Distrib. Fin. Regulatory News (DFCH)

30 September 2020

Distribution Finance Capital Holdings plc("DF Capital", "the Group" or the "Company" or together with its subsidiaries the "DFC Group")

Interim Results for six months ended 30 June 2020

Distribution Finance Capital Holdings plc, a niche lender providing working capital solutions to dealers and manufacturers across the UK, today announces results for the six months ended 30 June 2020.

The Group confirms the following financial highlights, and has provided its full report for the period within this announcement :-

In line with its previous updates, the Group's portfolio has continued to perform well throughout the period of the pandemic, notwithstanding that the loan book has reduced since lockdown restrictions were eased earlier in the year as dealers started to see a significant increase in sales of their products.

Having received notification from the Prudential Regulation Authority on 29 September 2020 of a successful bank licence application, the Group intends to build on these results and the solid foundations it has in place to establish itself as a specialist SME focused bank, targeting a profitable run-rate within 18 months of receiving authorisation. Further details will be shared at the webinar Investor Presentation at 9.30am on 30 September 2020.

Carl D'Ammassa, Chief Executive Officer commented: "The successful receipt of a banking licence should unlock our growth plans. With a sustainable funding source now in place as we expect to start raising deposits shortly, we believe the profitability of the Group will be transformed, with a target to improve net interest margin towards 6% over time. Our focus now is to: support our dealers; look to grow the loan book; and, build on the c. £1bn of demand for credit facilities we have from our existing dealer relationships. Whilst cautious about the near-term, we intend to maximise the use of our existing capital to achieve a loan book in the region of £270m. I'm delighted to have the opportunity to share more on our strategy and outlook following this announcement".

Enquiries:

Forward looking statements:

This document contains forward looking statements with respect to the business, strategy and plans of the company and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about DFC or management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. DFC's actual future results may differ materially from the results expressed or implied in these forward-looking statements as a result of a variety of factors. These include UK domestic and global economy and business conditions, risks concerning borrower credit quality, market related risks including interest rate risk, inherent risks regarding market conditions and similar contingencies outside DFC's control, any adverse experience in inherent operational risks, any unexpected developments in regulation or regulatory and other factors.

Interim Report

For the six months ended 30 June 2020

Chief Executive's Statement

I am delighted to be sharing our interim results as a newly authorised bank. We were informed of the regulators' decision to grant a bank licence on 29 September 2020. DF Capital Bank will be the new name of our banking franchise.

The pursuit of a banking licence has dominated much of our time as a listed company and is the culmination of more than two years of hard work. Having sought full authorisation from the outset, accordingly our licence has been granted without restrictions. We have been bank-ready for some time; the governance structures, policies, technology and people are in place as well as the required capital to fulfil our near-term ambitions, albeit these will evolve as we grow. Becoming a bank will provide us with a sustainable and lower cost funding source on which to execute our growth ambitions as a specialist lender to SMEs. Our maiden range of personal savings products will be launched in October 2020.

I look forward to providing regular updates on our progress as a newly authorised bank.

Results for the six months ended 30 June 2020

As reported in our Annual Report for the year ended 31 December 2020, the impact of COVID-19 has been disruptive for our customers, their supply chains and accordingly our business. We responded quickly to the impact of the pandemic and that has positioned us well as we now progress through the aftermath of lockdown and look to support the increasing demand for new loans from our dealers.

During lockdown, as expected, we saw minimal appetite for our lending products combined with limited ability to support new loans given restrictions placed on our funding. We provided modest levels of forbearance to dealers (less than 2% of the deals in the loan book by value), rescheduling principal repayments where required, to help during the period their businesses remained closed. As restrictions were eased and dealers reopened, our customers started to see retail sales improve on an increasing basis, which in turn saw many loans repaid in full, given our lending product is predominantly repaid as assets are sold. At 30 June 2020 our loan book stood at approximately £164m (2019: £168m), down significantly from £208m as at 31 December 2019. 

Gross revenues for the 6 month period to 30 June increased 37% from the same period in 2019 to £7.4m (2019: £5.4m). Gross yield reduced 30bp to 7.6% (2019: 7.9%) in light of lower levels of stock turn and a reduction in associated fee generation throughout the lockdown period.

