RMDL.L Regulatory News (RMDL)

RM SECURED DIRECT LENDING PLC

ANNUAL FINANCIAL REPORT

For the year ended 31 December 2019

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 and Medium sized 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.

Alternative Performance Measures ("APMs")

The financial information and performance summary data highlighted in the footnote to the above tables are considered to represent APMs of the Group and the Company.

Chairman's Statement

Introduction

On behalf of the Board, I am pleased to present RM Secured Direct Lending plc's ("RMDL" or "the Company") third annual report and financial statements for the year ended 31 December 2019. 

Consistent growth and performance

Since the Company listed in December 2016, RMDL has continued to grow its portfolio, increase the spread of its investments, and deliver against the objectives set out at IPO, generating excellent risk adjusted returns for investors.

It is pleasing that the Company has continued to grow its capital base, utilising its placing programme twice during the year, to issue 13.5 million new Ordinary Shares in March 2019 and 10 million new Ordinary Shares during November 2019, to both new and existing investors. The proceeds were deployed into the Investment Manager's attractive pipeline of opportunities.

These successful placings help achieve the twin aims of seeking to reduce the ongoing charges ratio and diversifying the Company's portfolio. Including the Zero Dividend Preference shares, the revolving credit facility and the net assets of the Company, RMDL has investments and investible assets of £140 million. The total number of shares in issue has increased to 122.2 million.

As at 31 December 2019, the Company had a NAV return of 8.2% (dividends re-invested at NAV) and since inception the NAV total return for investors has been 17.6%.

Returns to Shareholders and portfolio outperformance

Our distribution targets have been met and during the year there was continued outperformance of the Company versus its stated objectives.

The year saw the continuation of relatively benign conditions across the credit markets. Quantitative easing has been responsible for such benign credit conditions which imply weaker actual fundamentals if this central bank support were to be withdrawn.

The successful execution of the business strategy is evidenced by the number of Loans repaid in the year and the deployment of fresh capital to new Loans - whilst the total number of investments has remained largely static (34 as at 31 December 2019 versus 35 as at 31 December 2018) the portfolio dynamics are active. The portfolio has grown from £103million to £131million with 13 new investments during the year totalling £53million, drawdowns to previously documented facilities of £29million and repayments and divestments totalling £53million. These portfolio turnover statistics are useful in so far as it shows the dynamism within the portfolio and demonstrates that invested capital is repaid.

Highly resilient, well diversified portfolio

The Investment Manager has remained focused on creating a diverse portfolio but has moved strategically towards less cyclical sectors such as social infrastructure and real estate lending, including areas such as student accommodation, childcare and health care businesses, and mid-market branded hotels. Overall this has resulted in a stable, well secured, income generative portfolio where the Investment Manager can obtain additional risk adjusted returns due to their ability to source private credit transactions which are not available in the public markets.

Income generation and NAV Performance

The Company has paid or declared regular dividends during the year totalling 6.5 pence per Ordinary Share, as well as special dividends totalling 0.45 pence per Ordinary Share. The ability of the Company to pay dividends in excess of its target during a year when our peer group has struggled is testament to the ability of the Investment Manager to structure Loans for the benefit of Shareholders, whilst maintaining strict credit controls.

On the 25 February 2020 the Company declared a fourth interim dividend in respect of the period from 1 October 2019 to 31 December 2019 of 1.625 pence per Ordinary Share and an additional special dividend of 0.075 pence per Ordinary Share to be paid on the 27 March 2020.

The dividends paid in 2019 were covered by the net income generated in the portfolio. The retained revenue gives the Company flexibility to absorb credit losses whilst maintaining, and perhaps even growing, the NAV or to smooth dividend income in more difficult years.

The 8.2% NAV return (dividends re-invested at NAV) for 2019 in excess of the percentage distributed to Shareholders net of credit movements has seen the NAV grow over the year from 96.98 pence to 97.79 pence. It is the Board and the Investment Manager's goal to continue to grow this figure by having a well-covered dividend and by minimising credit losses.

