Real Est.cred Regulatory News (RECI)

This announcement contains inside information.

Date and time of release: 25 June 2019, 07:00

Real Estate Credit Investments Limited (the "Company")

Annual Report

The Board of Directors of the Company announces the release of the Annual Report and Audited Financial Statements (the "Financial Statements") for the year ended 31 March 2019.

View the Financial Statements. www.recreditinvest.com or click here http://www.rns-pdf.londonstockexchange.com/rns/2570D_1-2019-6-24.pdf

For further information, please contact:

Broker: Richard Bootle / Richard Crawley (Liberum Capital) +44 (0)20 3100 2222

Investor Relations: Alastair Perry (Cheyne) +44 (0)20 7968 7444

Real Estate Credit Investments Limited

Annual Report and Audited Consolidated Financial Statements

for the year ended 31 March 2019

The Company has today published its annual financial report for the year ended 31 March 2019 and has made it available online at www.recreditinvest.com.

The financial information set out in these summarised audited financial statements does not constitute the Company's statutory accounts for the years ended 2019 and 2018, but is derived from those accounts. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under The Companies (Guernsey) Law, 2008. A copy is available upon written request from the Company's registered office and will be published on the Company's website shortly.

Key Performance Indicators

Financial Highlights

Further Information

Monthly fact sheets as well as quarterly update presentations are also available on the Company's website:

www.recreditinvest.com.

About the Company

Real Estate Credit Investments Limited ("RECI" or the "Company") is a non-cellular company incorporated in Guernsey and is governed by the Companies (Guernsey) Law, 2008 (the "Companies Law"). The Company is regulated as an authorised closed-ended investment scheme by the Guernsey Financial Services Commission. At the AGM in September 2017, the continuation vote was passed and a further continuation resolution will be proposed at the AGM to be held in 2021.

The Company invests in real estate debt secured by commercial or residential properties in Western Europe, focusing primarily on the United Kingdom, France and Germany, countries where it sees the changing dynamics in the real estate debt market offering a sustainable deal flow for the foreseeable future. The Company has adopted a long-term strategic approach to investing and focuses on identifying value in real estate debt. In making these investments, the Company uses the expertise and knowledge of its Alternative Investment Fund Manager ("AIFM"), Cheyne Capital Management (UK) LLP ("Cheyne" or the "Investment Manager").

The Ordinary Shares are currently listed on the premium segment of the Official List of the UK Listing Authority and trade on the Main Market of the London Stock Exchange plc. Ordinary Shares offer investors a levered exposure to a portfolio of real estate credit investments and pay a quarterly dividend.

On 23 May 2019, the Company raised gross proceeds of £78.0 million through the issue of 45.9 million new Ordinary Shares at 170 pence per new Ordinary Share.

These Ordinary Shares were issued under the Company's Placing Programme as set out in the Company's prospectus dated 2 November 2018. The Company now has authority to issue up to a further 54.1 million new Ordinary Shares until 1 November 2019, when the Placing Programme completes.

Website and Share Price Information

The Company has a dedicated website, which may be found at www.recreditinvest.com and contains information, including regulatory announcements, share price information, financial reports, investment objectives and strategy, investor contacts, information on the Board and information on the Alternative Investment Fund Managers Directive ("AIFMD").

Investment Objective and Policy

Investment Objective

The investment objective of the Company is to provide Shareholders with attractive and stable returns, primarily in the form of quarterly dividends, by exposure to a diversified portfolio of real estate credit investments, predominantly comprising real estate loans and bonds.

Investment Policy

To achieve the investment objective, the Company invests and will continue to invest in real estate credit secured by commercial or residential properties in the United Kingdom and Western Europe ("Real Estate Credit Investments"). The Real Estate Credit Investments may take different forms but are likely to be:

(i) secured real estate loans, debentures or any other forms of debt instruments (together "Secured Debt"). Secured real estate loans are typically secured by mortgages over the property or charges over the shares of the property-owning vehicle. Individual Secured Debt investments will have a weighted average life profile ranging from six months to 15 years. Investments in Secured Debt will also be directly or indirectly secured by one or more commercial or residential properties, and shall not exceed a loan to value ("LTV") of 85 per cent. at the time of investment;

(ii) listed debt securities and securitised tranches of real estate related debt securities, for example, residential mortgage backed securities and commercial mortgage backed securities (together "MBS"), for the avoidance of doubt, this does not include equity residual positions in MBS;

(iii) other direct or indirect opportunities, including equity participations in real estate, save that no more than 20 per cent of the Total Assets will be invested in positions with an LTV in excess of 85 per cent or in equity positions that are uncollateralised. On certain transactions, the Company may be granted equity positions as part of its loan terms. These positions will come as part of the Company's overall return on its investments and may or may not provide extra profit to the Company depending on market conditions and the performance of the loan. These positions are deemed collateralised equity positions. All other equity positions that the Company may invest in are deemed uncollateralised equity positions.

Dividend Policy

Subject to the applicable requirements and restrictions contained in the Companies Law, the Company may consider making interim dividend payments to Shareholders, having regard to the net income remaining after the potential reinvestment of cash or other uses of income, at a level the Directors deem appropriate, in their sole discretion, from time to time. There is no fixed date on which it is expected that dividends will be paid to Shareholders. The Directors intend that the Company pays dividends to Shareholders when it is able and appropriate to do so. It is the intention of the Company to continue to pay a stable quarterly dividend with the potential for additional payments if investment returns permit.

Data Protection Laws

Following the introduction of the EU General Data Protection Regulation ("GDPR"), The Data Protection (Bailiwick of Guernsey) Law, 2017 ("DPGL") (together "The Data Protection Laws") the Company, its Corporate Broker, the Registrar and/or the Administrator may be deemed to hold personal data (as defined in The Data Protection Laws) relating to past and present Shareholders.

Any personal data will be held and processed by the Company (and any third party to whom it may delegate certain functions) in compliance with: (1) all applicable data protection legislation and regulatory requirements; and (2) the Company's (and, if applicable, the Administrator's and any other third party delegate's) Privacy Notice, a copy of which is available for consultation on the Company's website at www.recreditinvest.com. The foregoing processing of personal data is required in order to perform the contract with the prospective investor, to perform legal obligations incumbent upon it or otherwise is required for legitimate interests of the Company. A data subject may in certain circumstances object to the processing of its personal data and such rights and the matter in which they can be exercised are set out in the Company's Privacy Notice.

Prospective investors are responsible for informing any third party individual to whom the personal data relates to the disclosure and use of such data in accordance with these provisions and the prospective investors must provide a copy of all relevant Privacy Notices that have been provided to such third parties as appropriate.

Chairman's Statement

Once again, I am writing to you against a background of ongoing Brexit and associated political uncertainties, which are augmented by global economic challenges. Inevitably, these macro factors have impacted upon the credit and property markets in which your Company participates.

It is during times like these that the specialist investment expertise, market experience and transaction pipeline of our investment manager, Cheyne, come to the fore; as we look to them to deliver a stable NAV and an attractive and sustainable quarterly dividend for our Shareholders.

Accordingly, I am pleased to report an increased year end NAV of £1.65 per Share, building upon the consistency of the previous four years; total dividends of 12.0p per Share; and an annualised total return for Shareholders of 8.0%, for the year ended 31 March 2019.

We are grateful for the continuing support of our existing and new investors who participated in our Autumn 2018 tap issue and the recent May placing, contributing to the Company's current market capitalisation of circa £340 million.

Financial Performance

RECI reported total net profit for the financial year ended 31 March 2019 of £19.2 million on year end total assets of £355.2 million (£14.9 million in the year ended 31 March 2018 on year end total assets of £308.2 million).

The NAV at 31 March 2019 was £1.65 per Ordinary Share (£1.64 per Ordinary Share as at 31 March 2018). While fluctuations in NAV are inevitable from time to time, over the last five years, RECI has delivered consistent year end NAV per Ordinary Share of £1.62 (2015), £1.63 (2016), £1.63 (2017), £1.64 (2018) and £1.65 (2019), alongside an attractive dividend yield.

During the financial year ended 31 March 2019, the Company's Ordinary Shares traded at an average premium to NAV of 1.5% (2.4% for the year ended 31 March 2018).

