SCRF.L Regulatory News (SCRF)

NOT FOR RELEASE, DISTRIBUTION OR PUBLICATION, IN WHOLE OR IN PART, IN OR INTO THE UNITED STATES OR TO US PERSONS

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27 July 2021

SME Credit Realisation Fund Limited

(the "Company")

Annual Financial Report

SME Credit Realisation Fund Limited (the "Company") has published its results for the year ended 31 March 2021.

The Annual Report and Accounts are attached to this release and are available on the Company's website (www.smecreditrealisation.com).

CONTACTS

Richard Boleat, Chairman

+44 (0) 1534 615 656

Richard.Boleat@smecreditrealisation.com

Secretary and Administrator

Sanne Group (Guernsey) Limited

+44 (0) 1481 739810

smecreditrealisation@sannegroup.com 

Corporate Broker

Numis Securities

Nathan Brown

+44 (0) 207 260 1000

n.brown@numis.com 

Investor Relations

IR@smecreditrealisation.com

Website

www.smecreditrealisation.com

The ISIN number of the Ordinary Shares is GG00BMD04Y22, the SEDOL code is BMD04Y2 and the TIDM is SCRF.

The LEI number of the Company is 549300ZQIYQVNIZGOW60.

ABOUT SME Credit Realisation Fund Limited

The Company is a registered closed-ended collective investment scheme registered pursuant to the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended and the Registered Collective Investment Scheme Rules 2018 issued by the Guernsey Financial Services Commission (''GFSC''). 

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IMPORTANT NOTICES

This announcement contains "forward-looking" statements, beliefs or opinions. These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond the control of the Company and all of which are based on its directors' current beliefs and expectations about future events. Forward-looking statements are sometimes identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "could", "should", "shall", "risk", "intends", "estimates", "aims", "plans", "predicts", "projects", "continues", "assumes", "positioned" or "anticipates" or the negative thereof, other variations thereon or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events, assumptions or intentions. These forward-looking statements include all matters that are not historical facts. Forward-looking statements may and often do differ materially from actual results. They appear in a number of places throughout this announcement and include statements regarding the intentions, beliefs or current expectations of the Board or the Company with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Company's business concerning, amongst other things, the financial performance, liquidity, prospects, growth and strategies of the Company. These forward-looking statements and other statements contained in this announcement regarding matters that are not historical facts involve predictions. No assurance can be given that such future results will be achieved; actual events or results may differ materially as a result of risks and uncertainties facing the Company. Such risks and uncertainties could cause actual results to vary materially from the future results indicated, expressed or implied in such forward-looking statements. The forward-looking statements contained in this announcement speak only as of the date of this announcement. Nothing in this announcement is, or should be relied on as, a promise or representation as to the future. The Company disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this announcement to reflect any change in its expectations or any change in events, conditions or circumstances on which such statements are based unless required to do so by applicable law, the Prospectus Rules, the Listing Rules or the Disclosure Rules and Transparency Rules of the FCA. No statement in this announcement is intended as a forecast or profit estimate.

Neither this announcement nor any copy of it may be made or transmitted into the United States of America (including its territories or possessions, any state of the United States of America and the District of Columbia) (the "United States"), or distributed, directly or indirectly, in the United States or to US Persons (as such term is defined in Regulation S under the US Securities Act of 1933, as amended (the "Securities Act"). Neither this announcement nor any copy of it may be taken or transmitted directly or indirectly into Australia, Canada, Japan or South Africa or to any persons in any of those jurisdictions, except in compliance with applicable securities laws. Any failure to comply with this restriction may constitute a violation of United States, Australian, Canadian, Japanese or South African securities laws. The distribution of this announcement in other jurisdictions may be restricted by law and persons into whose possession this announcement comes should inform themselves about, and observe, any such restrictions. This announcement does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for securities in the United States, Australia, Canada, Japan or South Africa or in any jurisdiction to whom or in which such offer or solicitation is unlawful.

SME CREDIT REALISATION FUND LIMITED

ANNUAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 MARCH 2021

FORWARD-LOOKING STATEMENTS

This report includes statements that are, or may be considered, "forward-looking statements". The forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative, or other variations or comparable terminology. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

FINANCIAL HIGHLIGHTS

The information below is presented for the year ended 31 March 2021 or as at 31 March 2021 unless expressly stated to cover a different period.

SUMMARY INFORMATION

About the Company

SME Credit Realisation Fund Limited (the "Company" or the "Fund") is a closed-ended investment company incorporated with liability limited by shares in Guernsey under The Companies (Guernsey) Law, 2008 (as amended), on 22 July 2015.

Group Structure

The Company holds a number of its investments in loans through Special Purpose Vehicles ("SPVs"). This annual report for the year ended 31 March 2021 (the "Annual Report") includes the results of Basinghall Lending Designated Activity Company ("Basinghall"), Tallis Lending Designated Activity Company ("Tallis"), Lambeth Lending Designated Activity Company ("Lambeth"), and Queenhithe Lending Designated Activity Company ("Queenhithe"). The Company, Basinghall, Tallis, Lambeth and Queenhithe are collectively referred to in this report as the "Group".

Lambeth and Queenhithe both transferred their remaining portfolio's of Credit Assets to Basinghall during the year and liquidators were formally appointed and commenced proceedings to wind up each of the entities in an orderly manner. On 1 July 2021, the final meeting in relation to the liquidation of Lambeth took place. All liabilities have been discharged and final payment made to Basinghall under the class B note agreement. The entity is expected to be fully liquidated within 3 months of the signing of these consolidated financial statements. The proceedings for Queenhithe are still ongoing at the time of signing of these consolidated financial statements.

Refer to Business review on the Directors report for further information.

Capital Management

As at 31 March 2021 the total number of shares in issue was 134,164,922 (2020: 258,301,354) excluding nil (2020: 586,243) shares held in treasury.

The scrip dividend programme was discontinued by the Company in line with the change in the Company's Investment Objective and Policy as discussed below.

On 21 May 2019, the Company published a circular and notice of an EGM which set out details of, and sought shareholder approval for, certain Proposals. The Proposals involved modifying the Company's Investment Objective and Policy to reflect a realisation strategy, for the detailed reasons set out in that circular, and amending its Articles to include a mechanism to enable the Company to redeem shares in the Company compulsorily so as to return cash to shareholders.

On 11 June 2019, the Proposals were approved at the EGM as discussed in detail in the Strategic Report.

The Company is in the process of returning capital via a combination of share buybacks, compulsory redemptions of shares and distributions of dividends, as the Group's portfolio of Credit Assets amortises. The directors resolved to suspend the programme of repurchases of the Company's shares on 2 April 2020 until further notice.

As at 31 March 2021, the Company has repurchased a total of 43,746,667 shares via share buyback (2020: 43,736,667) of which nil (2020: 586,243) remain held in treasury. The 10,000 shares repurchased during the year on 1 April 2020 were repurchased prior to the directors resolving to suspend the programme of repurchases of the Company's shares on 2 April 2020 until further notice. During the year, a total of 10,000 (2020: 43,150,424 shares) shares held in treasury were cancelled and formally discharged.

The Company has compulsorily redeemed a total of 124,126,432 (2020: 32,245,772) shares for a total amount of £105,499,718 (2020: £30,499,833) throughout the year. All shares redeemed throughout the year were redeemed at the prevailing NAV per share at the date of declaration.

CHAIRMAN'S STATEMENT

Dear Shareholder,

I am pleased to write to you to provide an update on the Company's progress for the year ended 31 March 2021. The Company continues to conduct a managed wind-down of its activities, with the objective of returning capital to shareholders promptly whilst seeking to maximise returns.

COVID-19 Pandemic

The world has now been affected by the Covid-19 pandemic for some five quarters. When I last wrote to you, on 18 December 2020, I expressed some mild optimism that, despite the wholesale economic and human tragedies that continue to be felt on a day to day basis, government financial support to business, the strenuous efforts of the medical care community and the work of the vaccine designers and manufacturers offered a way to exit from the pandemic's impacts. Those views have been largely borne out, with varying levels of effectiveness, such that it is now possible to see how the pandemic can ultimately be defeated. Nonetheless, obvious risks remain around variant emergence, breadth of vaccine rollout and inconsistency of vaccine take-up, and uncertainty over timing of a true normalisation of economic conditions remains.

Performance Review and Net Asset Value ("NAV")

This report presents the financial position of the Company as at 31 March 2021.

You will have noted the announcement made by the Company on 21 April 2021 disclosing the Company's NAV at 31 March 2021 at £119 million (31 December 2020: £139 million) and NAV per Share at that date at 88.87 pence (31 December 2020: 84.77 pence). The improvement in NAV per Share was driven principally by a better than anticipated credit market environment compared to expectations at the onset of the pandemic and the demonstrably resilient performance of the Company's investments, which has also lead to an upwards revaluation of the Company's interest in the EIB transaction that was previously attributed no value.

An analysis of the performance of the Company for the 6 month period to 31 March 2021 (with the 6 month period to 30 September 2020 for comparative purposes) is set out below:

(1)FVTPL Adjustment includes fair value movements on the Fund's interest in the EIB transaction

(2)FVTOCI Adjustment includes fair value movements on the portfolio of credit assets held by the Fund, which moved to fair value accounting from 1 April 2020.

Performance Since 31 March 2021

The Board continues to closely monitor data points within the Company's loan portfolio to assess the extent to which borrowers continue to be impacted by the economic consequences of the pandemic in their ability to satisfy their loan repayment obligations.

Data shows a largely positive outcome, quarter to quarter, compared to the expectations reflected in the Company's net asset value at 31 March 2021. Despite this trend, there remain a number of material risks to the downside:

· economic reactivation stabilises at a "new normal" level which is materially below that which existed at the time of loan initiation, calling into question the viability of some business plans in the medium term;

· the impact of progressive withdrawal of governmental stimulus and support schemes; and

· the potential for a resurgence in the scale of pandemic activity and thus potential for further restrictions on social mobility and levels of business activity.

It remains difficult to assess the likelihood or scale of impact of any of the above risk factors at this time.

Return of Capital

You will note that the Company's net asset value has reduced from £179 million at 30 September 2020 to £119 million at 31 March 2021, as the Company continues to make distributions to shareholders. In the 6 month period to 31 March 2021, £67 million was distributed to shareholders through compulsory share redemptions and £4 million through dividend payments. The balance of the movement between the two period ends is reconciled by performance.

The Company will continue to return capital to investors predominantly by way of compulsory redemption of shares as liquidity arises through loan repayments or by other means. The directors may also seek to apply free cash to on-market share repurchases if such a strategy is deemed to be in the best interests of shareholders as a whole.

Potential Portfolio Sales

The Company is not currently in active discussion with any parties in relation to the disposal of its loan portfolios in whole or in part, and the reducing size of these portfolios through natural loan amortisation suggests that any such transaction, at least in relation to performing assets, is now unlikely. That said, the Company will continue to explore potential disposals where pricing levels are attractive.

Conclusion

We are pleased at the progress of the Company's managed winddown in the year, which has included robust cost management through fund structure simplification and effective portfolio management despite the challenging economic circumstances. I would like to express my continuing thanks to the Funding Circle team for the support provided to the Company, and would also like to thank my fellow Board members and our advisors for their industry and wise counsel in ensuring that the Company's response to the current environment remains focussed and fully risk assessed.

RICHARD BOLÉAT

Chairman of the Board of Directors

26 July 2021

STRATEGIC REPORT

Strategy and Business Model

The Group was established to provide shareholders with a sustainable and attractive level of dividend income, primarily by way of investment in Credit Assets originated both directly through the platform operated by Funding Circle and indirectly, in each case as detailed in the Company's original investment policy. The Group identified the Funding Circle platform as a leader in the growing direct lending space to small and medium sized enterprises ("SMEs") with its established infrastructure, scale of origination volumes and expertise in accurately assessing loan applications.

On 11 June 2019, the Company changed its Investment Objective and Policy to facilitate a managed wind-down of the Company in a prudent manner consistent with the principles of good investment management as required by the Listing Rules.

