment of SQN as our Investment Manager, the Company will now fulfil its mandate of delivering stable income and a healthy risk-adjusted total return.

 

Richard Hills

Chairman

8 September 2017

 

Investment Manager's Report

 

Introduction

Welcome to the first Investment Manager's report under the stewardship of SQN Asset Management Limited ("SQN AM").  We assumed responsibility for this mandate on 1 April 2017 and I am delighted to report that we have already made meaningful progress.  We are confident that after a thorough strategic review and making our first few investments, the outlook for the Company is good.

 

SQN Secured Income Fund plc is an investment company listed on the LSE and domiciled in the UK.  It invests on a secured basis in and through small and medium sized companies in the UK and the rest of the world using fundamental credit skills.

 

SQN is a credit fund manager with a successful track record in managing assets within an investment company structure having launched the SQN Asset Finance Fund in July 2014.  The SQN Group has a total of circa £750 million of assets under management and has a core competency in credit management and we are suitably resourced to deliver income and total return in line with expectations.  Most significantly, we retain our own origination team within the SQN Group which enables us to build a good pipeline of new investment opportunities.  We have offices in the UK and the US.

 

The addition of SQN Secured Income Fund plc under the SQN umbrella is a perfect complement to the existing strategies managed by SQN, all focused on secured, credit-driven investments with security provided by underlying assets.  Deal flow for SQN Secured Income Fund plc is a natural progression of the existing SQN business lines which has historically been captured by entities with limited UK-focused capacity.  SQN Secured Income Fund plc now provides the opportunity to target these investments that we believe will produce above market, risk-adjusted returns and regular income.

 

In the short window since our appointment:

 

·      Dawn Kendall was appointed as managing director of SQN AM.

·      Amberton Asset Management Limited ("Amberton") was appointed as sub-manager to ensure continuity of relationships and smooth transition.

·      A review of the platforms has been completed with solid platforms retained.

·      Performance of remaining platforms has improved.

·      The remaining cash of 31% of the portfolio has been invested under the Company's revised mandate, focussed on direct investments.

·      A new business pricing structure has been created at rates between 9.5% and 11.5%, sufficient to increase overall portfolio yield to meet the return targets.

·      The majority of cash has been committed with a healthy pipeline of new opportunities supporting a future capital raise.

 

With the introduction of direct lending to the Company's portfolio, an enhanced risk management regime has been introduced.  SQN AM's investment approach recognises the significance of strong processes and a robust governance regime and, accordingly, each drawdown requires a "triple lock" sign off from its legal, credit and portfolio management teams. This is in addition to the extensive portfolio management and platform relationship capabilities SQN AM inherited within Amberton.

 

With the revision of the investment objective and policy of the Company, we have pursued investments in four core areas: secured trade finance, receivable finance, wholesale lending and secured commercial opportunities, including development loans and commercial property in growth sectors.    As is consistent with other SQN AM programmes, we aim to avoid consumer credit exposure.  We consider this to be a prudent approach that reduces risk of correlated performance with any macro-economic headwinds.

 

At the time of SQN AM's appointment, approximately a third of the Company's assets were in cash with the remainder invested via platforms and through working capital loans to platforms.  Following a review, a decision was taken to cease making working capital loans to platforms and to reduce the number of platforms through which the Company conducts business. The selection of preferred platforms was made after an in-depth analysis of their credit processes, sector preferences and pricing structures, with an emphasis on diversification, "best in class" and transparency.  The Company is confident that relationships with these remaining platforms are strong and will continue to provide good loan deal flow.  In the future, the percentage of the Company's portfolio represented by platform-originated loans is expected to reduce in favour of direct investments.  However, it is intended that platform-originated loans will continue to be an important part of the portfolio and, as the Company grows, should be of a meaningful size in the market.

 

Available cash has been primarily deployed into direct lending opportunities originated by SQN AM.  The nature of these direct investments is diverse and provides high levels of security with regard to covenant provision.  Each loan has been established making use of SQN AM's extensive network of industry contacts and all loans have been extended at rates of interest commensurate with exceeding the Company's target returns (a target annual dividend of 6.25p per share for the current financial year, increasing to at least 7.00p per share with effect from July 2018, and a target annual return of at least 8%).  Most pleasing is that loans are with businesses where the Company expects to nurture long term relationships as they grow.

 

In addition to targeting higher average yields, the investments made since the change of manager have also been of a longer duration keeping capital at work and reducing reinvestment risk and drag.  As at July 2017, a little more than 35% of the portfolio positions had investment terms of three years or longer with just under 20% between one and two years.  The current average term is less than two years but is targeted to increase now that the restrictive provisions in the operating documents have been revised and now allow for concentrations of more than 2.5% for any single exposure.  We believe, given the high-touch nature of direct investments and the extensive due diligence performed, appropriate diversification can be achieved with an average transaction size of circa 5% of the value of the Company.

 

Investment Outlook

Annual borrowing by UK SMEs is £75 billion and is used to fund various things including business expansion, purchase of premises, fixed assets or capital expense to develop new products and markets.  As reported by the Bank of England and the British Bankers' Association this demand is unlikely to diminish given the contraction of total bank lending to this segment of circa 15% over the last five years (2011 - £189 billion v 2016 - £164 billion).  High Street lenders (six banks) own more than 70% of this current lending pool.  Challenger banks have filled some of the void, increasing their loan exposure by 31.5% over the same period.  However, their target market is different to ours - their typical customers tend to be either much smaller or much larger. This represents a significant gap in the market for the Company, as our preferred pool is providing flexible and sensible financing to businesses with £5-20 million turnover per year.  We consider that we are well placed, when compared with our peers, to make material positive progress in this market.

 

Dawn Kendall

Managing Director

SQN Asset Management Limited

8 September 2017

 

Principal Risks

 

Risk is inherent in the Company's activities, but it is managed through an ongoing process of identifying and assessing risks and ensuring that appropriate controls are in place.  The key risks faced by the Company, along with controls employed to mitigate those risks, are set out below.

 

Macroeconomic risk

Adverse macroeconomic conditions may have a material adverse effect on the Company's yield on investments, default rate and cash flows.  The Board and the Investment Manager keep abreast of market trends and information to try to prepare for any adverse impact.

 

The Company's assets are diversified by geography, asset class, and duration, thereby reducing the impact that macroeconomic risk may have on the overall portfolio.

 

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows and/or fair values of the Company's investments.  Exposure to interest rate risk is limited by the use of fixed rate interest on the majority of the Company's loans, thereby giving security over future loan interest cash flows.

 

Currency risk is the risk that changes in foreign exchange rates will impact future profits and net assets.  Currency risk is mitigated to a certain extent through the use of forward foreign exchange contracts to hedge movements in foreign currency exchange rates.

 

Credit risk

The Company invests in a range of secured loan assets mainly through wholesale secured lending opportunities, secured trade and receivable finance and other collateralised lending opportunities.  Prior to the change in Investment Objective, which was approved at the general meeting held on 27 April 2017, the Company invested in a range of loans originated principally through investee platforms with which the Sub-Investment Adviser is familiar.  Since the appointment of the new Investment Manager and the change in the Investing Policy, the Company has also increased its exposure to direct loans.  Significant due diligence is undertaken on the borrowers of these loans and security taken to cover the loans and to mitigate the credit risk on such loans.  

 

The key factor in underwriting secured loans is the predictability of cash flow to allow the borrower to perform as per the terms of the contract.

 

The Company has investment restrictions in place.  Therefore, as mentioned above, the Company's assets are diversified by geography, asset class, and duration, thereby reducing the impact that investment risk may have on the overall portfolio.

 

The credit risk associated with the investments is reduced not only by diversification but also by the use of security.  Despite the use of security, credit risk is not reduced entirely and so the Investment Manager and Sub-Investment Adviser monitor the recoverability of the loans (on an individual loan basis) each month and impairs loans where appropriate. 

 

Platform risk

The Company is dependent on platforms, for that reducing part of the loan portfolio originated through platforms, to operate the loan portfolio (to bring new loans to the Company's attention; to effectively monitor those loans; and to pay and receive monies as necessary).  If a platform were no longer able to operate effectively this could put at risk loans made with/through such a platform and increase credit risk.