Net interest margin reduced 180bp to 2.0% (2019: 3.8%) due to higher wholesale funding costs largely driven by the senior mezzanine facility being in place throughout the year. The mezzanine facility was originally put in place as a short term measure at a time the Group expected its banking licence to be granted imminently. As we move forward with our retail deposit raising activities, we expect to see our funding costs materially improve.

Net losses for the period were £7.2m (2019: £7.3m), the result of being at an early stage of our business plan and the continued heavy investment in building our niche lending franchise and pursuing a banking licence.

During the period we took action to reduce our cost base at the start of the lockdown and we anticipate the benefits of this to flow through the balance of 2020, with our current headcount being 71 (excluding NEDs), down from 90 at year-end 2019.

Throughout lockdown we have continued to develop and invest in our proposition. We launched DF Check, an app-based audit tool, to complement our existing approach and enhance our portfolio monitoring. This helped reduce our asset audit duration from 28 days in June 2020 to 20 days in September 2020.

Our security position improved during the period with loan to wholesale value improving to 79% (2019: 85%) and loan to retail value down to 66% (2019: 70%). Our portfolio remains well diversified across sectors and single name obligors. Additionally, the amount we borrow from wholesale lenders has dropped from 76% at year-end to 66% at June 2020 and further to 48% at 31 August 2020 (June 2019: 75%).

We have continued to intensively manage arrears, whilst supporting our dealers through lockdown. This has delivered significant reductions in arrears balances since year-end, which are now materially lower than pre-pandemic levels. The highly secured nature of our lending and the mix quality of our obligors has seen modest write-offs (£76k) through to 30 June 2020. Whilst we report an increase in cost of risk to 0.95% (2019: 0.75%), this is driven predominantly by changes to our IFRS9 provision assumptions in light of COVID-19. We are pleased with the overall performance of our portfolio, particularly relative to widely reported adverse dynamics elsewhere in the SME lending space.

Current trading and outlook

Following the period end, our loan book has continued to reduce standing at £90m as at 28 September 2020. This is a function of sales of existing dealer stock combined with limited availability of new assets to replenish forecourts. Many of the sectors that we support are reporting record levels of sales for the time of year, particularly in leisure related sectors, where there is obvious pent up demand particularly in those sectors associated with the renewed enthusiasm towards "staycation" from UK holidaymakers. This trend has positively impacted used values across most asset classes.

At the time of this report, our manufacturer partners have stabilised their supply chains and new assets are starting to flow more freely to dealers. Accordingly, we expect demand for our lending products to increase as we head through the autumn. Our immediate efforts, as we build a sustainable funding base from retail deposits, will be to re-build our loan book in line with increasing requirements of our dealers. We see a significant runway of growth ahead of us given pent up demand from existing relationships, alongside a solid pipeline of new opportunities.

At the time of our full year results, we shared near-term management actions that would address, in part, the material uncertainties the Group faced at that time. We have outperformed many of the downside scenarios we considered at the start of lockdown, which has placed us on solid foundations as we look to the future as a regulated bank. We have successfully rescheduled the sizeable bullet loan repayment originally due to TruFin plc in December 2020. We are currently in discussion with our wholesale lenders to extend the current waiver which ends on 30 September 2020. Additionally, continued progress has been made with the British Business Bank to move our ENABLE funding application forward, as a complementary and diversified funding source, alongside retail deposits.

Whilst we are cautious about the future with the potential impact of localised and any second national lockdown, at this point we are pleased with the progress. The grant of a bank licence will be transformational for the Group and allows the Company to focus on our ambitious growth plans. Notwithstanding the economic uncertainty, we see material opportunity ahead for DF Capital over the medium term and believe we can deliver superior shareholder returns as a digitally led growth platform, whilst achieving strong margin performance.

I'd like to thank, on behalf of the board, our employees and shareholders for supporting our ambitions and our customers for their trust and partnership through a difficult and challenging period of uncertainty.

Financial Review

1 The equity held in the Group

2 The effective interest rate we charge our customers including fees

3 Gross yield less interest expense

4 Impairments and provisions in the period as a % of average gross receivables. This figure further reduced to 0.53% for the eight months ended 31 August 2020.

5 Impairment allowance as a % of gross receivables at the period end

6 Operating cost as a % of total operating income. The definition of this calculation has been updated from the 2019 financial statements to give a more relevant measure in relation to our peers.

