SCRF.L Regulatory News (SCRF)

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

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23 July 2019

SME Credit Realisation Fund Limited

(the "Company")

SME Credit Realisation Fund Limited (the "Company") has published its results for the year ended 31 March 2019.

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

smecreditrealisation@sannegroup.com 

+44 (0) 1481 739810

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 GG00BYYJCZ96, the SEDOL code is BYYJCZ9 and the TIDM is SCRF

The LEI number of the Company is 549300ZQIYQVNIZGOW60.

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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 2015 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 2019

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 2019 and as at 31 March 2019 unless expressly stated to cover a different period.

SUMMARY INFORMATION

About the Company

SME Credit Realisation Fund Limited (formerly Funding Circle SME Income 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 SPVs. This annual report for the year ended 31 March 2019 (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".

Capital Management

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 January 2018, the Company entered into a transaction with Citibank London ("Citibank") to establish Lambeth to make loans to UK small businesses through the Funding Circle platform. Under the terms of the agreement, Citibank provided £50 million into the transaction, by entering into a senior floating rate loan. The Group contributed a portfolio of existing UK small business loans with a value of £53,472,022.

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 additional investment by Basinghall to Lambeth was settled by transferring a portfolio of loans during the year.

In August 2018, the Group entered into a transaction to provide lending to a special purpose vehicle, Queenhithe Lending Designated Activity Company ("Queenhithe") to make loans to UK small businesses. The Group provided initial funding of approximately £9.2 million through subscription into a 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. It was originally expected that the senior loan facility would be drawn down over a period of up to 18 months, after which there would be a reinvestment period of a further 18 months before the facility began to amortise monthly, with principal repayment in relation to the Group's investment sequential to the senior loan. The facility came with a 12-year legal maturity. Following the result of the extraordinary general meeting ("EGM") as described below, the Group ceased further investment into Queenhithe and no further drawdown on the facility have been made.

As at 31 March 2019 the total number of shares in issue was 323,044,293 (excluding 11,239,500 shares held in treasury).

The Company issued scrip dividends during the year with a value of £1,667,415, involving the issuance of 1,609,898 shares (2018: £2,009,470 and 1,953,598 shares) as a result of its scrip dividend programme as described in note 14. The scrip dividend programme has been discontinued by the Company as at 31 March 2019.

 In December 2018, the Company commenced a programme of repurchases of its shares in the secondary market. As at 31 March 2019, the Company has purchased a total of 11,239,500 shares which have been and remain held in treasury.

On 21 May 2019, the Company published a circular and notice of an extraordinary general meeting ("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 below.

CHAIRMAN'S STATEMENT

Dear Shareholder,

When I wrote to you in December 2018 in respect of the financial period ended 30 September 2018, I noted that the Company had faced some significant challenges in meeting its performance targets in Q3 of that year, and that performance had continued to be negatively impacted in Q4. That performance weakness was noted as having derived from three factors; credit stress in the higher risk segments of some historic UK loan cohorts, adverse interest rate differential effects arising from the costs of hedging the US portfolio's currency exposure back to British pounds, and higher than forecasted costs from IFRS 9 modelling and the professional and administrative costs of maintaining the Company's financing structures. These three factors gave rise to a NAV total return performance in H2/2018 of -0.2%, and a full year 2018 performance of just +0.7%. 2019 performance through 30 June, being the latest date for which net asset value per share has been calculated, showed a NAV total return of +1.6% which, when stripping out the positive effects of the Company's share buyback programme, is equivalent to a performance return of +0.8%, below the guidance provided to shareholders in December 2018.

Performance Review

An analysis of the performance of the Company for the period to 31 March 2019 is set out below:

Performance is inevitably coloured by the commencement of share buybacks, but in summary exhibits very limited differences from those on which I reported in December 2018 in respect of the period to 30 September 2018. In particular, delinquencies in the historic UK cohorts have continued to drag on performance. The board continues to anticipate that, based on Funding Circle's guidance, returns for the UK portfolio will improve over time as the stressed cohorts are repaid. Both the US and Continental European portfolios performed broadly in line with the board's expectations during the period. The Company is also likely to benefit from an unwinding of the IFRS 9 provision on performing loans, as the book amortises (see below).

Response to Performance Weakness

In my previous statement, I outlined to you a number of steps that the board, in conjunction with Funding Circle, intended to take to improve the performance of the Company, including rebalancing the geographical mix away from USD-denominated assets and towards Euro-denominated assets, and implementing a share buyback programme to reduce the discount at which the Company's shares were trading in the market. I did also note, however, that these steps were likely to take some time to generate meaningfully improved performance, and I also noted that there were risks to the downside from the uncertainty faced by UK-based businesses arising from the continuing delay in the finalisation of the form that the UK's exit from the EU will ultimately take.

Subsequent to the publication of the Company's interim financial statements in December 2018, I had the opportunity, alongside the team at Funding Circle, to speak to a number of the Company's investors, both institutional and private. Those interactions were extremely helpful in understanding concerns and aspirations that investors had for their holdings in the Company, and it became clear that there was limited appetite in allowing the Company's performance improvement steps to take effect, given the likely time period involved and the continuing risk to the performance of the portfolio from geopolitical factors. Consequently, the Company published an announcement on 5 April 2019 to the effect that it would shortly make certain Proposals to shareholders which, if passed, would result in the Company ceasing new investment, entering a managed wind-down to return capital to shareholders before ultimately being liquidated. A circular to all shareholders was published on 21 May 2019 setting out these matters, with the consequential meeting of shareholders being convened for 11 June 2019. At that meeting, the Proposals were overwhelmingly approved, and thus post year end, the Company has entered a managed wind-down.