Carefully managed credit risk and valuations

Credit risk is the most important risk factor within the portfolio. This is managed carefully by the Investment Manager, the AIFM (International Fund Management Limited) and overseen by the Board. Exposure is mitigated by having clear borrower/issuer risk limits and industry risk limits which are detailed in the Company's prospectus. These limits reflect a maximum borrower/issuer limit of 10% of the portfolio and are across a range of sectors to ensure sufficient sector diversity.

The Company's Loans are measured at fair value and this valuation is carried out by a third-party valuation agent, Mazars LLP. This independent valuation is conducted monthly and constitutes part of the NAV announcement released on or around the 16th of each month. The Board and the Investment Manager believe that this methodology accurately reflects the portfolio valuations and leads to an independent NAV valuation which investors and the Board can rely upon. The Investment Manager's report breaks out the portfolio of investments and details the marks which allows investors to better understand how this works in practice.

The Board and the Investment Manager recognise the problems in the wider sector and in our view the current wide discounts are reflective of the market not having confidence in the published NAV figures combined with reactive and often limited portfolio disclosures. We are committed to adhere to the highest standards of corporate governance and trust that the market will appreciate these efforts.

Shareholder communications

The Board and the Investment Manager believe that RMDL is leading the way when it comes to investor disclosures and since inception RM Funds has provided detailed monthly factsheets. These factsheets are released on or around the 16th of each month alongside the NAV and describe specific investments, net interest income and mark to mark movements.

Revolving Credit Facility

During the year, the Company extended the Revolving Credit Facility ("RCF") with OakNorth Bank, with an expiry date of 5 November 2020. As at the end of the year there was no drawn down of the RCF (2018: £Nil). Under the terms of the amended RCF, the Company may draw down loans up to an aggregate value of £10.5 million. Aside from setup costs, there is no additional cost to maintaining the facility, unless utilised.

Committed to responsible investing

The Board and the Investment Manager believe that responsible investment involves the integration of Environmental, Social and Governance ("ESG") factors within the investment process. Since inception the Company has had strict restrictions, laid out in its prospectus including the explicit exclusion of any investments to borrowers whose principle business is defence, weapons, munitions, pornography, tobacco, alcohol or gambling. In addition, the Investment Manager is a signatory to the Principles for Responsible Investment ("PRI"), supported by the United Nations, a framework of six principles, which RM Funds has incorporated into its business:

1. Incorporate ESG issues into investment analysis and decision-making processes;

2. Be active owners and incorporate ESG issues into our ownership policies and practices;

3. Seek appropriate disclosure on ESG issues by the entities in which we invest;

4. Promote acceptance and implementation of the Principles within the investment industry;

5. Work together to enhance our effectiveness in implementing the Principles;

6. Report on our activities and progress towards implementing the Principles.

Such ESG factors which are traditionally not part of financial analysis are currently incorporated and prioritised as part of the investment process and the Board will seek to review this quarterly going forward.

It is notable that the Investment Manager and the Board are focused on investments within Social Infrastructure. Such investments meet our core investment criteria and have a positive social output. This Company is aiming to increase the provision of funding for children's nurseries, student accommodation and aged care during 2020.

Annual General Meeting ("AGM")

The Company intends to hold its AGM at 11 a.m. on 27 May 2020 at the offices of RM Capital Markets Limited, 7 Melville Crescent, Edinburgh, EH3 7JA.

The well-being and safety of Shareholders and service providers is a primary concern for the directors of the Company. Due to the restrictions on gatherings and travel, save for very limited purposes, under the regulations and guidance issued by the UK Government relating to the Coronavirus (COVID-19) the Directors have (pursuant to powers granted to them by the Company's Articles of Association) determined that Shareholders should not attend the AGM in person. Arrangements have been made to ensure that the AGM is quorate and at the AGM only the formal business of the AGM will be considered.

As Shareholders are not able to attend the AGM in person they are strongly encouraged to vote online or submit their proxy forms remotely to ensure their vote counts at the AGM. Votes can be lodged in advance of the AGM through any of the following means:

• online at www.signalshares.com - You will need to log in to your share portal account. If you don't have an account you can register on the share portal using your investor code (shown on your share certificate) and you will be able to vote straightaway;

• postal voting; or

• via the CREST System if shares are held in CREST.