7 Number of borrower relationships

8 Number of vendors and manufacturers with whom we have programs that support our lending

9 Amount of credit available to our customers to draw

Summarised Statement of Comprehensive Income

Summarised Statement of Financial Position

Portfolio By Sector

Our Security Position - loan to wholesale and loan to retail value

1 Wholesale price is the invoice value paid by the dealer to the manufacturer

2 Retail price is the invoice value paid by the end user or purchaser of the asset

Our security position has improved from December 2019 to June 2020 with loan to wholesale value and loan to retail value reducing from 84% to 79% and from 70% to 66% respectively. This improvement has continued since June 2020, with loan to wholesale value and loan to retail value reducing further to 75% and 63% respectively at 31 August 2020.

Arrears

The June 2020 1-30 days past due balance includes £1.0m arrears past due and associated principal of £7.0m in respect of two related dealers who settled these outstanding balances on 3 July 2020. We have seen significant reductions in arrears to 31 August 2020 with total arrears of £1.1m and associated principal balance of £2.0m at this date, with these arrears balances being materially lower than pre-pandemic levels.

Alternative Performance Measures

Certain financial measures disclosed in the Interim Financial Report do not have a standardised meaning prescribed by International Financial Reporting Standards (IFRS) and may therefore not be comparable to similar measures presented by other issuers. These measures are deemed to be" alternative performance measures."

Statement of Directors' Responsibilities

The Directors confirm, to the best of their knowledge, that the condensed consolidated set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union, and that the Interim Financial Report herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial information differs from legislation in other jurisdictions.

By order of the Board

……………………………

Carl D'Ammassa

Director

29 September 2020

Independent Review Report to Distribution Finance Capital Holdings plc

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 which comprises the income statement, the balance sheet, the statement of changes in equity, the cash flow statement and related notes 1 to 21. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the AIM Rules of the London Stock Exchange.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting," as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the AIM Rules of the London Stock Exchange.

Use of our report

This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review 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, for our review work, for this report, or for the conclusions we have formed.

Deloitte LLP

Statutory Auditor

London, UK

29 September 2020

Condensed Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Financial Position

Condensed Consolidated Statement of Changes in Equity

Condensed Consolidated Cash Flow Statement

Notes to the Interim Financial Report

1. Basis of preparation

The condensed interim financial report of Distribution Finance Capital Holdings plc (the "Company" or "DFCH plc") include the assets, liabilities and results of its wholly owned subsidiary, Distribution Finance Capital Ltd ("DFC Ltd"), together form the "Group".

DFCH plc is a public limited company registered and incorporated in England and Wales whose company registration number is 11911574. The registered office is 196 Deansgate, Manchester, M3 3WF. The Company's ordinary shares are listed on the Alternative Investment Market (AIM) of the London Stock Exchange.

The principal activity of the Company is that of an investment holding company. The principal activity of the Group is the provision of niche commercial lending activities including short-term financing to dealers.

The interim report is presented in pounds sterling, which is the currency of the primary economic environment in which the Group operates, and are rounded to the nearest thousand pounds, unless stated otherwise.

1.2 Basis of accounting

The condensed consolidated set of financial statements included in this Interim Financial Report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' ('IAS 34'), as adopted by the European Union and the Interim Financial Report has been prepared in accordance with the Disclosure and Transparency Rules ('DTR') of the Financial Conduct Authority.

The condensed set of financial statements included within this interim financial report for the six months ended 30 June 2020 should be read in conjunction with the annual audited financial statements of Distribution Finance Capital Holdings plc for the year ended 31 December 2019.

The annual financial statements of Distribution Finance Capital Holdings plc are prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union.

The statutory financial statements of Distribution Finance Capital Holdings plc for the year ended 31 December 2019 have been reported on by the Company's auditors, Deloitte LLP, and have been delivered to the Registrar of Companies. The report of the auditors on those financial statements was unqualified, however the report of the auditors did indicate that a material uncertainty existed that may cast significant doubt on the Group's and the Company's ability to continue as a going concern. The audit opinion was not modified in respect of this matter. 

The condensed consolidated financial information for the six months ended 30 June 2020 has been prepared using accounting policies consistent with IFRS. The interim information does not constitute statutory financial statements within the meaning of section 434 of the Companies Act 2006. The financial information for the periods ending 30 June 2020 and 30 June 2019 are unaudited but has been reviewed by the Company's auditor, Deloitte LLP, and their report appears on page 10 of this interim financial report. The results for the period ended 31 December 2019 are audited.

