Source - RNS
RNS Number : 6095M
SME Loan Fund PLC (The)
17 October 2016
 

17 October 2016

The SME Loan Fund plc

("SMEF", the "Company" or "Parent Company" with its subsidiaries (together) the "Group")

 

Annual Financial Report

For the period from 13 July 2015 (date of incorporation) to 30 June 2016


 

A copy of the Company's Annual Report and Consolidated Financial Statements for the period ended 30 June 2016 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

 

 

Amberton Asset Management Limited

Graham Glass, Managing Director

[email protected]

 

tel: +44 (0)1481 708 280

 

Cantor Fitzgerald Europe

Sue Inglis / Ben Heatley

 

tel: +44 (0)20 7894 8229

 

www.thesmeloanfund.com


 


 

The  following  text  is  extracted  from  the  Annual  Report  and  Consolidated Financial Statements of the Company for the period ended 30 June 2016.

 

 

 

Strategic Report

 

Highlights

 


30 June 2016

 

Net assets [1]

£53,400,000

 

NAV per Ordinary Share

101.31p

 

Share price at 30 June 2016

89.75p

 

Discount to NAV

11.4%

 

Profit for the period

£3,655,000

 

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

4.95p

 

Total return per Ordinary Share (based on NAV)

+7.1%

 

Total return per Ordinary Share (based on share price)

-6.5%

 

Ordinary Shares in issue

52,660,350

 



 

[1]

In addition to the Ordinary Shares in issue, 50,000 Management Shares of £1 each are in issue.

 

 

[2]

Only 3.75p of the 4.95p per Ordinary Share dividends declared out of the profits for the period ended 30 June 2016 had been deducted from the 30 June 2016 NAV as the eighth and ninth dividends of 0.6p per Ordinary Share each had not been provided for at 30 June 2016 as, in accordance with IFRS, they were not deemed to be liabilities of the Company at that date.

On 24 August 2016, the Company declared a tenth dividend of 0.6p per Ordinary Share for the period from 1 July 2016 to 31 July 2016.  This dividend will be paid on 23 September 2016.

 

 

Overview and Investment Strategy

General information

The SME Loan Fund plc (the "Company", "Group" or "SMEF") 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 (formerly the Specialist Fund Market) on 23 September 2015 ("Admission").  On 31 August 2016, the Company changed its name from GLI Alternative Finance plc.

 

The Company commenced operations, following admission, as an investment company as defined in s833 of the Companies Act 2006.


Investment objective

The investment objective of the Company, together with its subsidiary, GLI Alternative Finance Guernsey Limited (together the "Group"), is to provide Shareholders with attractive risk adjusted returns through investment, principally via a portfolio of Investee Platforms, in a range of SME loan assets, diversified by way of asset class, geography and duration.  The Group may invest directly or indirectly into available opportunities, including by making investments in, or acquiring interests held by, third party alternative lending Platforms and other lending related opportunities as identified by the Investment Manager, Amberton Asset Management Limited, in accordance with the Group's investment policy.


Investment policy

The Group intends to achieve its investment objective by investing in a range of loans originated principally through the Investee Platforms.  The Group may also make investments through other third party alternative lending Platforms that present suitable investment opportunities by the Investment Manager.

 

The Group seeks to ensure that diversification of its portfolio is maintained, with the aim of spreading investment risk.

 

Geography - The Group seeks investments in SME loan assets in a broad range of jurisdictions (although weighted towards the UK) in order to build a global portfolio of loan assets.

 

Asset classes - The Group invests in a wide range of SME 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 interest payments.

 

Duration - The Group holds a portfolio of loans with broad terms of duration to maturity.  However, the Group's loan portfolio is weighted towards short-term financing to ensure an adequate degree of liquidity.  This is intended to provide the Group with both a liquid pool of assets ready for realisation, as well as a reliable stream of longer-term income.

 

Security - The Group will seek to invest in loan assets with a range of different types of security. Funds invested by the Group are secured, as and when required, over a range of assets including property, intellectual property or other specific assets, personal guarantees or via credit insurance.  Loans are unsecured only in the case of short-term, low ticket size lending, where the perceived level of risk in respect of the particular asset is low.

 

The Group is indifferent to sector when allocating funds via the Investee Platforms, alternative third party lending Platforms and in respect of any direct loan investments.  It instead adheres to the investment restrictions which apply to the Group's loan portfolio as a whole.


Note: Words and expressions defined in the prospectus relating to the Company dated 1 September 2015 (a copy of which is available on the Company's website) have the same meanings when used in the "Investment objective" and "Investment policy" sections above.


Chairman's Statement


Welcome to my first Chairman's statement covering the period from the launch of The SME Loan Fund plc to its year end, 30 June 2016. 

 

The Group was formed to provide Shareholders with a high income of circa 8% per annum, derived primarily from a portfolio of loans to SMEs and arranged through a number of specialist platforms acting as intermediaries between the Group and the ultimate borrower.


The Company was listed on the Specialist Fund Segment of the London Stock Exchange on 23 September 2015 raising gross proceeds of £52.7 million (£51.7 million net of issue costs).  The initial assets comprised of cash of £12.4 million and a seed portfolio of loans valued at £40.3 million which were provided by GLI Finance Limited ("GLIF") in exchange for Ordinary Shares of the Company.  At launch the Company raised around half of the anticipated proceeds, this was in part due to our being at the end of the queue following three successful launches in the sector which in total absorbed a considerable proportion of available demand for this type of product.  Stock markets at the time of our launch were also going through a volatile phase that hindered fund raising too.

 

Nevertheless, post the launch the general trend remains very positive and the Alternative Finance ("AltFi") sector has continued to grow apace.  New loans origination in UK, as measured by Liberum AltFi, for the period 31 December 2015 to 30 June 2016 rose from £5.5 billion to £7.3 billion.

 

Performance and markets

Since launch the Investment Manager has performed credibly, and a detailed insight into the management of the Group's portfolio and market influences is provided in the Investment Manager's Report.

