30 Apr 2018 07:00
ANNUAL FINANCIAL REPORT ANNOUNCEMENT
(Registered No. 09510201)
RANGER DIRECT LENDING FUND PLC
For the year ended 31 December 2017
Ranger Direct Lending Fund Plc (the "Company") announces that it has published its Annual Report and Accounts 2017. Copies of the Annual Report and Accounts 2017 and the Notice of the 2018 Annual General Meeting are available to view on the Company's website at http://www.rangerdirectlending.uk/ . They have also been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/NSM.
The financial information set out below does not constitute the Company's statutory accounts for the year ended 31 December 2017 but is derived from those accounts.
Copies of those documents, together with a form of proxy for use in connection with the 2018 Annual General Meeting, will be posted or made available to the Company's shareholders shortly.
The Company also announces that it will hold its Annual General Meeting at 3.00 pm on 19 June 2018 at Travers Smith LLP, 10 Snow Hill, London, EC1A 2AL.
Financial Performance at a Glance
Highlights | Ordinary Shares | |
31 Dec 2017 | 31 Dec 2016 | |
Net Asset Value1 (Cum Income) per share | GBP 9.903/USD 13.38 | GBP 12.203/USD 15.05 |
Net Asset Value2 (Ex Income) per share | GBP 10.193/USD 13.79 | GBP 12.213/USD 15.07 |
Total dividends per share | 101.76 pence | 89.61 pence |
Share Price4 | GBP 7.193/USD 9.72 | GBP 10.553/USD 13.02 |
Actual annualised return on the principal amount invested5 | (2.95)% |
5.53%
535336% |
% of Capital deployed5 | 95.5% | 98.3%7 |
The Company's market capitalisation as at 31 December 2017 was USD 156,775,447 (GBP 115,923,874 based on a Share Price of GBP 7.19 and based on 16,122,931 outstanding Ordinary Shares).
The Group's total comprehensive loss for the year ended 31st December 2017 amounted to USD 6,614,025 (31 December 2016: USD12,414,520 income)
Further details of the Group's performance for the year are included in the Investment Manager's Report on below which includes a review of the investment activity, impact of applicable regulations and adherence to investment restrictions.
1 Net Asset Value ("NAV") (cum income) includes all current year income, less the value of any dividends paid in respect of the period together with the value of the dividends which have been declared and marked ex-dividend but not yet paid, see below.
2 Net Asset Value (ex income) is the Net Asset Value cum/income excluding net current year income.
3 Translated at USD to GBP foreign exchange rate of 1.3524 (2016: 1.2340).
4 Share price taken from Bloomberg Professional.
5 Capital deployed amount used is the net proceeds from IPO, tap issue and C shares (from date of issue during the year).6 Annualised return based on monthly performances shown below.7 Before impairment of the Company's investment in Princeton. Capital deployed after impairment was 94.4%.
CHAIRMAN'S STATEMENT
2017 was a disappointing and frustrating year for the Company. Total NAV returns fell by 2.95% in US dollar terms, but continuing uncertainty over the Princeton investment was reflected in a sharp decline in the share price, which fell by 31.8% in sterling terms, widening the share price discount to NAV from 13.6% to 29.4%. However, aside from Princeton, portfolio performance was largely within expectations, confirming the assumptions made at the time of the Company's IPO, to the extent that the dividends paid increased from 89.61p in 2016 to 101.76p in 2017.
Nevertheless, the share price performance and the wide discount are indicative of a loss of confidence on the part of many Shareholders and the Board's immediate focus has, and continues to be, on three areas: a resolution of the Princeton issues, an independent confirmation of the Company's NAV aside from Princeton and ensuring the appropriate management arrangements are in place for the Company to recover and grow.
Princeton
The lack of detailed information on the investments underlying the Company's holding in Princeton Alternative Income, LP ("Princeton") meant that last year's financial statements were qualified in respect of this holding. Further efforts to clarify the value of these assets and to agree a redemption timetable proved fruitless and consequently the Company filed for arbitration in June 2017. As envisaged in my interim report last September, these hearings began in November, but extended into January and then March 2018. As the arbitration proceedings were drawing to a close, Princeton, and its general partner, Princeton Alternative Funding LLC (the "General Partner") filed for Chapter 11 bankruptcy. The bankruptcy hearings began in April and, through its representatives, the Company has been actively participating in the bankruptcy cases with a particular focus, to the extent possible in the circumstances, on seeking to protect its invested capital. One of the motions Ranger filed was a motion to instruct Princeton and its auditors to respond to the Company's information requests and on 13 April 2018 this motion was granted by the bankruptcy court. Despite this order, Princeton and its associates have not yet given the Company or our external auditors access to this information and therefore, regrettably, these financial statements have been qualified on the same basis as last year's. However, it is expected that Ranger will be able to examine the relevant documents in the next few weeks and any new information relating to the valuation of the Princeton assets will be released to the market as soon as possible. A further summary of this process and its implications is set out in the Investment Manager's report, but our priority remains to protect the Company's capital investment to the extent possible and eventually realise this investment.
The Company's holding in Princeton is valued at USD 29.3m as at 31 December 2017, following two write downs in 2017. The first, of USD 10.4m, was reported by Princeton themselves in November 2017, but the second, of USD 9.1m, was taken by the Company following a review of information provided during the arbitration process. Initial asset statements provided by Princeton to the bankruptcy court have been consistent with this valuation, but lack sufficient detail to confirm it.
Further details on the Princeton proceedings are set out in the Investment Manager's Report.
Management
The Princeton experience prompted extensive discussions between the Board and the Investment Manager to review diligence processes across the whole portfolio and to examine what lessons, if any, could be learned. It was clear from these meetings that the principal issues with Princeton were specific to that investment and related to Princeton's failure to respect the terms of the Company's investment. However, it was felt that the size this investment reflected an over-concentration within the portfolio on a limited number of platforms and that over time there was a need to increase the diversification of return streams. This resulted in the June 2017 announcement to revise the investment guidelines to reduce the maximum exposure to any single platform and to unsecured loans. It also provoked further debate about the depth of the management team required to handle the growth of a more diverse portfolio, potentially involving new lending categories as well as new platforms.
As a result, discussions began between the Board and Investment Manager and third parties to consider potential co-management arrangements. These discussions were announced to the market on 1 November 2017, at which time no agreement had been reached.
In January 2018, following discussions with Shareholders, the Board appointed independent external advisers and initiated a formal process to resolve the management arrangements for the Company beyond May 2018. This process has been directed by the Management Engagement Committee of the Board, which comprises the Company's three independent Directors and it is intended that the results of this process and detailed proposals setting out revised management arrangements for the Company will be announced to Shareholders by early May.
Valuation
The extent of the share price discount to NAV suggests that Shareholders are sceptical about the valuation of the portfolio, even allowing for Princeton. Therefore, in January the Board, in conjunction with the Investment Manager, engaged an independent valuation firm to evaluate the portfolio (excluding Princeton) as at the end of 2017.
A copy of the report from the third party valuation firm has now been delivered to the Company's Board and Investment Manager.
Following its review of the report, the Company, in consultation with its advisers, has made no changes in the valuation of the portion of the portfolio reviewed as compared to the valuation used as at 31 December 2017 for the purposes of calculating the audited NAV as at that date.
Outlook
The Board hopes that during the second half of 2018 we will see a resolution of the long running Princeton saga. By then we will also have recommended to Shareholders a well-resourced management structure that will be well placed to take advantage of the continuing opportunities in direct lending.
I believe we are now approaching the end of a very difficult period for the Company and I would like to thank the investment management team for their perseverance and professionalism over the last year.
Christopher WaldronChairman30 April 2018
INVESTMENT MANAGER'S REPORT
The Investment Manager continues to believe that there are attractive, high yield opportunities which can be accessed by providing funding through established Direct Lending Platforms in categories such as real estate, small/medium business enterprise (SME) lending, specialty finance, and trade receivables.
The Investment Manager continues to identify, negotiate, undertake due diligence, and invest with multiple direct lenders, subject to the overall supervision of the Board. The Board and the Investment Manager hold regular meetings to discuss the pipeline of potential investments and the typical term and return profile of such investments.
To mitigate risk, the Investment Manager has sought to diversified investments across multiple Direct Lending Platforms and continues to invest the Company's assets in a range of lending categories, industries, geographic areas, durations and funding structures.
As at 31 December 2017, all proceeds originating from the Company's IPO in May 2015, the tap issue completed in December 2015, both ZDP offerings, and the Open Offer and Initial Placing of C Shares in December 2016 (converted into Ordinary Shares in April 2017) remain deployed, less an amount for general fund operations and foreign exchange settlements. With the leverage provided by the ZDP shares, gearing is at 35.3% as at 31 December 2017.
At the time of acquisition of any investment that is non-USD denominated, it is hedged to USD to mitigate against currency fluctuations. Additionally, expected income on those investments is typically hedged for three months into the future.
The intra-group loan made to the Company by ZDPco is denominated in (and must be repaid in) GBP. In addition, the Company has undertaken to subscribe for such number of ordinary shares in the capital of ZDPco (which are also denominated in GBP) as is necessary to enable ZDPco to pay the holders of ZDP Shares their final capital entitlement on the ZDP Repayment Date of 31 July 2021. Any of those funds converted to USD or other currencies are hedged to GBP as well as the respective accrued interest owed on those amounts.
Company Portfolio
In 2017 the Company continued to invest through several Direct Lending Platforms in the US, UK, Australia, and Canada, focused primarily on secured Debt Instruments. While the Company has successfully invested in thirteen platforms since inception, investments with seven of those platforms are being liquidated due to performance issues, lack of material investment capacity, or other reasons. The remaining six platforms are currently providing sufficient capacity and diversity for reinvestment of principal proceeds from the portfolio.
During 2017, in addition to the impact to the Fund's performance from the Princeton Alternative Income Fund (as described in the Princeton section below), some performance issues were experienced with three platforms causing a material impact to the Company's performance especially during the fourth quarter of 2017. Hurricanes Irma and Harvey in August and September 2017 also affected some platform returns.
A summary of the material adjustments to loss reserves that were made during the year are summarised below.
• The Third SME Loans Platform that provides short-duration business cash advances - Overall loss rates have been trending higher than the loss rates initially provided by the platform at the time of loans purchase, partly due the hurricanes in Texas and Florida. As a result, an increase in loss reserves of USD 1.6 million was made in October 2017. This platform was acquired by a large international payment processor in 2017, and the Company expects a majority of the portfolio to self-liquidate by the end of Q3 2018.
• The Consumer Loans Platform - While no new loan purchases have been made since March 2017, loans in the portfolio have been trending to lower rates of return. Loss reserves were increased by USD 2.4 million in October 2017 to cover higher than existing losses in 2017 and expected losses on the remaining portfolio.
• The Second Consumer Loan Platform - No new loan purchases have been made since August 2016, but existing loans have continued to underperform. Loss reserves were increased by USD 0.6 million in October 2017 to cover higher than expected losses. No further adjustments are expected, since there is evidence that the peak of the loss curve occurred in 2017. Accordingly, there have been fewer write-offs in the last few months.
In addition to the debt instruments issued by the three platforms that are being liquidated, the other platforms where the Company's investments are currently in the process of realisation without further investment are: (i) Princeton (further details on which are set out below); (ii) The Equipment Loans Platform in which the Company permanently suspended investments at the start of 2016; (iii) and The Invoice Factoring Platform had insufficient capacity. The Secured Medical Loans Platform is temporarily suspended while the platform updates its loan agreements.
The Company has invested in eight categories and seventeen sub-categories of Debt Instruments spanning the thirteen different Direct Lending Platforms. As noted above, this diverse mix of investment types is intended to mitigate risk. At 31 December 2017, 83% of the portfolio was invested in secured Debt Instruments (including loans, cash advances, and receivables financing) to mainly SME borrowers, and 17% of the portfolio consisted of unsecured consumer loans. For this purpose, a secured Debt Instrument is defined by the Company as a payment obligation in which property, revenue (including receivables), or a payment guaranty has been pledged, mortgaged or sold to the Company as partial or full security with respect to such obligation.
The Company will continue to comply with its investment restrictions set out in investment policy, together with the subsequent directions issued by the Board which have previously been announced, and which apply at the time of investment when making further investments in Debt Instruments (whether directly or indirectly).
In addition to investing in Debt Instruments, the Company may also invest up to 10% of gross assets in the equity of Direct Lending Platforms and/or organizations serving the direct lending industry. As at 31 December 2017, one such equity investment had been made for USD 300,000 in June 2017.
IFRS 9 requires companies to make provisions based on future expected losses across their entire loan portfolio. Given the methodology the Company has applied in the past when interpreting IAS 39, the preliminary calculations as performed and reviewed by the Investment Manager and Fund Administrator implementing the new IFRS 9 standards show that any impact of the new standard will be immaterial for the Company.
Independent valuation of the portfolio
As previously announced by the Company on 29 January 2018, an independent valuation firm was retained to perform valuation consulting services on the Company's portfolio (excluding the investment in Princeton owing to a lack of available information in respect of that investment and well as other de minimis investments) as of 31 December 2017, which consisted of certain limited procedures that the Company identified and requested the independent valuation firm to perform.*
A copy of the report from the independent valuation firm has now been delivered to the Company's Board and Investment Manager.
The Company is ultimately and solely responsible for determining fair value of the investments in good faith, and following its review of the report, the Company, in its sole determination, following consultation with its advisers, has not made any amendment to the values of the portion of the portfolio reviewed as compared to the values used as at 31 December 2017 for the purposes of calculating the unaudited net asset value as at that date.
Princeton - Arbitration and bankruptcy proceedings
The Company announced on 12 March 2018 that Princeton and its General Partner filed voluntary chapter 11 bankrupcty petitions on 9 March 2018 in the United States Bankruptcy Court for the District of New Jersey. These filings had the effect of staying this first phase of the arbitration as against Princeton and its General Partner and also stopping the ruling on the segregation order being delivered.
Through its legal representatives, the Company has been actively participating in the bankruptcy cases with a particular focus on (to the extent possible in the circumstances) seeking to protect its capital invested.
* The identification of limited procedures on the appointment of an independent valuer is customary for such an appointment.
The bankruptcy court has now ruled that most of the pending counts in the arbitration proceedings, which were substantially completed at the time Princeton and the General Partner filed for bankruptcy, may be completed. After the arbitration proceedings are completed, the Company has a number of legal options, including seeking further relief from the Bankruptcy Court while the actual dates for the continued arbitration proceeding have not yet ben set, the Company will seek the earliest dates available to resume the arbitration proceedings once the Bankruptcy Court has issued its written orders on these matters.
The Company views this as a positive development and, once the arbitration panel has delivered its findings, will continue to seek relief in the Bankruptcy Court, including its pending request before the court for the appointment of an independent trustee to assume management and control of Princeton (including giving effect to the information and redemption notices previously served).
As previously reported, the arbitration process includes a second phase consisting of claims against various individuals and entities (including MicroBilt Corporation) who, as specified in the claims, are alleged to have controlled the Princeton funds, and to have acted improperly in connection with its activities, or improperly benefitted from misconduct. The Company intends to proceed with the second phase claims against the individuals and entities that are not subject to the bankruptcy stay. These claims continue to be conducted by the Company's attorneys on a contingency basis.
Princeton portfolio update
As previously disclosed by the Company, Princeton had provided a credit line to Argon Credit, LLC and Argon X, LLC (together "Argon") who used the proceeds to fund underlying consumer loans (which were included in the collateral for the credit line). Following the bankruptcy of Argon, Princeton took control of the Argon collateral and has been conducting loan servicing. Other than investor statements, Princeton has provided only limited information typically via their legal counsel. Consequently, the current status of the remaining investments that Princeton has made is unknown, but may be revealed during the Princeton bankruptcy proceedings.
The following summarises the financial events with Princeton through to December 2017.