 

The Investment Manager and Sub-Investment Adviser undertake due diligence on all the platforms and part of this work is to confirm that the platforms have disaster recovery policies in place whereby a third party administrator would step in to manage the loans in the event the platform could no longer do so.  If such an event were to occur, the Company's approach would vary depending on the platform and the circumstances, and would be determined by the Board after discussion with the Investment Manager, Sub-Investment Adviser and other advisers.

 

Regulatory risk

The Company's operations are subject to wide ranging regulations, which continue to evolve and change.  Failure to comply with these regulations could result in losses and damage to the Company's reputation.

 

The Company employs third party service providers to ensure that regulations are complied with.

 

Reputational risk

The Company has been incorporated with an unlimited life.  However, in the event that the Ordinary Shares have been trading at a discount to NAV of greater than 10% for three consecutive months (calculated on a rolling three monthly average of daily numbers), the Company shall convene a general meeting to propose a continuation resolution.  If such a continuation resolution is not passed, the Board will draw up proposals for the winding-up or reconstruction of the Company for submission to Shareholders.  Any adverse impact on the Company's reputation would likely result in a fall in its share price, thereby increasing the possibility of a continuation vote being proposed.

 

Details of the premium/discount of the share price to NAV are disclosed below.

 

Environment, Employee, Social and Community Issues

 

As an investment company, the Company does not have any employees or physical property, and most of its activities are performed by other organisations.  Therefore, the Company does not combust fuel and does not have any greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013.

 

The Board believes that the Company does not have a direct impact on the community or environment and, as a result, does not maintain policies in relation to these matters.

 

Gender Diversity

 

The Board of Directors of the Company currently comprises three male Directors.  Further information in relation to the Board's policy on diversity can be found in the Directors' Remuneration Report.

 

Key Performance Indicators

 

The Board uses the following key performance indicators ("KPIs") to help to assess the Company's performance against its objectives.  Further information on the Company's performance is provided in the Chairman's Statement and the Investment Manager's Report.

 

Dividend yield

The Company distributes at least 85% of its distributable income by way of dividends on a monthly basis.  During any year the Company may retain some of the distributable income and use these to smooth future dividend flows.  Following discussions with the Investment Manager regarding the anticipated returns from the Company's portfolio (both in the shorter and longer terms), the Company rebased its annual dividend target to 6.25p per Share, increasing to at least 7.00p per Share with effect from July 2018.  The monthly dividend at the new rate of 0.525p per Share was first paid in June 2017.  Over the longer term, the Company will be targeting an annual net asset value total return of at least 8%.

 

The Company has (to date) announced dividends of £3,356,000 (6.375p per Ordinary Share) for the year ended 30 June 2017, being 86.0% of distributable income for the year (see Notes 5 and 22 for further details).  To ensure the tax efficient streaming of qualifying interest income, the Company may announce an additional dividend out of the profits for the year ended 2017, once the tax advisers have finalised the tax computations.

 

NAV and total return

The Directors regard the Company's NAV as a key component to delivering value to Shareholders, but believe that total return (which includes dividends) is the best measure for shareholder value.

 

Premium/discount of share price to NAV

The Board regularly monitors the premium/discount of the price of the Ordinary Shares to the NAV per share.  As mentioned in Principal Risks above, in the event that the Ordinary Shares have been trading at a daily discount to NAV of greater than 10% for three consecutive months (calculated on a rolling three monthly average of daily numbers), the Board will convene a general meeting to propose a continuation resolution.  If such a continuation resolution is not passed, the Board will draw up proposals for the winding-up or reconstruction of the Company for submission to Shareholders.  The adoption of the new Articles of Association which include, amongst other things, a provision for the continuation resolution (by way of an ordinary resolution) if the Company's net assets at 31 December 2019 are less than £250 million.

 

At 30 June 2017 the shares were trading at 97.75p, a 1.00% discount to NAV.  However, the three month average share price was a 1.12% discount to NAV. 

 

Richard Hills

Chairman

8 September 2017

 

Statement of Comprehensive Income

for the year ended 30 June 2017

 

Note

Year ended

30 June 2017

Period from

13 July 2015 (incorporation) to 30 June 2016

 

 

£'000

£'000

Revenue

 

 

 

Investment income

 

4,462

3,762

Other income

 

4

1

 

 

------------

------------

Total revenue

 

4,466

3,763

 

 

------------

------------

Operating expenses

 

 

 

Management fees

7a

(408)

(295)

Other expenses

11

(209)

(164)

Legal and professional fees

 

(172)

(71)

Administration fees

7b

(144)

(129)

Directors' remuneration

8

(128)

(89)

Broker fee

 

(119)

(61)

 

 

------------

------------

Total operating expenses

 

(1,180)

(809)

 

 

------------

------------

Investment gains and losses

 

 

 

Movement in unrealised gains on loans

15

(718)

939

Movement in unrealised gain on investments at fair value through profit or loss

16

(193)

242

Movement in unrealised gain on investment in subsidiary

 

(677)

677

Movement in unrealised gain on derivative financial instruments

18

127

23

Realised gain on disposal of loans

 

782

-

Realised gain on disposal of investments at fair value through profit or loss

16

260

-

Realised gain on disposal of subsidiary

 

673

-

Realised loss on derivatives

18

(1,008)

(1,214)

 

 

------------

------------

Total investment gains and losses

 

(754)

667

 

 

------------

------------

Net profit from operating activities before gain on foreign currency exchange

 

2,532

3,621

 

 

 

 

Net foreign exchange (loss)/gain

 

(87)

34

 

 

------------

------------

Net profit before taxation

 

2,445

3,655

 

 

 

 

Taxation

 

 

 

Corporation tax

12

(5)

-

 

 

------------

------------

Profit and total comprehensive income for the year/period attributable to the owners of the Company

 

2,440

3,655

 

 

------------

------------

 

 

 

 

Earnings per Ordinary Share (basic and diluted)

13

4.63p

6.94p

 

 

------------

------------

 

All of the items in the above statement are derived from continuing operations.

There were no other comprehensive income items in the year/period.

Except for unrealised investment gains and losses, all of the Company's profit and loss items are distributable.

The accompanying notes form an integral part of the financial statements.

 

Statement of Changes in Equity

for the year ended 30 June 2017

 

 

 

 

Note

Called up share capital

Share premium account

Special distributable reserve

Profit and loss account

Total

 

 

£'000

£'000

£'000

£'000

£'000

Opening balance at 13 July 2015

 

-

-

-

-

-

Profit for the period

22

-

-

-

3,655

3,655

 

 

 

 

 

 

 

Transactions with Owners in their capacity as owners:

Share capital issued

21

577

52,133

-

-

52,710

Share issue costs

22

-

(990)

-

-

(990)

Dividends paid

5,22

-

-

(201)

(1,774)

(1,975)

Cancellation of share premium account

22

-

(51,143)

51,143

-

-

 

 

------------

------------

------------

------------

------------

Total transactions with Owners in their capacity as owners

 

577

-

50,942

(1,774)

49,745

 

 

 

 

 

 

 

 

 

------------

------------

------------

------------

------------

At 30 June 2016

 

577

-

50,942

1,881

53,400

 

 

 

 

 

 

 

Profit for the year

22

-

-

-

2,440

2,440

 

 

 

 

 

 

 

Transactions with Owners in their capacity as owners:

Dividends paid

5,22

-

-

-

(3,792)

(3,792)

 

 

------------

------------

------------

------------

------------

Total transactions with Owners in their capacity as owners

 

-

-

-

(3,792)

(3,792)

 

 

 

 

 

 

 

 

 

------------

------------

------------

------------

------------

At 30 June 2017

 

577

-

50,942

529

52,048

 

 

------------

------------

------------

------------

------------

 

There were no other comprehensive income items in the year/period.

The above amounts are all attributable to the owners of the Company.

The accompanying notes form an integral part of the financial statements.

