9 Mar 2018 14:00
RM SECURED DIRECT LENDING PLC
LEGAL ENTITY IDENTIFIER ('LEI'): 213800RBRIYICC2QC958
ANNUAL FINANCIAL REPORT ANNOUNCEMENT
For the period from incorporation on 27 October 2016 to 31 December 2017
INVESTMENT OBJECTIVE, FINANCIAL INFORMATION AND PERFORMANCE SUMMARY
Investment objective
RM Secured Direct Lending PLC ("the Company") aims to generate attractive and regular dividends through investment in secured debt instruments of UK Small Medium Enterprises ("SMEs"), and mid-market corporates and/or individuals including any loan, promissory notes, lease, bond, or preference share (such debt instruments, being "Loans") sourced or originated by RM Capital Markets Limited (the "Investment Manager") with a degree of inflation protection through index-linked returns where appropriate.
Financial information | ||||||||||||||||||||||||||||||||||
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Chairman's Statement
Introduction
On behalf of the Board I am pleased to present the Company's initial annual report and financial statements for the first full financial period (the "Period"), from the successful Initial Public Offering ("IPO") in December 2016 to the end of the calendar year 2017. RM Secured Direct Lending plc listed on the premium segment of the main market of the London Stock Exchange on 15 December 2016, issuing 50,300,000 Ordinary Shares at a price of £1 per share. In May 2017, the Company issued a further 7,000,000 Ordinary Shares at 101.25 pence per share. In addition, the Company issued 30,000,000 C Shares at a price of £1 per share in October 2017. The C Shares are expected to be converted to Ordinary Shares on 19 March 2018.
The Company was established to allow investors to participate in secured debt investments. These investments are typically secured over plant, property and equipment and/or cash flows. I am delighted to report that the Investment Manager has found suitable investment opportunities, which have allowed capital to be deployed in a timely manner. This program has met or exceeded targets set during investor roadshows. These investments exhibit the appropriate level of risk adjusted returns the Company seeks and the Investment Manager continues to see attractive opportunities to deploy capital which should allow the Company to raise additional capital during 2018.
The Company will be shortly issuing a prospectus for a programme in relation to the potential issuance of new Ordinary Shares, C Shares and Zero Dividend Preference Shares ("ZDP"). A circular and Notice of General Meeting has been sent to Shareholders separately to seek Shareholder approval for these proposals and an amended investment policy. As described in the circular, the Company has resolved to introduce what the Board considers to be a prudent level of structural gearing by way of the establishment of the ZDP Subsidiary and the issue of the ZDP Shares. In order to facilitate this structural gearing and for it to be used for investment purposes it is necessary to amend the existing investment policy. Full details of the proposed investment policy are provided in the circular. The General Meeting of the Company will take place on 28 March 2018 at 11.00 am.
Portfolio
At the period end the Ordinary Share portfolio had 23 debt investments totalling over £55m of deployed capital and the C Share portfolio had 9 debt investments which have been funded or committed to be funded totalling £21m. This represents 98% and 70% of the available capital of the Ordinary Shares and the C Shares respectively. The Board is delighted to have the broad sector diversity which was one of the initial objectives of the Company. Investments are spread across 13 sectors with the average yield on investments being 8.23% on the Ordinary Shares and 9.74% on the C Shares. Other key statistics are that 39% of the portfolio investments have their coupons linked to Libor and 69% of the investments are in the senior secured part of the capital structure, with the remainder being junior secured.
NAV and share price performance
As at 31 December 2017, the Company had 57,300,000 Ordinary Shares in issue and the closing price was 101.5 pence per share. Dividends totalling 2.2 pence per Ordinary Share were paid in the Period and this combined with the modest share price appreciation represents a 3.7% total return over the first full financial period of the Company.
As at 31 December 2017, the adjusted NAV per Ordinary Share was 98.6 pence and the share price was 101.5 pence per share, representing a premium of 3.0% to NAV.
As at 31 December 2017, the adjusted NAV per C Share was 97.8 pence and the share price was 102.0 pence per share, representing a premium of 4.3% to NAV.
Dividend
The Company has declared or paid dividends totalling 4.2 pence per Ordinary Share in respect of the financial period ended 31 December 2017, which is above the stated IPO dividend target of 4 pence per share. All the dividends have been classified as interest distributions.
On 15 February 2018 the Company declared an interim dividend for the quarter ended 31 December 2017 of 2.0 pence per Ordinary Share which will be paid on 23 March 2018.
Bank facility
During October, the Company entered into a £10m revolving credit facility with OakNorth Bank which expires on 4 May 2019. This will facilitate the tactical use of borrowings ahead of any known investment redemptions or capital raises. Aside from setup costs and an arrangement fee, there is no additional cost to maintaining the facility.
Regulation
In accordance with the Packaged Retail and Insurance-based Investment Products Regulation ("PRIIPS"), the Company has prepared a Key Information Document ("KID") which is available on the Company's website. It should be noted, however, that the cost, performance and risk calculations included in the KID follow the methodology prescribed by European Union rules and are not determined by the Company. Due to the limited trading history of the Company, the collateralised nature of the investments and the discount protection measures incorporated into the Articles of Association of the Company from inception, the Board and Investment Manager do not believe that the numbers in the KID accurately reflect the potential future returns of the Company.
Outlook
The Board believes the Company is well positioned to capitalise on opportunities during the next period as the Investment Manager has demonstrated the ability to source excellent investment opportunities and undertake a rigorous credit analysis and due diligence process. The Company has a diversified portfolio of secured loans generating a stable income and the Board would like to see the Company grow during 2018 with the aim of achieving the target dividend of 6.5%, spreading the Company's fixed costs and continued diversification of the portfolio.