Investment Objective and Policy

In order to implement the managed wind-down, it was necessary to amend the Company's Investment Objective and Policy to reflect the objective of realising the Company's portfolio, as follows:

"The Company will be managed with the intention of realising all remaining assets in the portfolio in a prudent manner which achieves a balance between maximising the value from the realisation of the Company's investments and making timely returns of capital to shareholders."

The managed wind-down is being effected with a view to the Company realising all of its investments in accordance with the Investment Objective. Such realisations will comprise natural amortisation of the Company's investments in Credit Assets as well as potentially opportunistic portfolio sales.

During the prior financial year, the Company ran an auction process as the Board explored a potential sale of a portion of the Company's assets during which it received a high level of interest from potential buyers. However, the Company is not in active discussion with any parties in relation to the disposal of its loan portfolios in whole or in part, and the reducing size of these portfolios through natural loan amortisation suggests that any such transaction, at least in relation to performing assets, is now unlikely.

In October 2020, Basinghall received proceeds of £2,203,183 for the sale of a pool of UK non-performing loans to a third party at a recovery rate which is consistent with historical recovery rates observed on the portfolio.

As a result of the Company's change in investment objective and policy, for the purposes of accounting, the Company's business model changed from "hold to collect" to "hold to collect and sell" during the prior financial year. The Company has therefore reclassified the valuation of Credit Assets from amortised cost to fair value through other comprehensive income ("FVTOCI") from 1 April 2020. This change in methodology is discussed further in notes 3 and 17.

The Company no longer allocates capital to Credit Assets, directly or indirectly via Leveraged Transactions or SPVs, or undertake capital expenditure except where necessary in the reasonable opinion of the Board in order to protect or enhance the value of any existing investments or to facilitate orderly disposals.

As at 31 March 2021, the Company held indirect investments in Credit Assets through the following investing companies:

The following analyses of the Group's investments in Credit Assets are provided as reference.

Loans by geographical region

Industry split

Basinghall, Tallis, Lambeth, Queenhithe and the EIB SPV were formed solely in connection with the implementation of the previous investment policy of the Company.

Loans acquired by Basinghall, Tallis and the EIB SPV (subject to the investment policy, any Portfolio Limits and Available Cash) were funded, in whole or in part, by advances made by the Company under the note programmes. The notes issued by Basinghall and Tallis to the Company are listed on the Irish Stock Exchange. Loans acquired by Lambeth and Queenhithe were funded in part by Basinghall. All loans held by Lambeth and Queenhithe were transferred to Basinghall during the year. Refer to the Directors report for further information.

The assets held by each of Basinghall, Tallis and the EIB SPV are ring-fenced from other entities or SPV's and there is no cross-collateralisation between the SPV's in which the Company invests.

Borrowing Limitation

In pursuit of the original investment objective, the Company was able to borrow or use leverage, and also guarantee the borrowings of its Affiliates and near Affiliates. The aggregate leverage or borrowings of the Company, its Affiliates and any Near Affiliates (including Basinghall, Tallis, Lambeth and/or Queenhithe) and guarantees of such borrowing or leverage by such person(s), was not permitted to exceed (at the time the relevant indebtedness is incurred or guarantee given) 0.5 times the then current NAV.

Following the approval of the resolution to execute a managed wind-down of the Company in its EGM on 11 June 2019, the leverage limit as described above no longer applies to the Company, its Affiliates and any near Affiliates.

All of the Group's leverage facilities have been fully repaid as of 31 March 2021.

Principal Risks and Risk Management

There are a number of actual and present and emerging risks and uncertainties which could have a material impact on the Group's actual results which may differ materially from expected and historical results, particularly given the ongoing managed wind-down of the Company and the impact of COVID-19.

The Board of Directors has overall responsibility for risk management and internal control within the context of achieving the Company's objectives. The Board agrees the strategy for the Company, approves the Company's risk appetite and monitors the risk profile of the Company. The Company also maintains a risk register to identify, monitor and control risk concentration, which has been updated to reflect the managed wind-down.

The Company maintains a risk matrix, consisting of the principal and emerging risks and the controls in place to mitigate those risks. The risk matrix provides a basis for the Audit Committee and the Board to regularly monitor the effective operation of the controls and to update the matrix when new risks are identified. The Board's responsibility for conducting a robust risk assessment are embedded in the Company's risk matrix and stress testing which helps position the Company to ensure compliance with The Association of Investment Companies Code of Corporate Governance's ("the AIC Code") requirements.

The Board continues to monitor the Company's systems of risk management and internal control and will continue to receive updates from the Company's external service providers to ensure that the principal risks and emerging risks faced by the Group are fully understood and managed appropriately. The Board did not identify any significant weaknesses during the year and up to the date of this Annual Report.

An overview of the principal risks and uncertainties that the Board considers to be currently faced by the Company are provided below, together with the mitigating actions being taken. The Directors have also linked the key performance indicators to the risks where relevant. Risks arising from the Group's use of financial instruments are set out in note 17 of the consolidated financial statements.

As part of the process of evaluating principal risks, the Board also identifies emerging risks and how they impact on the Group's managed wind down process. The likelihood of occurrence of each risk and the extent of financial effect to the Group are considered when the board makes economic decisions. Along with the update on the principal risks to take into account the impact of the COVID-19 pandemic to the Group, the board identified the following as emerging risks and other key operational risks:

Changes in the tax regulation in jurisdictions where the Group operates could have an impact on the treatment of income generated from loans held in subsidiaries

The Company holds assets indirectly through subsidiaries established in Ireland.

There is currently no indication that this will become a principal risk to the Group but the Board will continue to monitor any changes made in tax regulation across all jurisdictions in which the Group operates. Refer to note 12 for further information on taxation payable by Basinghall due to a change in tax regulation.

The Company has no employees and is reliant on the performance of third party service providers

The Company's investment administration functions have been outsourced to external service providers. Any failure by any external service provider to carry out its obligations could have a materially detrimental impact on the effective operation, reporting and monitoring of the Company's financial position. This may have an effect on the Company's ability to meet its investment objective successfully. The Board receives and reviews quarterly reports from its principal external service providers and also performs an annual quality review on the services provided by the external service providers. The results of the Board's review are reported to the Audit Committee.

Cybersecurity breaches

The Company is reliant on the functionality of Funding Circle's software and IT infrastructure to facilitate the process of servicing the Company's remaining Credit Assets. The Company is also reliant on the functionality of the IT infrastructure of its other service providers. These systems may be prone to operational, information security and related risks resulting from failures of, or breaches in, cybersecurity.

Along with other holders of risk assets generally, the Group is exposed to a range of macroeconomic, geopolitical and regulatory factors which could, in certain circumstances either individually or in combination have a negative effect on carrying values, portfolio returns, delinquencies and operating costs. These factors are kept under review by the Board and relevant Board committees as appropriate.

Hedging

The Board's policy is to seek to fully hedge currency exposure between Sterling and any other currency in which the Group's assets are denominated. During the year, the Company entered into forward foreign exchange contracts to minimise the risk of loss due to fluctuation of the Sterling to US Dollar exchange rate and the Sterling to Euro exchange rate in pursuance of this policy. There were unavoidable costs incurred in the hedge related to the interest rate differential between Sterling and US Dollars in the Group's assets and liabilities.

Foreign currency hedging activity is carried out by a specialist third party on behalf of the Company, in accordance with the hedging policy that the Board maintains.

Financial Performance

The key transactions and events that had an impact on the Group's performance are set out in the Directors' Report.

The Board continues to monitor the following which are considered as the Group's alternative performance measures in the context of the managed the wind down:

· Share price total return

· NAV total return

· Share price premium or discount to NAV

· Dividend per share

· Credit losses

· Fair value movements on Credit Assets

Refer to the definitions of each of the above included on the Glossary.

The Board notes that some or all of the key performance indicators used in the past are less relevant now that the Company has started the process of the managed wind-down.

Total return and share price premium/(discount)

For the period from inception to 31 March 2021, the total return on the ordinary share price was -12% and the NAV total return was 19%. The ordinary share was trading at a discount of 29.1% to NAV per ordinary share as at 31 March 2021.

Dividend per share

The Board declared dividends during the year totalling 5.25 (2020: 5.25) pence per Ordinary share. In May 2019, the Company published a circular and notice of EGM which set out details of, and sought shareholder approval for, certain Proposals. Pursuant to the Proposals, the Company has the power, under the New Articles, to make Compulsory Redemptions of shares in volumes and on dates to be determined at the Directors' sole discretion, with the amount distributed in respect of the shares on each occasion representing the cash available for distribution by the Company at the relevant time.

On 11 June 2019, the Proposals were approved at the EGM as discussed in detail in this Strategic Report. In addition to distributions made by way of the Compulsory Redemption process, or by means otherwise determined appropriate by the Directors, the Company currently intends to maintain quarterly dividend payments of 5.25 pence per Ordinary Share on an annualised basis, which may be partially uncovered. The Directors will continue to periodically review the Company's dividend policy in response to shareholder feedback and the progression of the managed wind-down.

Credit losses

The Board carefully monitors the level of defaults arising within the Group's portfolios. The credit loss provision prior to any fair value adjustments as at 31 March 2021 was £61.2m against outstanding principal and interest amounts of the loan portfolios of £141.45m (31 March 2020: provision of £59.0m against outstanding principal and interest amounts of the loan portfolio of £259.1m).

During the current financial year, the downside scenario was replaced by a macroeconomic scenario developed specifically for COVID-19 and consistent with portfolio modelling. Additionally, multipliers are applied to individual loan probability of defaults ("PD") such that overall gross losses for the portfolio are anchored to portfolio model expectations.

For further information on the movement in credit losses, refer to note 4 of the consolidated financial statements.

Viability Statement

The Directors consider that a period of 18 months is a reasonable timeframe for making an assessment of the Company's viability taking into account the process of achieving the managed wind-down, which could be longer than 18 months when the following considerations are taken into account:

§ The tail of loans to manage and/or dispose of including loans that will not contractually mature until 2024 and also defaulted loans;

§ Any cost management exercises completed which may aid decisions made by the Directors regarding any future disposal of remaining loan portfolio's; and

§ No firm wind-down plan is currently in place primarily as a result of ongoing market uncertainty driven by the COVID-19 pandemic.

The Directors believe that the 18 month period of assessment compared to the 3 year assessment used in the prior financial year is reasonable given the above considerations, the remaining weighted average life of 12 months on the portfolio of loans held, and considering that there are a number of loans with a remaining life longer than this period.

In their assessment of the viability of the Company, the Directors have considered each of the principal and emerging risks listed above and in particular the risks associated with the managed wind-down and the ongoing COVID-19 pandemic.

The Board believes that the principal risks, other than tail risks beyond its control, that may impact on the Company's ability to continue as a viable business are:

§ Default risk; and

§ Future wind down risks detailed above on the Strategic Risk.

The Directors have also considered the Company's income, expenditure and cash flow projections and the fact that the Company's investments held directly or through its subsidiaries do not comprise readily realisable. The viability analysis includes a review of higher-level defaults, lower realisable values and higher expenses. The Company maintains a risk register to identify, monitor and control risk concentration.

The Directors confirm that they believe the Company will be able to continue in operation and pay its liabilities as they fall due over the period of the managed wind-down.

Employees, Social, Human Rights and Environmental Issues

The Company has no employees and the Board comprises five non-executive Directors, all of whom, except Sachin Patel, are independent of Funding Circle. As an investment company, the Company has no direct impact on the community and as a result does not maintain specific policies in relation to these matters.

The Company operates by outsourcing significant parts of its operations to reputable professional companies, who are required to comply with all relevant laws and regulations and take account of social, environmental, ethical and human rights factors, where appropriate.

The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions-producing sources, including those within its underlying investment portfolio.

In carrying out its investment activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly.

Diversity and Inclusion

The Board of Directors of the Company comprises five male directors.

