Source - LSE Regulatory
RNS Number : 3183B
SQN Secured Income Fund PLC
20 September 2018
 

 

20 September 2018

SQN Secured Income Fund plc

("SSIF" or the "Company")

 

Annual Financial Report

For the year ended 30 June 2018


A copy of the Company's Annual Report and Financial Statements for the year ended 30 June 2018 will shortly be available to view and download from the Company's website, http://www.sqncapital.com/managed-funds/sqn-secured-income-fund/about/.  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

Robert Peel

 

tel: +44 44 20 7894 7719

 

Buchanan Communications

Charles Ryland/Henry Wilson

 

tel: +44 20 7466 5000

http://www.sqncapital.com/managed-funds/sqn-secured-income-fund/about/

 

The  following  text  is  extracted  from  the  Annual  Report  and  Financial Statements of the Company for the year ended 30 June 2018.


 

Strategic Report

 

Key Points

 


30 June 2018

30 June 2017

 

Net assets [1]

£51,539,000

£52,048,000

 

NAV per Ordinary Share

97.78p

98.74p

 

Share price at 30 June 2018

90.975p

97.75p

 

Discount to NAV

7.0%

1.0%

 

Profit for the year

£2,809,000

£2,440,000

 

Dividend per share declared in respect of the year

6.30p

6.375p

 

Dividend cover

0.99

1.16

 

Total return per Ordinary Share (based on NAV)

+5.4%

+4.6%

 

Total return per Ordinary Share (based on share price)

-0.5%

+16.0%

 

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 22).



 

Overview and Investment Strategy


General information

SQN Secured Income Fund plc (the "Company", "Fund" 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 admitted to trading on the London Stock Exchange Specialist Fund Segment on 23 September 2015 ("Admission").


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 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 ensures that diversification of its portfolio is maintained, with the aim of spreading investment risk.


Geography

The Company invests 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 invests 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 holds 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 invests 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 is indifferent to sector when allocating funds for investment and, instead, adheres 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:

 

Investment Restriction

Investment Policy

Geography

- Exposure to UK loan assets

- Minimum exposure to non-UK loan assets

Minimum of 60%
20%

Duration to maturity

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

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

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


None
None

50%

Maximum single investment

10%

Maximum exposure to single borrower or group

10%

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


25%

Maximum exposure to any individual wholesale loan arrangement

25%

Maximum exposure to loan assets 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 to 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

I am pleased to update Shareholders with my third Chairman's statement, covering 1 July 2017 to 30 June 2018.  After a period of significant change, the Company has consolidated its position.  Our investment manager, SQN Asset Management Limited ("SQN"), has transformed the Company into a much stronger and better placed investment vehicle.  The Company has now achieved dividend cover (boosted by its direct lending activity) and is fulfilling its obligations to Shareholders as set out in the strategic review undertaken by SQN at the time of its appointment in April 2017.


Performance and Markets

The Company's NAV at 30 June 2018 was £51.5 million compared with £52.0 million as at 30 June 2017.  The total return achieved during the period was 5.37%.

 

The foreign exchange exposure on non-Sterling assets (24.62% of NAV) was fully hedged and any liquidity calls arising from the hedging strategy are considered manageable within the Company's cash flow.


The underwriting discipline of SQN's investment management team has been constant, with a number of new loans issued to strong businesses in the UK and Europe.  A fuller synopsis of these investments is provided later, in the Investment Manager's report.


Development of the Company

On 1 April 2017, management of the investment portfolio was transferred to SQN and at the same time a successful secondary placing of the Ordinary Shares, previously owned by GLI Finance Limited, (48% of the issued capital) was made, mainly to new investors.


At a general meeting held on 27 April 2017, the Board was authorised to allot up to 250 million Ordinary Shares and/or C Shares pursuant to a share issuance programme.  This programme was designed to enable the Company to raise additional capital to take advantage of investment opportunities, thereby expanding and diversifying its investment portfolio.  In order to issue new shares the Company's shares are required to trade at a premium to NAV and, as this was not the case during this reporting period, no new shares were issued.


Given the passage of time, the Company is now required to publish a new prospectus before it can issue further Shares pursuant to the share issuance programme.


Investment 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 writing I am pleased to report that platform related investments now represent less than 50% of the total investable capital and by January 2019, it is expected that platform investments will be reduced to below 30% of the portfolio.  This represents a significant improvement in the risk profile of the Company.


