Source - LSE Regulatory
RNS Number : 3685A
ICG-Longbow Snr Sec UK Prop DebtInv
23 September 2022
 

ICG-Longbow Senior Secured UK Property Debt Investments Limited

 

Interim Report And

Unaudited Condensed Interim Financial Statements

For the six months ended 31 July 2022       

 

 

 

ICG-Longbow Senior Secured UK Property Debt Investments Limited ("the Company") is pleased to announce the released of its Interim Financial Statements for th e six months ended 31 July 2022 which will shortly be available on the Company's website at (ww.lbow.co.uk) where further information on the Company can also be found. The interim financial statements are also available for viewing on the National Storage Mechanism at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

 

All capitalised terms are defined in the Glossary of Capitalised Defined Terms unless separately defined.

 

Financial Highlights

 

 

Key Developments

·       Continuation of capital return to shareholders; distribution of £7.3 million (6.0 pence per ordinary share) made during the period, taking total capital distributions to £38.8 million (32.0 pence per ordinary share) since September 2021.

 

·       Dividends paid and declared totalling 2.1 pence per share for the six-month period to 31 July 2022, reflecting approximately 6% annualised on the prevailing quarterly NAV, in line with the Board's guidance to date.

 

·       Total loans outstanding of £74.7 million as at 31 July 2022, as the portfolio continues to reduce through loan repayments.

 

·       No losses incurred or impairment provisions required on any portfolio investments.

 

Performance

·       NAV of £80.55 million as at 31 July 2022 (31 January 2022: £87.77 million).

 

·       Profit after tax of £2.73 million for the six months ended 31 July 2022 (31 July 2021: £3.52 million).

·       Earnings per share for the period of 2.25 pence (31 July 2021: 2.90 pence).

·       Performance in line with expectations and commensurate with the ongoing reduction in the loan portfolio.

Dividend

·       Total dividends paid or declared for the period ended 31 July 2022 of 2.1 pence per share (31 July 2021: 3 pence per share), made up as follows:

o   Interim dividend of 1.1 pence per share paid in respect of quarter ended 30 April 2022; and

o   Interim dividend of 1.0 pence per share approved in respect of quarter ended 31 July 2022.

 

Investment Portfolio

·       As at 31 July 2022, the Company's investment portfolio comprised five loans with an aggregate principal balance of £74.7 million, representing 92.8% of the shareholders' equity (31 January 2022: six loans with an aggregate principal balance of £80.5 million, representing 91.8% of the shareholders' equity).

·       Weighted average portfolio LTV as at 31 July 2022 was 69.3% (31 January 2022: 67.8%).

·       As at 22 September 2022, the aggregate drawn balance was £73.7 million.

·       The underlying portfolio borrowers continue to pursue business plans while working towards loan repayments.

Corporate Summary

Investment Objective
In line with the revised Investment Objective and Policy approved by shareholders at the Extraordinary General

Meeting in January 2021, the Company is undertaking an orderly realisation of its investments.

 

Structure
The Company is a non-cellular company limited by shares incorporated in Guernsey on 29 November 2012 under the Companies Law. The Company's registration number is 55917, and it has been registered with the GFSC as a registered closed-ended collective investment scheme. The Company's Ordinary Shares were admitted to the premium segment of the FCA's Official List and to trading on the Main Market of the London Stock Exchange as part of its IPO which completed on 5 February 2013. The issued capital comprises the Company's Ordinary Shares denominated in Pounds Sterling. The Company previously made investments in its portfolio through ICG-Longbow Senior Debt S.A., the Company's wholly owned Luxembourg subsidiary. The Board resolved to simplify its corporate structure by collapsing the subsidiary company which has historically acted as the lender for the Company's investments. Following this decision, the subsidiary, ICG Longbow Senior Debt S.A. was dissolved under Luxembourg Law with effect from 18 January 2022. Following the dissolution, the Company has assumed the assets and liabilities of its former subsidiary.

 

Investment Manager
During the year ended 31 January 2021, the Company's management arrangements were amended and the Company appointed ICG Alternative Investment Limited as external discretionary investment manager, under the Alternative Investment Fund Management Directive (AIFMD) within a remit set by the Board. Previously, the Company was internally managed by the Board, after receiving advice from Intermediate Capital Managers Limited (an affiliate of ICG Alternative Investment Limited) under the terms of a non-discretionary Investment Advisory agreement.

 

Chairman's Statement

 

Introduction

On behalf of the Board, I am pleased to present the Interim Financial Statements for the Company for the six months ended 31 July 2022.

 

Economic and market conditions during the first half of the year were dramatically different from 2021, with sharp falls across global equity and bond markets.  In addition to the geopolitical challenges caused by the Russian invasion of Ukraine, investors saw and continue to be concerned by high levels of inflation, rising interest rates, increasing volatility and a slowing economy.  In the UK, CPI inflation reached 10.1% in July, a 40-year high, with rising energy and food prices the key contributors. 

 

Global central banks have belatedly responded to inflationary pressures with sustained increases in interest rates, albeit it remains uncertain how effective these will be given the significant time lag between rate movements and pricing adjustments.  It is also worth highlighting that, despite the increases, the Bank Rate of 1.75% as at the end of August 2022 remains extremely low by historical standards.  Some shareholders may recall that when inflation reached double digits in 1979 and 1980, Bank Rate was at 14% and didn't fall to single digit levels on a sustained basis until the early 1990s. 

 

The economic outlook for the coming winter looks to be challenging.  The UK energy price cap rose by 80% in October, with some estimates forecasting that the average household energy bill could exceed £5,000 in 2023.  In response, the new Prime Minister has announced an unprecedented support package, with a two year price cap equivalent to £2,500 for the average household, along with short term support for businesses.  Nonetheless, mortgage bills and rents are rising, and food prices look to continue to trend higher as a second order effect of input price rises and supply chain disruptions. 

 

The number of full-time employees continues to be close to record highs and job vacancies remain well above pre-pandemic levels, but showed the first signs of falling in June 2022.  Nominal earnings growth was 5.1% in the three months to June 2022 although real earnings are falling.  As a result industrial and labour relations have become strained, particularly in the public sector, with strike ballots and action becoming more widespread.  

 

GDP fell modestly (by 0.1%) in Q2 2022, according to preliminary estimates, albeit showed growth of 0.2% in July.  In August 2022, consensus forecasts predicted 2022 GDP growth of 3.6%, but growth for 2023 of only 0.5%.  The Bank of England is more conservative, predicting that the UK will fall into recession in Q4 2022 with five quarters of contraction before a return to sluggish growth. Illustrating the challenge faced by policymakers, in this flat growth environment one forecaster (Citi) predicts inflation rates peaking at 18.6% in early 2023. 

 

The Investment Manager comments further on property market conditions below.  While the Company retains secure first ranking mortgage loans with, in the most part, significant borrower equity subordinate to our positions, it is not immune to the challenging macro market conditions.  In particular, the reduced transaction volumes expected in UK markets and the cost and availability of debt financing may now mean that realisations are delayed beyond our prior expectations.  In that context the repayment of the residual £6.0 million exposure from the Quattro loan during the period was pleasing and allowed the Company a full exit. 

 

Portfolio

Full repayment of the remaining £6.0 million Quattro loan was received, together with interest and fees of £0.5 million.  After period end, modest repayments totalling £1.1 million were received on the Northlands loan, following the sale of some of the underlying properties.

 

Several of the Company's remaining investments have commenced sale or refinancing processes, as detailed further below, as the Sponsors work towards exit.  We are conscious that these processes are taking longer in the current market with the result that certain of the loans may slip modestly past their maturity dates.  As a responsible lender the Company and Investment Manager has been tolerant of this where there is confidence this is likely to be a short term issue and that the Sponsors are actively pursuing an exit in good faith. The Board will continue to notify shareholders of the likely prospects for and timing of capital returns as and when these investments repay.

 

As at the date of these accounts, outstanding loan balances were £73.7 million, with pro forma LTV of 69.3%.

 

Revenue and Profitability

Income from the loan portfolio for the period totalled £3.61 million (31 July 2021: £4.67 million) as the Company's loan portfolio continued to reduce in line with its stated investment strategy.   Profit for the period after tax was £2.73 million (31 July 2021: £3.52 million).

 

In line with expectations, earnings per share for the period were lower at 2.25 pence (31 July 2021: 2.90 pence), reflecting the reduction in the loan portfolio during the period. 

 

Dividend Performance

The Company paid a first interim dividend of 1.10 pence per share in respect of the quarter ended 30 April 2022 on 29 July 2022, and on 21 September 2022 declared a second interim dividend in respect of the quarter ended 31 July 2022 of 1.0 pence per share.

 

The Company's investments generated sufficient income to provide for a covered dividend during the reporting period.  As advised previously, and while it remains prudent to do so, the Board is targeting continuation of the payment of an annualised 6% dividend based on the prevailing quarter's net asset value.