• Original Investment in Princeton: USD 55,100,000.
• Reduction in capital due to impairment and reversal of incentive fees taken by Princeton in 2016: USD 8,856,612.
• Reduction in capital due to net loss, including impairment and reversal of Princeton incentive fees, taken by Princeton in October 2017: USD 7,912,687.
• Argon side pocket amount as reported by Princeton totals USD 12,724,515 as at 31 December 2017.
• Additional Argon impairment and reserve taken by the Investment Manager in October 2017 of USD 9,050,000.
• Argon net capital value attributed in Company accounts: USD 3,674,515.
• Additional Loss Reserves taken by the Investment Manager: USD 718,017 (all income equal to USD 386,941 reported by Princeton for November 2017 - being applied to loss reserves and USD 336,076 equal to the amount of normal loss reserves through October 2017).
• Remaining Princeton non-Argon estimated net capital value as reported by Princeton: USD 26,364,674.
• Net capital value per Company's records: USD 29,321,172.
The Board and the Investment Manager continue to monitor developments with Princeton. Further announcements will be made in due course where there are any relevant updates for Shareholders.
Allocation | |||
Sector | 31 Dec 2017 | 31 Dec 2016 | Change |
Platform Debt | 20% | 13% | 54% |
Commercial Real Estate Loans | 18% | 8% | 125% |
Business Loans/Merchant Cash Advances | 18% | 17% | 6% |
Consumer Loans | 17% | 28% | -39% |
Business Letter of Credit | 9% | 16% | -44% |
Multi-family Real Estate Loans | 9% | 6% | 50% |
Mixed-use Real Estate Loans | 5% | 5% | 0% |
Residential Real Estate Loans | 2% | 5% | -60% |
Factoring | 1% | 1% | 0% |
Equipment Loans | 1% | 1% | 0% |
Total (excluding cash and cash equivalents) | 100% | 100% | 0% |
Type | 31 Dec 2017 | 31 Dec 2016 | |
Secured | 83% | 82% | |
Unsecured | 17% | 18% | |
Ongoing Charges Information8
2017 | 2016 | |||||||||||||
Annualised ongoing charges9 | 2.07% | 1.81% | ||||||||||||
Performance fee10 | 0.01% | 0.60% | ||||||||||||
Annualised ongoing charges plus performance fee | 2.08% | 2.40% | ||||||||||||
Jan-17 | Feb-17 | Mar-17 | Apr-17 | May-17 | Jun-17 | Jul-17 | Aug-17 | Sep-17 | Oct-17 | Nov-17 | Dec-17 |
| ||
NAV per share (cum income - GBP | 12.62 | 12.5 | 12 | 11.7 | 11.83 | 11.5 | 11.4 | 11.46 | 11.05 | 10.23 | 9.86 | 9.9 |
| |
Top Ten Positions
(Shown as aggregate Debt Investments acquired from individual Direct Lending Platform)
Investment/Direct Lending Platform | Country | Principal Activity | Net Asset Value | % of Net Asset Value |
31 Dec 2017 | 31 Dec 2017 | |||
Real Estate Loans Platform | United States | Bridge loans to real estate developers | 71,848,345 | 33.30% |
SME Loans Platform | United States | Loans/advances to small/medium size businesses | 55,914,446 | 25.92% |
Consumer Loans Platform | United States | Loans to consumers with improving credit | 37,789,106 | 17.51% |
SME Credit Line Platform (Princeton) | United States | Credit lines to finance companies | 29,321,483 | 13.59% |
Vehicle Services Contract Platform | United States | Vehicle service contract financing | 22,203,907 | 10.29% |
International MCA Platform | United Kingdom | Loans/advances to small/medium size businesses | 19,038,004 | 8.82% |
International SME Lending Platform | Canada | Loans to businesses with government grants | 15,919,670 | 7.38% |
International MCA Platform | Australia | Loans/advances to small/medium size businesses | 15,835,667 | 7.34% |
MCA Platform | United States | Loans/advances to small/medium size businesses | 3,853,551 | 1.79% |
Second Consumer Loans Platform | United States | Loans to general consumers | 3,277,167 | 1.52% |
275,001,346 | 127.46% |
8 Ongoing charges are set out as a percentage of annualised ongoing charge over average reported Net Asset Value.
9 Ongoing charges are those expenses of a type which are likely to recur in the foreseeable future. The annualised ongoing charge is calculated using the Association of Investment Companies recommended methodology.10 Performance fee is calculated based on the terms of the Investment Management Agreement. Further information is provided in note 17 of the Notes to the Consolidated Financial Statements.
The following disclosures are extracted from the Group Strategic Report of the Annual Report and are repeated here solely for the purpose of complying with DTR 6.3.5.
Principal Risks and Internal Control
There are a number of potential risks and uncertainties which could have a material impact on the Group's performance and could cause actual results to differ materially from expected and historical results.
The Board of Directors has overall responsibility for risk management and internal control within the context of achieving the Company's objectives. The Board agrees the strategy for the Company, approves the Company's risk appetite and monitors the risk profile of the Company. The Company also maintains a risk register for its stress test to identify, monitor and control risk concentration.
The Company established a risk map during the IPO process, consisting of the key risks and controls in place to mitigate those risks. The risk map, which is reassessed at each Audit Committee meeting, provides a basis for the Audit Committee and the Board to regularly monitor the effective operation of the controls and to update the matrix when new risks are identified. The Board's responsibility for conducting a robust assessment of the principal risks is embedded in the Company's risk map and stress testing. The Board, through delegation to the Audit Committee, undertakes this robust annual assessment and review of the principal risks facing the Company together with a review of any new risks which may have arisen during the year.
The Company's investment management and administration functions have been outsourced to external service providers. Any failure of any external service provider to carry out its obligations could have a materially detrimental impact on the effective operation, reporting and monitoring of the Company's financial position. This is likely to have an effect on the Company's ability to meet its investment objectives successfully. The Company receives and reviews internal control reports from all of its external service providers on an annual basis and receives a third party independently reviewed control report on its Administrator, Registrar and Company Secretary. The Investment Manager's system of internal controls are monitored by its compliance department. The results of the review of the control report of its principal external service providers are reported to the Board by the Audit Committee. These reports did not identify any significant weaknesses during the year and up to the date of this Annual Report. If any had been identified then appropriate remedial action would have been taken.
In accordance with the Association of Investment Companies Code of Corporate Governance (the "AIC Code"), the Directors have carried out a review of the effectiveness of the system of internal control of the Company as it has operated during the year and up to the date of approval of the Annual Report. Information regarding the Company's internal control and risk management procedures can be found in the Corporate Governance Statement.
The Board will continue to keep the Company's system of risk management and internal control under review and will continue to receive updates from the Investment Manager to ensure that the principal risks and challenges faced by the Group are fully understood and managed appropriately.
An overview of the principal risks that the Board considers to be the main uncertainties currently faced by the Company are provided below, together with the mitigating actions being taken.
Principal risk | Mitigation | Link to KPI |
Macroeconomic risk* Adverse macroeconomic conditions may delay or prevent the Company from making appropriate investments that generate attractive returns and thereby cause "cash drag" on the Company's performance. Adverse market conditions and their consequences may have a material adverse effect on the Company's investment portfolio default rate, yield on investment and, therefore, cash flows. To the extent that there is a delay in making investments, the Company's returns will be reduced. |
The Board and the Investment Manager review on a quarterly basis the market trends affecting the loan industry. The Investment Manager carries out its regulatory review through externally sourced market data. |
Capital DeployedTarget Return |
Legal and compliance risk* Laws applicable to Debt Instruments may govern the terms of such instruments and subject the Company to legal and regulatory examination or enforcement action. Further, any proceeding brought by the federal or state regulatory authorities to any of the Direct Lending Platforms could result in cases against the Company itself and could affect whether the Debt Instruments are enforceable in accordance with their terms. | To manage this risk the Directors are regularly briefed by the Investment Manager's in house legal counsel and by the Company's legal counsel on legal and regularly developments. Further, regulatory risk is a standing item at board meetings.
|
Capital DeployedInvestment restrictions |
Investment risk The Group has substantial investments in Debt Instruments and the major risks include market and credit risks. The Company may take indirect exposure to debt instruments through platforms or funds; and such investments may be impacted if such platforms or funds declare bankruptcy. One such fund in which the Company invested, Princeton and its General Partner filed voluntary petitions of bankruptcy on 9 March 2018 in the United States Bankruptcy Court for the District of New Jersey. The bankruptcy petitions had the effect of staying arbitration that the Company has initiated against Princeton. The bankruptcy court has now announced it ruling that most of the pending counts in the arbitration proceedings, which were substantially completed at the time Princeton and the General Partner filed for bankruptcy, may be completed. After the arbitration proceedings are completed, the Company has a number of legal options, including seeking further relief from the Bankruptcy Court While the actual dates for the continued arbitration proceeding have not be set, the Company will seek the earliest dates available to resume the arbitration proceedings after the Bankruptcy Court has issued its written orders on these matters. Once the arbitration panel has delivered its findings, the Company will continue to seek relief in the bankruptcy court, including its pending request before the bankruptcy court for the appointment of an independent trustee to assume management and control of Princeton (including giving effect to the information and redemption notices previously served). | The number of investments held and sector diversity enable the Group to spread the risks with regard to market volatility, currency movements, revenue streams and credit exposure. The Company has in place investment restrictions and receives quarterly reports from the Investment Manager to monitor the Company's and Group's exposure to these risks. The Investment Manager's investment decisions are also driven by the degree of transparency and influence that the Investment Manager can achieve and the efficiency of the holding structure. If this proves difficult or unsatisfactory, investments will be reduced or curtailed altogether. Subsequent to the investment in Princeton, the Board will review any future proposed investment through a fund structure having particular regard to the reporting obligations that the underlying fund is subject to. Further, regular monitoring of compliance with those reporting requirements will become a standing agenda item of quarterly board meetings, with particular regard to any breach of service level agreements.
| Investment restrictions Target Return |
Taxation risk* As an investment company, the Company needs to comply with sections 1158/1159 of the Corporation Tax Act 2010.
|
The Investment Manager and Administrator prepare quarterly management accounts which allow the Board to assess the Company's compliance with investment trust conditions. Further, contractual arrangements with third party external service providers are in place, to ensure compliance with tax and regulatory requirements. |
Total dividends for the period |
Cyber security risk This is a new principal risk. The Company relies on services provided by its external service providers and therefore dependent on the effective operation of their systems in place. Likewise, the Company is dependent on the Direct Lending Platforms' ability to effectively manage vulnerabilities to technological failure and cyber attacks. Any weakness in their information security could result in a disruption to the dealing procedures, accounting and payment process. | The Company performs a due diligence review before entering into contracts with any external service provider and also prior to investing in a Debt Instrument. Subsequently, the Company receives a controls performance report such as ISAE 3402 report on the service provider which is subject to the Audit Committee's review. The Management Engagement Committee also meets on an annual basis to review the Investment Manager and other service providers' overall performance, independence, resources, expertise and compliance with the Investment Management Agreement and service provider agreements, respectively. | Investment restrictions |
Asterisks indicate the risk has remained unchanged since the previous annual report.
The Company has also considered Brexit's current and potential impact on the Company. The majority of the Group's portfolio is denominated in United States Dollar and the Company has entered into derivative contracts to manage the exposure to foreign currency on existing assets. Therefore the Board has concluded that this event does not represent a principal risk to the Company.
Viability Statement
In accordance with provision C.2.2 of the UK Corporate Governance Code, published by the Financial Reporting Council in April 2016 (the "UK Corporate Governance Code"), and Principle 21 of the AIC Code, the Directors have continued to assess the prospects of the Company over the three year period taking into account the final repayment date of the ZDP Shares in 2021.
The Directors also consider the requirement by the Articles of Association (the "Articles") to put a proposal for the continuance of the Company at the Annual General Meeting ("AGM") in 2020 and have reviewed the potential impact that this may have on the Company's viability.
In their assessment of the viability of the Company, the Directors have considered each of the principal risks and uncertainties above. The Directors have also reviewed the Company's income and expenditure projections and the fact the Company's investments (including those held through the Trust) do not comprise readily realisable securities which can be sold to meet funding requirements if necessary. The Company maintains a risk register for its stress test to identify, monitor and control risk concentration. In addition, overall credit and economic conditions are monitored by the Investment Manager's Credit and Risk Committee to provide insight with respect to potential warnings on adverse changes at macro level. The stress test uses the 2007 - 2009 financial crisis as its basis which resulted in the entry of institutions offering alternative lending sources of capital in the US and European markets, thereby reflecting the principal risks on deployment of the IPO proceeds and application of default allowance.
The Company has processes for monitoring operating costs, share price discount, the Investment Manager's compliance with the investment objective and policy, asset allocation, the portfolio risk profile, availability of eligible investments within the Company's investment policy, counterparty exposure, liquidity risk, financial controls and stress-testing based assessment of the Company's prospects.
Based on the Directors' evaluation of these factors, they concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period to 2021.
In the year to 31 December 2017, the Group generated a net loss of USD 6,436,466 after Princeton impairment allocation of USD 16,983,138 (see note 3) (31 December 2016: net profit USD 12,402,142 after the Princeton impairment allocation of USD 8,856,612).
The Group paid dividends for the year of USD 20,555,314 (31 December 2016: USD 17,796,167). The Group has fully deployed its capital raised from the IPO and achieved the targeted 10% dividend yield per annum payable to its Ordinary Shareholders.
Performance
The table below provides monthly performance information:
Ordinary Shares | ||||||||||||||
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | YTD | ||
% NAV
| 2016 | 0.48% | 0.75% | 0.77% | 0.78% | 0.82% | 0.74% | 0.79% | 0.72% | 0.75% | 0.82% | 0.83% | (2.80%) | 5.53% |
2017 | 0.87% | 0.66% | 0.74% | 0.60% | 0.58% | 0.54% | 0.41% | 0.42% | 0.22% | (8.32%) | 0.20% | 0.48% | (2.95%) | |
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | YTD | ||
Return on Share Price
| 2016 | (6.15%) | (0.31%) | (2.50%) | 2.14% | 2.62% | (1.02%) | 6.19% | 3.69% | 3.56% | 5.97% | (3.50%) | (6.72%) | 2.93% |
2017 | (0.19%) | 1.61% | 3.27% | (17.90%) | (5.46%) | (4.61%) | (0.58%) | (5.84%) | 4.96% | (4.23%) | (5.91%) | (0.76%) | (31.85%) |
C Shares | ||||||||||||||
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | YTD | ||
% NAV
| 2016 | (0.37%) | (0.37%) | |||||||||||
2017 | 0.31% | 0.46% | 0.77% | |||||||||||
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | YTD | ||
Return on Share Price
| 2016 | (2.50%) | (2.50%) | |||||||||||
2017 | 2.05% | 2.05% |
As at 31 December 2017, the portfolio (excluding cash and cash equivalents) was diversified across different sectors as follows:
Allocation | |||
Sector | 31 Dec 2017 | 31 Dec 2016 | Change |
Platform Debt | 20% | 13% | 54% |
Commercial Real Estate Loans | 18% | 8% | 125% |
Business Loans/Merchant Cash Advances | 18% | 17% | 6% |
Consumer Loans | 17% | 28% | -39% |
Business Letter of Credit | 9% | 16% | -44% |
Multi-family Real Estate Loans | 9% | 6% | 50% |
Mixed-use Real Estate Loans | 5% | 5% | 0% |
Residential Real Estate Loans | 2% | 5% | -60% |
Factoring | 1% | 1% | 0% |
Equipment Loans | 1% | 1% | 0% |
Total (excluding cash and cash equivalents) | 100% | 100% | 0% |
Trends and factors likely to affect future development performance and position of the Group are included in the Investment Manager's Report above.