 

The Group has produced a net profit after tax for the period ended 30 June 2016 of £3.7 million, representing earnings per Ordinary Share of 6.94p.  The Group's NAV at 30 June 2016 was £53.4 million (101.31p per Ordinary Share) compared to £51.7 million (98.15p per Ordinary Share) at launch.  The total return for the Group for the period was 7.1% on the opening NAV.

 

The Group's portfolio is fairly liquid with approximately 18% realisable within 90 days in normal market conditionsThe Group's non-Sterling investments are fully-hedged and any liquidity risks arising from the hedging policy are considered to be low.


Growth and Corporate Activity

The Board aims to establish the Company as one of the leading funds in the AltFi sector and to grow current assets significantly in the years ahead.  In the short term this is likely to be achieved by small, ongoing issues of shares to new or existing investors.  Once the Fund has added to its existing performance record and demonstrated the ability of the Investment Manager to generate a consistently high yield on the shares, a larger fund raise may be possible.  At all times the Board will take into account the interests of existing Shareholders before increasing the share capital of the Company.

 

The Company came into existence largely as a result of a spin-out of GLIF.  This company held a portfolio of investments in platforms that match borrowers and lenders together, with a portfolio of loans that had been arranged through these platforms.  Your Group's portfolio was seeded with a significant number, but not all, of these loans.  Hence the two companies now have clearly different investment strategies.  GLIF invests primarily into the equity of the platforms and seeks to achieve capital growth as the value of these platforms rises while SMEF aims to produce a high ongoing yield for its investors with limited capital growth.


In March 2016 the Somerston Group made a significant investment into SMEF by buying 15 million Ordinary Shares from GLIF.  It is the wish of the Boards of SMEF, GLIF and Somerston that SMEF is a truly independent company.  Recent name changes, referred to in more detail below, seek to reinforce this evolution.

 

SMEF is investing in loans originated by platforms that our Investment Manager considers to have a high level of credit experience, that undertake significant due diligence and originate loans that are amply secured and attractively priced. We also require these platforms to be open and transparent with us in all their dealings.  The platforms we use are constantly reviewed and the Board believes that it is in Shareholders' interests to contain the number of platforms used, by concentrating investments in loans originated via platforms that come up to our expectations.  At a general meeting held on 3 August 2016, the investment policy of the Group was amended to allow greater exposure to high quality, alternative finance loans.

 

Earnings and Dividends

Total earnings per Ordinary Share from listing to 30 June 2016 were 6.94p.

 

The Company elected to designate all of the dividends for the period ended 30 June 2016 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.

 

As set out in the Prospectus, 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 and use these to smooth future dividend flows.

 

The Company announced dividends of 4.95p per Ordinary Share for the period ended 30 June 2016, of which 3.75p per Ordinary Share were provided for in the 30 June 2016 financial statements.  In accordance with IFRS, dividends are only provided for when they become a contractual liability of the Company.  Therefore, during the period a total of £1,975,000 was incurred in respect of dividends, none of which was outstanding at the reporting date, but the eighth and ninth dividends of £316,000 each had not been provided for at 30 June 2016 as, in accordance with IFRS, they were not deemed to be liabilities of the Company at that date.

 

In the Prospectus we advised that we were targeting a net dividend yield of 8% per annum.  Although it is still early in the Company's life, if we were to continue to pay dividends of 0.6p per month, the Company would meet this target, based on the 30 June 2016 share price of 89.75p.  On a par share price of 100.00p the yield would be 7.2p.


Discount

During the recent period the Company's Ordinary Shares traded at an average price of 98.42p and at 89.75p at 30 June 2016 - a discount of 11.4% to its NAV.  At 30 September 2016, the NAV and share price had risen to 101.30p and 96.00p respectively - a discount of 5.2% to NAV.

 

The Board would ideally wish the Company's share to trade closer to par and will consider any means at its disposal so that the discount does not remain at an inappropriate level.  One of the mechanisms for managing this process is the periodic tender offers.  In March 2017 the first tender offer becomes available where Shareholders may tender all or part of their shareholding at the Dealing Value.  Moreover, SMEF's maturity profile is short and cash is constantly being generated to allow the Directors latitude to exercise other means to close the discount if the Board deems it appropriate and in Shareholders' best interest.


Change of names

As part of the process of formally splitting the historic links between SMEF, GLIF and GLI Asset Management Limited (which manages the assets of SMEF), in March 2016, the Investment Manager changed its name from GLI Asset Management Limited to Amberton Asset Management Limited ("Amberton" or the "Investment Manager").

 

With effect from 31 August 2016, the Board decided to change the name of the Company from GLI Alternative Finance plc to The SME Loan Fund plc.  The ticker for the Ordinary Shares changed from GLAF:LN to SMEF:LN on 31 August 2016. 


Equity shareholdings in SMEF (GLAF), GLIF and Amberton

The following information is shown to allow Shareholders of SMEF to understand the shareholding structure of the above entities as at 30 June 2016.

 

SMEF - GLIF holds 47.99% and the Somerston Group (through its wholly owned subsidiary Somerston Golf GP Limited ("GOLF")) holds 28.48% of the Ordinary Share capital.

 

GLIF - Somerston/GOLF own 22.2% of the ordinary share capital of GLIF.

 

Amberton - GLIF and GOLF each own 50% of the ordinary share capital of Amberton.

 

SMEF has no equity or loan interest in either GLIF or Amberton.


Board of Directors

During the period two Directors who were appointed on incorporation resigned from the Board, Norman Crighton and Nick Brind, on 21 June and 22 July 2016 respectively.  I would like to thank Norman and Nick for their hard work during the challenging early life of the Company. Both dedicated a considerable amount of time and effort to ensure that the Company was put on a firm footing for which the Board is grateful.  Following Norman's resignation, I was appointed Chairman and Ken Hillen, who was appointed a Director on 21 June 2016, took over my responsibilities as chairman of the Audit Committee.  Ken has considerable banking experience having held senior positions at the Royal Bank of Scotland, Anglo Irish Bank and Bank of Ireland and his skills will be very useful as we continue to augment our control procedures.  In due course it is likely that we shall add another Director to the Board but for now we have a dedicated and hard working Board with the necessary experience to drive the Company forward.