The first Annual General Meeting ("AGM") will be held on the 19 April 2018 where the Board and Investment Manager look forward to meeting Shareholders and answering any questions you may have. If you are unable to attend but have questions for the Board or Investment Manager then please contact N+1 Singers, who's details are in the Annual Report and Accounts.
The Board is grateful for the support of Shareholders and are delighted to have such a broad investor base. We would also like to thank the Investment Manager and the other professional advisors for their hard work and support throughout the first year.
Norman Crighton
Chairman
9 March 2018
Investment Manager's Report
Overview
During the period, the Investment Manager ("RM") worked towards meeting the Investment Objectives outlined in the Prospectus by deploying the funds raised at IPO and developing a diverse portfolio of secured debt investments which will generate a steady return for Shareholders. By late spring, this initial investment process was largely complete and the Company undertook a tactical additional capital raise of £7 million ahead of the summer. During the autumn RM approached new and existing investors to participate in a more substantial C share issue and an additional £30 million was raised. Growing the capital base of the Company in this way will enable investors to get exposure to a broader portfolio of debt investments and will spread the Company's fixed costs. The Company closed this C Share issue in October and by period end the capital had largely been deployed or committed to investments. It is the intention of the Company to merge the two share classes before the end of March 2018.
The first year's target of a 4% dividend has been exceeded and for the current year the target is 6.5% as outlined in the IPO prospectus. The share price performance of the Company over the period has been stable, trading in a narrow range between 101 and 103 pence and at a premium of between 2% and 4% to NAV. RM have purchased 102,151 shares of the Company during the period which represents half of the management fee earned and is in line with the commitment to investors made at the IPO. This is in addition to investments by RM at the IPO in excess of 1,000,000 shares and the management team. The intention is to align the Investment Manager's interests with Shareholders and this commitment to invest a proportion of the management fee will continue until December 2019.
Market environment
Whilst stock markets have been strong, there has been volatility both in underlying government bonds and across the currency markets. The key change during the period was the movement in Bank of England base rate, which was moved higher for the first time in 10 years from 0.25% to 0.5%. This was combined with changing expectations for the direction interest rates are moving to, as 10-year UK government yields over the period have moved from 1.23% to 1.35%.
This is still a relatively low base rate and there is scope for this to move higher. RM have sought to minimise exposure to interest rates by making investments which are either linked to Libor and thus benefit from higher coupons during this period, or which are fixed rate investments with relatively short tenors. These shorter dated fixed rate investments can then be redeployed as they mature and protect the portfolio from any sudden market shocks with regards to interest rates moving higher and faster than current expectations.
The US markets are seeing yields rise, which is driving weaker sentiment to global fixed income markets - over the period US 10 year rates were as low as 2.1% in September and have been moving consistently higher since then.
Portfolio
As at the period end the Ordinary Share portfolio was almost fully deployed with an average yield on investments of 8.23% and 70% of the C share capital had been deployed or committed to funding above the target 8% yield. This is consistent with a target gross yield above 8% across the portfolio and given, the pipeline of opportunities, the Company announced on 15 February 2018 that the Ordinary and C Shares will merge during March. The Company focuses on private debt and at the period end, 77% and 86% of the Ordinary and C Share portfolios respectively are in private debt instruments.
31 December 2017 | |||
Ordinary Shares | C Shares | ||
Number of investments1 | 23 | 9 | |
Number of sectors | 11 | 7 | |
Weighted average life (years) | 3.48 | 4.47 | |
Net asset value (IFRS Calculation) | £56.3m | £29.6m | |
Net asset value per share (cum income) (IFRS Calculation) | 98.20 | 98.58 | |
Total committed | £56.9m | £21.6m | |
Deployed | £55.8m | £14.6m | |
Average yield (on invested amount) | 8.23% | 9.74% | |
Average yield (including cash) | 8.04% | 4.72% | |
Senior secured / Junior secured | 72% / 28% | 57% / 43% | |
Fixed / Floating or index-linked | 72% / 28% | 16% / 84% | |
Private / Public investments | 77% / 23% | 86% / 14% | |
1 Of these, 7 investments are shared between both Ordinary and C Shares | |||
Opportunities are sourced via a number of channels, including directly by the Investment Manager and via financial advisory firms. Borrowers and investments are reviewed by the Investment Manager to ensure they have the appropriate credit metrics and appropriate security for each investment. The Investment Manager considers carefully whether the yield is suitable on a risk adjusted basis when considering the credit metrics and the security package combined with ranking in the capital structure. Post transaction close and investment the transactions are carefully monitored by the Investment Manager.
The investment strategy employed by the Investment Manager is sector agnostic (environmental, social and governance criteria as detailed in the Company's prospectus). The focus is on investments which demonstrate robust credit metrics, are supported by excellent management teams and have appropriate levels of security. During the period the uncertainty created by Brexit negotiations, the challenging macro picture, and the headwinds facing the high street and consumers, made certain cyclical sectors challenging to transact in. To this end, the team focused on non-cyclical areas such as social infrastructure, including healthcare. The sector represents the Company's second largest exposure at 14% and is likely to grow during 2018. Healthcare investments cover the entire spectrum, from elderly care, to supported living and complex care. There are well known headwinds affecting this sector as staff costs are increasing and local government budgets come under pressure, however well-structured transactions generate appropriate risk-adjusted returns, supported by tangible security and stable cash flows.
