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KNIGHTSTONE CAPITAL PLC

Financial Statements

Year ended 31 March 2016

Directors, Advisers and Bankers 1

Strategic Report 2

Report of the Directors 4

Independent Auditor's Report to the Members 6

Statement of comprehensive income 8

Statement of financial position 9

Statement of changes in equity 10

Notes to the financial statements 11

DIRECTORS

The directors who have served during the year are:

Graham Watts (to 23.09.15)

Duncan Brown (to 11.09.15)

Nick Horne

Tony MacGregor (from 24.03.16)

Nick Medhurst (from 10.09.15)

Linda Nash (Chair from 10.09.15)

Richard Taylor (to 10.09.15)

Graham Watts was Chair to 23 September 2015. Linda Nash was appointed as Chair on 25 February 2016.

SECRETARY 

Charlotte Ferris

AUDITOR

Mazars LLP

45 Church Street

Birmingham

B3 2RT

BANKERS

Barclays Bank Plc

The Bank of New York Mellon

REGISTERED OFFICE

Knightstone Housing

Weston Gateway Business Park

Weston-super-Mare

BS24 7JP

The Directors present their reports and audited financial statements for Knightstone Capital PLC ("the Company") for the year ended 31 March 2016. The Company is a member of the Knightstone Housing Group.

BUSINESS REVIEW AND FUTURE DEVELOPMENTS

Knightstone Capital Plc was incorporated in September 2013 and issued its first bond on the London Stock Exchange on 2 October 2013. The bond was a £100m 35 year fixed rate bond priced at a credit spread of 140 basis points above the benchmark gilt rate. It has an extended deferral of drawdown. The initial £1m was drawn at the date of issue and a further £49m will be received in November 2017 with Knightstone Capital Plc retaining £50m of the bonds to sell to investors in the future. There is an annual coupon of 5.058% from issue until 30 November 2017 and 5.576% thereafter. The bond was issued at par.

The Statement of comprehensive income shows a result of Nil for the year (2015: Profit of £11,702). This is in line with the Company's role as a special purpose lending vehicle which does not seek to generate significant financial returns. The prior year profit was distributed as Gift Aid through reserves.

Knightstone Capital Plc benefits from the Group's treasury service with policies and procedures approved by the Boards of Knightstone Housing Group Limited and Knightstone Housing Association Limited. These cover funding, interest rate exposures, cash management and the investment of surplus cash.

PRINCIPAL RISKS AND UNCERTANTIES

Knightstone Capital Plc on-lends all of its proceeds from capital market transactions to its parent company, Knightstone Housing Association Limited. Where capital markets funding has been on-lent, the underlying assets of the issuance belong to Knightstone Housing Association Limited.

As Knightstone Capital Plc is not obliged to provide incremental funding to other Group asset owning subsidiaries, Knightstone Capital Plc is not at risk if it cannot obtain further funding for the Knightstone Housing Group. All of Knightstone Capital Plc's costs relating to providing funding services are met by Knightstone Housing Association Limited.

FINANCIAL PERFORMANCE

The Company is a special purpose lending vehicle and does not seek to generate significant financial returns. The Company makes neither a profit nor a loss in line with its role as a special purpose lending vehicle. The Company therefore does not have financial key performance indicators.

FINANCIAL RISK MANAGEMENT

Risk Management Objectives and Policies

Knightstone Housing Group's finance function is responsible for treasury management activities and control of associated risks. Its activities are governed by the Treasury Management Policy, approved by the Board of the Group's parent company, Knightstone Housing Group Limited, which is ultimately responsible for treasury issues in all of Knightstone Housing Group's legal entities, which include the Company. The Group finance function does not operate as a profit centre.

The Company has in place a risk management programme that seeks to limit the adverse effects on the financial performance of the Company by monitoring levels of debt finance and related finance costs. 

Interest Rate Risk/Hedging

The Company currently borrows funds on a fixed rate basis from the capital markets and will, in future, on-lend these funds to its immediate parent company, Knightstone Housing Association Limited on the same fixed rate basis. As such, the Company does not bear any exposure to interest rate risk. The Company does not undertake any hedging activities and it does not have any derivatives.