Implementation of Shareholder Resolutions

In the circular to shareholders, I explained how the managed wind-down would work if shareholders voted to approve it. I have nothing further to add to what was said in that circular in that respect, and investors wishing to refresh their memories should re-examine the circular which appears in the Investor Relations section of the Company's website at https://www.smecreditrealisation.com/documents/investor-relations. Since the passing of the shareholder resolutions, the share buyback programme has been reinstituted to seek to provide a degree of market liquidity for investors wishing to sell their shares alongside generating accretion to net asset value arising from purchasing of shares at a discount to that metric. The board intends to continue to purchase shares in the market on an ongoing basis for these purposes.

In addition, the Company has engaged with Funding Circle and its other professional advisors to consider how best to return capital to shareholders as the Company's portfolio of loans is repaid. Investors will note that in the Company's latest factsheet, the portfolio maturity analysis indicates that only 25% of the portfolio is due to fully mature by the end of 2021, with the balance continuing to mature progressively until H1/2024. It makes sense, therefore, for the Company to examine whether it is possible to sell all or part of its portfolio to third parties in order to return capital at earlier dates. The necessary planning and data preparation process is already under way, and it is expected that price discovery will commence formally later this year. Any decision to move forward with portfolio sales will be governed by a strict and objective analysis of the value of any offer that the Company may receive by reference to the value that the Company, and thus shareholders, would otherwise derive from allowing the relevant credit assets held by the Company to amortise naturally over time, taking account of the risks and uncertainties that inevitably arise from an extended run-off period. The Company will report meaningful progress with this initiative as appropriate in due course. To the extent that the Company does not generate cash by way of portfolio sales, surplus liquidity arising from the repayment of the Company's credit assets will be paid to shareholders by way of a compulsory redemption of shares at the then prevailing net asset value per share as published by the Company from time to time. Investors should note that the Company has resolved, with immediate effect, to move to quarterly publication of net asset values, and thus the next net asset value to be reported to shareholders will be that for the period to 30 September 2019.

Conclusion

The process to give effect to the Company's revised strategy of returning capital is now well under way. Please take a moment to read the strategic report in these audited consolidated financial statements for more background as to the consequences and risks of the capital return programme. Investor interaction has been very helpful in shaping the direction of travel for the Company as it has faced performance challenges and will continue to provide valuable calibration to the board as the programme continues. Investors are reminded that they can email the Chairman directly at Richard.Boleat@smecreditrealisation.com. It has been an intensive period of work for the board, its advisors and the Funding Circle team and I thank them for their tireless hard work and guidance.

RICHARD BOLÉAT

Chairman of the Board of Directors

23 July 2019

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 SMEs with its established infrastructure, scale of origination volumes and expertise in accurately assessing loan applications.

On 5 April 2019, the Company announced that, following consultation with shareholders accounting for over two thirds of the share 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.

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 of Incorporation (the "Articles") to include a mechanism to enable the Company to redeem shares in the Company compulsorily so as to return cash to shareholders.

The Proposals also included the appointment of Funding Circle Global Partners Limited ("FCGPL") to facilitate potential portfolio sales on behalf of the Company and the change of the name of the Company into SME Credit Realisation Fund Limited ("SCRF") consistent to the proposed modification of the Company's Investment Objective and Policy.

On 11 June 2019, these Proposals were approved at the EGM that enabled the Directors 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.

Prior to the EGM, the Company had been purchasing its own shares in the secondary market. The Company announced on 19 June 2019 that, in light of the weakness in the Company's share price, the Board reserved the right to recommence share repurchases in the secondary market to the extent that liquidity is available to do so, and has conducted certain share repurchases since that time.

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.

The Investment Objective and Policy applicable prior to the approval of the Proposals was set out in the prior year Annual Report and also appended to the circular published on 21 May 2019. The revised Investment Objective and Policy is set out below.

"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 will be affected 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.

The Company will not allocate new 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.

Any cash received by the Company as part of the realisation process prior to its distribution to shareholders will be held by the Company as cash on deposit and/or as cash equivalents.

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

As at 31 March 2019, the Company held indirect investments in loans through the following investing companies:

*From January 2017, Tallis discontinued further lending to Spain. The Company retains a small portfolio of loans in Spain.

Investment Objective and Policy

Loans by geographical region

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

Industry split

Loans acquired by Basinghall, Tallis and the EIB SPV (subject to the investment policy, any Portfolio Limits and Available Cash) are 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 are funded in part by Basinghall.

The assets held by each of Basinghall, Tallis, Lambeth, Queenhithe and the EIB SPV are ring-fenced from other entities or special purpose vehicles and there is no cross-collateralisation between special purpose vehicles 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. The Company's leverage ratio, taking into account the EIB transaction on a "look through" basis, was approximately 49% as at 31 March 2019 which is within the Board's approved leverage limit of 50%.

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.

Principal Risk and Risk Management

There are a number of actual and potential 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 implementation of the managed wind-down.

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 has established a risk matrix, consisting of the key risks and 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 assessment of the principal risks 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 challenges 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.

In addition to the principal risks considered above, the Board also considers other key operational risks as part of its ongoing risk monitoring process.

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 reports from its principal external service providers. The Board may request a report on the operational effectiveness of controls in place at the 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 ("negative carry").

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.

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.

On 21 May 2019, the Company published a circular and notice of 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 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 this Strategic Report above.