Outlook

The Company is well positioned with a solid track record and an attractive dividend yield.  The Board will attempt to increase the Company's assets over the coming year against a background of a sector that is growing at an extraordinary rate.  Returns to Shareholders, as always, are the most important metric but we believe that a larger investment portfolio would lead to better risk adjusted returns and a lower expense ratio.  The Board is confident that further progress can and will be made in the year ahead.


Richard Hills

Chairman

14 October 2016


Investment Manager's Report


The SME Loan Fund plc was established in September 2015 with a portfolio of 25% cash and 75% loans.  A series of investments into quality loans took place during October reducing the cash levels down to 13% by the end of the month.  Investments were made into a variety of sectors including renewable energy loans which offered good cashflow characteristics.  The reduction in cash continued throughout November with a focus on non-UK based lending.  This resulted in cash levels falling to 8.7% and the portfolio's gross yield rising to 8.7% by the end of the month.  Solar energy projects were a focus for investment during December, taking renewable energy exposure from 13.8% to 14.6%, whilst the allocation to property was also increased, taking exposure from 14.2% to 15.9%. Cash levels stood at 4.4% by the calendar year end with a gross indicated fund yield of 9.7%. 

 

Loan origination around the new year was seasonally weak but with the Company already well established, a low cash level of 5% ensured that the Fund's gross yield remained close to 10%.  The yield fell slightly during February as mainstream investment markets suffered from considerable volatility, leading investors to seek out the relative safety of Alternative Finance markets, pushing yields lower.  New loan origination then picked up significantly and we increased exposure to Spanish SME loans and property based loans resulting in cash levels declining from 5.6% to 4%. 

 

Investment activity within the Group continued during March 2016 as exposure to the BMS Group was increased via an allocation to their Irish investment structure, itself part funded by the Irish Strategic Investment Fund.  With extremely high quality credit analysis work being carried out by BMS on these loans, the Company was delighted to be invited to be a 10% holder of the structure.  Due to some refinancing of loans within the Group, cash levels closed Q1 at 8.9%, increasing to 11.7% by the end of April.  A strong pipeline of loan origination was forecast for the remaining two months of the quarter resulting in cash falling to 4.7% by the end of June 2016.

 

The defensive qualities of the Company were severely tested during May as evidence of poor management control at the largest AltFi platform, Lending Club, in the U.S. came to light which saw the CEO Renaud Laplanche leave the company that he created.  Investment trusts were hit particularly hard with share prices falling to, in some cases, substantial discounts to net asset values.  The Company suffered a fall in its share price which saw the discount register a low level of 12.0% by month end; this had recovered somewhat to a discount of 11.4% as at 30 June 2016.

 

Income production within the Company has been in line with expectations with monthly dividend equating to a yield of 7.48% as at the end of the reporting period.  The first half of 2016 will be remembered for significant market volatility, particularly within the AltFi sector, exacerbated by the shock decision of the UK electorate to leave the European Union.  The Group has weathered these storms well and continues to provide a low risk strategy within the sector, exactly in keeping with its objectives.  It remains unleveraged and this stance is likely to continue for the foreseeable future.  Throughout the period the Company has pursued a policy of hedging all non-sterling exposure back into sterling as outlined in the Prospectus.

 

Post the end of the reporting period, the Board of GLI Alternative Finance plc proposed a name change to The SME Loan Fund plc to better identify its core investment allocation; this became effective on 31 August 2016 and the ticker also changed from GLAF:LN to SMEF:LN.  A new website was also launched, www.thesmeloanfund.com to provide investors, and potential investors with detailed information about the Company.  An EGM in August adjusted the investment restrictions slightly, allowing the Investment Manager to allocate capital more efficiently to investment into loans originated through Alternative Finance platforms.


Outlook

The Company was launched in September 2015 during a period of significant equity market volatility.  Whilst the initial launch proceeds were disappointing, the proof of concept has been established with the NAV performance being impressive without resorting to leverage.  As the appointed investment manager, Amberton is focussing on SME lending and the impairment rate is one of the lowest within the asset class.  This is a reflection of the due diligence carried out, not only on the Platforms, but also our strict manual underwriting processes on credit. 

 

It is clear that the past six months have seen testing times for Alternative Finance investment trusts.  The NAV performance of the Company has been in line with expectations and the share price, although having risen from its lows, offers a discount to the NAV.  With the flexibility offered to Shareholders to request a redemption of 20% of their holding at a price equal to NAV less ½% in March 2017, we feel that the investment attraction of the Company is at a high level.  Your Company is in a prime position, continuing to benefit from high quality loan origination from its many platform relationships.  We remain focused on providing an unleveraged exposure to SME AltFi loans whilst maintaining low impairment rates.  There is no doubt that the Brexit vote caused upset within investment markets but since then, equity markets have powered on to new highs and global government bond yields are now at unattractive new lows.  In contrast the high, single digit yield produced by the Group has now become an attractive option for a wide variety of investors.

 

Graham Glass

Amberton Asset Management Limited

14 October 2016


Principal Risks

 

Risk is inherent in the Group'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 Group, 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 Group'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 Group'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 Group's investments.  Exposure to interest rate risk is limited by the use of fixed rate interest on the majority of the Group'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 Group invests in a range of loans originated principally through Alternative Finance Platforms with which the Investment Manager is familiar.  The Group has investment restrictions in place.  Therefore, as mentioned above, the Group'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 monitors the recoverability of the loans (on an individual loan basis) each month and impairs loans where appropriate. 

 

Platform risk

The Group is dependent on Platforms to operate the loan portfolio (to bring new loans to the Group'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 undertakes 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 Group's approach would vary depending on the Platform and the circumstances, and would be determined by the Board after discussion with the Investment Manager and other advisers.  Graham Glass (the managing director of the Investment Manager and, as of 21 March 2016, Lead Investment Manager to the Group) has close contacts with the Platform owners and Andy Whelan/Emma Stubbs (directors of the Investment Manager) are on the boards of most of the Platforms themselves.