Liquidity Risk

The Company mitigates its liquidity risk in relation to principal repayments and coupon payments by lending proceeds of capital market issues on the same repayment terms to the finance instrument issued.

Credit Risk

All of the Company's capital markets financing proceeds are available to be on-lent to Knightstone Housing Association Limited, which represents the only credit risk to the Company. This credit risk is mitigated through a number of factors, including the housing asset security which stands behind the loan, the overall Homes and Communities Agency assessment of the Group's financial viability and the contractual protection of the loan agreement between the Company and Knightstone Housing Association Limited. The Company is not obliged to source further funding from the capital markets for on-lending to Knightstone Housing Association Limited.

The Strategic Report was approved on 9 August 2016 and signed on its behalf by

Linda Nash

Director

The directors present their report and audited financial statements for Knightstone Capital Plc for the year ended 31 March 2016. Knightstone Capital Plc is a member of Knightstone Housing Group.

OVERVIEW AND PRINCIPAL ACTIVITY

Knightstone Capital Plc is a wholly owned subsidiary of Knightstone Housing Association Limited which is an asset owning company within the Knightstone Housing Group (the "Group"). The objective of Knightstone Capital Plc is to source funding on behalf of Knightstone Housing Association Limited directly from the capital markets and on-lend the proceeds to Knightstone Housing Association Limited.

ADOPTION OF FRS 102

These accounts have been prepared under FRS102 Financial Accounting Standards. This is the first year applying FRS102 with the date of the transition being 1 April 2014. The transition from the previous UK GAAP to FRS102 has not impacted these financial statements and there have been no changes to the accounting policies.

DIRECTORS' RESPONSIBILITIES STATEMENT

The directors are responsible for preparing the Strategic Report, the Directors' Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law) including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland".

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and accounting estimates that are reasonable and prudent;

· state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements;

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

DIRECTORS

The directors who served during the period were

Graham Watts (to 23.09.15)

Duncan Brown (to 11.09.15)

Nick Horne

Tony MacGregor (from 24.03.16)

Nick Medhurst (from 10.09.15)

Linda Nash (from 10.09.15)

Richard Taylor (to 10.09.15)

Graham Watts was Chair to 23 September 2015. Linda Nash was appointed as Chair on 25 February 2016.

Corporate governance

The governance of the company is overseen by the parent company, Knightstone Housing Group Limited which includes the audit committee of the parent. As such, a separate audit committee for the company is not considered necessary on the basis that parent company's audit committee is suitable placed to perform the function for the group as a whole.

DIRECTORS' INDEMNITY

The Company's Articles of Association provide, subject to the provisions of the UK legislation, an indemnity for directors and officers of the Company in respect of liabilities they may incur in the discharge of their duties or in the exercise of their powers, including any liabilities relating to the defence of any proceedings brought against them which relate to anything done or omitted, or alleged to have been done or omitted, by them as officers or employees of the Company.

Appropriate directors' and officers' liability insurance cover is in place in respect of all of the Company's directors.

MATTERS INCLUDED WITHIN THE STRATEGIC REPORT

In accordance with section 414c (11) future developments and principal risks and uncertainties.

STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITORS

Each of the directors at the date of approval of this report has confirmed that:

· So far as the director is aware, there is no relevant audit information of which the Company's auditor is unaware; and

· The director has taken all the steps that he ought to have taken as a director to make himself aware of any information needed by the Company's auditor in connection with preparing their report and to establish that the Company's auditor is aware of that information.

AUDITOR

Mazars LLP is auditor to the Company and all other companies in the Knightstone Housing Group including the Company's immediate parent, Knightstone Housing Association Limited.

The Report of the Directors was approved on 9 August 2016 and signed on its behalf by

Linda Nash

Director

We have audited the financial statements of Knightstone Capital plc for the year ended 31 March 2016 which comprise the Statement of Comprehensive Income, the Statement of Financial Position, the Statement of Changes in Equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland".