A fourth interim dividend of 3.0p per Ordinary Share was declared on 24 June 2019 for the quarter ended 31 March 2019. Total dividends declared in respect of the financial year ended 31 March 2019 were 12.0p per share, returning £17.6 million to our Ordinary Shareholders.

The Company utilised short-term leverage at an average cost of borrowing of 1.8% and with average leverage of 26.5% of NAV during the last financial year. The Board and Cheyne will continue to consider and assess the pricing and structure of a range of potential leverage options.

During the financial year to 31 March 2019, the Company invested £73.6 million in the loan portfolio and purchased £131.2 million of new bonds for the portfolio. RECI also received cash repayments and interest of £147.7 million in this year.

Tap Issue and Placing Programme

On 21 September 2018, the Company announced that it had raised gross proceeds of £23.2 million through the tap issue of the maximum available 13,938,298 new Ordinary Shares at £1.67 per share.

On 2 November 2018, RECI launched a new placing programme ("Placing Programme") for up to 100 million new Ordinary Shares, which was approved by Shareholders at the Extraordinary General Meeting held on 29 November 2018.

On 24 May 2019, RECI announced that it had raised gross proceeds of £78.0 million through the issue of 45,882,353 new Ordinary Shares at £1.70 per share (the "Placing"). The Company retains authority to issue up to a further 54,117,647 new Ordinary Shares until 1 November 2019, when the Placing Programme completes.

The successful tap issue and completion of the Placing, have further diversified the Company's ownership and enhanced the liquidity of RECI's Ordinary Shares, while achieving a current market capitalisation of circa £340 million.

The proceeds raised by the tap issue have been fully invested and the investment of the Placing proceeds into the pipeline is underway, in accordance with the Company's investment strategy; and such investments are supporting the Company in continuing to deliver on its Investment Objective to provide Shareholders with attractive and stable returns, primarily in the form of quarterly dividends.

Board and Adviser Update

In accordance with Board succession planning, Susie Farnon succeeded John Hallam and myself as Chair of the Audit Committee and Management Engagement Committee respectively, during the last financial year.

Following a review and after conducting a competitive tender process, the Company announced on 27 February 2019, the appointments of: Citco Fund Services (Guernsey) as designated manager and administrator; Aztec Financial Services (Guernsey) Limited to provide corporate secretarial services; and The Bank of New York Mellon (International) Limited as depository, with effect from 1 March 2019.

Outlook

While your Board is pleased to report the consistent returns that RECI has delivered for our Shareholders against a difficult market backdrop, we are vigilant as to the challenges that exist or may present themselves over the next year. However, the difficulties faced by banks, alternative lenders and other sector participants, provide opportunities which RECI can be the beneficiary of; particularly, among senior loans and core income bonds.

Your Investment Manager will remain disciplined in seeking to select only the best opportunities from Cheyne's strong investment pipeline and we are confident that their focus on generating attractive risk adjusted returns will continue to provide appealing and sustainable returns for our Shareholders.

Bob Cowdell

Chairman

24 June 2019

Strategic Report

The Strategic Report describes the business of the Company and details the principal risks and uncertainties associated with its activities.

Objective, Investment Policy and Business Model

The Objective and Investment Policy are set out above, and further to this the Company's business model is detailed in the Investment Manager's Report. There is also an 'About the Company' section above explaining in more detail the corporate structure and listings of the Shares.

RECI is externally managed by Cheyne, a UK investment manager authorised and regulated by the Financial Conduct Authority ("FCA"). Cheyne is a limited liability partnership registered in England and Wales on 8 August 2006 and is authorised and regulated in the conduct of investment business in the United Kingdom by the FCA. Cheyne is also the AIFM of the Company.

Current and Future Development

A review of the year and outlook is contained in the Investment Manager's Report and also within the Chairman's Statement.

Performance

A review of performance is contained in the Key Performance Indicators ("KPIs") and Financial Highlights section and the Investment Manager's Report.

A number of performance measures are considered by the Board and the Investment Manager in assessing the Company's success in achieving its objectives and considering its progress and performance. The KPIs are shown above.

Duties and Responsibilities

The Board has overall responsibility for maximising the Company's success by directing and supervising the affairs of the business and meeting the appropriate interests of shareholders and relevant stakeholders, while enhancing the value of the Company and also ensuring the protection of investors. A summary of the Board's responsibilities is as follows:

· statutory obligations and public disclosure;

· strategic matters and financial reporting;

· risk assessment and management including reporting, compliance, governance, monitoring and control; and

· other matters having a material effect on the Company.

The Board is responsible to the shareholders for the overall management and strategy of the Company but has delegated day-to-day operation to the Investment Manager and Citco Fund Services (Guernsey) Limited (the "Administrator"), while reserving the powers of decision making relating to the determination of investment policy, corporate structure and the management of the share capital of the Company.

The Board is further responsible for financial reporting and controls and determining the dividend and accounting policies. While the Investment Manager manages the portfolio of the Company, the Board retains responsibility for overseeing the Investment Manager and ensuring the establishment and ongoing operation of a sound system of internal control. Any material contracts and those not in the normal course of business, are also dealt with by the Board.

The Board is also responsible for its own structure, size and effectiveness, with the delegation of some duties to Committees made up of its members. The Board retains the control of the Committees and requires that they report to the full Board on a regular basis providing their findings and recommendations. The Nomination Committee reviews Directors' remuneration and, as appropriate, makes recommendations to the Board; the Board sets the levels of remuneration, which are clearly communicated to Shareholders.

The Board performs a formal and rigorous review of its own performance and continually scrutinises its independence and transparency.

The Board's responsibilities for the Annual Report are set out in the Directors' Responsibility Statement. The Board is also responsible for issuing appropriate half-yearly financial reports and other price-sensitive public reports.

Long-term Viability

In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have assessed the prospect of the Company over a longer period than the 12 months required by the 'Going Concern' provision. The Board has chosen a period of three years for the following reasons:

(i) The Company's planning horizon covers a three year period;

(ii) The next continuation vote is due 2021 and a three year plan takes the company conservatively past this; and

(iii) The weighted average life of the bond portfolio is 2.8 years, the usual term of new loan at origination is between 3 to 5 years, so the majority of the assets could be expected to be realised in a three-year period, or shortly thereafter.

The three-year review considers the Company's cash flows arising from the loan and bond portfolios, including interest received and proceeds from realisations, obligations of the Company and dividend cover. Further considerations are the inherent sensitivities within the loan and bond portfolios, their impact on the cash flows, continuation vote in 2021 and the ability to issue further shares as per Placing Programme.

The Board has identified a number of Principal Risks, which are detailed below. The Board has taken these into account when considering the long-term viability of the Company.

The Board has performed the review over the three-year period, stress testing the performance against a number of adverse scenarios, such as the fair value write down of the investments, or reduced cash flows from the investment portfolio. The fair value stress test was considered relevant to factor in any potential events affecting the underlying assets or credit concerns about the borrowers which potentially could impact on the fair value. The reduced cash flows stress test was considered relevant in the event of potential defaults arising on the loan portfolio and the inability to recover the interest or principal back in full. Even taking these stress scenarios into account and bearing in mind the leverage and liquidity of the bond portfolio, the Company is expected to be able to meet its liabilities over the three-year period.

Risk Management

It is the role of the Board of Directors to review and manage all risks associated with the Company, mitigating these either directly or through the delegation of certain responsibilities to the Audit Committee and Investment Manager.

The Board considers that the following risks are the Principal Risks and uncertainties faced and has identified the mitigating actions in place to manage them.

Long-term Strategic Risk

The Company is subject to the risk that its long-term strategy and its level of performance fail to meet the expectations of its shareholders. The shares may trade at a discount to NAV and shareholders may be unable to realise their investments through the secondary market at NAV per share. The Board monitors the level of premium or discount of share price to NAV per share.

The Board monitors investment strategy and performance on an ongoing basis and regularly reviews the Objective and Investment Policy in light of prevailing investor sentiment to ensure the Company remains attractive to its shareholders. While the Board may seek to reduce any discount to NAV per share through share buybacks, there can be no guarantee that they will do so and/or that such a tactic will be successful.

The Company has the authority to make market purchases of fully paid shares of up to 14.99 per cent. of each class of shares in issue, and renewal of this authority will be sought from shareholders at AGM in 2019 and at each subsequent AGM, or earlier at an extraordinary general meeting if the Directors consider it appropriate.