The Company will continue to update Shareholders on material developments in the usual way, via the Regulatory News Service. Any investor relations enquiries or questions related to the Company or the AGM can be emailed to info@rm-capital.co.uk. The Board and the Investment Manager will respond to emailed questions via the monthly newsletter where appropriate.

Price performance and discount to NAV

In common with almost all closed-end funds, and especially with our peer group, the share price of RMDL has declined significantly since the end of February 2020 due to the impact on financial markets and investors of COVID-19. In common with other market corrections (the 2007-8 Global Financial Crisis, the September 2001 attacks leading to the 2002 stock market correction, the 2000 bursting of the dot com bubble, the 1998 Russia crisis, the 1997 Asia crisis, the 1990 Japan correction, the 1987 stock market correction etc) much of the fall in share prices seems to be down to investors being forced to sell positions due to deleveraging, and not, as yet, due to a fundamental economic change. RMDL is no exception with much of the fall, I believe, due to a few forced sellers. The Board is monitoring the situation closely and will respond appropriately. I would like to remind shareholders that in the Prospectus issued in November 2016, the Board ensured that a clause protecting shareholders from a prolonged discount was included. Although it is human nature to focus on the negatives, it is important to remember that the UK government has announced cuts in interest rates, an emergency rescue package of £350bn and numerous other measures designed to protect and stimulate the economy (as have other governments around the world), the impact of which has yet to be felt.

Coronavirus

The impact of the Coronavirus has been felt around the world but the economic and financial implications in the medium to long term are unclear. The Board and the Investment Manager continue to monitor and evaluate the situation. We will endeavour to keep Shareholders informed but we expect the situation to be highly volatile over the coming months.

Outlook

I have noted in previous years that credit conditions are likely to worsen - it is our view that this post global financial crisis credit cycle has been long and elongated by actions taken by policy makers and central bankers. The Investment Manager's strategy to focus on defensive sectors which are uncorrelated to wider equity markets is relevant to investors at this stage of the cycle for two specific reasons. 

Firstly, the ability to manage duration risk within the portfolio investments; Central Bank actions have lowered "risk free" government rates to such a level that traditional corporate bond funds have significant risk to any future increases to interest rate expectations. RMDL has actively mitigated this risk by investing in Loans reference to Libor referenced loans (or equivalent) or fixed coupon Loans.

The second reason is the active management and approach to the taking of credit risk; as credit spreads and government yields have compressed, covenants and lender protections have become weaker at a time when yields have fallen. RMDL seeks to mitigate this risk by finding those opportunities in private credit, offering investor protections that are not widely available in public markets and which offer above average returns.

While the recent performance by the wider Debt Investment Companies peer group may have dented investor sentiment, we remain confident in our Investment Manager's ability to deliver against our strategy. It is our view that the Company offers investors access to stable, long term, above average returns which has been demonstrated by the first three years of trading. Investors will take comfort in the demonstrable track record of accurate portfolio valuations, clear investor disclosure and an approach to lending that has high quality underwriting standards combined with professional due diligence, monitoring and control. 

The Board is delighted to have such a broad investor base and is grateful for the support of Shareholders. We would also like to thank RM Funds and the other professional advisors for their hard work and support throughout the year.

Norman Crighton

Chairman

21 April 2020

INVESTMENT MANAGER'S REPORT

Strong and sustainable performance

Over the course of the year, the portfolio generated a NAV Total Return of 8.2%, with total dividend distributions attributable for the year totalling 6.5 pence per Ordinary Share as well as special dividends totalling 0.45 pence per Ordinary Share. Following the year end an Interim Dividend relating to the final quarter of the year was declared on 25 February 2020 and paid to Shareholders on 27 March 2020. These dividends of 1.625 pence per Ordinary Share and an additional special dividend of 0.075 pence per Ordinary Share bring the total attributable to income generated in 2019 to in excess of the 6.50 pence per share distribution target which reflects portfolio outperformance. The additional dividend income was classified as a special dividend and paid over 3 quarters. Furthermore, the Investment Manager and the Board have taken a conservative approach by retaining a percentage of income net of credit losses which has allowed additional NAV growth over the year. The published NAV figures show growth from 96.98 pence per share at the beginning of the year to 97.79 pence per share at the end of 2019.