Premium/Discount
The Board monitors the price of the Company's Ordinary Shares in relation to their NAV and the premium/discount at which the shares trade. The following table shows the premium/discount through the year:
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | ||
Premium/ (discount) to NAV at end of each month | 2016 | (11.52%) | (13.33%) | (13.25%) | (10.75%) | (8.01%) | (17.38%) | (13.21%) | (9.23%) | (7.89%) | (8.75%) | (8.74%) | (13.52%) |
2017 | (12.83%) | (11.00%) | (7.95%) | (22.48%) | (27.47%) | (28.82%) | (28.63%) | (33.16%) | (27.26%) | (24.72%) | (26.51%) | (27.34%) |
Analysis of Key Performance Indicators and Investment Restrictions
The following KPIs are being tracked for the Group, and values for each as at 31 December 2017 are shown in the table below.
Indicator | Criteria | As of 31 Dec 2017 | |
Target Return11 | 12% to 13% unlevered annual net returns to the Company on loan investments | Targeted net annualised returns (after Princeton-Argon impairment) are 10% to 11% to the Company before fund expenses, management and performance fees.
| |
Capital Deployed | USD 311 million (net of relevant issue costs) available for deployment | USD 282 million principal (net of relevant issue costs) amount invested | |
Total dividends for the year | At least 85% of Net Profit | Interim dividends of 90% of Net Profit | |
Investment restrictions - Maximum term loan for investment
| 5 years | No Debt Instrument references a loan agreement with a term in excess of 5 years
| |
- Maximum term for trade receivable investment | 180 days | No Debt Instrument references a trade receivable in excess of 180 days
| |
- Maximum investment to any single asset class sub-category
| 25% of gross assets | The Company has invested 16.8% of gross assets in the commercial real estate loans sub-category
| |
- Maximum investment to loans originated by any single lending platform | 25% of gross assets | The Company has invested 24.0% of gross assets in the Direct Lending Platform which issues real estate loans
| |
- Maximum investment to any Debt Instrument | 2% of gross assets | No single Debt Instrument in which the Company has an interest exceeds 1.8% of gross assets
| |
Maximum investment in any Debt Instrument to an asset sub-class | 20% of gross assets | No single Debt Instrument originated or issued by a single Direct Lending Platform represents more than 19.7% of gross assets allocated to the asset class sub-category that the relevant Debt Instrument forms part of | |
Minimum investment in loans secured by assets or personal guarantee | 65% of gross assets | 80.1% of gross assets are invested in Debt Instruments which are secured by assets or personal guarantee
| |
- Target allocation to loans secured by assets or personal guarantee
| 75% of portfolio | 83.5% of the portfolio is secured by assets or personal guarantee | |
Employees, Social, Human Rights and Environmental Issues
The Company has no employees and the Board is composed of a majority of independent non-executive Directors with one non-independent non-executive Director. As an investment trust, the Company has no direct impact on the community and as a result does not maintain specific policies in relation to these matters.
The Company falls outside the scope of the Modern Slavery Act 2015 as it does not meet the turnover requirements under that act. The Company does operate by outsourcing significant parts of its operations to reputable professional companies, including investment management to the Investment Manager. In doing so the Investment Manager complies with all the relevant laws and regulations and also takes account of social, environmental, ethical and human rights factors, where appropriate.
The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013, including those within its underlying investment portfolio. However the Company believes that high standards of corporate social responsibility and in carrying out its investment activities and in its relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly to support its strategy and make good business sense.
In carrying out its investment activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly.
The following responsibility statement is extracted from page 47 of the Annual Report and is repeated here solely for the purpose of complying with DTR 6.3.5. This statement does not relate to the extracted information presented in the annual financial report announcement.
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS
The Directors are responsible for preparing the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial period. Under that law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS").
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 Group and the Company and of the profit or loss of the Group and the Company for that period. In preparing these financial statements, the Directors are required to:
· properly select and apply accounting policies;
· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
· provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and
· make an assessment of the Group's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and Company and to prevent and detect fraud and other irregularities.
Responsibility statement
We confirm to the best of our knowledge that:
· the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial positions and profit or loss of the Group and the Company;
· the Group strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
· the Annual Report, taken as a whole, includes a fair review of the development and performance of the business and the position of the Group and the Company, together with a description of the principal risks and uncertainties.
This responsibility statement was approved by the Board of Directors on 30 April 2018 and is signed on behalf of the Board.
Christopher WaldronChairman
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF RANGER DIRECT LENDING FUND PLC
Report on the audit of the financial statements
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF RANGER DIRECT LENDING FUND PLC
Report on the audit of the financial statements
Qualified opinion |
In our opinion, except for the possible effects of the matters described in the basis for qualified opinion section of our report: · the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at 31 December 2017 and of the group's and the parent company's loss for the year then ended; · the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; · the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and · the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements of Ranger Direct Lending Fund plc (the 'parent company') and its subsidiaries (the 'group') which comprise: · the consolidated and parent company statements of comprehensive income; · the consolidated and parent company statements of financial position; · the consolidated and parent company statements of changes in equity; · the consolidated and parent company cash flow statements; and · the related notes 1 to 25.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. |
Basis for qualified opinion |
As described in note 3, the directors have been unable to provide us with sufficient appropriate audit evidence in relation to the investment in Princeton recorded at a value of USD 29.6 million. We were unable to obtain sufficient appropriate audit evidence regarding this investment by using other audit procedures. The audit report was qualified in the prior year in respect of this matter. Princeton filed for bankruptcy in the USA in March 2018, with ongoing arbitration proceedings not yet finalised. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the financial statements section of our report.
We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC's Ethical Standard were not provided to the group or the parent company.
|
Summary of our audit approach | |
Key audit matters
| The key audit matters that we identified in the current year were: · Loan impairment ('loan loss provisions'); · Valuation of investment in the Princeton fund (see the Basis for qualified opinion section above); and · Material estimates impacting on revenue recognition.
Within this report, any new key audit matters are identified with ^ and any key audit matters which are the same as the prior year identified with >>. |
Materiality | The materiality that we used in the current year was USD 2.1 million (2016: USD 2.5 million) which was determined on the basis of 1% of net assets. |
Scoping
| We performed a full scope audit on 2 (2016: 2) components as identified in the prior year.
Together, this accounts for 100% (2016: 100%) of the Group's revenue and 100% (2016: 100%) of the Group's loss before tax. |
Significant changes in our approach | Our identification of key risks was revised: - We refined our key risk related to revenue recognition from overall effective interest rate recognition to focus on factoring income recognition.
|
Conclusions relating to going concern, principal risks and viability statement | |
Going concern We have reviewed the directors' statement in note 2 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the group's and company's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements.
We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit.
Principal risks and viability statement Based solely on reading the directors' statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the directors' assessment of the group's and the company's ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to: • the disclosures on pages 18 -21 that describe the principal risks and explain how they are being managed or mitigated; • the directors' confirmation on page 18 that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity; or • the directors' explanation on page 21 as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We are also required to report whether the directors' statement relating to the prospects of the group required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.
|
We confirm that we have nothing material to report, add or draw attention to in respect of these matters.
We confirm that we have nothing material to report, add or draw attention to in respect of these matters.
|
Key audit matters | |
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Basis for qualified opinion section above, we have determined the matters described below to be the key audit matters to be communicated in our report. | |
Loan impairment ('allowance for loan losses') >> | |
Key audit matter description | The allowance for loan losses amounted to USD 4.3 million as at 31 December 2017, against loans held at amortised cost of USD 251.0m at the same date. Refer to note 2 to the financial statements for information on loan loss provisioning which management and we consider to be a key source of estimation uncertainty.
There is a significant risk of material misstatement that the allowance for loan losses calculation is inappropriate and not in accordance with IAS 39.
There is also a risk that the inputs and estimates used by management for the calculation are inaccurate, causing heightened risk of material misstatement of the allowance for loan losses recorded. The key judgements used by management in calculating the default allowance provision include default rates, historical data such as repayment and credit history; and discount rates. We also considered the risk of fraudulent management bias in determining these estimates.
|
How the scope of our audit responded to the key audit matter
| Our procedures included:
Assessing related controls: We performed detailed walkthroughs of the loan and loan loss provisioning processes, assessing the design and implementation of key controls.
Tests of detail: We challenged management's estimations used in the calculation of the impairment provision by comparing the inputs to underlying supporting documentation.
We focused on the nature of certain non-material misstatements that we identified during the previous audit, being non-compliance with IAS 39 - Financial Instruments: Recognition and Measurement ("IAS 39") around the basis of the impairment loss calculation, and whether similar misstatements existed to a material level. We obtained and tested the analysis of impairment losses under IAS 39.
We compared the historical repayment profile for a sample of loans against the legal agreements to test that the repayments had been made in line with the terms of the agreement, and if not, whether the changes in payment profile had been properly factored into the loan loss provision calculated by management. |
Key observations
| Based on our audit procedures performed, the valuation of the loans are not materially misstated.
|
Factoring income revenue recognition ^ | |
Key audit matter description
| We have identified a significant risk of material misstatement around the accuracy of the calculation of factoring income on loans using the Effective Interest Rate. This balance is recorded through "other income". As the calculations are performed by management using manual spreadsheets and incorporating estimated settlement dates, there exists a significant risk of manipulation or error within these spreadsheets. The accounting policy for Loans and Receivables which generate other income is disclosed in note 2. |
How the scope of our audit responded to the key audit matter | Assessing related controls: We performed detailed walkthroughs of the loan and EIR processes on the platforms earning factoring income, assessing the design and implementation of key controls.
Tests of detail: We recalculated the factoring income for a sample of loan transactions and compared this to the recorded factoring income. We challenged any management estimates used in the calculation of the factoring income rate by comparing the inputs to underlying supporting documentation. |
Key observations
| Based on our audit procedures performed, the accuracy of the factoring income is not materially misstated.
|
Our application of materiality |
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
|
| |||||||||||||
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of USD 107k (2016: USD 125k) for the group and $106k (2016: $108) for the parent company, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. | ||||||||||||||
An overview of the scope of our audit |
Our group audit was scoped by obtaining an understanding of the group and its environment, including group-wide controls, and assessing the risks of material misstatement at the group level.
For the purposes of scoping our group audit, we determined two key audit components:
1. Ranger Direct Lending Fund Plc, which includes financial information relating to Ranger Direct Lending Trust; and
2. Ranger Direct Lending ZDP Plc, a subsidiary of Ranger Direct Lending Fund Plc that was incorporated to raise funds for the wider group to realise its investment objectives. For this we performed separate risk assessment procedures based on the component's activities.
These two components account for all of the operations and net assets as represented within the group financial statements. A full scope audit has been performed for both components directly by the audit engagement team.
|
Other information | |
The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include where we conclude that: Fair, balanced and understandable - the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's position and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or Audit committee reporting - the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or Directors' statement of compliance with the UK Corporate Governance Code - the parts of the directors' statement required under the Listing Rules relating to the company's compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. | We have nothing to report in respect of these matters. |
Responsibilities of directors |
As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group's and the parent company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. |
Auditor's responsibilities for the audit of the financial statements |
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report. |
Use of our report |
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. |
Report on other legal and regulatory requirements
Statement pursuant to section 837(4) of the Companies Act 2006 |
Respective responsibilities of directors and the auditor
In addition to their responsibilities described above, the directors are also responsible for considering whether the group, subsequent to the balance sheet date, has sufficient distributable profits to make a distribution at the time the distribution is made.
Our responsibility is to report whether, in our opinion, the subject matter of our qualification of our auditor's report on the group financial statements for the year ended 31 December 2016 is material for determining, by reference to those financial statements, whether distributions proposed by the company are permitted under section 830, section 831 and section 832 of the Companies Act 2006. We are not required to form an opinion on whether the company has sufficient distributable reserves to make the distribution proposed at the time the distribution is made.
Opinion on proposed distributions
In our opinion the subject matter of the above qualification is not material for determining by reference to these financial statements whether any distributions of not more thanUSD 40,000,000 in aggregate as may be proposed by the company (being an amount with sufficient headroom for the Company to pay dividends over the next 12 months) are permitted under section 830, section 831 and section 832 of the Companies Act 2006.
|
Opinions on other matters prescribed by the Companies Act 2006 |
In our opinion the part of the directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit: · the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and · the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors' report. |
Matters on which we are required to report by exception | |
Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: · we have not received all the information and explanations we require for our audit; or · adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or · the parent company financial statements are not in agreement with the accounting records and returns. |
We have nothing to report in respect of these matters. |
Directors' remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors' remuneration have not been made or the part of the directors' remuneration report to be audited is not in agreement with the accounting records and returns. |
We have nothing to report in respect of these matters. |
Other matters |
Auditor tenure Following the recommendation of the audit committee, we were appointed by the board of directors in April 2015 to audit the financial statements for the period ending 9 April 2015 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 4 financial periods covering the periods ending 9 April 2015 to 31 December 2017. |
Consistency of the audit report with the additional report to the audit committee Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK). |
Garrath Marshall, ACA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
30 April 2018
CONSOLIDATED AND COMPANY STATEMENTS OF FINANCIAL POSITION
AS AT 31 DECEMBER 2017
Notes | 2017 | 2016 | 2017 | 2016 | |
ASSETS | Group | Company | |||
Non-current assets | (USD) | (USD) | |||
Financial assets at fair value through profit or loss | 3 | 29,621,483 | 46,647,239 | 300,000 | - |
Loans held at amortised cost | 4 | 250,993,296 | 240,015,255 | 50,793,341 | 35,757,090 |
Deferred tax asset | 12 | 80,669 | - | 80,669 | - |
Investment in subsidiaries | 6 | - | - | 195,780,355 | 195,780,355 |
Total non-current assets | 280,695,448 | 286,662,494 | 246,954,365 | 231,537,445 | |
Current assets | |||||
Derivative assets | 13 | 1,110,329 | 531,528 | 1,110,329 | 531,528 |
Amounts owed by subsidiary undertakings | 16 | - | - | 44,712,526 | 65,710,219 |
Advances to/funds receivable from direct lending platforms | 5 | 3,782,916 | 1,000,563 | - | - |
Prepayments and other receivables | 192,635 | 958,452 | 101,488 | 134,345 | |
Cash and cash equivalents | 15 | 9,699,799 | 24,820,380 | 1,304,277 | 15,407,630 |
Total current assets | 14,785,679 | 27,310,923 | 47,228,620 | 81,783,722 | |
TOTAL ASSETS | 295,481,127 | 313,973,417 | 294,182,985 | 313,321,167 | |
Non-current liabilities | |||||
Zero dividend preference shares | 9 | 76,222,019 | 66,096,829 | - | - |
Amounts due to subsidiary undertaking | 16 | - | - | 73,835,016 | 66,049,907 |
Total non-current liabilities | 76,222,019 | 66,096,829 | 73,835,016 | 66,049,907 | |
Current liabilities | |||||
Accrued expenses and other liabilities | 8 | 2,619,586 | 3,700,070 | 1,335,155 | 3,061,492 |
Income tax liability | 290,496 | 54,328 | - | - | |
Derivative liabilities | 13 | 545,126 | 1,103,319 | 545,126 | 1,103,319 |
Total current liabilities | 3,455,208 | 4,857,717 | 1,880,281 | 4,164,811 | |
TOTAL LIABILITIES | 79,677,227 | 70,954,546 | 75,715,297 | 70,214,718 | |
NET ASSETS | 215,803,900 | 243,018,871 | 218,467,688 | 243,106,449 | |
SHAREHOLDERS' EQUITY | |||||
Capital and reserves | |||||
Share capital | 10 | 427,300 | 427,300 | 427,300 | 427,300 |
Share premium account | 10 | 40,346,947 | 40,346,947 | 40,346,947 | 40,346,947 |
Other reserves | 10 | 204,225,570 | 204,225,570 | 204,225,570 | 204,225,570 |
Revenue reserves | 4,484,858 | 5,077,791 | 8,647,515 | 6,583,320 | |
Realised capital profits | (30,035,108) | (6,682,162) | (36,982,537) | (6,952,782) | |
Unrealised capital losses | (3,480,486) | (388,953) | 1,802,893 | (1,523,906) | |
Foreign currency translation reserves | (165,181) | 12,378 | - | - | |
TOTAL SHAREHOLDERS' EQUITY | 215,803,900 | 243,018,871 | 218,467,688 | 243,106,449 | |
NAV per Ordinary Share | 13.38 | 15.05 | 13.55 | 15.06 | |
NAV per C Share | - | 12.09 | - | 12.09 | |
The accompanying notes below are an integral part of these financial statements.