The Board considered the following as the key performance indicators of the Group's financial performance before the change in the Company's Investment Objective and Policy:

·; Share price total return

·; NAV total return

·; Share price premium or discount to NAV

·; Capital deployed

·; Dividend per share

·; Credit losses

The Board notes that some or all of the key performance indicators used in the past will no longer be relevant now that the Company has started the process of the managed wind-down.

A review of the above key metrics utilised by the Board to measure and monitor the performance of the Company are summarised below for reference. As noted above, the key performance indicators may be revised in future financial reporting in line with the change in the Company's Investment Objective and Policy.

Total return and share price premium/(discount)

For the period from inception to 31 March 2019, the total return on the ordinary share price was -0.3% and the NAV total return was 15.0%. The ordinary share was trading at a discount of 10% to NAV per ordinary share as at 31 March 2019.

Capital deployed

As at 31 March 2019, the Company had deployed 93% of the issued capital in direct and indirect loans to SMEs in the UK, US and CE.

In accordance with the Company's investment policy, the Company holds sufficient cash for working capital purposes. 

In respect of the EIB transaction, the Group's indirect investment in loans within the unconsolidated Irish domiciled SPV has been included in the below asset allocation on a look through basis, as if the loans were held directly by the Group.

Asset allocation

Dividend per share

The Board declared dividends during the year totalling 4.25 (2018: 6.50) pence per Ordinary share.

In June 2018, after careful review of the effects to the total return of the material increase in hedging costs on the Company's USD-denominated assets and the leverage employed, the Company provided revised forward dividend guidance for the next 12 months, being annual dividends of, in aggregate, 5 to 6 pence per Ordinary share with effect from the quarter ended 30 September 2018 then subsequently paid annualised dividends in line with this guidance up to 31 December 2018.

In March 2019, the Company confirmed that there was no change in dividend guidance and confirmed the intention to maintain a dividend payment of 5.25 pence per share on an annualised basis in respect of at least the period ended 31 March 2020, even if partially uncovered.

As discussed above and note 14, the Company discontinued its scrip dividend programme as at 31 March 2019.

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.

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 in respect of at least the period ended 31 March 2020, which may be partially uncovered by income. 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.

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

Credit losses

The Board carefully monitors the level of defaults arising within the Group's portfolio. The credit loss provision as at 31 March 2019 was £36.6m (including the cumulative effect of IFRS 9 adoption of £6.6m) against outstanding principal and interest amounts of the loan portfolio of £340.2m (31 March 2018: provision of £8.4m against an outstanding principal and interest amounts of the loan portfolio of £330.6m).

Implementation of IFRS 9

The Group formally adopted IFRS 9 from 1 April 2018. The implementation of IFRS 9 led to a net decrease in the opening retained earnings position of £2.3m and a net decrease in profit for the year of £3.3m, as a result of required accounting adjustments. A more detailed analysis of the effect of the adoption of IFRS 9 is provided in note 2 to the consolidated financial statements. 

Viability Statement

Following the result of the EGM in June 2019, the Company's Investment Objective and Policy were updated to facilitate the managed wind-down of the Company. The Directors consider that a period of three years is a reasonable timeframe for making an assessment of the Company's viability taking into account the process of achieving the managed wind-down.

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

§ Asset devaluation.

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 securities which can be sold to meet funding requirements if necessary. The viability analysis includes a review of higher level defaults, realisable values and higher expenses. The Company maintains a risk register to identify, monitor and control risk concentration. In addition, overall credit and economic conditions are monitored to provide insight with respect to potential warnings on adverse changes at a macroeconomic level. In particular, the Directors highlight the uncertainties facing the UK and the EU as they continue negotiations over the United Kingdom's withdrawal from the European Union and the impact these may have on defaults within the Group's existing loan portfolio.

The Directors confirm that they have a reasonable expectation that 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.

DIRECTORS' REPORT

The Directors present their annual report and audited consolidated financial statements for the year ended 31 March 2019. 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 registered as a 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 loss for the year, determined under International Financial Reporting Standards ("IFRS"), amounted to £0.59 million (2018: comprehensive income of £17.24 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 in respect of at least the period ended 31 March 2020, which may be partially uncovered by income. Dividends declared during the year are disclosed in note 14.

Business review

The Group formally adopted IFRS 9 from 1 April 2018. The implementation of IFRS 9 led to a net decrease in the opening retained earnings position of £2.3m and a net decrease in profit for the year of £3.3m.

The Citibank transaction was amended and restated in July 2018 whereby the Senior Loan from Citibank was increased to £66 million with a corresponding net increase to the Group's lending of £17m.

In August 2018, the Group entered into a transaction to provide lending to a special purpose vehicle, Queenhithe, to make loans to UK small businesses. The Group provided initial funding of approximately £9.2 million through subscription into a 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.

In December 2018, the Company commenced repurchases of the Company's shares in the secondary market. As at 31 March 2019, the Company had purchased a total of 11,239,500 shares which have been held in treasury.

On 21 May 2019, the Company published a circular and notice of 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 Strategic Report includes further information about the Company's principal activities, financial performance during the year and indications of likely future developments.

Going concern

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

Whilst the managed wind-down of the Company was approved at the EGM, 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. As a result, the Directors continue to present the consolidated financial statements on a going concern basis.

The Directors expect that the Company will have to revisit the basis of preparation, classification and measurement of its assets and liabilities in line with the revised Investment Objective and Policy in due course, as discussed in the Strategic Report.

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 purpose 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"), cover the disclosures required by AIFMD. The Directors highlight the changes to the Company's Investment Objective and Policy as noted above.