The share price performance of the Company over the year has been largely stable, trading in a narrow range within 99.50 pence and 103 pence per share during the year.

Ongoing commitment to transparency and regular investor communications

Whilst 2019 was a year of outperformance for RMDL Shareholders with income distributions above target and overall NAV growth for the Company, it is clear that there are a number of issues within our peer group. This has led some companies to trade at significant discounts to NAV.

Since the IPO, the Board and the Investment Manager at RMDL have been very clear that investor disclosures should be substantial and robust and that the portfolio valuations, which make up the NAV, are independently produced by an external valuation agent and reflect perceived or actual risks. It is our objective as the Investment Manager to ensure that all investor communications are clear enabling all Shareholders to understand the full Company portfolio clearly. Such investor communications are monthly on or around the 16th of each month when the factsheet is released.

Alignment to investor interests

In line with the prospectus, the Investment Manager has continued to purchase shares of the Company during the year. The Investment Manager now own directly over 1,199,825 shares; the management team and related parties' also own additional shares. Since IPO the Investment Manager has purchased 699,825 shares directly in the secondary market. By purchasing RMDL shares, the Investment Manager has shown a significant alignment of its interests with Shareholders and it is our intention to continue to invest part of the management fee during 2020.

The Market Environment

The macro-economic picture was mixed during 2019, however there was ultimately a firm tone over the year for risk assets which masks mini bouts of volatility seen over the period. Concerns over the US/China trade war abated and no solution to Brexit for the majority of the year hampered UK business investment and confidence. The election win for the Conservatives in December provided clarity and a firm tone to end the year for the UK market.

Within Europe, quantitative easing restarted which provided stimulus to underperforming economies and supported Eurozone equity and bond markets.

Our view at RM is that the market is susceptible to weakness, as the rally seen during 2019 was not underpinned by positive economic news but relief that the trade war has not escalated, that Brexit will be done (in whatever form that may take) and signs that any further weakness in Europe will see continued Central Bank support to the markets.

As a result, we believe that Social Infrastructure and Real Estate backed lending offers the best place for capital at this point of the cycle. For the year we successfully deployed capital to mid-market branded hotels and student accommodation investments. Looking forward to 2020, our focus is on healthcare, childcare and additional investments within the student accommodation space. These sectors offer tangible asset backed lending and stable cash flows which are not directly correlated to the wider business cycle. 

Key Risks

As we look forward and try to understand the key risks, we identify the following;

Market: at RM Funds we break this down into three areas as we look forward to 2020:

· Weaker growth - the global synchronizations of trade means that the current US/China trade wars could have unintended consequences for global growth and economic activity which ultimately could lead to economic contraction. The impact of the coronavirus also will have an, as yet, unquantifiable impact on global growth.

· Whilst absolute default rates are low any slow-down in economic activity will put pressure on corporates who have already seen the ratio of rating's downgrades to upgrades increase. We see such credit risks as being higher than in previous cycles as a larger part of the market is now being taken up by single B or C rated issuers as investors have moved down the rating scale in an effort to find yield. Such issuers are less able to withstand losses and typically losses in default would be higher than previous cycles.

· Finally, the marginal impact from monetary policy makers especially within the Eurozone is getting less and less. Fiscal stimulus would be required to boost growth at a time when government debt levels are elevated. This in turn could lead to a negative feedback loop if European government debt values fall as banks have been encouraged to buy such assets by central banks and hold them on their balance sheets. This scenario perhaps poses the most risk as it becomes systemic.

Credit - The idiosyncratic credit risk is the risk attached to a specific investment rather than the broader market sentiment detailed above. In effect this is the risk that the borrower is unable to repay or service the loan. Within the portfolio this is the largest risk and is mitigated by the following actions by the Investment manager:

· Strict underwriting standards which relate to industry selections and risk concentrations, leverage and lender security.

· Careful due diligence and extensive initial credit work.