Target Portfolio Returns and Dividend

The Company's targeted returns are based on estimates and assumptions that are inherently subject to significant business and economic uncertainties and contingencies, and the actual rate of return may be materially lower than the targeted returns. In addition, the pace of investment may be slower than expected, or principal may be repaid earlier than anticipated, causing the return on affected investments to be less than expected. In addition, if repayments are not promptly re-invested this may result in cash drag which may lower portfolio returns. However, as the Company is able to invest in both bonds and loans, the Investment Manager has the ability to adjust the asset mix towards bonds, thereby helping the Company mitigate potential cash drag when loan repayments are made.

As a result the level of dividends and other distributions to be paid by the Company may fluctuate and there is no guarantee that any such distributions will be paid.

The Investment Manager regularly provides the Board with reports on pipeline opportunities, which include analysis of the expected returns available. The Directors also regularly receive information on the performance of the existing loans which includes analysis of the likelihood of any early repayments which may impact returns.

Valuation

The valuation and performance of the Company's investments that comprise its portfolio of Real Estate Credit Investments are the key value drivers for the Company's NAV and interest income. Judgements over fair value estimates could significantly affect these key performance indicators.

The Company categorises its financial assets and liabilities in accordance with IFRS 9 and establishes fair value utilising the methodology in accordance with IFRS 13, as set out in Note 15(d).

Credit Risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company.

Bonds - The Company is subject to the risk that issuers of asset backed securities in which it invests may default on their obligations and that certain events may occur which have an immediate and significant adverse effect on the value of such instruments. There can be no assurance that an issuer of an instrument in which the Company invests will not default or that an event which has an immediate and significant adverse effect on the value of such instruments will not occur, and that the Company will not sustain a loss on the transaction as a result. The Company seeks to mitigate this risk by monitoring its portfolio of investments, reviewing the underlying credit quality of its counterparties, on a monthly basis.

Loans - The Company is subject to the risk that the underlying borrowers to the loans in which it invests, may default on their obligations and that certain events may occur which have an immediate and significant adverse effect on the value of such instruments. Any loan may become a defaulted obligation for a variety of reasons, including non-payment of principal or interest, as well as covenant violations by the borrower in respect of the underlying loan documents. In the event of any default on the Company's investment in a loan by the borrower, the Company will bear a risk of loss of principal and accrued interest on the loan, which could have a material adverse effect on the Company's investment. There can be no assurance that a borrower will not default, that there will not be an issue with the underlying real estate security or that an event which has an immediate and significant adverse effect on the value of these loans will not occur, and that the Company will not sustain a loss on the transaction as a result. The Company seeks to mitigate this risk by performing due diligence and monitoring its portfolio of investments, reviewing the underlying credit quality of its borrowers, performance of the underlying asset, and loan covenants compliance against financial information received and the performance of the security, on a quarterly basis.

Market Risk

Market risk is the risk that the fair value and future cash flows of a financial instrument will fluctuate because of changes in market factors. Market risk is comprised of interest rate risk, currency risk, price risk and liquidity risk.

The Company's strategy on the management of market risk is driven by the Company's investment objective as detailed above and in Note 1 of the financial statements.

The Company's market risk is managed on a daily basis by the Investment Manager in accordance with policies and procedures detailed in the latest Prospectus and summarised in these financial statements.

Interest Rate Risk

Interest rate risk is the risk that the fair value and future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Company invests in both direct real estate loans and floating rate real estate debt securities, which include MBS.

Real estate loans can have fixed interest coupons and are therefore potentially exposed to the wider effects of changes in interest rates.

For bonds, the interest rate risk arises from the effects of fluctuations in the prevailing levels of market interest rates on the fair value of financial assets and liabilities and future cash flows. A segment of the portfolio consists of floating rate debt investments which are exposed to interest rate risk through changes in interest rates potentially having an effect on prepayments and defaults of the underlying loans of the securitisations.

While retaining the ability to do so the Company does not currently enter into hedging arrangements in respect of interest rate fluctuations.

Currency Risk

Currency Risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is exposed to currency risk to the extent that foreign exchange rates fluctuate in relation to financial instruments that are denominated in currencies other than GBP.

The Company manages its foreign exchange risk on a portfolio basis. The Company may bear a level of currency risk that could otherwise be hedged where it considers that bearing such risks is appropriate. The Company manages its foreign exposure via forward foreign currency exchange contracts.

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities on a timely basis. The Company's liquidity risk is managed on a daily basis by the Investment Manager in accordance with policies and procedures detailed in the notes to the financial statements. Where needed, the Investment Manager will seek to liquidate positions to increase cash or reduce leverage.

Much of the Market for MBS and real estate loans is relatively illiquid. In addition, investments that the Company purchases in privately negotiated (also called "over the counter" or "OTC") transactions may not be registered under relevant securities laws or otherwise may not be freely tradable, resulting in restrictions on their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. As a result of this illiquidity, the Company's ability to vary its portfolio in a timely fashion and to receive a fair price in response to changes in economic and other conditions may be limited.

Furthermore, where the Company acquires investments for which there is not a readily available market, the Company's ability to deal in any such investment or obtain reliable information about the value of such investment or risks to which such investment is exposed may be limited.

For further information on risks please refer to Note 15.

Brexit Impact Assessment

By way of a referendum, on 23 June 2016, the United Kingdom voted to leave the European Union ("EU"). It is acknowledged that uncertainty exists in relation to the United Kingdom's future relationship with the EU and specifically with regards to current 'passporting' which permits UK firms to manage certain EU domiciled funds. The Company has been closely monitoring this and indeed all other Brexit related developments to ensure that any potential impact to the valuation of financial assets at fair value through profit or loss. Future valuation might change significantly in future due to Brexit.

Investment Manager's Report

2018 saw the continuation of global macroeconomic uncertainty. Brexit has been joined by European elections, trade "wars" and low growth on a list of themes to cause concern. Most asset classes suffered negative returns in 2018. Cheyne remains cautious in its investment approach, to reflect these conditions, and continues its revised focus on senior loans and bonds at the expense of deeply subordinated mezzanine positions.

The Company, as advised by Cheyne, therefore continues to hold to its central thesis, which is that defensive credit (at a low leverage point, with substantial control and governance protection) earning generous and stable returns is the best risk adjusted investment proposition today. That thesis is especially evident in the highly inefficient and dislocated European real estate debt markets, where Cheyne sees a continuing opportunity for the foreseeable future, and is confident that this will ensure its strong pipeline of deals is maintained. The primary causes of the dislocation, namely the inability of banks to lend to this asset class in Europe and very high barriers to entry, hold true today, as they have since 2008. This looks set to remain the case in the UK and Europe for the foreseeable future.

The year for RECI was marked by:

· The successful raise of additional capital, growing its balance sheet from £228.5 million to £253.2 million during the year, and by a further £77.2 million in May 2019 to £333.8 million, which allows RECI to continue investing alongside Cheyne Capital's wider real estate debt platform

· Successfully investing capital raised with minimal delay

· Continued strong credit performance, especially demonstrated by the continued timely repayments on its debt investments (both in the UK and in Europe)

· A substantially more robust pipeline of new investments when compared to the prior year, resulting from Cheyne Capital's significantly larger footprint and positioning in European real estate lending

· Continued income coverage, which facilitates the Company's intention to provide investors with a stable quarterly dividend

State of the Markets

European Real Estate Markets

European real estate markets continue to be polarised, with a marked difference in demand between core long-term income assets and those which are in need of asset management or development. The opportunity to bridge the gap between creating value and core income is significant.

Debt markets demonstrate a similar polarisation, with lending appetite (both banks and alternative lenders) focused on long-term core income lending and eschewing value-additive or development lending. We feel that the aversion to value-additive asset lending in favour of core income lending is misplaced. The risk and return profile in the latter significantly outweighs the former, albeit for a lender that has a deep capability of understanding and executing on value-add or development asset strategies itself.

UK real estate markets have seen significant value declines since the Brexit vote in 2016. This is especially acute in certain sectors such as retail, but we cannot see a single asset class that has not suffered from Brexit. On the other hand, we continue to note increased liquidity and buying interest at these lower clearing levels. In the main, the negative consequences of Brexit on the economy, the UK consumer and on the UK real estate asset class are, in our view, largely priced in.

The same applies to lending markets in the UK, which continue to see foreign banks remaining on the sidelines.