RM Capital Markets Limited
9 March 2018
Principal risks and uncertainties
Together with the issues discussed in the Chairman's Statement and the Investment Manager's Report, the Board considers that the principal risks and uncertainties faced by the Company fall into the following main categories:
(i) Market risks
Availability of appropriate investments
There is no guarantee that loans will be made in a timely manner.
Before the Company is able to make or acquire loans, the Investment Manager is required to complete necessary due diligence and enter into appropriate legal documentation. There can be no guarantee these steps will occur.
In addition the Company may become subject to competition in sourcing and making investments. Some of the Company's competitors may have greater financial, technical and marketing resources or a lower cost of capital and the Company may not be able to compete successfully for investments. Competition for investments may lead to the available interest coupon on investments decreasing, which may further limit the Company's ability to generate its desired returns.
If the Investment Manager is not able to source a sufficient number of suitable investments within a reasonable time frame whether by reason of lack of demand, competition or otherwise, a greater proportion of the Company's assets will be held in cash for longer than anticipated and the Company's ability to achieve its investment objective will be adversely affected. To the extent that any investments to which the Company is exposed prepay, mature or are sold it will seek to reinvest such proceeds in further investments in accordance with the Company's investment policy.
Market sectors
Loans will be made to borrowers that operate in different market sectors each of which will have risks that are specific to that particular market sector.
UK exit from the European Union
A referendum was held on 23 June 2016 to decide whether the UK should remain in the EU. A vote was given in favour of the UK leaving the EU ("Brexit"). The extent of the impact on the Company will depend in part on the nature of the arrangements that are put in place between the UK and the EU following Brexit and the extent to which the UK continues to apply laws that are based on EU legislation. In addition, the macroeconomic effect of a Brexit on the value of investments in the lending market and, by extension, the value of investments in the portfolio is unknown. As such, it is not possible to state the impact that Brexit will have on the Company and its investments. It could also potentially make it more difficult for the Company to raise capital in the EU and/or increase the regulatory compliance burden on the Company. This could restrict the Company's future activities and thereby negatively affect returns.
Management of risks
The Company has appointed an experienced Investment Manager who directly sources loans. The Company is investing in a wide range of loan types and sectors and therefore benefits from diversification. Investment restrictions are relatively flexible giving the advisor ability to take advantage of diverse loan opportunities.
The Investment Manager, AIFM, Broker and the Board review market conditions on an ongoing basis.
(ii) Risks associated with meeting the Company's investment objective or target dividend yield
The Company's investment objective is to generate attractive and regular dividends through investment in loans sourced or originated by the Investment Manager and to generate capital appreciation by virtue of the fact that the returns on some loans will be index-linked. The declaration, payment and amount of any future dividends by the Company will be subject to the discretion of the Directors and will depend upon, amongst other things, the Company successfully pursuing the investment policy and the Company's earnings, financial position, cash requirements, level and rate of borrowings and availability of profit, as well as the provisions of relevant laws or generally accepted accounting principles from time to time.
Management of risks
The Investment Manager has a target portfolio yield which covers the level of dividend targeted by the Company. The Board reviews the position at board meetings.
(iii) Financial risks
The Company's investment activities expose it to a variety of financial risks which include liquidity, currency, leverage, interest rate and credit risks.
Further details on financial risks and the management of those risks can be found in the notes to the Annual Report and Accounts.
(iv) Corporate governance and internal control risks
The Company has no employees and the directors have all been appointed on a non-executive basis. The Company must therefore rely upon the performance of third party service providers to perform its executive functions. In particular, the AIFM, the Investment Manager, the Administrator, the Company Secretary, the Registrar and their respective delegates, if any, will perform services that are integral to the Company's operations and financial performance.
Poor performance of the above service providers could lead to various consequences including the loss of the Company's assets, inadequate returns to shareholders and loss of investment trust status.
Management of risks
Each of the above contracts was entered into after full and proper consideration of the quality and cost of services offered, including the financial control systems in operation in so far as they relate to the affairs of the Company. All of the above services are subject to ongoing oversight of the Board and the performance of the principal service providers is reviewed on a regular basis.
(v) Regulatory risks
The Company and its operations are subject to laws and regulations enacted by national and local governments and government policy. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Any change in the laws, regulations and/or government policy affecting the Company or any changes to current accountancy regulations and practice in the UK may have a material adverse effect on the ability of the Company to successfully pursue its investment policy and meet its investment objective and/or on the value of the Company and the shares. In such event, the performance of the Company, the Net Asset Value, the Company's earnings and returns to Shareholders may be materially adversely affected.
Management of risks
The Company has contracted out relevant services to appropriately qualified professionals. The Secretary and AIFM report on compliance matters to the Board on a quarterly basis and the Board has access to the advice of its Corporate Broker on a continuing basis. The assessment of regulatory risks forms part of the Board's risk assessment programme.
Portfolio
Largest 10 loans by drawn amounts across the entire portfolio
Valuation | Percentage of | ||
Business activity | Security type | £'000 | net asset |
Asset finance business | Loan investment | 8,000 | 9.3 |
Out-of-Home advertising | Loan investment | 7,534 | 8.8 |
Payroll software provider | Loan investment | 6,843 | 8.0 |
Automotive | Loan investment | 6,217 | 7.2 |
Renewable energy (solar) | Loan investment | 4,800 | 5.6 |
Student accommodation | Loan investment | 4,420 | 5.1 |
Insurance broking | Debt security instrument | 4,050 | 4.7 |
Power plant | Loan investment | 4,000 | 4.7 |
Care provider | Loan investment | 3,935 | 4.6 |
Care provider | Debt security instrument | 3,002 | 3.5 |
Ten largest holdings | 52,801 | 61.5 | |
Other loan investments | 16,399 | 19.1 | |
Other debt security instruments | 7,757 | 9.0 | |
Total holdings | 76,957 | 89.6 | |
Other net assets* | 8,886 | 10.4 | |
Total net assets | 85,843 | 100.0 | |
* The above is based on the Company's net assets before deduction of the C Share liabilities.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations.