 

 Statement of Financial Position

as at 30 June 2017

 

 

Note

30 June 2017

30 June 2016

 

 

£'000

£'000

Non-current assets

 

 

 

Loans at amortised cost

15

32,450

28,449

Investments at fair value through profit or loss

16,17

258

1,981

 

 

------------

------------

Total non-current assets

 

32,708

30,430

 

 

------------

------------

Current assets

 

 

 

Loans at amortised cost

15

7,008

17,625

Cash held on client accounts with platforms

15

1,144

359

Investment in subsidiary

14,17

-

41,088

Derivative financial instruments

17,18

150

23

Other receivables and prepayments

19

733

3,163

Cash and cash equivalents

 

13,376

2,192

 

 

------------

------------

Total current assets

 

22,411

64,450

 

 

------------

------------

Total assets

 

55,119

94,880

 

 

------------

------------

Current liabilities

 

 

 

Amount due to subsidiary

14

-

(41,088)

Other payables and accruals

20

(3,071)

(392)

 

 

------------

------------

Total liabilities

 

(3,071)

(41,480)

 

 

------------

------------

 

 

 

 

 

 

------------

------------

Net assets

 

52,048

53,400

 

 

------------

------------

Capital and reserves attributable to owners of the Company

 

 

 

Called up share capital

21

577

577

Other reserves

22

51,471

52,823

 

 

------------

------------

Equity attributable to the owners of the Company

 

52,048

53,400

 

 

------------

------------

 

 

 

 

Net asset value per Ordinary Share

23

98.74p

101.31p

 

 

------------

------------

 

These financial statements of SQN Secured Income Fund plc (registered number 09682883) were approved by the Board of Directors on 8 September 2017 and were signed on its behalf by:

 

 

Richard Hills

Chairman

8 September 2017

 

 

Ken Hillen

Director

8 September 2017

 

The accompanying notes form an integral part of the financial statements.

 

 Statement of Cash Flows

for the year ended 30 June 2017

 

 

 

 

Year ended 30 June 2017

Period from 13 July 2015 (incorporation) to 30 June 2016

 

£'000

£'000

Cash flows from operating activities

 

 

Net profit before taxation

2,445

3,655

Adjustments for:

 

 

Movement in unrealised gains on loans

718

(939)

Movement in unrealised gain on investment at fair value through profit or loss

193

(242)

Movement in unrealised gain on investment in subsidiary

677

(677)

Movement in unrealised gain on derivatives

(127)

(23)

Realised gain on disposal of loans

(782)

-

Realised gain on disposal of investments at fair value through profit or loss

(260)

-

Realised gain on disposal of subsidiary

(673)

-

Realised loss on derivatives

1,008

1,214

Interest received and reinvested by platforms

(1,596)

(1,505)

Capitalised interest

-

(23)

Decrease/(increase) in investments

11,710

(9,439)

 

------------

------------

Net cash inflow/(outflow) from operating activities before working capital changes

13,313

(7,979)

Increase in other receivables and prepayments

(1,011)

(624)

Increase in other payables and accruals

2,806

260

 

------------

------------

Net cash inflow/(outflow) from operating activities

15,108

(8,343)

 

 

 

Cash flows from financing activities

 

 

Proceeds from issue of Management Shares

-

50

Proceeds from issue of Ordinary Shares

-

12,801

Share issue costs paid

-

(473)

Dividends paid

(3,924)

(1,843)

 

------------

------------

Net cash (outflow)/inflow from financing activities

(3,924)

10,535

 

 

 

 

------------

------------

Increase in cash and cash equivalents in the year/period

11,184

2,192

Cash and cash equivalents at the beginning of the year/period

2,192

-

 

------------

------------

Cash and cash equivalents at 30 June 2017

13,376

2,192

 

------------

------------

 

 

 

Supplemental cash flow information

 

 

Non-cash transaction - receipt of seed portfolio for issue of Ordinary Shares

-

40,271

Non-cash transaction - interest received and reinvested by platforms

1,596

1,505

 

The accompanying notes form an integral part of the financial statements.

 

Notes to the Financial Statements

for the year ended 30 June 2017

 

1. General information

The Company was incorporated in England and Wales under the Companies Act 2006 on 13 July 2015 with registered number 09682883 and its shares were listed on the London Stock Exchange Specialist Fund Segment on 23 September 2015 ("Admission").

 

The Company is an investment company as defined in s833 of the Companies Act 2006.

 

Investment objective

A change to the investment objective and investment policy were approved by Shareholders at an general meeting held on 27 April 2017.  The new investment objective and investment policy are as below.

 

The investment objective of the Company is to provide Shareholders with attractive risk adjusted returns, principally in the form of regular, sustainable dividends, through investment predominantly in a range of secured loans and other secured loan-based instruments originated through a variety of channels and diversified by way of asset class, geography and duration.

 

Investment policy

The Company achieves its investment objective by investing in a range of secured loan assets mainly through wholesale secured lending opportunities, secured trade and receivable finance and other collateralised lending opportunities.  Loan assets include both direct loans as well as other instruments with loan-based investment characteristics (for example, but not limited to, bonds, loan participations, syndicated loans, structured notes, collateralised obligations or hybrid securities) and may include (subject to the limit set out below) other types of investment (for example, equity or revenue- or profit-linked instruments).  The Company may make investments through alternative lending platforms that present suitable investment opportunities identified by the Manager.

 

The Company will seek to ensure that diversification of its portfolio is maintained, with the aim of spreading investment risk.

 

 

 

 

2. Statement of compliance

 

 

a)  Basis of preparation

These financial statements present the results of the Company for the year ended 30 June 2017.  These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union.

 

The financial statements for the period ended 30 June 2016 were consolidated as, as at 30 June 2016, the Company held a wholly owned subsidiary. The subsidiary was liquidated during the current year (see note 14 for further details). Therefore, the information presented within these financial statements, including the comparative information, represents the Company only position.

 

These financial statements have not been prepared in full accordance with the Statement of Recommended Practice ("SORP") for investment trusts issued by the AIC in November 2014 and updated in January 2017 with consequential amendments, as the main driver of the SORP is to disclose the allocation of expenses between revenue and capital, thereby enabling a user of the financial statements to determine distributable reserves.  However, with the exception of investment gains and losses, all of the Company's profit and loss items are of a revenue nature as it does not allocate any expenses to capital.  Therefore, the Directors believe that full compliance with the SORP would not be of benefit to users of the financial statements.  Further details on the distributable reserves are provided in note 22. 

 

 

 

b)  Basis of measurement

The financial statements have been prepared on a historical cost basis, except for financial assets (including derivative instruments), which are measured at fair value through profit or loss.  The financial statements have been prepared on a going concern basis.

 

 

 

 

 

c)   Segmental reporting

The Directors are of the opinion that the Company is engaged in a single economic segment of business, being investment in a range of SME loan assets.

 

 

 

 

 

d)  Use of estimates and judgements

 

 

The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses.  The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis.  Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods.

 

Judgements made by management in the application of IFRSs that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 4.

 

         

 

3. Significant accounting policies

a)  Foreign currency

Foreign currency transactions are translated into Sterling using the exchange rates prevailing at the dates of the transactions.  Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income.  Translation differences on non-monetary financial assets and liabilities are recognised in the Statement of Comprehensive Income.

 

b)  Financial assets and liabilities

The financial assets and liabilities of the Company are defined as loans, bonds with loan type characteristics, investments at fair value through profit or loss, cash and cash equivalents, other receivables and other payables.

 

Recognition

The Company recognises a financial asset or a financial liability when, and only when, it becomes a party to the contractual provisions of the instrument.  Purchases and sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace are recognised on the trade date, i.e. the date that the Company commits to purchase or sell the asset.

 

Initial measurement

Financial assets and financial liabilities at fair value through profit or loss are recorded in the Statement of Financial Position at fair value.  All transaction costs for such instruments are recognised directly in profit or loss.

 

Financial liabilities not designated as at fair value through profit or loss, such as loans, are initially recognised at fair value, being the amount issued less transaction costs.

 

Subsequent measurement

After initial measurement, the Company measures financial assets designated as loans and receivables, and financial liabilities not designated as at fair value through profit or loss, at amortised cost using the effective interest rate method, less impairment allowance.  Gains and losses are recognised in the Statement of Comprehensive Income when the asset or liability is derecognised or impaired.  Interest earned on these instruments is recorded separately as investment income.

 

After initial measurement, the Company measures financial instruments which are classified at fair value through profit or loss at fair value.  Subsequent changes in the fair value of those financial instruments are recorded in net gain or loss on financial assets and liabilities at fair value through profit or loss.

 

Derecognition

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar assets) is derecognised where:

-       The rights to receive cash flows from the asset have expired;  or

-       The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a "pass-through" arrangement;  and

-       Either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

 

When the Company has transferred its rights to receive cash flows from an asset (or has entered into a pass-through arrangement) and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Company's continuing involvement in the asset.