European real estate and lending markets differ across the continent. We believe that the German and Spanish lending markets demonstrate‎ the greatest depth of competition and hence represent a weak risk adjusted investment proposition, with France representing the better proposition for lending.

Brexit uncertainty is, in our view, presenting the UK real estate market as the destination for opportunistic capital, much like the opportunity presented in the Southern European real estate markets during the 2008 and 2011 crises.

What is apparent on the ground in the UK is that lenders such as Cheyne still see significant volume from opportunistic borrowers and sponsors requesting funding for new projects, albeit at valuation levels which take into consideration the uncertainty generated by Brexit. Away from direct lending to new deals, we also see the continuation of substantial compelling opportunities from the valuation stress that Brexit has caused to otherwise good projects. Our preferred model here is to support capable sponsors with robust assets demonstrating a clear path to value creation, but which are in stress due to value declines or adverse incumbent creditor behaviour.

During the year, seven of our loans (across various real estate asset classes including logistics, office, hospitality, mixed-use and residential) have been re-paid or re-financed suggesting that market liquidity (at the lower valuations) is holding up at this most uncertain of times.

We continue to look for the most compelling lending opportunities in Europe as well as the UK. At the end of 2018 we closed a senior loan deal in Lisbon, Portugal with the largest global institutional real estate investor. The first quarter of 2019 has seen us finalising transactions in France and Italy, and we are continuing to evaluate further opportunities in Ireland, the Netherlands and Germany.

The Opportunity for RECI

RECI benefits from access to Cheyne Capital's established origination and investment capabilities in both private debt (loans) and listed debt (bonds) across Europe.

The origination volumes Cheyne Capital saw last year, which were significantly ahead of any previous year, have continued at a similar rate this year. This is mainly due to the further retrenchment of banks, the increasing volume of real estate deal flows, the ability of Cheyne Capital's platform to continually present innovative and timely solutions to the real estate community and the growth of its origination capabilities into France in particular (following on from the established origination capabilities in the UK and Germany).

Cheyne Capital originates all of its private debt (in contrast to taking participations in externally originated deals), thus capturing superior economics and retaining control over the deal structure. It is also a prominent investor in the listed bond markets for real estate (mainly Commercial Mortgage Backed Securities (CMBS)).

Given this, the current investment focus is on:

· Senior lending against value-add and development assets (particularly in the UK); and

· Senior lending against core and core+ income assets across Europe, retained as listed bonds and CMBS.

Placement Programme and Deployment

RECI's growth has continued in the year with the closing of an oversubscribed tap issue in September 2018, raising gross proceeds of £23.2 million and contributing towards the NAV increase at 31 March 2019 of £253.2 million, up from £228.5 million at 31 March 2018. Following this, and to cater for excess demand, the Company established a new placing programme for the issue of up to 100 million new Ordinary Shares. In May 2019, the first placing under this Placing Programme increased net assets to circa £334 million, with remaining authority to issue a further 54.1 million new Ordinary Shares under the programme.

RECI has been able to deploy these proceeds quickly across Cheyne's pipeline of deals and in CMBS bonds.

These new commitments (inter alia) include:

Loans

· In December, a new €12.1 million commitment to a senior loan with an LTV of 60% secured by a serviced apartment asset in Lisbon, of which €9.4 million was drawn down in the month.

· Post year end, RECI committed £15 million to a new UK loan deal, which is backed by a portfolio of high quality hotels in central London.

Bonds

· In April, RECI committed €12.6 million in a new €155 million asset originated by Cheyne to refinance the debt of the LOV Hotel Collection (LHC). LHC is the luxury hotel branch of LOV Group which owns and manages prestigious hotels across some of France's top regions. A further €4 million was invested across two bonds in a new CMBS issue.

· In July, RECI purchased two new bonds, both originated by Cheyne; £16.7 million in a UK CMBS backed by a portfolio of UK care homes and £2.1 million in a EUR CMBS backed by a portfolio of French student accommodation.

· In February, RECI purchased a new £9.8 million UK CMBS bond, originated by Cheyne, which is backed by a portfolio of high quality French hotels in Paris and Nice.

Real Estate Team

The Real Estate team at Cheyne is now one of the largest non-bank stand-alone real estate credit businesses in Europe, with AUM of $3 billion and 28 dedicated people and the support of Cheyne Capital's infrastructure. It has consistently delivered through cycles and economic shocks (2009, 2011, 2016 Brexit vote), and the continuing supportive dynamics and established infrastructure underpin it as a long-term, stable business. RECI continues to benefit from this and the opportunity to participate in Cheyne's strong pipeline of investments.

Dividend Stability

The weighted average levered gross yield of the investment portfolio at 31 March 2019 was 9.9%, which after taking into account lowered expenses (on a per share basis), lowered financing costs and fair value adjustments, returned a total NAV per share (including dividends) of 8.0% in the financial year to 31 March 2019.

It remains the Company's ambition to maintain a stable quarterly dividend paying capability through economic cycles.

Portfolio Composition

RECI's investment portfolio, a diversified book of 55 positions in real estate bonds and loans, was valued at £302.5 million as at 31 March 2019, up from £245.4 million as at 31 March 2018. The portfolio had a weighted average levered yield of 9.9% and an average loan to value of 66.4% as at 31 March 2019.

Portfolio by Geography (Funded Fair Value*)

Top 10 Positions1 as at 31 March 2019

Total Commitment £185.3 million

WA LTV2 60.8%

WA Yield3 12.9%

* Balance Sheet value of amounts drawn by the borrowers.

1 Based on total commitment of bonds and loans.

2 The Weighted Average Loan to Value has been calculated by reference to the value of the relevant collateral of the relevant bond or loan.

3 WA based on commitment. WA effective yield is based on:

i) for the bonds the effective yield is based on the current levered yield on the bonds using prices as at 31 March 2019,

ii) for the loans the yield stated is the effective accounting yield based on the funded loan balances, which includes interest and fees.

Loan Portfolio

The drawn fair value of the loan portfolio, excluding accrued interest, had decreased from £148.1 million at 31 March 2018 to £139.4 million as at 31 March 2019. During the year, the Company made a £10.7 million commitment to a new deal, taking total loan commitments to £184.7 million as at 31 March 2019. The average loan portfolio LTV exposure as at 31 March 2019 was 65.9%, down from 66.3% the previous year. The portfolio continues to provide attractive risk-adjusted returns with a weighted average yield of 8.8% per annum, before any back end fees, profit share or equity element contributions are taken into account.

Loan Portfolio Summary as at 31 March 2019

Real Estate Bond Portfolio

As at 31 March 2019, the bond portfolio of 37 bonds was valued at £163.1 million, compared to 23 bonds valued at £97.3 million as at 31 March 2018. The recorded interest income on the bonds in the year ended 31 March 2019 was £6.9 million compared to £5.4 million in the year ended 31 March 2018.

The bond portfolio, valued at £163.1 million, has the potential for strong defensive returns:

· The portfolio is characterised by a short duration (2.8 years) and high coupon, which is defensive to interest rate rise and provides resilience in turbulent markets.

· The weighted average unlevered yield of the bond portfolio as at 31 March 2019 was 5.8%, the weighted average levered yield of the bond portfolio as at 31 March 2019 was 12.3%.

· The average leverage of the portfolio over the financial year was 26.5%, achieved through the provision of short term flexible financing. The Company enters into repurchase arrangements agreements with several banks to provide leverage. This financing is collateralised against certain of the Company's bond portfolio assets with a fair value totalling £128.3 million (31 March 2018: £100.0 million which includes £48.1 million of receivable for bonds sold) and a weighted average cost at 31 March 2019 of 1.80% (31 March 2018: 1.96%) per annum. The average period to maturity of the repurchase arrangements is 2 months.

Bond Portfolio Summary as at 31 March 2019

Outlook

2018 was an extremely challenging year for global capital markets. Most asset classes suffered negative returns in 2018 as key macroeconomic concerns took centre stage including a deepening global trade war, Brexit and a new European sovereign crisis. Cheyne remains cautious in its investment approach, to reflect these conditions, and maintains a strong investment pipeline continuing our revised focus on senior loans and bonds at the expense of deeply subordinated mezzanine positions.

Cheyne Capital Management (UK) LLP

24 June 2019

Directors' Report

The Directors present their annual report and the audited financial statements for the year ended 31 March 2019.