Company law requires the Directors to prepare accounts for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS") and applicable law. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company as at the end of the period and of the net return for the period. In preparing these accounts, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates, which are reasonable and prudent;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; and
• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and which disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the accounts comply with the Companies Act 2006. 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 accounts are published on the Company's website at https://rmdl.co.uk/ which is maintained by the Company's Investment Manager. The work carried out by the auditors does not involve consideration of the maintenance and integrity of these websites and, accordingly, the auditors accept no responsibility for any changes that have occurred to the accounts since being initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors' confirmation statement
The Directors each confirm to the best of their knowledge that:
(a) the accounts, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
(b) the Annual Report includes a fair review of the development and performance of the business and position of the Company, together with a description of the principal risks and uncertainties that it faces.
The Directors consider that 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 Company's performance, business model and strategy.
For and on behalf of the Board
Norman Crighton
Director
9 March 2018
Statement of Comprehensive Income
For the period from incorporation on 27 October 2016 to 31 December 2017
Revenue | Capital | Total | ||
£'000 | £'000 | £'000 | ||
Loss on investments | - | (853) | (853) | |
Income | 3,586 | - | 3,586 | |
Investment management fee | (370) | - | (370) | |
Other expenses | (777) | - | (777) | |
Return before finance costs and taxation | 2,439 | (853) | 1,586 | |
Finance costs | (32) | (174) | (206) | |
Return on ordinary activities before taxation | 2,407 | (1,027) | 1,380 | |
Taxation | (44) | 44 | - | |
Return on ordinary activities after taxation | 2,363 | (983) | 1,380 | |
Return per Ordinary Share (pence) | 4.35p | (1.81p) | 2.54p | |
The total column of this statement is the profit and loss account of the Company.
All the revenue and capital items in the above statement derive from continuing operations
'Return on ordinary activities after taxation' is also the 'Total comprehensive income for the period'.
The notes form an integral part of these financial statements.
Statement of Financial Position
As at 31 December 2017 | |||
£'000 | |||
Fixed assets | |||
Investments at fair value through profit or loss | 76,957 | ||
Current assets | |||
Receivables | 1,069 | ||
Cash and cash equivalents | 15,441 | ||
16,510 | |||
Payables: amounts falling due within one year | |||
Payables | (7,624) | ||
C Shares in issue | (29,574) | ||
Net current assets | (20,688) | ||
Total assets less current liabilities | 56,269 | ||
Net assets | 56,269 | ||
Capital and reserves: equity | |||
Share capital | 573 | ||
Share premium | 6,845 | ||
Special reserve | 48,502 | ||
Capital reserve | (983) | ||
Revenue reserve | 1,332 | ||
Total Shareholders' funds | 56,269 | ||
NAV per share - Ordinary Shares - adjusted (pence) | 98.59p | ||
NAV per share - Ordinary Shares - IFRS calculation (pence) | 98.20p | ||
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The notes form an integral part of these financial statements
Statement of Changes in Equity
For the period from incorporation on 27 October 2016 to 31 December 2017
Share capital | Share premium | Special reserve | Capital reserve | Revenue reserve | Total | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Balance as at beginning of the period | - | - | - | - | - | - |
Return on ordinary activities | - | - | - | (983) | 2,363 | 1,380 |
Issue of Ordinary Shares | 573 | 56,815 | - | - | - | 57,388 |
Share issue costs | - | (1,215) | - | - | - | (1,215) |
Transfer to Special reserve | - | (48,755) | 48,755 | - | - | - |
Special reserve costs | - | - | (24) | - | - | (24) |
Dividend paid | - | - | (229) | - | (1,031) | (1,260) |
Balance as at 31 December 2017 | 573 | 6,845 | 48,502 | (983) | 1,332 | 56,269 |
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Distributable reserves comprise: the Revenue reserve; the Capital reserves attributable to realised profits; and the Special reserve.
Share capital represents the nominal value of shares that have been issued. The Share premium includes any premiums received on the issue of share capital. Any transaction costs associated with the issuing of shares are deducted from Share premium.
The notes form an integral part of these financial statements.
Statement of Cash Flows
For the period from incorporation on 27 October 2016 to 31 December 2017
£'000 | ||||
Operating activities | ||||
Return on ordinary activities before finance costs and taxation* | 1,586 | |||
Adjustment for losses on investments | 844 | |||
Increase in debtors | (1,069) | |||
Increase in creditors | 691 | |||
Net cash flow from operating activities | 2,052 | |||
Investing activities | ||||
Proceeds from sale of investments | 29,676 | |||
Purchase of investments | (100,617) | |||
Net cash flow from investing activities | (70,941) | |||
Financing activities | ||||
Share issue proceeds | 57,388 | |||
Share issue costs | (1,215) | |||
C Share issue proceeds | 30,000 | |||
C Share issue costs | (559) | |||
Transfer to Special reserve costs | (24) | |||
Equity dividends paid | (1,260) | |||
Net cash flow from financing activities | 84,330 | |||
Increase in cash | 15,441 | |||
Opening balance at beginning of the period | - | |||
Balance as at 31 December 2017 | 15,441 | |||
* Cash inflow from interest received on investment holdings was £2,713,000.
The notes form an integral part of these financial statements.