Respective responsibilities of the board and auditor

As explained more fully in the Directors' Responsibilities Statement set out on page 4, the directors are responsible for the preparation of financial statements and for being satisfied that they give a true and fair view.

Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors. This report is made solely to the company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body for our audit work, for this report, or for the opinions we have formed.

Scope of the audit of the financial statements

A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www. frc.org.uk/auditscopeukprivate.

Opinion on the financial statements

In our opinion the financial statements:

· give a true and fair view of the state of the Company's affairs as at 31 March 2016 and of its result for the period then ended;

· have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice including Financial Reporting Standard 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland"; and

· have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on the other matters prescribed by the Companies Act 2006

In our opinion the information given in the Strategic Report and Report of the Directors for the financial period for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

· adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or

· the financial statements are not in agreement with the accounting records and returns; or

· certain disclosures of directors' remuneration specified by law are not made; or

· we have not received all the information and explanations we require for our audit.

Signed on 19 August 2016

Stephen Eames (Senior Statutory Auditor)

For and on behalf of Mazars LLP

Chartered Accountants and Statutory Auditor

45 Church Street

Birmingham

West Midlands

B3 2RT

The results included in the profit and loss account relate wholly to continuing activities.

These financial statements were approved by the Board of directors on 9 August 2016 and signed on its behalf by:

Linda Nash Charlotte Ferris

Chair Secretary

Profit and loss account

This reserve represents cumulative profits and losses of the Company

1 GENERAL INFORMATION

Knightstone Capital Plc was incorporated in the United Kingdom in September 2013 and is a wholly owned subsidiary of Knightstone Housing Association Limited which is an asset owning company within the Knightstone Housing Group (the "Group"). The registered office is Weston Gateway Business Park, Weston-super-Mare, BS24 7JP.

The objective of Knightstone Capital Plc is to source funding on behalf of Knightstone Housing Association Limited directly from the capital markets and on-lend the proceeds to Knightstone Housing Association Limited.The financial statements have been prepared for the year ended 31 March 2016, and are stated in GBP and rounded to the nearest £.

2 ACCOUNTING POLICIES

The financial statements have been prepared in accordance with the Companies Act 2006 and applicable accounting standards

A summary of all material accounting policies, which have been consistently applied, are set out below:

(a) Basis of preparation

The financial statements have been prepared under the historical cost convention.

(b) Disclosure exemptions

FRS 102 allows a qualifying entity certain disclosure exemptions, subject to certain conditions, which have been complied with, including notification of and no objection to, the use of exemptions by the Association's shareholders. The Association is included in the consolidated financial statements of Knightstone Housing Group Limited. Note 1 provides details of where those consolidated financial statement may be obtained from.

In preparing the financial statements, the Association has taken advantage of the following exemptions:

· from disclosing key management personnel compensation, as required by paragraph 7 of Section 33 Related Party Disclosures;

· from presenting a statement of cash flows, as required by Section 7 Statement of Cash Flows; and

· On the basis that equivalent disclosures are given in the consolidated financial statements, the company has also taken advantage of the exemption not to provide certain disclosures as required by Section 11 Basic Financial Instruments and Section 12 Other Financial Instrument Issues.

(c) Statement of compliance

This is the first year the Company has prepared its financial statements in accordance with FRS 102, accordingly the financial information as at 1 April 2014 (being the date of transition) and for the year ended 31 March 2015 have been restated where appropriate for material adjustments on adoption of FRS 102 in the current year. For more information see Note 15.

(d) Going concern

At the date of these financial statements the directors have carried out a detailed and comprehensive review of the business and its future prospects. In the opinion of the directors, the Company is expected to be able to continue trading within the current arrangements for at least 12 months from the date of the Company year end and consequently the financial statements are presented on the going concern basis in accordance with FRS 102, The Financial Reporting Standard applicable in the UK and Ireland ("FRS 102").

(e) Financial assets

Financial assets are defined as cash or any asset that is a contractual right to receive cash or another financial asset from another entity, or a contractual right to exchange financial instruments with another entity under conditions that are potentially favourable, or an equity instrument of another entity. The only category of financial asset held by the Company is debtors.