1.3 Principal accounting policies

The principal accounting policies adopted in the preparation of this financial information are set out below. These policies have been applied consistently to all the financial periods presented.

1.4 Going concern

The Directors have assessed the likelihood the Group will be able to meet its debts as they fall due for the foreseeable future, being a period at least twelve months after the date of approval of the Interim Financial Statements, including the impact that the COVID-19 pandemic has had on the UK economy and, therefore, the Group.

We were informed of the regulators' decision to grant a bank licence without restrictions on 29 September 2020. This will give access to retail deposit funding that is expected to become the primary source of funding for the Group going forwards. 

COVID-19 impacted the Group's borrowers through the extended period of lockdown, with dealers substantively closed, their retail sales slowed, and stock turning at a slower pace than we would normally expect, which impacted repayment of the Group's loans. As restrictions were eased and dealers reopened, our customers started to see retail sales improve on an increasing basis, which in turn saw many loans repaid in full, given our lending product is predominantly repaid as assets are sold, reducing the value of our loan book to £90m as at 28 September 2020. 

Additionally, as a reaction to the public health crisis, the Group's lenders tightened their own credit appetite, which has seen the Group's ability to transact new lending significantly curtailed and cash flow from the lending facility to the Group has also been constrained. This has also been a factor in the reduction of the loan book, particularly over the past few weeks as our manufacturer partners have stabilised their supply chains and new assets are starting to flow more freely to dealers. We are currently in discussion with our wholesale lenders to extend the current waiver which ends on 30 September 2020. It is expected transitional funding arrangements will be agreed with the lenders in the coming weeks as the Group moves towards retail deposit raising as its primary funding source. The facility has an expiry date of 12 December 2020, at which time there would be no new loan origination supported by the facility. 

In August 2020 we successfully rescheduled the £8.9m plus interest bullet loan repayment originally due to TruFin plc in December 2020. The rescheduling of this final loan repayment allows the Group, should the outstanding loan balance not be repaid in full on 1 January 2021, to make phased payments from 1st January 2021 over nine equal monthly interest-bearing instalments.

We have also made further progress with the British Business Bank in moving our ENABLE funding application forward, as a core component of a diversified funding strategy.

In light of these points, prior to confirmation of the granting of the bank licence, the Group has performed analysis to assess the Group's resilience during an extended period of stress, assessing both capital and liquidity resilience in challenging circumstances, while also considering appropriate and reasonable management actions. This approach to analysis is in line with common practices for banks in assessing the impact of stress on the firm's business plan. In performing this stress analysis, the Directors have also assessed the going concern of the Group, by considering the wide range of information, the funding strategy, dealers facing potential further lockdown and slower loan repayments during that period, potential insolvencies and significantly elevated losses running at 4x the 2019 loss rate, whilst also taking in to account the strong security position of the lending product (c.63% of retail sales value) and the strong capital position of the Group which is currently funding in excess of 50% of the loan book. As part of our assessment, as a severe stress, the Group confirmed that it could continue as a going concern for at least 12 months from the reporting date without consideration of funding from deposits or agreement of alternative funding following the expiration of the current facility.

The Directors believe, on the basis of this information and management's analysis, that the assumptions used are plausible and present a significant downside scenario. Having regard for the financial outcomes from this scenario, alongside the success of the actions laid out previously, the Board concluded that the Group will have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Directors have adopted the going concern basis in preparing the Interim Financial statements.

1.5 Critical accounting estimates and judgements

In accordance with IFRS accounting standards, the Directors of the Group are required to make judgements, estimates and assumptions in certain subjective areas whilst preparing these financial statements. The application of these accounting policies may impact the reported amounts of assets, liabilities, income and expenses and actual results may differ from these estimates.

Any estimates and underlying assumptions used within the statutory financial statements are reviewed on an ongoing basis, with revisions recognised in the period in which they are adjusted, and any future periods affected.

Further details can be found in note 3 of these financial statements on the critical accounting estimates and judgements used within these financial statements.

1.6 Foreign currencies

The financial statements are expressed in Pounds Sterling, which is the functional and presentational currency of the Group.