Regulatory risk

The Group'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 Group's reputation.

 

The Group 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.


Brexit

Brexit may, in time, lead to divergence in regulatory regimes between the UK and the European Union and may create additional investment and trading opportunities.  However, in a process which is yet to start, it is too early to say precisely what these opportunities will be or when they will present themselves.


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 in the Company's Annual Report and Consolidated Financial Statements.


Key Performance Indicators

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


Dividend yield

As set out in the Prospectus, 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 and use these to smooth future dividend flows.  The target is for the Ordinary Shares to yield an 8% dividend.

 

The Company announced dividends of £2,607,000 (4.95p per Ordinary Share) for the period ended 30 June 2016, being 87.25% of distributable income for the period (see notes 5 and 22 for further details).


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 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.

 

At 30 June 2016 the shares were trading at 89.75p, an 11.4% discount to NAV.  However, the three month average share price is a 6.4% discount to NAV. 


Richard Hills

Chairman

14 October 2016

 

Consolidated Statement of Comprehensive Income

 

for the period from 13 July 2015 (incorporation) to 30 June 2016

 


 


Note

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

 



£'000

 

Revenue



 

Investment income


3,764

 

Other income


1

 



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

 

Total revenue


3,765

 



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

 

Operating expenses



 

Management fees

7a

(295)

 

Administration fees

7b

(129)

 

Directors' remuneration

8

(89)

 

Legal and professional fees


(71)

 

Other expenses

11

(69)

 

Broker fee


(61)

 

Audit fees

10

(44)

 

Custodian fee


(19)

 

Registrar fees


(17)

 

Auditors' non-audit and taxation fees

10

(15)

 



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

 

Total operating expenses


(809)

 



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

 

Investment gains and losses



 

Movement in unrealised gains on loans

15

1,551

 

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

16

307

 

Movement in unrealised gain on derivative financial instruments

18

23

 

Realised loss on derivatives

18

(1,214)

 



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

 

Total investment gains and losses


667

 



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

 




 

Net profit from operating activities before gain on foreign currency exchange


3,623

 




 

Net foreign exchange gain


34

 



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

 

Net profit before taxation


3,657

 




 

Taxation



 

Withholding tax

12

(2)

 




 



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

 

Profit and total comprehensive income for the period attributable to the owners of the parent


3,655

 



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

 




 

Earnings per Ordinary Share (basic and diluted)

13

6.94p

 



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

 




 

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

There were no other comprehensive income items in the period.

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

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

 

 

 

 

Consolidated and Parent Company Statements of Changes in Equity

for the period from 13 July 2015 (incorporation) to 30 June 2016


 

 

Consolidated and Parent Company

Note

Called up share capital

Share premium account

Distributable reserves

Total



£'000

£'000

£'000

£'000







Opening balance at 13 July 2015


-

-

-

-

Profit for the period

22

-

-

-

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

-

-

-

(1,975)

Cancellation of share premium account

22

-

(51,143)

51,143

-


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

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

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

               -----------

Total transactions with Owners in their capacity as owners


577

-

51,143

49,745









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

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

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

-----------

At 30 June 2016


577

-

51,143

53,400



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

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

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

-----------


There were no other comprehensive income items in the period.

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

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

 



 

Consolidated and Parent Company Statements of Financial Position

as at 30 June 2016




Consolidated

Parent Company


Note

30 June 2016

30 June 2016



£'000

£'000

Non-current assets




Loans

15

28,449

28,449

Investments at fair value through profit or loss

16

1,981

1,981



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

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

Total non-current assets


30,430

30,430



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

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

Current assets




Loans

15

17,625

17,625

Cash held on client accounts with Platforms

15

359

359

Investment in subsidiary

14

-

41,088

Derivative financial instruments

18

23

23

Other receivables and prepayments

19

3,163

3,163

Cash and cash equivalents


2,192

2,192



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

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

Total current assets


23,362

64,450



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

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





Total assets


53,792

94,880



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

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

Current liabilities




Amount due to subsidiary

14

-

(41,088)

Other payables and accruals

20

(392)

(392)



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

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

Total liabilities


(392)

(41,480)



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

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







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

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

Net assets


53,400

53,400



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

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

Capital and reserves attributable to owners of the Company




Called up share capital

21

577

577

Distributable reserve

22

51,143

51,143

Profit and loss account

22

1,680

1,680



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

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

Equity attributable to the owners of the Parent Company


53,400

53,400



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

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





Net asset value per Ordinary Share

23

101.31p

101.31p



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

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


These consolidated and Parent Company financial statements of The SME Loan Fund plc (registered number 09682883) were approved by the Board of Directors on 14 October 2016 and were signed on its behalf by:

 

Richard Hills

Chairman

14 October 2016

 

Ken Hillen

Director

14 October 2016


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



 

Consolidated and Parent Company Statements of Cash Flows

for the period from 13 July 2015 (incorporation) to 30 June 2016



Consolidated

Parent Company


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


£'000

£'000

Cash flows from operating activities



Net profit before taxation

3,657

3,655

Adjustments for:



Movement in unrealised gains on loans

(1,551)

(939)

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

(307)

(919)

Movement in unrealised gain on derivatives

(23)

(23)

Realised loss on derivatives

1,214

1,214

Interest received and reinvested by Platforms

(1,505)

(1,505)

Capitalised interest

(23)

(23)

Increase in investments

(9,439)

(9,439)


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

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

Net cash outflow from operating activities before working capital changes

(7,977)

(7,979)

Increase in other receivables and prepayments

(624)

(624)

Increase in other payables and accruals

260

260


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

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

Net cash outflow from operating activities

(8,341)

(8,343)




Cash flows from financing activities



Proceeds from issue of Management Shares

50

50

Proceeds from issue of Ordinary Shares

12,801

12,801

Share issue costs paid

(473)

(473)

Dividend paid

(1,843)