Debtors are assets with fixed or determinable payments that are not quoted on an active market, other than those that are categorised as financial assets at fair value through profit or loss. These are initially recognised at transaction price plus directly attributable transaction costs. At each balance sheet date they are subsequently measured at amortised cost, with interest income recognised in profit or loss using the effective interest method. Examples of loans and receivables include amounts on-lent to Group entities.

(f) Financial liabilities

Financial liabilities are defined as any liability that is a contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial instruments with another entity under conditions that are potentially unfavourable. Financial liabilities held by the Company include issued debt. Interest charges are recognised in profit or loss using the effective interest method. The only category of financial liability held by the Company is those measured at amortised cost using the effective interest method.

In the case of issued debt due in more than one year, the fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate available to the Company for similar financial instruments.

(g) Segmental Information

The Company has one class of business from which it derives its income, being to provide funding to its immediate parent company, Knightstone Housing Association Limited. All interest, income, expenditure and net assets are derived from UK operation.

(h) Taxation

The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes.

(i) Bond issue costs

The Company has a contractual agreement in place with Knightstone Housing Association Limited whereby Knightstone Housing Association Limited will meet any costs associated with issuing bonds. Issue costs are therefore not recognised as a deduction to the carrying amount of the debt financial instruments where they are not incurred by the Company.

3 CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In applying the Company's accounting policies, the directors are required to make judgements, estimates and assumptions in determining the carrying amounts of assets and liabilities. The directors' judgements, estimates and assumptions are based on the best and most reliable evidence available at the time when the decisions are made, and are based on historical experience and other factors that are considered to be applicable. Due to the inherent subjectivity involved in making such judgements, estimates and assumptions, the actual results and outcomes may differ.

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

3.1 CRITICAL JUDGEMENTS IN APPLYING THE COMPANY'S ACCOUNTING POLICIES

The critical judgements that the directors have made in the process of applying the Company's accounting policies and that have the most significant effect on the amounts recognised in the financial statements are discussed below.

ASSESSING WHETHER THE COMPANY MEETS THE DEFINITION OF A FINANCIAL INSTITUTION

The directors have performed an assessment to conclude whether the Company meets the definition of a financial institution as set out by FRS 102. Entities that meet this definition are required to present additional disclosures as required by FRS 102 Section 34 Specialised Activities.

A financial institution includes entities "whose principal activity is to generate wealth or manage risk through financial instruments". The principal activity of the company is deemed by the directors to be the sourcing of funding directly from the capital markets to on-lend to the group. Funding obtained is secured on the assets of the group, and interest charges are passed to the group, hence the Company itself does not generate profit from the arrangement.

As such, the directors do not regard the Company to fall within the definition of a financial institution; this being on the basis that the Company's use of financial instruments is not primarily for the generation of wealth or for the management of risk, but rather for the purpose of raising finance on behalf of the group.

3.2 KEY SOURCES OF ESTIMATION UNCERTAINTY

The directors are of the opinion that there are no sources of estimation uncertainty.

4 OPERATING PROFIT

During the year, the Company recharged interest paid on loans to Knightstone Housing Association Limited to whom the proceeds of the capital markets issue have been on-lent. Consequently during the period the Company made neither a profit nor a loss.

Audit fees for the Company are paid for by the ultimate parent company, Knightstone Housing Group Limited, and disclosed within its consolidated accounts.

5 EMPLOYEES

The Company does not have any employees. All employees acting on behalf of the Company are employed by Knightstone Housing Group Limited or Knightstone Housing Association Limited whose costs are disclosed in those financial statements.

6 BOARD OF DIRECTORS' REMUNERATION

The directors of Knightstone Capital Plc are employed and remunerated by Knightstone Housing Group Limited. Full accounting disclosures on directors' remuneration are therefore included within the Group accounts.

Repayment of the on lent funds is at a fixed amount in line with the terms of the agreement.