 

The Company derecognises a financial liability when the obligation under the liability is discharged, cancelled or expires.

 

Impairment

A financial asset is impaired when the recoverable amount is estimated to be less than its carrying amount.


An impairment loss is recognised immediately in the Statement of Comprehensive Income, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment is treated as a revaluation decrease.

 

b)  Cash and cash equivalents

Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value.

 

c)   Receivables and prepayments

Receivables are carried at the original invoice amount, less allowance for doubtful receivables.  Provision is made when there is objective evidence that the Company will be unable to recover balances in full.  Balances are written-off when the probability of recovery is assessed as being remote.

 

d)  Transaction costs

Transaction costs incurred on the acquisition of loans are capitalised upon recognition of the financial asset.

 

e)  Income and expenses

Bank interest and loan interest are recognised on a time-proportionate basis using the effective interest rate method.

 

Dividend income is recognised when the right to receive payment is established.

 

All expenses are recognised on an accruals basis.  All of the Company's expenses (with the exception of share issue costs, which are charged directly to the distributable reserve) are charged through the Statement of Comprehensive Income in the period in which they are incurred.

 

f)   Taxation

The Company is exempt from UK corporation tax on its chargeable gains as it satisfies the conditions for approval as an investment trust.  The Company is, however, liable to UK corporation tax on its income.  However, the Company has elected to take advantage of modified UK tax treatment in respect of its "qualifying interest income" in order to deduct all, or part, of the amount it distributes to Shareholders as dividends as an "interest distribution".

 

g)  Changes in accounting policy and disclosures

New and amended standards and interpretations

The accounting policies adopted are consistent with those of the previous financial year.  The Company adopted the following new and amended relevant IFRS in the year:

IFRS 7

Financial Instruments: Disclosures - annual improvements.

IFRS 12

Disclosure of Interests in Other Entities - amendments regarding the application of the consolidation exception.

IAS 1

Presentation of Financial Statements - amendments resulting from the disclosure initiative.

 

The adoption of the above standards did not have an impact on the financial position or performance of the Company.

 

h)  Accounting standards issued but not yet effective

The International Accounting Standards Board ("IASB") has issued/revised a number of relevant standards with an effective date after the date of these financial statements.  Any standards that are not deemed relevant to the operations of the Company have been excluded.  The Directors have chosen not to early adopt these standards and interpretations and they do not anticipate that they, with the exception of IFRS 9, would have a material impact on the Company's financial statements in the period of initial application. 

 

Effective date

 

IFRS 2

Share-based payments

1 January 2018

 

IFRS 9

Financial Instruments

1 January 2018

 

IFRS 15

Revenue from Contracts with Customers

1 January 2018

 

IAS 7

Statement of Cash Flows

1 January 2017

 

 

Annual improvements to IFRSs 2014-2016 Cycle

1 January 2017

 

IFRIC 22

Foreign Currency Transactions and Advance Consideration

1 January 2018

 

 

In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments that replaces IAS 39, Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9.  IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting.  IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted.  Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory.  For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.

The Company plans to adopt the new standard on the required effective date.  The Company has performed a high-level impact assessment of all three aspects of IFRS 9.  This preliminary assessment is based on currently available information and may be subject to changes arising from further detailed analyses or additional reasonable and supportable information being made available to the Company in the future.  Overall, the Company expects no significant impact on its balance sheet and equity, and will perform a more detailed assessment in 2017.

 

i)     Classification and measurement

The classification of financial assets will be based on the Company's business model and the contractual cash flow characteristics of its investments.  The Company does not expect a significant impact on its Statement of Financial Position or equity on applying the classification and measurement requirements of IFRS 9.  The Board expects to continue measuring loans and receivables at amortised cost, and at fair value all financial assets and liabilities currently held at fair value.

 

ii)    Impairment

IFRS 9 changes the basis of recognition of impairment on financial assets from an incurred loss to an expected credit loss approach for assets held at amortised cost.  This introduces a number of new concepts and changes to the approach to provisioning compared with the current methodology under IAS 39:

·      Expected credit losses are based on an assessment of the probability of default, loss given default and exposure at default, discounted to give a net present value.  The expected credit loss should be probability weighted and take into account all reasonable and supportable information.

 

iii)   Hedge accounting

The Company does not currently designate any hedges as effective hedging relationships which qualify for hedge accounting.  Therefore, the Company does not expect there to be any impact with respect to hedge accounting on the Company as a result of applying IFRS 9.

 

The Directors are currently evaluating the impact of IFRS 9 upon the Company.  However, it is noted that the measurement of impairment will involve increased complexity and judgement, including estimation of probabilities of default.  The use of security on a large (and increasing) proportion of the Company's loans will limit the impact of adopting IFRS 9. Therefore, it is not expected to have a material financial impact.  However, it will not be practical to disclose reliable financial impact estimates until the implementation programme is further advanced.

 

The impact that IFRS 15 will have on the Company's financial statements is also considered to be immaterial because the Company does not have any contracts with customers which meet the definition under IFRS 15.

 

 

 

4. Use of Judgements and estimates

 

The preparation of the Company's financial statements requires the Directors to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements and disclosure of contingent liabilities.  However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability in future periods.

 

 

Estimates and assumptions

The Company based its assumptions and estimates on parameters available when the financial statements were approved.  However, existing circumstances and assumptions about future developments may change due to market changes or circumstances arising beyond the control of the Company.  Such changes are reflected in the assumptions when they occur.

 

         

 

i) Recoverability of loans and other receivables

The Directors assess the recoverability of the Company's loans to determine whether any impairment provision is required.  There is an indicator of impairment for a loan when the borrower has failed to make a payment, either capital or interest, when contractually due and, upon assessment, the Company feels that full recovery is not expected.  The Company assesses at each reporting date (and at least on a monthly basis) whether there is objective evidence that a loan, or group of loans, classified as loans at amortised cost, is impaired. As part of this process:

·      Platforms are contacted to determine default and delinquency levels of individual loans;

·      Consideration is given as to whether payment has been received after the balance sheet date or whether loans are secured; and

·      Recovery rates are estimated.

 

At 30 June 2017, the Company's financial instruments at fair value through profit or loss comprised unlisted equity shares and derivative financial instruments.  See note 17 for details of the bases of valuation.

 

5. Dividends

The Company distributes at least 85% of its distributable income earned in each financial year by way of dividends.  Following discussions with the Investment Manager regarding the anticipated returns from the Company's portfolio (both in the shorter and longer terms), with effect from May 2017, the Company rebased its annual dividend target to 6.25p per Share, increasing to at least 7.0p per Share with effect from July 2018.  The monthly dividend at the new rate of 0.525p per Share was first paid in June 2017.  Over the longer term, the Company will be targeting an annual net asset value total return of at least 8%.  The Company intends to continue to pay monthly dividends to Shareholders.

 

The Company elected to designate all of the dividends for the year ended 30 June 2017 as interest distributions to its Shareholders.  In doing so, the Company took advantage of UK tax treatment by "streaming" income from interest-bearing investments into dividends that will be taxed in the hands of Shareholders as interest income.

 

To date, the Company has declared the following dividends in respect of earnings for the year ended 30 June 2017:

Announcement date

Pay date

Total dividend declared in respect of earnings in the year

Amount per

Ordinary Share

 

 

£'000

 

23 August 2016

23 September 2016

316

0.60p

21 September 2016

28 October 2016

316

0.60p

25 October 2016

28 November 2016

316

0.60p

21 November 2016

23 December 2016

316

0.60p

12 December 2016

27 January 2017

316

0.60p

12 January 2017

24 February 2017

316

0.60p

15 February 2017

24 March 2017

316

0.60p

24 March 2017

28 April 2017

316

0.60p

19 May 2017

23 June 2017

276

0.525p

23 June 2017

28 July 2017

276

0.525p

21 July 2017

25 August 2017

276

0.525p

 

 

------------

------------

Dividends declared (to date) for the year

3,356

6.375p

Less, dividends paid after the year end

(552)

(1.05)p

Add, dividends paid in the year in respect of the prior period

988

1.876p

 

 

------------

------------

Dividends paid in the year

 

3,792

7.201p

 

 

------------

------------

 

In accordance with IFRS, dividends are only provided for when they become a contractual liability of the Company.  Therefore, during the year a total of £3,792,000 (2016: £1,975,000) was incurred in respect of dividends, none of which was outstanding at the reporting date (2016: none).  The twentieth and twenty first dividends of £276,000 each had not been provided for at 30 June 2017 as, in accordance with IFRS, they were not deemed to be liabilities of the Company at that date.