Notes to the financial statements | ||||||||||||||||
1. General information | ||||||||||||||||
RM Secured Direct Lending plc was incorporated in England and Wales on 27 October 2016 with registered number 10449530, as a closed-ended investment company. The Company commenced its operations on 15 December 2016. The Company intends to carry on business as an investment trust within the meaning of Chapter 4 of Part 24 of the Corporation Tax Act 2010. | ||||||||||||||||
The Company's investment objective is to generate attractive and regular dividends through investment in secured debt instruments of UK SMEs and mid-market corporates and/or individuals including any loan, promissory notes, lease, bond or preference share sourced or originated by the Investment Manager with a degree of inflation protection through index-linked returns where appropriate. | ||||||||||||||||
The Company's shares were admitted to the Official List of the UK Listing Authority with a premium listing on 15 December 2016. On the same day, trading of the Ordinary Shares commenced on the London Stock Exchange. The registered office is Mermaid House, 2 Puddle Dock, London, EC4V 3DB. | ||||||||||||||||
2. Accounting policies | ||||||||||||||||
The principal accounting policies followed by the Company are set out below:
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(a) Basis of accounting | ||||||||||||||||
The financial statements have been prepared on a going concern basis in accordance with IFRS, which comprise standards and interpretations approved by the IASB and International Accounting Standards and Standing Interpretations Committee interpretations approved by the IASC that remain in effect and to the extent that they have been adopted by the European Union. Further details on going concern are provided in the Annual Report and Accounts. The financial statements have been prepared on a historical cost basis, except for the measurement at fair value of investments. The Board has determined by having regard to the currency of the Company's share capital and the predominant currency in which its Shareholders operate, that sterling is the functional and reporting currency. Where presentational recommendations set out in the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" ("SORP"), issued in the UK by the AIC in November 2014 and updated in January 2017, do not conflict with the requirements of IFRS, the Directors have prepared the financial statements on a basis consistent with the recommendations of the SORP, in the belief that this will aid comparison with similar investment companies incorporated in the United Kingdom. | ||||||||||||||||
In accordance with the SORP, the Statement of Comprehensive Income has been analysed between a revenue return (dealing with items of a revenue nature) and a capital return (relating to items of a capital nature). Revenue returns include, but are not limited to, investment related income, operating expenses, income related finance costs and taxation (in so far as they are not allocated to capital). Net revenue returns are allocated via the revenue return to the Revenue reserve. Capital returns include, but are not limited to, profits and losses on the disposal and the valuation of non-current investments, operating costs and finance costs (in so far as they are not allocated to revenue). Net capital returns are allocated via the capital return to Capital reserves.
Dividends on Ordinary Shares may be paid out of Revenue reserve, Capital reserve and Special reserve.
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In the opinion of the Directors, there are no new standards that became effective during the period that had a material impact on the financial statements. At the date of approval of the Annual Report and Accounts, the following standard, which has not been applied in these financial statements, was in issue but not yet effective:
· Amendments to IAS 7 'Statement of Cash flows', is effective for annual periods beginning on or after 1 January 2017. The main objective of these amendments is to provide disclosures that enable users of financial statements to evaluate changes arising from financing activities. This should improve the information provided to users of financial statements about an entity's financing activities.
· IFRS 9, 'Financial instruments', effective for annual periods beginning on or after 1 January 2018, specifies how an entity should classify and measure financial assets and liabilities, including some hybrid contracts. The standard improves and simplifies the approach for classification and measurement of financial assets compared with the requirements of IAS 39. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged. The standard applies a consistent approach to classifying financial assets and replaces the numerous categories of financial assets in IAS 39, each of which had its own classification criteria. The Company's loan investments are held at fair value through profit or loss and, in accordance with IFRS 9, will continue to be classified as such based on below assessment.
i) Classification and measurement The classification of financial assets is based on the Company's business model and the contractual cash flow characteristics of its investments. Assessment of contractual cash flows is one of the criteria for determining whether financial assets should be classified as measured at amortised cost i.e. whether the cash flows from a financial asset constitutes Solely the Payment of Principal and Interest ('SPPI'). A financial asset that does not meet the SPPI criterion is always measured at fair value through profit or loss, unless it is equity instrument for which an entity may apply fair value through other comprehensive income election. The Company does not expect a significant impact on its Statement of Financial Position or equity on applying the classification and measurement requirements of IFRS 9.
ii) Impairment IFRS 9 changes the basis of recognition of impairment on financial assets from an incurred loss to an expected credit loss approach for assets held at amortised cost and fair value through other comprehensive income. Under this approach, the impairment loss would be recognised from the date of origination depending on the credit quality of the asset.
iii) Hedge accounting The Company does not currently designate any hedges as effective hedging relationships, which qualify for hedge accounting. Therefore, the Company does not expect there to be any impact with respect to hedge accounting on the Company as a result of applying IFRS 9.
The Board is currently considering the impact of the above standards. Based on its assessment, the standards are not expected to have a material impact on the Company's financial statements.
The financial statements have also been prepared on the assumption that approval as an investment trust will continue to be granted.