As the terms of the on-lending agreement underlying the intra-group debtor mirror those of the Company's bond liability shown under Creditors (note 11), the fair value of the £1 million debtor is estimated as £1.4 million. The basis of the estimation is shown in note 11.

On 2 October 2013, Knightstone Capital Plc issued a £100 million 35 year fixed rate bond with an annual coupon of 5.058% from issue until 30 November 2017 and 5.576% thereafter. Of the total issue, £50 million has been retained on behalf of the issuer and no interest is due on the retained element of the issue. £50 million is therefore repayable on 1 October 2048. The initial £1m was drawn at the date of issue and a further £49m will be received in November 2017 with Knightstone Capital Plc retaining £50m of the bonds to sell to investors in the future. The bond was issued at par.

Knightstone Capital Plc can on-lend all of its proceeds from capital market transactions to its immediate parent Company, Knightstone Housing Association Limited. The underlying assets of this issuance therefore belong to Knightstone Housing Association Limited which are held through a security trust arrangement with the Prudential Trustee Company Limited.

The drawn elements of the bond will be secured by fixed charges over property security of Knightstone Housing Association Limited at their Market Value as defined by VS 3.2 of the RICS Valuation - Professional Standards 2012.

No collateral has been called in the period.

All of Knightstone Capital Plc's costs relating to providing funding services were met by Knightstone Housing Association Limited.

The Company currently borrows funds on a fixed rate basis from the capital markets and will in future on-lend these funds to its immediate parent company, Knightstone Housing Association Limited on the same fixed rate basis. As such, the Company does not bear any exposure to interest rate risk. All of the Company's capital markets financing proceeds will be available to be on-lent to Knightstone Housing Association Limited, which represents the only credit risk to the Company. This credit risk is mitigated through a number of factors, including the housing asset security which stands behind the loan, the overall HCA assessment of the Group's financial viability and the contractual protection of the loan agreement between the Company and Knightstone Housing Association Limited. No further qualitative disclosures about credit, liquidity and market risks are applicable.

The market value of the financial instrument as at 31 March 2016 is estimated as £1.4 million. The debt has not been traded in the period between issue and at the year end its market value has been calculated against the price of a reference gilt (UKT 3.62% 2045) at 31 March 2016 plus a 140bps credit spread, which is appropriate to Knightstone.

The ordinary shares of the Company carry no right to fixed income and one voting right per share.

Knightstone Housing Association Limited is the registered holder of 50,000 fully paid shares of £1. The shares were issued on incorporation of the Company on 16 September 2013. Knightstone Housing Association Limited acquired its 50,000 ordinary shares on 16 September 2013.

14 ULTIMATE PARENT UNDERTAKING

The immediate parent company is Knightstone Housing Association Limited, a charitable housing association and a registered society under the Co-operative and Community Benefit Societies Act 2014 with registration number 21080R and registered with the Regulator pursuant to sections 111 and 112 of the Housing and Regeneration Act 2008 (Registration No. L0291).

The directors of Knightstone Capital Plc regard Knightstone Housing Group Limited as the ultimate parent undertaking and controlling party. Knightstone Housing Group Limited is a housing association and a registered society under the Co-operative and Community Benefit Societies Act 2014 with registration number 29867R and registered with the Regulator pursuant to sections 111 and 112 of the Housing and Regeneration Act 2008 (Registration No. L4436).

The results of Knightstone Capital Plc are consolidated within Knightstone Housing Group Limited only.

15 RELATED PARTY DISCLOSURE

Knightstone Capital Plc has taken advantage of the exemption permitted by Section 33 "Related party transactions" contained in FRS 102, and has therefore not disclosed transactions or balances with entities which are wholly owned members of the Group. There were no other related party transactions.

16 EXPLANATION OF TRANSITION TO FRS102

These accounts have been prepared under FRS 102 the Financial Reporting Standard applicable in the UK and Republic of Ireland. This is the first year applying FRS 102 with the date of the transition being 1 April 2014. The transition from the previous UK GAAP to FRS 102 has not impacted these financial statements and there have been no changes to the accounting policies.