 

All dividends in the year were paid out of revenue (and not capital) profits.

 

On 21 August 2017, the Company declared a dividend of 0.525 pence per share for the period from 1 July 2017 to 31 July 2017.  This dividend will be paid on 29 September 2017.

 

6. Related parties

As a matter of best practice and good corporate governance, the Company has adopted a related party policy which applies to any transaction which it may enter into with any Director, the Investment Manager, Amberton Asset Management Limited ("Amberton" or the "Sub-Investment Adviser") or any of their affiliates which would constitute a "related party transaction" as defined in, and to which would apply, Chapter 11 of the Listing Rules.  In accordance with its related party policy, the Company obtained: (i) the approval of a majority of the Directors; and (ii) a third-party valuation in respect of these transactions from an appropriately qualified independent adviser.

 

Transactions with GLI Finance Limited ("GLIF")

In September 2016, as payment of the balance due from GLIF, the Company conducted a transaction with GLIF that combined the novation of platform loans and equity in platforms, both to and from GLIF, with a cash transfer to GLIF of £1,049,000.

 

In January 2017, the Company sold a further two platform loans to GLIF, for a combined total of £685,000.

 

In the previous period, the Company purchased GLI Alternative Finance Guernsey Limited from GLIF, on Admission, in return for 40,270,763 Ordinary Shares in the Company.  In addition, during the previous period the Company purchased loans and associated interest of £4,675,000 from GLIF.

 

The Company also purchased a loan from Sancus Limited (a subsidiary of GLIF) of £1,250,000 as part of a co-investment agreement, for which GLIF was the borrowing party of the original loan.  As at 30 June 2016, the outstanding balance of the loan was £1,250,000 and during the period ended 30 June 2016, the Company earned interest on the loan of £84,000, of which £4,000 was outstanding as at 30 June 2016.

 

Further, on 23 December 2015, GLIF agreed to buy back a loan and associated accrued interest from the Company.  GLIF agreed that interest would continue to accrue to the Company, on the same terms, until such time that GLIF repaid the loan.

 

As at 30 June 2016, GLIF owed the Company £2,392,000, which related solely to the above mentioned loan and accrued interest.

 

On 30 June 2016, GLIF guaranteed 100% of the outstanding principal of a £1,200,000 loan from the Company to one of the platforms and all of the associated interest.

 

Loan to Medical Equipment Solutions Limited ("MESL")

In June 2017, the Company loaned £1,380,000 to MESL, whose Chairman is Neil Roberts, who is also chairman of SQN Capital Management, LLC.  Loan interest of £3,000 was earned in the year, all of which was outstanding at 30 June 2017.  The loan bears interest at 10.0% per annum and is for a period of five years from the date of drawdown.  The loan is to be repaid via 60 monthly payments.

 

Loan to Amberton Properties (Oxford) Limited

In December 2016, the Group loaned £1,300,000 to Amberton Properties (Oxford) Limited via Sancus Group and received interest of 8% per annum, in advance, being £46,000 for the duration of the loan. The loan was repaid in full in May 2017.

 

Transactions with subsidiary undertaking

Details of the transactions with the Company's previous subsidiary undertaking are disclosed in note 14.

 

 

7. Key contracts

a)  Investment Manager

With effect from 1 April 2017, SQN Asset Management Limited ("SQN UK") and SQN Capital Management, LLC ("SQN US") were appointed as the Investment Manager and Amberton ceased to act as investment manager.  Amberton was appointed as Sub-Investment Adviser to the Investment Manager with effect from 1 April 2017.

 

The Investment Manager has responsibility for managing the Company's portfolio.  For their services, the Investment Manager is entitled to a management fee at a rate equivalent to the following schedule (expressed as a percentage of NAV per annum, before deduction of accruals for unpaid management fees for the current month): 

·      1.0% per annum for NAV lower than or equal to £250 million; 

·      0.9% per annum for NAV greater than £250 million and lower than or equal to £500 million; and 

·      0.8% per annum for NAV greater than £500 million. 

 

The management fee is payable monthly in arrears on the last calendar day of each month.  No performance fee is payable by the Company to the Investment Manager. 

 

The Company may also incur transaction costs for the purposes of structuring investments for the Company. These costs form part of the overall transaction costs that are capitalised at the point of recognition and are taken into account by the Investment Manager when pricing a transaction. When structuring services are provided by the Investment Manager or an affiliate of them, they shall be entitled to charge an additional fee to the Company equal to up to 1.0% of the cost of acquiring the investment (ignoring gearing and transaction expenses).  This cost will not be charged in respect of assets acquired from the Investment Manager, the funds they manage or where they or their affiliates do not provide such structuring advice. 

 

The Investment Manager has agreed to bear all the broken and abortive transaction costs and expenses incurred on behalf of the Company.  Accordingly, the Company has agreed that the Investment Manager may retain any commitment commissions received by the Investment Manager in respect of investments made by the Company save that if such commission on any transaction were to exceed 1.0% of the transaction value, the excess would be paid to the Company.

 

With effect from 1 April 2017, Amberton was no longer directly appointed by the Company and was not entitled to a fee from the Company.  The fees of the Sub-Investment Adviser are borne by the Investment Manager.

 

 

During the year, a total of £408,000 (2016: £295,000) was incurred in respect of management fees (£278,000 to Amberton and £130,000 to SQN UK (2016: £295,000 to Amberton)), of which £43,000 (2016: £93,000 to Amberton) was payable at the reporting date.

 

b) Administration fees

Elysium Fund Management Limited ("Elysium") is entitled to an administration fee of £100,000 per annum in respect of the services provided in relation to the administration of the Company, together with time based fees in relation to work on investment transactions.  During the year, a total of £144,000 (2016: £129,000) was incurred in respect of administration fees, of which £31,000 (2016: £35,000) was payable at the reporting date.

 

A set-up fee of £25,000 was also paid to Elysium in the period ended 30 June 2016.

 

8. Directors' remuneration

During the year, a total of £128,000 (2016: £89,000) was incurred in respect of Directors' remuneration, £9,000 of which was payable at the reporting date (2016: none).  No bonus or pension contributions were paid or payable on behalf of the Directors.  Further details can be found in the Directors' Remuneration Report.

 

9. Key management and employees

The Company had no employees during the year (2016: none). Therefore, there were no key management (except for the Directors) or employee costs during the year.

 

10. Auditor's remuneration

For the year ended 30 June 2017, total fees, plus VAT, charged by RSM UK Audit LLP, together with amounts accrued at 30 June 2017, amounted to £45,000 (2016: £121,000), of which £42,000 (2016: £44,000) related to audit services, £3,000 (2016: £15,000) was in respect of tax services, and £nil (2016: £62,000) (included in Share issue costs) related to reporting accountant and tax work on the IPO.  As at 30 June 2017, £38,000 (2016: £23,000) was due to RSM UK Audit LLP.

 

11. Other expenses

 

Year ended 30 June 2017

Period from 13 July 2015 (incorporation) to 30 June 2016

 

£'000

£'000

Audit fees (note 10)

42

44

Accountancy and taxation fees

37

-

Registrar fees

30

17

Custodian fee

25

19

Listing fees

22

14

Website costs

17

18

Other expenses

15

15

Travel costs

6

13

Directors' liability insurance

6

6

Printing costs

6

3

Auditors' non-audit and taxation fees (note 10)

3

15

 

------------

------------

 

209

164

 

------------

------------

 

12. Taxation

The Company has received confirmation from HMRC that it satisfied the conditions for approval as an investment trust, subject to the Company continuing to meet the eligibility conditions in s.1158 of the Corporation Tax Act 2010 and the ongoing requirements for approved investment trust companies in chapter 3 or part 2 of the Investment Trust (approved Company) Tax Regulations 2011 (Statutory Instrument 2011.2999).  The Company intends to retain this approval and self-assesses compliance with the relevant conditions and requirements.

 

As an investment trust the Company is exempt from UK corporation tax on its chargeable gains.  The Company is, however, liable to UK corporation tax on its income.  However, the Company has elected to take advantage of modified UK tax treatment in respect of its "qualifying interest income" in order to deduct all, or part, of the amount it distributes to Shareholders as dividends as an "interest distribution".