General Information

The Company was incorporated in Guernsey on 6 September 2005 with registered number 43634.

The "About the Company" section of the Annual Report above provides information regarding the structure of the Company, the investment objective and the listing details of the Shares of the Company.

The Company's investment management activities are managed by the Investment Manager, who is also the AIFM. The Company has entered into an Investment Management Agreement (the "Investment Management Agreement") under which the Investment Manager manages its day-to-day investment operations, subject to the supervision of the Company's Board of Directors. The Company is an Alternative Investment Fund ("AIF") within the meaning of the Alternative Investment Fund Manager Directive ("AIFMD") and accordingly the Investment Manager has been appointed and registered as AIFM of the Company.

Principal Activity and Business Review

The principal activity of the Company during the year was that of an investment company investing in Real Estate Credit Investments. For full details of the investment policy of the Company see above.

A new Placing Programme ("Placing") which was announced on 2 November 2018 was approved at an Extraordinary General Meeting of the Company on 29 November 2018. The Placing is intended to enable the Company to raise additional capital through the issue of up to 100 million new Ordinary Shares before expiry on 1 November 2019, with net proceeds to be used to acquire investments in accordance with the investment objective and policy. On 23 May 2019, the Company successfully completed and closed a Placing of 45.9 million new Ordinary Shares.

Results and Dividends

The results for the year and the Company's financial position as at year end are shown below. Dividends totalling £17.6 million (31 March 2018: £13.7 million) were paid on the Ordinary Shares during the year. Preference Share Coupons of £1.6 million were paid prior to the redemption and the payment of accrued interest of all Preference Shares on 16 September 2017.

A fourth interim dividend for the year ended 31 March 2019 of 3.0p per Ordinary Share (31 March 2018: 3.0p per share) was declared by the Directors on 24 June 2019, this has not been included as a liability in these financial statements.

Capital Structure

Details of the authorised, issued and fully paid Ordinary share capital, together with details of the movements in the Company's issued share capital during the current and prior year are shown in Note 14.

The Company has one class of Ordinary Shares which carry no right to fixed dividends. Each Ordinary Share carries the right to one vote at general meetings of the Company. All Preference Shares were redeemed on 16 September 2017.

No person has any special rights of control over the Company's share capital.

Board of Directors

The Directors of the Company who served during the year were:

Directors

Bob Cowdell (Chairman)

Susie Farnon

John Hallam

Graham Harrison

Bob Cowdell (Chairman) (UK resident) is an independent non-executive director who has focused on the financial sector throughout his career; initially as a solicitor and then as a corporate broker and adviser. He was previously co-founder and Head of the ABN AMRO Global Investment Funds Team and then Head of Financials at RBS Hoare Govett. He is currently chairman of Castel Underwriting Agencies Limited and a non-executive director of Thomas Miller Holdings Limited; and a former non-executive director of Baillie Gifford UK Growth Fund Plc, Catlin Underwriting Agencies Limited, Catlin Insurance Company (UK) Limited, XL London Market Limited and XL Insurance Company SE. A Freeman of the City of London, he is a member of the Institute of Directors and the Chartered Insurance Institute. He has been a member of the Board since June 2015.

Susie Farnon (Chairman of the Audit Committee) (Guernsey resident). Mrs Farnon is a Fellow of the Institute of Chartered Accountants in England and Wales and qualified as an accountant in 1983. She is a former Banking and Finance partner of KPMG Channel Islands from 1990 until 2001 and head of the Channel Island Audit Practice from 1999. She has served as President of the Guernsey Society of Chartered and Certified Accountants and as a member of the States of Guernsey Audit Commission and as Vice-Chairman of the Guernsey Financial Services Commission. Susie is a non-executive director of a number of property and investment companies listed on the London Stock Exchange or elsewhere and is a board member of the Association of Investment Companies. She has been a member of the Board since February 2018.

John Hallam (Guernsey resident). Mr Hallam is a Fellow of the Institute of Chartered Accountants in England and Wales and qualified as an accountant in 1971. He is a former partner of PricewaterhouseCoopers having retired in 1999 after 27 years with the firm both in Guernsey and in other countries. He is the Chairman of NB Distressed Debt Investment Fund Ltd as well as being a director of a number of financial services companies, some of which are listed on the London Stock Exchange. He served for many years as a member of the Guernsey Financial Services Commission from which he retired in 2006 having been its Chairman for the previous three years. He has been a member of the Board since March 2016.

Graham Harrison (Senior Independent Director) (Guernsey resident). Mr Harrison is co-founder and managing director of Asset Risk Consultants Limited, an investment consulting practice based in Guernsey. After obtaining a Masters in Economics from the London School of Economics, he began his career working in structured finance for Midland Montagu in London and then as a project economist for the Caribbean Development Bank in Barbados. In 1993, he moved back to Guernsey to help develop investment-related business for the Bachmann Group and in 2002 he led a management buy-out which saw Asset Risk Consultants Limited become an independent business. A Chartered Fellow of the Chartered Institute for Securities and Investment, he has been on the Board of the Company since launch. He is also currently a non-executive director of a number of investment and asset management companies including BH Global Limited and Volta Finance Limited.

The following summarises the Directors' directorships in other public companies listed on the London Stock Exchange:

Mr Harrison and Mrs Farnon are on the board of BH Global Limited, but the Company believes that this does not impact their ability to be considered independent. All Directors are independent of the Investment Manager and free from any business or other relationship that would materially interfere with the exercise of their independence.

With regard to the appointment and replacement of Directors, the Company is governed by its Articles of Incorporation (the "Articles") and The Companies (Guernsey) Law 2008. The Articles themselves may be amended by special resolution of the Shareholders. The powers of Directors are described in the Articles and in these financial statements in the Corporate Governance Statement. Under its Articles, the Company has authority to issue an unlimited number of Ordinary Shares of no par value.

The Directors' interests in the share capital of the Company (some of which are held directly or by entities in which the Directors may have a beneficial interest) are:

Substantial Interests in Share Capital

Chapter 5 of the Disclosure and Transparency Rules, requires disclosure of major shareholder acquisitions or disposals (over 5% of the shares) in the Company (see list below of major shareholders). During the year there were 3 notifications of such transactions, (31 March 2018: 17 notifications).

List of major Ordinary Shareholders as at 31 March 2019:

Issued Share Capital

The issued share capital of the Company consisted of 153.3 million Ordinary Shares (31 March 2018: 139.4 million Ordinary Shares).

Directors and Officers Liability Insurance

Directors and Officers liability insurance is in place and due for renewal on 30 June 2019.

Listing Information

The Ordinary Shares are currently listed on the premium segment of the Official List of the UK Listing Authority and trade on the Main Market of the London Stock Exchange plc.

Website

The Directors are responsible for the maintenance and integrity of the financial and corporate information included on the Company's website.

The Investment Manager

Having reviewed the performance of the Investment Manager, the Directors are satisfied that the continued appointment of the Investment Manager on the terms agreed is in the best interests of the Shareholders and the Company. The Company has entered into the Investment Management Agreement under which the Investment Manager manages its day-to-day investment operations. Details of the Investment Management Agreement can be found in Note 18.

Auditor

Deloitte LLP has been the Company's external auditor since the Company's incorporation. Further information on the work of the auditor is set out in the Audit Committee Report. The Company has undertaken a competitive tender process and Deloitte was reappointed.

The Audit Committee reviews the appointment of the auditor on an annual basis.

Principal Risks and Uncertainties

Principal Risks and Uncertainties are discussed in the Strategic Report of these financial statements.

Related Party Transactions

Related party transactions are disclosed in Note 18 of these financial statements. There have been no material changes in the related party transactions described in the last annual report.

Going Concern

The Directors believe it is appropriate to adopt the going concern basis in preparing the financial statements as, after due consideration, they consider that the Company has adequate resources to continue in operational existence for the foreseeable future.

The Directors consider that the cash resources available at 31 March 2019 of £38.6 million together with the cash held at the broker of £1.4 million, and the financing available through activities such as repurchase agreements sufficient to cover normal operational costs and current liabilities, including the proposed dividend, as they fall due for the foreseeable future.

AGM

The AGM of the Company will be held at 11.00 am on 17 September 2019. Details of the resolutions to be proposed at the AGM, together with explanations, will appear in the Notice of Meeting to be distributed to Shareholders together with a copy of this Annual Report.