· Effective ongoing monitoring and the ability to recover capital in a downside scenario.

Currency - the risks here are that USD and EUR currencies depreciate and RMDL investments in local currency lose value versus our base currency in GBP. The Company has mitigated this risk by using currency forwards to hedge the majority of any currency exposures within the portfolio. At the end of the year the only non-GBP assets held were in EUR.

Interest Rates - should rates rise the present value of the current loans could decline as higher discount rates are used. This has been mitigated by investing predominantly in Loans that have coupons which are linked to Libor. Portfolio fixed rate investments usually have relatively short maturities to mitigate this risk.

Responsible Investing

RM Funds is a signatory to the Principals for Responsible Investment ("PRI"). The PRI defines responsible investment as a strategy and practice to incorporate environmental, social and governance factors (ESG) in investment decisions. RM Funds incorporates ESG criteria early on as part of the investment process and in addition there is active engagement wherever possible with portfolio Companies to help them improve their ESG processes. In practice this is delivered by the RM Funds Responsible Investing Investment Policy which is integral to RM's business philosophy as we believe we can make a difference. This policy framework applies to all investment made by RM Funds and is governed by our principals and our commitments:

Our principals; Respect for the internationally proclaimed human rights principles, equal opportunity independent of gender, race or religion; freedom of association and the right to bargain collectively; working conditions that surpass basic health and safety standards; the conduct of good governance practices, in particular in relation to bribery and conflicts of interest; environmental responsibility and responsibility to active climate change engagement

Our commitments; Integrate the above principles into our decision-making process, by carefully considering ESG issues associated with any potential investment during the due diligence phase; encourage portfolio companies to follow the above principles by implementing governance structures that provide appropriate level of oversight and by seeking disclosure on ESG issues; provide ESG training and support to RM employees involved in the investment process, so that they may perform their work in accordance with the above principles and with this policy; seek to be transparent in its efforts to integrate ESG considerations in investments and annually report on its progress towards implementing the above principles, comply with national and other applicable laws; help promote the implementation of the above principles; consider our alignment with other related conventions and standards set by Invest Europe, the UN Global Compact Initiative and the UN Principles for Responsible Investment (PRI); continuously strive to improve ESG performance within our portfolio companies.

Investing in attractive asset backed lending opportunities

The Company is focused on middle market corporate and real asset lending. The focus is on private Loans which are secured over company assets or property as in our view real asset lending provides downside protection for investor's capital. The Investment Manager looks for strong management teams, contracted cash flows and real assets.

The Investment Manager specialises in corporate, asset finance and project finance lending and has built up a portfolio of 34 investments. The Investment Manager believes that such transactions offer a spread pick up versus such credit opportunities in the public markets and additional protections for investor's capital in the form of typically enhanced covenants and borrower security. Many traditional corporate bonds which offer any yield are unsecured or deeply structurally subordinated and offer fewer investors protections to mitigate any downside scenarios. In addition, the RMDL portfolio has been created to reduce duration risk by having a significant exposure to floating rate coupons.

The portfolio is well diversified across sectors and borrowers, with a broad mix of funding across the capital structure. Investment Manager target transactions with appropriate borrower equity, appropriate risk adjusted spreads and security which is recoverable so that in a downside scenario there is capital protection.

Geographically all of the investments are currently within the UK or Europe although the mandate is to invest within developed global markets. Investment Manager aim to mitigate any currency exposure by hedging any non-UK investments back to GBP.

The Company breaks down the type of Loan into three areas; bilateral loans, syndicated loans and public bonds. As at 31 December 2019 the split was Bilateral 58%, Syndicated 37%, Bond 5%. The advantages for each type are as follows:

· Bilateral loans - RMDL as the sole lender, given the bespoke nature of the financing, the Company receives enhanced yield to compensate for the illiquidity and enhanced investor protections via the transaction covenants. Valued by the Valuation agent.

· Syndicated facilities - as a member of a lending syndicate typically the Investment Manager is working with borrowers who have larger financing needs that need to be supplied by more than one debt funder. Sponsor backed transactions with significant equity sitting below lenders, enhanced yield due to less liquidity than public bonds usually with enhanced security and covenants. Typically valued by external pricing source.