 

 

Year ended

30 June 2017

Period from

13 July 2015 (incorporation) to 30 June 2016

 

£'000

£'000

Corporation tax:

 

 

-       Current year

-

-

-       Adjustments in relation to prior period [1]

5

-

 

------------

------------

Total tax expense for the year/period

5

-

 

------------

------------

[1]

The Company made interest distributions in relation to the prior year based on estimated taxable profit for that period.  The adjustment of £5,000 relates to the corporation tax charge on the residual taxable profit which transpired upon finalisation of the corporation tax return.

 

 

 

 

Year ended

30 June 2017

Period from

13 July 2015 (incorporation) to 30 June 2016

 

 

£'000

£'000

 

Reconciliation of tax charge:

 

 

 

Profit before taxation

2,445

3,655

 

 

------------

------------

 

Tax at the standard UK corporation tax rate of 20%

489

731

 

Effects of:

 

 

 

-       Non-taxable investment gains and losses

150

(133)

 

-       Interest distributions

(671)

(598)

 

-       Tax losses carried forward

32

-

 

-       Adjustments in relation to prior period

5

-

 

 

------------

------------

 

Total tax expense

5

-

 

 

------------

------------

 

 

 

Domestic corporation tax rates in the other jurisdictions in which the Company operated were as follows:

 

 

Year ended

30 June 2017

Period from

13 July 2015 (incorporation) to 30 June 2016

 

 

£'000

£'000

 

United Kingdom

20%

20%

 

Guernsey

nil

nil

 

 

 

Due to the Company's status as an investment trust and the intention to continue to meet the required conditions, the Company has not provided for deferred tax on any capital gains and losses.

         

 

13. Earnings per Ordinary Share

The earnings per Ordinary Share of 4.63p (2016: 6.94p) is based on a profit attributable to the owners of the Company of £2,440,000 (2016: £3,655,000) and on a weighted average number of 52,660,350 (2016: 52,660,350) Ordinary Shares in issue since Admission.  There is no difference between the basic and diluted earnings per share.

 

14. Investment in subsidiary undertaking

The Company's previously wholly-owned subsidiary, GLI Alternative Finance Guernsey Limited, was liquidated on 16 May 2017. Before this date, the subsidiary, which had been incorporated in Guernsey, had been dormant for several months.

 

As at 30 June 2016, the investment in the subsidiary, carried at fair value through profit or loss, was held at £41,088,000, and the Company owed £41,088,000 to the subsidiary.

 

15. Loans at amortised cost

 

 

Year ended            30 June 2017

  Period from          13 July 2015  (incorporation) to 30 June 2016

 

£'000

£'000

Loans

40,381

45,494

Unrealised gain*

221

939

 

------------

------------

Balance at year/period end

40,602

46,433

 

------------

------------

Loans:

Current

7,008

17,625

 

Non-current

32,450

28,449

Cash held on client accounts with platforms

1,144

359

 

------------

------------

Loans at amortised cost

40,602

46,433

 

------------

------------

*Unrealised gain

 

 

Foreign exchange on non-Sterling loans

651

1,334

Impairments

(430)

(395)

 

------------

------------

Unrealised gain

221

939

 

------------

------------

 

The weighted average interest rate of the loans as at 30 June 2017 was 8.58% (2016: 9.49%).

 

There is an indicator of impairment for a loan when the borrower has failed to make a payment, either capital or interest, when contractually due.  The Company assesses at each reporting date (and at least on a monthly basis) whether there is objective evidence that a loan or group of loans, classified as loans at amortised cost, is impaired.  As part of this process:

-       Platforms are contacted to determine default and delinquency levels of individual loans; and

-       Recovery rates are estimated.

 

At 30 June 2017, repayments of £1,031,000 (2016: £181,000) were past due, aged as below.  However, the Company assessed the recoverability of the loans and did not consider any impairment necessary.

 

 

30 June 2017

30 June 2016

 

£'000

£'000

Less than 30 days overdue

385

16

More than 30 days but less than 90 days overdue

-

165

More than 90 days but less than a year overdue

646

-

 

------------

------------

 

1,031

181

 

------------

------------

 

At 30 June 2017, the Board considered £430,000 (2016: £395,000) of loans to be impaired as, following routine investigation of loan performance, the Investment Manager received evidence of delayed and missed interest payments in respect of the below loans.  This evidence indicated that the loans' recoverability would be less than their carrying value and by liaising directly with the platforms to establish a recovery rate, Amberton had estimated a recoverable amount as at 30 June 2017.

 

 

30 June 2017

30 June 2016

 

£'000

£'000

Funding Knight

307

285

UK Bond Network

104

-

MyTripleA

19

-

Liftforward

-

110

 

------------

------------

Total impairment

430

395

 

------------

------------

During the year, £454,000 (2016: nil) of loans were written off and included within Realised gain on disposal of loans in the Statement of Comprehensive Income.

 

16. Investments at fair value through profit or loss

 

Year ended 30 June 2017

Period from 13 July 2015 (incorporation) to 30 June 2016

 

£'000

£'000

Balance brought forward

1,981

-

Additions in the year/period

181

1,739

Disposals in the year/period

(1,971)

-

Realised gain on disposal of investments at fair value through profit or loss

 

260

 

-

Movement in unrealised gain on investments at fair value through profit or loss

 

(193)

 

242

 

------------

------------

Balance at year/period end

258

1,981

 

------------

------------

 

 

 

For further information on the investments at fair value through profit or loss, see note 17.

 

17. Fair value of financial instruments at fair value through profit or loss

The following table shows financial instruments recognised at fair value, analysed between those whose fair value is based on:

-       Quoted prices in active markets for identical assets or liabilities (Level 1);

-       Those involving inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2);  and

-       Those with inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

 

 

At 30 June 2017, the financial instruments designated at fair value through profit or loss were as follows:

 

 

30 June 2017

 

Level 1

Level 2

Level 3

Total

Financial assets

£'000

£'000

£'000

£'000

Unlisted equity shares

-

-

258

258

Derivative financial instruments (note 18)

-

150

-

150

 

------------

------------

------------

------------

Total financial assets designated as at fair value through profit or loss

-

150

258

408

 

------------

------------

------------

------------

 

At 30 June 2016, the financial instruments designated at fair value through profit or loss were as follows:

 

 

30 June 2016

 

Level 1

Level 2

Level 3

Total

Financial assets

£'000

£'000

£'000

£'000

Unlisted equity shares

-

-

41,129

41,129

Unlisted preference shares

-

-

1,940

1,940

Derivative financial instruments (note 18)

-

23

-

23

 

------------

------------

------------

------------

Total financial assets designated as at fair value through profit or loss

-

23

43,069

43,092

 

------------

------------

------------

------------

           

 

At 30 June 2017, the Company held unlisted equity shares and derivative financial instruments.  The unlisted equity shares are carried at the net asset value of the underlying entity, and derivative financial instruments, being foreign currency forward contracts, are valued at the forward foreign currency exchange rate at the reporting date.

 

Level 2 financial instruments include foreign currency forward contracts.  They are valued using observable inputs (in this case foreign currency spot rates).

 

Transfers between levels

There were no transfers between levels in the year (2016: none).

 

18. Derivative financial instruments

During the year, the Company entered into foreign currency forward contracts to hedge against foreign exchange fluctuations.  The Company realised a loss of £1,008,000 (2016: loss of £1,214,000) on forward foreign exchange contracts that settled during the year.


As at 30 June 2017, the open forward foreign exchange contracts were valued at £150,000 (2016: £23,000).

 

19. Other receivables and prepayments

 

30 June 2017

30 June 2016

 

£'000

£'000

Accrued interest

711

651

Prepayments

14

18

Due from GLI Finance Limited

-

2,392

Other receivables

8

102

 

------------

------------

 

733

3,163

 

------------

------------

 

20. Other payables and accruals

 

30 June 2017

30 June 2016

 

£'000

£'000

Other payable (see below)

2,692

-

Deferred investment income

124

62

Legal and professional fees

53

-

Management fee

43

93

Transaction fees

40

-

Audit fee

35

23

Administration fee

31

35

Other payables and accruals

18

12

Broker fee

13

23

Directors' remuneration

9

-

Accountancy and taxation fees

8

-

Taxation

5

-

Withholding taxation on dividends

-

131

Travel costs

-

13

 

------------

------------

 

3,071

392

 

------------

------------

 

 

 

At 30 June 2017, the Company had entered into a fully signed agreement for a loan to a borrower. However, the funds left the Company's bank account on 4 July 2017, creating a payable at the year end.