All of the Company's available cash is now committed to direct lending opportunities originated by SQN through its extensive network of industry contacts.  The nature of these direct loans is diverse but provides good levels of security through covenant provision and all loans are at rates of interest exceeding the Company's target returns.


Earnings and Dividends

Earnings per Ordinary Share for the reporting period were 5.33p.

 

The Company elected to designate all dividends for the period ended 30 June 2018 as interest distributions to its Shareholders.  By doing so, it 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.


The Company achieved and covered its annual dividend target of 6.25p for the period under review and has announced an increased annual dividend target of 7.00p from July 2018, with a total return target of at least 8.00%.  This is in line with previous guidance provided by the Board and the investment manager.


Discount

During the period, the Ordinary Shares traded at an average discount to NAV of 4.27%.  This is frustrating but the platform originated SME sector is currently suffering from a negative perception in investors' eyes due to poor investment practices followed by some of our competitors. This has led to a general widening of discounts across the sector.  While this is disappointing we believe that good communication with our existing and new investors will encourage stronger support for our direct strategy.  We are also working with the investment manager to identify other potential measures to eradicate the discount.


Gearing

The Company has maintained its policy of operating without a banking loan facility.  This policy is periodically reviewed by the Board in conjunction with the investment manager.  As the percentage of direct loans increases, giving SQN more control over the quality of loans accepted, the Board may decide to incorporate a modest level of gearing into the investment structure.


Board developments

After three years in the role of Chairman and following considerable progress on many fronts, some of which are outlined in this report, I have decided to step down as a Director of the Company and will not seek re-election at the forthcoming AGM. Ken Hillen has been asked by the Board to replace me and I am pleased to say that he has agreed to take over as Chairman post the AGM. This, of course, in turn creates a vacancy for the position of Chairman of the Audit and Valuation Committee. Again I am pleased to report that Gay Coley will take over this role post the AGM.


Outlook

The Manager has made good progress in eliminating the riskier elements of the portfolio and has gone a long way towards building a diversified, good quality direct lending book of business.


SQN is now fulfilling its original task of delivering stable income from the Company's assets.  The Board believes that the portfolio now offers sound, risk-adjusted total returns and as SQN has a substantial pipeline of deals waiting for funding the Board is keen to support your manager over the coming year and hopes that the size of the Company can be increased considerably.

 

I wish the Board and SQN well for the coming year and I hope to see further positive developments in the Company.


Richard Hills

Chairman

19 September 2018



 

 

Investment Manager's Report


Overview

We are pleased to write our second Investment Manager's report in respect of SQN Secured Income Fund plc

 

We began management of this mandate on 1 April 2017, as defined in a strategic review following our appointment. We are pleased to report swift progress in restructuring the portfolio away from platform investments into our own directly originated loans, implementation of a cost saving programme and most importantly, confirmation that dividend cover will be achieved within the time frame we outlined upon assuming management of the Fund.  We have achieved this without gearing, whilst maintaining a keen eye on the risk management of legacy positions and our newly imposed underwriting standards for direct loans.


Background

SQN is a credit based alternative fund manager with a successful track record in managing assets in an investment company structure.  The SQN Group has a total of £800 million assets under management and a further £1 billion in advisory portfolios.  Our core competency is in credit management and we are suitably resourced to deliver income and total return in line with the expectations we have set.  Most significantly, we retain our own origination team within the SQN Group.  This has enabled us to build a strong diversified pipeline of new investment opportunities.  We have offices in the UK and the US and furthermore, we have started building an investment capability in Ireland.


Over the course of the year, we have made very good progress on key commitments made to the Board and Shareholders since our appointment.  These are:

 

·      A covered dividend of 7p per Ordinary Share per annum, to be achieved by July 2018, in line with Board and investment manager guidance.

·      Half of the portfolio has now been reinvested into direct loans originated by SQN using our rigorous underwriting process.

·      Reduced exposure to platform investments, originally 100% of the portfolio, with an expectation that this exposure will fall to circa 30% of the portfolio by calendar year end 2018.

·      Robust risk management of impairment reporting from platforms.

·      Timely implementation of IFRS 9 methodology, with the lowest loss provisions in the peer group.

·      Cost review and roll out of budgetary savings for 2018/19.

·      Successful final transition from the Company's previous sub-advisor.

·      New hires to the team at SQN have included relationship and origination staff.

·      All cash as it becomes available is committed in a timely fashion and we continue to see a healthy pipeline of new opportunities.