The Remuneration and Nominations Committee and the Board are committed to diversity at Board level and is supportive of increased gender and ethnic diversity but recognises that it may not always be in the best interest of shareholders to prioritise this above other factors. The Remuneration and Nominations Committee regularly reviews the structure, size and composition required of the Board, taking into account the challenges and opportunities facing the Company. In considering future candidates, appointments will be made on merit, including taking account of the specific skills, experience, independence, and knowledge needed to ensure a rounded Board and the diversity benefits each candidate can bring to the overall Board composition. The commencement of the managed wind-down is inevitably limiting in the Board's ability to implement enhanced diversity and inclusion strategies, given the limited future life of the Company.

Stakeholder Engagement

The AIC Code requires that matters set out in section 172 of the Companies Act, 2006 ("s172 of the Companies Act") are reported notwithstanding the Company is incorporated in Guernsey. As an investment company, the Company does not have any employees and conducts its core activities through third-party service providers. Each service provider is subjected to oversight and control, is required to have in place suitable policies to ensure they maintain high standards of business conduct, treat customers fairly, and employ corporate governance best practice. The Board considers the view of the Company's other key stakeholders as part of its discussions and decision making process. The Board's commitment to maintaining the high-standards of corporate governance recommended in the AIC Code, combined with the directors' duties incorporated into The Companies (Guernsey) Law, 2008, the constitutive documents, the Disclosure Guidance and Transparency Rules, and Market Abuse Regulation, ensures that shareholders are provided with frequent and comprehensive information concerning the Company and its activities. Whilst the primary duty of the Directors is owed to the Company as a whole consideration being given, the Board considers as part of its decision making process the interests of all stakeholders. Particular to the continued alignment between the activities of the Company and those that contribute to delivering the Board's strategy, which include the Portfolio Manager and Administrator. The Board respects and welcomes the views of all stakeholders. Any queries or areas of concern regarding the Company's operations can be raised with the Secretary.

DIRECTORS' REPORT

The Directors present their annual report and audited consolidated financial statements for the year ended 31 March 2021. In the opinion of the Directors, the annual report and audited consolidated financial statements are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company's performance, business model and strategy.

Incorporation

The Company is a limited liability company registered in Guernsey under The Companies (Guernsey) Law, 2008 (as amended) with registered number 60680.

Activities

The Company is a registered and closed-ended collective investment scheme in Guernsey pursuant to The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended. Prior to the amendment of the Company's Investment Objective and Policy, the primary activity of the Company was investment in loans to small and medium sized enterprises in the United Kingdom, the United States and Continental Europe, in order to seek to provide shareholders with a sustainable and attractive level of dividend income. Following the result of the EGM on 11 June 2019, the Company has ceased investment into Credit Assets as the Company's Investment Objective and Policy were updated to facilitate the managed wind-down of the Company.

Results and dividends

The total comprehensive income for the year, determined under International Financial Reporting Standards ("IFRS"), amounted to £4.58 million (2020: loss of £5.25 million). The payment of any dividend by the Company is subject to the satisfaction of a solvency test as required by The Companies (Guernsey) Law, 2008 (as amended). Following the result of the EGM, the Directors expect to maintain quarterly dividend payments of 5.25 pence per Ordinary Share on an annualised basis, which may be partially uncovered by income. Dividends declared during the year are disclosed in note 14.

Business review

The Strategic Report includes further information about the Company's principal activities, financial performance during the year and indications of likely future developments.

In December 2018, the Company commenced a programme of repurchases of its shares in the secondary market. As at 31 March 2021, the Company has purchased a total of 43,746,667 shares (31 March 2020: 43,736,667) of which nil remained held in treasury at 31 March 2021 (31 March 2020: 586,243). During the year, a total of 10,000 shares which were being held in treasury were cancelled and formally discharged (31 March 2020: 43,150,424). The directors resolved to suspend the programme of repurchases of the Company's shares on 2 April 2020 until further notice.

The Company also redeemed a total of 124,126,432 shares (2020: 32,245,772) for a total amount of £105,499,718 (2020: £30,499,833) throughout the year.

On 11 April 2020, Lambeth fully repaid the remaining amount owed on its senior loan to Citibank. The remaining portfolio of Credit Assets held within Lambeth were transferred to Basinghall on 17 June 2020 for an amount equal to the principal and interest outstanding at 31 May 2020 being the economic cut-off date for the transaction. In October 2020, liquidators were formally appointed and commenced proceedings to wind up Lambeth in an orderly manner. On 1 July 2021, the final meeting in relation to the liquidation of Lambeth took place. All liabilities have been discharged and final payment made to Basinghall under the class B note agreement. The entity is expected to be fully liquidated within 3 months of the signing of these consolidated financial statements.

On 17 August 2020, Queenhithe fully repaid the remaining amount owed on its loan with Fleetbank. The remaining portfolio of Credit Assets held within Queenhithe were transferred to Basinghall on the same date for an amount equal to the principal and interest outstanding at 31 July 2020 being the economic cut-off date for the transaction. In December 2020, liquidators were formally appointed and commenced proceedings to wind up Queenhithe in an orderly manner. The proceedings are still ongoing as at the date of signing of these consolidated financial statements.

The World Health Organisation declared COVID-19 as a global pandemic on 11 March 2020.

The Board continues to closely monitor the situation and the impact on the performance of the loan portfolios held by the Group. The Board receives updates on a regular basis from Funding Circle on current delinquency and default trends by geographic exposure. The Risk Committee also reviews a comprehensive range of other risks that may be impacted by COVID-19.

During the year, the impact of COVID-19 led to the use of forbearance measures for eligible borrowers, including short term payment plans and payment holidays, to assist creditworthy borrowers whose businesses suffered a short-term liquidity shock as a result of the ongoing pandemic environment. As at 30 June 2020, 15% of the combined portfolio by outstanding principal was on forbearance measures through either a partial payment plan or payment holiday, with almost half of those on partial payment plans. Forbearance measures continue to be offered for borrowers directly impacted by COVID-19, with 2% of the combined portfolio by outstanding principal on forbearance as at 31 March 2021.

Borrowers that went on forbearance measures implemented by Funding Circle have demonstrated resilient performance since coming off their plan, with 92% of the combined portfolio by outstanding principal making full contractual repayments as of 31 March 2021. The directors have seen a large proportion of borrowers returning to making full contractual repayments which has assisted in the stronger than expected performance by each of the portfolios in the latter stages of the year.

The full impact of COVID-19 and the measures implemented on the Group's portfolios of Credit Assets in the mid to long term still remains uncertain, however the Directors continue to monitor the delinquency and default data available to them closely.

In October 2020, Basinghall received proceeds of £2,203,183 for the sale of a pool of UK non-performing loans to a third party at a recovery rate which is consistent with historical recovery rates observed on the portfolio.

Going concern

The Directors have considered the financial performance of the Group and the impact of market conditions at the financial year end date and subsequently.

Whilst the managed wind-down of the Company continues to progress, there is no definite and final plan in place for the timing of liquidation of the Company's assets and the process of returning capital to shareholders.

The Company will therefore continue to redeem shares and pay dividends. The Company has prepared cashflow forecasts and liquidity analysis reviewing likely scenarios to support further distributions and to monitor the ongoing solvency of the Company. This is reviewed on a regular basis in light of new information received.

The Directors confirm that they have a reasonable expectation that the Company will continue to be able to pay its liabilities as they fall due over the period of the managed wind-down and as the ongoing impacts of the COVID-19 pandemic progresses. As a result, the Directors continue to present the consolidated financial statements on a going concern basis.

Alternative Investment Fund Managers Directive ("AIFMD")

The AIFMD requires Alternative Investment Fund Managers ("AIFM") to comply with certain disclosure, reporting and transparency obligations for Alternative Investment Funds ("AIF") that it markets in the EU. The Company is a self-managed AlF for the purposes of the AIFMD and therefore has to comply with the disclosure requirements of the AIFMD.

The Company regularly publishes updates on the website in the form of factsheets. These, along with the regular announcements made through the Regulatory News Service ("RNS") of the FCA, cover the disclosures required by AIFMD.

The Directors consider that any change in respect of which a reasonable investor, becoming aware of such information, would reconsider its investment in the Company, including because the information could impact on the investor's ability to exercise its rights in relation to its investment, or otherwise prejudice that investor's (or any other investor's) interest in the Company should be considered material. In setting this threshold, the Directors have had regard to the current risk profile of the Company which outlines the relevant measures to assess the Company's exposure or potential exposure to those risks. As required by the Listing Rules, any material change to the investment policy of the Company will be made only with the approval of the shareholders and as such, shareholders' approval was sought at the EGM on 11 June 2019 to implement the modification of the Company's Investment Objective and Policy as noted in the Strategic Report.

The AIFMD also requires the Company to disclose the remuneration of its investment manager (if any) providing analysis between fixed and variable fees along with the information of how much of such remuneration was paid to senior management at the investment manager and how much was paid to members of staff. As a self-managed AIF, the Company has no investment manager and thus has no information to report.

United States of America Foreign Account Tax Compliance Act ("FATCA")

Guernsey has entered into an Intergovernmental Agreement ("IGA") with the US Treasury in order to comply with FATCA and has also entered into an IGA with the UK in order to comply with the UK's requirements for enhanced reporting of tax information in accordance with FATCA principles. Under such IGAs, the Company is regarded as a Foreign Financial Institution ("FFI") resident in Guernsey. The Board continues to monitor developments in the rules and regulations arising from the implementation of FATCA in conjunction with its tax advisors.

Common Reporting Standard ("CRS")

On 13 February 2014, the Organisation for Economic Co-operation and Development released the Common Reporting Standard ("CRS") designed to create a global standard for the automatic exchange of financial account information, similar to the information to be reported under FATCA. On 29 October 2014, 51 jurisdictions signed the multilateral competent authority agreement ("Multilateral Agreement") that activates this automatic exchange of FATCA-like information in line with the CRS.

Pursuant to the Multilateral Agreement, certain disclosure requirements may be imposed in respect of certain investors in the Company who are, or are entities that are controlled by one or more, residents of any of the signatory jurisdictions. It is expected that, where applicable, information that would need to be disclosed will include certain information about investors, their ultimate beneficial owners and/or controllers, and their investment in and returns from the Company and its subsidiaries. Guernsey, along with 60 other jurisdictions, including some EU Member States, has adopted the CRS with effect from 1 January 2016, with the first reporting completed in 2017. The Group continues to comply with the requirements of CRS.

Corporate governance

The Company has been fully compliant with the AIC code of corporate governance throughout the year which is publicly available at https://www.theaic.co.uk/aic-code-of-corporate-governance.

Refer to the corporate governance report for further information.

Directors

The Directors who held office during the financial year end and up to the date of approval of this report were:

Tom Parachini, Global Head of Legal and Regulatory at Funding Circle, is appointed as Alternate Director for Sachin Patel.

Directors' shares and interests

A list of all Directors who served during the year and up to the date of this report and their biographies are included in a separate section of this report.

The appointment and replacement of Directors is governed by the Company's Articles of Incorporation, The Companies (Guernsey) Law 2008 (as amended) and related legislation. The Articles of Incorporation themselves may be amended by special resolution of the Shareholders.

As at 31 March 2021, the Directors and/or their connected parties held the following Ordinary shares of the Company:

During the year, no Director had a material interest in a contract to which the Company was a party (other than his own letter of appointment). Mr. Patel is an employee of Funding Circle Ltd.

Movement in the number of shares held by each of the directors and/or connected parties during the year relates to the redemptions paid by the Company and the purchase of further shares.

Substantial shareholdings

As at 31 March 2021, the Company had been informed of the following notifiable interests of 5% or more in the Company's voting rights in accordance with Disclosure and Transparency Rule 5.1.2:

Significant agreements

The Company is not party to any significant agreements which take effect after or terminate upon a change of control of the Company, nor has the Company entered into any agreements with its Directors to provide for compensation for loss of office as a result of a takeover bid.

Information to be disclosed in accordance with UK Listing Rule 9.8.4

Disclosure of information to the Auditor

The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditor is unaware and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company's Auditor is aware of that information.

Independent Auditor

PricewaterhouseCoopers CI LLP ("PwC") served as independent auditor during the financial year and has expressed its willingness to continue in office. A resolution to re-appoint PwC as independent auditor was approved in the Annual General Meeting.