Members of the Board will be in attendance at the AGM and will be available to answer shareholder questions.

Directors' Remuneration Report

The Directors of the Company are entitled to receive an annual fee for their services as Directors. Each Director shall be entitled to be repaid all expenses reasonably incurred in the performance of their duties as Director to the Company. If by arrangement by the Board, any Director shall perform or render any special duties or services outside of his ordinary duties as a Director, he may be paid such reasonable additional remuneration as the Board may determine.

Each of the Directors has signed a letter of appointment with the Company setting out the terms of their appointment.

The Company has not established a Remuneration Committee as the Company does not have any executive Directors or employees.

Directors' annual fees are listed in the table below:

Directors' remuneration for the years ended 31 March 2019 and 31 March 2018 was as follows:

Corporate Governance Statement

Statement of compliance with Corporate Governance

To comply with the UK Listing Regime, the Company must comply with the requirements of the UK Corporate Governance Code. The Company is also required to comply with the Code of Corporate Governance issued by the Guernsey Financial Services Commission.

The Company is a member of the Association of Investment Companies (the "AIC") and by complying with the July 2016 edition of the AIC code of Corporate Governance for investment companies ("AIC Code") is deemed to comply with both the UK and Guernsey Codes of Corporate Governance. Furthermore, the Company will be following the 2019 edition of the AIC Code for the year ended 31 March 2020.

The Board has considered the principles and recommendations of the AIC Code, by reference to the guidance notes provided by the AIC Guide, and considers that reporting against these will provide appropriate information to shareholders. To ensure ongoing compliance with these principles the Board reviews a report from the Corporate Secretary identifying how the Company is in compliance and identifying any changes that might be necessary.

The Company has complied with the recommendations of the AIC Code throughout the accounting period and thus the relevant provisions of the UK Corporate Governance Code, except as set out below.

The UK Corporate Governance Code includes provisions relating to:

· the role of the chief executive;

· executive Directors' remuneration;

· the remuneration committee; and

· the whistle-blowing policy.

For the reasons set out in the AIC Guide, and as explained in the UK Corporate Governance Code, the Board considers some of these provisions are not relevant to the position of the Company as it is an externally managed investment company. The Directors are non-executive and the Company does not have employees, hence no remuneration committee or whistle-blowing policy is required. The key service providers all have whistle-blowing policies in place. The Board as a whole had fulfilled the function of the Management Engagement Committee, prior to that Committee's establishment.

The Board

The Directors details are listed in the Directors' Report, which set out their range of investment, financial and business skills and experience.

The Board meets at least four times a year and, in addition, there is regular contact between the Board, the Investment Manager and the Company Secretary including an annual strategy meeting and Investment Manager due diligence visits, when the Board attends the offices of the Investment Manager and meets with senior executives. Further, the Board requires that it is supplied in a timely manner with information by the Investment Manager, the Company Secretary and other advisors in a form and of a quality appropriate to enable it to discharge its duties.

Duties and Responsibilities

The Board has overall responsibility for optimising the Company's performance by directing and supervising the affairs of the business and meeting the appropriate interests of shareholders and relevant stakeholders, while enhancing the value of the Company and also ensuring the protection of investors. A summary of the Board's responsibilities is as follows:

· statutory obligations and public disclosure;

· strategic matters and financial reporting;

· risk assessment and management including reporting, compliance, governance, monitoring and control; and

· other matters having a material effect on the Company.

The Board is responsible to shareholders for the overall management of the Company. The Board has delegated the day-to-day operation of the Company to the Investment Manager, Administrator and the Company Secretary. The Board reserves the powers of decisions relating to the determination of investment policy, the approval of changes in strategy, capital structure, statutory obligations, public disclosure and the entering into of any material contracts by the Company.

The following table shows the number of regularly scheduled meetings held by the Board and each committee for the year ended 31 March 2019 as well as the number of attendances at each meeting.

Additionally a number of ad-hoc meetings were held during the year which, as they dealt primarily with administrative and transaction matters, were attended by those Directors available at the time.

Chairman

The Chairman, Mr Cowdell, is responsible for leadership of the Board, ensuring its effectiveness on all aspects of its role and setting its agenda. The Chairman is also responsible for ensuring that the Directors receive accurate, timely and clear information. The Chairman is responsible for effective communication with Shareholders and can be contacted through the Company Secretary.

Senior Independent Director ("SID")

Mr Harrison is the SID and, as such, his primary roles are to support the Chairman and act as an intermediary for the other non-executive directors in matters relating to the Chairman including leading them in the annual performance evaluation of the Chairman. The SID is also available to shareholders who may have any concerns which contact through the normal channels of the Chairman and AIFM has failed to resolve or for which such contact is inappropriate. Mr Harrison can also be contacted through the Company Secretary.

Board Independence

For the purposes of assessing compliance with the AIC Code Principles 1 and 2 the Board considers whether the current Directors are independent of the Investment Manager and free from any business or other relationship that could materially interfere with the exercise of their independent judgment. In making this assessment, consideration is also given to all other factors which might be relevant including length of service. The Board has concluded that all Directors remain independent.

Committees of the Board

In accordance with the AIC Code, the Board has established an Audit Committee, a Nomination Committee and a Management Engagement Committee, in each case with formally delegated duties and responsibilities within written terms of reference.

Audit Committee

The audit committee is chaired by Mrs Farnon, and its other members are Mr Cowdell, Mr Harrison and Mr Hallam. Mrs Farnon joined the Audit Committee on 20 February 2018 and took over the chairmanship when Mr Hallam stepped down on 30 September 2018. The terms of reference of the Audit Committee state that it will meet not less than three times in each financial year. The Audit Committee Report below sets out the role and activities of this committee and its relationship with the external auditor.

Nomination Committee

The Nomination Committee is chaired by Mr Cowdell and its other members are Mr Hallam, Mr Harrison and Mrs Farnon. The members of the Nomination Committee are and will be independent Directors. The terms of reference state that the Nomination Committee will meet not less than once a year; will have responsibility for considering the size, structure and composition of the Board; and retirements and appointments of additional and replacement Directors; consideration of Board remuneration; and that the Nomination Committee will make appropriate recommendations to the Board.

The Board aims to have a balance of skills, experience, diversity (including gender) and length of service and knowledge of the industry. The Board undertakes an evaluation of its performance on an annual basis. The performance of each Director is considered as part of a formal review by the Nomination Committee.

The position of Chairman of each committee will be reviewed on an annual basis by the Nomination Committee and their membership and terms of reference are kept under review.

The performance of the Chairman of the Board will be assessed by the Senior Independent Director through discussions with the other Directors.

Management Engagement Committee

The Management Engagement Committee is chaired by Mrs Farnon, who succeeded Mr Cowdell in September 2018, with its other members being Mr Hallam and Mr Harrison. The Committee will meet at least once a year for the purpose of evaluating the performance of the Company's service providers, the review of service agreements and service level statements and the level and method of their remuneration.

Director Re-Election Tenure and Induction

The Nomination Committee has considered the question of a policy on Board tenure. It is strongly committed to striking the correct balance between the benefits of continuity and those that come from the introduction of new perspectives to the Board. As provided for in the AIC guidelines and in order to phase future retirements and appointments the Board has not, at this stage, adopted any specific limits to terms, but expects to refresh the Board at appropriate intervals.

The Board regards all Directors as being independent. The Board has adopted a policy whereby all Directors will be proposed for re-election each year and so all Directors will be proposed for re-election at the forthcoming AGM. Details of Directors' tenure are disclosed below.

Internal Controls

As reported in the Strategic Report, the Board has applied principle 15 of the AIC Code by establishing a continuous process for identifying, evaluating and managing the significant risks the Company faces. The Board regularly reviews the process, which has been in place from the start of the financial year to the date of approval of this report. The Board is responsible for the Company's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.

In compliance with principle 15 of the AIC Code, the Board regularly reviews the effectiveness of the Company's system of internal control. The Board's monitoring covers all controls, including financial, operational and compliance controls and risk management. It is based principally on reviewing reports from the Investment Manager in order to consider whether all significant risks are identified, evaluated, managed and controlled and whether any significant weaknesses are promptly remedied and indicate a need for more extensive monitoring. To this end a Risk Matrix is maintained, which identifies the significant risks faced by the Company together with the controls intended to manage them and is reviewed at each scheduled Board meeting. The Board has also performed a specific assessment considering all significant aspects of internal control arising during the year covered by this report. The Audit Committee assists the Board in discharging its review responsibilities.