There are no comparatives as this is the Company's first accounting period. | ||||||||||||||||
b) Investments Investments consist of debt instruments, which includes bonds and loans made by the Company. The debt instruments are designated on initial recognition as at fair value through profit or loss as they are included in a group of financial assets that are managed and their performance evaluated on a fair value basis. They are initially and subsequently measured at fair value. Gains/losses are attributed to the capital column of the Statement of Comprehensive Income. The debt instruments are derecognised when their term expires, or they are sold or repaid. | ||||||||||||||||
(c) Foreign currency Transactions denominated in foreign currencies are translated into sterling at actual exchange rates as at the date of the transaction. Monetary assets and liabilities and non-monetary assets held at fair value denominated in foreign currencies are translated into sterling using London closing foreign exchange rates at the period end. Any gain or loss arising from a change in exchange rates is included as an exchange gain or loss to capital or revenue in the Statement of Comprehensive Income as appropriate. Foreign exchange movements on investments are included in the Statement of Comprehensive Income within loss on investments. | ||||||||||||||||
(d) Income Interest income is recognised in the revenue column of the Statement of Comprehensive Income on a time apportioned basis. All other income including deposit interest, early redemption fees and arrangement fees received are accounted for on a receipt basis. The arrangement fees are recognised when the investment is recognised. | ||||||||||||||||
(e) Capital reserves Realised and unrealised gains and losses on the Company's investments are recognised in the capital column of the Statement of Comprehensive Income and allocated to the Capital reserve. | ||||||||||||||||
(f) Expenses All expenses are accounted for on an accruals basis. Expenses are recognised in the revenue column of the Statement of Comprehensive Income. | ||||||||||||||||
Management fees and finance costs The Company is expecting to derive its returns predominantly from interest income. Therefore, the Board has adopted a policy of allocating all management fees and finance costs (in so far as they are not directly attributable to capital) to the revenue column of the Statement of Comprehensive Income.
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(g) Taxation The charge for taxation is based upon the net revenue for the period. The tax charge is allocated to the revenue and capital columns of the Statement of Comprehensive Income according to the marginal basis whereby revenue expenses are first matched against taxable income arising in the revenue account. Deferred taxation will be recognised as an asset or a liability if transactions have occurred at the initial reporting date that give rise to an obligation to pay more taxation in the future, or a right to pay less taxation in the future. An asset will not be recognised to the extent that the transfer of economic benefit is uncertain. | ||||||||||||||||
h) Financial liabilities Bank loans and overdrafts are initially recorded at the proceeds received net of direct issue costs and subsequently measured at amortised cost using the effective interest rate. C Shares are treated as debt on issue and reclassified as equity upon conversion to the Company's Ordinary Shares. The associated costs of issuing C Shares are treated as capital and amortised over the period between issue and conversion of C Shares.
i) Dividends Interim dividends to the Shareholders are recorded in the Statement of Changes in Equity on the date that they are paid. Final dividends are recorded in the Statement of Changes in Equity when they are approved by Shareholders.
(j) Judgements, estimates and assumptions The preparation of financial statements requires the Directors to make estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Although these estimates are based on management's best knowledge of current facts, circumstances and, to some extent, future events and actions, the Company's actual results may ultimately differ from those estimates, possibly significantly. The most significant assumptions and estimates are disclosed in note 3.
During the period, there have been no estimates, judgements or assumptions, which have had a significant impact on the financial statements.
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3. Investments at fair value through profit or loss | ||||||||||||||||
(a) Summary of valuation | ||||||||||||||||
Period ended31 December 2017 | ||||||||||||||||
£'000 | ||||||||||||||||
Financial assets held: | ||||||||||||||||
Debt securities and loan investments | 76,957 | |||||||||||||||
76,957 | ||||||||||||||||
(b) Movements | ||||||||||||||||
Period ended31 December 2017 | ||||||||||||||||
£'000 | ||||||||||||||||
Book cost at the beginning of the period | - | |||||||||||||||
Opening gains on investments | - | |||||||||||||||
Opening valuation | - | |||||||||||||||
Purchases at cost | 107,477 | |||||||||||||||
Sales: | ||||||||||||||||
- proceeds | (29,676) | |||||||||||||||
- losses on investment | (689) | |||||||||||||||
Closing losses on investments | (155) | |||||||||||||||
Closing valuation at period end | 76,957 | |||||||||||||||
Book cost at end of the period | 77,112 | |||||||||||||||
Losses on investment holdings at the period end | (155) | |||||||||||||||
Closing valuation at period end | 76,957 | |||||||||||||||
(c) Losses on investments | ||||||||||||||||
Period ended31 December 2017 | ||||||||||||||||
£'000 | ||||||||||||||||
Losses on investment | (689) | |||||||||||||||
Movements in losses on investment holdings at the period end | (155) | |||||||||||||||
Other capital losses | (9) | |||||||||||||||
Total losses on investments | (853) | |||||||||||||||
Significant accounting estimates and judgements
The Company recognises loan investments at fair value through profit or loss. The significant assumptions made at the point of valuation of loans are the discounted cash flow analysis and/or benchmarked discount/interest rates, which are deemed appropriate to reflect the risk of the underlying loan.
These assumptions are monitored to ensure their ongoing appropriateness.
4. Income | ||||||||||||||||
Period ended31 December 2017 | ||||||||||||||||
£'000 | ||||||||||||||||
Income from investments | ||||||||||||||||
Bond and loan interest | 2,834 | |||||||||||||||
Bank interest | 20 | |||||||||||||||
Arrangement fees | 142 | |||||||||||||||
Loan redemption fees | 531 | |||||||||||||||
Other income | 59 | |||||||||||||||
Total | 3,586 | |||||||||||||||
5. Investment management fee |
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| ||||||||||||||||
Period ended31 December 2017 |
| |||||||||||||||
£'000 |
| |||||||||||||||
Basic fee: |
| |||||||||||||||
100% charged to revenue | 370 |
| ||||||||||||||
Total | 370 |
| ||||||||||||||
| ||||||||||||||||
The Company's Investment Manager is RM Capital Markets Limited. The Investment Manager is entitled to receive a management fee payable monthly in arrears and is at a rate of one-twelfth of 0.5% if the Company's net assets are less than £75 million. If the Company's net assets are in excess of £75 million then they are entitled to receive a management fee one twelfth of 0.875% per calendar month of net assets payable a month in arrears. The combined net assets of both the Ordinary and C Shares (if any in issue) is used as the basis of calculating the management fees.