The maintenance and integrity of the Group and Company's website is the responsibility of the Directors. The work carried out by the independent auditor does not involve consideration of these matters and accordingly, the auditor accepts no responsibility for any changes that may have occurred to the consolidated financial statements since they were initially presented on the website. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Company Secretary

The Company Secretary is Sanne Group (Guernsey) Limited of De Catapan House, Grange Road, St Peter Port, Guernsey GY1 2QG.

Taxation

The Company is subject to taxation under The Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 act and the investing companies are subject to taxation in Ireland under the Irish Finance Act 2019. There has been no updates to these acts during the year that have had any impact on the taxation payable by the Group. See note 12 for further information.

On behalf of the Board

RICHARD BOLÉAT

Chairman of the Board of Directors

CORPORATE GOVERNANCE REPORT

The Financial Reporting Council ("FRC"), the UK's independent regulator for corporate reporting and governance responsible for the Corporate Governance Code, has endorsed the AIC Code meaning that companies who report in accordance with the AIC Code fully meet their obligations under the UK Corporate Governance Code (the "Code") and the related disclosure requirements contained in the Listing Rules.

Statement of how the principles of the AIC Code are applied

Throughout the financial year ended 31 March 2021 the Company has been in compliance with the relevant provisions set out in the AIC Code and the relevant provisions of the Code. The Code includes provisions relating to: the roles of the chief executive, executive directors' remuneration; and the need for an internal audit function, each of which is not considered by the Board to be relevant to the Company. The Company has therefore not reported further in respect of these provisions.

Board of Directors

The Board is comprised of five Directors, all of whom are non-executive. All the Directors are independent except for Sachin Patel who is an employee of Funding Circle Ltd. Richard Boléat is the Chairman of the Board and Jonathan Bridel is the Senior Independent Director. The Company did not use an external search consultancy nor any open advertising in the selection of the Chairman and the non-executive Directors. The Company was satisfied that the formal selection process from a pool of candidates with the relevant expertise and skills was appropriate for the needs of the Company. Biographies of the Directors are shown in a separate section of this report and demonstrate the range and depth of skills and experience each brings to the Board.

The Directors ensure that, at all times, the Board is composed of members who, as a whole, have the required knowledge, abilities and expert experience to properly complete their tasks and are sufficiently independent. A Board member is considered independent if he has no business or personal relations which cause a conflict of interest with those of the Company. Every member of the Board ensures that he has sufficient time to perform his mandate. The Board considers the skills, competence and independence of candidates in the context of the overall board composition. The Board has put in place appropriate insurance cover in respect of any legal action against the Directors.

The Board has not stipulated a maximum term of any directorship, including the tenure of the Chairman given the annual election/re-election process discussed below and commencement of the managed wind-down.

Copies of the letters of appointment are available on request from the Company Secretary.

Independence of Directors

In accordance with the AIC Code, the Board has reviewed the independence of the individual directors and the Board as a whole. Each of the Directors except Sachin Patel is considered independent.

Board evaluation

A formal Board evaluation process has been put in place in line with the Board's policy to monitor and improve performance of the Directors. The Board carried out a formal evaluation process on an annual basis. The Directors completed self-assessment forms which were reviewed and discussed with the Chairman. The Senior Independent Director performed an annual review of the Chairman's performance. The Directors carried out an annual review of the Board as a whole discussing its composition, size and structure and ensuring that there is a good balance of skills and experience. The answers to these questionnaires were discussed by the Remuneration and Nominations Committee. However, given the Company's change in investment objective, managed wind-down and the limited future life of the Company, the annual board evaluations are no longer taking place or being discussed by the Remuneration and Nominations Committee.

The Board shall offer induction training to new Directors about the Company, its key service providers, the Directors' duties and obligations and other matters as may be relevant from time to time. A regular review will be undertaken by the Board to ensure that the Directors' ongoing training and development needs are met.

Election/Re-election of Directors

It is the Company's policy that at each Annual General Meeting of the Company all Directors shall retire from office, but, subject to the Articles, shall be eligible for re-appointment.

Committees of the Board

Audit, Risk, Management Engagement and Remuneration and Nominations Committees have been established by the Board and each Committee has formally delegated duties, responsibilities and terms of reference, which are available from the Company Secretary upon request.

An outline of the responsibilities of each of the Committees is set out below.

Audit Committee

The Board has established the Audit Committee comprising of all the Directors except for Sachin Patel and is chaired by Jonathan Bridel. The Audit Committee meets at least three times a year and is responsible for ensuring, inter alia, that the financial performance of the Company is properly reported on and monitored and provides a forum through which the Company's external auditor may report to the Board. The Audit Committee reviews and recommends to the Board the adoption and approval of the annual and half yearly consolidated financial statements, results, internal control systems and procedures and accounting policies of the Company.

Risk Committee

The Company has established a risk committee, which comprises of all of the Directors, with Frederic Hervouet as chairman. The risk committee meets four times a year or more often if required. The risk committee takes responsibility for the risk management policies of the Company's operations and oversight of the operation of the Company's risk management framework as well as completing all risk reporting for regulatory purposes.

Management Engagement Committee

The Company has established a Management Engagement Committee which is chaired by Richard Burwood and comprises of all the Directors except for Sachin Patel. The Management Engagement Committee meets at least once a year or more often if required. The principal duties of the Committee are to review the actions and judgments of Funding Circle UK, Funding Circle US and Funding Circle CE and also the terms of agreements appointing each of them. The Committee is also responsible for monitoring the compliance of other service providers with the terms of their respective agreements.

Remuneration and Nominations Committee

The Company has established a Remuneration and Nominations Committee which is chaired by Richard Boléat and comprises all of the Directors. The Directors believe that the appointment of the chairman of the Remuneration and Nominations Committee does not affect his independence.

The Board believes it is appropriate for all Directors to be a member of the Remuneration and Nominations Committee as Sachin Patel has waived his right to remuneration from the Company and all other Directors are independent non-executive Directors.

The Remuneration and Nominations Committee meets at least once a year or more often if required. The duties of the Committee include:

• determining and agreeing with the Board the framework or broad policy for the remuneration of the Company's Chairman and non-executive Directors pursuant to the Company's Articles of Incorporation;

• reviewing the structure, size and composition (including the skills, knowledge and experience) required of the Board compared to its current position and make recommendations to the Board with regard to any changes necessary; and

• giving full consideration to succession planning of Directors, taking into account the challenges and opportunities facing the Company.

Meetings and attendance

There were 7 Board meetings held during the financial year ended 31 March 2021. The attendance record of each of the Directors was as follows:

There were 4 Risk Committee meetings, 5 Audit Committee meetings and 1 Remuneration and Nominations Committee meeting held during the financial year ended 31 March 2021. A Management Engagement Committee meeting was held subsequent to the year end in April 2021.

The attendance record of each of the Committee members was as follows:

Board Observers

Funding Circle UK has the right (pursuant to the Services Agreement) to nominate up to two observers to attend meetings of the Board. Those nominees may (other than in limited circumstances) attend each such meeting as observers, but do not have any rights to participate in the conduct of the business of the Company or to vote on any matter.

The Board may require that those nominees not attend the part of any Board meeting which considers (i) the termination of any agreement to which Funding Circle is party, or (ii) any dispute or litigation between Funding Circle and the Company.

Company Secretary

The Board appointed Sanne Group (Guernsey) Limited to act as Company Secretary on 22 July 2015. The principal duties of the Company Secretary are to monitor compliance with the established corporate governance framework, report to the Board and to arrange and host Board and Committee meetings.

Internal Control Review

The Board is responsible for ensuring the maintenance of a robust system of internal control and risk management and for reviewing the effectiveness of the Company's overall internal control arrangements and processes following recommendations from the Audit Committee. In performing their duties, the Board considered the relevant guidance published by the FRC as they apply to the Group. The systems and controls in place have been in place for the year under review and up to the date of signing of this annual report and audited consolidated financial statements. The results of the Board's review of the systems and controls are presented in the Audit Committee Report.

The Directors may delegate certain functions to other parties such as Funding Circle UK, Funding Circle US, Funding Circle CE, FCGPL, the Administrator and other service providers. In particular, the Directors have appointed Funding Circle UK, Funding Circle US and Funding Circle CE to service the Company's investments in loans and FCGPL to provide corporate services to the Company. Notwithstanding these delegations, the Directors have responsibility for exercising overall control and supervision of the services provided by Funding Circle UK, Funding Circle US and Funding Circle CE, for the risk management of the Company and otherwise for the Company's management and operations.

The Management Engagement Committee carries out regular reviews of the performance of Funding Circle UK, Funding Circle US and Funding Circle CE together with other service providers appointed by the Company.

Investor Relations

All shareholders have the opportunity to attend and vote, in person or by proxy, at the AGM or other meetings of shareholders. The notice of the AGM, which is sent out at least fourteen days in advance, sets out the business of the meeting. Shareholders are encouraged to attend the AGM and to participate in proceedings. The Chairman of the Board and the Directors, together with representatives of Funding Circle, will be available to answer shareholders' questions at the AGM.

Shareholders and other interested parties are able to contact the Company through a dedicated investor relations function. Contact details are as follows:

Email: ir@smecreditrealisation.com 

Shareholders are also able to contact the Company via the Chairman or Company Secretary as follows:

Richard Boléat

Tel: +44 (0) 1534 615 656

Email: Richard.Boleat@smecreditrealisation.com

Sanne Group (Guernsey) Limited

Tel: +44 (0) 1481 739 810

Email: smecreditrealisation@sannegroup.com 

AUDIT COMMITTEE REPORT

Membership

Jonathan Bridel - Chairman (Independent non-executive Director)

Richard Burwood (Independent non-executive Director)

Fred Hervouet (Independent non-executive Director)

Richard Boléat (Company Chairman* and Independent non-executive Director)

* The Board believes it is appropriate for the Company Chairman to be a member of the Audit Committee as he is a Fellow of the Institute of Chartered Accountants in England & Wales and is an independent Director.

Key Objectives

The provision of effective governance over the appropriateness of the Company's financial reporting, taking into account the consolidation of its subsidiaries, including the adequacy of related disclosures, the performance of the external auditor and the management of the Company's systems of internal controls and business risks.

Responsibilities

The primary responsibilities of the Audit Committee are:

§ reviewing the Company's financial results announcements and financial statements and monitoring compliance with relevant statutory and listing requirements;

§ reporting to the Board on the appropriateness of the Company's accounting policies and practices including critical accounting policies and practices;

§ advising the Board on whether the Committee believes 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;

§ scrutiny of the loans held at fair value through other comprehensive income;

§ compiling a report on its activities to be included in the Company's annual report;

§ overseeing the relationship with and appointment of the external auditor;

§ agreeing with the external auditor the audit plan including discussions on the key risk areas within the consolidated financial statements;

§ considering the financial and other implications on the independence of the auditor arising from any non-audit services to be provided by the auditor; and

§ considering the appropriateness of appointing the auditor for non-audit services.

The Audit Committee members have a wide range of financial and commercial expertise necessary to fulfil the Committee's duties. The Chairman of the Committee, Jonathan Bridel, is a Fellow of the Institute of Chartered Accountants in England and Wales, and has recent and relevant financial experience, as required by the AIC Code. He serves as Audit Chairman on other listed companies and previously worked in senior positions in banking and finance and investment management including SME lending. The Board is satisfied he has recent and relevant financial experience and has designated him as its financial expert on the Committee. The Committee as a body has the competence and experience relevant to the sector. The qualification of the members of the committee are noted in the biographies section in a separate section of this report.

Committee Meetings

The Committee meets formally at least three times a year. Only members of the Audit Committee have the right to attend Audit Committee meetings. However, other Directors and representatives of Funding Circle and the Administrator are invited to attend Audit Committee meetings on a regular basis and other non-members may be invited to attend all or part of the meetings as and when appropriate and necessary. The Company's external auditor, PricewaterhouseCoopers CI LLP ("PwC"), is also invited to meetings as is appropriate.

Main Activities during the year

The Committee assists the Board in carrying out its responsibilities in relation to financial reporting requirements, risk management and the assessment of internal controls and key procedures adopted by the Company's service providers. The Committee also manages the Company's relationship with the external auditor and considers the appointment of external auditor, discusses with the external auditor the nature and scope of the audit, keeps under review the scope, results, cost and effectiveness of the audit and reviews the independence of the external auditor. The Committee also considers the objectivity of the auditor and reviews the external auditor's letter of engagement and management letter.