The financial statements for the year ended 31 December 2017 of Ranger Direct Lending Fund Plc, a public company limited by shares and incorporated in England and Wales with registered number 09510201, were approved and authorised for issue by the Board of Directors on 30 April 2018.
Signed on behalf of the Board of Directors:
Christopher WaldronChairman
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Notes | 1 Jan to 31 Dec 17 | 1 Jan to 31 Dec 16 | |||||
Revenue | Capital | Total | Revenue | Capital | Total | ||
Income | (USD) | (USD) | (USD) | (USD) | (USD) | (USD) | |
Investment income | 26,511,977 | - | 26,511,977 | 21,872,269 | - | 21,872,269 | |
Gain on revaluation of derivative contracts | - | 2,184,162 | 2,184,162 | - | - | - | |
Net gain on financial assets at fair value through profit or loss | 3 | - | - | - | - | 125,672 | 125,672 |
Foreign exchange gain | - | - | - | - | 281,679 | 281,679 | |
Other income | 8,213,322 | - | 8,213,322 | 4,911,063 | - | 4,911,063 | |
Bank interest income | 115 | - | 115 | 1,832 | - | 1,832 | |
34,725,414 | 2,184,162 | 36,909,576 | 26,785,164 | 407,351 | 27,192,515 | ||
Operating expenditure | |||||||
Net loss on financial assets at fair value through profit or loss | 3 | - | 12,558,687 | 12,558,687 | - | - | - |
Foreign exchange loss | - | 2,591,408 | 2,591,408 | - | - | - | |
Investment Manager Performance Fees | 16,17 | (1,822) | 15,585 | 13,763 | 1,387,481 | - | 1,387,481 |
Investment Management Fees | 16,17 | 3,054,733 | - | 3,054,733 | 2,521,735 | - | 2,521,735 |
Service and premium fees | 2,964,697 | - | 2,964,697 | 2,413,701 | - | 2,413,701 | |
Provision for / (Reversal of) default | 7 | - | 3,073,240 | 3,073,240 | - | (36,801) | (36,801) |
Loans written off | 4, 7 | - | 10,730,543 | 10,730,543 | - | 5,089,881 | 5,089,881 |
Company secretarial, administration and registrar fees | 494,475 | - | 494,475 | 427,685 | - | 427,685 | |
Finance costs | 3,604,530 | - | 3,604,530 | 1,057,092 | - | 1,057,092 | |
Loss on revaluation of derivative contracts | - | - | - | - | 707,433 | 707,433 | |
Other expenses | 4,107,794 | - | 4,107,794 | 1,167,838 | - | 1,167,838 | |
14,224,407 | 28,969,463 | 43,193,870 | 8,975,532 | 5,760,513 | 14,736,045 | ||
Profit/(loss) before tax | 20,501,007 | (26,785,301) | (6,284,294) | 17,809,632 | (5,353,162) | 12,456,470 | |
Taxation | 12 | (571,923) | 419,751 | (152,172) | (316,328) | 262,000 | (54,328) |
Profit/(loss) after tax | 19,929,084 | (26,365,550) | (6,436,466) | 17,493,304 | (5,091,162) | 12,402,142 | |
Basic Earnings Per Ordinary Share - USD | 14 | 1.25 | (1.66) | (0.40) | 1.18 | (0.34) | 0.84 |
Basic Earnings Per Ordinary Share - GBP | 14 | 0.93 | (1.23) | (0.30) | 0.95 | (0.28) | 0.68 |
Diluted Earnings Per Ordinary Share - USD | 14 | 1.24 | (1.64) | (0.40) | 1.18 | (0.34) | 0.84 |
Diluted Earnings Per Ordinary Share - GBP | 14 | 0.91 | (1.21) | (0.30) | 0.95 | (0.28) | 0.68 |
Basic and Diluted Loss Per C Share - USD | 14 | - | - | - | (0.05) | - | (0.05) |
Basic and Diluted Loss Per C Share - GBP | 14 | - | - | - | (0.04) | - | (0.04) |
Profit/(loss) for the year | 19,929,084 | (26,365,550) | (6,436,466) | 17,493,304 | (5,091,162) | 12,402,142 | |
Other comprehensive income: | |||||||
items that may be reclassified subsequently to profit and loss: | |||||||
Exchange differences on translation of net assets of subsidiary | - | - | (177,559) | - | - | 12,378 | |
Total comprehensive (loss)/ income for the year/period | 19,929,084 | (26,365,550) | (6,614,025) | 17,493,304 | (5,091,162) | 12,414,520 | |
FOR THE YEAR ENDED 31 DECEMBER 2017
The accompanying notes below are an integral part of these financial statements.The total column of this Statement of Comprehensive Income was prepared in accordance with International Financial Reporting Standards ("IFRS"). The supplementary revenue and capital columns are both prepared under the guidance published by the Association of Investment Companies ("AIC"). All items in the above Statement derive from continuing operations.
COMPANY STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2017
Notes | 1 Jan to 31 Dec 17 | 1 Jan to 31 Dec 16 | |||||
Revenue | Capital | Total | Revenue | Capital | Total | ||
Income | (USD) | (USD) | (USD) | (USD) | (USD) | (USD) | |
Investment income | 4,988,423 | - | 4,988,423 | 2,601,451 | - | 2,601,451 | |
Foreign exchange gain | - | - | - | - | 299,649 | 299,649 | |
Gain on revaluation of derivative contracts | - | 2,184,162 | 2,184,162 | - | - | - | |
Dividend and other income | 75 | - | 75 | 1,412 | - | 1,412 | |
Bank interest income | 39 | - | 39 | 42 | - | 42 | |
4,988,537 | 2,184,162 | 7,172,699 | 2,602,905 | 299,649 | 2,902,554 | ||
Operating expenditure | |||||||
Investment Manager Performance Fees | 16,17 | (1,822) | 15,585 | 13,763 | 1,387,481 | - | 1,387,481 |
Investment Management Fees | 16,17 | 3,054,733 | - | 3,054,733 | 2,521,735 | - | 2,521,735 |
Foreign exchange loss | - | 2,624,171 | 2,624,171 | - | - | - | |
Service and premium fees | 105,036 | - | 105,036 | 39,135 | - | 39,135 | |
Provision for default | - | 155,552 | 155,552 | - | 68,572 | 68,572 | |
Company secretarial, administration and registrar fees | 389,478 | - | 389,478 | 361,320 | - | 361,320 | |
Impairment loss on investment in subsidiaries | - | 225,717 | 225,717 | - | 747,901 | 747,901 | |
Finance costs | 1,393,469 | - | 1,393,469 | 400,609 | - | 400,609 | |
Loss on revaluation of derivative contracts | - | - | - | - | 707,433 | 707,433 | |
Other expenses | 1,071,800 | - | 1,071,800 | 664,263 | - | 664,263 | |
6,012,694 | 3,021,025 | 9,033,719 | 5,374,543 | 1,523,906 | 6,898,449 | ||
Operating loss | (1,024,157) | (836,863) | (1,861,020) | (2,771,638) | (1,224,257) | (3,995,895) | |
Income from shares in group undertaking | 23,903,821 | (26,206,917) | (2,303,096) | 21,508,379 | (5,010,386) | 16,497,993 | |
Profit before tax | 22,879,664 | (27,043,780) | (4,164,116) | 18,736,741 | (6,234,643) | 12,502,098 | |
Taxation | (339,084) | 419,753 | 80,669 | 262,000 | (262,000) | - | |
Profit after tax and total comprehensive income for the year | 22,540,580 | (26,624,027) | (4,083,447) | 18,998,741 | (6,496,643) | 12,502,098 | |
Basic Earnings Per Ordinary Share - USD | 14 | 1.42 | (1.67) | (0.26) | 1.28 | (0.44) | 0.84 |
Basic Earnings Per Ordinary Share - GBP | 14 | 1.05 | (1.24) | (0.19) | 1.04 | (0.35) | 0.68 |
Diluted Earnings Per Ordinary Share - USD | 14 | 1.40 | (1.65) | (0.25) | 1.28 | (0.44) | 0.84 |
Diluted Earnings Per Ordinary Share - GBP | 14 | 1.03 | (1.22) | (0.19) | 1.04 | (0.35) | 0.68 |
Basic and Diluted Loss Per C Share - USD | 14 | - | - | - | (0.05) | - | (0.05) |
Basic and Diluted Loss Per C Share - GBP | 14 | - | - | - | (0.04) | - | (0.04) |
The accompanying notes below are an integral part of these financial statements.
The total column of this Statement of Comprehensive Income was prepared in accordance with International Financial Reporting Standards ("IFRS"). The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies ("AIC"). All items in the above Statement derive from continuing operations.
Other comprehensive income
There were no items of other comprehensive income in the current year or prior year.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 2017
Notes | Share Capital | Share Premium | Other Reserves | Realised Capital Profits | Unrealised Capital Profits/ (Losses) | Revenue Reserves | Foreign currency translation reserves | Total | |
Balance at 1 January 2016 | 228,201 | 20,989,992 | 204,225,570 | 2,573,965 | (883,440) | 1,710,176 | - | 228,844,464 | |
Issue of C Shares - net | 10 | 199,099 | 19,356,955 | - | - | - | - | - | 19,556,054 |
Dividends | 11 | - | - | - | (3,670,478) | - | (14,125,689) | - | (17,796,167) |
Reclassification of capital losses | - | - | - | (883,440) | 883,440 | - | - | - | |
Profit for the year | - | - | - | (4,702,209) | (388,953) | 17,493,304 | 12,402,142 | ||
Other comprehensive income for the year | - | - | - | - | - | - | 12,378 | 12,378 | |
Balance at 31 December 2016 | 427,300 | 40,346,947 | 204,225,570 | (6,682,162) | (388,953) | 5,077,791 | 12,378 | 243,018,871 | |
Balance at 1 January 2017 | 427,300 | 40,346,947 | 204,225,570 | (6,682,162) | (388,953) | 5,077,791 | 12,378 | 243,018,871 | |
Dividends | 11 | - | - | - | (78,929) | - | (20,476,385) | - | (20,555,314) |
Reclassification of capital losses | - | - | - | (388,953) | 388,953 | - | - | - | |
Tax relating to capital contribution | - | - | - | - | - | (45,632) | - | (45,632) | |
Profit for the year | - | - | - | (22,885,064) | (3,480,486) | 19,929,084 | - | (6,436,466) | |
Other comprehensive income for the year | - | - | - | - | - | - | (177,559) | (177,559) | |
Balance at 31 December 2017 | 427,300 | 40,346,947 | 204,225,570 | (30,035,108) | (3,480,486) | 4,484,858 | (165,181) | 215,803,900 |
The accompanying notes below are an integral part of these financial statements.
COMPANY STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2017
Share Capital | Share Premium | Other Reserves | Realised Capital Profits | Unrealised Capital Profits/ (Losses) | Revenue Reserves | Total | ||
Notes | (USD) | (USD) | (USD) | (USD) | (USD) | (USD) | (USD) | |
Balance at 1 January 2016 | 228,201 | 20,989,992 | 204,225,570 | 2,573,965 | (883,532) | 1,710,268 | 228,844,464 | |
Issue of C Shares - net | 10 | 199,099 | 19,356,955 | - | - | - | - | 19,556,054 |
Dividends | 11 | - | - | - | (3,670,478) | - | (14,125,689) | (17,796,167) |
Reclassification of capital losses | - | - | - | (883,532) | 883,532 | - | - | |
Total comprehensive income for the year | - | - | - | (4,972,737) | (1,523,906) | 18,998,741 | 12,502,098 | |
Balance at 31 December 2016 | 427,300 | 40,346,947 | 204,225,570 | (6,952,782) | (1,523,906) | 6,583,320 | 243,106,449 | |
Balance at 1 January 2017 | 427,300 | 40,346,947 | 204,225,570 | (6,952,782) | (1,523,906) | 6,583,320 | 243,106,449 | |
Dividends | 11 | - | - | - | (78,929) | - | (20,476,385) | (20,555,314) |
Reclassification of capital losses | - | - | - | (1,523,906) | 1,523,906 | - | - | |
Total comprehensive income for the year | - | - | - | (28,426,920) | 1,802,893 | 22,540,580 | (4,083,447) | |
Balance at 31 December 2017 | 427,300 | 40,346,947 | 204,225,570 | (36,982,537) | 1,802,893 | 8,647,515 | 218,467,689 |
The accompanying notes below are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 2017
1 Jan to 31 Dec 2017 | 1 Jan to 31 Dec 2016 | ||
Notes | (USD) | (USD) | |
(Loss)/Profit for the year | (6,436,466) | 12,402,142 | |
Adjustments for: | |||
Dividend income | - | - | |
Provision for income tax expense | 152,172 | 54,328 | |
Tax paid | (58,163) | - | |
Benefit for deferred taxes | 12 | (80,669) | - |
Net loss/(gain) on financial assets at fair value through profit or loss | 3 | 12,558,687 | (125,672) |
Investment income | (26,511,977) | (21,872,269) | |
Interest expense on ZDP Shares | 9 | 3,486,353 | 1,024,920 |
Amortisation of transaction fees - net | 253,554 | 73,823 | |
Amortisation of issue costs | 118,177 | 32,172 | |
Foreign exchange loss | 2,610,088 | 2,469,237 | |
(Gain) / loss on revaluation of derivative financial instruments | (2,184,162) | 707,433 | |
Loans written off | 4,7 | 10,730,543 | 5,089,881 |
Provision for/(reversal of) default | 3,638,263 | (5,126,682) | |
Operating cash flows before movements in working capital | (1,723,599) | (5,270,687) | |
Decrease / (increase) in other current assets and prepaid expenses | 765,817 | (847,710) | |
(Decrease) / increase in accrued expenses and other liabilities | (1,080,483) | 728,820 | |
(Increase)/decrease in funds receivable from direct lending platforms - net | (2,782,353) | 2,082,546 | |
Net cash flows used in operating activities | (4,820,619) | (3,307,031) | |
Investing activities | |||
Acquisition of financial assets at fair value through profit or loss | 3 | (300,000) | (3,000,000) |
Acquisition of loans | 4 | (220,006,567) | (259,863,807) |
Principal repayments | 4 | 199,083,681 | 150,024,854 |
Proceeds from partial redemption of financial assets at fair value through profit or loss | 3 | 4,767,069 | 9,201,900 |
Investment income received | 24,780,203 | 20,582,579 | |
Net settlement on derivative positions | 1,047,170 | (135,642) | |
Dividend income received | - | - | |
Net cash flows used in investing activities | 9,371,556 | (83,190,116) | |
Financing activities | |||
Proceeds on issue of Ordinary Shares | 10 | - | - |
Proceeds on issue of C Shares | 10 | - | 19,556,054 |
Proceeds on issue of ZDP Shares | 9 | - | 65,070,704 |
Dividends paid | 11 | (20,555,314) | (17,796,167) |
Net cash flows (used in)/from financing activities | (20,555,314) | 66,830,591 | |
Net change in cash and cash equivalents | (16,004,377) | (19,666,556) | |
Effect of foreign exchange | 883,796 | (838,998) | |
Cash and cash equivalents at the beginning of the year | 24,820,380 | 45,325,934 | |
Cash and cash equivalents at the end of the year | 15 | 9,699,799 | 24,820,380 |
The accompanying notes below are an integral part of these financial statements.