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 well as with due regard to the Company's investment restrictions set out in the Company's Prospectus. 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.

Directors

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

Phillip Hyett, who is Head of Funds at Funding Circle, acts 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 below.

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 2019, the Directors 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 Limited.

Substantial shareholdings

As at 31 March 2019, 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.

Acquisition of Company's own shares

As noted above, the Company commenced repurchases of the Company's shares in the secondary market in December 2018. As at 31 March 2019, the Company had purchased a total of 11,239,500 shares which have been held in treasury.

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.

Auditor

PricewaterhouseCoopers CI LLP ("PwC") served as auditor during the financial year and has expressed its willingness to continue in office. A resolution to re-appoint PwC as 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 Third Floor, La Plaiderie Chambers, La Plaiderie, St Peter Port, Guernsey GY1 1WG, Channel Islands until 1 April 2019 on which date the registered office of the Company Secretary changed to De Catapan House, Grange Road, St Peter Port, Guernsey GY1 2QG.

By order of the Board

Authorised Signatory

Sanne Group (Guernsey) Limited, Company Secretary

CORPORATE GOVERNANCE REPORT

The Company became a member of the Association of Investment Companies ("AIC") in November 2015 and has applied the AIC Code from that date.

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 2019 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 Limited. 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 below 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 Company does not have a policy on length of service of Directors. The Board has not stipulated a maximum term of any directorship.

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 carries out a formal evaluation process on an annual basis. The Directors complete self-assessment forms which are reviewed and discussed with the Chairman. The Senior Independent Director performs an annual review of the Chairman's performance. The Directors carry 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 will be 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 approximately 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 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 10 Board meetings held during the financial year ended 31 March 2019. The attendance record of each of the Directors was as follows:

There were 4 Risk Committee meetings, 5 Audit Committee meetings, 2 Management Engagement meetings and 2 Remuneration and Nominations Committee meetings held during the financial year ended 31 March 2019. Phillip Hyett attended 2 Board meetings as alternate to Sachin Patel during the year.

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.

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 amortised cost;

§ 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 below.

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-year 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 2019, the following significant risks were considered by the Audit Committee as they are most relevant to the nature of the Group's business:

§ Impairment and carrying values of loans advanced

The measurement of loans advanced is in accordance with the accounting policy set out in note 3 of the consolidated financial statements. A formal policy has been developed by the Board using data provided by Funding Circle to estimate the impairment on loans. The Audit Committee regularly reviews this policy and the underlying loan models and has satisfied itself as to the impairment and carrying values of loans advanced in the consolidated financial statements. The Company revised the impairment policy from 1 April 2018, following the adoption of IFRS 9 (see note 2 to the consolidated financial statements).

§ Fair value estimation of the EIB transaction

The estimation of the fair value of the Group's investment in the EIB transaction presented as a financial asset at fair value through profit or loss in the Consolidated Statement of Financial Position is an area that requires estimation and exercise of judgement (see note 5 and 17 of the consolidated financial statements).

§ 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.

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 above. 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 2019 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 2019 significant risks were identified in relation to impairment and the carrying values of loans advanced, fair value estimation of the EIB transaction 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 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 2019, 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 Partner, and assesses their independence on an annual basis. The external auditor is required to rotate the Audit Engagement Partner responsible for the Company's audit every five years. The current Audit Engagement Partner has been in place since appointment for the period ended 31 March 2016 and is considered to be independent. The Audit Committee will engage with the external auditor to ensure an effective rotation of the Audit Engagement Partner during the fifth year of appointment. 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 2019 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 £300,870 (2018: £227,439) for their audit and non-audit services rendered for the year ended 31 March 2019. The Committee assessed whether PwC should be appointed in relation to certain transaction 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 2019:

* This includes £15,000 paid to PwC UK for assistance with the implementation of IFRS 9.

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 2020, 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 2019 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

23 July 2019

DIRECTORS' REMUNERATION REPORT

The Board has established a Remuneration and Nominations Committee which met three times 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:

\* The annual fee for Richard Burwood includes £5,000 director's fee for each of Tallis Lending Designated Activity Company, Basinghall Lending Designated Activity Company and Queenhithe Lending Designated Activity Company.

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 2019 was as follows:

*Director's fee waived

Richard Burwood is also a Director of Basinghall, Tallis and Queenhithe. The total remuneration to the Directors disclosed in the above table excludes £7,376 (2018: £23,576) representing Director's 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 2019 each of Richard Boléat, Jonathan Bridel, and Richard Burwood had a share interest in the Company, in the form of 5,000 (2018: 5,000) Ordinary shares, representing 0.0015% (2018: 0.0024%) interest in voting rights. Frederic Hervouet had a share interest in the Company in the form of 107,000 (2018: 107,000) Ordinary shares, representing 0.0330% in the voting rights as at 31 March 2019 (2018: 0.0522%). There have been no changes to the shares held by the Directors up to the date of this report.

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

23 July 2019

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 adopted 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

23 July 2019 23 July 2019

INDEPENDENT AUDITOR'S REPORT

TO THE MEMBERS OF SME CREDIT REALISATION FUND LIMITED

Report on the audit of the consolidated financial statements

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Our opinion

In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of SME Credit Realisation Fund Limited (formerly Funding Circle SME Income Fund Limited) (the "Company") and its subsidiaries (together "the Group") as at 31 March 2019, 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.

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What we have audited

The Group's consolidated financial statements comprise:

● the consolidated statement of financial position as at 31 March 2019;

● 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 a summary of significant accounting policies.

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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.

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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.