(1,843)


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

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

Net cash inflow from financing activities

10,535

10,535




Taxation paid

(2)

-





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

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

Increase in cash and cash equivalents in the period

2,192

2,192

Cash and cash equivalents at the beginning of the period

-

-


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

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

Cash and cash equivalents at 30 June 2016

2,192

2,192


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

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




Supplemental cash flow information



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

40,271

40,271

Non-cash transaction - interest received and reinvested by Platforms

1,505

1,505


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

 


Notes to the Consolidated and Parent Company Financial Statements

for the period from 13 July 2015 (incorporation) to 30 June 2016

 

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

The investment objective of the Company, together with its subsidiary (the "Group"), is to provide Shareholders with attractive risk adjusted returns through investment, principally via a portfolio of Investee Platforms, in a range of SME loan assets, diversified by way of asset class, geography and duration.  The Group may invest directly or indirectly into available opportunities, including by making investments in, or acquiring interests held by, third party alternative lending Platforms and other lending related opportunities as identified by Amberton Asset Management Limited (the "Investment Manager") in accordance with the Group's investment policy.

 

Investment policy

The Group intends to achieve its investment objective by investing in a range of loans originated principally through the Investee Platforms.  The Group may also make investments through other third party alternative lending Platforms that are identified as suitable investment opportunities by the Amberton Asset Management Limited.

 

Note: Words and expressions defined in the prospectus relating to the Company dated 1 September 2015 (a copy of which is available on the Company's website) have the same meanings when used in the "Investment objective" and "Investment policy" sections above.

 

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

 

Change of name

In March 2016, the investment manager of the Group underwent a rebranding exercise from GLI Asset Management Limited to Amberton Asset Management Limited.  Furthermore, the investment policy of the Group was being amended to bring greater exposure to high quality alternative finance loans, with such changes due to be voted upon at the General Meeting to be held on 3 August 2016.  In order to reflect this change in strategy, the Board decided to change the name of the Company from GLI Alternative Finance plc to The SME Loan Fund plc with effect from 31 August 2016.    The ticker for the Ordinary Shares was also changed to SMEF:LN. 


2. Statement of compliance

a)  Basis of preparation

These financial statements present the results of the Company and its subsidiary (together the "Group") for the period from 13 July 2015 (incorporation) to 30 June 2016.  These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union.

 

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 January 2009, 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 Group's and 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 (note 4i).


c)   Segmental reporting

The Directors are of the opinion that the Group 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.


e)  Basis of consolidation

The financial statements incorporate the financial statements of the Company and its wholly-owned subsidiary.  Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

 

Subsidiaries are those entities, including special purpose entities, controlled by the Company.  Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.  In assessing control, potential voting rights that presently are exercisable are taken into account.

 

The financial statements of the subsidiary are included in the consolidated financial statements from the date that control commenced to the date that control ceases.  The accounting policies of the subsidiary are aligned with the policies adopted by the Company.

 

All intercompany balances and transactions are eliminated on consolidation.

 

A separate income statement for the Parent Company is omitted from the group financial statements by virtue of section 408 of the Companies Act 2006.

 

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 Consolidated Statement of Comprehensive Income.  Translation differences on non-monetary financial assets and liabilities are recognised in the Consolidated Statement of Comprehensive Income.


b)  Financial assets and liabilities

The financial assets and liabilities of the Group 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 Group 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 Group 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 Consolidated 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 Group 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 Consolidated Statement of Comprehensive Income when the asset or liability is derecognised or impaired.  Interest earned on these instruments is recorded separately as interest income.

 

After initial measurement, the Group 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.  Interest and dividend earned or paid on these instruments are recorded separately in interest income or expense and dividend income or expense.


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

 

When the Group 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 Group's continuing involvement in the asset.

 

The Group 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 Consolidated 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 Group 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 Group's expenses (with the exception of share issue costs, which are charged directly to the distributable reserve) are charged through the Consolidated 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)  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 Group 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 Group's financial statements in the period of initial application.  A full assessment of the impact of IFRS 9 and IFRS 15 has not yet been performed.


Effective date

 

IFRS 7

Financial Instruments: Disclosures

1 January 2016

 

IFRS 9

Financial Instruments

1 January 2018

 

IFRS 15

Revenue from Contracts with Customers

1 January 2018

 

IAS 1

Presentation of Financial Statements

1 January 2016

 

IAS 7

Statement of Cash Flows

1 January 2017

 

IAS 27

Separate Financial Statements

1 January 2016

 


Annual improvements to IFRSs 2012-2014 Cycle

1 January 2016

 


 

4. Use of Judgements and estimates

 

The preparation of the Group'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.

 

 

Judgements

In the process of applying the Group's accounting policies, management has made the following judgements, which have had the most significant effects on the amounts recognised in the financial statements:

 

 

i)  Going concern

After making reasonable enquiries, and assessing all data relating to the Group's liquidity, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and do not consider there to be any threat to the going concern status of the Company or Group.  Therefore, financial statements have been prepared on a going concern basis.

 


 

Estimates and assumptions

The Group 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 Group.  Such changes are reflected in the assumptions when they occur.

 

i) Recoverability of loans and other receivables

The Directors assess the recoverability of the Group's loans to determine whether any impairment provision is required.  A loan is impaired when the borrower has failed to make a payment, either capital or interest, when contractually due.  The Group 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 2016, the Group's financial instruments at fair value through profit or loss comprised unlisted preference shares, unlisted equity shares and derivative financial instruments.  See note 17 for details of the bases of valuation.

 

ii) Valuation of unlisted preference shares

The Directors assess the fair value of the Group's unlisted preference shares, making estimates and assumptions regarding future interest and/or capital payment defaults and cost of capital in formulating Present Value calculations.

 

5. Dividends

The Company intends to distribute at least 85% of its distributable income earned in each financial year by way of dividends.  The Company is targeting a net dividend yield of 8% per annum of the Issue Price per Ordinary Share as at Admission.  The Company intends to continue to pay monthly dividends to Shareholders.