Meetings of the Committee generally take place prior to a Company Board meeting. The Committee reports to the Board, as part of a separate agenda item, on the activity of the Committee and matters of particular relevance to the Board in the conduct of their work. The Board requires that the Committee advise it on whether it believes the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

At its meetings during the year, the Committee focused on:

Financial reporting

The primary role of the Committee in relation to financial reporting is to review with Funding Circle, the Administrator and the External Auditor the appropriateness of the half-yearly and annual consolidated financial statements concentrating on, amongst other matters:

§ The quality and acceptability of accounting policies and practices;

§ The clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements including the application of IFRS 9 and IFRS 10;

§ Material areas in which significant judgments have been applied or where there has been discussion with the external auditor;

§ Whether the annual report and consolidated financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy; and

§ Any correspondence from regulators and listing authorities in relation to financial reporting.

To aid its review, the Committee considers reports from Funding Circle and the Administrator.

Significant risks

In relation to the annual report and consolidated financial statements for the year ended 31 March 2021, the following significant risks were considered by the Audit Committee as they are most relevant to the nature of the Group's business:

§ Valuation of loans advanced

Loans advanced recorded at fair value through other comprehensive income ("FVTOCI") represent thelargest balance in the statement of financial position. Furthermore, the FVTOCI basis of measurementunder IFRS 9 mandates that management evaluate the expected credit losses on the loan portfolio and account for them through the profit and loss, with movement on fair value going through the OCI. Valuation of the loans advanced is received from a third party valuation expert on a quarterly basis. The Audit Committee regularly reviews and has satisfied itself as to the inputs used in the valuation methodology of the loans advanced in the consolidated financial statements at 31 March 2021.

§ Fraud risk in income recognition

Mitigating factors were reviewed through the risk register and internal controls framework which is reviewed and approved by the Committee on a regular basis. The Committee has considered and challenged as appropriate the assessment of risks within these documents and obtained evidence about the effective operation of the internal controls in place, including critically assessing reporting provided by Funding Circle. The Audit Committee is satisfied that the accounting policy for recognition of the interest earned on loans is in line with the relevant accounting standards.

§ Valuation of the financial asset held at fair value through profit or loss (the EIB transaction)

The fair value of the EIB transaction is determined by considering the fair value of the senior loan note in the structured finance transaction and the fair value of the underlying loan portfolio, and any adjustments for other material assets and liabilities. Refer to note 17 for further information on fair value estimation.

The Committee in conjunction with the Board and Funding Circle have reviewed the impact of COVID-19 on the consolidated financial statements as at 31 March 2021. In the first part of the year, underlying loan performance was largely effected by COVID-19 with a number of borrowers directly impacted by the pandemic. However, following the introduction of forbearance measures and government initiatives the directors have seen resilient performance with 92% of the combined portfolio by outstanding principal making full contractual repayments as of 31 March 2021. The assumptions used for forecasting expected credit losses, as required under IFRS 9, were based on a macroeconomic scenario developed specifically for COVID-19 and consistent with portfolio modelling. Additionally, multipliers are applied to individual loan probability of defaults ("PD") such that overall gross losses for the portfolio are anchored to portfolio model expectations.

Internal Control and Risk Management

The Committee along with the Risk Committee has established a process for identifying, evaluating and managing all major risks faced by the Group. The process is subject to regular review by the Board and accords with the AIC Code of Corporate Governance. The Board is responsible overall for the Group's system of internal control and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate risks of failure to achieve the Company's business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Committee receives reports from the Risk Committee on the Group's risk evaluation process and reviews changes to significant risks identified. The Committee has undertaken a full review of the Group's business risks, which have been analysed and recorded in a risk report, which is reviewed and updated regularly. Each quarter a Funding Circle report outlines the steps taken to monitor the areas of risk including those that are not directly the responsibility of Funding Circle and reports the details of any known internal control failures.

Separately, Funding Circle has established an internal control framework to provide reasonable but not absolute assurance on the effectiveness of the internal controls operated on behalf of its clients. The effectiveness of the internal controls is assessed by Funding Circle's compliance and risk department on an on-going basis. Funding Circle's controls processes have also been outlined to the Board. The Board's assessment of the Company's principal risks and uncertainties is set out in the Strategic Report. By means of the procedures set out above, the Board confirms that it has reviewed the effectiveness of the Group's system of internal controls for the year ended 31 March 2021 and subsequently and that no material issues have been noted.

External Audit

The effectiveness of the external audit process is dependent on appropriate audit risk identification at the start of the audit cycle. The Committee received a detailed audit plan from PwC, identifying their assessment of these key risks. For the year ended 31 March 2021 significant risks were identified in relation to the valuation of loans advanced and the risk of fraud in revenue recognition (in addition to the risk of management override of controls). These risks are tracked through the year and the Committee challenged the work done by the auditor to test management's assumptions and estimates around these areas. The Committee has assessed the effectiveness of the audit process addressing these matters through the reporting received for the year-end consolidated financial statements. In addition, the Committee will seek feedback from the Administrator on the effectiveness of the audit process. For the year ended 31 March 2021, the Committee was satisfied that there had been appropriate focus and challenge on the primary areas of audit risk and assessed the quality of the audit process to be good.

Appointment and Independence

The Committee considers the reappointment of PwC, including the rotation of the Audit Engagement Leader, and assesses their independence on an annual basis. The external auditor is required to rotate the Audit Engagement Leader responsible for the Company's audit every five years. The Audit Committee has engaged with the external auditor to ensure an effective rotation of the Audit Engagement Leader following the fifth year of appointment and as such a new Audit Engagement Leader has been appointed for the current year's audit. In its assessment of the independence of the auditor, the Committee receives details of any relationships between the Company and PwC that may have a bearing on their independence and receives confirmation that they are independent of the Company. The Committee approved the fees for audit services for the year ended 31 March 2021 after a review of the level and nature of work to be performed and after being satisfied that the fees were appropriate for the scope of the work required.

Non Audit Services

To safeguard the objectivity and independence of the external auditors from becoming compromised, the Committee has a formal policy governing the engagement of the external auditors to provide non-audit services. No material changes have been made to this policy during the year. The auditor and the Directors have agreed that all non-audit services require the pre-approval of the Audit Committee prior to commencing any work. Fees for non-audit services are tabled annually so that the Audit Committee can consider the impact on auditor's objectivity. The auditor (and their affiliated network firms) was remunerated £264,792 (2020: £284,756) for their audit and non-audit services rendered for the year ended 31 March 2021. The Committee assessed whether PwC should be appointed in relation to certain tax and other non-audit services related services and concluded that it would be in the best interest of the Company to do so.

PwC were remunerated as follows for the year ended 31 March 2021:

The current length of PwC's tenure is 6 years and the last time tendering took place was in October 2015.

The Committee is satisfied with the effectiveness of the audit provided by PwC, and is satisfied with the auditor's independence. The Committee has therefore recommended to the Board that PwC be reappointed as external auditor for the year ending 31 March 2022, and to authorise the Directors to determine their remuneration and terms of engagement. Accordingly, a resolution proposing the reappointment of PwC as auditor will be put to the shareholders at the 2021 AGM.

Committee Evaluation

The Committee's activities form part of the performance evaluation that will be carried out by the Board.

Jonathan Bridel

Chairman of the Audit Committee

26 July 2021

DIRECTORS' REMUNERATION REPORT

The Board has established a Remuneration and Nominations Committee which met once during the current financial year.

Composition

The Remuneration and Nominations Committee was formed on 28 September 2015, comprising all the members of the Board. The Board has appointed Richard Boléat as Chairman of the Committee.

The Directors and Company Secretary are the only officers of the Company. Copies of the Directors' letters of appointment are available upon request from the Company Secretary at the registered office and will be available for inspection at the AGM. The Company Secretary is engaged under a Company Secretarial Agreement with the Company. The Company has no employees.

The Directors are each entitled to serve as non-executive Directors on the boards of other companies and to retain any earnings from such appointments.

Responsibilities

The primary responsibilities of the Committee are:

§ determine and agree with the Board the framework or broad policy for the remuneration of the Company's Chairman and non-executive directors pursuant to the Company's Articles of Incorporation;

§ review the ongoing appropriateness and relevance of the remuneration policy;

§ ensure that contractual terms on termination, and any payments made, are fair to the individual and the Company, that failure is not rewarded and that the duty to mitigate loss is fully recognised;

§ annually review the structure, size and composition (including the skills, knowledge and experience) required of the Board compared to its current position and make recommendations to the Board with regard to any changes as necessary;

§ give full consideration to succession planning of directors, taking into account the challenges and opportunities facing the Company, and what skills and expertise are therefore needed on the Board in the future; and

§ keep under review the leadership needs of the Company with a view to ensuring the continued ability of the Company to compete effectively in the Platform.

Remuneration Policy

In setting the Company's remuneration policy, the Remuneration and Nominations Committee has sought (so far as it considers appropriate for a company with a non-executive Board) to align the interests of the Board with those of the Company and to incentivise the Directors to help the Company to achieve its investment objective.

The Directors shall be paid such remuneration by way of fees for their services as is defined in each of the Directors' letters of appointment. Under the terms of their appointments as non-executive Directors of the Company, the Directors (other than Sachin Patel who has waived his entitlement to an annual fee) are entitled to the following annual fees:

*Richard Burwood resigned from the boards of Tallis Lending Designated Activity Company and Basinghall Lending Designated Activity Company on 13 July 2020, Lambeth Designated Activity Company on 15 September 2020 and Queenhithe Lending Designated Activity Company on 3 December 2020 and is no longer entitled to receive £5,000 per annum for each of these entities.

The Directors are not entitled to any other fixed or variable remuneration.

No Director has a service contract with the Company, nor are any such contracts proposed. The retirement, disqualification and removal provisions relating to the Directors (in their capacity as Directors) are set out in their letters of appointment.

No annual bonus will be paid to any Director and the Company does not operate a long term incentive plan.

The Directors are entitled to be repaid by the Company all properly incurred out-of-pocket expenses reasonably incurred in the execution of their duties.

In setting the level of each non-executive Director's fees, the Company has had regard to: the time commitments expected, the level of skill and experience of each Director, the current market, the fee levels of companies of similar size and complexity.

On termination of their appointment, Directors shall only be entitled to such fees as may have accrued to the date of termination, together with reimbursement in the normal way of any expenses properly incurred prior to that date. If the Board considers it appropriate to appoint a new director, the new director remuneration will comply with the current policy.

Directors' remuneration and Share interests

The total remuneration of the Directors for the year ended 31 March 2021 was as follows:

Richard Burwood was also a Director of Basinghall, Tallis, Lambeth and Queenhithe until resigning as a director of each entity during the year. The total remuneration to the Directors disclosed in the above table excludes £10 (2020: £4,240) representing Directors' expenses charged to the Company, Basinghall, Tallis and Queenhithe. There were no other items in the nature of remuneration, pension entitlements or incentive scheme arrangements which were paid or accrued to the Directors during this year.

As at 31 March 2021 Richard Boléat had a share interest in the Company, in the form of 13,554 (2020: 4,448) Ordinary shares, representing 0.0047% (2020: 0.0015%) interest in voting rights. Jonathan Bridel had a share interest in the Company, in the form of 65,552 (2020: 4,448) Ordinary shares, representing 0.0225% (2020: 0.0015%) interest in voting rights, and Richard Burwood had a share interest in the Company, in the form of 24,784 (2020: 4,448) Ordinary shares, representing 0.0085% (2020: 0.0015%) interest in voting rights. Frederic Hervouet had a share interest in the Company in the form of 92,041 (2020: 95,176) Ordinary shares, representing 0.0316% in the voting rights as at 31 March 2021 (2020: 0.0327%).

During the year no remuneration was received by any Director in a form other than cash. Furthermore, no payments were made for loss of office, other benefits or other compensation for extra services to any Director or former Director of the Company.