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Our audit approach

Context

Our audit of the Group for the year ended 31 March 2019 was planned and executed having considered the key activities of the Group during the year, including a transaction entered into by the Company to provide lending to a special purpose vehicle, Queenhithe Lending Designated Activity Company ("Queenhithe"), which will make loans to UK small businesses. Our assessment is that the primary operations of the Group remained largely unchanged from the prior year up until 31 March 2019.

The Group formally adopted IFRS 9 on 1 April 2018 and as a result, from the date of this adoption, the Group was required to estimate the expected credit loss allowances on its portfolio of loans advanced and to measure its investment in the EIB transaction. Our overall audit approach in terms of scoping and key audit matters was therefore largely focused on the valuation of loans advanced reported at amortised cost and the valuation of the investment in the EIB transaction which is held as a financial asset at fair value through profit or loss.

Post year-end, 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 credit assets as well as potential, opportunistic portfolio sales. This did not have a significant impact on the consolidated financial statements for the year ended 31 March 2019 and the Group is still considered to be a going concern.

Overview

Audit scope

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.

We tailored the scope of our audit in order to perform sufficient work to enable us to provide 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 all 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.

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Materiality 

The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They 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 the consolidated financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the consolidated financial statements as a whole.

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £346,000, as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

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Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters 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.

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 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 identified above 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 in this regard.

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Responsibilities of the directors for the consolidated financial statements

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 relating 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.

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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.

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. 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. For example, the terms on which the United Kingdom may withdraw from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the Group and the wider economy.

● 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.

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Report on other legal and regulatory requirements

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.

We have nothing to report in respect of the following matters which we have reviewed:

● the directors' statement set out above in relation to going concern. As noted in the directors' statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the consolidated financial statements. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the directors intend it to do so, for at least one year from the date the consolidated financial statements were signed. As part of our audit we have concluded that the directors' use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group's ability to continue as a going concern;

● the directors' statement that they have carried out a robust assessment of the principal risks facing the Group and the directors' statement in relation to the longer-term viability of the Group. Our review 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 UK Corporate Governance Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit; and

● the part of the Corporate Governance Statement relating to the parent Company's compliance with the ten further provisions of the UK Corporate Governance Code specified for our review.

This report, including the opinion, 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 this opinion, 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.

Nicholas John Vermeulen

For and on behalf of PricewaterhouseCoopers CI LLP

Chartered Accountants and Recognised Auditor

Guernsey, Channel Islands

23 July 2019

Other comprehensive income

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

The Notes below form part of these consolidated financial statements.

The consolidated financial statements were approved and authorised for issue by the Board of Directors on 23 July 2019 and were signed on its behalf by:

Richard Boléat Jonathan Bridel

Chairman Chairman of the Audit Committee

The Notes below form part of these consolidated financial statements.

The Notes below form part of these consolidated financial statements.

The Notes below form part of these consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2019

1. GENERAL INFORMATION

The Company is a closed-ended limited liability company registered under The Companies (Guernsey) Law, 2008 (as amended) with registered number 60680. The Company is a registered collective investment scheme in Guernsey and its shares are listed on the premium segment of the London Stock Exchange's Main Market for listed securities. 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 was Third Floor, La Plaiderie Chambers, La Plaiderie, St Peter Port, Guernsey GY1 1WG, Channel Islands until 1 April 2019 on which date the registered office changed to 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 as also discussed in note 20.

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

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") and are in compliance with The Companies (Guernsey) Law, 2008 (as amended).

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

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, there may be consequential changes in the Company's future accounting policies following the adoption of the Proposals, which may impact the methodology of the valuations of its assets and liabilities.

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

IFRS 9 - "Financial Instruments" (Replacement of IAS 39 - "Financial Instruments: Recognition and Measurement") - effective for accounting periods beginning on or after 1 January 2018.

The Group adopted IFRS 9 in its consolidated financial statements for the year beginning on 1 April 2018. The accounting policies of the Group have been updated to comply with the requirements of IFRS 9 for the purpose of preparing these consolidated financial statements. As permitted by the transitional provisions of IFRS 9, the Group elected not to restate comparative figures. The key changes from the adoption of IFRS 9 are set out below:

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.

From 1 April 2018, 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.

Financial assets

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 loans advanced 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.

The Group does not have any financial asset that falls within this category.

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 reclassified from amortised cost financial assets to financial assets 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.

Impairment

IFRS 9 replaced the "incurred loss" model in IAS 39 with an "expected credit loss" model in the measurement of impairment loss. The overall effect of the change from IAS 39 to IFRS 9 is that the assessment of impairment loss is intended to be more forward looking under IFRS 9. At initial recognition, an impairment allowance is required for expected credit losses ("ECL") 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 to the recognition of income on the financial asset.

The following table summarises the changes in ECL and basis of interest income recognition based on the 'stage' of the financial assets.

The impairment requirements of IFRS 9 apply to the Group's loans and receivables. The Board has built a custom model for estimating impairment losses that complies with the requirements of IFRS 9. The model calculates the ECL on either a 12-month or lifetime basis depending on whether a significant increase in credit risk has occurred since initial recognition or whether an asset is considered to be credit-impaired. 12-month and lifetime expected credit losses are calculated based on three metrics:

1. Probability of Default ("PD") - this is the likelihood of a default event, estimated for each loan at origination. The lifetime PD is calculated by applying a term structure to the 12 month PD determined at origination. The term structure is derived from historical observed data on each of the loan portfolios.

2. Loss Given Default ("LGD") - the expected loss for each loan in the event of default, based on historic recovery experience.