 

21. Share capital

 

30 June 2017

30 June 2016

 

£'000

£'000

Authorised share capital:

 

 

Unlimited number of Ordinary Shares of 1 pence each

-

-

Unlimited C Shares of 10 pence each

-

-

Unlimited Deferred Shares of 1 pence each

-

-

50,000 Management Shares of £1 each

50

50

 

------------

------------

 

 

30 June 2017

30 June 2016

 

£'000

£'000

Called up share capital:

 

 

52,660,350 Ordinary Shares of 1 pence each

527

527

50,000 Management Shares of £1 each

50

50

 

------------

------------

 

577

577

 

------------

------------

 

The Management Shares, which are held by Amberton, are entitled (in priority to any payment of dividend of any other class of share) to a fixed cumulative preferential dividend of 0.01% per annum on the nominal amount of the Management Shares.

 

The Management Shares do not carry any right to receive notice of, nor to attend or vote at, any general meeting of the Company unless no other shares are in issue at that time.  The Management Shares do not confer the right to participate in any surplus of assets of the Company on winding-up, other than the repayment of the nominal amount of capital.

 

22. Other reserves

 

 

Profit and loss account

 

 

Special distributable reserve

 

 

Distributable

 

Non-distributable

 

 

Total

 

£'000

£'000

£'000

£'000

Cancellation of share premium account

51,143

-

-

51,143

Realised revenue profit

-

2,988

-

2,988

Realised investment gains and losses

-

(1,214)

-

(1,214)

Unrealised investment gains and losses

-

-

1,881

1,881

Dividends paid

(201)

(1,774)

-

(1,975)

 

------------

------------

------------

------------

At 30 June 2016

50,942

-

1,881

52,823

 

 

 

 

 

Realised revenue profit

-

3,194

-

3,194

Realised investment gains and losses

-

707

-

707

Unrealised investment gains and losses

-

-

(1,461)

(1,461)

Dividends paid

-

(3,792)

-

(3,792)

 

------------

------------

------------

------------

At 30 June 2017

50,942

109

420

51,471

 

------------

------------

------------

------------

 

With the exception of investment gains and losses, all of the Company's profit and loss items are of a revenue nature as it does not allocate any expenses to capital.

 

During the period ended 30 June 2016, and following the approval of the Court, the Company cancelled the share premium account and transferred £51,143,000 to a special distributable reserve, being premium on issue of shares of £52,133,000 less share issue costs of £990,000.

 

The two £276,000 dividends (see note 5), which were declared on 23 June 2017 and 21 July 2017 respectively, will be partly paid out of the £109,000 remaining realised revenue profit with the balance being paid from the special distributable reserve.

 

23. Net asset value per Ordinary Share

The net asset value per Ordinary Share is based on the net assets attributable to the owners of the Company of £52,048,000 (2016: £53,400,000), less £50,000 (2016: £50,000), being amounts owed in respect of Management Shares, and on 52,660,350 (2016: 52,660,350) Ordinary Shares in issue at the year end.

 

24. Financial Instruments and Risk Management

The Investment Manager manage the Company's portfolio to provide Shareholders with attractive risk adjusted returns, principally in the form of regular, sustainable dividends, through investment predominantly in a range of secured loans and other secured loan-based instruments originated through a variety of channels and diversified by way of asset class, geography and duration.

 

The Company will seek to ensure that diversification of its portfolio is maintained, with the aim of spreading investment risk.

 

Risk is inherent in the Company's activities, but it is managed through a process of ongoing identification, measurement and monitoring.  The Company is exposed to market risk (which includes currency risk, interest rate risk and price risk), credit risk and liquidity risk from the financial instruments it holds.  Risk management procedures are in place to minimise the Company's exposure to these financial risks, in order to create and protect Shareholder value.

 

Risk management structure

The Investment Manager is responsible for identifying and controlling risks.  The Board of Directors supervises the Investment Manager and is ultimately responsible for the overall risk management approach within the Company.

 

The Company has no employees and is reliant on the performance of third party service providers.  Failure by the Investment Manager, Administrator, Custodian, Registrar or any other third party service provider to perform in accordance with the terms of its appointment could have a significant detrimental impact on the operation of the Company.

 

The market in which the Company participates is competitive and rapidly changing.  The risks have not changed from those detailed on pages 20 to 30 in the Company's Prospectus, which is available on the Company's website.

 

Risk concentration

Concentration indicates the relative sensitivity of the Company's performance to developments affecting a particular industry or geographical location.  Concentrations of risk arise when a number of financial instruments or contracts are entered into with the same counterparty, or where a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions.  Concentrations of liquidity risk may arise from the repayment terms of financial liabilities, sources of borrowing facilities or reliance on a particular market in which to realise liquid assets.  Concentrations of foreign exchange risk may arise if the Company has a significant net open position in a single foreign currency, or aggregate net open positions in several currencies that tend to move together.

 

With the aim of maintaining a diversified investment portfolio, and thus mitigating concentration risks, the Company has established the following investment restrictions in respect of the general deployment of assets.

 

Geographical

The Company invests in a range of secured loan assets in a broad spread of jurisdictions, but weighted towards the UK, Continental Europe and North America.

 

At the 27 April 2017 general meeting, several changes were approved by Shareholders to the Company's investment restrictions (calculated based on the Company's gross assets at the time of investment) to reflect the proposed broader focus of its investment policy:

 

Investment Restriction

Revised Investment Policy

Prior Investment Policy

Geography

 

 

- Exposure to UK loan assets

Minimum of 60%

Maximum of 70%

- Minimum exposure to non-UK loan assets

20%

30%

Duration to maturity

 

 

- Minimum exposure to loan assets with duration of less than 6 months

None

20%

- Maximum exposure to loan assets with duration of 6 - 18 months and 18 - 36 months

None

40% in each case

Maximum exposure to loan assets with duration of more than 36 months

50%

40%

Maximum single investment

10%

2.5%

Maximum exposure to single borrower or group

10%

None

Maximum exposure to loan assets sourced through single alternative lending platform or other third party originator


25%


None

Maximum exposure to any individual wholesale loan arrangement

25%

None

Maximum exposure to loan assets which are neither sterling-denominated nor hedged back to sterling


15%


None

Maximum exposure to unsecured loan assets

25%

50%

Maximum exposure to assets (excluding cash and cash-equivalent investments) which are not loans or investments with loan-based investment characteristics



10%



None

 

The Company complied with the investment restrictions throughout the year up to 27 April 2017, when the Company needed to increase the level of cash held in order to meet the possible redemption facility.  Since then, the Company has been redeploying the cash and at the date of signing this report, the Company met all of its investment restrictions.

 

Market risk

(i)     Price risk

Price risk exposure arises from the uncertainty about future prices of financial instruments held.  It represents the potential loss that the Company may suffer through holding market positions in the face of price movements.  The investments at fair value through profit or loss (see notes 16 and 17) are exposed to price risk and it is not the intention to mitigate the price risk.

 

At 30 June 2017, if the valuation of the investments at fair value through profit or loss had moved by 5% with all other variables remaining constant, the change in net assets would amount to approximately +/- £13,000 (2016: +/- £99,000).  The maximum price risk resulting from financial instruments is equal to the £258,000 carrying value of the investments at fair value through profit or loss (2016: £1,981,000).

 

Market risk

(ii)     Foreign currency risk

Foreign currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign currency exchange rates.  Currency risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Company's functional currency.  The Company invests in securities and other investments that are denominated in currencies other than Sterling.  Accordingly, the value of the Company's assets may be affected favourably or unfavourably by fluctuations in currency rates and therefore the Company will necessarily be subject to foreign exchange risks. 