 

NAV and Share Price Performance

The Company's NAV reduced to £80.55 million as at 31 July 2022 (31 January 2022: £87.77 million), as a result of the repayment of the Quattro loan during the period, and subsequent distribution of capital.  Allowing for the return of capital in the period of 6.0 pence per ordinary share, the NAV per share of 66.41 pence grew modestly over the period (31 January 2022: 72.35 pence per share).

 

The Company's share price ended the period at 57.50 pence per share, down from 71.40 pence as at 31 January 2022.  The share price reflected, at period end, a 15.5% discount to the Company's NAV.  The Board continues to believe the discount is unwarranted, given the equity buffer enjoyed by the Company's loan investments and the ongoing progress towards loan repayments (and thus capital distributions) as detailed by the Investment Manager below.

 

Outlook

We are pleased to have been able to pay a covered dividend during the period, proportionate to the Company's NAV. As noted above, it is the Board's intention to continue to pay dividends from our net income and we are maintaining our guidance of targeting an annualised 6% based on the prevailing quarter's NAV.

 

The Board is aware that shareholders remain keen to understand the likely timing and quantum of future capital distributions.  As highlighted previously, the loan maturity dates set out later in this report provide good indications, and all the Company's borrowers understand the relevant dates.   Several of the properties securing the Company's loans are either being marketed for sale or in negotiations for refinancing.  However, the Board is mindful that these are commonly taking longer in the current market.  These protracted processes may lead to delays in repayment, and consequently the potential for a slower return of capital.  The Investment Manager is taking all necessary steps to procure timely repayment of loans while protecting shareholders' assets.

 

The Board will communicate with shareholders on a timely basis with progress on all future capital distributions.

 

 

Jack Perry

Chairman

 

22 September 2022

 

 

Investment Manager's Report

 

The Investment Manager's Report refers to the performance of the loans and the portfolio during the 6 months to 31 July 2022 and the general market conditions prevailing at that date.  Any forward-looking statements in this report reflect the latest information available as at 22 September 2022.

 

Investment Objective

The investment objective of the Company, as approved by the shareholders of the Company, was revised in January 2021 and is now to conduct an orderly realisation of the assets of the Company.  

 

 

Fund facts

Fund launch:  

5 February 2013


Fund type: 

Closed ended investment company

Investment Manager:        

ICG-Longbow


Domicile:    

Guernsey

Base currency:        

GBP


Listing:        

London Stock Exchange

Issued shares:        

121.3 million


ISIN code:  

GG00B8C23S81

Investment Management fee:   

1.0%


LSE code:   

LBOW



Website:      

www.lbow.co.uk

 

Share price & NAV at 31 July 2022

 

Key portfolio statistics at 31 July 2022

Share price (pence per share):

57.50


Number of investments:

5

NAV (pence per share):

66.41


Percentage capital invested(2):

92.8%

Premium/(Discount):

(15.5%)


Weighted avg. investment coupon:

7.34%

Approved dividend (pence per share)(1):

1.0


Weighted avg. LTV:

69.3%

Dividend payment date(1):

4 November 2022




 

(1)  For the Quarter ended 31 July 2022. Ex-Dividend Date is 6 October 2022

(2) Loans advanced at amortised cost / Total equity attributable to the owners of the Company.

 



Ongoing charges

 

For the period ended 31 July 2022 the ongoing charges ratio of the Company was 1.95% (2021: 1.53%). The ongoing charges ratio has been calculated using AIC recommended methodology and is made up as follows:

 

2022

2021

£

£

Ongoing annualised expenses

1,665,337

1,829,667

Weighted average NAV

                                 85,436,151

                        119,204,001

Ongoing charges ratio

1.95%

1.53%

 

Ongoing charges are those expenses of a type which are likely to recur in the foreseeable future, whether charged to capital or revenue, and which relate to the operation of the Company as a collective fund, excluding the costs of acquisition/disposal of investments, performance fees, financing charges and gains/losses arising on investments. Ongoing charges are based on costs incurred in the year as being the best estimate of future costs. The ongoing charges ratio is calculated by dividing the annualised ongoing charges by the average NAV for the period. The Board notes that, whilst it is actively managing costs and reducing these where possible, the ongoing charges ratio has increased in line with expectations due to certain fixed costs which may not reduce proportionate to NAV during the period of realisation of the Company's investments.

 

Summary

As at 31 July 2022 the investment portfolio comprised five loans. 

 

No new investments were made in the period and lending activity was limited to further advances totalling £0.6 million on the Northlands portfolio loan, in support of the borrower's business plan.  The Company received repayment in full of the £6.0 million Quattro loan, with interest, exit and prepayment fees of £0.5 million.

As at the period end:

·      Reduction in par value of the loan portfolio to £74.7 million (31 January 2022: £80.5 million)

·      Weighted average LTV of 69.3% (31 January 2022: 67.8%)

·      WA interest coupon of 7.34% (31 January 2022: 7.39%)

·      NAV per share of 66.41 pence (31 January 2022: 72.35 pence)

 

Following period end, the Company received a series of partial repayments of the Northlands loan, following sales of certain of the portfolio properties as the Sponsor works towards full repayment.  These payments totalled £1.1 million in aggregate.  

 

Company Performance

During the period the Company received repayment in full of the remaining £6.0 million balance of the Quattro  loan, with interest and fees of £0.5 million.  The portfolio LTV stood at 69.3% as at 31 July 2022, and was substantially stable during the period.  The weighted average loan coupon was also largely unchanged, at 7.34%. 

 

At period end, the Company had £3.1 million of cash, which is sufficient to cover the announced dividend for the quarter, in addition to its near-term liabilities and working capital needs. 

 

The weighted average unexpired loan term reduced to approximately 0.6 years, reflecting the approaching near-term maturity dates of the majority of loans.  As these loans repay, the Company intends to return capital to shareholders in line with its investment objective. 

 

Portfolio

 

Portfolio statistics

31 July 2022

31 January 2022

Number of loan investments

5

6

Aggregate principal advanced

£74,749,557

£80,543,427

Weighted average LTV

69.3%

67.8%

Weighted average interest coupon p.a.

7.34%

7.39%

Weighted average unexpired loan term

0.60 years

0.97 years

Cash held

£3,068,145

£4,801,224

    

Investment Portfolio as at 31 July 2022        

 

Project

Region

Sector

Term start

Unexp.

Term

(years)

Day 1

balance

(£m)

Day 1

LTV

(%)

Balance outstanding (1)

(£m)

Current

 LTV

(%)

 

Affinity

South West

Office

Mar-18

0.00

14.20

67.3

17.30

68.4

 

Southport

North West

Hotel

Feb-19

0.71

12.50

59.5

15.00

96.2

 

Northlands

London

Mixed use

Aug-19

0.21

9.00

55.3

10.59

59.2

 

RoyaleLife

National

Residential

Sept-19

1.21

20.27

74.3

25.38

60.9

 

LBS

London

Office

Oct-19

0.21

4.92

69.3

6.47

58.5

 

Total / weighted average

 

0.60

60.89

66.4

74.75

69.3

 

 

(1)        For the RoyaleLife facility, balance outstanding includes capitalised interest

 

Economy and Financial Market Update

The economic story of the reporting period has been the rapid and sustained rise in inflation rates.  While the problem is global, the UK has been particularly hard hit with headline CPI reaching 10.1% in July, a 40-year high, and forecasters predicting further increases.  In the UK there is increasing alarm at the impact the expected material rises in the energy price cap will have on households.  We are equally alert to the effect on businesses, where there is no such cap albeit where some Government support is expected. 

 

Inflation means consumers are also suffering real wage cuts and, in many sectors, industrial action has become more widespread in the hope of securing improved pay settlements.  With mortgage rates, rents, food and energy costs all increasing there is a real risk of a significant impact on consumer confidence.  The ONS notes that households already appear to be cutting back on non-essential spending.

 

As a result, the latest Bank of England forecasts for the UK economy make for bleak reading, with five quarters of economic contraction from Q4 2022 before a period of stagnant to weak growth in the medium term.  Rate setters are thus having to weigh the need to get inflation down with the impact on wider economic conditions.   While the Bank has come under criticism from some quarters for acting too late on inflation, rates are now rising in a sustained way with the expectation of significant further rises to come.  Markets are currently implying that Bank Rate will reach 4% in 2023, and the benchmark 5-year swap rate rose 100bp between late July and late August, standing at  around 3.5% at the time of writing.

 

The new Prime Minister, Liz Truss, faces a challenging in-tray.  A significant package of measures to support consumer and business energy costs has already been announced.  Further measures are expected in an emergency budget in the coming weeks.   It remains to be seen whether this will have a positive economic impact, but the overall outlook remains gloomy in the near term.

 

Occupational Demand/Supply

According to recent data from CoStar, vacancy in London offices has risen by over 50% since the onset of the Covid pandemic, with 31 million sq ft of currently available space according to the research, compared to 20 million sq ft in Q1 2020.   This points to weaker market conditions, yet data from Savills show that first half office take up was 13% above the 10 year average, at 5.2 million sq ft, and 70% of those occupiers looking for space are seeking to maintain or expand their footprints, with only 13% looking to downsize.  