During the course of its review of the system of internal control, the Board has not identified nor been advised of any failings or weaknesses which it has determined to be significant.

While investment management is provided by Cheyne Capital Management (UK) LLP, the Board is responsible for setting the overall investment policy and monitors the actions of the Investment Manager at regular Board meetings. Administration services are provided by Citco Fund Services (Guernsey) Limited. Regular compliance reports from both the Investment Manager and the Administrator are received by the Board. In addition, the Administrator makes available its Global Fund Accounting and Custody Controls Examination, SOC 1 report to the Board on an annual basis.

Custody of assets is undertaken by the Depositary, The Bank of New York Mellon (International) Limited. Effective 1 March 2019, the Company changed its Administrator from State Street (Guernsey) Limited to Citco Fund Services (Guernsey) Limited.

The Investment Manager has established an internal control framework and reviews the segregation of duties within this to ensure that control functions are segregated from the trading and investing functions. As a part of this framework, the valuation of financial instruments is overseen by an internal pricing committee which is supported by resources which ensure that it is able to function at an appropriate level of quality and effectiveness.

Specifically, the Investment Manager's pricing committee is responsible for establishing and monitoring compliance with valuation policy. Within the trading and investing functions, the Investment Manager has established policies and procedures that relate to the approval of all new transactions, transaction pricing sources and fair value hierarchy coding within the financial reporting system.

The Directors of the Company clearly define the duties and responsibilities of their agents and advisers, whose appointments are made by the Board after due consideration. The Board monitors the ongoing performance of such agents and advisers. Each agent and adviser maintains its own systems of internal control on which it reports to the Board. The systems are designed to ensure effective and efficient operation, internal control and compliance with laws and regulations. In establishing the systems of internal control, regard is paid to the materiality of relevant risks, the likelihood of costs being incurred and costs of control. It follows, therefore, that the systems of internal control can only provide reasonable but not absolute assurance against the risk of material misstatement or loss.

The Board has reviewed the need for an internal audit function and has decided that the systems and procedures employed by the Administrator, Sub Administrator and Investment Manager, including their own internal controls and procedures, provide sufficient assurance that a sound system of risk management and internal control, which safeguards Shareholders' investment and the Company's assets, is maintained. An internal audit function specific to the Company is therefore considered unnecessary.

Shareholder Engagement

The Board believes that the maintenance of good relations with shareholders is important for the long-term prospects of the Company and seeks engagement with investors. Where appropriate, the Chairman, and other Directors are available for discussion about governance and strategy with major shareholders and the Chairman ensures communication of shareholders' views to the Board. The Board receives feedback on the views of shareholders from Liberum Capital Limited (the "Corporate Broker") and the Investment Manager, and shareholders are welcome to contact the Chairman or any Director at any time via the Company Secretary.

The Directors believe that the AGM provides an appropriate forum for shareholders to communicate with the Board and encourages participation. There is an opportunity for individual shareholders to question the Chairmen of the Board and the Audit Committee at the AGM. The Board assesses the results of AGMs considering whether the number of votes against or withheld in respect of resolutions are such as to require discussion in the subsequent Annual Report.

Corporate Social Responsibility

The Board keeps under review developments involving social and environmental issues, and will report on those to the extent they are considered relevant to the Company's operations.

UK Criminal Finances Act 2017

In respect of the UK Criminal Finances Act 2017 which has introduced a new Corporate Criminal Offence of 'failing to take reasonable steps to prevent the facilitation of tax evasion', the Board confirms that it is committed to zero tolerance towards the criminal facilitation of tax evasion.

GDPR

The Board confirms that the Company has considered GDPR and taken measures itself and with its service providers, to meet the requirements of GDPR and equivalent Guernsey law. See the GDPR Privacy Notice disclosure above.

Anti-Bribery and Corruption Policy

The Board has adopted a formal Anti-bribery and Corruption Policy. The policy applies to the Company and to each of its Directors. Furthermore, the policy is shared with each of the Company's main service providers.

Whistle Blowing

As the Company has no employees of its own, it does not have a whistle-blowing policy but in its review of service providers the Management Engagement Committee ensures that they do.

Employees and Socially Responsible Investment

The Company has a management contract with the Investment Manager. It has no employees and all of its Directors are non-executive, with day-to-day activities being carried out by third parties. There are therefore no disclosures to be made in respect of employees.

The Company's main activities are carried out by the Investment Manager who was one of the initial signatories to the Standards Board for Alternative Investments (formerly known as the Hedge Fund Standards Board) and is a signatory to the United Nations- supported Principles for Responsible Investment (PRI).

Gender Metrics

The Board has chosen not to adopt a definitive policy with quantitative targets for board diversity. However, gender, knowledge, skills, experience, residency and governance credentials are all considered by the Nominations Committee when recommending appointments to the Board and in formulating succession plans. The Board currently has 25% female representation, complying with the Hampton Alexander Report for companies of RECI's size.

Principal Risks and Uncertainties

The Board has carried out a robust assessment to identify the principal risks that could affect the Company, including those that would threaten its business model, future performance, solvency or liquidity. It has adopted a controls based approach to its risk monitoring requiring each of the relevant service providers, including the Investment Manager, to establish the necessary controls to ensure that all known risks are monitored and controlled in accordance with agreed procedures. The Directors receive periodic updates at their Board meetings on key risks and have adopted their own control review to ensure where possible, risks are monitored appropriately.

Each Director is aware of the principal risks and uncertainties inherent in the Company's business and understands the importance of identifying, evaluating and monitoring these risks. The Board has adopted procedures and controls that enable it to manage these principal risks and uncertainties within acceptable limits and to meet all of its legal and regulatory obligations.

The Board considers the process for identifying, evaluating and managing these principal risks and uncertainties faced by the Company on an on-going basis and these principal risks and uncertainties are reported and discussed at Board meetings. It ensures that effective controls are in place to mitigate these risks and that a satisfactory compliance regime exists to ensure all applicable local and international laws and regulations are upheld.

The Company's Principal Risks are discussed in the Strategic Report of these financial statements and in the Company's Prospectus, available on the Company's website (www.recreditinvest.com) while those specifically relating to financial reporting are discussed in the Audit Committee report and Note 15.

Changes in Regulation

The Board monitors and responds to changes in regulation as it impacts the Company and its policies.

Audit Committee Report

Dear Shareholder,

On the following pages, we present the Audit Committee's Report for 2019, setting out the responsibilities of the Audit Committee and its key activities during the year ended 31 March 2019. As in previous years, the Audit Committee has reviewed the Company's financial reporting, the independence and effectiveness of the Independent Auditor and the internal control and risk management systems of the Company's service providers. In order to assist the Audit Committee in discharging these responsibilities, regular reports are received and reviewed from the Manager, Administrator and Independent Auditor.

A member of the Audit Committee will be available at each AGM to respond to any shareholder questions on the activities of the Audit Committee.

Susie Farnon

Chairman, Audit Committee

Membership of the Audit Committee

The audit committee is chaired by Mrs Farnon, and its other members are Mr Cowdell, Mr Harrison and Mr Hallam. Mr Hallam stepped down as Chairman of the Audit Committee and Mrs Farnon took over as Chairman of the Audit Committee with effect from 1 October 2018. The FRC Guidance on Audit Committees recommends that such a committee should comprise solely of independent non-executive directors and, as noted in the Corporate Governance Statement, the Board has considered the independence of its members and has concluded that they all remain independent. The Company Chairman currently serves as a member of the Audit Committee. The terms of reference state that the Audit Committee will meet not less than three times in the year and meet the external auditors three times a year on which occasions the need to meet without representatives of either the Investment Manager or the Administrator being present is considered. The terms of reference include all matters indicated in the Disclosure and Transparency Rule 7.1 and the AIC Code.

The Board has taken note of the requirement that at least one member of the Committee should have recent and relevant financial experience and is satisfied that the Committee is properly constituted in that respect with all members being highly experienced and Mr Hallam and Mrs Farnon being chartered accountants who also sit on other audit committees.