 

As stated in the Company's Prospectus, the Company has elected to designate all of the dividends for the period ended 30 June 2016 as interest distributions to its Shareholders.  In doing so, the Company is taking 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 has declared the following dividends in respect of earnings for the period from incorporation to 30 June 2016:


Announcement date

Pay date

Total dividend declared in respect of earnings in the period

Amount per

Ordinary Share



£'000


25 November 2015

30 December 2015

316

0.60p

24 December 2015

29 January 2016

210

0.40p

25 January 2016

26 February 2016

290

0.55p

16 February 2016

30 March 2016

290

0.55p

15 March 2016

26 April 2016

290

0.55p

22 April 2016

27 May 2016

290

0.55p

25 May 2016

24 June 2016

290

0.55p

28 June 2016

29 July 2016

316

0.60p

14 July 2016

26 August 2016

316

0.60p



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

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



2,608

4.95p



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

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

 

In accordance with IFRS, dividends are only provided for when they become a contractual liability of the Company.  Therefore, during the period a total of £1,975,000 was incurred in respect of dividends, none of which was outstanding at the reporting date.  The eighth and ninth dividends of £316,000 each had not been provided for at 30 June 2016 as, in accordance with IFRS, they were not deemed to be liabilities of the Company at that date.

 

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

 

On 23 August 2016, the Company declared a dividend of 0.60 pence per share for the period from 1 July 2016 to 31 July 2016.  This dividend will be paid on 23 September 2016.

 

On 21 September 2016, the Company declared a dividend of 0.60 pence per share for the period from 1 July 2016 to 31 August 2016.  This dividend will be paid on 28 October 2016.


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, 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 GLIF

The Company purchased the subsidiary (see note 14) from GLIF, a significant Shareholder of the Company and a 50% shareholder of the Investment Manager, on Admission, in return for 40,270,763 Ordinary Shares in the Company.  In addition, during the period the Group purchased loans and associated interest of £4,675,000 from GLIF.

 

The Group 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 Group 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 Group.  GLIF agreed that interest would continue to accrue to the Group, on the same terms, until such time that GLIF repaid the loan.

 

As at 30 June 2016, GLIF owed the Group £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 Group to one of the Platforms and all of the associated interest.  85% of the principal, plus all associated interest to 30 September 2016, was paid to the Group by GLIF, as part of a larger transaction, on 30 September 2016.


Transactions with subsidiary undertaking

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

 

7. Key contracts

a)  Investment Manager

The Group pays the Investment Manager a fee at the below rates expressed as a percentage of the Company Value, where the Company Value shall mean the lower of Net Asset Value and Market Capitalisation:

·      0.75% per annum of the Company Value up to £100 million; and

·      0.50% per annum of the Excess, being such part of the Company Value in excess of £100 million.

 

For the period from Admission until 6 November 2015 (the date on which the Investment Manager confirmed in writing that 90% of the net proceeds of the Issue had been invested or committed for investment), any cash instruments were excluded from the calculation of the Net Asset Value for the purposes of determining the management fee.

 

During the period, a total of £295,000 was incurred in respect of management fees, of which £93,000 was payable at the reporting date.

 

b) Administration fees

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 period, a total of £129,000 was incurred in respect of administration fees, of which £35,000 was payable at the reporting date.

 

A set-up fee of £25,000 was also paid to Elysium.

 

8. Directors' remuneration

The Directors are paid such remuneration for their services as determined by the Board.  Under the terms of their appointments, the Chairman of the Company receives £35,000 per annum, the chairman of the Audit and Valuation Committee receives £30,000 per annum and other non-executive Directors receive £25,000 per annum.

 

During the period, a total of £89,000 was incurred in respect of Directors' remuneration, none of which was payable at the reporting date.  No bonus or pension contributions were paid or payable on behalf of the Directors.

 

9. Key management and employees

The Group had no employees during the period. Therefore, there were no key management (except for the Directors) or employee costs during the period.


10. Auditor's remuneration

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

 

11. Other expenses


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



£'000


Website costs

18


Other expenses

15


Listing fees

14


Travel costs

13


Directors' liability insurance

6


Printing costs

3



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



69



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



 

12. 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".

 


 

Withholding tax of £2,000 was incurred by the Company's Guernsey subsidiary as a result of interest on certain loans to UK individuals/entities.  The Company only owned the Guernsey subsidiary from Admission and all loans made by the subsidiary were transferred to the Company on 1 October, so withholding tax only arose for a short period of time.  It is intended that all future loans in the UK will be made by the Company and therefore, unless tax laws change, it is not expected that UK withholding tax will be suffered by the Company in the future.

 

 

13. Earnings per Ordinary Share

The earnings per Ordinary Share of 6.94p is based on a profit attributable to the owners of the Company of £3,655,000 and on a weighted average number of 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

Details of the subsidiary undertaking held by the Company at 30 June 2016 were as follows:

Name of subsidiary undertaking

Country of incorporation

Principal activity

% of ordinary shares held

GLI Alternative Finance Guernsey Limited

Guernsey

Dormant (previously lending)

100%

 

During the period, loans and associated interest of £41,178,000 were novated from the subsidiary undertaking to the Company.  As at 30 June 2016, the investment in the subsidiary, designated as an investment at fair value through profit or loss, was held at £41,088,000.  As at 30 June 2016, the Company owed £41,088,000 to the subsidiary.



 

15. Loans


Consolidated

Parent Company


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


£'000

£'000

Amortised cost

44,882

45,494

Unrealised gain*

1,551

939


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

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

Balance at period end

46,433

46,433


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

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

Loans:

Current

17,625

17,625


Non-current

28,449

28,449

Cash held on client accounts with Platforms

359

359


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

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


46,433

46,433


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

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

*Unrealised gain



Foreign exchange on non-Sterling loans

1,946

1,334

Impairments

(395)

(395)


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

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

Unrealised gain

1,551

939


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

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




The weighted average interest rate of the loans as at 30 June 2016 was 9.49%.

 

A loan is impaired when the borrower has failed to make a payment, either capital or interest, when contractually due.  The Group 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 2016, repayments of £181,000 were past due but not impaired, aged as follows:

 


£'000


Less than 30 days overdue

16


More than 30 days but less than 90 days overdue

165



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



181



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


 

At 30 June 2016, the Board considered £395,000 of loans to be impaired as, following routine investigation of loan performance, Amberton 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 2016.





£'000


Funding Knight

285


Liftforward

110



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


Total impairment

395



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




 

16. Investments at fair value through profit or loss


Consolidated and Parent Company



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



£'000


Additions in the period

1,674


Unrealised gain

307



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


Balance at period end

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 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 preference shares                                                                                              

-

-

1,940

1,940

 

Unlisted equity shares

-

-

41

41

 

Derivative financial instruments (note 18)

-

23

-

23

 


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

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

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

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

 

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

-

23

1,981

2,004

 


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

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

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

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

 


The Group holds unlisted 25% preference shares, unlisted equity shares and derivative financial instruments.  The fair value of the unlisted preference shares has been calculated using a Present Value formula, based on estimates and assumptions regarding future interest and/or capital payment defaults and cost of capital.  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 exchange rate at the reporting date.

 

The Group's holding of unlisted 25% preference shares is categorised as Level 3.  The valuation of investment is subject to certain unobservable inputs used in the fair value measurement and valuation process.  At 30 June 2016, the unobservable input and sensitivity of this input was as follows:

·      Impairment of investment's underlying loan portfolio

If the impairment of the investment's underlying loan portfolio, which directly affects the return of the 25% preference shares and was applied in the valuation, increased from 4% per annum to 8% per annum, the valuation of the investment would decrease by £38,793.  A 4% decrease in the impairment would increase the valuation by £38,793.

 

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 period.



 

18. Derivative financial instruments

During the period, the Group entered into foreign currency forward contracts to hedge against foreign exchange fluctuations.  The Group realised a loss of £1,214,000 on forward foreign exchange contracts that settled during the period.


As at 30 June 2016, the open forward foreign exchange contracts were valued at £23,000.

 

19. Other receivables and prepayments


Consolidated and Parent Company



30 June 2016



£'000


Due from GLI Finance Limited (note 6)

2,392


Accrued interest

651


Other receivables

102


Prepayments

18



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



3,163



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


 

20. Other payables and accruals


Consolidated and Parent Company



30 June 2016



£'000


Withholding taxation on dividends

131


Management fee

93


Deferred investment income

62


Administration fee

35


Audit fee

23


Broker fee

23


Travel costs

13


Other payables and accruals

12



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



392



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


 

21. Share capital


Consolidated and Parent Company



30 June 2016



£'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



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


Called up share capital:



52,660,350 Ordinary Shares of 1 pence each

527


50,000 Management Shares of £1 each

50



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



577



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


 

During the period, 52,660,350 Ordinary Shares were issued at £1 each, together with 50,000 Management Shares at £1 each.

 

The Management Shares, which are held by the Investment Manager, 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. Reserves

The Profit and loss account is made up as follows:


Consolidated and Parent Company



30 June 2016



£'000


Realised revenue profit

2,988


Investment gains and losses

667


Dividends paid

(1,975)



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



1,680



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


Distributable reserves

1,013


Non-distributable reserves

667



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



1,680



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





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

 

The two £316,000 dividends (see note 5), which were declared on 28 June 2016 and 14 July 2016 respectively, will be paid out of the £1,013,000 remaining realised revenue profit.

 

During the period, 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.

 

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 Parent Company of £53,400,000, less £50,000, being amounts owed in respect of Management Shares, and on 52,660,350 Ordinary Shares in issue at the period end.

 

24. Financial Instruments and Risk Management

The Investment Manager manages the Group's portfolio to provide Shareholders with attractive risk adjusted returns through investment, principally via a portfolio of Investee Platforms, in a range of SME loan assets, diversified by way of asset class, geography and duration.  The Investment Manager seeks to achieve its investment objective by investing in a range of loans originated principally through the investee Platforms in which the majority shareholder of the Investment Manager (GLIF) holds a strategic equity investment.  The Group also makes investments through other third party alternative lending Platforms that are identified as suitable investment opportunities by the Investment Manager.

 

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


Risk is inherent in the Group's activities, but it is managed through a process of ongoing identification, measurement and monitoring.  The Group 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 Group'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 Group.

 

The Group 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 Group.

 

The market in which the Group 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 Group'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 Group 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 Group has established the following investment restrictions in respect of the general deployment of assets.


Geographical

The Group makes loans to SMEs in a broad spread of jurisdictions, but weighted towards the UK.  The Group intends to comply with the following restrictions on its percentage holdings of loan assets in the following jurisdictions:

-       UK: no more than 70% of Gross Assets; and

-       Rest of the World (being any jurisdiction outside the UK): at least 30% of Gross Assets.


Duration

The Group diversifies its risk portfolio by limiting the allocation of investments in terms of duration to maturity, although weighted towards short-term financing to ensure a degree of liquidity.  The Group limits the investment of Gross Assets (based on the duration to maturity of the loans), as follows:

-       Six months or less: between 10% and 40% of Gross Assets;

-       Six to 18 months: between 10% and 40% of Gross Assets;

-       18 to 36 months: between 10% and 40% of Gross Assets; and

-       36 months or more: between 10% and 40% of Gross Assets.


Security

Loan assets have a range of different types of security.  However, no more than 50% of Gross Assets will be held in unsecured loan assets.

 

Other restrictions

From time to time, the Group provides loans to the Platforms themselves, to fund the general working capital requirements of the Platform, rather than for onward deployment in SME loan assets.  At any time, the provision of such working capital loans will be limited to 5% of Gross Assets in aggregate (calculated at the time of investment).