· Public Bonds - some issuers prefer to issue a bond as a private placement rather than a syndicated loan and in addition some large corporate issues meet the RMDL investment criteria and offer appropriate risk adjusted returns. Smaller more liquid part of the portfolio. Valued by external pricing source.

Having various degrees of liquidity within the portfolio is useful especially when it comes to managing cash resources. Typically, bilateral loans can take a number of months to structure so having the ability to raise cash at the point of funding is critical without suffering cash drag should the transaction not proceed, or conversely managing cash balances if there is an unexpected repayment.

Increasing portfolio diversification and dividend cover

Over the period investment activity has meaningfully increased both the diversity and scale of the portfolio with 13 new investments totalling £53million and drawdowns to previously documented facilities of £29million. Against this there have been repayments and divestments totalling £53million which means overall the Loan book has grown from circa £103million of invested capital at year end 2018 to £131million at 31 December 2019.

Dividend cover has increased from 0.96x to 1.30x. This is important as this gives the Company capacity to absorb any credit losses whilst maintaining the dividend target and growing NAV.

The largest and most significant repayments were from two borrowers:

· The first was ICP Nurseries who in April 2019 repaid a loan with prepayment penalties attached to it, along with the sale of some equity warrants which the Company took for facilitating the growth financing to ICP.

· The second repayment was from Satcom Global who repaid a USD Loan facility in December. This facility had a minimum term to it which meant again additional interest was due and paid.

Both showcase the types of borrowers we target and demonstrate how such flexible financing offered by the Company when appropriately structured can yield above average returns.

The Company's Loans are measured at Fair Value and this valuation is carried out monthly by a third-party Valuation agent, Mazars LLP. For loans of sufficient liquidity, third party pricing is delivered by Markit Group to Mazars LLP, and these valuations are quoted in bid prices. Pricing sources are detailed on the portfolio breakdown detailing the breakdown between Markit Group reference prices and Mazars LLP as the Valuation Agent.

The key points are; the book has valuations which are £2.9 million less than the par value. These marks reflect the perceived or actual risk within the investments at year end and are the equivalent of circa 2.3% of NAV. Where there are actual risks the workout and recovery processes are actioned to maximise value and the return of capital. Where it is perceived risk we expect full repayment as Loans are refinanced or repaid.

Across the portfolio there is a running yield of 8.57%. The running yield is the annual income on an investment divided by its current market value.

Portfolio update and outlook for 2020

Over recent days and weeks there have been significant changes to equity and credit market valuations caused by the global effects of the spread of the Coronavirus. This sell off has increased in pace over this recent period and become a major market shock which might equal or exceed the previous and infamous periods such as the dot com, global financial crisis and the eurozone crisis. The speed of the sell-off has been astonishing with equity markets experiencing recent highs in mid-February and then by mid -March multi year lows. The unusual nature of this potential market shock affects both demand and supply and both equity and credit markets have moved in tandem. For a number of years, the Investment Management team has been extolling the virtue of secured private credit and have made favourable valuation comparisons to unsecured high yield bonds. We are therefore not surprised to see wider credit spreads; however, we are astounded to see where these spreads have moved to and also where secured Loans have been trading.

It is the stated aim of the Company to mark the portfolio to market - such marks give investors real-time accurate information as to the Net Asset Value of the portfolio. This allows them to make informed decisions with regards to the share price and the value of the Company on a monthly basis on or around the 16th of each month. These valuations are temporal as the markets are clearly constantly moving, and in addition they are exacerbated by the fact that the underling instruments are generally relatively illiquid and therefore price movements can be exacerbated by extreme changes in sentiment.

The recent market movements are considered a significant post balance sheet event. The Company's most recently published post year end NAV, prepared as at 31 March 2020, showed that total net assets of the Company fell by 11.4% to £105.9 million. This was primarily driven by the value of investments falling from £131.2 million as at 31 December to £119.7 million as at 31 March 2020. The valuation was prepared by the Company's independent valuer. This portfolio revaluation is driven by all of the investments being marked reflect that perceived or actual risks have increased where visible price points are available these reference prices have been used. We expect these marks to return to normality as we move through this current crisis and as the "fear" levels subside.