 

Although it is a disappointment that the Ordinary Shares traded at a discount to NAV during the reporting period, we have concluded that the reasons are mostly external to SQN and beyond our control.  The alternative lending sector is very diverse and other funds have had mixed performances leading to a trend for widening discounts across the board.  We acknowledge legitimate investor concern for highly geared, platform-based strategies.


Comparison of our highly disciplined, diversified approach to underwriting with a platform led strategy is difficult to justify due to an historic overhang of market perception of the Fund's core activity.  We stand by our intention to reduce higher risk third party exposures to a manageable 20% of the portfolio and are working hard to achieve this by July 2019.   Additionally, we are considering further measures to eradicate the discount, which would enable the Company the opportunity to raise further capital over the coming year.


As previously reported, we have pursued investments in three core areas; secured trade finance, receivables finance and wholesale lending.  We have avoided consumer credit exposure by focussing on secured commercial opportunities including development loans and commercial property in growth sectors.  We consider this a prudent approach which diminishes the risk of exposure to macro-economic headwinds.  In addition, we have made loan commitments to European businesses benefitting from opportunities created by the Brexit vote in the UK and despite our strong presence in the U.S., we have demurred from adding to our U.S. allocation for the time being until foreign exchange hedging costs are less economically prohibitive.  Our strategy is uncorrelated to conventional asset markets and their consequent risks.


At the time of writing this report the Fund is positioned with a ratio of 52%:48% in loans versus platforms compared to an allocation of 100% to platforms when we assumed management of the Fund.  We consider this a significant boost to a favourable assessment of the portfolio.  It has also contributed to a reduction in duration as all new debt facilities have been underwritten at between two and five year maturities.  All loans have been negotiated at good commercial rates meeting the Company's requirements after fees and expenses for its target returns to shareholders.  Most pleasing is that the loans are with high quality businesses with whom the Company expects to nurture long term relationships.


The SQN investment approach recognises the significance of strong processes and robust governance. Accordingly, each drawdown requires a "triple lock" sign off from our legal, credit and portfolio management teams. With the introduction of direct lending to the Company's portfolio, we implemented an enhanced risk management regime with a "red flag" check list for each facility.  This process has been further enhanced during the reporting period and we have made significant progress in developing this more refined risk model.


In accordance with IFRS 9 regulations, our portfolio reported the lowest loss provision in the sector of 42 basis points, which we expect to reduce further upon establishment of an 80:20 ratio of loans to platform investments.  This is testament to our continued commitment to the highest credit underwriting standards.


Investment Outlook

As was noted last year, borrowers in the SME sector continued to seek alternative lenders as high street banks have withdrawn from the market.  Our preferred investment size is in the £1 million to £20 million range but as the Fund remains small, we are mainly placing transactions of between £1 million and £5 million into the portfolio.  Our preferred maturity of between three and five years is also attractive to these companies as it gives them breathing space to grow and to focus on their core activities.

 

In July, the Bank of England raised the base rate, for the first time since the global financial crisis started but this had very little impact on our market and we expect to maintain rate discipline on new underwriting.  As the Brexit negotiations unfold, we are careful to assess this risk for new loan business and we will avoid sectors with significant exposure to a UK recession and sharp FX movements.  We have been encouraged by new business generated in Europe and will continue to consider management buyout and acquisition finance deals as they are presented to us.  Demographic and valuation multiples are still very attractive for debt financing of these companies.  In the US, we observe a similar opportunity as baby boomer owned companies transition to the next generation.  However, our appetite for US deals is dampened given the costs associated with USD hedging, arising from the dollar's continued strength versus our base currency of Sterling.


As the peer to peer platform market matures with many deals reaching their first refinancing period, we expect to observe continued write downs from less disciplined competition.  Consolidation in the sector has already begun and we have already observed significant developments that confirm this, having been offered mature loan books at significant discount to par.  By rapidly reducing our exposure to this part of the market, we expect our loss provisions to be lower for longer.  This will ensure SQN maintains a high degree of integrity for our Shareholders and deliver on our commitment to a 7p income and 8% total return from September 2018 for the long term.


We are confident that our investment strategy remains valid and stand by our decision to implement this approach.  We look forward to engaging with our investors over the coming months and an appreciation of our share price closer to net asset value, which would lay the basis for us to increase the capital base of the Fund.


Dawn Kendall

Managing Director

SQN Asset Management Limited

19 September 2018



 

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.  The Company is also exposed 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 monitors 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 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 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 and other advisers.