 

In the regional markets, Jones Lang LaSalle reports steady leasing activity in the 'Big Six' markets in H1 2022, slightly ahead of H1 2021 levels.  Vacancy rates declined modestly, to 5.9% from 6.2% in the prior year, with upward pressure on rents remaining, led by Bristol which saw prime rents reach £42.50 per sq ft, a 13% increase on the prior year. 

 

The industrial occupational markets continue to show strength.  Take up for the first half of larger (100,000 sq ft+) units was 16.8 million square feet, 25% above the 5-year average, with a further 6.4 million sq ft under offer at the end of June.  By comparison 35.4 million sq ft was leased in FY 2021, which was the second highest year on record.  According to Jones Lang LaSalle, UK vacancy rates are only 1.6%, and still only 5.3% if speculative construction is included.  Given the ongoing supply/demand dynamics, upward pressure on rents remains, with prime rents increasing by 19% on average in the 12 months to June 2022. 

 

While the Company has only negligible exposure to the retail markets, there have been some signs of market conditions improving.  Vacancy rates in both shopping centres and on high streets fell modestly in Q2 2022, to 18.9% and 14.0% respectively, albeit these are well above the levels in other core property sectors.  The picture is somewhat better in retail warehouse parks, where demand from discounters and foodstores continues and Allsops report a vacancy rate of 7.8% (and falling) as at May 2022.  These vacancy rates are critical as, ultimately, until more than one occupier is competing for the same store, rental growth is unlikely to be realised.  In many markets there is still a meaningful level of absorption required before growth can return.    

 

Property Investment Market

Industrial market conditions changed dramatically during the period.  Amazon's announcement in late April of a scaling back of its take up in the sector led to an immediate correction in the share prices of public market landlords, with SEGRO's share price falling from £13.42 at the end of April to £10.73 by 9th May.  This sentiment fed into private markets relatively quickly, with buyers seeking discounts of 10% - 20% on previous asking prices.  In many cases this has been accepted by vendors, noting that the buyer pool is also facing rising interest rate costs as well as a more challenging macro outlook.   While substantial, these discounts only partially reverse the relentless pricing growth seen in the sector over the past few years.  According to Knight Frank, industrial yields in August 2022 have returned to the levels seen in August 2021.

 

Office transaction volumes softened in Q2, with quarterly trades of £4.4bn (according to Lambert Smith Hampton) below the £5.2bn in Q1 and 10% below the five-year average.  Market sentiment has softened, according to Knight Frank, with yields reported to have moved outwards by 25bp in August, although anecdotally we are hearing that depth of bidding is thinning and pricing levels are less certain.  What is noticeable is that sales processes are taking longer to conclude, with the traditional summer slowdown contributing to the relative inertia.  The sector does continue to show appeal however, driven by strong occupational market conditions in many markets.  Sunlight House in Manchester, the Paragon building in Bristol, and the Kaleidoscope Building in London's Farringdon (leased to Tik-Tok) were notable completions in the summer months. 

 

What has been remarkable during the period is the slowdown in monthly volumes.  While May 2022 showed all-time high investment sales of £9.0bn (skewed by Brookfield's £3.3bn acquisition of the Student Roost platform), June levels fell to £2.2bn, according to Lambert Smith Hampton, the lowest level since the height of the pandemic.  We anticipate that volumes will remain sluggish while both property and finance markets remain in a period of price discovery. 

 

Finance Markets

The relatively buoyant financing market conditions seen in Q1 2022 adjusted significantly towards the end of the period, driven by both geopolitical and macro concerns.  According to Bank of England data, overall lending to property rose by £2.2bn, to £172.3bn, in the six months to June 2022.  However, this will reflect deals originally agreed in 2021 and Q1 2022, and likely masks the most recent changes.

 

In particular, the key challenge has been the significant and sustained increase in funding costs, with the benchmark 5-year swap rate rising markedly, from around 1.25% at the end of January to around 3.5% at the time of writing.  Moreover, the rate has shown significant volatility, with intra-day movements of over 25bp seen on several occasions. 

 

The above leads to uncertainty for borrowers in what their financing costs (and thus projected equity returns) will look like, as well as challenges for lenders in forecasting interest coverage ratios.  When allied to a 'wait and see' approach from more cautious lenders, the result is a slowdown in volumes and processes taking longer (and in some cases becoming abortive). 

 

Notably, we are seeing increasing evidence of finance processes becoming fractured, particularly for larger transactions.  HSBC was reported to have pulled a potential £380m CMBS issuance in May as a result of market conditions; the recovery in CMBS seen in 2021 appears largely to have stalled. The interest rate environment and ongoing price discovery of credit spreads means large institutions are disincentivised from originating loans to distribute.  Anecdotally we are hearing that many bank balance sheets are near full for 2022 lending.

 

Notwithstanding the undoubted challenges in the market, there is by no means a credit crunch and debt still remains widely available, particularly for smaller and mid-market transactions.  The annual financing property presentation by Savills, in June 2022, identified over 400 active lenders to the market, against 240 in 2018, with a continued evolution in the diversity of funding sources.   

 

 

 

Portfolio Profile and Activity

The Company's investment portfolio was largely stable during the reporting period, with no new investments and the sole repayment being the exit of the remaining £6.0 million balance of the Quattro loan. 

 

After period end we saw a series of partial repayments of the Northlands loan, totalling £1.1 million in aggregate, following the sale of certain of the portfolio properties. 

 

The Company's weighted average LTV is now 69.3%, with a weighted average unexpired loan term of 0.6 years and longest maturity of 1.2 years.  All the Company's borrowers are aware that their lender is winding down and as such are all working towards exiting the loans.  Certain of these processes are well advanced although there is no doubt that transactions, whether sales or refinancings, are taking longer to complete in the current market given the uncertainties noted above.  

 

The weighted average interest coupon is 7.34%, and this is supplemented by contractual arrangement fees paid at closing and exit fees upon repayment in certain instances.  In addition, the RoyaleLife loan continues to benefit from call protection provisions which would provide shareholders with supplementary fees in the event of early repayment.  

 

While markets remain in a price discovery mode with the pace of transactions slowing, we are satisfied with the credit profile of the Company's loans and are encouraged by our Sponsors' efforts to work towards sales and refinancing. 

 

Portfolio Outlook

 

As at the date of these accounts, formal sales processes have been launched for the properties securing the Affinity, LBS and Southport loans, although in each case there can be no assurance that any sale will complete.  We are aware that certain of our Sponsors have also been pursuing refinancing options as an alternative exit route.  Despite the slowdown in transactional and finance market activity, the fourth quarter (in particular) tends to be the busiest in the property calendar and as such we remain optimistic on the prospects for further repayments in H2 2022, and the resulting opportunity to return capital to shareholders.  We remain in active dialogue with Sponsors to facilitate timely repayments.

 

We are nonetheless mindful that the macro position is evolving quickly and are paying close attention to all our investments for signs of stress.  

 

Loan Portfolio

As set out above, as at 31 July 2022, the Company's portfolio comprised of five loans with an aggregate balance outstanding of £74.7 million.

 

A summary of each of the individual loans as at 31 July 2022 is set out below:

 

Affinity

On 28 February 2018, a new £16.2 million commitment was made, of which £14.2 million was advanced, to refinance a multi-let office property in Bristol, and to provide a £2.0 million capital expenditure facility to fund a refurbishment programme.  Subsequently, the loan was increased to £16.7 million in support of the borrower's business plan and thereafter a further £1.0 million loan commitment was made to allow for further upgrade works to the property.

 

The property is currently fully leased with a contracted rent of £2.5 million per annum. The Sponsor has continued to invest in the property, which was placed on the market for sale towards the end of the reporting period.  The loan's original term expired in April 2022, however the Company has agreed a short-term loan extension to allow for the sales process to conclude or an alternative exit to be realised.

 

 

Property profile


Debt profile

Number of properties

1


Day one debt

£14,200,000

Property value

£25,300,000


Debt outstanding

£17,299,963

Property value per sq. ft.

£221


Original term

4.2 years

Property area (sq. ft.)

114,364


Maturity

April 2022

Number of tenants

12


LTV as at 31 July

68.4%

Weighted lease length

2.5 years


Loan exposure per sq. ft.

£151

 

Southport

Initially a £15.0 million loan commitment, secured by a hotel and leisure complex in Southport, Merseyside.  The initial loan to value ratio was 59.5%. 

 

During the Covid-19 pandemic the Investment Manager agreed to an element of interest capitalisation to support the loan Sponsor while the asset was closed for trade.  Subsequently, a lease surrender agreement from one of the property's commercial tenants allowed for the repayment of previously capitalised interest, with the loan balance of £15.0 million consistent with the original commitment. 

 

The hotel adjoins the proposed new Southport Events Centre, and with the aim of capitalising on this proposed regeneration, along with robust summer trading, the property was placed on the market for sale in July 2022.   Following the period end the Investment Manager has received an updated valuation which puts the Company's exposure at 96% LTV, in breach of covenant.  However, the Sponsor is progressing an offer for the asset in excess of this valuation and which would see the loan repaid in full.  While there is no assurance this will complete, the Company has reserved all its rights in respect of the covenant breach and has taken steps to accelerate repayment.