COMPANY STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 2017
1 Jan to 31 Dec 2017 | 1 Jan to 31 Dec 2016 | ||
Notes | (USD) | (USD) | |
(Loss)/profit for the year | (4,083,447) | 12,502,098 | |
Adjustments for: | |||
Dividend income/income from shares in group undertaking | 2,303,096 | (16,497,993) | |
Investment income | (4,988,423) | (2,601,451) | |
Foreign exchange gain | 2,396,785 | (205,937) | |
Impairment loss on investment in subsidiaries | 6 | 225,717 | 747,901 |
Benefit for deferred taxes | 12 | (80,669) | |
Interest expense on loan with subsidiary undertaking | 9 | 1,393,469 | 400,609 |
(Gain) / loss on revaluation of derivative contracts | (2,184,162) | 707,433 | |
Provision for default | 4,7 | 155,552 | 68,572 |
Reversal of origination fees | - | 332 | |
Operating cash flows before movements in working capital | (4,862,082) | (4,878,436) | |
Decrease/(increase) in other current assets and prepaid expenses, excluding receivable from issuance of management shares | 32,857 | (24,827) | |
Increase in amounts owed by subsidiary undertaking | (13,227,729) | (65,734,646) | |
(Decrease)/increase in accrued expenses and other liabilities | (1,726,337) | 525,708 | |
Net cash flows used in operating activities | (19,783,291) | (70,112,201) | |
Investing activities | |||
Acquisition of loans | 4 | (16,473,130) | (39,053,284) |
Acquisition of financial assets at fair value through profit or loss | 3 | (300,000) | - |
Principal repayments | 4 | 5,280,919 | 2,592,569 |
Investments in subsidiary undertaking | 6 | (225,717) | (747,901) |
Investment income received | 4,099,890 | 2,137,980 | |
Dividend income received | 31,922,326 | 24,288,509 | |
Net settlement on derivative positions | 1,047,168 | (135,642) | |
Net cash flows from/(used in) investing activities | 25,351,456 | (10,917,769) | |
Financing activities | |||
Proceeds on issue of shares | 10 | - | 19,556,054 |
Intercompany loan from subsidiary undertaking | 16 | - | 68,368,674 |
Dividends paid | 11 | (20,555,314) | (17,796,167) |
Net cash flows (used in)/from financing activities | (20,555,314) | 70,128,561 | |
Net change in cash and cash equivalents | (14,987,149) | (10,901,409) | |
Effect of foreign exchange | 883,796 | (838,998) | |
Cash and cash equivalents at the beginning of the year | 15,407,630 | 27,148,037 | |
Cash and cash equivalents at the end of the year | 15 | 1,304,277 | 15,407,630 |
The accompanying notes below are an integral part of these financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2017
1. GENERAL INFORMATION
The Company was incorporated and registered in England and Wales on 25 March 2015 and commenced operations on 1 May 2015 following its admission to the London Stock Exchange Main Market. The registered office of the Company is 6th Floor, 65 Gresham Street, London, EC2V 7NQ.
The financial statements ("financial statements") include the results of the Trust and ZDPco. The investment objective of the Group is to seek to provide Shareholders with an attractive return, principally in the form of quarterly income distributions, by acquiring a portfolio of debt obligations (such as loans, invoice receivables and asset financing arrangements) that have been originated or issued by Direct Lending Platforms.
2. SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies adopted in the preparation of these financial statements are set out below.
Basis of accounting and preparation
These financial statements have been prepared in compliance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU"). The financial statements were also prepared in accordance with the Statement of Recommended Practice ("SORP") for investment trusts issued by the AIC (as issued in November 2014 and updated in January 2017), where this guidance is consistent with IFRS.
Basis of measurement and consolidation
The financial statements have been prepared on a historical cost basis as modified for the revaluation of certain financial assets. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Trust and ZDPco is fully consolidated from the date on which control is transferred to the Group and deconsolidated from the date that control ceases.
Going concern
The Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements. Further detail is contained in the Group Strategic Report.
New Accounting Standards, amendments to existing Accounting Standards and/or interpretations of existing Accounting Standards (separately or together, "New Accounting Requirements") not yet adopted
In the Directors' opinion, except for the application of IFRS 9 referred to below, all non-mandatory New Accounting Requirements are either not yet permitted to be adopted, or would have no material effect on the reported performance, financial position or disclosures of the Group and consequently have neither been adopted nor listed.
New Accounting Requirements endorsed for use in the EU
IFRS 9 - "Financial Instruments" (Replacement of IAS 39 - "Financial Instruments: Recognition and Measurement") - effective from 1 January 2018
The Group is required to adopt IFRS 9 from 1 January 2018. The Group has assessed the estimated impact that the initial application of IFRS 9 will have on its consolidated financial statements. This is based on available information to date and is summarised below.
Given the methodology the Company has applied in the past when interpreting IAS 39, the preliminary calculations in implementing the new IFRS 9 standards show that any impact of the new standard will be immaterial for the Company.
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement.
i - Classification - Financial assets
IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, Fair Value through Other Comprehensive Income ("FVOCI") and Fair Value through Profit or Loss ("FVTPL"). The standard eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale.
Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never bifurcated. Instead, the hybrid financial instrument as a whole is assessed for classification.Based on its assessment, the Group does not believe that the new classification requirements will have a material impact on its accounting for loans held at amortised cost and investments in equity securities that are managed on a fair value basis.
ii - Impairment - Financial assets and contract assets
IFRS 9 replaces the 'incurred loss' model in IAS 39 with a forward-looking 'expected credit loss' (ECL) model. This will require considerable judgement about how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis.
The new impairment model will apply to financial assets measured at amortised cost or FVOCI, except for investments in equity instruments, and to contract assets.
Under IFRS 9, loss allowances will be measured on either of the following bases:
- 12 month ECL: these are ECLs that result from possible default events within the 12 months after the reporting date; and
- lifetime ECL: these are ECLs that result from all possible default events over the expected life of a financial instrument.
Lifetime ECL measurement applies if the credit risk of a financial asset at the reporting date has increased significantly since initial recognition and 12-month ECL measurement applies if it has not. An entity may determine that a financial asset's credit risk has not increased significantly if the asset has low credit risk at the reporting date.
The Group believes that impairment losses are likely to become more volatile for assets in the scope of the IFRS 9 impairment model. Based on the impairment methodology described below, the Group has estimated the application of IFRS 9's impairment requirements at 1 January 2018 results in reduction of impairment losses in loans held at amortised cost of USD 9,263 and a corresponding adjustment to equity with an increase in unrealized capital losses by USD 7,480.
Under IFRS 9, the Group has to classify all financial instruments in scope for impairment into 3 Stages - stage 1, stage 2 or 3, depending on the change in credit quality since initial recognition.
Investments in equity instruments and financial assets at FVTPL are out of scope of the impairment requirement.
Stage 1
This includes loans where there is no significant increase in credit risk since initial recognition or loans that have low credit risk on reporting date. For loans in stage 1, interest is accrued on the gross carrying amount of the loans and a 12-month expected credit loss ("ECL") is factored in the profit and loss ("P&L") calculations.
Stage 2
This consists of loans with significant increase in credit risk since initial recognition but not credit impaired. Interest for loans in stage 2 is accrued on the gross carrying amount, however, a lifetime ECL is factored into the profit and loss calculations.
Stage 3
Includes loans which demonstrate evidence of impairment on the reporting date. Interest is accrued on the net carrying amount of the loans and a lifetime ECL is factored into the profit and loss calculations.
For the Group's loan investments, the assessment is performed on a collective basis per platform as the underlying loans have shared risk characteristics however individual assessment may be performed depending on the magnitude and available information from the platform providers.
For short-term receivables and cash and cash equivalents, the ECL model is not likely to result in a material change of the balance due to their short-term nature therefore the Group will apply the simplified approach for contracts that have a maturity of one year or less.
iii - Classification - Financial liabilities
IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of liabilities designated as at FVTPL are recognised in profit or loss, whereas under IFRS 9 these fair value changes are generally presented as follows:
- the amount of change in fair value that is attributable to changes in the credit risk of the liability is presented in the OCI; and
- the remaining amount of change in the fair value is presented in profit or loss.
The Group has not designated any financial liabilities at FVTPL and it has no current intention to do so. The Group's assessment did not indicate any material impact regarding the classification of financial liabilities at 1 January 2018.
Use of estimates, judgements and assumptions
The following are areas of particular significance to the Group's financial statements and include the use of estimates and the application of judgement, which is fundamental to the preparation of these financial statements. Actual results could differ from those estimates.
Key source of estimation uncertainty - impairment of loans
Information about significant areas of estimation uncertainty and critical judgements in relation to the impairment of loans are described under Impairment section below and in note 4.
Key source of estimation uncertainty - fair value of financial assets at fair value through profit or loss
The determination of fair values based on available market data requires significant judgement by the Group. See note 3 for the fair value estimation.
Functional and presentation currency
The financial statements are presented in US Dollars ("USD"), the currency of the primary economic environment in which the Company operates, the Company's functional currency.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign currency assets and liabilities are translated into the functional currency using the exchange rate prevailing at the statement of financial position date.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets.
Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. The effective interest method calculates the amortised cost by allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the loans to the net carrying amount on initial recognition.
Impairment
In evaluating the portfolio and estimating the default allowance, management takes into consideration numerous factors, including current economic conditions, prior loan loss experience, composition of the loan portfolio and management's estimate of credit losses. Such evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, also considers among other matters, the estimated net realisable value or the fair value of the underlying collateral, economic conditions, historical loss experience, and other factors that warrant recognition in providing for an adequate allowance for loan losses. Management establishes an allowance for loan losses that it believes is adequate to reflect incurred impairment losses in the existing portfolio. In the event that management's evaluation of the level of the allowance for loan losses is inadequate, the Group would need to increase its provision for loan losses.
If, in a subsequent period, the amount of the default allowance decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the reversal of the previously recognised default allowance is recognised in the Statement of Comprehensive Income.
Financial assets held at fair value through profit or loss
The Group's financial assets consist of equity investments in funds and an investment in a Cayman SPV. The Group designated its investment as financial assets at fair value through profit or loss in accordance with International Accounting Standards 39 Financial Instruments: Recognition and Measurement ("IAS 39"), as the fund is managed and its performance is evaluated on a fair value basis.
Purchases and sales of financial assets are recognised on the trade date, the date which the Group commits to purchase or sell the assets and are derecognised when the rights to receive cash flows from the financial assets have expired or the Group has transferred substantially all risks and rewards of ownership. Financial instruments are initially recognised at fair value, and transaction costs for financial assets carried at fair value through profit or loss are expensed. Gains and losses arising from changes in the fair value of the Group's financial instruments are included in the Statement of Comprehensive Income in the period which they arise.
Financial liabilities at amortised cost - Zero Dividend Preference Shares
These are initially recognised at cost, being the fair value of the consideration received associated with the borrowing net of direct issue costs. Zero Dividend Preference Shares are subsequently measured at amortised cost using the effective interest method. Direct issue costs are amortised using the effective interest method and are added to the carrying amount of the Zero Dividend Preference Shares.
Derivative financial instruments
Derivative financial instruments, including short-term forward currency and swap contracts are classified as held at fair value through profit or loss, and are classified in current assets or current liabilities in the statement of financial position. Derivatives are entered into to reduce the exposure on the foreign currency loans. Changes in the fair value of derivative financial instruments are recognised in the Statement of Comprehensive Income as a capital item. The Group's derivatives are not used for speculative purposes and hedge accounting is not applied.
Taxation
Investment trusts which have approval as such under section 1158 of the Corporation Taxes Act 2010 are not liable for taxation on capital gains. The Company has taken advantage of modified UK tax treatment in respect of its qualifying interest income for an accounting period and has chosen to designate as an "interest distribution" all or part of any amount it distributes to the Shareholders as dividends, to the extent that it has qualifying interest income for the accounting period. As such, the Company is able to deduct such interest distributions from its income in calculating its taxable profit for the relevant accounting period. It is expected that the Company will have material amounts of qualifying interest income and therefore may decide to designate some or all of the dividends payable as interest distributions.
The current tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the statement of financial position date.
Deferred tax is the tax expected to be payable or recoverable on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax rates that have been enacted or substantively enacted at the statement of financial position date.
The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Investment and other income
Investment income and other income are recognised when it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. Income for all interest bearing financial instruments is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition.
Dividend income
Dividend income from investments is recognised when the Shareholders' rights to receive payment have been established.
Dividends payable
Dividends payable on ordinary shares are recognised in the Statement of Changes in Equity when approved by the Directors in respect of interim dividends and by the Shareholders if declared as a final dividend by the Directors at the AGM. The Directors intend to recommend a dividend on a quarterly basis, having regard to various considerations including the financial position of the Company.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and highly liquid interest-bearing securities with original maturities of three months or less.
Segmental reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses. The Directors perform regular reviews of the operating results of the Group and make decisions using financial information at the Group level only. Accordingly, the Directors believe that the Group has only one reportable operating segment.
The Directors are responsible for ensuring that the Group carries out business activities in line with the transaction documents. They may delegate some or all of the day-to-day management of the business, including the decisions to purchase and sell securities, to other parties both internal and external to the Group. The decisions of such parties are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Directors, therefore the Directors retain full responsibility as to the major allocation decisions of the Group.
Earnings per share
The Company presents basic and diluted earnings per share ("EPS") data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary Shareholders by the weighted average number of ordinary shares outstanding during the period. The diluted EPS is the same as the Basic EPS as there is currently no arrangement which could have a dilutive effect on the Company's ordinary shares.
Share capital and share premium
Ordinary Shares are not redeemable and are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.
Expenses (including finance costs)
Expenses are accounted for on an accruals basis and are recognised in the Statement of Comprehensive Income. Investment management fee is 100% allocated to revenue. Except for provision of default and performance fee associated with financial assets at fair value through profit or loss, which are allocated into capital and revenue in accordance with SORP, all other expenses are charged through revenue.
3. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
The Group's financial asset at fair value through profit or loss represents its investment in Princeton and in Crowdnetic.
31 Dec 17 | 31 Dec 16 | 31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | (Company) | (Company) | |
USD | USD | USD | USD | |
Opening fair value | 46,647,239 | 52,723,467 | - | - |
Purchases | 300,000 | 3,000,000 | 300,000 | - |
Redemptions | (4,767,069) | (9,201,900) | - | - |
Net gain/(loss) | ||||
- net gain allocation | 4,424,451 | 8,982,284 | - | - |
- Argon impairment allocation | (16,983,138) | (8,856,612) | - | - |
Closing balance | 29,621,483 | 46,647,239 | 300,000 | - |
Fair value estimationPrinceton
The Group's investment in Princeton is valued on the basis of Statement of Fund Performance received on a monthly basis from Princeton, less a provision for potential defaults of USD 9,768,017 (2016: USD 137,750).
In previous accounting period, the fair value as at the reporting date was checked for reasonableness by comparing the amount against Princeton's discounted projected future cash flows. Following Argon's bankruptcy as announced by the Company on 22 December 2016, the Investment Manager made various inquiries in respect of the basis on which Princeton's reserve against the Argon portfolio has been made. These inquiries included meetings with Princeton's management, auditor, legal counsel and the Group's auditor. As the Investment Manager has not been provided enough data to make its own determination of the value of this asset, the Investment Manager, as a practical expedient, is relying upon the NAV provided by Princeton as at 31 December 2017, without any adjustment.
In June 2017, the Company announced that, among other claims, it is seeking to enforce redemption and provision of financial information rights against Princeton via the arbitration proceedings. As noted in the Company's announcement on 12 March 2018, Princeton and its General Partner filed voluntary chapter 11 bankruptcy petitions on 9 March 2018 in the United Stated Bankruptcy Court for the District of New Jersey. The Company is therefore seeking to obtain discovery from Princeton, pursuant to the bankruptcy process, relating to the valuation and value of Princeton's assets. It is also, through its legal representatives, actively participating in the bankruptcy cases with a particular focus on, to the extent possible in the circumstances, seeking to protect its capital invested.
The bankruptcy petitions have the effect of staying this first phase of the arbitration as against Princeton and its general partner. As previously reported, the arbitration process includes a second phase consisting of claims against various individuals and entities (including MicroBilt Corporation) who, as specified in the claims, are alleged to have controlled the Princeton funds, and to have acted improperly in connection with its activities, or improperly benefitted from misconduct. Although the bankruptcy filing may stay some of the claims in the second phase, the Company intends to proceed with the second phase claims against the individuals and entities that are not subject to the bankruptcy stay. These claims continue to be conducted by the Company's attorneys on a contingency basis.
FinMkt, Inc. (formerly Crowdnetic Corporation) ("Crowdnetic")
The Group's investment in Crowdnetic, a Cayman SPV, is valued based on the 2nd equity financing in October 2017. The Group held 600,000 fully diluted Series A preferred shares at a price of USD 0.50 per share.
4. LOANS HELD AT AMORTISED COST
31 Dec 17 | 31 Dec 16 | 31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | (Company) | (Company) | |
USD | USD | USD | USD | |
Opening balance | 240,015,255 | 130,572,462 | 35,757,090 | 576,248 |
Purchases | 220,006,567 | 259,863,807 | 16,473,130 | 39,053,284 |
Principal repayments | (199,083,681) | (150,024,854) | (5,280,919) | (2,592,569) |
Amortisation of transaction fees | (253,554) | (73,823) | - | (332) |
Accrued interest | 1,731,774 | 1,289,690 | 888,532 | 463,471 |
Loans written-off | (10,730,543) | (5,089,881) | - | - |
Effect of foreign exchange | 2,945,742 | (1,648,828) | 3,111,060 | (1,674,440) |
254,631,559 | 234,888,573 | 50,948,893 | 35,825,662 | |
(Provision for) / utilisation of default allowance - net | (3,638,263) | 5,126,682 | (155,552) | (68,572) |
Closing balance | 250,993,296 | 240,015,255 | 50,793,341 | 35,757,090 |
The Group's loans are accounted for using the effective interest method. The carrying value of such instruments includes assumptions that are based on market conditions existing at each statement of financial position date. Such assumptions include application of default rate and identification of effective interest rate taking into account the credit standing of each borrower as assessed by each direct lending platform. At year end, the Directors estimate that the carrying value approximates the fair value.
The main factor considered by the Board in determining whether or not the amounts due are impaired is if the underlying borrowers' source of income has decreased or is unlikely to continue. The following table shows the age of the receivables which are considered to be at risk of default:
31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | |
USD | USD | |
Up to 3 months | 9,710,030 | 13,660,557 |
3 to 6 months | 4,415,793 | 7,938,810 |
Over 6 months | 18,485,476 | 459,409 |
32,611,299 | 22,058,776 |
The movement in the provision for allowance for loan losses is as follows:
31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | |
USD | USD | |
Balance at the beginning of the year | 660,839 | 683,455 |
Provision for the year | 14,368,806 | 5,067,265 |
Amount written-off during the year | (10,730,543) | (5,089,881) |
Balance at end of the year | 4,299,102 | 660,839 |
5. ADVANCES TO/FUNDS RECEIVABLE FROM DIRECT LENDING PLATFORMS
31 Dec 17 | 31 Dec 16 | 31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | (Company) | (Company) | |
USD | USD | USD | USD | |
Other direct lending platforms | 3,782,916 | 1,000,563 | - | - |
3,782,916 | 1,000,563 | - | - |
6. INVESTMENT IN SUBSIDIARIES
31 Dec 17 | 31 Dec 16 |
| ||||
(Company) | (Company) |
| ||||
USD | USD |
| ||||
Investment in subsidiaries | 195,780,355 | 195,780,355 |
| |||
Subsidiary name | Effective ownership % | County of Incorporation and Place of Business | Principal activity | |||
Ranger Direct Lending Fund | 100% | USA | Invests in a portfolio of Debt Instruments through Direct Lending Platforms | |||
Ranger Direct Lending ZDP plc | 100% | United Kingdom | Issuance of zero dividend preference shares | |||
In the Company's statement of comprehensive income, an impairment loss of USD 225,717 (2016: USD 747,901) was recognised relating to the Company's investment in ZDPco, in respect of expenses paid on behalf of ZDPco. The Company's investment in ZDPco was fully impaired due to ZDPco's Shareholder's deficit position as at reporting date.
7. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
Profit on ordinary activities before taxation is stated after charging/(crediting):
31 Dec 17 | 31 Dec 16 | 31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | (Company) | (Company) | |
USD | USD | USD | USD | |
Provision for/(Reversal of) default | 3,073,240 | (36,801) | 155,552 | 68,572 |
Loans written-off | 10,730,543 | 5,089,881 | - | - |
Foreign exchange loss/(gain) - net | 2,591,408 | (281,679) | - | (299,649) |
16,395,191 | 4,771,401 | 155,552 | (231,077) |
31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | |
USD | USD | |
Audit fees for annual financial statements: | ||
- RDLF | 129,880 | 116,400 |
- ZDPco | 26,801 | 27,148 |
Additional audit fees in respect of audit for the year ended 31 December 2016 | 69,321 | - |
Agreed-Upon procedure for C Share conversion | 6,196 | - |
Non-audit fees related to corporate financial services charged to Share Premium | - | 37,837 |
Non-audit fees related to corporate financial services included as issue costs in note 9 | - | 152,522 |
Fee for review of half-yearly financial reporting - RDLF | 18,887 | 11,005 |
251,083 | 344,912 |
8. ACCRUED EXPENSES AND OTHER LIABILITIES
31 Dec 17 | 31 Dec 16 | 31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | (Company) | (Company) | |
USD | USD | USD | USD | |
Performance fees payable - notes 16 and 17 | - | 1,387,481 | - | 1,387,481 |
Investment Management fees payable - notes 16 and 17 | 853,887 | 475,002 | 853,887 | 475,002 |
Withholding tax payable | - | 922,994 | - | 922,994 |
Other payables | 1,765,699 | 914,593 | 481,268 | 276,015 |
2,619,586 | 3,700,070 | 1,335,155 | 3,061,492 | |
9. ZERO DIVIDEND PREFERENCE SHARES
31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | |
USD | USD | |
Opening balance | 66,096,829 | - |
Issuance of ZDP Shares | - | 66,395,370 |
Issue costs | - | (1,324,666) |
Amortisation of issue costs during the year | 296,551 | 57,819 |
Amortisation of premium during the year | (178,374) | (25,647) |
Interest expense during the year | 3,486,353 | 1,024,920 |
Effect of foreign exchange | 6,520,660 | (30,967) |
Closing balance | 76,222,019 | 66,096,829 |
Under the ZDPco's Articles of Association, the Directors are authorised to issue up to 55 million zero dividend preference shares ("ZDP Shares") for a period of 5 years from 25 July 2016. The ZDPCo issued 53 million ZDP Shares at GBP 0.01 each (the "ZDP Shares") in 2016. On 1 November 2016, the ZDPco passed a resolution to authorise Directors to issue up to 75 million ZDP shares, such authority to expire on 26 July 2021, unless revoked sooner or varied by the Company in general meeting. The ZDP Shares will have a term of five years and a final capital entitlement of GBP 127.63 pence per ZDP share on 31 July 2021, being the ZDP Repayment Date. The total amount repayable on the ZDP repayment date is GBP 67,643,900.
The ZDP Shares do not carry the right to vote at general meetings of the Company, although they carry the right to vote as a class on certain proposals which would be likely to materially affect their position. Further ZDP Shares (or any shares or securities which rank in priority to or pari passu with the ZDP Shares) may be issued without the separate class approval of the ZDP Shareholders provided that the Directors determine that the ZDP Shares would have a Cover of not less than 2.75 times immediately following such issue. The Cover for ZDP Shares as at 31 December 2017 is 3.19 times (2016: 3.70 times).
10. SHARE CAPITAL AND SHARE PREMIUM
The table below shows the total issued share capital as at 31 December 2017 and 31 December 2016:
Nominal value | Nominal value | Number of shares | |
GBP | USD | Number | |
Ordinary Shares | 309,591 | 427,300 | 16,122,931 |
Ordinary Shares
The IPO of 13,500,000 Ordinary Shares on 1 May 2015 was priced at GBP 10 each resulting in a share premium amount of USD 204,225,570 (GBP 132,665,694) net of direct issue costs. Shareholder's approval was given on 2 April 2015 for the Company's share premium account to be cancelled immediately after admission and this permission was confirmed by court order on 1 July 2015.
On 16 December 2015, the Company issued a total of 1,348,650 new Ordinary Shares at GBP 10.45 per share resulting in a share premium amount of USD 20,989,992 (GBP 13,889,694) net of direct issue costs of USD 287,555 pursuant to a tap issue.
C Shares
On 16 December 2016 the Company issued 1,611,041 C Shares pursuant to the Open Offer and Initial Placing at an issue price of GBP 10 per C Share each resulting in a share premium amount of USD 19,356,955 (GBP 15,666,299) net of direct issue costs. The Company's C Shares were subsequently converted into 274,281 Ordinary Shares on 6 April 2017, following full investment of the net proceeds of the issue of the C Shares in accordance with the Company's investment policy.
Rights attaching to the shares
The holders of the C shares and ordinary shares are only entitled to receive, and to participate in, any dividends declared in relation to the relevant class of shares that they hold.
The holders of Ordinary Shares shall be entitled to all of the Company's remaining net assets after taking into account any net assets attributable to the C shares.
The Ordinary Shares and C Shares shall carry the right to receive notice of, attend and vote at general meetings of the Company.
On a winding-up or a return of capital by the Company, if there are C shares in issue, the net assets of the Company attributable to the C shares shall be divided pro rata among the holders of the C shares. For so long as C shares are in issue, and without prejudice to the Company's obligations under the Act, the assets attributable to the C shares shall, at all times, be separately identified and shall have allocated to them such proportion of the expenses or liabilities of the Company as the Directors fairly consider to be attributable to the C shares.
Voting Rights
Subject to any rights or restrictions attached to any shares, on a show of hands every Shareholder present in person has one vote and every proxy present who has been duly appointed by a Shareholder entitled to vote has one vote, and on a poll every Shareholder (whether present in person or by proxy) has one vote for every share of which he is the holder. A Shareholder entitled to more than one vote need not, if he votes, use all his votes or cast all the votes he uses the same way. In the case of joint holders, the vote of the senior holder who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the vote of the other joint holders, and seniority shall be determined by the order in which the names of the holders stand in the Register.
No Shareholder shall be entitled to vote at any general meeting or at any separate general meeting of the holders of any class of shares in the Company, either in person or by proxy, in respect of any share held by him unless all amounts presently payable by him in respect of that share have been paid.
Variation of Rights and Distribution on Winding Up
If at any time the share capital of the Company is divided into different classes of shares, the rights attached to any class may, unless otherwise provided by the terms of issue of the Shares of that Class, be varied or abrogated, whether or not the Company is being wound up, either with the consent in writing of the holders of not less than three-quarters in nominal value amount of the issued shares of the affected class, or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class (but not otherwise).
At every such separate general meeting the necessary quorum, other than an adjourned meeting, shall be two persons holding or representing by proxy at least one-third in nominal amount of the issued shares of the class in question, and at an adjourned meeting one person holding shares of the class in questions or his proxy; any holder of shares of the class in question present in person or by proxy may demand a poll and the holder of shares of the class in question shall, on a poll, have one vote in respect of every share of such class held by him. Where the rights of some only of the shares of any class are to be varied, the foregoing provisions as if each group of shares of the class differently treated formed a separate class whose rights are to be varied.
Variation of Rights and Distribution on Winding Up
The Company has no fixed life but, pursuant to the Articles, an ordinary resolution for the continuation of the Company will be proposed at the AGM of the Company to be held in 2020 and, if passed, every five years thereafter. Upon any such resolution not being passed, proposals will be put forward within three months after the date of the resolution to the effect that the Company be wound up, liquidated, reorganised or unitised. If the Company is wound up, the liquidator may divide among the Shareholders in specie the whole or any part of the assets of the Company and for that purpose may value any assets and determine how the division shall be carried out as between the Shareholders or different classes of Shareholders.
The table below shows the movement in shares during the year:
Nominal value | Nominal value | Number of shares | |
GBP | USD | Number | |
Ordinary Shares | 309,591 | 427,300 | 16,122,931 |
Shares in issue at the beginning of the year | Shares converted | Shares in issue at the end of the year | |
Ordinary Shares | 14,848,650 | 1,274,281 | 16,122,931 |
C Shares | 1,611,041 | (1,611,041) | - |
10. DIVIDENDS
1 Jan to | 1 Jan to | |||
Per share | 31 Dec 2017 | 31 Dec 2016 | ||
pence | USD | USD | ||
Ordinary Shares dividends declared and paid: | ||||
Interim dividends in 2017 (in respect of 30 Sept 2017 results) | 21.70 | 4,586,363 | - | |
Interim dividends in 2017 (in respect of 30 Jun 2017 results) | 24.62 | 5,158,963 | - | |
Interim dividends in 2017 (in respect of 31 Mar 2017 results) | 26.93 | 5,534,376 | - | |
Interim dividends in 2017 (in respect of 31 Dec 2016 results) | 28.51 | 5,275,612 | - | |
Interim dividends in 2016 (in respect of 30 Sept 2016 results) | 27.67 | - | 5,102,085 | |
Interim dividends in 2016 (in respect of 30 Jun 2016 results) | 26.87 | - | 5,210,318 | |
Interim dividends in 2016 (in respect of 31 Mar 2016 results) | 20.45 | - | 4,423,133 | |
Interim dividends in 2016 (in respect of 31 Dec 2015 results) | 14.62 | - | 3,060,631 | |
Total dividends paid during the year | 20,555,314 |
17,796,167 | ||
Set out below is the total dividend paid in respect of the financial year:
The Company intends to distribute at least 85% of its distributable income earned in each financial year by way of dividends. The Company intends to pay dividends on a quarterly basis with dividends declared in February, May, August and November and paid in April, June, September and December in each year. On 1 March 2018, the Directors declared an interim dividend of 24.14 pence per share for the three month period ended 31 December 2017.
It is the current intention of the Board to move towards a policy of balancing the quarterly dividend payments as soon as the revenue position of the Company permits this approach. The Board, in its sole discretion, may choose not to adopt a dividend balancing policy if it considers this is desirable to minimise the effects of cash drag on the Company's performance.
12. TAXATION
In May 2015 the Company received confirmation from HM Revenue & Customs as an approved investment trust in the UK for accounting periods commencing on or after 1 May 2015, subject to the Company continuing to meet the eligibility conditions at Section 1158 Corporation Tax Act 2010 and the ongoing requirements for approved investment trust companies in Chapter 3 of Part 2 Investment Trust (Approved Company) Tax Regulations 2011 (Statutory Instrument 2011/2999). The Company intends to retain this approval and self-assesses compliance with the relevant conditions and requirements.
As an investment trust, the Company is exempt from UK corporation tax on its chargeable gains. The Company's revenue income from loans is taxable in the hands of the Company however, to the extent that interest distributions are paid to Shareholders, the Company may treat that amount as deductible from its taxable profits.
31 Dec 17 | 31 Dec 17 | 31 Dec 17 | |
Revenue | Capital | Total | |
USD | USD | USD | |
Corporation tax: | |||
Current year | 652,592 | (419,751) | 232,841 |
Deferred tax | (80,669) | - | (80,669) |
Tax expense | 571,923 | (419,751) | 152,172 |
31 Dec 16 | 31 Dec 16 | 31 Dec 16 | |
Revenue | Capital | Total | |
USD | USD | USD | |
Corporation tax: | 279,956 | (225,628) | 54,328 |
Current year | 36,372 | (36,372) | - |
Deferred tax | - | - | - |
Tax expense | 316,328 | (262,000) | 54,328 |
The tax reconciliation is as follows:
| |||
Profit/(loss) before tax | 20,501,007 | (26,785,301) | (6,284,294) |
Tax at the standard UK corporation tax rate of 19.25% | 3,946,444 | (5,156,170) | (1,209,727) |
Effects of: | |||
- Non-deductible expenses | 693,872 | 2,065,630 | 2,759,501 |
- Interest distributions | (3,984,582) | - | (3,984,582) |
- Loss brought forward | (419,753) | - | (419,753) |
- Marginal relief | 419,753 | (419,753) | - |
- Foreign exchange difference on consolidation | (3,141) | - | (3,141) |
- Non-taxable fair value adjustments | - | 3,090,542 | 3,090,542 |
- Deferred tax credit | (80,669) | - | (80,669) |
Tax expense | 571,923 | (419,751) | 152,172 |
Deferred tax asset | 80,669 | - | 80,669 |
31 Dec 16 | 31 Dec 16 | 31 Dec 16 | |
Revenue | Capital | Total | |
USD | USD | USD | |
Profit before tax | 17,809,632 | (5,353,162) | 12,456,470 |
Tax at the standard UK corporation tax rate of 20% | 3,561,926 | (1,070,631) | 2,491,295 |
Effects of: | |||
- Non-deductible expenses | 211,418 | 1,017,976 | 1,229,394 |
- Interest distributions | (3,523,123) | (479,809) | (4,002,932) |
- Unutilised interest distributions | - | 255,584 | 255,584 |
- Marginal relief | 1,404 | (1,404) | - |
- Foreign exchange difference on consolidation | 28,331 | - | 28,331 |
- Non-taxable fair value adjustments | - | 52,656 | 52,656 |
- Prior year adjustment | 36,372 | (36,372) | - |
316,328 | (262,000) | 54,328 |
As of 31 December 2017 the Company had recognised a deferred tax asset of USD 80,669 (2016: USD nil), based on a prospective corporation tax rate of 17%, in respect of losses of USD 474,526 (2016: USD nil) which are available to be carried forward against future taxable profits.
13. DERIVATIVE FINANCIAL INSTRUMENTS
31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | |
USD | USD | |
Derivative assets | 1,110,329 | 531,528 |
Derivative liabilities | (545,126) | (1,103,319) |
565,203 | (571,791) |
31 Dec 17 | 31 Dec 16 | ||
Notional | (Group) | (Group) | |
Amount | USD | USD | |
Derivative assets/(liabilities) | - | ||
Forward foreign currency contracts | 10,283,485 | (157,109) | (804,214) |
Forward currency swap contracts | 56,704,401 | 722,312 | 232,423 |
66,987,886 | 565,203 | (571,791) |
The Company has entered into various swap and forward contracts to manage exposure to foreign currency on existing assets. The notional amounts provided in the table above reflect the aggregate of individual derivative positions on a gross basis.
14. BASIC AND DILUTED EARNINGS PER SHARE
The basic earnings per Ordinary Share is based on each of the profit after tax and on 15,910,551 Ordinary Shares, being the weighted average number of ordinary shares in issue through the year (31 December 2016: 14,848,650 Ordinary Shares and 1,611,041 C Shares).
The diluted earnings per Ordinary Share is based on each of the profit after tax and on 16,122,931 Ordinary Shares, being the weighted average number of ordinary shares in issue throughout the year and the potential Ordinary Shares i.e. C Shares that were converted to Ordinary Shares during the year (31 December 2016: 14,848,650 Ordinary Shares and 1,611,041 C Shares).
15. CASH AND CASH EQUIVALENTS
The components of the Group's cash and cash equivalents are:
31 Dec 17 | 31 Dec 16 | 31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | (Company) | (Company) | |
USD | USD | USD | USD | |
Cash at bank | 9,632,179 | 24,758,680 | 1,236,657 | 15,407,630 |
Cash equivalents | 67,620 | 61,700 | 67,620 | - |
9,699,799 | 24,820,380 | 1,304,277 | 15,407,630 |
16. RELATED PARTIES
Transactions between the Group and its related parties are disclosed below.
The Directors, who are the key management personnel of the Group, are remunerated per annum as follows:
31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | |
USD | USD | |
Chairman | 38,976 | 26,421 |
Other directors | 67,879 | 44,495 |
106,855 | 70,916 |
As at 31 December 2017, USD 27,809 (2016: USD 23,126) was accrued for directors' remuneration.
As at 31 December 2017 Mr Waldron has an interest in the Company, in the form of 3,500 Ordinary Shares representing 0.02% interest in the total voting rights (2016: 500 Ordinary Shares and 583 C Shares, representing 0.0066% interest in the total voting rights). Mr Canon indirectly owns 630 shares, as a limited partner of Ranger Capital Company, representing 0.03% in the voting rights of the Company. The remaining Directors do not have any interests in the Company's shares. None of the Directors hold any share options nor are any receivables due or payable to them under any long term incentive plan.
The Company has not made any contribution, to any Directors' pension scheme and no retirement benefits are otherwise accruing to any of the Directors under any defined benefit or monthly purchase scheme for which the Company is liable. There have been no changes to the aforementioned holding between 31 December 2017 and the date of this report.
The Group does not have any employees.
The Board has delegated responsibility for day-to-day management of the loans held by Direct Lending Platforms to the Investment Manager. Under the terms of the Investment Management Agreement, the Investment Manager is entitled to a management fee and a performance fee together with reimbursement of reasonable expenses incurred by it in the performance of its duties. Total investment management fees for the year amounted to USD 3,054,733 (31 December 2016: USD 2,521,735). As at 31 December 2017, the investment management fees payable were USD 853,887 (31 December 2016: USD 475,002). Further details are disclosed in note 17 below.
During the year, the Investment Manager received a reimbursement amount of USD 94,466 for expenses (31 December 2016: USD 93,400 comprising: issue costs on C Shares amounting to USD 11,457 and other expenses of USD 81,943). Performance fee for the year amounted to USD 13,763 (31 December 2016: USD 1,387,481). As at 31 December 2017, performance fee payable was USD nil (31 December 2016: USD 1,387,481).
As at 31 December 2017, the Investment Manager holds 4,500 Ordinary Shares representing 0.03% of the total interest in voting rights of the Company (31 December 2016: nil).
The Company entered into a Trust Agreement with Ranger Direct Lending Fund Trust on 22 April 2015. The Company, being the sole unitholder, has sole discretion to declare distributions from the Trust. As at 31 December 2017, amounts owed by undertaking relating to the Trust's net income was USD 44,712,526 (2016: USD 65,710,219).
The Company incorporated the ZDPco on 23 June 2016 as a public limited company with limited life and granted an undertaking to (among other things) subscribe for such number of ordinary shares in the capital of ZDPco as may be necessary or to otherwise ensure that the ZDPco has sufficient assets to satisfy its obligations to the ZDP Shareholders and pay any operational costs incurred by the ZDPco. During the year, the Company paid ZDPCo's expenses amounting to USD 225,717 (2016: USD 673,851 representing ZDPCo's expenses and Share issue costs).
On 25 July 2016, the Company entered into a Loan Agreement with the ZDPCo. Pursuant to the Loan Agreement, the ZDPCo immediately following the admission of its ZDP Shares, on-lent the proceeds to the Company which the latter have applied towards making investments in accordance with its investment policy and working capital purposes. The amount payable to the ZDPCo which is eliminated upon consolidation is USD 73,835,016 (2016: USD 66,049,907).
17. FEES AND EXPENSES
Management fee
The management fee is payable monthly in arrears and is at the rate of 1/12 of 1.0% per month of NAV (the "Management Fee"). For the period from Admission until the date on which 80% of the Net Proceeds have been invested or committed for investment, directly or indirectly, in Debt Instruments or Direct Lending Company Equity, the value attributable to any assets of the Group other than Debt Instruments or in investments in Direct Lending Company Equity held for investment purposes (including any cash) will be excluded from the calculation of Net Asset Value for the purposes of determining the Management Fee.
The Investment Manager may charge a fee based on a percentage of gross assets (such percentage not to exceed 1.0% and provided that the aggregate Management Fee payable by the Group shall not exceed an amount equal to 1.0% of the gross assets of the Company or its group in aggregate (as applicable)) to any entity which is within the Company's group (including the Company), provided that such entity employs leverage for the purpose of its investment policy or strategy.
Performance fee
The Investment Manager is also entitled to a performance fee calculated by reference to the movements in the Adjusted NAV since the end of the Calculation Period (as defined below) in respect of which a performance fee was last earned or Admission if no performance fee has yet been earned (the Adjusted NAV at such earlier date being the "High Water Mark").
The performance fee will be a sum equal to 10% of the amount by which the Adjusted Net Asset Value at the end of a Calculation Period exceeds the High Water Mark.
The performance fee will be calculated in respect of each twelve month period starting on 1 January and ending on 31 December in each calendar year (a "Calculation Period"), save that the first Calculation Period was the period commencing on Admission and ending on 31 December 2015 and the last Calculation Period shall end on the date that the Investment Management Agreement is terminated or, where the Investment Management Agreement has not previously been terminated, the Business Day prior to the date on which the Company enters into liquidation, and provided further that if at the end of what would otherwise be a Calculation Period no performance fee has been earned in respect of that period, the Calculation Period shall carry on for the next 12 month period and shall be deemed to be the same Calculation Period and this process shall continue until a performance fee is next earned at the end of the relevant period.
In the event that C shares are in issue, the Investment Manager shall be entitled to a performance fee in respect of the net assets referable to the C shares on the same basis as summarised above. A Calculation Period shall be deemed to end on the date of their conversion into Ordinary Shares.
The Management fee and Performance fee payable to the Investment Manager will be calculated and paid in US Dollars.
Termination Arrangements
The Investment Management Agreement shall remain in force unless and until terminated by the Company or the Investment Manager both giving to the other not less than 12 months' written notice, such notice not to be served before the third anniversary of Admission.
This Agreement may also be terminated by the Company (without prejudice to any right of action accruing or already accrued to it) immediately and without penalty in writing if there is a Change of Control of the Investment Manager and the entity acquiring control of the Investment Manager is deemed, in the reasonable opinion of the Board, to be unsuitable.
Consequences of Termination
If the agreement is terminated, the Company shall: (a) pay the accrued management fees and performance fees on a pro rata basis to the date of termination in accordance with Schedule 3 of the Investment Management Agreement; and (b) promptly reimburse to the Investment Manager all of its out of pocket expenses incurred in respect of the performances of its services hereunder up to the date of termination and payable by the Company in accordance to this Agreement. No additional payment will be required to be made to the Investment Manager by the Company.
18. FINANCIAL RISK MANAGEMENT
Financial risk factors
The Company has an established management process to identify the principal risks that it faces as a business. The risk management process relies on the Investment Manager and the Board of Directors' assessment of the risk likelihood and impact and also developing and monitoring appropriate controls. The table below sets out the key financial risks and examples of relevant controls and mitigating factors. The Board considers these to be the most significant risks faced by the Company that may impact the achievement of the Company's investment objectives. They do not comprise all of the risks associated with the Company's strategy and are not set out in priority order.
Currency risk | Key controls and mitigating factors |
The risk that exchange rate volatility may have an adverse impact to the Company's financial position and result. | The Investment Manager monitors the Company's exposure to foreign currencies on a monthly basis and reports to the Board at each board meeting. The Investment Manager measures the risk to the Company of the foreign currency exposure by considering the effect on the Company's net asset value and total return of a movement in the exchange rate to which the Company's assets, liabilities, income and expenses are exposed. The Company has entered into derivative contracts to mitigate the effect of the currency risk (see note 13). The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. |
The currency risk of the Group's monetary financial assets and (liabilities) was:
31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | |
USD | USD | |
United States Dollars | 244,174,487 | 270,826,561 |
Great British Pounds | (56,629,319) | (48,320,585) |
Canadian Dollars | 12,153,250 | 6,957,815 |
Australian Dollars | 16,105,482 | 13,555,080 |
215,803,900 | 243,018,871 | |
Sensitivity analysis
31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | |
USD | USD | |
Great British Pounds | (2,831,466) | (2,416,029) |
Canadian Dollars | 607,663 | 347,891 |
Australian Dollars | 805,274 | 677,754 |
Effect on Revenue return after taxation | (1,418,529) | (1,390,384) |
A 5% weakening of USD against the above currencies would have resulted in an equal and opposite effect on the above amounts, on the basis that all other variables remain constant. The Group's exposure has been calculated as at the year end and may not be representative of the period as a whole.
It is assumed that all exchange rates move by +/- 5% against US Dollar.
This percentage is deemed reasonable based on the average market volatility in exchange rates during the period. The sensitivity analysis is based on the Group's foreign currency financial assets and financial liabilities held at the Statement of Financial Position date.
Funding and liquidity risk | Key controls and mitigating factors |
The risk of being unable to continue to fund the Company's lending operation on an ongoing basis. | The Company finances its operations mainly from the issuance of Ordinary Shares and C Shares. There are no redemption rights for the Shareholders since the Company is closed-ended investment company. The ZDP Shares should have a minimum Cover11 of 2.75 times. The Administrator and the Investment Manager calculate the Cover each calendar month. In managing the Company's financial assets, the Investment Manager ensures that the Company holds at all times a portfolio of assets to enable the Company to discharge its payment obligations. The Group does not have any overdraft or other borrowing facilities. |
Maturity of financial assets and liabilities
The maturity profile of the Group's financial assets and liabilities is as follows:
31 Dec 17 | 31 Dec 17 | 31 Dec 16 | 31 Dec 16 | |
Financial Assets | Financial Liabilities | Financial Assets | Financial Liabilities | |
USD | USD | USD | USD | |
Within one year | 14,785,679 | 3,455,208 | 27,310,923 | 4,857,717 |
In more than one year but not more than five years | 280,695,448 | 76,222,019 | 286,662,494 | 66,096,829 |
In more than five years | - | - | - | - |
295,481,127 | 79,677,227 | 313,973,417 | 70,954,546 |
11 Cover represents a fraction where the numerator is equal to the NAV of the Group on a consolidated basis adjusted to: (i) add back any liability to ZDP Shareholders; and (ii) deduct the estimated liquidation costs of the ZDPco, and the denominator is equal to the amount which would be paid on the ZDP Shares as a class.
Interest rate risk | Key controls and mitigating factors |
The Company is exposed to interest rate risk due to fluctuations in the prevailing market rates. | In the event that interest rate movements lower the level of income receivable on loan portfolios or cash deposits the dividend required to be paid by the Company to the Shareholders will also be reduced. Interest rate risk is analysed by the Investment Manager on a monthly basis and is communicated and monitored by the Board on a quarterly basis. The Company may also invest in other investment funds that employ leverage with the aim of enhancing returns to investors. |
IFRS 7 requires disclosure of a sensitivity analysis for each type of market risk to which the entity is exposed at the reporting date, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date.
The sensitivity to a reasonably possible 50 bps decrease/increase in the interest rates, with all other variables held constant, would have decreased/increased the Group's returns after tax by the following:
31 Dec 17 | 31 Dec 16 | |
USD | USD | |
Effect on Revenue return | 204,370 | 116,015 |
The above changes are considered by the Directors to be reasonable given the observation of prevailing market conditions in the period. The average effective interest income rate during the year is 13.3% (31 December 2016: 17.9%).
Credit and counterparty risk | Key controls and mitigating factors |
Credit risk is the risk of financial loss to the Group if the borrower fails to meet its contractual obligations. The carrying amounts of financial assets best represent the maximum credit risk exposure at the reporting date. | The Group and its Investment Manager seek to mitigate the credit risk by actively monitoring the Group's loan direct lending platform portfolio and the underlying credit quality of the borrowers. The Group's investment strategy allows the Group to potentially reduce risk through investment diversification while also potentially achieving higher returns by investing in the best performing direct lending asset classes. Further, cash is held at banks that are considered to be reputable and high quality. Cash balances are spread across a range of banks to reduce concentration risk. |
The maximum exposure to credit risk, expressed as the gross principal amount of the loans outstanding rather than the carrying value of such loans, without taking into account any collateral held or other credit enhancements was as follows:
31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | |
USD | USD | |
Financial assets at fair value through profit or loss | 29,621,483 | 46,647,239 |
Loan principal amount | 246,905,891 | 237,694,949 |
Accrued interest | 4,087,405 | 2,320,306 |
Derivative assets | 1,110,329 | 531,528 |
Advances to/funds receivable from direct lending platforms | 3,782,916 | 1,000,563 |
Prepayments and other receivables | 192,635 | 958,452 |
Cash and cash equivalents | 9,699,799 | 24,820,380 |
295,400,458 | 313,973,417 |
The amounts presented in the Statement of Financial Position are net of default provision. Default provision is made where there is an identified loss event, based on previous experience, as evidence of a reduction in the recoverability of cash flows. The majority of the Group's cash and cash equivalents is with Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. As at 31 December 2017, Bank of America, N.A. has a long-term deposit credit rating of A+ (2016: A+) from Standard & Poor's and Merrill Lynch, Pierce, Fenner & Smith Incorporated has a long-term senior credit rating of A+ (2016: A+) from Standard & Poor's. Given this rating, the Directors do not expect this counterparty to fail to meet its obligations.
Fair value hierarchy
The fair values of the financial assets held at fair value through profit and loss was derived from the NAV of Princeton as at 31 December 2017 and price per share of Crowdnetic as at 31 October 2017. The fair values of the derivative financial instruments have been provided to the Directors by the counterparty, BNP Paribas S.A. and RBC Capital Markets., on whom the Directors rely as expert providers of such valuations.
The fair values of cash and cash equivalents, funds receivable from/payable to Direct Lending Platforms, prepayments and other receivables, and accrued expenses and other liabilities are estimated to be approximately equal to their carrying values due to their short-term nature.
The Directors based the fair value of the ZDP Shares disclosed below on the traded price of GBP 1.019 per share which was observed on the London Stock Exchange on 29 December 2017 (2016: GBP 1.045 per share which was observed on the London Stock Exchange on 29 December 2016) being the last observable traded price before period-end. The fair value for the ZDP Shares of GBP 54,007,000 or USD 73,039,067 (based on an exchange rate of 1.3524) is disclosed in this note for disclosure purposes only under IFRS 13.
IFRS 13 "Fair Value Measurement" ("IFRS 13") defines a fair value hierarchy that prioritises the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy under IFRS 13 are as follows:
Level 1: Inputs that reflect unadjusted quoted prices in active markets for identical assets and liabilities at the valuation date;
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the assets or liability either directly (as prices) or indirectly (derived from prices), including inputs from markets that are not considered to be active; and
Level 3: Inputs that are not based upon observable market data.
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. The main input parameters for this model are the default rate (the value rises when the default rate is lower, and decreases when the default rate is higher), the interest rate (the value rises when the interest rate is higher, and drops when the interest rate is lower), and the discount rate (the value rises when the discount rate is lower, and drops when discount rate is higher). A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
However, the determination of what constitutes "observable" requires significant judgement by the Directors. The Directors consider observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple independent sources that are actively involved in the relevant market.
The categorisation of a financial instrument within the hierarchy is based upon the pricing transparency of the financial instruments and does not necessarily correspond to the Group's perceived risk inherent in such financial instruments.
The following tables include the fair value hierarchy of the Group's financial assets and liabilities designated at fair value through profit or loss:
Level 1 | Level 2 | Level 3 | Total | |
31 Dec 17 | (USD) | (USD) | (USD) | (USD) |
Financial assets | - | 1,110,329 | 29,621,483 | 30,731,812 |
Financial liabilities | - | 545,126 | - | 545,126 |
Level 1 | Level 2 | Level 3 | Total | |
31 Dec 16 | (USD) | (USD) | (USD) | (USD) |
Financial assets | - | 531,528 | 46,647,239 | 47,178,767 |
Financial liabilities | - | 1,103,319 | - | 1,103,319 |
There were no transfers between Levels during the year or in the prior period.
As disclosed in note 4, the fair value of Loans held at amortised cost approximate their carrying amounts and are categorised as Level 2.
The ZDP Shares are classified within Level 1 of the fair value hierarchy on the basis that the fair value was derived from an observable traded price.
19. OTHER INCOME
31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | |
USD | USD | |
Factor income | 7,203,352 | 3,990,930 |
Fee income | 850,102 | 866,227 |
Late fee income | 158,541 | 53,906 |
Other income | 1,327 | - |
8,213,322 | 4,911,063 |
20. OTHER EXPENSES
31 Dec 17 | 31 Dec 16 | |
(Group) | (Group) | |
USD | USD | |
Legal fees | 3,043,960 | 399,481 |
Audit fees | 271,828 | 162,740 |
Amortisation of origination fee | 253,554 | 73,823 |
Director fees | 121,827 | 73,547 |
Regulatory fees | 35,400 | 19,738 |
Other expenses | 381,225 | 438,509 |
4,107,794 | 1,167,838 |
21. OPERATING SEGMENTS
Geographical information
The Group is managed as a single asset management business, being the investment of the Group's capital in financial assets comprising Debt Instruments and loans originated by Direct Lending Platforms.
The chief operating decision maker is the Board of Directors. Under IFRS 8 the Group is required to disclose the geographical location of revenue and amounts of non-current assets other than financial instruments.
Revenues
The Group's revenues are currently generated from United States of America ("USA"), United Kingdom ("UK") and Canada. The total investment income generated from USA, UK and Canada amounted to USD 21,528,260, USD 3,606,532 and USD 1,377,185, respectively (2016: USA, UK and Canada amounted to USD 19,270,818, USD 2,152,851 and USD 448,599 respectively).
Non-current assets
The Group does not have non-current assets other than the Loans held at amortised cost and financial assets at fair value through profit or loss.
22. CAPITAL MANAGEMENT
The Board's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the Company. The Company's capital is represented by the Ordinary Shares, C Shares, share premium account and retained earnings. The capital of the Company is managed in accordance with its investment policy, in pursuit of its investment objectives.
The Company is subject to externally imposed capital requirements in relation to its statutory requirement relating to interest/dividend distributions to Shareholders.
Leverage
During 2016, the Company incorporated the ZDPco which issued ZDP Shares for trading on the London Stock Exchange's main market for listed securities. The proceeds from the issuance of the ZDP Shares were on-lent to the Company - by way of an intercompany loan agreement.
The Company's leverage limit under its Prospectus is 1.5. The Company has not breached this limit anytime during the year, nor has the Company made any changes to this maximum limit. The Company's borrowing policy does not grant the Company any right to reuse collateral.
Liquidity
As a closed ended investment company in which Shareholders have no right of redemption, there are no assets of the Company which are subject to special arrangements due to their illiquid nature, nor have any new arrangements been implemented for managing the liquidity of the Company.
23. COMMITMENTS
As at 31 December 2017, the Company had no outstanding commitments (2016: none).
24. ULTIMATE CONTROLLING PARTY
It is the opinion of the Directors that there is no ultimate controlling party.
25. SUBSEQUENT EVENTS
On 1 March 2018, the Directors proposed the payment of dividend on the ordinary shares of USD 33.61 cents (GBP 24.14 pence) per Ordinary Share at a total amount of USD 5,419,426. This dividend was paid in April 2018 and charged from revenue reserves.
As noted in the Company's announcement on 12 March 2018, Princeton and its General Partner each filed voluntary chapter 11 bankruptcy petitions on 9 March 2018 in the United Stated Bankruptcy Court for the District of New Jersey. The bankruptcy petitions had the effect of staying this first phase of the arbitration initiated by the Company against Princeton and its General Partner.
Through its legal representatives, the Company has been actively participating in the bankruptcy cases with a particular focus on, to the extent possible in the circumstances, seeking to protect its capital invested.
The bankruptcy court has now announced it ruling that most of the pending counts in the arbitration proceedings, which were substantially completed at the time Princeton and the General Partner filed for bankruptcy, may be completed. After the arbitration proceedings are completed, the Company has a number of legal options, including seeking further relief from the Bankruptcy Court While the actual dates for the continued arbitration proceeding have not be set, the Company will seek the earliest dates available to resume the arbitration proceedings after the Bankruptcy Court has issued its written orders on these matters.
The Company views this as a positive development and, once the arbitration panel has delivered its findings, will continue to seek relief in the bankruptcy court, including its pending request before the bankruptcy court for the appointment of an independent trustee to assume management and control of Princeton (including giving effect to the information and redemption notices previously served).
The arbitration process includes a second phase consisting of claims against various individuals and entities (including MicroBilt Corporation) who, as specified in the claims, are alleged to have controlled the Princeton funds, and to have acted improperly in connection with its activities, or improperly benefitted from Princetons misconduct. Although the bankruptcy filing may stay some of the claims in the second phase, the Company intends to proceed with the second phase claims against the individuals and entities that are not subject to the bankruptcy stay. These claims continue to be conducted by the Company's attorneys on a contingency basis.
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE DISCLOSURES (UNAUDITED)
Ranger Alternative Management II, L.P. was appointed as the Investment Manage following the Company's Admission. The appointment shall continue in force unless and until terminated by the Company or the Investment Manager giving to the other not less than 12 months' written notice, such notice not to be served before the fourth anniversary of Admission.
Ranger Alternative Management II, L.P. (the "Investment Manager") and the Company are required in accordance with Alternative Investment Fund Managers Directive to make certain periodic disclosures as follows:
Changes to AIFMD disclosure schedule
The prospectus issued by the Company in connection with IPO contained a schedule of disclosures prepared by the Investment Manager for the purposes of AIFMD. In addition, the AIFMD requires the Company's annual report to include details of any material changes to the information contained in that Schedule. The Investment Manager confirms that no material changes have occurred in relation to the information contained in the schedule.
In making this confirmation, the Investment Manager considers that any change in respect of which a reasonable investor, becoming aware of such information, would reconsider its investment in the Company, including because the information could impact on the investor's ability to exercise its rights in relation to its investment, or otherwise prejudice that investors (or any other interests) interest in the Company should be considered material. In setting this threshold, the Investment Manager has had regard to the current risk profile of the Company which outlines the relevant measures to assess actual and potential exposure to those risks set out in the prospectus published by the Company on 14 April 2015 as well as to the investment restrictions. As required by the Listing Rules, any material change to the investment policy of the Company will be made only with the approval of Shareholders.
Liquidity Risk Profile and Management
As identified in the Company's prospectus in respect of IPO, the Company identified that there is a risk that a position held by the Company cannot be realised at a reasonable value sufficiently quickly to meet the obligations (primarily, debt) of the Company as they fall due. In monitoring the Company's exposure to this risk, the Investment Manager maintains a risk register for its stress test to identify, monitor and control risk concentration. In addition, overall credit and economic conditions are monitored by the Investment Manager's Credit and Risk Committee to provide insight with respect to potential warnings on adverse changes at macro level. The stress test uses the 2007 - 2009 financial crisis as its basis which resulted in the entry of institutions offering alternative lending sources of capital in the US and European market, thereby reflecting the principal risks on liquidity.
Based on the Company's current portfolio, the Investment Manager does not consider that the risk limits set by it are likely to be breached. As a closed-ended investment company, Shareholders of the Company have no right of redemption. Therefore in managing the Company's financial assets, the Investment Manager ensures that the Company holds at all times a sufficiently liquid portfolio of assets to enable the Company to discharge its payment obligations. The Group does not currently have any overdraft or other borrowing facilities. There have been no material changes to the Investment Manager's liquidity risk management systems for the Company since Admission.
Investment Manager Remuneration
During the Investment Manager's financial year between 1 January 2017 and 31 December 2017, the proportion of the total remuneration paid or allocated by the Investment Manager to its staff attributable to the Company was USD 1,507,333 (2016: USD 2,746,048). Within this, the proportion of the fixed remuneration of the Investment Manager's staff attributable to the Company was USD 1,502,138 (2016: USD 1,859,189) and the proportion of the variable remuneration of the Investment Manager's staff attributable to the Company was USD 5,195) (2016: USD 886,859).
The foregoing information takes into account the fixed and variable remuneration of 13 members of staff, being those employees of the Investment Manager that are fully or partly involved in the activities of the Company.
During the financial year, the aggregate amount of remuneration earned and paid to senior management of the Investment Manager was USD 2,086,231 and the aggregate amount of remuneration paid to members of staff, including senior management, whose actions had a material impact on the risk profile of the Company was USD 2,746,048. The majority of staff other than senior management whose remuneration is included in the above disclosure were not employed by the Investment Manager until the end of the financial year ended 31 December 2016 and, as a result, the aggregate remuneration for such other staff does not reflect the full annual salary and benefits payable.
The compensation structure of the Investment Manager was created and designed by the owners of the Investment Manager, who all fulfil key roles in the ongoing policies and daily activities of the Investment Manager. In designing the compensation structure, the owners have had regard to all aspects of performance, including any potentially excessive risk taking.
The compensation structure is designed to reward investment professionals, owners, and other personnel for long -term performance and it is typically comprised of a combination of base salary, additional discretionary sums, and ownership distributions. This helps to align all participants with the Investment Manager's long term results and performance. The discretionary incentive compensation of certain personnel may also include a retention based component.
Employees generally participate in an annual discretionary bonus scheme. The purpose of this scheme is to reward staff employees for their contributions to the business during the year. The level of bonus payments is determined by reference to the profits of the group and the personal performance of the individual employee, in addition to the performance of the particular area in which the employee works. Where profits are reduced, the amount available for distribution as annual discretionary bonuses is also reduced.
Some employees who are owners or part of the fund management team do not participate in the annual discretionary bonus scheme. They (along with members of their teams who are limited partners of the Investment Manager) are instead eligible for bonuses (or profit allocations in the case of limited partners) which are assessed by reference to the economic success of the Investment Manager. These bonuses are based on the net income of the Investment Manager's management company. Where the economic success of the management company is depressed or reduced, it is possible that no bonus payments will be made.
The firm also reviews its books and records on a regular basis to ensure that variable remuneration payments are based on actual payments received from their products, that is, the management and performance fees physically received and adjusted for costs.
COMPANY INFORMATION
Directors
Christopher WaldronJonathan SchneiderMatthew MulfordK. Scott Canon
Company Secretary
Link Company Matters Limited
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
United Kingdom
Registrar
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
United Kingdom
Auditor
Deloitte LLP
Chartered Accountants and Statutory Auditor
2 New Street Square
London EC4A 3BZ
United Kingdom
Registered Office
(with effect from 9 October 2017)6th Floor
65 Gresham Street
London EC2V 7NQUnited Kingdom
Investment Manager
Ranger Alternative Management II, LP
2828 N. Harwood Street
Suite 1900
Dallas, Texas
United States
info@rangercap.com
Sponsor, Broker and Placing Agent - Ordinary Shares
Liberum Capital Limited
Level 12, Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
United Kingdom
Administrator
Sanne Fiduciary Services Limited
13 Castle Street
St Helier
Jersey JE4 5UT
Channel Islands
English and US Securities Law Legal Adviser
Travers Smith LLP
10 Snow Hill
London EC1A 2AL
United Kingdom
Cash Custodian
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
END