 

The Company's exposure to platform risk is decreasing as it realises platform loans and exits positions on certain platforms entirely.


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.


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 and one female Director.  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.  The Company's annual dividend target for the period under review was 6.25p per Share, and this is increased to 7.00p per Share with effect from July 2018.

 

The Company has announced dividends of £3,318,000 (6.30p per Ordinary Share) for the year ended 30 June 2018, being 101.0% of distributable income for the year (see Notes 5 and 23 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 2018, 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 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 2018 the shares were trading at 90.975p, a 6.96% discount to NAV.  However, the three month average share price was a 7.14% discount to NAV.


Richard Hills

Chairman

19 September 2018



 

Statement of Comprehensive Income

 

for the year ended 30 June 2018

 


Note

Year ended

30 June 2018

Year ended

30 June 2017

 



£'000

£'000

 

Revenue




 

Investment income


4,466

4,462

 

Other income


1

4

 



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

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

 

Total revenue


4,467

4,466

 



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

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

 

Operating expenses




 

Management fees

7a

(518)

(408)

 

Other expenses

11

(154)

(209)

 

Broker fee


(123)

(119)

 

Administration fees

7b

(116)

(144)

 

Directors' remuneration

8

(114)

(128)

 

Legal and professional fees


(72)

(172)

 

Transaction fees


(59)

-

 



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

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

 

Total operating expenses


(1,156)

(1,180)

 



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

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

 

Investment gains and losses




 

Movement in unrealised loss on loans

15

(315)

(718)

 

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

16

22

(193)

 

Movement in unrealised gain on investment in subsidiary

14

-

(677)

 

Movement in unrealised (loss)/gain on derivative financial instruments

18

(182)

127

 

Realised (loss)/gain on disposal of loans


(40)

782

 

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

16

-

260

 

Realised gain on disposal of subsidiary

14

-

673

 

Realised gain/(loss) on derivative financial instruments

18

21

(1,008)

 



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

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

 

Total investment gains and losses


(494)

(754)

 



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

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

 

Net profit from operating activities before loss on foreign currency exchange


2,817

2,532

 





 

Net foreign exchange loss


(8)

(87)

 



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

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

 

Net profit before taxation


2,809

2,445

 





 

Taxation




 

Corporation tax

12

-

(5)

 



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

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

 

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


2,809

2,440

 



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

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

 





 

Earnings per Ordinary Share (basic and diluted)

13

5.33p

4.63p

 



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

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

 

 

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

There were no other comprehensive income items in the year.

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 2018


 

 

 

Note

Called up share capital

Special distributable reserve

Profit and loss account

Total



£'000

£'000

£'000

£'000

At 1 July 2016


577

50,942

1,881

53,400







Profit for the year

23

-

-

2,440

2,440







Transactions with Owners in their capacity as owners:

Dividends paid

5,23

-

-

(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







Profit for the year

23

-

-

2,809

2,809







Transactions with Owners in their capacity as owners:

Dividends paid

5,23

-

-

(3,318)

(3,318)



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

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

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

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

Total transactions with Owners in their capacity as owners


-

-

(3,318)

(3,318)









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

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

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

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

At 30 June 2018


577

50,942

20

51,539



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

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

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

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


There were no other comprehensive income items in the year.

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 2018



Note

30 June 2018

30 June 2017



£'000

£'000

Non-current assets




Loans at amortised cost

15

31,918

32,450

Investments at fair value through profit or loss

16,17

280

258



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

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

Total non-current assets


32,198

32,708



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

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

Current assets




Loans at amortised cost

15

12,445

7,008

Cash held on client accounts with platforms

15

196

1,144

Derivative financial instruments

17,18

-

150

Other receivables and prepayments

19

772

733

Cash and cash equivalents


6,125

13,376



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

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

Total current assets


19,538

22,411



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

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

Total assets


51,736

55,119



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

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

Current liabilities




Other payables and accruals

20

(165)

(3,071)

Derivative financial instruments

17,18

(32)

-



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

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

Total liabilities


(197)

(3,071)



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

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







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

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

Net assets


51,539

52,048



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

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

Capital and reserves attributable to owners of the Company




Called up share capital

22

577

577

Other reserves

23

50,962

51,471



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

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

Equity attributable to the owners of the Company


51,539

52,048



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

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





Net asset value per Ordinary Share

24

97.78p

98.74p



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

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


These financial statements of SQN Secured Income Fund plc (registered number 09682883) were approved by the Board of Directors on 19 September 2018 and were signed on its behalf by:

 

Richard Hills

Chairman

19 September 2018

 

Ken Hillen

Director

19 September 2018


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



 

 Statement of Cash Flows

for the year ended 30 June 2018



Year ended 30 June 2018

Year ended 30 June 2017


£'000

£'000

Cash flows from operating activities



Net profit before taxation

2,809

2,445

Adjustments for:



Movement in unrealised loss on loans

315

718

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

(22)

193

Movement in unrealised gain on investment in subsidiary

-

677

Movement in unrealised loss/(gain) on derivative financial instruments

182

(127)

Realised loss/(gain) on disposal of loans

40

(782)

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

-

(260)

Realised gain on disposal of subsidiary

-

(673)

Realised (gain)/loss on derivative financial instruments

(21)

1,008

Amortisation of transaction fees

59

-

Interest received and reinvested by platforms

(595)

(1,596)

Capitalised interest

(312)

-

(Increase)/decrease in investments

(3,443)

11,710

Taxation paid

(5)

-


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

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

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

(993)

13,313

Increase in other receivables and prepayments

(39)

(1,011)

(Decrease)/increase in other payables and accruals

(2,901)

2,806


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

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

Net cash (outflow)/inflow from operating activities

(3,933)

15,108




Cash flows from financing activities



Dividends paid

(3,318)

(3,924)


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

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

Net cash outflow from financing activities

(3,318)

(3,924)





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

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

(Decrease)/increase in cash and cash equivalents in the year

(7,251)

11,184

Cash and cash equivalents at the beginning of the year

13,376

2,192


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

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

Cash and cash equivalents at 30 June 2018

6,125

13,376


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

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




Supplemental cash flow information



Non-cash transaction - interest received

907

1,596


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

 

Notes to the Financial Statements

for the year ended 30 June 2018


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 admitted to trading 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 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 2018.  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 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 23.

 

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 IFRS 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 IFRS 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.

 

IAS 7

Statement of Cash Flows - Disclosure initiative




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 12

Income Taxes (amendments resulting from Annual Improvements 2015-2017 Cycle (income tax consequences of dividends))

1 January 2019

 

IAS 23

Borrowing Costs (amendments resulting from Annual Improvements 2015-2017 Cycle (borrowing costs eligible for capitalisation)

1 January 2019

 

IFRIC 22

Foreign Currency Transactions and Advance Consideration

1 January 2018

 

IFRIC 23

Uncertainty over Income Tax Treatments

1 January 2019

 




 

IFRS 9: Financial Instruments

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 with effect from 1 July 2018.  The Company has performed an impact assessment of all three aspects of IFRS 9:

 

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 will continue to measure loans and receivables at amortised cost, and at fair value for 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 is probability weighted and takes 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.

 

IFRS 9 provisioning will lead to a one-off decrease in the Company's NAV of 0.42% from 1 July 2018.  All material loss provisions are related to platform impairments on investments made before the Investment Manager took control of the portfolio.  Since assuming management of the Company on 1 April 2017, SQN Asset Management Limited has reduced platform exposure from 100% to under 50%, delivering on the strategy of providing income from direct lending originated and underwritten solely by the Investment Manager.  The Company has managed the risk posed by peer to peer platform exposure effectively and will continue to reduce the overall exposure to these platforms to the target weight of 20% of the whole portfolio.

 

Given that the adjustment to NAV is driven purely by a revised accounting methodology, it will have no impact on the Company's future cash flows.  Underlying performance is unaffected as this change is purely an accounting adjustment and has no bearing on the loans held within the Company.

 


 

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.

 


 

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.

 


 

i) Recoverability of loans and other receivables

 

Following the adoption of IFRS 9 on 1 July 2018, the approach to recognising impairment has changed slightly.  This is explained in note 3(i).  This did not affect the carrying value of the loans at 30 June 2018.

 


 

At 30 June 2018, 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 7.00p per Share for dividends paid out of reserves for the period from 1 July 2018 onwards, the first dividend of which will be paid on 28 September 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 2018 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 2018:

Announcement date

Pay date

Total dividend declared in respect of earnings in the year

Amount per

Ordinary Share



£'000


21 August 2017

29 September 2017

276

0.525p

22 September 2017

27 October 2017

276

0.525p

23 October 2017

24 November 2017

276

0.525p

22 November 2017

29 December 2017

276

0.525p

21 December 2017

26 January 2018

276

0.525p

19 January 2018

23 February 2018

276

0.525p

20 February 2018

23 March 2018

276

0.525p

16 March 2018

27 April 2018

276

0.525p

25 April 2018

25 May 2018

276

0.525p

29 May 2018

29 June 2018

276

0.525p

22 June 2018

27 July 2018

276

0.525p

25 July 2018

31 August 2018

276

0.525p



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

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

Dividends declared (to date) for the year

3,318

6.30p

Less, dividends paid after the year end

(553)

(1.05)p

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

553

1.05p



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

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

Dividends paid in the year


3,318

6.30p



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

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


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 £3,318,000 (2017: £3,792,000) was incurred in respect of dividends, none of which was outstanding at the reporting date (2017: none).  The dividends of £276,467 each, which were declared on 22 June 2018 and 25 July 2018, had not been provided for at 30 June 2018 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 30 August 2018, the Company declared a dividend of 0.583p per Share for the period from 1 July 2018 to 31 July 2018.  This dividend will be paid on 28 September 2018.


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.


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 £127,000 was earned in the year (2017: £3,000), £3,000 of which was outstanding at 30 June 2018 (2017: £3,000).  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.

 

At 30 June 2018, the balance of the loan was £1,156,000 (2017: £1,380,000).


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. Amberton Properties (Oxford) Limited was a subsidiary of a 50% shareholder of the investment manager at that time, Amberton Asset Management Limited.


Transactions with GLI Finance Limited ("GLIF")

In September 2016, as payment of the balance due from GLIF, the majority shareholder at that time, 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.


7. Key contracts

a)  Investment Manager

The Investment Manager, SQN Asset Management Limited ("SQN UK") and SQN Capital Management, LLC ("SQN US"), 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, the former Investment Manager, Amberton, was appointed as Sub-Investment Adviser to the Investment Manager. From that date, 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 were borne by the Investment Manager. Amberton ceased to act as Sub-Investment Adviser to the Investment Manager with effect from 1 June 2018.

 

During the year, a total of £518,000 (2017: £408,000) was incurred in respect of management fees (£518,000 to SQN UK (2017: £278,000 to Amberton and £130,000 to SQN UK)), of which £42,000 was payable to SQN UK at the reporting date (2017: £43,000 to SQN UK).

 

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 £116,000 (2017: £144,000) was incurred in respect of administration fees, of which £28,000 (2017: £31,000) was payable at the reporting date.


8. Directors' remuneration

During the year, a total of £114,000 (2017: £128,000) was incurred in respect of Directors' remuneration, none of which was payable at the reporting date (2017: £9,000).  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 (2017: 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 2018, total fees, plus VAT, charged by RSM UK Audit LLP, together with amounts accrued at 30 June 2018, amounted to £38,000 (2017: £45,000), of which £38,000 (2017: £42,000) related to audit services and none (2017: £3,000) was in respect of tax services.  As at 30 June 2018, £35,000 (2017: £38,000) was due to RSM UK Audit LLP.

 

11. Other expenses


Year ended 30 June 2018

Year ended 30 June 2017


£'000

£'000

Audit fees (Note 10)

38

42

Registrar fees

30

30

Website costs

19

17

Other expenses

14

15

Custodian fee

13

25

Listing fees

13

22

Accountancy and taxation fees

8

37

Printing costs

7

6

Travel costs

7

6

Directors' liability insurance

5

6

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

-

3


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

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


154

209


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

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



 

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 of 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 2018

Year ended

30 June 2017


£'000

£'000

Corporation tax:



-       Current year

-

-

-       Adjustments in relation to prior period

-

5


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

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

Total tax expense for the year

-

5


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

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

 

 

 

 

Year ended

30 June 2018

Year ended

30 June 2017

 

 

£'000

£'000

 

Reconciliation of tax charge:



 

Profit before taxation

2,809

2,445

 


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

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

 

Tax at the standard UK corporation tax rate of 19% (2017: 20%)

534

489

 

Effects of:



 

-       Non-taxable investment gains and losses

94

150

 

-       Interest distributions

(630)

(671)

 

-       Unrecognised deferred tax

2

32

 

-       Adjustments in relation to prior period

-

5

 


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

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

 

Total tax expense

-

5

 


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

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

 


 

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

 


Year ended

30 June 2018

Year ended

30 June 2017

 

United Kingdom

19%

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 5.33p (2017: 4.63p) is based on a profit attributable to the owners of the Company of £2,809,000 (2017: £2,440,000) and on a weighted average number of 52,660,350 (2017: 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.