 

As at 30 June 2017, a proportion of the net financial assets of the Company, excluding the foreign currency forward contracts, were denominated in currencies other than Sterling as follows:

 

 

 

Investments at fair value through profit or loss

 

Loans and receivables

 

Cash and cash equivalents

 

Other payables and accruals

Exposure

Foreign currency forward contract

Net exposure

30 June 2017

£'000

£'000

£'000

£'000

£'000

£'000

£'000

US Dollars

-

5,467

1,413

(29)

6,851

(6,854)

(3)

Euros

59

4,775

87

(2)

4,919

(4,925)

(6)

 

---------------

---------------

---------------

---------------

---------------

---------------

---------------

 

59

10,242

1,500

(31)

11,770

(11,779)

(9)

 

---------------

---------------

---------------

---------------

---------------

---------------

---------------

30 June 2016

 

 

 

 

 

 

 

US Dollars

1,940

7,144

318

-

9,402

(9,122)

280

Euros

25

5,467

10

-

5,502

(5,248)

254

 

---------------

---------------

---------------

---------------

---------------

---------------

---------------

 

1,965

12,611

328

-

14,904

(14,370)

534

 

---------------

---------------

---------------

---------------

---------------

---------------

---------------

 

In order to limit the exposure to foreign currency risk, the Company entered into hedging contracts during the year. At 30 June 2017, the Company held foreign currency forward contracts to sell US$8,800,000 and €5,550,000 (2016: US$12,100,000 and €6,300,000) with a settlement date of 31 July 2017.

 

Other future foreign exchange hedging contracts may be employed, such as currency swap agreements, futures contracts and options.  There can be no certainty as to the efficacy of any hedging transactions.

 

At 30 June 2017, if the exchange rates for US Dollars and Euros had strengthened/weakened by 5% against Sterling with all other variables remaining constant, net assets at 30 June 2017 would have decreased/increased by £(7,000)/£8,000 (2016: £(27,000)/£29,000), after accounting for the effects of the hedging contracts mentioned above.

 

(iii)   Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments.  The Company is exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial instruments and cash flow.  However, due to the fixed rate nature of the majority of the loans, cash and cash equivalents of £13,376,000 (2016: £2,192,000 and loans of £1,700,000) were the only interest bearing financial instruments subject to variable interest rates at 30 June 2017.  Therefore, if interest rates had increased/decreased by 50 basis points, with all other variables held constant, the change in value of interest cash flows of these assets in the year would have been £67,000 (2016: £19,000).

 

 

30 June 2017

Fixed interest

Variable interest

Non-interest bearing

Total

 

£'000

£'000

£'000

£'000

Financial Assets

 

 

 

 

Loans

39,458

-

-

39,458

Cash held on client accounts with platforms

-

-

1,144

1,144

Investments at fair value through profit or loss

-

-

258

258

Derivative financial instruments

-

-

150

150

Other receivables

-

-

719

719

Cash and cash equivalents

-

13,376

-

13,376

 

------------

------------

------------

------------

Total financial assets

39,458

13,376

2,271

55,105

 

------------

------------

------------

------------

Financial Liabilities

 

 

 

 

Other payables

-

-

(2,947)

(2,947)

 

------------

------------

------------

------------

Total financial liabilities

-

-

(2,947)

(2,947)

 

------------

------------

------------

------------

 

 

 

 

 

Total interest sensitivity gap

39,458

13,376

(676)

52,158

 

------------

------------

------------

------------

 

 

 

 

 

30 June 2016

 

 

 

 

Financial Assets

 

 

 

 

Loans

44,374

1,700

-

46,074

Cash held on client accounts with platforms

-

-

359

359

Investments at fair value through profit or loss

-

-

1,981

1,981

Investment in subsidiary

-

-

41,088

41,088

Derivative financial instruments

-

-

23

23

Other receivables

2,317

-

828

3,145

Cash and cash equivalents

-

2,192

-

2,192

 

------------

------------

------------

------------

Total financial assets

46,691

3,892

44,279

94,862

 

------------

------------

------------

------------

Financial Liabilities

 

 

 

 

Amount due to subsidiary

-

-

(41,088)

(41,088)

Other payables

-

-

(330)

(330)

 

------------

------------

------------

------------

Total financial liabilities

-

-

(41,418)

(41,418)

 

------------

------------

------------

------------

 

 

 

 

 

Total interest sensitivity gap

46,691

3,892

2,861

53,444

 

------------

------------

------------

------------

 

The Investment Manager manages the Company's exposure to interest rate risk, paying heed to prevailing interest rates and economic conditions, market expectations and its own views as to likely moves in interest rates.

 

Although it has not done so to date, the Company may implement hedging and derivative strategies designed to protect investment performance against material movements in interest rates.  Such strategies may include (but are not limited to) interest rate swaps and will only be entered into when they are available in a timely manner and on terms acceptable to the Company.  The Company may also bear risks that could otherwise be hedged where it is considered appropriate.  There can be no certainty as to the efficacy of any hedging transactions.

 

Credit risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company, resulting in a financial loss to the Company.

 

At 30 June 2017, credit risk arose principally from cash and cash equivalents of £13,376,000 (2016: £2,192,000) and balances due from the platforms and SMEs of £40,602,000 (2016: £46,433,000).  The Company seeks to trade only with reputable counterparties that the Investment Manager believes to be creditworthy.

 

The Company's credit risks principally arise through exposure to loans provided by the Company, either directly or through platforms.  These loans are subject to the risk of borrower default.  Where a loan has been made by the Company through a platform, the Company will only receive payments on those loans if the corresponding borrower through that platform makes payments on that loan.  The Investment Manager has sought to reduce the credit risk by obtaining security on the majority of the loans and by investing across various platforms, geographic areas and asset classes, thereby ensuring diversification and seeking to mitigate concentration risks, as stated in the "risk concentration" section earlier in this note.

 

The cash pending investment or held on deposit under the terms of an Investment Instrument may be held without limit with a financial institution with a credit rating of "single A" (or equivalent) or higher to protect against counterparty failure.

 

The Company may implement hedging and derivative strategies designed to protect against credit risk.  Such strategies may include (but are not limited to) credit default swaps and will only be entered into when they are available in a timely manner and on terms acceptable to the Company.  The Company may also bear risks that could otherwise be hedged where it is considered appropriate.  There can be no certainty as to the efficacy of any hedging transactions.

 

Liquidity risk

Liquidity risk is defined as the risk that the Company will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments.  The principal liquidity risk is contained in unmatched liabilities.  The liquidity risk at 30 June 2017 was low since the ratio of cash and cash equivalents to unmatched liabilities was 4:1 (2016: 6:1).

 

The Investment Manager manages the Company's liquidity risk by investing primarily in a diverse portfolio of loans, in line with the Prospectus and as stated in the "risk concentration" section earlier in this note.  The maturity profile of the portfolio (excluding the amount due from subsidiary (see Note 14)), as detailed in the Investment Manager's Report, is as follows:

 

 

30 June 2017

30 June 2016

 

Percentage

Percentage

0 to 6 months

32.6

24.1

6 months to 18 months

11.0

21.8

18 months to 3 years

19.7

30.1

Greater than 3 years

36.7

24.0

 

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100.0

100.0

 

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Capital management

The Board's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the Company.  The Company's capital comprises issued share capital, retained earnings and a distributable reserve created from the cancellation of the Company's share premium account.

 

To maintain or adjust the capital structure, the Company may issue new Ordinary and/or C Shares, buy back shares for cancellation or buy back shares to be held in treasury.  During the year ended 30 June 2017, the Company did not issue any new Ordinary or C shares, nor did it buy back any shares for cancellation or to be held in treasury (2016: none, other than those shares issued at launch).

 

The Company is subject to externally imposed capital requirements in relation to its statutory requirement relating to dividend distributions to Shareholders.  The Company meets the requirement by ensuring it distributes at least 85% of its distributable income by way of dividend.

 

25. Contingent assets and contingent liabilities

There were no contingent assets or contingent liabilities in existence at the year end (2016: none).

26. Events after the reporting period

Two dividends of 0.525p per Ordinary Share, which (in accordance with IFRS) were not provided for at 30 June 2017, have been declared out of the profits for the year ended 30 June 2017 (see note 5).

 

On 21 August 2017, the Company declared a dividend of 0.525p per Ordinary Share for the period from 1 July 2017 to 31 July 2017.  This dividend will be paid on 29 September 2017.

 

There were no other significant events after the reporting period.

 

27. Parent and Ultimate Parent Company

The Directors do not believe that the Company has an individual Parent or Ultimate Parent.

 

 

---  ENDS ---


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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