Transactions in foreign currencies are translated to the Group's functional currency at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign exchange differences arising on translation are recognised in the statement of income.

1.7 New accounting standards issued but not yet effective

The Group assesses on an ongoing basis the impact of new accounting standards which are not yet effective at the reporting date and the likely impact of the new accounting standard on the financial statements. At 30 June 2020, the Group has applied all new IFRS standards and foresees no additional standards with a likely material impact to consider at this time.

2. Summary of significant accounting policies

The same accounting policies, presentation and methods of computation are followed in the condensed consolidated set of financial statements as applied in the Company's latest annual audited financial statements for the year ended 31 December 2019, with the exception of share-based payments accounting policies. Furthermore, any adoption of new and amended standards are also set out below.

The preparation of interim condensed consolidated financial statements in compliance with IAS 34 requires the use of certain critical accounting judgements and key sources of estimation uncertainty. It also requires the exercise of judgement in applying the Group's accounting policies. There have been no material revisions to the nature and the assumptions used in estimating amounts reported in the annual audited financial statements of DFCH plc for the year ended 31 December 2019.

2.1 Share-based payments

The Group has introduced a number of long term incentive share schemes for all employees, including some Directors, whereby they have been granted equity-settled share-based payments in the Group. The share schemes all have vesting conditions with some schemes for senior management being subject to specific performance conditions which, in line with guidance from the Investment Association, shall be determined by the remuneration committee within six months of the date of grant. All share schemes are equity settled share-based payments.

The fair value of equity settled share-based payment awards are calculated at grant date and recognised over the period in which the employees become unconditionally entitled to the awards (the vesting period). The amount is recognised as staff costs in the income statement, with a corresponding increase in equity through the retained earnings account. The amount recognised as an expense is adjusted to reflect differences between expected and actual outcomes, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and specific performance conditions at the vesting date.

See note 9 for further details on the share schemes.

2.2 Own shares

Own equity instruments of the Group which are acquired by it or by any of its subsidiaries (treasury shares) are deducted from equity. Consideration paid or received on the purchase, sale, issue or cancellation of the Group's own equity instruments is recognised directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of own equity instruments.

3. Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial information in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expenses.

The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The judgements and estimates that have a significant effect on the amounts recognised in the historical financial information are noted below.

3.1 Critical accounting judgements

The Board Audit Committee assessed and reviewed the critical accounting judgement in respect of the recognition of transferred assets.

Loan derecognition

DFC Ltd has a funding arrangement in place whereby the majority of the loans advanced to customers are sold to a special purpose vehicle, namely DFC Funding No1 Limited. As part of this transaction DFC Funding No1 entered into an agreement with an expiry date to December 2019 with Senior and Senior Mezzanine funders, secured on this floating pool of underlying assets sold by the Group. This facility was subsequently extended to December 2020. On the basis the Group retains substantially all the risks and rewards of ownership of these transferred financial assets, the Group is satisfied the loans advanced do not meet the criteria for derecognition under IFRS 9 so continues to recognise the financial assets and also recognised a collateralised borrowing for the proceeds received.

3.2 Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period, that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below:

3.2.1 Expected Credit Losses (ECL) loan impairment

Impairment model assumptions

See the Group's Annual Report for the year ended 31 December 2019 which outlines the assumptions the Group includes to best estimate the probability of default ("PD"), exposure at default ("EAD"); and loss given default ("LGD") inputs within the impairment model in order to calculate the expected credit loss ("ECL"). The general design of the model remains unchanged for the period ended 30 June 2020 but the key area of estimates was therefore the calibration.

COVID-19

The Company was incorporated in 2019 and its subsidiary, DFC Ltd, began originating loans to customers in early 2017. Consequently, the Group has not experienced an economic decline of this nature before so has limited historical data to effectively forecast the impact of COVID-19 on impairment losses. The Group at the time of approving this interim report has incurred minimal realised losses to date and has not seen a material rise in loan receivable balances in default. Regardless, the Group is acutely aware of the potential impact on our business so is continuously monitoring the impact of the pandemic on the UK economy and its customer base whereby updating its loan impairment allowances, as necessary. At the moment, these estimates are higher than we saw from actuals during the period ended 30 June 2020 but we believe it is consistent with the broader economic indicators. As we go forward, we will review these estimates taking into account actuals and updated forecasts and would expect the two to align as the economy stabilises at a particular level.

Probability of Default ("PD")

The Group has incorporated the results of a research publication on the impact of COVID-19 on UK credit risk, which was conducted by a leading credit rating agency. The Group has applied these empirical findings, alongside its own internal expectation, to estimate the impact of COVID-19 on its PD assumptions.

Loss Given Default ("LGD")

The Group has assessed the impact of COVID-19 on LGD by stressing two main parameters within the calculation; the expected cashflows on the collateral held by the Group and the discounting factor of these expected cashflows. Firstly, the Group has applied haircuts to the underlying collateral values in order to recognise in the current macro-economic environment the value of the underlying assets funded may have dropped in value since before the pandemic. Furthermore, the Group has adjusted its discounting of these cashflows as it will likely take longer to recover these cashflows in the event of default in the current environment. The Group has also considered the impact upon the applicable effective interest rate (EIR) through the discount factor but this is considered to not be material.

The Group has assessed that if the LGD further increased by a factor of 4, this would generate an additional impairment allowance of approximately £2,600,000 at 30 June 2020 (30 June 2019: £750,000; 31 December 2019: £1,400,000), which would increase the loss allowance coverage to 2.87% from 1.31%.

Economic Stress Scenarios

The Group considers four economic stress scenarios within its impairment modelling whereby the Group stresses PD and LGD inputs in accordance with expected macro-economic outlooks. This provides an ECL impairment allowance for each scenario which is multiplied by the likelihood of occurrence over the next 12-month period from the balance sheet date to give a probability weighted ECL. As part of the model update, we have changed the probability weighting to take into account our latest forecasts for the likelihood of these different scenarios occurring.

The material impact of COVID-19 on the economic outlook has prompted the Group to revise its scenarios for 30 June 2020 from the scenarios followed at 31 December 2019. See below for the updated economic stress scenarios:

In the event one of the above scenarios occurs and applied a 100% probability weighting the impact on the impairment allowances would be as follows:

Impact on COVID-19 on net income

Extending additional support to our customers through COVID-19 has been a priority for the Group. Since the majority of dealers were closed during the COVID-19 lockdown their ability to sell assets and accordingly repay the Group on contractual due dates was constrained. The repayment of our loan principal is predominantly on the basis of assets being sold by the dealer. In light of significantly reduced forecourt footfall and reduced sales, during the six month period ended 30 June 2020, we have supported c.35% of our dealers, who passed particular credit risk checks, by temporarily deferring the repayment of loan principal. During any period of deferral, interest and fees have continued to be charged and accordingly paid by the dealers. This deferral did not therefore materially impact net income.

In addition to principal payment deferrals the Group has also waived monthly facility fees for all customers since March 2020. 

4. Operating segments

IFRS 8: Operating Segments requires particular classes of entities (essentially those with publicly traded securities) to disclose information about their operating segments, products and services, the geographical areas in which they operate, and their major customers. Information is based on the Group's internal management reports, both in the identification of operating segments and measurement of disclosed segment information.

It is the Director's view that the Group's products and the markets to which they are offered are so similar in nature that they are reported as one class of business. All customers are currently UK-based only. As a result, it is considered that the chief operating decision maker uses only one segment to control resources and assess the performance of the entity, while deciding the strategic direction of the Group.

5. Interest and similar income

6. Fee income

7. Other gains and losses

In the six month period ended 30 June 2020 the Group announced the closure of its London Headquarters office transferring the headquarters to its Manchester office location. The Group was previously recognising a lease liability for the London office lease up to the contractual end date in April 2023. The Company decided in May 2020 to trigger a break clause in the leasing contract which enables the Company to terminate the agreement in October 2020. The Group has reduced the corresponding right-of-use asset and lease liability in proportion to the reduction in lease term, recognising the difference as a loss on lease modification in accordance with IFRS 16.

8. Staff costs

Contractor costs are recognised within personnel costs where the work performed would otherwise have been performed by employees. Contractor costs arising from the performance of other services is included within other operating expenses.

Refer to note 9 for further details on the share option schemes introduced by the Group in the six month period ended 30 June 2020.

9. Share-based payments

Summary of long term incentive schemes granted in current period:

All employee awards were granted at the same date in June 2020 and all awards are equity-settled. The shares awarded for all schemes are Distribution Finance Capital Holdings plc which are listed on the Alternative Investment Market (AIM). The grant price is recorded at the AIM closing market price on the date the awards were granted to employees. The awards were granted to employees and Directors within the Group with the majority of the employees being employed by DFC Ltd.

All share options issued by the Group, as detailed above, were issued in the six month period ended 30 June 2020. During the six month period ended 30 June 2020, none of the share options were exercised, expired or forfeited. The Group did not have any share options prior to this period. Given all the above share options were granted on the same date in June 2020, the weighted average grant price is 37.50 pence.

The terms of the individual schemes are as follows:

General Award

Nil cost options over ordinary shares of £0.01 each of the current share capital of the Company were granted to all employees. These options vest over a three year period and are not subject to specific performance conditions.

Recruitment Award

Carl D'Ammassa has been granted nil-cost options over 900,000 ordinary shares of £0.01 each of the current share capital of the Company. This grant was made in connection with his recruitment as Chief Executive Officer. These options will be subject to vesting over a three year period and will be subject to specific performance conditions which, in line with guidance from the Investment Association, shall be determined by the remuneration committee within six months of the date of grant.

Senior Manager Award

Nil cost options over ordinary shares of £0.01 each of the current share capital of the Company were granted to certain senior managers. This grant has been made as an ordinary course award under the terms of the PSP. These options will be subject to vesting over a three year period and will be subject to specific performance conditions which, in line with guidance from the Investment Association, shall be determined by the remuneration committee within six months of the date of grant.

10. Provisions

Analysis for movements in other provisions:

Social Security Payments

The consultancy fee payments tax liability relates to the recognition of a tax liability in relation to PAYE and national insurance contributions that should have been deducted relating to consultancy fees paid. This has been notified to HMRC and the Group is awaiting confirmation of the agreed settlement amount.

Severance Payments

In the six months ended 30 June 2020, the Group made additional severance payments of £193,000. The Group expects to settle this obligation in full by October 2020.

Leasehold Dilapidations

Following the closure of the London office the Group has reduced the expected leasehold dilapidation provision by £3,000. This has been recognised in accordance with IFRS 16 and has concurrently reduced the corresponding right-of-use asset. The Group expects to incur £30,000 of dilapidations in October 2020 when the Group exits the London office. The residual £58,000 is expected to be settled in July 2023.

11. Net impairment loss on financial assets

See note 13 on further analysis of the movement in impairment allowances on loans and advances to customers.

12. Taxation

Analysis of tax charge recognised in the period:

Taxation is calculated using the UK corporation tax rate of 19% (2018: 19%) of the estimated taxable profit for the year.

Expenses that are not deductible in determining taxable profits/losses include impairment losses, amortisation of intangible assets, depreciation of fixed assets, client and staff entertainment costs, and professional fees which are capital in nature.

The corporation tax main rate has been confirmed for the years starting 1 April 2017, 2018 and 2019. In the summer 2015 Budget, the government announced plans to reduce the main rate to 18% for the year starting 1 April 2020 and a further reduction to 17% for year starting 1 April 2020. In the 2020 Budget, the government announced that the Corporation Tax main rate for the years starting 1 April 2020 and 2021 would not reduce to 18% and 17% respectively but instead remain at 19% for both periods.

A deferred tax asset is only recognised to the extent the Group finds it probable that future taxable profits will be available against which to be utilised against prior taxable losses. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. The Group has not recognised a deferred tax asset in any period given it does not anticipate to generate taxable profits in the 12-month period following the balance sheet date which can be offset against unused taxable losses. As at 30 June 2020, the Group has estimated £4.9 million (31 December 2019: £3.55 million) of unused tax credits for which a deferred tax asset has not been recognised against.

13. Loans and advances to customers

Refer to note 11 for further details on the impairment losses recognised in the periods.

Ageing analysis of gross loan receivables:

Analysis of gross loan receivables in accordance with impairment losses:

Analysis of impairment losses on loans and advances to customers:

*In light of the COVID-19 pandemic the Group has amended a number of the assumptions for calculating the expected credit losses impairment. Refer to note 3.2 for further details of these changes to the IFRS 9 impairment model. These changes have not impacted to the allocation of loan receivables between different stages but have increased the impairment allowance balances held to reflect the impact of COVID-19 on the UK economy and Group's customer base.

14. Trade and other receivables