 

15. Loans at amortised cost

 

 

Year ended            30 June 2018

  Year ended            30 June 2017


£'000

£'000

Loans

44,653

40,381

Unrealised (loss)/gain*

(94)

221


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

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

Balance at year end

44,559

40,602


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

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

Loans:

Non-current

31,918

32,450


Current

12,445

7,008

Cash held on client accounts with platforms

196

1,144


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

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

Loans at amortised cost and cash held on client accounts with platforms

44,559

40,602


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

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

*Unrealised (loss)/gain



Foreign exchange on non-Sterling loans

605

651

Impairments

(699)

(430)


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

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

Unrealised (loss)/gain

(94)

221


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

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




The movement in unrealised loss on loans in the Statement of Comprehensive Income comprises:


Year ended            30 June 2018

  Year ended            30 June 2017


£'000

£'000

Movement in foreign exchange on non-Sterling loans

(46)

(683)

Movement in impairments

(269)

(35)


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

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

Movement in unrealised loss on loans

(315)

(718)


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

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


The weighted average interest rate of the loans as at 30 June 2018 was 9.24% (2017: 8.58%).


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 2018, repayments of £1,503,000 (2017: £1,031,000) were past due, aged as below.  However, the Company assessed the recoverability of the loans and did not consider any impairment necessary.

 


30 June 2018

30 June 2017


£'000

£'000

Less than 30 days overdue

212

385

More than 30 days but less than 90 days overdue

1,023

-

More than 90 days but less than a year overdue

165

646

More than a year overdue

103

-


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

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


1,503

1,031


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

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


At 30 June 2018, the Board considered £699,000 (2017: £430,000) 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, the Investment Manager had estimated a recoverable amount as at 30 June 2018.

 


30 June 2018

30 June 2017


£'000

£'000

Sancus Funding (previously Funding Knight)

515

307

UK Bond Network

104

104

MyTripleA

80

19


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

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

Total impairment

699

430


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

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

 

During the year, £40,000 (2017: £454,000) 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 2018

Year ended 30 June 2017


£'000

£'000

Balance brought forward

258

1,981

Additions in the year

-

181

Disposals in the year

-

(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

 

22

 

(193)


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

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

Balance at year end

280

258


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

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




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 2018, the financial instruments designated at fair value through profit or loss were as follows:

 


30 June 2018


Level 1

Level 2

Level 3

Total

Financial assets/(liabilities)

£'000

£'000

£'000

£'000

Unlisted equity shares

-

-

280

280

Derivative financial instruments (Note 18)

-

(32)

-

(32)


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

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

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

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

Total financial assets/(liabilities) designated as at fair value through profit or loss

-

(32)

280

248


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

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

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

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


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 2018, 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 (2017: 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 profit of £21,000 (2017: loss of £1,008,000) on forward foreign exchange contracts that settled during the year.


As at 30 June 2018, the open forward foreign exchange contracts were valued at £(32,000) (2017: £150,000).


19. Other receivables and prepayments


30 June 2018

30 June 2017


£'000

£'000

Accrued interest

759

711

Prepayments

13

14

Other receivables

-

8


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

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


772

733


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

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

 

20. Other payables and accruals


30 June 2018

30 June 2017


£'000

£'000

Management fee

42

43

Audit fee

35

35

Administration fee

28

31

Transaction fees

20

40

Deferred investment income

19

124

Other payables and accruals

12

18

Accountancy and taxation fees

7

8

Broker fee

2

13

Other payable [1]

-

2,692

Legal and professional fees

-

53

Directors' remuneration

-

9

Taxation

-

5


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

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


165

3,071


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

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




[1]

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 30 June 2017.


21. Reconciliation of liabilities arising from financing activities

IAS 7 requires the Company to detail the changes in liabilities arising from financing activities, including both cash and non-cash changes.  Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Company's statement of cash flows as cash flows from financing activities.

 

As at 30 June 2018, the Company had no liabilities classified as cash flows from financing activities (2017: none).

 

22. Share capital


30 June 2018

30 June 2017


£'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 2018

30 June 2017


£'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 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.


23. Other reserves



Profit and loss account



Special distributable reserve

 

 

Distributable

 

Non-distributable

 

 

Total


£'000

£'000

£'000

£'000

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






Realised revenue profit

-

3,303

-

3,303

Realised investment gains and losses

-

(19)

-

(19)

Unrealised investment gains and losses

-

-

(475)

(475)

Dividends paid

-

(3,318)

-

(3,318)


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

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

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

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

At 30 June 2018

50,942

75

(55)

50,962


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

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

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

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


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.