3. Exposure At Default ("EAD") - the expected future outstanding balance of the loan in the event of default, taking in to account contractual amortisation and historic prepayments.

These metrics 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.

Credit risk is not monitored on individual loans post origination, instead the collective performance of loans against expectations at origination on a vintage level is monitored. As a result, lifetime expected credit losses are taken as a portion of each cohort anticipated to be in stage 2 and a weighted average ECL is calculated. Lifetime expected credit losses are also taken as an impairment for loans delinquent by more than 30 days.

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. The treatment of defaulted loans is the same as the Group's policy before adoption of IFRS 9 which was disclosed in the last annual consolidated financial statements.

Use of forward-looking information

Forecast PD for loans are adjusted to take in to account the current and future macroeconomic environment based on a modelled relationship with key macroeconomic variables. This is forecast for a base case scenario and for multiple alternative scenarios.

Impact of IFRS 9 adoption to the Group's assets, liabilities and financial performance

Taking into account the effect of the reclassification of the Group's investment in the structured finance transaction and adoption of the new impairment model, the implementation of IFRS 9 led to a net decrease in the opening balance of retained earnings of £2,342,862 and net decrease in profit for the period of £3,279,350. There have been no significant changes in estimation techniques made during the reporting period.

The table below summarises the effect of adoption of IFRS 9 to the opening balance of the following accounts in the Group's consolidated financial statements:

IFRS 15 "Revenue from Contract with Customers" -- effective for accounting periods commencing on or after 1st January 2018

The Company's adoption of IFRS 15 had no material impact on the recognition and measurement of income in the consolidated financial statements. The Company's revenue from loans advanced is solely collection of principal and interest which are in scope of IFRS 9.

Financial liabilities

In both the current and prior period, the Group's loans payable 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.

Derivative financial instruments

The Group's derivative financial instruments continue to be accounted for at fair value through profit or loss.

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.

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 at fair value. The methods used to measure fair value are further disclosed in note 17.

The Company owns all the Profit Participating Notes issued by Basinghall Lending Designated Activity Company ("Basinghall"), Tallis Lending Designated Activity Company ("Tallis") and Queenhithe Lending Designated Activity Company ("Queenhithe"), companies incorporated in the Republic of Ireland. 

Basinghall retains substantially all of the risks and rewards of the underlying portfolio of the loans transferred to Lambeth. The Directors believe that the Company's ownership of the Profit Participating Notes issued by Basinghall, Tallis and Queenhithe and the substantial retention of the risks and rewards on the underlying loan portfolio held by Lambeth constitute control as it exposes the Company to variability of returns from its involvement with the financial and operating activities of these entities. 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, the 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 the 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 the 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 at least on an annual basis except for the estimates used in the calculation of the fair value of the EIB transaction which is reviewed on a regular basis consistent to the frequency of the NAV reporting. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

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:

• Note 2(b) - The assumption that the Company's business model of holding credit assets to collect is still deemed appropriate as at year end. This assumption will be reassessed in future financial periods.

• Note 2(b) - The accounting treatment of Lambeth and Queenhithe as consolidated subsidiaries based on the assessment that the retention of substantially all of the risks and rewards on the underlying portfolio of loans sold by Basinghall to each of Lambeth and Queenhithe is deemed to constitute control as it exposes the Group to variability of returns from its involvement with the financial and operating activities of Lambeth and Queenhithe.

• Note 2(c) - One of the subsidiaries 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.

• Note 3(b) - The estimation of impairment of loans require judgement based on the model set out above. In relation to the investment in notes issued by the Irish SPVs (see note 4), the receipt of and estimated timing of scheduled and unscheduled repayments of loans advanced in the Irish SPV and the impact on the carrying value and interest income of the notes.

• Note 3(k) - The Directors assessed whether the Group had a single operating segment based on its business model (origination of loans) or several operating segments based on the jurisdictions where loans are 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 estimation of fair values of the Group's loans and receivables require estimation of revised cash flows and judgement on the appropriate market interest rate to apply. The fair value of the EIB transaction has been estimated by discounting future cash flows from the investment (note 17). The Directors considered that a discounted cash flow model using appropriate market interest rates at the reporting date would not result in any material difference to the amortised cost amount reported for loans and receivables on the Consolidated Statement of Financial Position.

3. Significant accounting policies

The accounting policies set out below have been applied consistently throughout the year and the prior year except for the impact of adoption of IFRS 9 which became effective from 1 April 2018.

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) Loans advanced

Loans advanced are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans advanced are recognised when the funds are advanced to borrowers or when the agreements with the borrowers have been completed.

Loans advanced are measured at amortised cost using the effective interest method, less any impairment. The effective interest method calculates the amortised cost by allocating all relevant cash flows over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the loans to the net carrying amount on initial recognition.

ii) Impairment of financial assets

At initial recognition, an impairment allowance is required for expected credit losses ("ECL") 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 to the recognition of income on the financial asset.

The model built by the Board 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.

Credit risk is not monitored on individual loans post origination, instead the collective performance of loans against expectations at origination on a vintage level is monitored. As a result, lifetime expected credit losses are taken as a portion of each cohort anticipated to be in stage 2 and a weighted average ECL is calculated. Lifetime expected credit losses are also taken as an impairment for loans delinquent by more than 30 days.

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 treatment of defaulted loans is the same as the Group's policy before adoption of IFRS 9 which was disclosed in the last annual consolidated financial statements.

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

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 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.

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 issued under the scrip dividend scheme are recognised at the reference price. The calculation of the reference price is disclosed in more detail in note 14.