 

 

Property profile


Debt profile

Number of properties

1


Day one debt

£12,500,000

Property value (£)

£15,600,000


Debt outstanding

£15,000,000

Property value (£/bedroom)

£117,293


Original term

4 years

Property value (£/sq. ft.)

£343


Maturity

April 2023

Bedrooms

133


LTV as at 31 July

96.2%

Property area (sq. ft.)

45,430


Loan exposure per bedroom

£112,782

 

 

Northlands

In October 2019 the Company provided a £12.5 million commitment to the Sponsor, secured by a highly diversified portfolio of high street retail, office and tenanted residential units located predominantly in London and the South East.  The initial loan amount was £9.0 million with a LTV ratio of 55.3%. 

 

The Sponsor's business plan includes implementation of a planning consent to develop residential apartments on one of the sites in the portfolio, and in support of this the Company provided a £3.5 million capital expenditure commitment.  This commitment has been steadily drawn during the term.

 

Progress against business plan has been steady, and the Sponsor has been marketing certain assets for sale, alongside pursuing a refinancing of the balance of the portfolio, to work towards a repayment of the loan at its maturity date.  As a result of these efforts, repayments of approximately £1.1 million were made after period end, using proceeds from property sales, reducing LTV to approximately 56.5%.

 

 

Property profile

 

Debt profile

Number of properties

14


Day one debt

£9,000,000

Property value

£17,906,500


Debt outstanding

£10,593,576

Property value per sq. ft.

£147


Original term

3.0 years

Property area (sq. ft.)

121,285


Maturity

October 2022

Number of tenants

101


LTV as at 31 July

59.2%

Weighted lease length

3.2 years


Loan exposure per sq. ft.

£87

 

RoyaleLife

In September 2019 the Company provided a £24.6 million commitment to an affiliate of RoyaleLife, the UK's leading provider of bungalow homes, secured by a portfolio of ten assets in the residential bungalow homes sector.  The facility forms part of a larger four-year, £142.7 million loan originated by the Investment Manager, with the Company participating alongside two other funds managed by the Investment Manager.

 

The initial loan drawn down was £20.3 million, with the balance comprising a capital expenditure commitment in support of the borrower's business plan.

 

The Sponsor's home sales were adversely affected by Covid-19 and the subsequent lockdown restrictions, and as a result the Investment Manager agreed to capitalise some of the interest due on the loan, with the Sponsor also committing new equity capital into the business. The total outstanding loan balance is now £25.4 million, and is above the day 1 commitment owing to the capitalised interest. 

 

 

Property profile

 

Debt profile

Number of properties

10


Day one debt

£20,267,119

Property value (£) *

£41,670,248


Debt outstanding

£25,382,017

Number of tenants

n/a


Original term

4.1 years

Weighted lease length

n/a


Maturity

October 2023




LTV as at 31 July

60.9%

*pro rata based on Company's share of total loan




 

 

LBS

In September 2019, the Company entered into a £6.5 million loan commitment with a fund advised by LBS Properties, and secured by a multi-let office property in Farringdon, London. 

 

The loan carried an initial LTV ratio of 69.0%, and included a capital expenditure commitment in support of the borrower's business plan for a full refurbishment of the property.  The refurbishment works were completed ahead of schedule, a new tenant was secured for the majority of the space and an improvement in the valuation was recorded, with the LTV now 58.5%

 

Loan performance was stable during the period and towards the end of the period the property was placed on the market for sale.

 

 

Property profile


Debt profile

Number of properties

1


Day one debt

£4,922,000

Property value

£11,070,000


Debt outstanding

£6,474,586

Property value per sq. ft.

£1,049


Original term

3.1 years

Property area (sq. ft.)

10,557


Maturity

October 2022

Number of tenants

1


LTV as at 31 July

58.5%

Weighted lease length

8.0 years


Loan exposure per sq. ft.

£613

Subsequent Events

 

Significant subsequent events have been disclosed in Note 11 to the Financial Statements.

ICG Real Estate

22 September 2022

 

Directors' Responsibilities Statement

 

The Directors are responsible for preparing this Interim Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

 

•    The Unaudited Condensed Interim Financial Statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; and

•    The Chairman's Statement and Investment Manager's Report include a fair review of the information required by:

(i)   DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the Unaudited Condensed Interim Financial Statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(ii)  DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the financial year and that have materially affected the financial position and performance of the entity during that period; and any changes in the related party transactions described in the last Annual Report and Financial Statements that could do so.

 

On behalf of the Board

 

 

Jack Perry

Chairman

 

22 September 2022

 

Principal Risks and Uncertainties

 

The Company invests primarily in UK commercial real estate loans of a fixed rate nature; as such, it is exposed to the performance of the borrower and the underlying property on which its loans are secured. 

 

The principal risks and uncertainties of the Company were identified in detail in the Annual Report and Financial Statements for the year ended 31 January 2022. However, the Ukrainian crisis, rising energy prices and the knock-on impacts on inflation and interest rates have had a profound impact on economic and certain market conditions in the six months ended 31 July 2022 and beyond, as further detailed in the Investment Manager's report.

 

In addition to regular risk reviews, emerging risks such as those mentioned above are considered as they arise, to assess any potential impact on the Company and to determine whether any actions are required.

 

As a result of such risks emerging, the Audit and Risk Committee has recently reviewed its assessment of the key risks faced by the Company, which are currently identified as the following:

 

·      Realisation risk regarding the possibility of deteriorating market liquidity for certain assets and/or uncertainty over collateral values and accuracy of valuations which could result in lower amounts of capital realised than that originally expected.

·      A borrower's inability to secure sale or refinancing of an underlying property as planned could frustrate the timely repayment of capital;

·      Non-payment of interest could affect the ability of the Company to maintain a covered dividend as the orderly realisation of its investments progresses;

·      Complications with the liquidation process could occur which may affect timing of the final distribution to shareholders;

·      Heightened risk from macro factors and market conditions arising from current economic and geopolitical  conditions.

 

Condensed Statement of Comprehensive Income

FOR THE SIX-MONTH PERIOD TO 31 JULY 2022

 



1 February 2022 to

1 February 2021 to

1 February 2021 to



31 July 2022

31 July 2021

31 January 2022



£

£

£


Notes

(Unaudited)

(Unaudited)

(Audited)

Income

 

 

 

 

Income from loans

 

3,611,439

                        4,640,240

9,310,030

Other fee income from loans

 

-

                             34,000

207,739

Total income

 

3,611,439

                        4,674,240

9,517,769

 

 




Expenses

 




Investment Management fees

9

519,039

                           595,958

                        1,165,922

Other expenses

10

280,736

                           262,617

640,503

Reorganisation costs

 

-

                           156,800

129,941

Directors' remuneration

9

80,000

                             91,375

171,375

Finance costs

 

-

                             47,382

63,351

Total expenses

 

879,775

                        1,154,132

2,171,092

Profit for the period/year before tax

 

2,731,664

3,520,108

7,346,677

Taxation charge

 

-

 

2,079

                                10,912

Profit for the period/year after tax

 

2,731,664

3,518,029

7,335,765

Total comprehensive income for the period/year

 

2,731,664

 

3,518,029

7,335,765

Basic and diluted Earnings per Share (pence)

5

2.25

 

2.90

6.05

 

 

All items within the above statement have been derived from discontinuing activities on the basis of the orderly realisation of the Company's assets.

 

The Company has no recognised gains or losses for either period other than those included in the results above, therefore, no separate statement of other comprehensive income has been prepared.

 

The accompanying notes form an integral part of these Interim Financial Statements.

 

Condensed Statement of Financial Position

As at 31 July 2022

 

 

 

31 July 2022

31 January 2022

31 July 2021



£

£

£


Notes

(Unaudited)

 

(Audited)

 

(Unaudited)

Assets

 



 

Loans advanced at amortised cost

    4

77,976,950

 

83,257,529

 

108,468,063

Cash and cash equivalents

 

3,068,145

4,801,224

10,466,329

Trade and other receivables                        

 

529,620

 

502,485

 

1,620,797

Total assets

 

81,574,715

88,561,238

120,555,189


 




Liabilities

 




Other payables and accrued expenses

 

1,021,864

 

793,223

 

1,427,105

Total liabilities

 

1,021,864

793,223

1,427,105

Net assets

 

80,552,851

87,768,015

119,128,084


 




Equity

 




Share capital                             

   6

80,298,422

87,576,589

119,115,310

Retained earnings

 

254,429

191,426

12,774

Total equity attributable to the owners of the Company

 

80,552,851

 

87,768,015

 

119,128,084

Number of ordinary shares in issue at period/year end

6


121,302,779

 

121,302,779

 

121,302,779

Net Asset Value per ordinary share (pence)

5

66.41

 

72.35

 

98.21

 

The Interim Financial Statements were approved by the Board of Directors on 22 September 2022 and signed on their behalf by:

 

 

Jack Perry    

Fiona Le Poidevin

Chairman

Director

 



The accompanying notes form an integral part of these Interim Financial Statements.