 

The two £276,000 dividends (see Note 5), which were declared on 22 June 2018 and 25 July 2018, will be partly paid out of the £75,000 remaining realised revenue profit with the balance being paid from the special distributable reserve.

 

24. 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 £51,539,000 (2017: £52,048,000), less £50,000 (2017: £50,000), being amounts owed in respect of Management Shares, and on 52,660,350 (2017: 52,660,350) Ordinary Shares in issue at the year end.


25. Financial Instruments and Risk Management

The Investment Manager manages 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, Broker, 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.

 

Investment Restriction

Investment Policy

 

Geography

- Exposure to UK loan assets

- Minimum exposure to non-UK loan assets

Minimum of 60%
20%

Duration to maturity

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

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

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


None
None
50%

Maximum single investment

10%

Maximum exposure to single borrower or group

10%

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


25%

Maximum exposure to any individual wholesale loan arrangement

25%

Maximum exposure to loan assets 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 complied with the investment restrictions throughout the year and up to the date of signing this report.


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 2018, 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 +/- £14,000 (2017: +/- £13,000).  The maximum price risk resulting from financial instruments is equal to the £280,000 carrying value of the investments at fair value through profit or loss (2017: £258,000).


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 2018, 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 2018

£'000

£'000

£'000

£'000

£'000

£'000

£'000

US Dollars

-

5,235

1,921

-

7,156

(7,516)

(360)

Euros

63

4,839

628

-

5,530

(5,417)

113


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

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

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

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

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

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

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


63

10,074

2,549

-

12,686

(12,933)

(247)


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

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

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

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

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

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

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

30 June 2017








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)


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

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

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

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

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

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

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


In order to limit the exposure to foreign currency risk, the Company entered into hedging contracts during the year. At 30 June 2018, the Company held foreign currency forward contracts to sell US$9,950,000 and €6,140,000 (2017: US$8,800,000 and €5,550,000) with a settlement date of 26 September 2018.

 

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 2018, 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 2018 would have increased/(decreased) by £13,000/£(15,000) (2017: £(7,000)/£8,000), 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 £6,125,000 (2017: £13,376,000) were the only interest bearing financial instruments subject to variable interest rates at 30 June 2018.  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 £31,000 (2017: £67,000).


 

 

Fixed interest

Variable interest

Non-interest bearing

Total

30 June 2018

£'000

£'000

£'000

£'000

Financial Assets





Loans

44,363

-

-

44,363

Cash held on client accounts with platforms

-

-

196

196

Investments at fair value through profit or loss

-

-

280

280

Other receivables

-

-

759

759

Cash and cash equivalents

-

6,125

-

6,125


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

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

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

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

Total financial assets

44,363

6,125

1,235

51,723


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

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

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

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

Financial Liabilities





Other payables

-

-

(146)

(146)

Derivative financial instruments

-

-

(32)

(32)


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

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

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

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

Total financial liabilities

-

-

(178)

(178)


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

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

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

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






Total interest sensitivity gap

44,363

6,125

1,057

51,545


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

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

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

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







Fixed interest

Variable interest

Non-interest bearing

Total


£'000

£'000

£'000

£'000

30 June 2017





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


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

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

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

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


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 2018, credit risk arose principally from cash and cash equivalents of £6,125,000 (2017: £13,376,000) and balances due from the platforms and SMEs of £44,559,000 (2017: £40,602,000).  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 2018 was low since the ratio of cash and cash equivalents to unmatched liabilities was 31:1 (2017: 4:1).

 

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


30 June 2018

30 June 2017


Percentage

Percentage

0 to 6 months

17.0

32.6

6 months to 18 months

25.3

11.0

18 months to 3 years

16.6

19.7

Greater than 3 years

41.1

36.7


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

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


100.0

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 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 2018, 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 (2017: none).

 

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.


26. Contingent assets and contingent liabilities

There were no contingent assets or contingent liabilities in existence at the year end (2017: none).

 

 

27. 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 2018, have been declared out of the profits for the year ended 30 June 2018 (see Note 5).

 

On 30 August 2018, the Company declared a dividend of 0.583p per Ordinary Share for the period from 1 July 2018 to 31 July 2018.  This dividend will be paid on 28 September 2018.

 

There were no other significant events after the reporting period.


28. 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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END
 
 
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