 

To avoid a concentration of risk, for the Group's top ten investments (measured by Gross Assets), the Group will invest no more than 2.5% of Gross Assets (calculated at the time of investment) into an individual credit risk.  For investments outside the top ten, the Group will invest no more than 1% of Gross Assets (calculated at the time of investment) into an individual credit risk.  Where a loan finances a basket of underlying credits, the exposure to any one underlying credit will not be more than 2.5% of Gross Assets (calculated at the time of investment) for the Group's top ten investments, and not more than 1% of Gross Assets (calculated at the time of investment) outside the Group's top ten investments.


A number of positions contained in the seed portfolio (as detailed in the Prospectus) breached these limits and the Investment Manager has been working to ensure that the Group's portfolio complies with the investment restrictions going forward.  In particular, the Group's largest loan to a single issuer was in excess of the 2.5% limit, but this breach was rectified in the period, and ten positions outside of the top ten were in excess of the 1% limit.  By 30 June 2016, only four positions outside of the top ten were in breach of the 1% limit.


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 Group 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 2016, 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 +/- £99,000.  The maximum price risk resulting from financial instruments is equal to the £1,981,000 carrying value of the investments at fair value through profit or loss.


(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 Group's functional currency.  The Group invests in securities and other investments that are denominated in currencies other than Sterling.  Accordingly, the value of the Group's assets may be affected favourably or unfavourably by fluctuations in currency rates and therefore the Group will necessarily be subject to foreign exchange risks. 

 

As at 30 June 2016 a proportion of the net financial assets of the Group, 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

 

 

Net exposure



30 June 2016

30 June 2016

30 June 2016

30 June 2016



£'000

£'000

£'000

£'000

US Dollars


1,940

7,144

318

9,402

Euros


25

5,467

10

5,502



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

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

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

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



1,965

12,611

328

14,904



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

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

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

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

 

In order to limit the exposure to foreign currency risk, the Group entered into hedging contracts during the period. At 30 June 2016, the Group held foreign currency forward contracts to sell US$12,100,000 and €6,300,000 with a settlement date of 15 July 2016.

 

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 2016, 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 2016 would have decreased/increased by £(27,000)/£29,000.


(iii)   Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments.  The Group 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 £2,192,000 and loans of £1,700,000 through two Platforms were the only interest bearing financial instruments subject to variable interest rates at 30 June 2016.  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 period would have been £19,000.



 


Fixed interest

Variable interest

Non-interest bearing

Total


£'000

£'000

£'000

£'000

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

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

3,191

53,774


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

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

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

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

Financial Liabilities





Other payables

-

-

(330)

(330)


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

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

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

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

Total financial liabilities

-

-

(330)

(330)


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

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

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

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






Total interest sensitivity gap

46,691

3,892

2,861

53,444


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

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

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

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

 

The Investment Manager manages the Group'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 Group 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 Group.  The Group 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 Group, resulting in a financial loss to the Group.

 

At 30 June 2016, credit risk arose principally from cash and cash equivalents of £2,192,000 and balances due from the Platforms of £46,433,000.  The Group seeks to trade only with reputable counterparties that the Investment Manager believes to be creditworthy.

 

The Group's credit risks principally arise through exposure to loans provided by the Group to/through Platforms.  These loans are subject to the risk of borrower default.  Where a loan has been made by the Group through a Platform, the Group 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 Group 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 Group.  The Group 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 Group 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 2016 was low since the ratio of cash and cash equivalents to unmatched liabilities was 6:1.

 

The Investment Manager manages the Group'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, as detailed in the Investment Manager's Report, is as follows:

 


Percentage


0 to 6 months

24.1


6 months to 18 months

21.8


18 months to 3 years

30.1


Greater than 3 years

24.0



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



100.0



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


 

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 Group.  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 Shares and/or C Shares, buy back shares for cancellation or buy back shares to be held in treasury.  During the period ended 30 June 2016, the Company did not issue any new Ordinary or C shares, other than those shares issued at launch, nor did it buy back any shares for cancellation or to be held in treasury.

 

The Company is subject to externally imposed capital requirements in relation to its statutory requirement relating to dividend distributions to Shareholders.

 

25. Contingent assets and contingent liabilities

There were no contingent assets or contingent liabilities in existence at the period end.

 

26. Events after the reporting period

Two dividends of 0.6p per Ordinary Share, which (in accordance with IFRS) were not provided for at 30 June 2016, have been declared out of the profits for the period ended 30 June 2016 (see note 5).

 

On 23 August 2016, the Company declared a dividend of 0.6p per Ordinary Share for the period from 1 July 2016 to 31 July 2016.  This dividend will be paid on 23 September 2016.  On 21 September 2016, the Company declared a dividend of 0.6p per Ordinary Share for the period from 1 July 2016 to 31 August 2016.  This dividend will be paid on 28 October 2016.


On 22 July 2016, the Company announced a change of name from GLI Alternative Finance plc to The SME Loan Fund plc, to take effect from 31 August 2016.

 

On 3 August 2016, the Group changed its investment restrictions, following a General Meeting, as per the Circular dated 7 July 2016. In summary, the changes were that:

 

·      No more than 70% of the Company's gross assets will be invested in UK loan assets, with at least 30 per cent, of gross assets being invested in loan assets from other jurisdictions around the world;

 

·      The Group will invest at least 20% of gross assets in loan assets where the duration to maturity of the loan asset is less than six months. The Group will invest no more than 40% of gross assets in loan assets where the duration to maturity of the loan asset is between six months and 18 months. The Group will invest no more than 40% of gross assets in loan assets where the duration to maturity is greater than 18 months but less than 36 months. The Group will invest no more than 40% of gross assets in loan assets where the duration to maturity is 36 months or longer;

 

·      No more than 50% of gross assets will be held in unsecured loan assets;

 

·      At any time, the total amount of working capital loans will be limited to 5% of gross assets in aggregate;

 

·      The Group will invest no more than 2.5% of gross assets into an individual credit risk for the Group's top ten investments and no more than 2% of gross assets for investments outside the top ten;

 

·      The Group may employ borrowings of up to 150% of net asset value; and

 

·      The Group's un-invested or surplus capital or assets may be invested in cash instruments for cash management purposes.

 

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 ---


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