There is no performance fee payable to the Investment Manager. |
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6. Other expenses |
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Period ended31 December 2017 |
| |||||||||||||||
£'000 |
| |||||||||||||||
| ||||||||||||||||
Administration and Company Secretarial fees | 166 |
| ||||||||||||||
Auditor's remuneration*: |
| |||||||||||||||
Statutory audit fee | 48 |
| ||||||||||||||
Non-audit fees | 24 |
| ||||||||||||||
Broker fees | 95 |
| ||||||||||||||
Consultancy fees | 66 |
| ||||||||||||||
Custody fees | 30 |
| ||||||||||||||
Directors' fees | 103 |
| ||||||||||||||
AIFM fees | 95 |
| ||||||||||||||
Valuation fees | 59 |
| ||||||||||||||
Other expenses | 91 |
| ||||||||||||||
Total | 777 |
| ||||||||||||||
*Auditor's remuneration includes VAT of £8,000 on statutory audit fees and £4,000 on non-audit fees. The non-audit fees were in relation to the audit of the Company's initial accounts during the period. |
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| ||||||||||||||||
Prior to appointment as the Company's Auditor, Ernst & Young LLP, received £61,500 plus VAT for non-audit Initial Public Offering related services, which have been treated as a capital expense and included in 'Share issue costs' disclosed in the Statement of Changes in Equity.
|
| |||||||||||||||
7. Finance costs |
| |||||||||||||||
Period ended31 December 2017 |
| |||||||||||||||
Revenue | Capital | Total |
| |||||||||||||
£'000 | £'000 | £'000 |
| |||||||||||||
Loan arrangement fees | 32 | - | 32 |
| ||||||||||||
C Share finance costs | - | 174 | 174 |
| ||||||||||||
Total | 32 | 174 | 206 |
| ||||||||||||
During October 2017, the Company entered into a £10m revolving credit facility with OakNorth Bank. This will facilitate the tactical use of borrowings ahead of any known investment redemptions or capital raises. Aside from setup costs and an arrangement fee, there is no additional cost to maintaining the facility. There had been no drawdown of the facility during the period.
8. Taxation | |||||
Revenue | Capital | Total | |||
£'000 | £'000 | £'000 | |||
(a) Analysis of tax charge / (credit) the period: | |||||
Corporation tax | 44 | (44) | - | ||
Total current tax charge / (credit) (see note 8 (b)) | 44 | (44) | - | ||
(b) Factors affecting the tax charge for the period: | |||||
The effective UK corporation tax rate for the period is 19.28%. The tax charge differs from the charge resulting from applying the standard rate of UK corporation tax for an investment trust company. The differences are explained below: | |||||
Revenue | Capital | Total | |||
£'000 | £'000 | £'000 | |||
Return on ordinary activities before taxation | 2,407 | (1,027) | 1,380 | ||
UK corporation tax at 19.28% | 464 | (198) | 266 | ||
Effects of: | |||||
Gain on investments held at fair value not taxable | - | 164 | 164 | ||
Disallowed expenses | - | 34 | 34 | ||
Interest distributions paid/payable | (420) | (44) | (464) | ||
Total tax charge | 44 | (44) | - | ||
The Company is not liable to tax on capital gains due to its status as an investment trust.
| |||||
(c) Deferred tax assets/(liabilities) | |||||
The Company had no recognised or unrecognised deferred asset/liability as at the period end.
9. Receivables | ||||
Period ended31 December 2017 | ||||
£'000 | ||||
Amounts falling due within one year: | ||||
Bond and loan interest receivable | 873 | |||
Other debtors | 196 | |||
Total | 1,069 | |||
10. Payables |
| ||||||||||
Period ended31 December 2017 |
| ||||||||||
£'000 |
| ||||||||||
Amounts falling due within one year: |
| ||||||||||
Loans for future settlement | 6,860 |
| |||||||||
Other creditors | 764 |
| |||||||||
Total | 7,624 |
| |||||||||
11. Share capital | |||||||||||
As at 31 December 2017 | |||||||||||
No. of Shares | £'000 | ||||||||||
Allotted, issued & fully paid: | |||||||||||
Ordinary Shares of 1 pence | 57,300,000 | 573 | |||||||||
C Shares of 10 pence | 30,000,000 | 3,000 | |||||||||
Share Movement | |||||||||||
The table below sets out the share movement since incorporation 27 October 2016 to 31 December 2017. | |||||||||||
Shares issued | Shares redeemed | Shares in issue at31 December 2017 | |||||||||
Management Shares | 50,000 | (50,000) | - | ||||||||
Ordinary Shares | 57,300,000 | - | 57,300,000 | ||||||||
C Shares | 30,000,000 | - | 30,000,000 | ||||||||
On incorporation, the issued share capital of the Company was £0.01 represented by one Ordinary Share, held by RM Capital Markets Limited as subscriber to the Company's memorandum of association. The Ordinary Share was fully paid up. | |||||||||||
To enable the Company to obtain a certificate of entitlement to conduct business and to borrow under Section 761 of the Act, on 3 November 2016, 50,000 redeemable management shares of £1 each ("Management Shares") were allotted to the Investment Manager. The Management Shares were fully paid up and were redeemed at the same price, immediately following Admission on 15 December 2016 out of the proceeds of the Issue. | |||||||||||
On 15 December 2016, 50,300,000 Ordinary Shares of 1 pence each ("Ordinary Shares") were allotted and issued to Shareholders as part of the placing and offer for subscription in accordance with the Company's prospectus dated 24 November 2016. | |||||||||||
On 24 May 2017, the Company issued and allotted 7,000,000 Ordinary Shares. | |||||||||||
In response to demand from investors, on 25 October 2017 30,000,000 of the Company's Shares ("C Shares"), were issued at a price of £1 per share as part of the placing and offer for subscription in accordance with the Company's prospectus dated 24 November 2016. The C Shares will convert into Ordinary Shares ranking pari passu with the existing Ordinary Shares on the basis of the conversion ratio which will be calculated, inter alia, on the earlier of (i) 85% of the assets attributable to the C Share class have been invested ("Conversion"); or (ii) six months after Admission (24 April 2018). These C Shares are expected to be converted into Ordinary Shares before the end of March 2018.