Responsibilities

The Audit Committee has regard to the UK Corporate Governance Code and the AIC Code. The Audit Committee examines the effectiveness of the Company's internal control systems, the integrity of the annual and half-yearly reports and Financial Statements and ensures that they are fair, balanced and understandable and provide the necessary information. They also consider the auditors' remuneration and engagement, as well as the auditors' independence and any non-audit services provided by them. Other areas of responsibility include:

· Consideration of the fair value of the Company's investments and income generated from the portfolio;

· Consideration of the accounting policies of the Company;

· Meeting with the external auditor to discuss the proposed audit plan and reporting;

· Assess the effectiveness of the external auditor and audit process;

· Consideration of the need for an internal audit function;

· Review of any independent reports in respect of the Investment Manager, the Administrator or the Depositary;

· Consideration of the risks facing the Company including the Company's Anti-Bribery, Corruption and similar obligations; and

· Monitoring the Company's procedures for ensuring compliance with statutory regulations and other reporting requirements.

In addressing all of the above considerations, the Audit Committee seeks the appropriate input from the Auditors, Investment Manager, Administrator and Legal Counsel and makes a recommendation to the Board of the Company as appropriate.

Meetings

The Audit Committee meets at least three times annually, including shortly before the Board meets to consider the Company's half-yearly and annual financial reports, and reports to the Board on its deliberations and recommendations. It also has an annual planning meeting with the Auditor and other ad hoc meetings as considered necessary.

The Audit Committee operates within clearly defined terms of reference and provides a forum through which the Company's external auditors report to the Board. The terms of reference of the Audit Committee are available from the Company's registered office. The Audit Committee receives information from the Company's service providers with the majority of information being directly sourced from the Secretary, Administrator, the Investment Manager and the external auditors. The Audit Committee considers the nature, scope and results of the Auditor's work and reviews their performance annually prior to providing a recommendation to the Board on the reappointment or removal of the Auditor. During the year, the Audit Committee held a competitive tender process during Autumn 2018 and Deloitte was reappointed.

Significant Issues Considered over Financial Reporting

The Audit Committee has determined that the key risks of misstatement of the Company's Financial Statements relate to the judgments in respect of the fair value of the Company's portfolio and income recognition.

Additional information regarding principal risks and uncertainties is provided in the Strategic Report and in Note 15.

The Board considers a report from the Investment Manager at each Board meeting which sets out a review of the portfolio and its performance. The report also details earnings forecasts and asset class analysis. As a result, the Board is able to interrogate the Investment Manager on the basis of the assumptions made and the validity of the expected forecasts.

Valuation of Portfolios

The Audit Committee conducted a detailed review of each loan position through discussions with the AIFM's relevant individual asset managers challenging them as appropriate. Such discussions covered aspect such as:

· Available and recent professional valuations

· Credit quality of the individual borrower

· Quality of the underlying collateral

· Status of development schedules compared to original plans

· Planning or other disputes

· Comparison between effective and actual yields

· Whether or not any value should be ascribed to contingent fees and potential profit participations provided for in contractual arrangements

When considering the bond investments the Audit Committee considered a number of factors including, but not restricted to:

· Pricing sources

· The valuation approach used to value certain bonds by the independent pricing advisor and challenging the AIFM's assessment of the comparable securities used in determining the valuation of these bonds

· Comparison between effective and actual yields

· Depth of prices and any disparity between different marks

· Indicative liquidity

· Comparison of realised prices with previous valuations

Having conducted this process the Committee concluded that any assumptions used were reasonable and that the valuations were in accordance with the applicable standards.

Income Recognition

The Audit Committee and the Board as a whole considered and challenged the Investment Manager's expected realisation or maturity dates and the resultant expected cash flows. The Committee found that the assumptions used were reasonable and that whilst it is possible that the expected realisation dates may change over time the Committee and the Board are satisfied that the assumed realisation dates and the Investment Manager's methods of calculating income are reasonable and in line with International Financial Reporting Standards ("IFRS").

Risk Management

The Company's risk assessment process and the way in which significant business risks are managed is a key area of focus for the Committee. The work of the Audit Committee is driven primarily by the Company's assessment of its principal risks and uncertainties as set out in the Strategic Report and in Note 15, and it receives reports from the Investment Manager on the Company's risk evaluation process and reviews changes to significant risks identified.

Internal Audit

The Committee considers at least once a year whether or not there is a need for an internal audit function. Currently the Committee believes that, given the Company has no employees, the SOC 1 internal control report provided by the Administrator and the reporting provided by the Investment Manager are sufficient and has made a recommendation to the Board to this effect.

External Audit

Deloitte LLP has been the Company's external Auditor since the Company's inception.

The objectivity of the Auditor is reviewed by the Committee which also reviews the terms under which the external Auditor may be appointed to perform non-audit services. Auditor independence is maintained through limiting non-audit services to tax reporting and audit-related work that falls within defined categories for example acting as Reporting Accountant in connection with the Placing Programme. All engagements with the Auditor are subject to pre-approval from the Audit Committee and fully disclosed within the Annual Report for the relevant period. A new lead audit partner is appointed every five years and the Audit Committee ensures the Auditor has appropriate internal mechanisms in place to ensure its independence.

When evaluating the external Auditor, the Committee has regard to a variety of criteria including industry experience, independence, reasonableness of audit plan, ability to deliver constructive criticism, effectiveness of communication with the Board and the Company's service providers, quality control procedures, management of audit process, price and added value beyond assurance in audit opinion.

In order to maintain auditor independence, Deloitte LLP ensured the following safeguards were in place:

· review and challenge of key decisions by the Quality Review Partner and engagement quality control review by a member of the Independent Professional Standard Review Team.

The Company held a competitive tender process during Autumn 2018 and Deloitte was reappointed.

The Committee reviews the scope and results of the audit, its cost effectiveness and the independence and objectivity of the auditor, with particular regard to the level of non-audit fees. During the year Deloitte charged non-audit fees of £57,500 for work performed on the Placing Programme and £28,000 for the 30 September 2018 interim review.

Notwithstanding the provisions of such services, the Audit Committee considers Deloitte LLP to be independent of the Company and that the provision of such non-audit services is not a threat to the objectivity and independence of the conduct of the audit as appropriate safeguards are in place.

To fulfil its responsibility regarding the independence of the Auditor, the Audit Committee considers:

· discussions with or reports from the Auditor describing its arrangements to identify, report and manage any conflicts of interests; and

· the extent of non-audit services provided by the Auditor and arrangements for ensuring the independence, objectivity and robustness and perceptiveness of the auditor and their handling of key accounting and audit judgements.

To assess the effectiveness of the Auditor and the audit process, the Committee reviews:

· the Auditor's fulfilment of the agreed audit plan and variations from it;

· discussions or reports highlighting the major issues that arose during the course of the audit;

· feedback from other service providers evaluating the performance of the audit team;

· arrangements for ensuring independence and objectivity; and

· robustness of the Auditor in handling key accounting and audit judgements.

The Audit Committee was satisfied with the audit process and Deloitte LLP's effectiveness and independence as an Auditor having considered the degree of diligence and professional scepticism demonstrated by them.

On behalf of the Audit Committee

Susie Farnon

Chairman of the Audit Committee

24 June 2019

Directors' Responsibility Statement

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

The Companies (Guernsey) Law 2008 requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Company financial statements in accordance with IFRS. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that year. In preparing these financial statements, International Accounting Standard 1 ("IAS 1") requires that Directors:

· 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 IFRS 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 Company'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 Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies (Guernsey) Law 2008. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

We confirm that to the best of our knowledge:

(i) The financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

(ii) The Chairman's Statement, the Strategic Report and the Investment Manager's Report include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties they face; and

(iii) So far as each Director is aware, there is no relevant audit information of which the Company's Auditors are unaware, and each Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company's Auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 249 of the Companies (Guernsey) Law 2008 (as amended).

Responsibility Statement of the Directors in Respect of the Annual Report under the UK Corporate Governance Code

The Directors are responsible for preparing the Annual Report in accordance with applicable law and regulations. Having taken advice from the Audit Committee, the Directors consider the Annual Report and Financial Statements, taken as a whole, as fair, balanced and understandable and that it provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Statement of Comprehensive Income

For the year ended 31 March 2019

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

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

Statement of Financial Position

As at 31 March 2019

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

Statement of Changes in Equity

For the year ended 31 March 2019

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

Statement of Cash Flows

For the year ended 31 March 2019