Looking ahead to the rest of 2020, opportunities will arise. However, first and foremost will be the management of the existing portfolio. Largely the overall credit environment will be dictated by other global events - the Investment Manager will focus on the monitoring of the portfolio and ensuring scheduled payments are received. Given the unique nature of this event, and the almost wholesale shut down to industry, we expect monthly trading performance of a number of our borrowers to be impacted, the degree and severity will be subject to both sector specific factors, macro "health" factors and any structural credit support mechanisms built into the transaction/investment (for example funded interest reserve accounts). The Investment Manager in partnership with financial sponsors and borrowers will provide guidance and advice to holdings experiencing temporal stress, and aid in any workout situation as the case maybe.

The core investment theme of RMDL remains focused on lending to real assets and businesses which do not have direct correlations to the economic cycle. Such assets offer stable cashflows and downside protection to the Company and therefore investors. Overall, the Investment Management team believe that despite the recent market volatility the portfolio is well positioned to continue to deliver the stable returns which investors are seeking and in addition there will be greater NAV growth as we target a return to the opening NAV.

RM Capital Markets Limited

21 April 2020

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 Group 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 Group is able to make or acquire loans, the Investment Manager is required to complete necessary due diligence and enter into appropriate legal documentation. In addition, the Group may become subject to competition in sourcing and making investments. Some of the Group's competitors may have greater financial, technical and marketing resources or a lower cost of capital and the Group 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 Group'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 Group's assets will be held in cash for longer than anticipated and the Group's ability to achieve its investment objective will be adversely affected. To the extent that any investments to which the Group is exposed prepay, mature or are sold it will seek to reinvest such proceeds in further investments in accordance with the Group'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

Following the exit of the UK from the EU on 31 January 2020 under the Withdrawal Agreement the UK is currently subject to a transition period which will run until the end of 2020 (unless extended). During the transition period the UK remains in the Single Market and the Customs Union of the EU while the terms of a new trade agreement are negotiated. If those negotiations are not completed and ratified before the end of the Transition Period, World Trade Organisation rules may apply.

The extent of the impact on the Group will depend in part on the new trade agreement that is put in place between the UK and the EU and the extent to which the UK continues to apply laws that are based on EU legislation. In addition, the macroeconomic effect 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 Group and its investments. It could also potentially make it more difficult for the Group to raise capital in the EU and/or increase the regulatory compliance burden on the Group. This could restrict the Group's future activities and thereby negatively affect returns.

Management of risks

The Group has appointed an experienced Investment Manager who directly sources loans. The Group 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.

The Company expects uncertainty around Brexit to continue during this transition period and until the terms of a new trade agreement are negotiated. The position is, however, being monitored as negotiations continue and the impact on the Company will be reassessed accordingly.

(ii) Risks associated with meeting the Group's investment objective or target dividend yield

The Group'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 Group will be subject to the discretion of the Directors and will depend upon, amongst other things, the Group successfully pursuing the investment policy and the Group's earnings, financial position, cash requirements, level and rate of borrowings and availability of profit, as well the provisions of relevant laws or generally accepted accounting principles from time to time.

Management of risks

The Investment Manager has a well-defined investment policy and process which is regularly and rigorously reviewed by the independent Board of Directors and performance is reviewed at quarterly Board meetings. The Investment Manager is experienced and employs its expertise in making investments in a diversified portfolio of loans. The Investment Manager has a target portfolio yield which covers the level of dividend targeted by the Group. The Board reviews the position at board meetings.

(iii) Financial risks

The Group'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 note 21 to the financial statements.

(iv) Corporate governance and internal control risks (including cyber security)

The Group has no employees and the Directors have all been appointed on a non-executive basis. The Group 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 Group Secretary and the Registrar will perform services that are integral to the Group's operations and financial performance.

Poor performance of the above service providers could lead to various consequences including the loss of the Group's assets, inadequate returns to Shareholders and loss of investment trust status. Cyber security risks could lead to breaches of confidentiality, loss of data records and inability to make investment decisions.