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12. Return per Ordinary Share |
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Total return per Ordinary Share is based on the gain on ordinary activities after taxation of £1,380,000. |
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Based on the weighted average number of 54,349,738 Ordinary Shares in issue from commencement of the Company's operations on 15 December 2016 to 31 December 2017, the returns per share were as follows: |
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Period ended31 December 2017 |
| ||||||||||
Revenue | Capital | Total |
| ||||||||
Return per Ordinary Share | 4.35p | (1.81p) | 2.54p |
| |||||||
13. Net asset value per share |
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The net asset value per share attributable to the Ordinary Shareholders at the period end were as follows: |
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Net Asset Value per share31 December 2017 | Net assets attributable31 December 2017 |
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(pence) | £'000 |
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Ordinary Share NAV | 98.59 | 56,490 |
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Loss attributable to C Shares | (0.09) | (47) |
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IFRS adjustment (C Share finance costs) | (0.30) | (174) |
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Ordinary Share NAV (IFRS calculation) | 98.20 | 56,269 |
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The net asset value per share is based on total Shareholders' funds of £56,269,000 and 57,300,000 Ordinary Shares in issue at the period end.
The IFRS adjustment is in respect of the C Share finance costs in relation to classification of the C Shares as debt as per IFRS requirement. The impact on the NAV of the finance costs will reverse at conversion of the C Shares into Ordinary Shares.
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14. Dividend |
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The dividend relating to the period ended 31 December 2017, which is the basis on which the requirements of Section 1159 of the Corporation Tax Act 2010 are considered is detailed below: |
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Pence per Ordinary Share | Revenue£'000 | Capital£'000 |
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Interim dividend - Paid 30 Jun 2017 | 0.20p | - | 115 |
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Interim dividend - Paid 15 Sep 2017 | 0.20p | - | 114 |
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Interim dividend - Paid 29 Dec 2017 | 1.80p | 1,031 | - |
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Total interim dividends paid | 2.20p | 1,031 | 229 |
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Interim dividend - payable* | 2.00p | 1,146 | - |
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Total dividends paid and proposed | 4.20p | 2,177 | 229 |
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*Not included as a liability in the period ended 31 December 2017 financial statements.
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On 15 February 2018, the directors approved the payment of an interim dividend at the rate of 2.0p per Ordinary Share with an ex-dividend date of 22 February 2018, a record date of 23 February 2018 and a payment date of 23 March 2018. The dividend will be funded from the Company's Revenue reserve.
The Company has elected to designate the interim dividends for the period as interest distributions to its ordinary Shareholders.
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15. Related party transaction |
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Fees payable to the Investment Manager are shown in the Statement of Comprehensive Income. As at 31 December 2017 the fee outstanding to the Manager was £63,000. |
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Fees are payable at an annual rate of £36,000 to the Chairman, £33,000 to the Chairman of the Audit Committee and £30,000 to the other Directors. As at 31 December 2017, there were no Directors' fee outstanding. The Directors' fees are disclosed in Note 6 and the Directors' shareholdings are disclosed in the Annual Report and Accounts. Arrangement fees are paid by some borrowers to the Investment Manager. The amount the Investment Manager can retain from borrowers in most cases is capped at 1.25% and agreed with the Board. The Company receives any arrangement fees from the Investment Manager in excess of the 1.25% or otherwise agreed with the borrower. During the period to 31 December 2017, the Company received £142,000 in arrangement fees from RM.
As at 31 December 2017, the Investment Manager held 602,151 Ordinary Shares in the Company.
On the 16 January 2018, the Investment Manager purchased a further 79,458 of the Company's Ordinary Shares. Following this purchase, the Investment Manager's total holding of Ordinary Shares is 681,609. |
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16. Classification of financial instruments |
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IFRS 13 requires the Company to classify its investments in a fair value hierarchy that reflects the significance of the inputs used in making the measurements. IFRS 13 establishes a fair value hierarchy that prioritises the inputs to valuation techniques used to measure fair value. The three levels of fair value hierarchy under IFRS 13 are as follows: |
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Level 1 |
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Inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. |
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Level 2 |
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Inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
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Level 3 |
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Inputs are unobservable for the asset or liability. |
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The classification of the Company's investments and liabilities held at fair value are detailed in the table below: |
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31 December 2017 |
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Level 1 | Level 2 | Level 3 | Total |
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£'000 | £'000 | £'000 | £'000 |
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Financial assets: |
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Debt securities | - | 36,074 | - | 36,074 |
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Loan investments | - | - | 40,883 | 40,883 |
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Total financial assets | - | 36,074 | 40,883 | 76,957 |
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Financial liabilities: |
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C Shares in issue (market value) | 30,600 | - | - | 30,600 |
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Total financial liabilities | 30,600 | - | - | 30,600 |
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