The Company has no employees other than its Directors who are all non-executive. When periodically considering the level of fees, the Remuneration and Nominations Committee evaluates the contribution and responsibilities of each Director and the time spent on the Company's affairs. Following this evaluation, the Committee will determine whether the fees as set out in the Remuneration Policy continue to be appropriate. Although the Company has not to date consulted shareholders on remuneration matters, it has reviewed the remuneration of Directors of other investment companies of similar size and complexity and to the limits set out in the Company's Articles of Incorporation. The Company welcomes any views the shareholders may have on its remuneration policy.

Richard Boléat

Chairman of the Remuneration and Nominations Committee

26 July 2021

STATEMENT OF DIRECTORS' RESPONSIBILITIES

IN RESPECT OF THE FINANCIAL STATEMENTS 

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

The Companies (Guernsey) Law, 2008 (as amended) requires the Directors to prepare financial statements for each financial year and under that law they have elected to prepare the consolidated financial statements in accordance with IFRS as issued by the International Accounting Standards Board ("IASB").

The consolidated financial statements are required by law to give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that year.

In preparing these consolidated financial statements, the Directors are required to:

• Select suitable accounting policies and then apply them consistently;

• Make judgements and estimates that are reasonable and prudent;

• State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the consolidated financial statements; and

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

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the consolidated financial statements comply with The Companies (Guernsey) Law, 2008 (as amended). They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

The Directors confirm that they have complied with the above requirements in preparing the consolidated financial statements and that to the best of their knowledge and belief:

• This annual report includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that the Group faces;

• The consolidated financial statements, prepared in accordance with IFRS issued by the IASB and interpretations issued by the IFRS Interpretations Committee, give a true and fair view of the assets, liabilities, financial position and results of the Group; and

• The annual report and consolidated financial statements, taken as a whole, provide the information necessary to assess the Group's position and performance, business model and strategy and is fair, balanced and understandable.

Richard Boléat Jonathan Bridel

Chairman Chairman of the Audit Committee

26 July 2021 26 July 2021

Independent auditor's report to the members of SME Credit Realisation Fund Limited

Report on the audit of the consolidated financial statements

Our opinion

In our opinion, the financial statements give a true and fair view of the financial position of SME Credit Realisation Fund Limited (the "company") and its subsidiaries (together "the group") as at 31 March 2021, and of their consolidated financial performance and their consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in accordance with the requirements of The Companies (Guernsey) Law, 2008.

What we have audited

The group's consolidated financial statements comprise:

· the consolidated statement of financial position as at 31 March 2021;

· the consolidated statement of comprehensive income for the year then ended;

· the consolidated statement of changes in shareholders' equity for the year then ended;

· the consolidated statement of cash flows for the year then ended; and

· the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated financial statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements of the group, as required by the Crown Dependencies' Audit Rules and Guidance. We have fulfilled our other ethical responsibilities in accordance with these requirements.

Our audit approach

Our audit of the group for the year ended 31 March 2021 was planned and executed having considered the key activities of the group during the year.

At the Extraordinary General Meeting on 11 June 2019 the shareholders of the company voted to amend the company's investment objective and policy to implement a managed wind-down of the company by means of natural amortisation of the company's investments in loans advanced as well as potential, opportunistic portfolio sales. Due to the change in the business model, the loans advanced previously measured at amortised cost have been reclassified to fair value through other comprehensive income in the consolidated financial statements.

Although there was a sale of a pool of UK non-performing loans in the period, the group continues to hold loans advanced as at 31 March 2021. Our assessment is therefore that the primary operations of the group remained largely unchanged from the prior year up until 31 March 2021, other than the change in basis of measurement for the loans advanced.

Overview

The scope of our audit

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

This is not a complete list of all risks identified by our audit.

How we tailored the audit scope

We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the consolidated financial statements as a whole, taking into account the structure of the group, the accounting processes and controls, and the industry in which the group operates.

The company is based in Guernsey with four underlying subsidiaries located in Ireland. The consolidated financial statements are a consolidation of the company and all underlying subsidiaries.

Scoping was performed at the group level, irrespective of whether the underlying transactions took place within the company or within the subsidiaries. The group audit was led, directed and controlled by PricewaterhouseCoopers CI LLP and audit work for material items within the consolidated financial statements was performed in Guernsey by PricewaterhouseCoopers CI LLP. All subsidiaries and the parent that make up the group were in scope for our audit procedures over the consolidated financial statements.

Materiality

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the consolidated financial statements as a whole.

Based on our professional judgement, we determined materiality for the consolidated financial statements as a whole as follows:

In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate.

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above GBP 149,000 (2020: GBP 258,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

Reporting on other information

The directors are responsible for the other information. The other information comprises all the information included in the Annual Report and Audited Consolidated Financial Statements (the "Annual Report") but does not include the consolidated financial statements and our auditor's report thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.

Responsibilities for the consolidated financial statements and the audit

Responsibilities of the directors for the consolidated financial statements

As explained more fully in the Statement of Directors' Responsibilities, the directors are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with international Financial Reporting Standards, the requirements of Guernsey law and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

· Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

· Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group's internal control.

· Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.

· Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group's ability to continue as a going concern over a period of at least twelve months from the date of approval of the consolidated financial statements. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the group to cease to continue as a going concern.

· Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

· Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Use of this report

This report, including the opinions, has been prepared for and only for the members as a body in accordance with Section 262 of The Companies (Guernsey) Law, 2008 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Report on other legal and regulatory requirements

Company Law exception reporting

Under The Companies (Guernsey) Law, 2008 we are required to report to you if, in our opinion:

· we have not received all the information and explanations we require for our audit;

· proper accounting records have not been kept; or

· the consolidated financial statements are not in agreement with the accounting records.

We have no exceptions to report arising from this responsibility.

Corporate governance statement

The Listing Rules require us to review the directors' statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the company's compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report.

The company has reported compliance against the 2019 AIC Code of Corporate Governance (the "Code") which has been endorsed by the UK Financial Reporting Council as being consistent with the UK Corporate Governance Code for the purposes of meeting the company's obligations, as an investment company, under the Listing Rules of the FCA.

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the consolidated financial statements and our knowledge obtained during the audit, and we have nothing material to add or draw attention to in relation to:

· The directors' confirmation that they have carried out a robust assessment of the emerging and principal risks;

· The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an explanation of how these are being managed or mitigated;

· The directors' statement in the consolidated financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the group's ability to continue to do so over a period of at least twelve months from the date of approval of the consolidated financial statements;

· The directors' explanation as to their assessment of the group's prospects, the period this assessment covers and why the period is appropriate; and

· The directors' statement as to whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Our review of the directors' statement regarding the longer-term viability of the group was substantially less in scope than an audit and only consisted of making inquiries and considering the directors' process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code and considering whether the statement is consistent with the consolidated financial statements and our knowledge and understanding of the group and its environment obtained in the course of the audit.

In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the consolidated financial statements and our knowledge obtained during the audit:

· The directors' statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for the members to assess the group's position, performance, business model and strategy;

· The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and

· The section describing the work of the Audit Committee.

We have nothing to report in respect of our responsibility to report when the directors' statement relating to the company's compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors.

Tony Corbin

For and on behalf of PricewaterhouseCoopers CI LLP

Chartered Accountants and Recognised Auditor

Guernsey, Channel Islands

26 July 2021

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2021

Other comprehensive income

The other comprehensive income recognised above relates to the unrealised gain on the movement in fair valuation of the Group's portfolio of loans advanced.

There were no other items of other comprehensive income in the current or prior period.

The accompanying notes form part of these consolidated financial statements.

CONSOLIDATED STATEMENT OFINANCIAL POSITION

AS AT 31 MARCH 2021

The consolidated financial statements were approved and authorised for issue by the Board of Directors on 26 July 2021 and were signed on its behalf by:

Richard Boléat Jonathan Bridel

Chairman Chairman of the Audit Committee

The accompanying notes form part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE YEAR ENDED 31 MARCH 2021

The accompanying notes form part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 MARCH 2021

Reconciliation of movement in net debt

The accompanying notes form part of these consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2021

1. GENERAL INFORMATION

The Company is a closed-ended limited liability company incorporated under The Companies (Guernsey) Law, 2008 (as amended) with registration number 60680. The Company is a registered and closed ended investment scheme in Guernsey and admitted to trading on the London Stock Exchange's Main Market and listed on the United Kingdom Listing Authority ("UKLA's") premium segment. The Company's home member state for the purposes of the EU Transparency Directive is the United Kingdom. As such, the Company is subject to regulation and supervision by the Financial Conduct Authority, being the financial markets supervisor in the United Kingdom. The registered office of the Company is De Catapan House, Grange Road, St Peter Port, Guernsey GY1 2QG.

The Company was established to provide shareholders with sustainable and attractive levels of dividend income, primarily by way of investment in loans originated both directly through the Platforms operated by Funding Circle and indirectly, in each case as detailed in the investment policy. The Company identified Funding Circle as a leader in the growing Platform lending space with its established infrastructure, scale of origination volumes and expertise in accurately assessing loan applications.

On 21 May 2019, the Company published a circular and notice of extraordinary general meeting ("EGM") which sets out details of, and sought shareholder approval for, certain Proposals. The Proposals involved modifying the Company's Investment Objective and Policy to reflect a realisation strategy and amending its Articles to include a mechanism to enable the Company to redeem shares in the Company compulsorily so as to return cash to shareholders.

On 11 June 2019, the Proposals were approved at the EGM as discussed in detail in the Strategic Report.

The Company publishes net asset value statements on its website at www.smecreditrealisation.com.

2. Basis of preparation

a) Statement of compliance

The consolidated financial statements, which give a true and fair view, have been prepared in accordance with International Financial Reporting Standards ("IFRS") as promulgated by the International Accounting Standards Board and are in compliance with The Companies (Guernsey) Law, 2008 (as amended).

The Directors of the Company have elected to only prepare consolidated financial statements for the year under Section 244 of The Companies (Guernsey) Law 2008 (as amended).

Assets and liabilities of the Group have been presented in the Statement of Financial Position in their order of liquidity as permitted by International Accounting Standard 1, Presentation of Financial Statements.

On 5 April 2019, the Company announced that following consultation with shareholders accounting for over two thirds of the register, the Board acknowledged their preference to cease investment in new Credit Assets and commence a process to return capital in an orderly and expeditious manner with the objective of optimising returns to shareholders.

As noted above, the Company published a circular and notice of EGM which sets out details of, and sought shareholder approval for, certain Proposals. On 11 June 2019, the shareholders approved the Proposals which resulted in, amongst other things, the change to the Company's Investment Policy and Objective to achieve a managed wind-down of the Company.

Whilst the managed wind-down of the Company was approved at the EGM, there is no definite and final plan in relation to the timing of the liquidation of the Company's assets and the process of returning capital to shareholders. The Company will continue to be considered a going concern. However, this may be required to change through the course of the managed wind-down as the natural amortisation of the Company's investments in Credit Assets takes place and potentially opportunistic portfolio sales are pursued.

The Company is not in active discussion with any parties in relation to the disposal of its loan portfolios in whole or in part, and the reducing size of these portfolios through natural loan amortisation suggests that any such transaction, at least in relation to performing assets, is now unlikely. That said, the Company will continue to explore potential disposals where pricing levels are attractive.

As a result of the Company's managed wind-down and exploration of portfolio sales, for the purposes of accounting, the Company's business model was deemed to have changed from hold to collect to hold to collect and sell during the prior financial year. The Company is therefore required to report under fair value accounting for the valuation of Credit Assets from 1 April 2020. This change in methodology is discussed further in note 17.

New Accounting Standards, amendments to existing Accounting Standards and/or interpretations of existing Accounting Standards (separately or together, "New Accounting Requirements") adopted in the current year

In the Directors' opinion, all non-mandatory New Accounting Requirements are either not yet permitted to be adopted, or would have no material effect on the reported performance, financial position or disclosures of the Group and consequently have neither been adopted nor listed.

b) Basis of measurement and consolidation

These consolidated financial statements have been prepared on a historical cost basis, as modified by the valuation of derivative financial instruments and the Company's investment in the EIB transaction at fair value through profit or loss and for the period beginning 1 April 2020, the loans advanced at fair value through other comprehensive income. The methods used to measure fair value are further disclosed in note 17.

The Company owns 100% of the Profit Participating Notes issued by Basinghall and Tallis. Basinghall owns all the Profit Participating Notes issued by Queenhithe and Lambeth. Basinghall, Tallis, Queenhithe and Lambeth are all companies incorporated in the Republic of Ireland. 

The Directors believe that the Company's ownership of the Profit Participating Notes issued by Basinghall and Tallis constitute control as it exposes the Company to variability of returns from its involvement with the financial and operating activities of these entities. Lambeth and Queenhithe both transferred their portfolios of Credit Assets to Basinghall during the year for amounts equal to the outstanding amount of principal and accrued interest, with EUR 1 principal amount outstanding on the class B Notes issued. The liquidation process was still ongoing for both entities as at 31 March 2021 and any residual cash remaining after the settlement of all outstanding liabilities for each entity is payable to Basinghall. Therefore, these financial statements have been prepared on a consolidated basis. 

Intercompany transactions including intercompany gains and losses on currency translation between the Company and its subsidiaries were eliminated in the consolidation process.

c) Functional and presentation currency

These consolidated financial statements are presented in Pound Sterling, which is the functional currency of each of the entities in the Group and the presentation currency of the Group. In the Directors' opinion, Pound Sterling is the functional currency of the Company, Basinghall, Lambeth and Queenhithe because substantially all their financing and operating activities are carried out in Pound Sterling. The Directors believe that the functional currency of Tallis is Pound Sterling as its operations are carried out as an extension of the Company's operations. The Group hedges the projected cash flows from its US dollar and Euro investments such that its principal exposure is to Pound Sterling. 

d) Use of estimates and judgements

The preparation of financial statements in accordance with IFRS requires the Board to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities and income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on a quarterly basis by the Board. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years.

In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are included in the following:

Judgements

• Note 2(b) - The assumption that the Company's business model of holding Credit Assets to collect is no longer deemed appropriate. As a result of the Company's managed wind-down and potential portfolio disposals, the Company's business model has changed from hold to collect to hold to collect and sell from 1 April 2020.

• Note 2(b) - The accounting treatment of Lambeth and Queenhithe as consolidated subsidiary's based on the assessment that the Company still maintains an element of control following the transfer of the entities loan portfolios to Basinghall and still maintains the right to variability of returns from its involvement with the financial and operating activities of Lambeth and indirectly Queenhithe throughout the process of liquidation.

• Note 2(c) - Tallis has its primary assets and liabilities denominated in Euro. The Directors assessed whether the functional currency is the Euro or Pound Sterling. The subsidiary's operations are considered to be an extension of the operations of the Company and therefore the Directors believe that the appropriate functional currency for the subsidiary is Pound Sterling, the functional currency of the Company.

Estimates

• Note 2(b) - The Company has reported under fair value accounting for the valuation of Credit Assets from 1 April 2020. As of 31 March 2021 therefore, these portfolios are recognised at fair value through other comprehensive income and have been estimated by discounting future cash flows expected to be received from the Credit Assets (note 17).

• Note 3(b) - The estimation of impairment of loans require judgement based on the model set out above. During the financial year, the downside scenario was replaced by a macroeconomic scenario developed specifically for COVID-19 and consistent with portfolio modelling. Additionally, multipliers are applied to individual loan PDs such that overall gross losses for the portfolio are anchored to portfolio model expectations.

• Note 3(k) - The Directors assessed whether the Group had a single operating segment based on its original business model (origination of loans) or several operating segments based on the jurisdictions where loans were originated. After consideration of the financial information that the Board regularly reviews in making economic decisions, the Board concluded that operating segments based on jurisdiction is a more appropriate basis.

• Note 17 - The determination of fair value of the Group's investment in the EIB transaction requires estimation of future cash flows and judgement on the appropriate market discount rate to apply. The fair value of the EIB transaction has been estimated by discounting future cash flows expected from the investment (note 17).

3. Significant accounting policies

The accounting policies set out below have been applied consistently throughout the year and the prior year.

a) Foreign currencies

Transactions in foreign currencies are initially translated at the foreign currency exchange rate ruling at the date of the transaction. Monetary assets and monetary liabilities denominated in foreign currencies are retranslated to Pound Sterling at the foreign currency closing exchange rate ruling at the reporting date.

None of the Group entities have a functional currency different to presentation currency.

b) Financial instruments

i) Classification and measurement

IFRS 9 requires financial assets to be classified into the following measurement categories: (i) those measured at fair value through profit or loss; (ii) those measured at fair value through other comprehensive income; and, (iii) those measured at amortised cost. The determination is made at initial recognition. Unless the option to designate a financial asset as measured at fair value through profit or loss is applicable, the classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument.

The Group classifies its financial instruments in the following measurement categories:

The Group holds debt instruments and derivative financial instruments. Debt instruments are those that meet the definition of a financial liability from the issuer's perspective, such as the Group's loans advanced, investment in the EIB structured finance transaction and loans payable. Classification and subsequent measurement of these debt instruments depend on:

Derivative financial instruments relate to the Group's forward foreign exchange transactions that are covered in more detail later in this note.

Amortised cost

Financial assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest ("SPPI"), and that are not designated at fair value through profit or loss, are measured at amortised cost. The carrying amount of these assets is adjusted by any expected credit loss allowance measured as described below. Interest income from these financial assets is included in the 'interest income on loans advanced'.

The Group's cash and cash equivalents and other receivables are included in this category.

Fair value through other comprehensive income

Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets' cash flows represent solely payments of principal and interest, and that are not designated at fair value through profit or loss, are measured at fair value through other comprehensive income. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on the instrument's amortised cost which are recognised in profit or loss.

Reclassification of loans advanced from financial asset at amortised cost to financial asset at fair value through other comprehensive income

For financial assets, reclassification is required between fair value through other comprehensive income ("FVTOCI") and amortised cost, if and only if the entity's business model objective for its financial assets changes so its previous model assessment would no longer apply.

If reclassification is appropriate, it must be done prospectively from the reclassification date which is defined as the first date of the first reporting year following the change in business model. An entity does not restate any previously recognised gains, losses, or interest.

The Group's loans advanced have been reclassified and now fall within this category from 1 April 2020 due to the change in business model during the prior financial year. This is the first reporting year showing the loans advanced at fair value through other comprehensive income.

The fair value of the loans advanced has been estimated by discounting expected future cash flows from the loans advanced using a discount rate determined by the Directors based on appropriate market comparatives and conditions. Refer to note 17 for further information.

Disposal

On disposal of any financial asset measured at FVTOCI, any related balance within the FVTOCI reserve is reclassified to other gains/(losses) within profit or loss.

In the Directors' opinion, all other non-mandatory new accounting requirements are either not yet permitted to be adopted, or wouldhave no material effect on the reported performance, financial position or disclosures of the Group and consequently have neitherbeen adopted nor listed.

Fair value through profit or loss

Assets that do not meet the criteria for amortised cost or fair value through other comprehensive income are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognised in profit or loss within 'net income on financial asset at fair value through profit or loss'. Interest income from these financial assets is included within the same line using the effective interest rate method.

The Group's investment in the EIB structured finance transaction falls within this category and has been measured at fair value through profit or loss as this investment has exposure to returns that is affected by the profitability of the underlying SPV. The Directors believe that the contractual cash flows are not solely linked to payments of principal and interest consistent with a basic lending arrangement.

ii) Impairment of financial assets

At initial recognition, an impairment allowance is required for expected credit losses ("ECL") on financial assets measured at amortised cost and debt instruments measured at FVOCI resulting from possible default events within the next 12 months. When an event occurs that increases the credit risk of the counterparty, an allowance is required for ECL for possible defaults over the term of the financial instrument. The change in credit risk of the counterparty will also have an impact on the recognition of income on the financial asset.

The model for estimating impairment losses calculates the ECL on either a 12-month or lifetime basis depending on whether significant increase in credit risk has occurred since initial recognition or whether an asset is considered to be credit-impaired.

These metrics used to calculate the 12-month and lifetime expected credit losses are forecast for each loan for the next 12 months and to maturity, then a 12-month and lifetime expected credit loss can be calculated. These future losses are discounted at the Effective Interest Rate (EIR) individually for each loan.

Probability of default scores are not updated for individual loans post origination and thus cannot be used to indicate a significant increase in credit risk, therefore stage 2 criteria is based on loan payment performance. As a result, lifetime expected credit losses are taken as an impairment for loans which have missed a single payment within the last 6 months and are less than 91 days late.

The Group classifies that loans are 91 or more days late as credit impaired or defaulted for which lifetime expected loss is taken as an impairment charge. Stage 3 includes loans that have fallen 91 or more days late as a result of forbearance measures introduced in April 2020 as a response to COVID-19, which have not been contractually defaulted. The treatment of defaulted loans is the same as the Group's policy before adoption of IFRS 9 on 1 April 2018.

If, in a subsequent year, the amount of the default allowance decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the reversal of the previously recognised default allowance is recognised in the Consolidated Statement of Comprehensive Income.

Where a loan is not recoverable, it is written off within the related provision for loan impairment. Subsequent recoveries of amounts previously written off are reflected against the impairment losses recorded in the Consolidated Statement of Comprehensive Income.

Use of forward-looking information

Forecast Probability of Default ("PD") for loans are adjusted to take into account the current and future macroeconomic environment. This method was previously based on a modelled relationship with key macroeconomic variables, with forecasts for a base case scenario and for multiple alternative scenarios.

iii) Financial asset at fair value through profit or loss

The Group's investment in the EIB structured finance transaction has been classified as a financial asset at fair value through profit or loss. This investment has exposure to returns that is affected by the profitability of the underlying SPV. This investment is measured initially and subsequently at fair value with changes in fair value recognised in the Consolidated Statement of Comprehensive Income.

iv) Derivative financial instruments

The Group holds derivative financial instruments to minimise its exposure to foreign exchange risks. Derivatives are classified as financial assets or financial liabilities (as applicable) at fair value through profit or loss. They are initially recognised at fair value with attributable transaction costs recognised in the Consolidated Statement of Comprehensive Income when incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are recognised in the Consolidated Statement of Comprehensive Income. The fair values of derivative transactions are measured at their market prices at the reporting date.

v) Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported within assets and liabilities where there is a legally enforceable right to set-off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

vi) Derecognition of financial instruments

Financial assets, or a portion thereof, are derecognised when the contractual rights to receive the cash flows from the assets have expired, or when they have been transferred and either (i) the Group transfers substantially all the risks and rewards of ownership, or (ii) the Group neither transfers nor retains substantially all the risks and rewards of ownership and the Group has not retained control.

There may be instances when the Group renegotiates or otherwise modifies the contractual cash flows of loans to customers. When this happens, the Group assesses whether or not the new terms are substantially different to the original terms. If the terms are substantially different, the Group derecognises the original financial asset and recognises a 'new' asset initially at fair value and recalculates a new effective interest rate for the asset.

Financial liabilities and derivative financial instruments are derecognised when they are extinguished or when the obligation specified in the contract is discharged, cancelled or expired.

vii) Financial liabilities

In both the current and prior year, the Group's loans payable and accrued expenses and other liabilities are classified as subsequently measured at amortised cost. The Group does not hold any financial liabilities that meet the criteria for subsequent measurement at fair value through profit or loss.

c) Cash and cash equivalents

Cash and cash equivalents include cash at bank and in hand and highly liquid interest-bearing securities with original maturities of three months or less.

d) Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of Ordinary shares are recognised as a deduction from the proceeds.

Shares purchased by the Company during the year are held in Treasury until cancelled and formally withdrawn on a quarterly basis throughout the year.

e) Treasury shares

Treasury shares are classified as equity and are measured at cost.

f) Earnings per share

The Company presents basic and diluted earnings per share ("EPS") data for its Ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to Ordinary shareholders by the weighted average number of Ordinary shares outstanding during the year. The diluted EPS is calculated by adjusting the profit or loss attributable to Ordinary shareholders for the effects of all dilutive potential Ordinary shares. For further details, see note 13.

g) Income

Income on loans held at FVTOCI (2020: amortised cost) is recognised under the effective interest rate method, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the loan to its net carrying amount on initial recognition.

In calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees received and paid and costs borne that are an integral part of the effective interest rate and all premiums or discounts above or below market rates.

Bank interest and other income receivable are accounted for on an accrual basis.

h) Expenses and fees

Expenses are accounted for on an accrual basis and are recognised in the Consolidated Statement of Comprehensive Income.

i) Taxation

The Company is classified as exempt for taxation purposes under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 (as amended) and as such incurs a flat fee (presently £1,200 per annum). No other taxes are incurred in Guernsey.

Basinghall, Tallis, Lambeth and Queenhithe are Irish resident companies that are subject to corporation tax in Ireland at a rate of 25% on their profits.

The tax currently payable by Basinghall, Tallis, Lambeth and Queenhithe is based on the taxable profit of the companies for the year. Taxable profit differs from net profit as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the reporting date.

Deferred tax is the tax expected to be payable or recoverable on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax rates that have been enacted or substantively enacted at the Consolidated Statement of Financial Position date.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

j) Dividends payable

Dividends payable on the Company's shares are recognised in the Consolidated Statement of Changes in Shareholders' Equity when declared by the Directors or, where applicable, when approved by the Shareholders. The Directors consider declaration of a dividend on a quarterly basis, having regard to various considerations, including the financial position of the Company. The payment of any dividend by the Company is subject to the satisfaction of a solvency test as required by The Companies (Guernsey) Law, 2008 (as amended).

k) Segment reporting

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses. The Group has three operating segments based on jurisdiction: UK, US and CE.

4. LOANS ADVANCED

\* The sale of non-performing loans by Basinghall in October 2020 is included within the principal and interest collections line.

The Group predominantly made unsecured loans in previous years and prior to the modification of the Company's investment policy during the prior year. As at 31 March 2021, the carrying value of loans secured by charges over properties is nil (31 March 2020: £647,606).

Information about the gain recognised on the movement of the loans at FVTOCI and information about the methods and assumptions used in determining the fair value is provided in note 17.

Each loan has a contractual payment date for principal and interest. The Group classifies loans that are 91 or more days late as credit impaired or defaulted for which lifetime expected loss is taken as an impairment charge.

The following table shows the movement in impairment allowance during the year.

Impairment allowance has increased for the year due to an increased number of delinquencies across the Group's portfolio of loans advanced. Impairment losses increased by £11,936,141 during the year to £61,204,749.

The table below shows an analysis of the principal and interest of the loans along with the amount recognised as an impairment allowance analysed by the stages described within IFRS 9:

Stage 3 includes loans that have fallen 91 or more days late as a result of forbearance measures introduced in April 2020 as a response to COVID-19, which have not been contractually defaulted.

The table below shows an analysis of the principal and interest of the loans along with the amount recognised as an impairment allowance as at 31 March 2020:

In October 2020, Basinghall received proceeds of £2,203,183 for the sale of a pool of UK non-performing loans to a third party at a recovery rate which is consistent with historical recovery rates observed on the portfolio.

Structured Finance Transactions

In June 2016, the Company entered into a structured finance transaction with the European Investment Bank (the "EIB transaction"). The transaction involved the Company participating in the financing of an Irish domiciled special purpose vehicle ("EIB SPV"). The Company invested £25 million into the junior Class B Note issued by the EIB SPV whilst the European Investment Bank ("EIB") committed £100 million in a senior loan to the EIB SPV.

In August 2018, the Group entered into a transaction to provide lending to a special purpose vehicle, Queenhithe, which makes loans to UK small businesses. The Group, through Basinghall, provided an initial funding of approximately £9.2 million through subscription into the Class B note issued by Queenhithe. Queenhithe has been accounted for in these consolidated financial statements as a subsidiary consolidated into the results of the Group.

In November 2018, the transaction was updated whereby the Department for Business, Energy and Industrial Strategy ("BEIS") - the British Business Bank's ("BBB") sole shareholder - agreed to provide up to £150 million of funding via a senior floating rate, loan to Queenhithe.

Following the result of the EGM on 11 June 2019, the Group has ceased any further investment through Queenhithe.

The transactions entered into by the Group in respect of the structured financing arrangements for Lambeth are discussed in note 10.

5. FINANCIAL ASSET AT FAIR VALUE THROUGH PROFIT OR LOSS

The Group's financial asset at fair value through profit or loss relates to the investment in the EIB transaction.

In October 2019, one of the financial covenants in respect of the EIB transaction was breached resulting in a switch from principal proceeds being distributed pari passu between the EIB and the Company to being fully allocated to the EIB until such time as the loan with the EIB has been fully repaid or the breach is no longer continuing.

On 29 July 2020, the EIB SPV entered into an agreement with the EIB and the Company (amongst other parties) which altered the order of repayment of the principal and interest amounts due to the EIB and the Company and prioritised repayment to the EIB as senior lender. Principal and interest collections on the portfolio, net of SPV running costs, are currently being applied to repay the loan with the EIB.

As a result of resilient performance seen on the portfolio of loans held by the EIB SPV, It has been estimated that the Company will receive future cashflows from its investment in the EIB transaction and as such has resulted in a fair value gain of £5,141,217 being recognised in the consolidated statement of comprehensive income for the year (31 March 2020: loss of £6,195,281).

The calculation of the fair value is discussed in note 17.

6. SEGMENTAL REPORTING

The Group operates in the UK, US, Germany, Spain and the Netherlands. For financial reporting purposes, Germany, Spain and the Netherlands combine to make up the Continental Europe operating segment.

The measurement basis used for evaluating the performance of each segment is consistent with the policies used for the Group as a whole. Assets, liabilities, profits and losses for each reportable segment are recognised and measured using the same accounting policies as the Group.

Except for the EIB transaction, all of the Group's investments are loans to SMEs. Each individual SME loan does not generate income that exceeds 10% of the Group's total income.

The structured finance transaction and the corresponding income have been reported under the 'UK' segment below. All items of income and expenses not directly attributable to specific reportable segments have been included in 'Other income and expenses' column.

Segment performance for the year ended 31 March 2021

Segment performance for the year ended 31 March 2020

7. cash and cash equivalents

Cash equivalents are term deposits held with different banks with maturities between overnight and 90 days.

8. Derivatives

Foreign exchange swaps are held to hedge the currency exposure generated by US dollar assets and Euro assets held by the Group (see note 17). The hedges have been put in place taking into account the fact that derivative positions, such as simple foreign exchange swaps, could cause the Group to require cash to fund margin calls on those positions. The Group negotiated the terms of the contracts with each counterparty such that no collateral is required on the initial transaction and in instances of temporary negative fair value positions.

Fair value of currency derivatives

9. ACCRUED EXPENSES and other LIABILITIES

10. loanS payable

In January 2018, the Group entered into the Citibank transaction to provide lending to a special purpose vehicle, Lambeth, which makes loans to UK small businesses. Under the terms of the Senior Facility Agreement, Citibank provided £50 million into the transaction, by entering into a senior floating rate loan.

In July 2018, the Citibank transaction was amended whereby the senior loan from Citibank was increased to £66 million with a corresponding net increase to the Group's lending to Lambeth. As a result, Basinghall has increased its investments into Lambeth to keep the proportional exposure between Citibank and Basinghall.

The loan from Citibank was fully repaid by Lambeth on 11 April 2020. Total interest expense on this loan during the period was £638 (2020: £696,276). The remaining portfolio of Credit Assets held were transferred to Basinghall on 17 June 2020 for an amount equal to the outstanding balance of the Class B note in issue. In October 2020, liquidators were formally appointed and commenced proceedings to wind up Lambeth in an orderly manner. The proceedings are still ongoing as at the date of signing of these consolidated financial statements.

In August 2018, the Group entered into a transaction to provide lending to Queenhithe. The Group provided initial funding of approximately £9.2 million through subscription into the Class B note issued by Queenhithe. In November 2018, the transaction was updated whereby the Department for Business, Energy and Industrial Strategy ("BEIS") - the British Business Bank's ("BBB") sole shareholder - agreed to provide up to £150 million of funding via a senior floating rate loan to Queenhithe. The facility came with a 12-year legal maturity. As at 31 March 2021, Queenhithe has drawn £20,378,043 (2020: £20,378,043) from the facility.

Pursuant to the original loan agreement with BBB and the relevant agreement supplement signed in November 2018, the total commitment fee incurred for the year was £187,500 (2020: £837,500) with £nil (2019: £93,750) outstanding as at 31 March 2021.

On 17 August 2020, Queenhithe fully repaid the remaining amount owed on its loan with Fleetbank. The remaining portfolio of Credit Assets held were transferred to Basinghall on the same date for an amount equal to the principal and interest outstanding at 31 July 2020 being the economic cut-off date for the transaction. In December 2020, liquidators were formally appointed and commenced proceedings to wind up Queenhithe in an orderly manner. The proceedings are still ongoing as at the date of signing of these consolidated financial statements.

The loan from BBB had a floating interest rate plus a margin. Total interest expense on this loan during the year was £62,962 (31 March 2020: £334,611) with £nil (31 March 2020: £6,964) outstanding as at 31 March 2021.

11. Share capital

As at 31 March 2021, the Company has purchased a total of 43,746,667 shares (2020: 43,736,667 shares) of which nil (31 March 2020: 586,243) remain held in treasury. During the year, a total of 596,243 shares held in treasury were cancelled and formally discharged.

Following the COVID-19 pandemic and the uncertainty around its impact, the directors resolved to suspend the programme of repurchases of the Company's shares on 2 April 2020 until further notice.

The Company redeemed a total of 124,126,432 (2020: 32,245,772) shares for a total amount of £105,499,718 (2020: 30,499,833) during the year.

Rights attaching to the Ordinary share class

All shareholders have the same voting rights in respect of the share capital of the Company. Every member who is present in person or by a duly authorised representative or proxy shall have one vote on a show of hands and on a poll every member present shall have one vote for each share of which he is the holder, proxy or representative. All shareholders are entitled to receive notice of the Annual General Meeting and any other General meetings.

Each Ordinary share will rank in full for all dividends and distributions declared after their issue and otherwise pari passu in all respects with each existing Ordinary share and will have the same rights (including voting and dividend rights and rights on a return of capital) and restrictions as each existing Ordinary share.

12. taxation

The Group may be subject to taxation under the tax rules of the jurisdictions in which it invests. During the year, Basinghall, Tallis, Lambeth and Queenhithe which are consolidated into the Group's results were subject to a corporation tax rate of 25% in Ireland.

From 1 January 2020 new tax rules were applicable under the legislative changes made to the Irish Finance Act 2019. These rules included changes to the anti-hybrid and anti-avoidance rules in section 110 TCA of the legislation.

Basinghall paid class B profit participating note interest to SCRF in February 2020 totaling £1,392,467, which is considered disallowable for tax purposes in Ireland following the legislative changes discussed above and so a 25% tax charge will be levied totaling £348,117. This charge relates to the prior financial year ended 31 March 2020 and is accrued in the current period due to the timing of the completion of the impact assessment. As at 31 March 2021, this amount remains accrued and unpaid. The Group has been advised by its legal advisors that changes made to its structural arrangements have caused the relevant entity to fall outside the scope of the legislative changes discussed above with effect from 1 April 2020.

13. Earnings per share ("EPS")

The calculation of the basic and diluted EPS is based on the following information:

14. Dividends

The following table shows a summary of dividends declared during the year, and previous year, in relation to Ordinary shares and C Shares.

The Company's scrip offering programme has been discontinued from 31 March 2019.

15. Directors' remuneration and expenses

None of the Directors have any personal financial interest in any of the Group's investments other than indirectly through their shareholding in the Group.

16. FEES AND EXPENSES

Loan origination and servicing

Funding Circle UK has been appointed pursuant to the UK Origination Agreement, UK Servicing Agreement and the Services Agreement. Funding Circle US (as defined in the Prospectus) has been appointed pursuant to the US Origination Agreement and the US Servicing Agreement.