Shares purchased by the Company during the year are held in Treasury.

e) Treasury shares

Treasury shares are classified as equity.

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 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 accruals basis.

h) Expenses and fees

Expenses are accounted for on an accruals 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 Continental Europe.

4. LOANS ADVANCED

The Group predominantly made unsecured loans in previous periods and prior to the modification of the Company's investment policy subsequent to the year end. As at 31 March 2019, the carrying value of loans secured by charges over properties is £2,254,567 (31 March 2018: £5,453,709).

Each loan has a contractual payment date for principal and interest. The Group considers a loan as past due when the borrower's repayment has not been received for at least 30 days from the scheduled payment date. A loan is classified as defaulted when the borrower's repayment is late by 91 or more days.

The following table shows the movement in impairment allowance during the year. The Group has not restated the prior year comparative balance but has adjusted the opening retained earnings position by £2,342,862 consists of 1) £3,319,601 decrease due to the additional impairment allowance as shown in the table below and 2) £976,739 increase due to the fair value movement of the financial asset at fair value through profit or loss that would have been recognised in the prior year had the comparative balances been restated as shown in note 2.

The total impairment allowance charged for the current year to the Consolidated Statement of Comprehensive Income of £24,847,832 consists of: 1) £21,568,482 impairment allowance for the current period calculated based on the accounting policies before adoption of IFRS 9; and 2) £3,279,350 increased impairment charge in the current period due to the effect of adoption of IFRS 9.

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:

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 2018. As noted above, the Group did not restate the prior year amounts to take into account the new impairment model under IFRS 9:

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 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. It was expected that the senior loan facility would be drawn down over a period of up to 18 months, after which there would be a reinvestment period of a further 18 months before the facility began to amortise monthly, with principal repayment in relation to the Group's investment sequential to the senior loan. The facility came with a 12-year legal maturity.

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. This was previously classified as loans advanced measured at amortised cost. As disclosed in note 2, the investment in the EIB transaction has been reclassified to financial asset at fair value through profit or loss following adoption of IFRS 9. 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 Group ceased originating loans in Spain from January 2017.

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 small and medium-sized entities ("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 2019 identified as Alternative Performance Measures ("APM")

With IFRS 9 impact

As disclosed in note 2, the Group adopted IFRS 9 during the year. The most significant impact of IFRS 9 was the recognition of impairment losses on loans advanced as soon as they are issued. This means that increased levels of lending will generally increase the amount of impairment loss recognised compared to the accounting policies before adoption of IFRS 9.

Comparative segmental information without IFRS 9 impact has been presented below to aid in evaluating the financial performance of each segment.

Without IFRS 9 impact

Segment performance for the year ended 31 March 2018

Segment assets and liabilities as at 31 March 2018

The Company is domiciled in Guernsey whilst Basinghall, Tallis, Lambeth and Queenhithe are domiciled in Ireland. The Group incurred net loss of £3,498,426 (2018: net income of £4,382,029) as a result of the EIB transaction during the year. All other income was earned from SME borrowers in the UK, US and CE.

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

The amount payable for loans committed but not yet funded represents funds not released to borrowers but for which fully executed loan agreements are in place. The Group has acquired the rights to principal and interest repayments for these loans and these are therefore included in the loans advanced with a corresponding liability recognised for funds to be released to the borrowers.

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 additional investment by Basinghall to Lambeth was settled by transferring a portfolio of loans during the year.

During the year, the senior loan from Citibank has entered its amortisation period and the partial payments to Citibank were made in accordance with the original Senior Facility Agreement.

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 2019, Queenhithe has drawn £17,741,424 from the facility.

The Group, with the assistance of the Administrator and Funding Circle, monitors certain covenants under the terms of the agreement with Citibank. The most material covenants relate to the default levels on the portfolio and allocation limits on credit risk bands of the loans. There has been no breach of such covenants during the period.

The loan from Citibank bears a floating interest rate plus a margin. Total interest expense on this loan during the year was £1,517,953 with £78,982 outstanding as at 31 March 2019. The loan has a termination date of 107 months from the closing date on 17 January 2018.

The loan with BBB bears a floating interest rate plus a margin. Total interest expense on this loan during the year was £81,503 with £17,238 outstanding as at 31 March 2019.

11. Share capital

In May 2018, the Company's Ordinary shares held in Treasury (the "Treasury shares") were made available to meet market demand from existing and new investors. The sale price per Treasury share was 102.20p, representing a discount of 2.2% to the Ordinary share price as at close of trading on 30 April 2018 and a premium to the estimated NAV per Ordinary share of 2-3%, which included a provision for IFRS 9 adjustments.

The Company issued scrip dividends during the year amounting to £1,667,415 and 1,609,898 shares (2018: £2,009,470 and 1,953,598 shares). In December 2018, the Company commenced repurchases of the Company's shares in the secondary market. As at 31 March 2019, the Company has purchased a total of 11,239,500 shares which have been held in treasury.

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.

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 scrip dividend shares were issued on 30 April 2018.

In prior year, the Board offered ordinary shareholders a choice to receive dividends in cash or in shares via a scrip dividend programme. Under the programme, the number of shares issued is determined by using a Reference Share Price determined as the higher of (i) the prevailing average of the middle market quotations of the shares derived from the Daily Official List of the London Stock Exchange for the ex-dividend date and the four subsequent dealing days and (ii) the prevailing net asset value per share.

The scrip offering programme has been discontinued as at 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.