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 Group. 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. The Group's key service providers report periodically to the Board on their procedures to mitigate cyber security risks.

(v) Regulatory risks

The Group 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 Group or any changes to current accountancy regulations and practice in the UK may have a material adverse effect on the ability of the Group to successfully pursue its investment policy and meet its investment objective and/or on the value of the Group and the shares. In such event, the performance of the Group, the Net Asset Value, the Group's earnings and returns to Shareholders may be materially adversely affected.

Management of risks

The Group 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.

(vi) Emerging risks and uncertainties

The Group periodically carries out a robust assessment of the Company's emerging and principal risks and the procedures in place to identify these risks. The experience and knowledge of the Board is invaluable to these discussions, as is advice received from the Board's service providers, specifically the AIFM who is responsible for the risk and portfolio management services and outsources the portfolio management to the Investment Adviser. The following is a description of the emerging risks that each service provider highlights to the Board on a regular basis to aid in the identification of emerging risks.

1. Investment Manager: the Investment Manager provides a report to the Board at least quarterly on industry trends, insight to future challenges in the sector, including the regulatory, political and economic changes likely to impact the Group;

2. Alternative Investment Fund Manager: following advice from the Investment Manager and other service providers, the AIFM maintains a register of identified risks including emerging risks likely to impact the Company;

3. Broker: provides advice periodically, specific to the Company on the Company's sector, competitors and the investment company market whilst working with the Board and Investment Manager to communicate with Shareholders;

4. Company Secretary and Auditor: briefs the Board on forthcoming legislation and regulatory change that might impact on the Company. The Auditor also has specific briefings at least annually;

5. AIC: The Company is a member of the AIC, which provides regular technical updates as well as drawing members' attention to forthcoming industry and regulatory issues.

COVID-19 has been met by a large stimulus by the Government, an injection of £350 billion, with the intention of protecting the economy against the coronavirus impact, however at this point in time it is difficult to know how this will be translated in the economy and the outcome is uncertain. It may be the case that it will have a beneficiary effect on the economy and be inflationary, however the situation is unknown. The operational risks as a result of the COVID-19 pandemic were discussed by the Board. Updates on operational resilience were received from the Investment Manager, Administrator and other key service providers. The board were satisfied that the key service providers have the ability to continue to operate.

The impact of Covid-19 on the markets and the Company's financial position are closely monitored by the Investment Manager and the Board. Please refer to the Chairman's statements and Investment Manager for their assessment.

Management of risks

The Board regularly reviews the Company's risk matrix, focussing on risk mitigation and ensuring that the appropriate controls are in place. Regular review ensures that the Group operates in line with the risk management policy, prospectus and investment strategy. Emerging risks are actively discussed throughout the year to ensure that risks are identified and managed so far as practicable. The experience and knowledge of the Board is invaluable to these discussions, as is advice received from the Board's service providers.

PORTFOLIO

Largest 10 loans by drawn amounts across the entire portfolio as at 31 December 2019

\* The above is based on the Group's net assets before deduction of ZDP Shares capital entitlement.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the consolidated 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 consolidated 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 Group as at the end of the year and of the net return for 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;

• present information including accounting policies and additional disclosures as required to ensure the report is presented in a manner that provides relevant, reliable, comparable and understandable information;

• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; and

• prepare the consolidated financial statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the accounts comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The accounts are published on the Group's website at https://rmdl.co.uk/ which is maintained by the Group'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 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 Group; and

(b) this Annual Report includes a fair review of the development and performance of the business and position of the Group, together with a description of the principal risks and uncertainties that it faces.

The Directors consider that the consolidated financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Group's performance, business model and strategy.

For and on behalf of the Board

Norman Crighton

Director

21 April 2020

Movement in financial liabilities - Group

Company

The Company has a £10.5 million 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. Interest will accrue on each Loan at the annual at the annual percentage of which is the aggregate of three-month LIBOR and 3.65% per annum.

There had been no drawdown of the facility as at the year end. During the year, the Company drew down £16.9million from the credit facility, which was subsequently fully repaid before the year end.