 

Condensed Statement of Changes in Equity

For the SIX-MONTH period to 31 July 2022


 

Number

Ordinary Share

B Share

Retained

 


Notes

of shares

capital

capital

earnings

Total


 

 

£

£

£

£


 

 

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

As at 1 February 2022

 

  121,302,779

87,576,589

 -

191,426

87,768,015


 






Profit for the year

 

                      -  

-

-

2,731,664

2,731,664

Dividends paid

7

                      -  

-

-  

(2,668,661)

(2,668,661)

B Shares issued May 2022

6

  121,302,779

(7,278,167)

7,278,167

-

-

B Shares redeemed & cancelled May 2022

6

(121,302,779)

 -

(7,278,167)

-

(7,278,167)

As at 31 July 2022

 

  121,302,779

          80,298,422

                         -  

           254,429

          80,552,851

 

For the SIX-MONTH period to 31 July 2021

 

 

 

Number

Share

Retained

 


Notes

of shares

capital

earnings

Total




£

£

£




(Unaudited)

(Unaudited)

(Unaudited)

As at 1 February 2021

 

121,302,779

119,115,310

133,829

119,249,139

 

 





Profit for the period


-

-

3,518,029

3,518,029

Dividends paid

7

-

-

(3,639,084)

(3,639,084)

As at 31 July 2021

 

121,302,779

119,115,310

12,774

119,128,084

 

The accompanying notes form an integral part of these Interim Financial Statements.


Condensed Statement of Cash Flows

For the SIX-MONTH period to 31 July 2022

 


 

1 February 2022 to

1 February 2021 to

1 February 2021 to


 

31 July 2022

31 July 2021

31 January 2022



£

£

£


Notes

(Unaudited)

(Unaudited)

(Audited)

Cash flows generated from operating activities





Profit for the period/year


2,731,664

3,518,029

7,335,765

Adjustments for non-cash items and working

capital movements:




Movement in other receivables


(27,135)

(386,963)

731,350

Movement in other payables and accrued expenses


228,641

(45,402)

(675,545)

Movement in tax payable


-

2,061

(1,679)

Loan amortisation

 

(513,291)

(608,726)

(1,321,983)



2,419,879

2,478,999

6,067,908






Loans advanced, less arrangement fees

 

(162,434)

(3,938,975)

(1,643,473)

Loans repaid at par

4

5,956,304

6,791,749

30,420,038

Net loans repaid less arrangement fees

 

5,793,870

2,852,774

28,776,565

Net cash generated from operating activities


8,213,749

5,331,773

34,844,473






Cash flows used in financing activities





Dividends paid

7

(2,668,661)

(3,639,084)

(7,278,168)

Return of Capital paid

6

(7,278,167)

-

(31,538,721)


 




Net cash used in financing activities

 

(9,946,828)

(3,639,084)

(38,816,889)

Net movement in cash and cash equivalents


(1,733,079)

1,692,689

(3,972,416)

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


4,801,224

8,773,640

8,773,640

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


3,068,145

10,466,329

4,801,224

 

The accompanying notes form an integral part of these Interim Financial Statements.

 

Notes to the Unaudited Condensed Interim Financial Statements

For the six-month period to 31 July 2022

 

1. General information

ICG-Longbow Senior Secured UK Property Debt Investments Limited is a non-cellular company limited by shares and was incorporated in Guernsey under the Companies Law on 29 November 2012 with registered number 55917 as a closed-ended investment company. The registered office address is Floor 2, PO Box 286, Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 4LY.

 

The Company's shares were admitted to the Premium Segment of the Official List and to trading on the Main Market of the London Stock Exchange on 5 February 2013.

 

The unaudited condensed financial statements comprise the financial statements of the Company as at 31 July 2022.

 

In line with the revised Investment Objective and Policy approved by shareholders in the Extraordinary General Meeting in January 2021, the Company is now undertaking an orderly realisation of its investments. As sufficient funds become available the Board intends to return capital to shareholders, taking account of the Company's working capital requirements and funding commitments.

 

ICG Alternative Investment Limited is the external discretionary investment manager. The Board resolved to simplify its corporate structure by collapsing the Luxembourg subsidiary company which has historically acted as the lender for the Group's investments. The subsidiary was dissolved on 18 January 2022. Under Luxembourg Law, and as sole shareholder, the Company has taken responsibility for the remaining assets and liabilities of its subsidiary following its dissolution.

 

2. Accounting policies

a) Basis of preparation

The Interim Financial Statements included in this Interim Report, have been prepared in accordance with IAS 34  'Interim Financial Reporting', as adopted by the EU, and the Disclosure and Transparency Rules of the FCA.

 

The Interim Financial Statements have not been audited or reviewed by the Company's Auditor.

 

The Interim Financial Statements do not include all the information and disclosures required in the Annual Report and Financial Statements and should be read in conjunction with the Company's Annual Report and Financial Statements for the year ended 31 January 2022, which are available on the Company's website (www.lbow.co.uk). The Annual Report and Financial Statements have been prepared in accordance with IFRS as adopted by the EU.

 

 

Prior to its dissolution on 18 January 2022, the subsidiary (ICG Longbow Senior Debt S.A.), was consolidated into the Company's accounts and the Company's financial statements were prepared on a consolidated basis, as the Group existed for the majority of the financial year ended 31 January 2022. The financial statements for the period ended 31 July 2022 have been prepared for the Company only, with comparative information comprising the results of the Group. Since the Company has taken responsibility for the remaining assets and liabilities of its subsidiary following its dissolution, the Directors consider these comparatives to be appropriate.

 

Other than as set out above, the same accounting policies and methods of computation have been followed in the preparation of these Interim Financial Statements as in the Annual Report and Financial Statements for the year ended 31 January 2022.

 

The Company applied, for the first time, certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2022. The new standards or amendments to existing standards and interpretations, effective from 1 January 2022, did not have a material impact on the Company's interim condensed financial statements. It is not anticipated that any standard which is not yet effective, will have a material impact on the Company's financial position or on the performance of the Company's statements.

 

b) Going concern

The Directors, at the time of approving the Financial Statements, are required to satisfy themselves that they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. At the EGM of the Company on 14 January 2021, following a recommendation from the Board published in a circular on 16 December 2020, shareholders voted by the requisite majority in favour of a change to the Company's Objectives and Investment Policy which would lead to an orderly realisation of the Company's assets and a return of capital to shareholders.

 

It is intended that the investments will be realised as and when the loans fall due or shortly thereafter, and the Directors expect that the investments will be held to maturity with the last loan due for repayment by the end of 2023. Whilst the Directors are satisfied that the Company has adequate resources to continue in operation throughout the realisation period and to meet all liabilities as they fall due, given the Company is now in a managed wind down, the Directors consider it appropriate to adopt a basis other than a going concern in preparing the financial statements. The basis of valuation for investments is amortised cost, recognising the realisable value of each investment in the orderly wind down of the Company and in the absence of a ready secondary market in real estate loans by which to assess market value. There has been no material change in the carrying value of the investments. No material adjustments have arisen as a result of ceasing to apply the going concern basis.

The loans owned by the Company will be held to their maturity.

 

c) Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors as a whole. The key measure of performance used by the Board to assess the Company's performance and to allocate resources is the total return on the Company's Net Asset Value, as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the Financial Statements.

For management purposes, the Company is organised into one main operating segment, being the provision of a diversified portfolio of UK commercial property backed senior debt investments.

The majority of the Company's income is derived from loans secured on commercial and residential property in the United Kingdom.

Due to the Company's nature it has no employees.

The Company's results do not vary significantly during reporting periods as a result of seasonal activity.

 

3. Critical accounting judgements and estimates in applying the Company's accounting policies

The preparation of the Financial Statements under IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making 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.

 

Critical judgements

In assessing the Expected Credit Loss (ECL), the Board have made critical judgements in relation to the staging of the loans and assessments which impact the loss given default. In assessing whether the loans have incurred a significant increase in credit risk the Investment Manager, on behalf of the Board, assesses the credit risk attaching to each of the loans. The Company has adopted the Investment Manager's internal credit rating methodology and has used its loss experience to benchmark investment performance and potential impairment for both Stage 1 and Stage 2 loans under IFRS 9 considering both probability of default and loss given default. The judgement applied in allocating each investment to Stage 1, 2 or 3 is key in deciding whether losses are considered for the next 12 months or over the life of the loan. The Board has estimated that one loan, Southport, has shown evidence of heightened credit risk. In assessing the ultimate ECL in relation to this loan, the Board has made assumptions regarding the collateral value and headroom over the principal loan amounts as well as the residual term of the loan.

 

Critical accounting estimates

The measurement of both the initial and ongoing ECL allowance for loan receivables measured at amortised cost is an area that requires the use of significant assumptions about credit behaviour such as likelihood of borrowers defaulting and the resulting losses. In assessing the probability of default, the Board has taken note of the experience and loss history of the Investment Manager which may not be indicative of future losses. The default probabilities are based on a number of factors including rental income trends, interest cover and LTV headroom and sectoral trends which the Investment Manager believes to be a good predictor of the probability of default, in accordance with recent market studies of European commercial real estate loans. Covid-19 impacted valuations in those real estate sectors most impacted by lockdowns and social restrictions and changes in working habits. As the restrictions have been lifted and the vaccination programme has been rolled out, most sectors have recovered somewhat and investors, and tenants, have returned to the market. Inflation and interest rate pressures remain a concern and the prospect for growth has deteriorated since the start of the Ukrainian crisis. However, given the exit plans in place for each remaining loan, supported by valuation equity headroom, the Directors consider the loss given default to be close to zero as the loans are the subject of very detailed due diligence procedures on inception, close monitoring through their life to provide early warning of a deteriorating credit position and LTV headroom. In line with the Company's investment strategy at the time, most loans benefited from significant LTV headroom, and business plans designed to deliver further value increases over time. This combined with tight covenants have enabled the Investment Manager to manage risk over the term of the loans. Following the change in Investment Strategy to one of orderly wind down, the Investment Manager and the Board have placed greater emphasis on the source and delivery of repayment over the residual term of each loan when assessing valuation and the risk of capital loss. As a result of these considerations, no loss allowance has been recognised based on 12-month expected credit losses for those loans in stage 1 nor for lifetime losses for those in stage 2, as any such impairment would be wholly insignificant to the Company.

 

Revenue recognition is considered a significant accounting judgement and estimate that the Directors make in the process of applying the Company's accounting policies.

The Directors also make estimates in determining the fair value of prepayment options embedded within the contracts for loans advanced. The key factors considered in the valuation of prepayment options include the exercise price, the interest rate of the host loan contract, differential to current market interest rates, the risk-free rate of interest, contractual terms of the prepayment option, and the expected term of the option. Given the low probability of exercise and undeterminable exercise date, the value attributed to these embedded derivatives is considered to be £nil (31 January 2022: £nil).

 

4.  Loans advanced

(i) Loans advanced

 


31 July 2022

31 July 2022

31 January 2022

31 January 2022


Principal advanced

Fair value (at amortised cost)

Principal advanced

Fair value (at amortised cost)


£

£

£

£

Northlands

10,593,577

10,800,042

10,431,142

10,548,056

Quattro

-

-

5,956,304

5,984,263

Affinity

17,299,963

17,728,572

17,299,964

17,706,033

Southport

15,000,000

15,215,550

15,000,000

15,348,830

RoyaleLife

25,382,017

27,683,694

25,382,017

27,145,110

LBS

6,474,000

6,549,092

6,474,000

6,525,237


74,749,557

77,976,950

80,543,427

83,257,529

 

(ii)  Valuation considerations

As noted above the Company is now in the process of an orderly wind down. It remains the intention of the Investment Manager and Directors to hold loans through to their repayment date. The Directors consider that the carrying value amounts of the loans, recorded at amortised cost in the Interim Financial Statements, are approximately equal to their fair value. For further information regarding the status of each loan and the associated risks see the Investment Manager's Report.

 

Amortised cost is calculated using the effective interest rate method which takes into account all contractual terms (including arrangement and exit fees) that are an integral part of the loan agreement. As these fees are taken into account when determining initial net carrying value, their recognition in profit or loss is effectively spread over the life of the loan. 

 

The Company's investments are in the form of bilateral loans, and as such are illiquid investments with no readily available secondary market. Whilst the terms of each loan includes repayment and prepayment fees, in the absence of a liquid secondary market, the Directors do not believe a willing buyer would pay a premium to the par value of the loans to recognise such terms and as such the amortised cost is considered representative of the fair value of the loans.

 

Each property on which investments are secured was subject to an independent, third-party valuation at the time the investment was entered into. All investments are made on a hold to maturity basis. Each investment is monitored on a quarterly basis, in line with the underlying property rental cycle, including a review of the performance of the underlying property security. No market or other events have been identified through this review process which would result in a fair value of the investments significantly different to the carrying value.

 

As the UK economy emerges from the impacts of Covid-19 the position of each underlying property has generally improved, notwithstanding the record levels of inflation and high interest rates.  However as set out above and in the Investment Manager's report a recession is likely and the outlook is less certain than at 31 January 2022 although the balance outstanding in each case remains at sufficient discount to the value of the underlying real estate on which they are secured. The Investment Manager has reviewed the plans in place and prospects for repayment of each loan over its residual term and the Directors do not currently consider any loan to be subject to specific impairment, or for there to be an immediate risk of not achieving full repayment, including arears of interest, over the residual term of each loan.

 

(iii) IFRS 9 - Impairment of Financial Assets

The internal credit rating of each loan as at 31 July 2022 has been reviewed. Of the two loans identified as Stage 2 assets at 31 January 2022, one has since repaid in full while the other is still identified as Stage 2. All other loans showed no deterioration and were considered as Stage 1 assets with no ECL over a twelve-month period.

 

As at 31 July 2022

 

Stage 1

Stage 2

Stage 3

Total

Principal advanced

59,749,557

15,000,000

-

74,749,557

Gross carrying value

62,761,400

15,215,550

-

77,976,950

Less ECL allowance

-

-

-

-


62,761,400

15,215,550

-

77,976,950

 

As at 31 January 2022

 

Stage 1

Stage 2

Stage 3

Total

Principal advanced

59,587,122

20,956,304

-

80,543,426

Gross carrying value

61,924,436

21,333,093

-

83,257,529

Less ECL allowance

-

-

-

-


61,924,436

21,333,093

-

83,257,529

 

One loan was considered as Stage 2 loan as at 31 July 2022 (31 January 2022: two loans).

 

The Quattro loan, identified as Stage 2 as at 31 January 2022, was repaid in full in April 2022, following the combination of property sales and a refinance by the borrower.

 

The second Stage 2 loan, Southport, continues to be recognised as Stage 2 as at 31 July 2022. Whilst trading at the hotel is improving and a strong summer has been reported, a new red book valuation received after period end indicates the Company's exposure has increased to 96% LTV. The Sponsor placed the property on the market for sale in July 2022 and is now progressing an offer in excess of this valuation which would see the Company's Loan repaid in full before maturity, although there can be no assurance that this will complete.   Whilst the sales price and valuation support a repayment of the loan in full, given the elevated LTV exposure and sector uncertainties, the Company has taken steps to accelerate repayment.

 

All other loans have shown no material deterioration since inception or over the course of the financial period and were considered as Stage 1 assets with no ECL over a twelve-month period.

 

A reconciliation of the ECL allowance was not presented as the allowance recognised at period end was £nil.

 

(iv) IFRS 9 Impairment - Stress Analysis

As discussed above, the Company's ECL is a function of the probability of default ("PD") and loss given default ("LGD"), where PD is benchmarked against ICG Real Estate's internal credit rating model and LGD is based on ICG Real Estate's track record of over £5.7 billion of senior and whole loans which would satisfy the Company's investment parameters.

 

All loans are expected to repay in full within their residual term, or following short term extensions granted by the Company in its sole discretion.  The Company has performed stress analysis on its expected credit loss by considering the impact of a one, two and three grade deterioration in the credit rating of each loan as if they were all Stage 2 assets and considered the impact of impairment over the life of the loans.

 

As discussed above, the Covid-19 pandemic impacted the performance of a number of loans with a resultant reduction in interest cover, and either arrears or capitalisation of interest leading to higher LTV exposures, the leisure sector was particularly affected where properties were subject to forced closure and operating restrictions. Within ICG's benchmark portfolio the Covid-19 pandemic, and its impact on valuation of the retail sector properties in particular, lowered ICG's recovery expectations for non‑performing loans. As a result, the application of stress tests in accordance with the Company's policy results in a significantly higher risk profile than pre Covid-19, reflecting ICG's loss experience. It should be noted that the Company has very limited exposure to the retail sector.

 

With ICG's internal rating model a two-stage deterioration in rating would migrate the Southport Loan classification from Borderline to Substandard, with a model ECL of 1.8%, whilst a three-stage deterioration  would result in a model ECL of 15.6%.

 

The majority of loans still benefit from strong equity value protection and could withstand a 20% fall in property values before being at risk of loss. The exception is Southport where the LTV is currently 96%, following receipt of an updated valuation of the hotel.  Notwithstanding the current sales process which would see the Company's loan repaid in full, a 20% fall in underlying property values would result in a loss of approximately £2.5 million.

 

Stress test impact on Expected Credit Loss at 31 July

 

 

31 July 2022

31 July 2021

One grade deterioration in credit rating

£74,000

 

£236,000



Two grade deterioration in credit rating

£363,000

£857,000



Three grade deterioration in credit rating

£2,496,000

£3,026,000



 

The remaining loan portfolio is set out in 4(i) above and the current performance of each loan is discussed in the Investment Manager's report.

 

5. Earnings per share and Net Asset Value per share

Earnings per share

  

1 February 2022


  

to 31 July 2022

 

to 31 July 2021

Profit for the period after tax (£)

2,731, 664


3,518,029

Weighted average number of ordinary shares in issue

121,302,779


121,302,779

Basic and diluted EPS (pence)

2.25


2.90

Adjusted basic and diluted EPS (pence)

2.25


2.90

 

The calculation of basic and diluted Earnings per share is based on the profit for the period and on the weighted average number of ordinary shares in issue during the period. 

 

The calculation of adjusted basic and diluted Earnings per share is based on the profit for the period, adjusted for one-off other fee income during the period totalling £Nil (31 July 2021: £Nil).

 

There are no dilutive shares at 31 July 2022 (31 January 2022: £Nil).

 

Net Asset Value per share

  

31 July 2022

 

31 January 2022

NAV (£)

80,552,851


87,768,015

Number of ordinary shares in issue

121,302,779


121,302,779

NAV per share (pence)

66.41


72.35

 

The calculation of NAV per share is based on Net Asset Value and the number of ordinary shares in issue at the period/year end.

 

6. Share Capital

The authorised share capital of the Company is represented by an unlimited number of ordinary shares with or without a par value which, upon issue, the Directors may designate as (a) ordinary shares; (b) B shares; and (c) C shares, in each case of such classes and denominated in such currencies as the Directors may determine.

 


31 July 2022

 

31 January 2022


Number of shares

 

Number of shares

Authorised



 

Ordinary Shares of no par value

Unlimited


Unlimited

B Shares of no par value

Unlimited


Unlimited

 

 


 

 

Total No


Total No

Ordinary Shares

121,302,779


121,302,779

 




B Shares




B Shares issued September 2021

-


121,302,779

B Shares redeemed and cancelled September 2021

-


 (121,302,779)

B Shares issued December 2021

-


121,302,779

B Shares redeemed and cancelled December 2021

-


 (121,302,779)

B Shares issued January 2022

-

 

121,302,779

B Shares redeemed and cancelled January 2022

-

 

 (121,302,779)

B Shares issued May 2022

7,278,167

 

-

B Shares redeemed and cancelled May 2022

(7,278,167)

 

-

B shares

-

 

-


 

 



£

 

£

Share capital brought forward

87,576,589


119,115,310

Repaid in the year

(7,278,167)


 (31,538,721)

Share capital carried forward

80,298,422


87,576,589

 

Return of Capital

Return of Capital is recognised by the Company in the quarterly NAV calculation following the declaration date.

The Directors announced one return during the period ended 31 July 2022 and have returned an amount of 6 pence per Ordinary Share to shareholders, being £7,278,167 in total based on the current number of Ordinary Shares in issue. This return of capital was effected by way of an issue of redeemable B Shares to existing shareholders pro rata to their shareholding on the record date set out below and the subsequent redemption of those B Shares.

 


Return of Capital per share

 Total Return of Capital

1 February 2022 to 31 July 2022

Pence

 £

Return of Capital May 2022

6.00

        7,278,167


6.00

          7,278,167

 

7. Dividends

Dividends are recognised by the Company in the quarterly NAV calculation following the declaration date. A summary of the dividends declared and/or paid during the period/year ended 31 July 2022 and 31 January 2022 are set out below:

 


Dividend per share

 

Total dividend

1 February 2022 to 31 July 2022

Pence

 

£

Interim dividend in respect of quarter ended 31 January 2022

1.10


1,334,331

Interim dividend in respect of quarter ended 30 April 2022

1.10


1,334,330


2.20


2,668,661

 



Dividend per share

 

Total dividend

1 February 2021 to 31 January 2022

Pence

 

£

Interim dividend in respect of quarter ended 31 January 2021

1.50


1,819,542

Interim dividend in respect of quarter ended 30 April 2021

1.50


1,819,542

Interim dividend in respect of quarter ended 31 July 2021

1.50


1,819,542

Interim dividend in respect of quarter ended 31 October 2021

1.50


1,819,542


6.00


7,278,168

 

Following shareholder approval of proposed changes to the Company's Investment Objectives and Investment Policy which will allow an orderly realisation of the Company's assets and return of capital to shareholders, the Board expects the Company to continue the payment of quarterly dividends whilst it remains prudent to do so.  The dividend payable per ordinary share will however reduce over time as assets are realised and as capital is returned to shareholders.

 

Rights attaching to Shares

The Company has a single class of Ordinary Shares which are not entitled to a fixed dividend. The company had one issue of redeemable B shares which were redeemed throughout the period ended 31 July 2022 on a Return of Capital payment to shareholders of the redeemable B shares. At any General Meeting of the Company each Ordinary Shareholder is entitled to have one vote for each share held. The Ordinary Shares also have the right to receive all income attributable to those shares and participate in distributions made and such income shall be divided pari passu among the holders of Ordinary Shares in proportion to the number of Ordinary Shares held by them.

 

The Company's Articles include a B Share mechanism for returning capital to Shareholders and following Shareholder approval on 14 January 2021, the Company has and will continue to utilise this mechanism in future. When the Board determines to return capital to Shareholders, the Company has issued B Shares, paid up out of the Company's assets, to existing Shareholders pro rata to their holding of Ordinary Shares at the time of such issue. The amount paid up on the B Shares will be equal to the cash distribution to be made to Shareholders via the B Share mechanism. The B Shares shall be redeemable at the option of the Company following issue and the redemption proceeds (being equal to the amount paid up on such B Shares) paid to the holders of such B Shares on such terms and in such manner as the Directors may from time to time determine. It is therefore expected that the B Shares will only ever be in issue for a short period of time and will be redeemed for cash shortly after their issue in order to make the return of capital to Shareholders.

 

It is intended that following each return of capital the Company will publish a revised estimated Net Asset Value and Net Asset Value per Ordinary Share based on the prevailing published amounts adjusted to take into account the return of capital.

 

The number of Ordinary shares in issue will remain unchanged.

 

8. Financial Risk Management

The Company through its investment in senior loans is exposed to a variety of financial risks. The main risks arising from the Company's financial instruments are: market risk (including currency risk and interest rate risk), credit risk and liquidity risk and are fully disclosed on pages 54 to 58 of the Annual Report and Financial Statements for the year ended 31 January 2022.

 

The Company's principal risk factors are fully discussed in the Company's Prospectus, available on the Company's website (www.lbow.co.uk) and should be reviewed by shareholders.

 

 

9. Related party transactions and Directors' remuneration

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the party in making financial or operational decisions.

 

In the opinion of the Directors, on the basis of shareholdings advised to them, the Company has no immediate or ultimate controlling party.

 

Directors

The Company Directors' fees for the period amounted to £80,000 (31 July 2021: £91,375) with outstanding fees at 31 July 2022 of £31,250 due to the Directors (31 January 2022: £31,250).

 

Investment Manager

Investment management fees for the period amounted to £519,039 (31 July 2021: Investment management/advisory fees £595,958) of which £512,712 was outstanding at the period/year end (31 January 2022: £289,107).

 

10. Other expenses

The other expenses shown in the Statement of Comprehensive Income are made up as shown below.

                                                                                                                                                                               



1 February 2022 to

1 February 2021 to

1 February 2021 to



31 July 2022

31 July 2021

31 January 2022



£

£

£



(Unaudited)

(Unaudited)

(Audited)

Luxco operating expenses


-

(3,652)

95,358

Broker fees


-

25,275

76,925

Administration fees


125,843

114,896

205,285

Regulatory fees


10,947

14,557

16,524

Listing fees


8,248

6,255

14,573

Legal & professional fees


44,832

44,024

122,555

Audit fees


23,161

26,844

46,454

Other expenses


67,705

34,418

62,829

Total expenses

 

 

280,736

 

262,617

 

640,503

 

11. Subsequent events

Following the Ukrainian crisis, the Investment Manager has reviewed the portfolio and has not identified any direct exposure to either Russian or Ukrainian companies or individuals. The Company continues to monitor the situation for potential macro-economic impacts which may affect the performance or repayment of the remaining loan.

 

There were no other material subsequent events.

 

glossary of capitalised defined terms

 

"Administrator" means Ocorian Administration (Guernsey) Limited;

"Admission" means the admission of the shares to the premium-listing segment of the Official List and to trading on the London Stock Exchange;

"AEOI" means Automatic Exchange of Information;

"Affinity" means Affinity Global Real Estate;

"Annual Report and Financial Statements" means the annual publication of the Company or Group provided to the shareholders to describe their operations and financial conditions, together with their Financial Statements;

"Audit Committee" means the Audit and Risk Management Committee, a formal committee of the Board with defined terms of reference;

"Board" or "Directors" or "Board of Directors" means the directors of the Company from time to time;

"CBI" means the Confederation of British Industry;

"Circular" means the Circular of the Company dated 16 December 2020, regarding proposal for a change to the Company's Objectives and Investment Policy which would lead to an orderly realisation of the Company's assets and a return of capital to shareholders;

"Companies Law" means the Companies (Guernsey) Law, 2008, (as amended);

"Company" means ICG-Longbow Senior Secured UK Property Debt Investments Limited;

"CVA" means Company Voluntary Arrangement;

"Disclosure Guidance and Transparency Rules" or "DTRs" means the disclosure guidance published by the FCA and the transparency rules made by the FCA under section 73A of FSMA;

"ECL" means expected credit or losses;

"EGM" means an Extraordinary General Meeting of the Company;

"EPS" or "Earnings per share" means Earnings per ordinary share of the Company and is expressed in Pounds Sterling;

"ERV" means Estimated Rental Value;

"EU" means the European Union;

"Euros" or "" means Euros;

"FCA" means the UK Financial Conduct Authority (or its successor bodies);

"Financial Statements" or "Consolidated Financial Statements" means the audited consolidated financial statements of the Company for the year to 31 January 2022, including the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows, and associated notes;

"GDP" means gross domestic product;

"GFSC" means the Guernsey Financial Services Commission;

"GIIN" means Global Intermediary Identification Number;

"GMG" means GMG Real Estate;

"Group" means the Company, ICG Longbow Senior Secured UK Property Debt Investments Limited together with its wholly owned subsidiary, ICG Longbow Senior Debt S.A (Luxco) which was liquidated on 18 January 2022;

"IAS" means international accounting standards as issued by the Board of the International Accounting Standards Committee;

"ICG" means Intermediate Capital Group plc;

"ICG Private Funds" means private real estate debt funds managed or advised by the Investment Manager or its associates; 

"IFRS" means the International Financial Reporting Standards, being the principles-based accounting standards, interpretations and the framework by that name issued by the International Accounting Standards Board, as adopted by the EU;

"Interest Cover Ratio" or "ICR" means the debt/profitability ratio used to determine how easily a company can pay interest on outstanding debt;

"Interim Financial Statements" means the unaudited interim condensed financial statements of the Company, including the Condensed Statement of Comprehensive Income, the Condensed Statement of Financial Position, the Condensed Statement of Changes in Equity, the Condensed Statement of Cash Flows, and associated notes;

"Interim Report" means the Company's interim report and unaudited interim condensed financial statements for the period ended 31 July;

"Investment Grade Tenant" means a tenant that is rated Aaa to Baa3 by MIS and/or AAA to BBB- by S&P;

"Investment Manager" or "ICG Real Estate" means ICG Alternative Investment Limited;

"Investment Management Agreement" means Investment Management Agreement dated 25 November 2020 between the Company and the Investment Manager ICG Alternative Investment Limited; 

"IPO" means the Company's initial public offering of shares to the public, which completed on 5 February 2013;

"ISIN" means an International Securities Identification Number;

"LBS" means LBS Properties Limited;

"LGD" means loss given default;

"Listing Rules" means the listing rules made by the FCA under section 73A Financial Services and Markets Act 2000;

"London Stock Exchange" or "LSE" means London Stock Exchange plc;

"LTV" means Loan to Value ratio;

"Luxco" or "Subsidiary" means the Company's wholly owned subsidiary, ICG-Longbow Senior Debt S.A. which was liquidated on 18 January 2022;  

"Main Market" means the main securities market of the London Stock Exchange;

"Management Engagement Committee" means a formal committee of the Board with defined terms of reference;

"MIS" means Moody's Investors Service;

"MSCI" means Morgan Stanley Capital Index;

"NAV per share" means the Net Asset Value per ordinary share divided by the number of Shares in issue (other than shares held in treasury);

"Net Asset Value" or "NAV" means the value of the assets of the Company less its liabilities, calculated in accordance with the valuation guidelines laid down by the Board, further details of which are set out in the 2017 Prospectus;

"Nomination Committee" means a formal committee of the Board with defined terms of reference;

"Northlands" means Northlands Portfolio;

"NMPIs" means Non-Mainstream Pooled Investments;

"OECD" means The Organisation for Economic Co-operation and Development;

"Official List" is the Premium Segment of the FCA's Official List;

"ONS" means Office of National Statistics;

 

 

"IPO Prospectus" means the prospectus published on 31 January 2013 by the Company in connection with the IPO of ordinary shares;

"PD" means probability of default;

"post-Covid" means the period after 23 March 2020;

"Prospectus" means the prospectus published in May 2018 by the Company in connection with the placing programme;

"Quattro" means Quattro Portfolio;

"Registrar" Link Asset Services (Guernsey) Limited (formerly Capita Registrars (Guernsey) Limited);

"Registrar Agreement" means the Registrar Agreement dated 31 January 2013 between the Company and the Registrar;

"RICS" means the Royal Institution of Chartered Surveyors;

"RoyaleLife" means the RoyaleLife portfolio;

"S&P" means Standard & Poor's Credit Market Services Europe Limited, a credit rating agency registered in accordance with Regulation (EC) No 1060/2009 with effect from 31 October 2011;

"SONIA" means Sterling Overnight Interbank Average Rate;

"Southport" means the Southport Hotel property;

"SPV" means special purpose vehicle;

"UK" or "United Kingdom" means the United Kingdom of Great Britain and Northern Ireland;

"UK Listing Authority" or "UKLA" means the Financial Conduct Authority;

"US" or "United States" means the United States of America, its territories and possessions; and

"£" or "Pounds Sterling" or "Sterling" means British pound sterling and "pence" means British pence.

 

directors and general information

 

Board of Directors

Jack Perry (Chairman)                                                                      Stuart Beevor

Paul Meader

Fiona Le Poidevin

 

Audit and Risk Committee

Fiona Le Poidevin (Chairman)

Stuart Beevor

Paul Meader

 

Management Engagement Committee

Jack Perry (Chairman)                                                                     

Paul Meader

Fiona Le Poidevin

Stuart Beevor

 

Nomination Committee

Jack Perry (Chairman)                                                                     

Stuart Beevor

Paul Meader

Fiona Le Poidevin

 

Remuneration Committee

Paul Meader (Chairman)

Jack Perry

Stuart Beevor

Fiona Le Poidevin

 

Investment Manager

ICG Alternative Investment Limited

Procession House

55 Ludgate Hill

London

United Kingdom

EC4M 7JW

 

Registered office

PO Box 286

Floor 2

Trafalgar Court

Les Banques

St Peter Port

Guernsey

GY1 4LY

 

 

 

 

 

Independent Auditor

Deloitte LLP

PO Box 137

Regency Court

Glategny Esplanade

St. Peter Port

Guernsey

GY1 3HW

 

Guernsey Administrator and Company Secretary

Ocorian Administration (Guernsey) Limited

P.O. Box 286

Floor 2

Trafalgar Court

Les Banques

St Peter Port

Guernsey

GY1 4LY

 

Depositary

Ocorian Depositary (UK) Limited

5th Floor

20 Fenchurch Street

London

England

EC3M 3BY

 

Registrar

Link Asset Services (Guernsey) Limited

Mont Crevelt House

Bulwer Avenue

St Sampsons

Guernsey

GY2 4LH

 

Corporate Broker and Financial Adviser

Cenkos Securities plc

6-8 Tokenhouse Yard

London

United Kingdom

EC2R 7AS

 

Identifiers

GIIN: 6IG8VS.99999.SL.831

ISIN: GG00B8C23S81

Sedol: B8C23S8

Ticker: LBOW

Website: www.lbow.co.uk

 

English Solicitors to the Company

Gowlings WLG (UK) LLP 

4 More London Riverside

London

United Kingdom

SE1 2AU

 

Guernsey Advocates to the Company

Carey Olsen

Carey House

PO Box 98

Les Banques

St Peter Port

Guernsey

GY1 4BZ

 

Bankers

Butterfield Bank (Guernsey) Limited

PO Box 25

Regency Court

Glategny Esplanade

St Peter Port

Guernsey

GY1 3AP

 

Barclays Bank plc

6-8 High Street

St Peter Port

Guernsey

GY1 3BE

 

Lloyds Bank International Limited

PO Box 136

Sarnia House

Le Truchot

St Peter Port

Guernsey

GY1 4EN

 

The Royal Bank of Scotland International

Royal Bank Place

1 Glategny Esplanade

St Peter Port

Guernsey

GY1 4BQ

 

 

cautionary statement

 

The Chairman's Statement and the Investment Manager's Report have been prepared solely to provide additional information for shareholders to assess the Company's strategies and the potential for those strategies to succeed. These should not be relied on by any other party or for any other purpose.

 

The Chairman's Statement and Investment Manager's Report may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology.

 

These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this document and include statements regarding the intentions, beliefs or current expectations of the Directors and the Investment Manager, concerning, amongst other things, the investment objectives and investment policy, financing strategies, investment performance, results of operations, financial condition, liquidity, prospects, and distribution policy of the Company and the markets in which it invests.

 

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance.

 

The Company's actual investment performance, results of operations, financial condition, liquidity, distribution policy and the development of its financing strategies may differ materially from the impression created by the forward-looking statements contained in this document.

 

Subject to their legal and regulatory obligations, the Directors and the Investment Manager expressly disclaim any obligations to update or revise any forward-looking statement contained herein to reflect any change in expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

 

ICG-Longbow Senior Secured UK Property Debt Investments Limited

PO Box 286

Floor 2, Trafalgar Court

Les Banques, St Peter Port, Guernsey

GY1 4LY, Channel Islands.

 

T +44 (0) 1481 742742

F +44 (0) 1481 742698

 

Further information available online:

www.lbow.co.uk

 

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