Funding Circle Nederlands B.V. ("Funding Circle Netherlands") has been appointed pursuant to the Dutch Origination Agreement and the Dutch Servicing Agreement. Funding Circle Espana SLU ("Funding Circle Spain") has been appointed pursuant to the Spanish Origination Agreement and the Spanish Servicing Agreement. Funding Circle CE GmbH ("Funding Circle CE") has been appointed pursuant to the German Origination Agreement and the German Servicing Agreement. Each of Funding Circle Netherlands and Funding Circle Spain has agreed to designate Funding Circle CE as sub-contracting agent for the purposes of their respective Origination Agreements and Servicing Agreements.

The Group does not pay Funding Circle any fees on the initial origination of loans. 

Funding Circle UK is entitled to receive loan servicing fees equal to 1 per cent. per annum, calculated daily, on the aggregate outstanding principal balance of the portfolio of loans held by each of Basinghall and Lambeth excluding any loans which have been charged off as defined in the Servicing Agreement. Servicing fees to Funding Circle UK of £1,963,510 were incurred during the year (2018: £1,341,481). Servicing fees outstanding as at 31 March 2019 were £190,281 (2018: £234,731).

FCGPL is also entitled to receive fees under the Services Agreement at an annual rate of 0.1 per cent. of net asset value of the Group. This fee accrued from the date on which the Group made investments in respect of loans in an amount equal to 80 per cent. of the gross IPO issue proceeds of £150 million. During the year ended 31 March 2019, £323,643 (2018: £239,338) was incurred under the Services Agreement. Corporate servicing fees outstanding as at 31 March 2019 was £190,281 (2018: £26,453).

Funding Circle US is entitled to receive loan servicing fees equal to 1 per cent. per annum, calculated daily, on the aggregate outstanding principal balance of the portfolio of loans held by the Company which have been originated in the US excluding any loans which have been charged off as defined in the Servicing Agreement. Servicing fees to Funding Circle US of £1,081,279 were incurred during the year (2018: £749,060). Servicing fees outstanding as at 31 March 2019 were £70,617 (2018: £90,639).

Funding Circle Netherlands is entitled to receive loan servicing fees equal to 1 per cent. per annum, calculated daily, on the aggregate outstanding principal balance of the portfolio of loans held by Tallis excluding any loans which have been charged off as defined in the Servicing Agreement. 

Funding Circle Spain is entitled to receive loan servicing fees equal to 1 per cent. per annum, calculated daily, on the aggregate outstanding principal balance of the portfolio of loans held by Tallis excluding any loans which have been charged off as defined in the Servicing Agreement. 

Funding Circle Deutschland GmbH is entitled to receive loan servicing fees equal to 1 per cent. per annum, calculated daily, on the aggregate outstanding principal balance of the portfolio of loans held by Tallis excluding any loans which have been charged off as defined in the Servicing Agreement. 

Funding Circle CE receives servicing fees for Funding Circle Netherlands, Funding Circle Spain and Funding Circle Deutschland GmbH as per the sub-contracting agency agreement. Servicing fees to Funding Circle CE during the year amounted to £406,348 (2018: £123,302). Servicing fees outstanding as at 31 March 2019 were £90,318 (2018: £15,978).

Each of the Funding Circle entities is entitled to additional fees of up to 40 per cent. of collections received on charged off assets under each of the relevant Services Agreement in reimbursement of costs incurred in respect of collection charges and external legal fees. No such additional fees were charged to the Group during the current year or the prior year.

Administration, company secretarial and cash management

Sanne Group (Guernsey) Limited ("Sanne Guernsey") has been appointed as Administrator to the Company pursuant to the Administration Agreement. The Administrator also acts as Company Secretary and Cash Manager of the Company.

Sanne Guernsey is entitled to receive an annual fee equal to five basis points of the net asset value of the Group subject to a minimum amount of £85,000 (2018: £85,000). Administration fees of £204,796 were incurred during the year (2018: £229,343). There were no administration fees outstanding as at 31 March 2019 and 2018.

Sanne Capital Markets Ireland Limited ("Sanne Ireland") has been appointed as Administrator to Basinghall, Tallis and Lambeth and is entitled to receive an annual fee for each entity of £58,000 (2018: £45,000). Administration fees of £208,227 were incurred during the year (2018: £87,470) (including fees for additional work performed). There were no administration fees outstanding as at 31 March 2019 and 31 March 2018.

Intertrust Management Ireland Limited ("Intertrust Ireland") has been appointed as Administrator to Queenhithe and is entitled to receive an annual fee of £23,000. Administration fees of £35,865 were incurred during the year. The total administration fees outstanding as at 31 March 2019 was £7,253 (2018: £nil).

Registrar

Link Asset Services (the "Registrar") has been appointed as the Company's Registrar to undertake maintenance of the statutory books of the Company and to perform such related activities as are required to carry out the registrar function. The Registrar is entitled to an annual maintenance fee per shareholder subject to a minimum charge of £4,500 (2018: £4,500) per annum. Registrar service fees of £45,375 were incurred during the year (2018: £57,336). Registrar service fees outstanding as at 31 March 2019 amounted to £2,565 (2018: £nil).

Currency management fee

Record Currency Management Limited has been appointed as currency manager. The currency manager is entitled to fees calculated based on the GBP equivalent amount of the US Dollar and EUR denominated exposure being hedged within the Group's portfolio. Fees of £123,283 were incurred during the year (2018: £74,657). Fees outstanding as at 31 March 2019 amounted to £29,895 (2018: £nil).

Audit, audit related and non-audit related services

Remuneration for all work carried out for the Group by the statutory audit firm in each of the following categories of work is disclosed below: