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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Gcp Asset Backed Income Fund Limited | LSE:GABI | London | Ordinary Share | JE00BYXX8B08 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 68.60 | 68.60 | 69.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Trust,ex Ed,religious,charty | 15.18M | 7.69M | 0.0181 | 37.90 | 291.98M |
From Apr 2019 to Apr 2024
TIDMGABI TIDMGABC
RNS Number : 7137G
GCP Asset Backed Income Fund Ltd
19 March 2020
GCP Asset Backed Income Fund Limited
("GCP Asset Backed" or the "Company")
LEI 213800FBBZCQMP73A815
Annual report and financial statements for the year ended 31 December 2019
19 March 2020
The Directors of the Company are pleased to announce the Company's annual results for the year ended 31 December 2019. The full annual report and financial statements can be accessed via the Company's website at www.graviscapital.com/funds/gcp-asset-backed/literature and will be posted to shareholders over the course of the next few weeks.
For further information, please contact:
Gravis Capital Management Limited:
+44 (0)20 3405 8500
David Conlon
Dion Di Miceli
Investec Bank plc: +44 (0)20 7597 4000
Helen Goldsmith
Denis Flanagan
Neil Brierley
Buchanan/Quill: +44 (0)20 7466 5000
Helen Tarbet
Sarah Gibbons-Cook
Henry Wilson
GCP Asset Backed Income Fund Limited
Annual report and financial statements for the year ended 31 December 2019
ABOUT THE COMPANY
GCP Asset Backed Income Fund Limited is a listed investment company which focuses predominantly on investments in UK asset backed loans.
The Company seeks to provide shareholders with attractive risk-adjusted returns through regular, growing distributions and modest capital appreciation over the long term.
The Group is currently invested in a diversified portfolio of asset backed loans across the social infrastructure, property, energy and infrastructure, and asset finance sectors, located predominantly in the UK.
The Company is a closed-ended investment company incorporated in Jersey. The Company has a premium listing on the Official List of the FCA with its shares admitted to trading on the Premium Segment of the Main Market of the LSE since 23 October 2015.
At 31 December 2019, its market capitalisation was GBP479.1 million. The Company is a constituent of the FTSE All-Share Index.
At a Glance - 31 December 2019
Hot Features
Premium
2017 2018 2019
--------------------------- ------ ------ -------
Market capitalisation GBPm 328.3 397.1 479.1
Value of investments GBPm 261.8 378.4 453.9
Dividends for the year p 6.05 6.35 6.45(1)
Ordinary share price p 103.50 104.50 108.50
NAV per ordinary share p 100.85 101.74 102.33
Profit for the year GBPm 14.0 21.6 28.0
--------------------------- ------ ------ -------
Highlights for the year
- Dividends of 6.45(1) pence per share in respect of the year, including a special dividend of 0.25 pence, ahead of the target of 6.20 pence per share. The dividend was fully covered by basic EPS of 6.81 pence.
- Total shareholder return(2) for the year of 10.2% (31 December 2018: 9.1%) and an annualised total shareholder return since IPO(2) of 8.3%.
- Profit for the year of GBP28.0 million, up from GBP21.6 million in the prior year.
- NAV per ordinary share of 102.33 pence at 31 December 2019 increasing from 101.74 pence in the prior year.
- Gross proceeds of GBP63.3 million were raised during the year through a placing of ordinary shares in June 2019.
- Exposure to a diversified, partially inflation and/or interest rate-protected portfolio of 45 asset backed loans with a third party valuation of GBP453.4 million at 31 December 2019.
- Loans of GBP89.4 million advanced against 29 projects with a further GBP40.3 million secured against five projects, advanced post year end.
1. Includes a dividend of 1.55 pence per share for the quarter to 31 December 2019, which was paid post year end.
2. Alternative performance measure - refer below for definitions and calculation methodology.
Alex Ohlsson, Chairman, commented:
"I am pleased to report that the Company has once again delivered against its objectives, growing its NAV and exceeding its dividend target for the fourth consecutive year. The Company has paid a fully covered dividend of 6.45 pence per share and generated a total shareholder return(1) for the year of 10.2%.
The Investment Manager's focus on assets that are integral to society continues to deliver a strongly performing portfolio for the Group. The portfolio comprises 45 loans, 94% of which are secured against physical assets offering strong downside and capital protection. The remainder of loans are secured against contracted cash flows with robust underlying contractual protection in place.
Events continue to unfold in regards to Coronavirus (COVID-19) and the Investment Manager is maintaining close dialogue with borrowers to understand any impact on the portfolio. All borrowers, including the operators of the care home, nursery and student accommodation assets within the portfolio have been following the guidance issued by the UK Government and have put appropriate protections in place. To date there has been no impact on the Company's cashflows as a result of the spread of the virus."
1. Alternative performance measure - refer below for definitions and calculation methodology.
INVESTMENT OBJECTIVES AND KPIs
The Company's purpose as a closed--ended investment company is to meet its investment objective, which is to generate attractive risk--adjusted returns through regular, growing distributions and modest capital appreciation over the long term.
ATTRACTIVE RISK ADJUSTED
RETURNS REGULAR, GROWING DISTRIBUTIONS CAPITAL APPRECIATION
To provide shareholders
with returns that are
attractive with regard To provide shareholders To achieve modest appreciation
to the level of risk with regular, growing in shareholder value
taken. dividend distributions. over the long term.
------------------------------ ------------------------------
KEY PREFORMANCE INDICATORS
The Company's ordinary
shares were trading at
108.50 pence per share
The Company exceeded at the year end. The
its dividend target of Company's NAV growth
The Company has generated 6.20 pence for the year continues to be predominantly
an annualised total shareholder ended 31 December 2019 driven through the excess
return(1) since IPO of and has grown its dividend cash flows the Company
8.3%. year-on-year. generates.
10.2% 6.45p 108.50p
Total shareholder return(1) Dividends in respect Ordinary share price
for the year of the year at 31 December 2019
31 December 2018: 9.1% (31 December 2018: 6.35p) (31 December 2018: 104.50p)
41%
8.2% Percentage of portfolio
Weighted average annualised by value with inflation 6.0%
yield(1) on investment and/or interest rate Premium to ordinary share
portfolio protection NAV at 31 December 2019
(31 December 2018: 8.0%) (31 December 2018: 46%) (31 December 2018: 2.7%)
------------------------------ ------------------------------
Further information on Company performance can be found below.
1. Alternative performance measure - refer above for definitions and calculation methodology.
PORTFOLIO AT A GLANCE
Portfolio of 45 asset backed loans with an average life of six years which are partially inflation and/or interest rate protected. The loans fall within the following sectors and are secured predominantly against assets and cash flows in the UK:
PROPERTY
- 15 loans within sector - GBP205.0m - 45%
SOCIAL INFRASTRUCTURE
- 16 loans within sector - GBP174.1m - 38%
ENERGY AND INFRASTRUCTURE
- 9 loans within sector - GBP48.8m - 11%
ASSET FINANCE
- 5 loans within sector - GBP25.5m - 6%
SENIOR RANKING SECURITY
61%
SECURED AGAINST PHYSICAL ASSETS
94%
UK EXPOSURE
85%
CHAIRMAN'S STATEMENT
The Company exceeded its dividend target for the fourth consecutive year by way of the payment of a fully covered dividend of 6.45 pence. The Company generated a total shareholder return(1) of 10.2%.
Introduction
The Company's investment objective is to generate attractive risk-adjusted returns through regular, growing distributions and modest capital appreciation over the long term. Capital preservation is a fundamental part of this and a key investment driver of the Board and the Investment Manager. The sustainability of the Company depends on the ability to protect its capital base whilst delivering stable and attractive risk--adjusted returns. I am pleased to report that the Company has once again delivered against these objectives, growing its NAV and exceeding its dividend target for the fourth consecutive year.
The Investment Manager's focus on assets that are integral to society continues to deliver a strongly performing portfolio for the Group. The portfolio comprises 45 loans, 94% of which are secured against physical assets offering strong downside and capital protection. The remainder of loans are secured against contracted cash flows with robust underlying contractual protection in place.
The Board and Investment Manager remain highly vigilant to the risks of investing in asset backed loans, noting the issues experienced in the sector during the year and additionally that the Group had to address its first problem loan. The Investment Manager has retained its disciplined approach to investing and continually seeks to enhance its investment monitoring and reporting processes across all areas of the Group. The Board believes that these steps will ensure the Company is well placed to continue to deliver for investors.
Financing
The Company raised GBP63.3 million through a placing in June 2019. This issuance enabled the Group to repay its drawn RCF and take advantage of a range of attractive opportunities, whilst benefiting shareholders through greater portfolio diversification and enhancing the market liquidity of the Company's ordinary shares.
The valuation of investments increased during the year to GBP453.9 million from GBP378.4 million at 31 December 2018, with the largest single asset exposure reducing to 4.8% of total assets.
The Company has in place an RCF of GBP50 million with RBSI. This is used prior to the issuance of new shares, with funds being substantially invested prior to a capital raise to minimise any deployment risk and cash drag. The Board believes the use of the facility optimises the cash position and is a benefit of the maturity and strong track record of the Company.
Post year end, the GBP10 million short-term facility was extended to mature in August 2020 in line with the existing tranche of the RCF.
Investments
During the year, the Group advanced GBP89.4 million in the form of 29 investments, 19 new and ten follow-on transactions, improving the diversification and risk profile of the portfolio. All new investments were consistent with the Group's standard investment approach.
In March 2019, the Group experienced a default on a loan which was secured against specific assets in ringfenced companies and represented 0.7% of the portfolio at the time of default. The companies were part of a wider group which experienced financial difficulties. As a result of these issues, the loan was revalued downwards by GBP0.6 million. The Group has an exclusivity agreement in place for the sale of the Project Company and post period end it exchanged with the buyer on a sale and purchase agreement. It is anticipated that the sale will complete in Q2 2020 pending regulatory approval from Ofgem. The Group also intends to dispose of one other securitised asset, a grid entry unit, from the same group. The Investment Manager expects the recovery from the sale of both assets to be slightly higher than the current carrying value. In light of the lessons learned on this loan, the Investment Manager has updated its lending requirements.
The focus remains on financing assets and contracted cash flows supported by a structural demand for the goods and services provided. The Group invests using a project finance, 'covenant--heavy' approach to debt (read more below). The Board believes this method along with a stringent borrower selection process contribute significantly to the strength of the loan portfolio.
Whilst the interest rate environment remains low, the Board is aware that the attractiveness of investments is sensitive to rate changes. As a result, the Group has sought partial inflation and/or interest rate protection where possible and has achieved this on approximately c.40% of investments by value.
Post period end, the Group received a repayment on two of its co-living investments, along with a prepayment fee of c.GBP1 million. The Group was able to immediately recommit GBP53 million to the same borrower group in a larger facility of up to GBP140 million alongside Deutsche Bank for a term of up to four years. This increased facility is to support the borrower's pipeline of projects and is the Group's first co-lending transaction, demonstrating the evolution of the Company as lender.
NAV, share price performance and share repurchase
At the year end, the net assets of the Company were GBP451.8 million. The NAV per ordinary share increased from 101.74 pence at 31 December 2018 to 102.33 pence at 31 December 2019.
The Company's ordinary shares have traded at a premium to NAV throughout the year, with an average premium of 5.6%. At 31 December 2019, the ordinary share price was 108.50 pence, representing a premium to NAV of 6.0%.
Recent market volatility has had an impact on the Company's share price post year end, which the Board is monitoring closely. The Group currently has c.GBP9 million of cash available (excluding its RCF). As announced today, the Company has used some of these funds to repurchase shares as the share price discount to NAV offers value to shareholders.
Dividend policy
The Company paid dividends in respect of the financial year of 6.45 pence per ordinary share (including a special dividend of 0.25 pence), exceeding its target dividend of 6.20 pence for the year and continuing its stated aim of growing its dividend year-on-year.
Governance and compliance
The Board recognises the importance of a strong corporate governance culture and continues to maintain principles of good corporate governance as set out in the AIC Code. Refer below for further details.
Board appointment
The Directors are delighted to welcome Marykay Fuller to the Board, who was appointed as a non--executive Director of the Company on 6 November 2019. Marykay is a banking and finance professional with 30 years' experience in debt and equity markets.
Market outlook
The Board and Investment Manager note the impact of the Coronavirus (COVID-19) and the disruption that this outbreak is having on supply chains and the overall economy. As a result of the impact of Coronavirus (COVID-19), the Investment Manager will be slowing down pipeline activities and ensuring investments are only made into new projects which are of a high quality and demonstrate significant downside protection. At the end of the year the Group had a significant pipeline with a value of c.GBP100 million. The Group will be working with the borrowers to extend the investment deadlines of these transactions where possible to ensure that investments occur at an optimal and more certain time.
Key risks
Political and regulatory risks are inherent in any UK focused business at present. At the time of writing, the full impact of Brexit remains uncertain. Aside from the macro-economic impact, there is the risk of an increase in operating costs for certain of the Group's borrowers as well as implications for the free movement of labour from the EU to the UK.
Across the loan portfolio, the Group has exposure to UK house prices. The Board closely monitors activity in the market and its current view on the UK property market remains stable. The Board believes the fundamentals remain relatively strong and the continued demand versus supply dynamic provides comfort against a significant correction of prices. The Group's loan portfolio has a large degree of inbuilt protection due to being advanced against an average LTV of c.60%.
The Group has one fully hedged non-Sterling loan, representing less than 1% of the portfolio by value. Any increased volatility in currency markets should have a limited impact on the profitability of the Company.
The Board and the Investment Manager are cognisant of these risks and continue to carry out stress testing on loans during the structuring process to ensure they remain viable in a variety of possible scenarios. To date the Board and the Investment Manager have not seen any negative impact across the borrower portfolios.
At the time of writing, events continue to unfold in regards to Coronavirus (COVID-19) and the Investment Manager is maintaining close dialogue with borrowers to understand any impact on the portfolio. All borrowers, including the operators of the care home, nursery and student accommodation assets within the portfolio have been following the guidance issued by the UK Government and have put appropriate protections in place. To date there has been no impact on the Company's cash flows as a result of the spread of the virus. Further details can be found below.
Corporate social responsibility
The Board believes that a commitment to strong principles of corporate social responsibility should be embedded within and complement all investment decisions. The Group intends to continue supporting borrowers who have a positive impact on society. Fundamentally, the Investment Manager believes that such positive impact enhances the security of the portfolio and enables the Company to back transactions that are integral to society.
Alex Ohlsson
Chairman
18 March 2020
1. Alternative performance measure - refer below for definitions and calculation methodology.
For more information, please refer to the strategic report below.
Strategic overview
The Company's investment objective is to generate attractive risk-adjusted returns through regular, growing distributions and modest capital appreciation over the long term.
The Group will at all times invest and manage its assets in a manner which is consistent with the objective of spreading investment risk.
Investment objective
The Company's investment objective is to generate attractive risk-adjusted returns through regular, growing distributions and modest capital appreciation over the long term.
Investment policy
The Company seeks to meet its investment objective through a diversified portfolio of investments which are secured against, or comprise, contracted, predictable medium to long-term cash flows and/or physical assets. The Company's investments will predominantly be in the form of medium to long-term fixed or floating rate loans which are secured against cash flows and/or physical assets which are predominantly UK based.
The Company's investments will typically be unquoted and will include, but not be limited to, senior loans, subordinated loans, mezzanine loans, bridge loans and other debt instruments. The Company may also make limited investments in equities, equity-related derivative instruments such as warrants, controlling equity positions (directly or indirectly) and/or directly in physical assets.
The Company will at all times invest and manage its assets in a manner which is consistent with the objective of spreading investment risk.
Investment restrictions
The Company observes the following investment restrictions:
- any single investment, or any investments with a single counterparty, will be limited to 20% of the gross assets of the Company;
- investments in equities and equity-related derivative instruments, including controlling equity positions and any direct investments in physical assets, will be limited to 10% of the gross assets of the Company;
- no more than 20% of the gross assets of the Company will be used to finance investments outside the UK; and
- the Company will not invest in other listed closed-ended funds.
The limits set out above shall all apply as at the time of investment, as appropriate.
Structure of investments
The Company currently anticipates that it will make investments directly or indirectly through one or more underlying special purpose vehicles which will typically be wholly owned by the Company and over which the Company will exercise control as regards investment decisions. The Company may from time to time invest through vehicles which are not wholly owned by it. In such circumstances, the Company will seek to secure controlling rights over such vehicles through shareholder agreements or other legal arrangements.
In the event of a breach of the investment restrictions set out above, the Investment Manager shall inform the Directors upon becoming aware of the same and if the Directors consider the breach to be material, notification will be made to a regulatory information service.
No material change will be made to the investment policy without the approval of shareholders by ordinary resolution.
Non-financial objectives of the Company
The key non-financial objectives of the Company are:
- to maintain strong and positive working relationships with all stakeholders, including shareholders and borrowers; and
- to promote the development of emerging asset backed sectors by developing financial products that match the requirements of these sectors.
Key policies
Borrowing and gearing policy
The Company may, from time to time, use borrowings for investment purposes, to manage its working capital requirements or in order to fund the market purchase of its own shares. Gearing, represented by borrowings, will not exceed 25% of NAV, calculated at the time of borrowing.
Hedging and derivatives
The Company may invest through derivatives for investment purposes and efficient portfolio management. In particular, the Company may engage in interest rate hedging or otherwise seek to mitigate the risk of interest rate changes as part of the Company's efficient portfolio management.
Investments will be denominated primarily in Sterling. However, the Company may make limited investments denominated in currencies other than Sterling, including US Dollars, Euros and Australian Dollars. In the event of the Company making such investments, the Investment Manager will use its judgement, in light of the Company's investment policy, in deciding whether or not to effect any currency hedging in relation to any such investments. In addition, the Company may do so where the Investment Manager considers such hedging to be in the interests of efficient portfolio management and may utilise derivative instruments to seek to achieve this. The Company will not engage in currency trading for speculative purposes.
Any use of derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the remainder of the Company's investment portfolio and will be subject to the investment restrictions described above.
Dividend policy
The Company pays dividends on a quarterly basis, with dividends typically declared in January, April, July and October and paid in or around February, May, August and November in each financial year.
The Company offers a scrip dividend alternative to shareholders and currently anticipates that it will continue to do so.
Conflicts of interest
Where there is any overlap for a potential investment with GCP Infra, GCP Infra has a right of first refusal over such investment.
In the event that the Investment Manager or any directors, officers or employees of the Investment Manager are directly or indirectly interested in any entity or asset in relation to any investment proposal, the potential investment is presented to the Board for its approval. Further details can be found below.
BUSINESS MODEL
The Group invests in a diversified portfolio of asset backed loans to provide regular, growing distributions and modest capital appreciation over the long term.
INVESTMENT INVESTMENT IMPLEMENTATION OF INVESTMENT MEASUREMENT Sustainability
SECTOR OBJECTIVES STRATEGY
Independent Strong governance
Board
------------------- ------------------ ------------------- ------------------ -------------------
Attractive Investment Manager Annualised ENVIRONMENTAL
risk adjusted LOAN ORIGINATION OPERATIONAL total shareholder AND SOCIAL
returns AND EXECUTION MANAGEMENT return(1)
To provide The Group invests The operations since IPO Read how
shareholders in asset backed of the Company was 8.3%. the Company's
with returns loans utilising are delegated activities
that are the Investment to the Investment 10.2% benefit the
attractive Manager's Manager who Total shareholder environment
with regard expertise maintains a return(1) and contribute
to the level and a proven robust control for the year to society
of risk track record environment in the
taken. in loan and undergoes sustainability
originating an internal section below.
and monitoring. controls review
The Group is from an external
able to provide audit provider
bespoke lending on an annual
solutions where basis.
traditional
lenders cannot
due to reasons
other than credit
quality.
------------------- ------------------ ------------------- ------------------ -------------------
ASSET BACKED Regular, FINANCIAL RISK MANAGEMENT The Company GOVERNANCE
LOANS growing MANAGEMENT The Company has exceeded
distributions The Company operates a its dividend Read how
Predetermined, To provide operates a robust risk target for the Company
asset backed shareholders disciplined management the year is governed
cash flows with regular, approach to and mitigation and increased and the activities
growing capital raising, process along its dividend of the Board
dividend only increasing with active year-on-year. during the
distributions. its capital controls monitoring year in the
when it has and stress 6.45p governance
a highly testing procedures. Dividends section below.
executable The Investment in respect
pipeline of Manager is of the year
investments. appointed as
The Company AIFM to the
uses hedging Company and
where appropriate is responsible
to manage foreign for the management
exchange exposure. of risk alongside
The Company's the Board.
dividends are
fully covered
by earnings
for the year.
------------------- ------------------ ------------------- ------------------ -------------------
Capital THIRD PARTY ADVISORY AND The shares FINANCIAL
appreciation SERVICE PROVIDERS ADMINISTRATION have traded
To achieve at a premium Read about
modest appreciation to NAV throughout the Company's
in shareholder the year. financial
value over performance
the long 6.0% and dividend
term. Premium to cover in
ordinary the financial
share NAV review and
at year end its long-term
viability
below.
------------------- ------------------ ------------------- ------------------ -------------------
1. Alternative performance measure - refer below for definitions and calculation methodology.
INVESTMENT MANAGER'S REPORT
The Company's target market remains underserviced by mainstream lenders and therefore presents an opportunity for generating attractive risk-adjusted returns.
The market
Asset backed lending
Asset backed lending is an approach to structuring investments used to fund infrastructure, industrial or commercial projects and asset financing. Asset backed lending relies on the following to create security against which investment can be provided:
- the intrinsic value of physical assets; and/or
- the value of long-term, contracted cash flows generated from the sale of goods and/or services produced by an asset.
Asset backed lending is typically provided to a Project Company, a corporate entity established with the specific purpose of owning, developing and operating an asset. Financing is provided to the Project Company with recourse solely to the shares held in, and assets held by, that Project Company.
Cash generation to service loans and other financing relies on the monetisation of the goods and/or services that a Project Company's assets provide. Lenders implement a security structure that allows them to take control of the Project Company and its assets to optimise the monetisation of goods and/or services associated with such assets if the Project Company has difficulties complying with its financing terms.
Typically, an asset backed lending structure involves a number of counterparties, who enter into contractual relationships with the Project Company that apportion value and risk through providing services (e.g. operations and maintenance) associated with the development, ownership and/or operations of an asset. In structuring an asset backed loan, the Project Company will seek to ensure risks (and associated value) are apportioned to those counterparties best able to manage them. This ensures the effective pricing and management of risks inherent in the asset. Further, it also means the residual risks (and potential rewards) being taken by the Project Company are well understood by the parties providing finance to such company.
The benefits associated with asset backed investments
Investment in asset backed loans offers relatively secure and predictable returns to their lenders, when compared with general corporate or unsecured lending. Further, the reduction since 2007 in the availability of mainstream debt (primarily from banks) has created the potential for more attractive pricing on debt investments, particularly where such investments have been originated and structured to accommodate the borrowers' specific requirements. In particular, where borrowers may not have access to mainstream financing for reasons other than the creditworthiness of the relevant proposition, such as loan size, tenure, structure or an understanding of the underlying cash flows and/or asset, attractive rates are available for those willing to commit the resource, innovation and time to understanding and identifying a solution for a specific borrower's requirements.
A key benefit arising from the Investment Manager's approach to asset backed lending is transparency. A loan secured against a specific asset (within a Project Company established specifically for that asset) is capable of analysis broadly by reference to a set of known variables such as:
- how an asset generates cash flow; - its current value; - expected future value; - the competence of its service providers; and
- the availability of alternative parties in the event of a failure by one or more service providers.
The need to fully understand the risks associated with a given asset and structure arrangements with experienced service providers to effectively manage those risks requires specialist skills and resources. For this reason, the Company's target market remains underserviced by mainstream lenders and therefore offers an attractive risk--adjusted return for parties with relevant experience and access to the required resources.
'Covenant-heavy' loans
The Group enters into its asset backed loans using a 'covenant-heavy' approach to lending. This is an approach to structuring and documentation that focuses on borrower needs but requires borrowers to meet well defined and specific performance measurements. The covenants restrict how a special purpose vehicle can be operated and gives the lender a significant level of control over the business.
This structure differs from the 'cov-lite' loans, which are becoming more common in larger asset based lending transactions. A 'cov-lite' structure is more borrower friendly and will often allow the borrower to structure the business in a way it determines without consultation or consent from the lenders.
Some of the key differences in the two structures include:
Project Company activity 'Cov-lite' 'Covenant-heavy'
------------------------ ------------------------------ --------------------------
Incur new debt Borrower allowed automatically Only with specific consent
if certain conditions of lender
are met
------------------------ ------------------------------ --------------------------
Pay dividends Allowed once an EBITDA Only with consent and
test or income test met subject to look forward
ratios
------------------------ ------------------------------ --------------------------
EBITDA add backs Ability to add certain No add back abilities
costs back to EBITDA
to ensure profitability
tests are met
------------------------ ------------------------------ --------------------------
Dispose of assets Ability to move assets No ability to move assets
outside the secured group without consent
------------------------ ------------------------------ --------------------------
Refinancing of debt Often allowed to refinance Limited refinance ability
subject to consent and
fees
------------------------ ------------------------------ --------------------------
The Group continues to see significant benefits in its project finance lending approach. These benefits can be achieved through the continuation of the Group's strategy of targeting asset classes that are sub-optimal for mainstream lenders, due to size and maturity of sector.
Outlook
The Investment Manager notes the current economic climate with regard to Coronavirus (COVID-19) and the impact that this will have on the wider economy, potential supply chains and ability of business to meet contractual obligations. With this in mind and after discussion with the Board, the Investment Manager will be looking to slow down its rate of deployment into new investments.
The Group has cash available at present as well as access to its RCF facility, which expires in August 2020 and can be extended for a further twelve months. The Group remains well capitalised and has the capacity to fund any attractive deals that may arise. However, the Investment Manager is mindful that these transactions would need to meet additional downside sensitivities to see them through the current environment.
The Investment Manager continues to work on an attractive pipeline of opportunities with both new and existing borrowers. The pipeline transactions mirror the current portfolio in terms of yield, size and sectors.
In the coming months, the Investment Manager will be working with existing and new borrowers to ensure deadlines on transactions are well managed and are met.
All potential borrowers working on pipeline transactions with the Group will be conscious of the risks involved in starting new projects given the disruption from the Coronavirus (COVID-19) outbreak. Therefore, whilst the Investment Manager is not anticipating significant deterioration in the pipeline overall, some transactions are likely to fall away or be delayed. The Investment Manager remains confident that new opportunities will become available and that the Group will be able to deploy available funds efficiently in the future once the market readjusts.
Investment pipeline
The Investment Manager maintains a pipeline of potential investments on behalf of the Group. At the end of the year, the pipeline represented c.GBP100 million of new opportunities.
The Investment Manager continues to focus on borrowers and sectors where there is potential to complete follow-on transactions. This enables the Investment Manager to obtain significant sector knowledge and enhanced confidence over the certainty of its pipeline, ensuring new capital raised and capital returned to the Company is deployed efficiently.
Currently c.70% of the pipeline consists of transactions with existing borrowers; these transactions can be scheduled to complete on a timetable which matches the repayment profile of existing loans, ensuring capital remains efficiently deployed.
TARGET SECTOR UPDATES
SOCIAL INFRASTRUCTURE
Assets that include student accommodation, housing for vulnerable adults, homes for the elderly, nurseries and urban regeneration
38%
Percentage of portfolio by value
GBP174.1m
Valuation of sector within the portfolio
This sector provides a core element of the Group's investments. Social infrastructure as a sector is long--term in nature and requires significant amounts of upfront due diligence to determine the quality and long-term structural demand position for the asset.
Due diligence includes analysis of existing market participants, the potential future competitive landscape, demand demographics, affordability and legislative impact. The Investment Manager is targeting areas where demand for an asset is both:
- not supported by existing infrastructure; and - where structural issues exist that present barriers to entry for future competitors.
The sector has continued to perform strongly for the Group, with the care homes that were under development now open, enjoying excellent reviews and being nominated and awarded several design awards. The performance and valuation uplift that has been achieved on these assets demonstrates that the Group's strategy of targeting experienced borrowers is key to building a portfolio of high--quality, performing loans.
The Investment Manager is delighted to have backed a high-quality nursery group in the year who have two operational assets and one asset under construction. Both operational assets are fully occupied with significant waiting lists. The nurseries themselves are best in class, as demonstrated by the outstanding rating given by Ofsted to the first nursery in the group.
The Investment Manager continues to target follow-on transactions with existing borrowers whilst capitalising on the accumulated knowledge and sectoral experience it has developed.
The Investment Manager continues to see significant opportunities in the student accommodation and nursery sectors. Over the coming year the Investment Manager expects to see a number of student accommodation facilities refinance as assets are completed. To date, developments in the UK are ahead of schedule and expected to open in the summer of 2020. The Australian borrower has emerged as the largest owner and operator of student accommodation in Australia, with c.GBP5 billion of assets and c.13,500 beds under operation.
This sector includes loans secured against assets located in the UK (28%), Europe (5%) and Australia (5%).
TARGET SECTOR UPDATES
ENERGY AND INFRASTRUCTURE
Assets that produce or manage energy and/or process waste
11%
Percentage of portfolio by value
GBP48.8m
Valuation of sector within the portfolio
The Investment Manager continues to seek out opportunities that have a strong sustainability angle, whilst providing core asset protection. This sector remains highly competitive, though to mitigate against this, the Investment Manager continues to seek to gain a foothold by taking smaller positions with borrowers who have growth potential.
The Group's investment in an operating CNG station business has been a big success, with demand substantially exceeding original projections. Although the loan remains small at c.GBP1.6 million, the Investment Manager is actively working with the business to refinance a number of their other facilities, as well as fund new facilities which meet the Company's financing criteria.
The existing CNG fuel station has displaced 5.4 million litres of diesel fuel over the last year with 100% renewable waste-derived biomethane. Biomethane emits 60% less CO(2) than diesel, meaning the trucks contribute significantly to lowering CO(2) emissions.
The recycling facility that the Group has lent to has continued to perform well, diverting over 90,000 tonnes of waste from landfill in 2019 and significantly contributing to the UK Government's resources and waste targets. This is approximately the average capacity of 7,000 rubbish trucks.
The Investment Manager is keen to complete further transactions with both of these borrowers, recognising the positive impact these investments are having on the environment.
The Investment Manager is actively looking at new asset classes and structures, including solutions for electric vehicle charging, which in the UK needs significant capital expenditure to meet the growth in demand.
This sector includes loans secured against assets in the UK only.
TARGET SECTOR UPDATES
ASSET FINANCE
Assets that generate long-term, regular cash flows
6%
Percentage of portfolio by value
GBP25.5m
Valuation of sector within the portfolio
Asset finance continues to be the sector where there is less obvious need for the bespoke funding solutions offered by the Group. The core elements of the sector continue to be well serviced by specialist and mainstream lenders and often at rates lower than the Group's cost of capital.
Notwithstanding the above, the Group continues to seek opportunities for controlled deployment of capital. The Investment Manager continues to see value in securing long--term management contracts in sectors which are easily understood, simple to perform and generate strong underlying profits, such as rooftop solar panel O&M servicing and boiler servicing.
The Investment Manager is looking at a number of new areas in this sector, including the financing of football transfer fees and royalties where there are strong contractual protections in place. The Investment Manager believes these areas have the ability to meet the Company's return and risk requirements and, therefore, the Investment Manager is looking to closely engage with the specialist arrangers in these areas. The opportunity is arising in these areas as the volumes are increasing and the traditional funders are struggling to keep up with demand.
This sector includes loans secured against assets located in the UK (5%) and Europe (1%).
TARGET SECTOR UPDATES
PROPERTY
Assets that include financing for property purchases or development and co-living spaces
45%
Percentage of portfolio by value
GBP205.0m
Valuation of sector within the portfolio
The Investment Manager has identified niche areas of the property market which remain underserved by mainstream lenders.
The Investment Manager continues to have significant success in generating robust and secure property exposures. The bridging and development portfolio continues to perform strongly, with the Group's underlying arrangers originating high-quality transactions. The Group continues to fund co-living assets and the Investment Manager views these as a significant and attractive new asset class. The existing borrower's flagship site in London's Canary Wharf opened at the end of 2019, offering over 700 beds on either a short stay or long stay basis.
The Group benefited this year from a repayment of a mezzanine funding line provided to a buy--to--let warehousing facility which undertook its first successful securitisation during the period. The overall portfolio grew to GBP280 million prior to syndication. The Group entered two new warehousing lines during the year, both of which are expected to be syndicated in early 2020. The rates and quality of the security pool have been extremely high, with over c.82% of the initial book portfolio being rated AAA. The new portfolios are being built using the same lending limits and on the basis of being highly attractive to the syndication markets.
The Investment Manager continues to work with the specialist lenders where the Company has developed strong and successful relationships. Going forward, new transactions may be one-off opportunities or mezzanine products to retail bank offerings.
This sector includes loans secured against assets based in the UK (42%), Europe (1%) and the US (2%).
Portfolio Summary
Portfolio
The Group's investments are supported by a diverse range of assets located predominantly in the UK. At 31 December 2019, the weighted average annualised yield(1) was 8.2% across the portfolio with a weighted average expected term of six years. In total, 38 loans have been advanced to companies with operating assets. The remaining seven loans have been advanced to companies with assets under construction.
Investment valuation
During the year, the Valuation Agent carried out a fair market valuation of the Group's investments on behalf of the Board on a semi-annual basis (previously, all valuations had been performed on a quarterly basis). Any assets which may be subject to discount rate changes continue to be valued on a quarterly basis. The valuation principles used by the Valuation Agent are based on a discounted cash flow methodology. A fair value for each asset acquired by the Group is calculated by applying a discount rate (determined by the Valuation Agent) to the cash flow expected to arise from each asset.
The weighted average discount rate(1) across the portfolio at 31 December 2019 was 8.1%. The valuation of investments is sensitive to changes in discount rates applied. There were no investments subject to revaluations as a result of discount rate changes during the year. However, one investment was uplifted as a result of inflation. Sensitivity analysis detailing the impact of a change in discount rates is given in note 19.4.
1. Alternative performance measure - refer below for definitions and calculation methodology.
Portfolio performance
All investments are closely monitored by the Investment Manager against strict reporting and information requirements as set out in the loan documentation.
During the year the Group experienced its first default on a loan. The loan was secured against combined heat and power ("CHP") engines accredited for ROCs and two grid entry units, in addition to the overarching Project Companies which held planning and development rights for an anaerobic digestion project. The Group has an exclusivity agreement in place for the sale of the Project Company and post period end it exchanged with the buyer on a sale and purchase agreement. It is anticipated that the sale will complete in Q2 2020 pending regulatory approval from Ofgem. The Company also intends to dispose of one other securitised asset, a grid entry unit, from the same Group. The Investment Manager expects the recovery from the sale of both assets to be slightly higher than the current carrying value.
Assets under construction are proceeding materially on time and budget, with a number of investments completing construction in the year, reducing the overall construction exposure across the portfolio as a percentage of portfolio by value. Two of the Group's larger student development loans are ahead of schedule and are expected to achieve practical completion in the second quarter of 2020. This will significantly reduce the Group's overall construction exposure.
Notwithstanding the problem loan mentioned above, the operational performance of the assets has been in line with, or better than, the Investment Manager's expectations and interest and principal payments have been received from the underlying investments in accordance with expectations.
Brexit has been seen to impact upon the valuations of a number of UK based property funds. As a result, the Investment Manager has closely reviewed the Group's loans with property exposure, including the bridging and development finance loans.
The low average LTVs of c.60%, and the type of property investment in these structures mean that the Investment Manager does not expect these loans will be materially impacted by the UK's exit from the EU, as demonstrated by the continued stable performance since the EU referendum.
Group exposure
The Group's exposure to seven projects that have not yet completed construction with reference to total portfolio assets by value at 31 December 2019 was 17%.
The bridging and development finance investments have exposure to UK residential property prices. However, the low LTV of these investments means that there is significant headroom in the underlying asset values to absorb movements in property valuations. Further, the tenor of any particular loan is short relative to the duration of the facility, offering further protection from any market changes over the medium to long term.
Key investment highlights
The Group made 29 advances during the year totalling GBP89.4 million, comprising ten new loans, and 19 extensions to existing facilities. From these advances, five were in the energy and infrastructure sector; two in asset finance; seven in property; and 15 in social infrastructure projects. The Group received capital repayments of GBP9.7 million, in line with expectations for the year. Post year end, the Group made a further five advances totalling GBP40.3 million and received four repayments totalling GBP60.9 million which included repayments on two of its co-living investments, along with prepayment fees of c.GBP1 million. The Group was able to immediately recommit up to GBP53 million to the same co-living borrower group in a larger facility of up to GBP140 million alongside Deutsche Bank for a term of up to four years.
Investments made during the year(1)
SECTOR AVERAGE SECURITY STATUS INVESTMENTS REPAYMENTS
TERM
------------------- -------- ------------------- ------------------------ ------------------------ --------------
Asset finance 8 years Senior Operational GBP8.4 million GBP4.7 million
Energy 9 years Senior Operational/construction GBP2.8 million GBP4.3 million
and infrastructure
Property(2) 3 years Senior/subordinated Operational GBP50.3 million GBP0.7 million
Social 9 years Senior/subordinated Operational/construction GBP27.9 million -
infrastructure
------------------- -------- ------------------- ------------------------ ------------------------ --------------
TOTAL GBP89.4 MILLION GBP9.7 MILLION
------------------- -------- ------------------- ------------------------ ------------------------ --------------
Investments made
post year end(1)
----------------------------- ------------------- ------------------------ ------------------------ --------------
SECTOR AVERAGE SECURITY STATUS INVESTMENTS REPAYMENTS
TERM
------------------- -------- ------------------- ------------------------ ------------------------ --------------
Social 14 years Senior/subordinated Operational/construction GBP9.9 million -
infrastructure
Property(2) 4 years Subordinated Operational/construction GBP30.4 million GBP60.9
million
TOTAL GBP40.3 MILLION GBP60.9
MILLION
------------------- -------- ------------------- ------------------------ ------------------------ --------------
Investment commitments
at the date of
the report(1)
----------------------------- ------------------- ------------------------ ------------------------ --------------
SECTOR AVERAGE TERM SECURITY STATUS INVESTMENTS
------------------- -------- ------------------- ------------------------ ------------------------ --------------
Property 3 years Subordinated Operational/construction GBP22.7
million
Social 18 years Subordinated Operational GBP1.0 million
infrastructure
------------------- -------- ------------------- ------------------------ ------------------------ --------------
TOTAL GBP23.7
MILLION
------------------- -------- ------------------- ------------------------ ------------------------ --------------
1. The Company makes its investments through its wholly owned subsidiary. Refer to note 1 for further information.
2. Includes projects that were subject to review by the Board under the Company's investment approval process, refer below.
FEATURED ASSET
Scape Mile End Canalside
The Group provided mezzanine financing to support the construction of a new development of student accommodation in East London.
The asset
In July 2016, the Group financed the development of a 412-bed, purpose built, private student accommodation residence located adjacent to Queen Mary's University London ("QMUL"), in Mile End, London. As well as ensuite bedrooms, the project includes shared working areas, communal kitchens, a gym and a cinema room. The project builds on the success of the existing Scape building near the QMUL campus with both sites providing quick access to the university campus and local transport links at Mile End.
The developer, Scape, is a market leader in private student accommodation with operational assets in London and Australia. Scape has significant experience in acquiring sites and developing assets through planning, construction and operations.
The asset is operating at full capacity with students occupying the accommodation for the 2019/20 academic year. Scape is already seeing strong demand for the next academic year commencing in September 2020.
The directors of the Investment Manager directly or indirectly own an equity interest in this development project. In accordance with the Company's investment approval process, this investment was reviewed and approved by the Board.
FEATURED ASSET
CNG Stations
The Group has financed a CNG station in Leyland, developed and operated by CNG Fuels, a leading operator of CNG stations in the UK.
The asset
In January 2018, the Group financed its first CNG station, which is strategically located on the M6 to support major distribution depots in the region. It was the UK's first high pressure CNG station allowing vehicles to access CNG directly from the grid and reduce the energy required to compress the gas.
The project has experienced growth in the volumes dispensed through the site since first opening in 2016 as more diesel-powered fleets are replaced with CNG vehicles. Not only does the replacement provide an economic benefit, with CNG over 30% cheaper than fuelling with diesel, but the stations benefit from Renewable Transport Fuel Certificates ("RTFCs") through biomethane injected into the grid. The developer is actively working with biomethane producers to ensure that they can continue to provide RTFCs to their customers.
The developer is working on a further pipeline of stations to support networks of CNG--powered vehicles across the UK. Expanding this infrastructure will enable wider adoption of CNG as a fuel of choice for heavy goods vehicles and encourage decarbonisation throughout the supply chain, enabling companies to meet their environmental targets. The Group is actively working with the developer to support this project.
Diesel displacement
Vehicles at the site have displaced 5.4 million litres of diesel over the last year through fuelling at this station. CNG trucks emit 60% less CO(2) than diesel trucks, highlighting the significant positive impact this form of transportation has on air quality and the environment.
FINANCIAL REVIEW OF THE YEAR
The Company has generated total income of GBP34.0 million, paid dividends of 6.45 pence per share and generated a total shareholder return(1) for the year of 10.2%.
Financial performance
In the year to 31 December 2019, the Company's portfolio generated total income of GBP34.0 million (31 December 2018: GBP27.1 million). Total profit for the year was GBP28.0 million (31 December 2018: GBP21.6 million), with basic EPS of 6.81 pence (31 December 2018: 7.27 pence). The Company's ongoing charges ratio(1) , calculated in accordance with the AIC methodology, was 1.2% (31 December 2018: 1.2%) for the year to 31 December 2019.
Dividends
The Company paid dividends totalling 6.45 pence per ordinary share in respect of the year (including a special dividend of 0.25 pence), thereby exceeding its dividend target of 6.20 pence per share. The dividend was fully covered by earnings per share of 6.81 pence. The Company has grown its dividend by 1.6% year-on-year (including the special dividend) from 6.35 pence.
Capital raised
In June 2019, the Company raised GBP63.3 million by way of a non-pre-emptive placing of 60,317,131 ordinary shares at an issue price of 105.00 pence per share.
NAV and share price performance
Net assets attributable to equity holders at 31 December 2019 were GBP451.8 million, up from GBP386.6 million at 31 December 2018. The Company's NAV per ordinary share has increased from 101.74 pence at 31 December 2018 to 102.33 pence per ordinary share at 31 December 2019.
The Company's ordinary shares have predominantly traded at a premium to the latest published prevailing NAV since IPO, with an average premium over the financial year of 5.6%. At 31 December 2019, there were 441,544,019 ordinary shares in issue.
Cash position
The Company received interest payments of GBP36.9 million and capital repayments of GBP10.8 million in the year, in line with expectations. The Company paid dividends of GBP25.1 million (excluding dividends settled in shares(2) ) during the year and a further GBP6.3 million (excluding dividends settled in shares(2) ) post year end. The Company raised GBP63.3 million of equity capital and made investments of GBP89.4 million. Post year end, the Group has made a further five advances totalling GBP40.3 million and received four repayments totalling GBP60.9 million. At the date of the report, investment commitments were GBP23.7 million. Total cash reserves at the year end were GBP8.7 million.
Conflicts of interest
During the year, the Group committed to make investments of up to GBP10 million to finance the development of graduate accommodation in Boston, Massachusetts and also continued to finance construction projects of a number of private student accommodation developments in Australia and in the UK.
The directors of the Investment Manager directly or indirectly own an equity interest in these development projects. In accordance with the Company's investment approval process, these investments were reviewed and approved by the Board.
Where there is any overlap for a potential investment with GCP Infra, GCP Infra has a right of first refusal over such investment.
During the year, three investments were offered to GCP Infra under its right of first refusal; all were declined as a result of falling outside of the GCP Infra investment policy.
To date, no investments offered to GCP Infra have been accepted.
1. Alternative performance measure - refer below for definitions and calculation methodology.
2. Dividends settled in shares are where shareholders have elected to take the scrip dividend alternative
Sustainability
The Company aims to operate a fully sustainable business model with a low carbon footprint for all its wider stakeholders.
Responsible investment
The Investment Manager is a signatory to the UN Principles for Responsible Investment ("UNPRI"). The UNPRI, established in 2006, is a global collaborative network of investors working together to put the six Principles for Responsible Investment into practice. The principles are a voluntary and aspirational set of investment principles for incorporating ESG issues into investment practice. More information can be found on the UNPRI website: www.unpri.org. The Investment Manager is in the process of integrating sustainability across its business, including the embedding of responsible investing policies in its investment management processes and the establishment of a dedicated sustainability committee.
Environmental
Greenhouse gas emissions reporting
The Company has no employees and does not own any property, and it does not purchase electricity, heat, steam or cooling for its own use. The Company outsources all services on a fee basis and, as such, it is not practical to attempt to measure or quantify emissions in respect of any outsourced energy use.
Green energy projects
The Group has invested in a number of green energy projects, including an operational CNG station. The station is located in Lancashire, UK, within the immediate vicinity of the major customer. The site has been operational since March 2016 and was developed as a flagship project with National Grid/Cadent as the first high--pressure gas fuel station in the UK. Read more above.
The Company has also invested in a number of battery storage projects which support the deployment of renewable energy projects throughout the UK by providing flexible capacity and balancing services to the National Grid. In addition, the Company has invested in companies providing operation and maintenance services for rooftop solar panels, in turn contributing to increased renewable capacity in the UK.
Social
The Company's business model targets assets for which there is a structural demand within society.
The Group provides benefits to society through its investing activities, by providing funding for assets, such as housing for vulnerable adults, care for the elderly and urban regeneration, in addition to assets that meet a structural demand for producing or managing energy and/or processing waste. The Group also provides finance for property purchases or developments which mainstream lenders cannot serve, for reasons other than credit quality.
Since IPO, the Group's investment activities have facilitated the creation of c.800 jobs, of which c.400 have been created at urban regeneration projects, c.250 at care homes, with the remainder at student accommodation schemes and nurseries. The Group intends to continue to support borrowers that have a positive impact on society, as it further enhances the security of the portfolio and enables the Company to back transactions that are integral to society.
Governance
Read how the Company is governed and the activities of the Board during the year in the governance section below.
Financial
Read about the Company's financial performance and dividend cover in the financial review above and its long-term viability below.
GENERATING VALUE FROM WASTE
Oakleaf recycling facility
The Group has financed the construction and operation of a recycling facility near Heathrow Airport. The facility consists of high--end plant and equipment which can separate and sort commercial and industrial waste. The facility sorts the waste received into designated streams through a combination of mechanical and manual sorting processes. The purpose of the facility is to extract as much value from the waste it receives, by extracting the materials which have a value and can be resold. The residue is disposed of at a cost to a cement kiln, where it is used as fuel. The process ensures that nearly all the input that arrives at the facility is either recycled or used as fuel, ensuring that there is a significant diversion of waste away from landfill. In 2019, 70,000 tonnes were diverted from landfill. The facility has been operational since April 2017.
Risk management
The Board and the Investment Manager recognise that risk is inherent in the operation of the Company and are committed to effective risk management to protect and maximise shareholder value.
Risk management strategy
The Board has the ultimate responsibility for risk management and internal controls within the Company. The Board and the Investment Manager recognise that risk is inherent in the operation of the Company and are committed to effective risk management to protect and maximise shareholder value. When setting the risk management strategy, the Board also determines the nature and extent of the risks they are willing to take to achieve the Company's strategic objective.
Risk management process
During the year, the Board, with the assistance of the Risk committee (previously carried out by the Audit and Risk committee), reviewed the risks and assessed the effectiveness of the Company's risk management process and internal control systems. Refer to the Risk committee report below for further information. This review covered the operational, compliance and financial risks facing the Company, including emerging risks. As a result, the Board has not identified, nor been advised of, any failings or weaknesses which it has determined to be of a material nature.
Risk appetite
The Company's investment policy detailed above sets out the key components of its risk appetite. The Board and the Investment Manager seek to manage investment risk within set risk/return parameters.
Role of the AIFM
The Investment Manager has been appointed as AIFM to the Company. The AIFM is required to operate an effective and suitable risk management framework to allow the identification, monitoring and management of the risks to which the AIFM and the AIFs under its management are exposed.
The AIFM's permanent risk management function has a primary role alongside the Board in shaping the risk policy of the Company, in addition to responsibility for risk monitoring and risk measuring in order to ensure that the risk level complies on an ongoing basis with the Company's risk profile.
Stress testing
In order to analyse the effect of the principal risks and uncertainties on the Company's net cash flows, key financial ratios, viability and dividend cover, the Investment Manager has stress tested the Company's financial model by flexing a number of key assumptions used in order to model the aggregated impact of plausible scenarios, including:
- significant reductions in interest income received; - new and reinvested capital levels; - borrower default and recovery rates; - significant increases in the Company's operating expenses and debt financing costs; and - the impact on the portfolio of downside stress tests on a sector-by-sector basis.
The Investment Manager has revisited these scenarios in light of the Coronavirus (COVID-19) outbreak and believes that they continue to represent a robust sensitivity analysis.
Further information is given in the going concern and viability statement below.
Principal uncertainties
The Board continues to consider Brexit, as detailed below, to be a principal uncertainty for the Company.
Uncertainty 1: Brexit
The UK officially left the EU on 31 January 2020. There continues to be a considerable amount of uncertainty regarding the future relationship between the UK and the EU.
Whilst the Board does not currently consider Brexit to be a principal risk for the Company, the Board considers it worth noting that the Company focuses predominantly on investments in UK-based asset backed investments that generally rely on demand for the goods and services such assets provide from across the UK. A general and persistent weakening of the UK economy and a general fall in market sentiment caused by the uncertainty that Brexit may pose has the potential to impact the performance of the Group's underlying investments.
The Board has also considered the impact of Brexit as a principal uncertainty on its principal risks. Specifically, in relation to any impact on the Company's principal risks and uncertainties, the Board has considered:
- the AIC guidance note dated February 2019 'Impact of a "no deal" Brexit on investment companies';
- the portfolio's reliance on the EU for materials and/or labour; and
- an assessment of the impact on the Company's prospects including pipeline, availability of capital and share price.
Particularly, for some of the Group's investments, the borrower relies on a workforce that predominantly comprises migrants living in the UK. A reduction in the availability of a workforce with the required skills may have a negative impact on these investments. Further, a number of investments utilise plant and machinery manufactured by European companies. Whilst any foreign exchange risks during construction are usually hedged as part of any investment, where plant and machinery needs to be replaced during the operational life of assets, there is the risk that costs will increase if Sterling weakens against the Euro and/or other relevant currencies.
The Board will continue to monitor the potential macro-economic and political impacts of Brexit and the detailed implications for the Group's investments and wider impact on the UK economy.
Uncertainty 2: Coronavirus (COVID-19)
At the time of writing, the UK is experiencing an increase in the number of diagnosed cases of Coronavirus (COVID-19) which has now been classified as a pandemic by the World Health Organisation and is causing disruption in the global and national economy.
Whilst there has been no impact on the Company's cash flows to date, the Board is continuing to monitor the situation and has considered:
- the potential impact on vulnerable populations supported by the Company's investments (e.g. care homes);
- the reliance of the portfolio on materials and/or labour; and - the impact of a prolonged period of lockdown.
The primary concern in the portfolio is the risk to care home residents who are statistically more vulnerable to viral infection. A widespread outbreak of the virus could cause a negative impact on the operations of these assets. However, no cases have been reported to date and all of the projects are operating best practice to minimise risk of infection. All of the borrowers with a potential impact from COVID-19 are following UK Government guidance.
The Company has business continuity procedures ("BCPs") in place through its service providers. The Investment Manager and the Administrator have established BCPs to ensure they can continue to service their clients. The Investment Manager has enacted its BCPs and these are operating effectively. The Administrator's BCPs will be invoked as circumstances require.
The Board will continue to monitor the development of the Coronavirus (COVID-19) outbreak and any potential impact on the portfolio.
Principal risks
The Board considers the Company's principal risks, as detailed below, to be those that could materially threaten the successful delivery of the Company's strategic objectives, detailed on above.
Risk 1: Credit Risk
------------------------- -------------------------- --------------------------- ----------------------------
How the risk is Change in residual
Risk Impact managed risk over the year
------------------------- -------------------------- --------------------------- ----------------------------
Borrower default, The success of the The Investment Manager Stable
loan non -- performance Group is dependent continuously monitors The Group's investment
and collateral risks upon borrowers fulfilling the actual performance portfolio has continued
Borrowers to whom their payment obligations of projects and to perform in line
the Group has provided when they fall due. their borrowers, with expectations,
loans default or Failure of the Group taking action where with substantially
become insolvent. to receive payments appropriate, and all borrowers fulfilling
or to recover part reports on performance their payment obligations
or all amounts owed of the Group's portfolio since IPO. The Investment
together with potential to the Board each Manager and the
additional costs quarter. Board continue to
incurred from the closely monitor
renegotiation and/or the impact of the
restructuring of continued economic
loans can result uncertainty as a
in substantial, result of the UK's
irrecoverable costs exit from the EU
being incurred. and the impact of
This could have disruption due to
a material adverse COVID-19. The significant
effect on the NAV majority of borrower
of the Company and businesses are incorporated
its ability to meet and operate in the
its stated target UK with minimal
returns and dividend. reliance on EU cross
border trading.
All borrowers are
following relevant
guidance on the
COVID-19 outbreak
and are putting
contingency plans
in place to minimise
impact to their
businesses. For
further information
on the performance
of the Group's portfolio,
refer to the Investment
Manager's report
above.
------------------------- -------------------------- ---------------------------
Risk 2: Economic
Risk
------------------------- -------------------------- --------------------------- ----------------------------
How the risk is Change in residual
Risk Impact managed risk over the year
------------------------- -------------------------- --------------------------- ----------------------------
Property If the market value The Group's property Stable
Loans made by the of any property investments are The average LTV
Group to projects investments for at a low average of the Group's property
involved in property which the Group LTV level. In addition, portfolio has remained
or the development has provided finance the credit risk broadly stable in
of property, are is found to be materially associated with the year and no
indirectly exposed lower than assumed each Project Company losses have occurred
to the performance or projected, this is mitigated as at a borrower level.
of the underlying may adversely impact the cash flows receivable The portfolio has
real estate market the Group's ability are secured over a low average LTV
in the relevant to recover the value the assets of the giving in-built
area. of its investments Project Company, headroom to allow
in the event of which in turn has for reductions in
a borrower default security over multiple property prices
or sale process. assets at the underlying in the future. The
project level. overall shortage
of supply of housing
in the UK provides
a degree of support
to the housing market.
The Investment Manager
and the Board continue
to monitor the market.
For further information
on the Group's property
investments please
see above.
------------------------- -------------------------- --------------------------- ----------------------------
Valuation risk Uncertainty about The Company has Stable
Due to the nature valuation assumptions engaged an experienced The Group's investment
of the investments and estimates could valuation agent portfolio has continued
made by the Group, result in outcomes to carry out the to perform substantially
observable market that require a material valuation of investments in line with expectations
data or comparable adjustment to the on a regular basis. with no material
prices may not exist carrying amount In addition, the changes in valuations
for some of the of the assets in Investment Manager, or realised amounts.
assumptions used the portfolio in as part of its due However, during
in their valuation. the future. diligence process, periods of uncertainty,
uses market recognised valuations can be
professionals to more difficult to
provide initial estimate due to
valuations where a reduction in the
possible. number of comparable
market transactions.
The Board continues
to monitor the potential
impact that the
UK's exit from the
EU and the Coronavirus
(COVID-19) outbreak
may have on some
of the Group's investments.
Risk 3: Key Resource
Risk
------------------------- -------------------------- --------------------------- ----------------------------
How the risk is Change in residual
Risk Impact managed risk over the year
------------------------- -------------------------- --------------------------- ----------------------------
Reliance on key An inability by The Company has Stable
personnel at the the Investment Manager entered into a contractual The Investment
Investment Manager to retain and recruit engagement with Manager continues
The Company is dependent the required level the Investment Manager. to provide adequate
on key people within of personnel with The performance resources and act
the Investment Manager the appropriate of the Investment with due skill,
to meet its investment skills and experience Manager is monitored care and diligence
objective. may adversely impact by the Board along in its responsibilities
its ability to service with the Company's as Investment Manager
the needs of the other key service and AIFM to the
Company. providers on an Company. The Investment
ongoing basis. The Manager has also
Investment Manager upgraded systems
provides regular to strengthen its
updates to the Board control processes
on its resourcing during the year.
plans and has a For further information
competitive remuneration on the responsibilities
and retention plan of the Investment
focused on key employees. Manager refer to
The Investment Manager note 21.
has robust BCPs
in place to enable
it to continue to
manage the Company
if and when circumstances
require.
------------------------- -------------------------- --------------------------- ----------------------------
Risk 4: Regulatory
Risk
------------------------- -------------------------- --------------------------- ----------------------------
How the risk is Change in residual
Risk Impact managed risk over the year
------------------------- -------------------------- --------------------------- ----------------------------
Change in laws, Any change in the The Company has Stable
regulation and/or laws, regulations a comprehensive There is continued
policy and/or Government compliance monitoring uncertainty about
The Company, its policy affecting programme relevant the impact of the
operations and the the Company or the to its operations UK's exit from,
underlying Project underlying Project that ensures compliance and future of its
Companies are subject Companies may have with developments relations with,
to laws and regulations a material adverse and changes in legislation the EU, which the
enacted by national effect on the ability and regulation in Directors anticipate
and local Governments. of the Company to the Channel Islands, will continue to
successfully pursue the UK and any impact be the case in the
the investment policy, of Brexit, in the short term.
to meet its investment jurisdictions in In the longer term,
objective and therefore which the Group there may be opportunities
on the value of invests, and listing to streamline regulation
the Company. and FCA marketing allowing business
rules. in the UK to be
easier and more
responsive to the
needs of companies.
For more information
refer to the Chairman's
statement above.
------------------------- -------------------------- --------------------------- ----------------------------
Risk 5: Execution
Risk
------------------------- -------------------------- --------------------------- ----------------------------
How the risk is Change in residual
Risk Impact managed risk over the year
------------------------- -------------------------- --------------------------- ----------------------------
Reinvestment risk The decline or lack The Investment Manager The Investment Manager
and availability of availability is continuously continues to see
of suitable investments of suitable investments in contact with attractive investment
The Company is not meeting the risk the market, seeking opportunities across
able to deploy capital and return profile new deals, and builds a variety of sectors,
in a timely manner. of the Company's a specific investment including energy,
investment strategy pipeline before social infrastructure,
within the required recommending the waste and specialist
timescales may have raising of additional property. At the
a negative impact finance to ensure year end, the Group
on the Company's that capital is had a significant
returns as a result deployed in a timely pipeline of investment
of holding uninvested manner. opportunities. For
cash balances. further information
refer to the Investment
Manager's report
above.
------------------------- -------------------------- --------------------------- ----------------------------
Emerging risks
Emerging risks include trends which are characterised by a high degree of uncertainty in terms of their occurrence, probability and their potential impact. As part of the Company's risk management processes, emerging risks are considered at the formal reviews of the Company's risks, as described above. The Board and the Risk committee have considered emerging risks in the following areas:
- climate change; - global financial volatility; - supply chain management; and - Coronavirus (COVID-19).
Going concern and viability statement
The Directors have assessed the financial prospects of the Company for the foreseeable future, being a period of at least twelve months from the date these financial statements were approved, and made an assessment of the Company's ability to continue as a going concern. The Directors are satisfied that the Company has the resources to continue in business for the foreseeable future and furthermore are not aware of any material uncertainties that may cast significant doubt upon the Company's ability to continue as a going concern.
The Board regularly reviews the principal risks facing the Company, including those that would threaten its strategy. The Board also assesses the Company's policies and procedures for monitoring, managing and mitigating its exposure to these risks.
The Directors have carried out a robust assessment of each of the Company's principal risks, including those that would threaten its business model, future performance, solvency or liquidity, uncertainty, as detailed above and, through stress testing as described above, have also assessed the prospects of the Company over a longer period than the twelve months required by the going concern provision of the AIC Code.
The Board has determined that a five year period constitutes an appropriate period over which to provide its viability statement. The weighted average term of the loans within the investment portfolio is six years and in the view of the Board and the Investment Manager, financial forecasts that support the analysis may be subject to further capital raises for which the impact beyond a five year term is difficult to assess. In addition, the extent to which macro-economic, political, social, technological and regulatory changes beyond a five year term may have a plausible impact on the Company are difficult to forecast. The assessment involved an evaluation of the potential impact on the Company of these risks occurring through the use of stress testing as detailed above.
Based on this assessment and the stress testing performed on the Company's prospects, the Directors confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment to 31 December 2024.
Approval of strategic report
The strategic report has been approved by the Board and is signed on its behalf by the Chairman.
Alex Ohlsson
Chairman
18 March 2020
BOARD OF DIRECTORS
The Board of Directors is responsible for the effective stewardship of the Company's activities in order to ensure the long-term success of the Company in the interest of shareholders.
Alex Ohlsson
Chairman
Alex Ohlsson, a Jersey resident, is the managing partner of the law firm Carey Olsen, and is recognised as an expert in corporate and finance law in Jersey with a particular focus on international real estate finance and structures. Mr Ohlsson joined Carey Olsen in 1991, became a Jersey solicitor in 1994 and an Advocate of the Royal Court of Jersey and a partner of Carey Olsen in 1995. He was educated at Queens' College, Cambridge, where he obtained an MA (Hons) in Law. Mr Ohlsson served as the independent chairman of the States of Jersey's audit committee from 2009 until 2018. He is an advisory board member of Jersey Finance, Jersey's financial services promotional body. He acts as a non--executive director of a number of companies. He is also chairman of the LSE Main Market listed company Foresight Solar Fund Limited.
Skills and experience:
Substantial board level and legal experience in the corporate and finance sectors in Jersey.
Date of appointment:
14 September 2015
Joanna Dentskevich
Senior Independent Director and chair of the Risk committee and the Remuneration and Nomination committee
Joanna Dentskevich, a Jersey resident, has over 30 years of risk, finance and investment banking experience gained in leading global banks worldwide, alternative investments and the offshore funds industry. Previously, she was a director at Morgan Stanley heading up its Global Customer Valuation Group, a director of risk at Deutsche Bank and chief risk officer of a London-based hedge fund. Mrs Dentskevich has a BSc (Hons) in Maths and Accounting. Mrs Dentskevich also serves on the board of two other LSE listed companies, EJF Investments Limited, where she is chair of the board, and Middlefield Canadian Income PCC.
Skills and experience:
Substantial relevant risk and board level experience in the investment sector.
Date of appointment:
7 September 2015
Colin Huelin FCA
Chair of the Audit committee
Colin Huelin, a Jersey resident, graduated in mechanical engineering with a first class honours BSc degree and Diploma at Southampton University in June 1982. He completed his graduate management development and monitored professional development scheme with Shell UK and the Institute of Mechanical Engineers in 1986. Mr Huelin qualified as a chartered accountant with Ernst & Young in 1989 and was appointed finance director for Computer Patent Annuities ("CPA") in February 1990. He was appointed CEO for CPA in 1995. In November 1998, he joined Abbey National Offshore as head of financial planning, was promoted to finance director in 2003 and then managing director of Santander Private Banking in Jersey in November 2007, a position he held until 31 May 2015.
Skills and experience:
Substantial board level and financial experience in the banking and private sectors in Jersey.
Date of appointment:
7 September 2015
Marykay Fuller
Chair of the Management Engagement committee
Marykay Fuller, a UK resident, is a banking and finance professional with 30 years' experience in debt and equity markets, working with a broad range of businesses across a variety of jurisdictions including the UK, USA, Europe, South America and Asia. Most recently, she was a senior deal advisory partner at KPMG LLP where she also represented the firm on the board of the trade group, British American Business. Ms Fuller is currently a non-executive director of the UK Civil Aviation Authority, where she is a member of the audit and remuneration committees. She is chair of the Air Travel Trust and also serves on the Alumni Advisory Board of Heinz College, Carnegie Mellon University in the USA.
Skills and experience:
Substantial business and debt experience across a variety of jurisdictions.
Date of appointment:
6 November 2019
THE INVESTMENT MANAGER
The Board of Directors has appointed the Investment Manager to provide day-to-day investment management services to the Group.
INVESTMENT TEAM
David Conlon
Director
David Conlon is a director of the Investment Manager and the lead fund manager for the Company.
David is a qualified chartered accountant, having trained at PwC before moving to the project finance team at KPMG. He has significant experience in project finance investment and has been involved in investing and arranging both debt and equity in a wide range of projects in the PFI, renewable and social infrastructure sectors. David joined the Investment Manager in 2013.
David has an LLB in Law from Nottingham Trent University.
Antonia Vouraki
Senior portfolio manager
Antonia Vouraki is a senior portfolio manager of the Investment Manager and is responsible for monitoring the ongoing performance of the Company.
Antonia joined the Investment Manager in 2015 from a tech start-up, where she was responsible for the valuation and financial analysis of the company. Prior to this, she conducted academic research on firm value volatility, corporate governance and regulations across developed and emerging markets.
Antonia graduated with a degree in Business Administration from Athens University of Economics and Business. She has an MSc in Finance and Management from Cranfield University and a Masters in Finance from London Business School.
Joanne Fisk
Associate
Jo Fisk is an associate of the Investment Manager, focusing on origination for the Company across all sectors.
Prior to joining the Investment Manager, Jo qualified as a lawyer in the project finance team of UK based law firm Burges Salmon, where she specialised in UK renewables project finance. Jo is experienced in a wide range of sectors including onshore wind, fuelled renewables and solar. She has particular expertise in portfolio--financing transactions.
Jo has a degree in Neuroscience from the University of Sussex.
PORTFOLIO ADMINISTRATION
Luther Ward-Faint
Portfolio manager
William Parry-Jones
Fund financial controller
Irsida Dhimarko
Portfolio administrator
Kate Arnold
Portfolio administrator
FINANCIAL AND CORPORATE ADVISORY
Saira Johnston
Chief financial officer
Dion Di Miceli
Head of investment companies
Chloe Marlow
Head of corporate reporting
Sarah Bowe
Compliance and risk officer
BOARD LEADERSHIP AND PURPOSE
CORPORATE GOVERNANCE STATEMENT
I am pleased to present the Company's corporate governance statement for the year ended 31 December 2019.
Introduction from the Chairman
In this corporate governance statement the Company reports on its compliance with the AIC Code, sets out how the Board and its committees have operated during the year and describes how the Board exercises effective stewardship over the Company's activities for the benefit of its members as a whole.
The Board recognises the importance of a strong corporate governance culture and has established a framework for corporate governance which it considers to be appropriate to the business of the Company. All Directors contribute to Board discussions and debates. The Board believes in providing as much transparency for shareholders as is reasonably possible.
The AIC Code
As a member of the AIC, the Company reports against the principles and provisions of the AIC Code.
The Board considers that reporting against the principles and provisions of the AIC Code, which has been endorsed by the FCA and supported by the JFSC, provides better information to shareholders as it addresses all the principles set out in the UK Code, as well as setting out additional principles on issues that are of specific relevance to investment companies.
A copy of the AIC Code can be found at www.theaic.co.uk. A copy of the UK Code is available at www.frc.org.uk.
Statement of compliance with the AIC Code
Pursuant to the Listing Rules, the Company is required to provide shareholders with a statement on how it has applied the provisions of, and complied with, the AIC Code.
The UK Code includes provisions relating to:
- the role of the chief executive; - executive directors' remuneration; and - the need for an internal audit function.
The Board considers these provisions are not relevant to the Company, being an externally managed investment company. In particular, all of the Company's day-to-day responsibilities are delegated to third parties, the Company has no employees or internal functions and the Directors are non-executive. The Company has therefore not reported further in respect of these provisions.
During the year, the Company has complied with the provisions of the AIC Code, except the appointment of a senior independent director. Post year end, on 21 January 2020, Joanna Dentskevich was appointed Senior Independent Director.
Board conflicts of interest
It is the responsibility of each individual Director to avoid a conflict of interest situation arising. The Director must inform the Board as soon as he or she is aware of the possibility of an interest that might possibly conflict with the interests of the Company. The Company's articles of association authorise the Board to approve such situations, where deemed appropriate. A register of conflicts is maintained by the Company Secretary and is reviewed at Board meetings, to ensure that any authorised conflicts remain appropriate. The Directors are required to confirm at these meetings whether there has been any change to their position.
The Directors must also comply with the statutory rules requiring company directors to declare any interest in an actual or proposed transaction or arrangement with the Company.
Further details of the Directors' conflicts of interest can be found in note 21.
Culture of the Board
The Chairman leads the Board and is responsible for its overall effectiveness in directing the Company. He demonstrates objective judgement, promotes a culture of openness and debate and facilitates constructive board relations and the effective contribution of all Directors. In liaison with the Company Secretary, he ensures that the Directors receive accurate, timely and clear information. The Directors are required to act with integrity, lead by example and promote this culture within the Company.
The Board seeks to ensure the alignment of its purpose, values and strategy with this culture of openness, debate and integrity through ongoing dialogue and engagement with its service providers, principally the Investment Manager. The culture of the Board is considered as part of the annual performance evaluation process which is undertaken by each Director and the culture of the Company's service providers, including their policies, practices and behaviour, is considered by the Board as a whole during the annual review of the performance and continuing appointment of all service providers.
Stakeholders
The Company's primary objective is to provide shareholders with attractive risk-adjusted returns through regular, growing distributions and modest capital appreciation in the long term. The stakeholder model below demonstrates how the Company interacts with all of its stakeholders.
Society
The Company positively impacts society through its investing activities, providing funding for assets which are integral to society.
Shareholders
All investors in the Company, be these institutional, such as pension funds or wealth managers, or retail, such as private individuals.
Borrowers
Owners of the Project Companies to which the Group advances loans.
Suppliers
Suppliers across the UK and Jersey who provide services to the Company.
Government and regulators
Governmental organisations providing public services for society, or financial services regulators.
Lender
Provider of the Company's credit facilities.
The Company engages with its stakeholders in different ways and this section outlines the key stakeholder groups, the importance of engagement and how the Company interacts.
Section 172 of the Companies Act 2006
The Board values the importance of maintaining a high standard of business conduct and stakeholder engagement and ensuring a positive impact on the environment in which the Group operates.
Although it is not a requirement for a non-UK company to comply with section 172 of the Companies Act 2006, there are, however, related corporate governance disclosures in the AIC Code which apply to the Company on a comply or explain basis.
The Board of Directors consider, both individually and together, that they have acted in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole (having regard to the stakeholders and matters set out in section 172 of the Companies Act 2006) in the decisions taken during the year.
STAKEHOLDERS WHY ENGAGE HOW THE COMPANY ENGAGES
--------------------------------- ------------------------------ -----------------------------------
Shareholders
--------------------------------- ------------------------------ -----------------------------------
All investors in the Through the provision The Company, primarily
Company, be these institutional, of capital, shareholders through its Investment
such as pension funds enable the Company to Manager and Broker, engages
or wealth managers, or pursue its investment in ongoing communication
retail, such as private objective. In return, with its shareholders
individuals. the Company generates via market interactions,
earnings for shareholders webinars and shareholder,
as well as safeguarding analyst and marketing
and growing the capital presentations. Shareholder
value of the portfolio. engagement by the Investment
Manager and the Broker
is reported to the Board
on a quarterly basis.
The Board encourages
shareholders to attend
and vote at general meetings
of the Company in order
that they may discuss
governance and strategy
and to understand shareholders'
issues and concerns.
Prior to the June 2019
equity raise, the Broker
and the Investment Manager
engaged with existing
shareholders and other
financial institutions
to gauge interest of
a possible equity fundraise,
where they met with 35
institutional investors
to discuss, amongst other
matters, the Company's
performance, investment
portfolio and future
growth.
--------------------------------- ------------------------------ -----------------------------------
Borrowers
--------------------------------- ------------------------------ -----------------------------------
Owners of the Project By engaging with borrowers The Investment Manager's
Companies to which the and understanding their designated portfolio
Group advances loans. needs, the Group can monitoring team engages
offer bespoke lending with borrowers on an
solutions which reflect ongoing basis. Engagement
the contractual fundamentals is in the form of regular
and inherent risks of interaction with the
the underlying assets borrowers, including
and cash flows. periodic site visits
to the underlying assets
held by Project Companies,
which this year included
a visit to two care communities
in Hereford and Abergavenny
and a newly opened co--living
site in London. The regular
monitoring of information
and financial covenant
obligations is also carried
out to ensure compliance
with financial covenants
to ensure the early identification
of potential issues.
The Investment Manager
reports to the Board
on asset performance
on a quarterly basis.
As detailed in the Chairman's
statement, the Group
had a default on one
of its small loans during
the year. The Investment
Manager has been working
closely with the borrower
to exit the loan on the
best available terms
for the Group. Post year
end the Company exchanged
on a sale and purchase
agreement and is awaiting
approval from Ofgem in
order to complete the
sale.
The Board engages with
the Investment Manager
with regard to 'conflicted
investments', where the
Investment Manager or
any directors, officers
or employees of the Investment
Manager are directly
or indirectly interested
in any entity or asset
in relation to the investment.
--------------------------------- ------------------------------ -----------------------------------
Lender
--------------------------------- ------------------------------ -----------------------------------
Provider of the Company's The Company's lender, The day-to-day management
credit facilities. RBSI, provides a credit of the credit facility
facility which is used is delegated to the Investment
in the making of investments Manager who engages with
in accordance with the RBSI to ensure that it
investment policy, access remains fully informed
to which creates an efficient on all relevant business
method of investing capital of the Company. This
and minimises the effect high level of engagement
of cash drag. helps to support the
relationship with RBSI.
The Investment Manager
reports to the Board
on a quarterly basis
on current and future
financing requirements,
as well as the quantum
and duration of the RCF.
On 16 April 2019, the
Company entered into
an agreement with RBSI
to increase the existing
RCF from GBP30 million
to GBP50 million.
--------------------------------- ------------------------------ -----------------------------------
Suppliers
--------------------------------- ------------------------------ -----------------------------------
Suppliers across the The Company's suppliers The Board has a close
UK and Jersey who provide include third party service working relationship
services to the Company. providers engaged to with all its advisers
provide corporate or and regularly engages
administration services, with all parties. The
in addition to the investment Management Engagement
management services provided Committee regularly monitors
by the Investment Manager. the performance and reviews
These services are critical the terms of each service
to the ongoing operational contract. To ensure suppliers
performance of the Company. meet the Company's high
level of conduct, all
suppliers are required
to confirm on an annual
basis, in the form of
a questionnaire, that
they have adequate policies
and procedures in place.
During the year, the
Directors visited the
offices of the Investment
Manager for their annual
review of the Investment
Manager, refer below.
. The annual Management
Engagement committee
meeting was held on 22
October 2019 where the
committee reviewed the
performance, and considered
the continued appointment,
of the Company's service
providers.
--------------------------------- ------------------------------ -----------------------------------
Society
--------------------------------- ------------------------------ -----------------------------------
The Company positively Through responsible investing Indirectly, the Company
impacts society through the Company can ensure engages with society
its investing activities, the long-term success through its social infrastructure
providing funding for of not only itself but investing providing funding
assets which are integral also of the environments for housing for vulnerable
to society. within which it operates. adults, care for the
elderly and urban regeneration,
in addition to funding
assets that manage energy
and/or process waste.
Through its normal methods
of shareholder engagement,
the Company reports on
the benefits to society.
--------------------------------- ------------------------------ -----------------------------------
Since IPO, the Group's
investment activities
have facilitated the
creation of c.800 jobs,
of which c.400 have been
created at urban regeneration
projects, c.250 at care
homes, with the remainder
at student accommodation
schemes and nurseries.
--------------------------------- ------------------------------ -----------------------------------
Government and regulators
--------------------------------- ------------------------------ -----------------------------------
Governmental organisations Good governance and compliance The Board encourages
providing public services with applicable regulations openness and transparency
for society, or financial is vital in ensuring and promotes proactive
services regulators. the continued success compliance with new regulation.
of the Company and the The Company, through
regimes within which its Investment Manager
it operates. and Administrator, files
AIFMD and Jersey regulatory
statistics on a quarterly
basis and assists the
JFSC in collecting data
to conduct a national
risk assessment of money
laundering and terrorist
financing threats to
Jersey. The Company has
been engaging with local
legal and tax advisers
to ensure it meets the
requirements of the new
economic substance regulation,
Taxation (Companies -
Economic Substance) (Jersey)
Law 2019.
--------------------------------- ------------------------------ -----------------------------------
DIVISION OF RESPONSIBILITIES
The Board is responsible for the effective stewardship of the Company's affairs, including corporate strategy, corporate governance, risk management and overall investment policy.
The Board
PURPOSE:
Responsible for the long-term success of the Company.
Provides overall leadership, sets out the strategic aims of the Company and ensures that the necessary resources are in place for the Company to meet its objective and fulfil its obligations to shareholders within a framework of high standards of corporate governance and effective internal controls.
Composition at 31 December 2019:
Chairman: Alex Ohlsson
Colin Huelin FCA
Joanna Dentskevich
Marykay Fuller
Board committees
Audit committee
PURPOSE:
Ensures that the Company's financial performance is properly monitored, controlled and reported, including engagement with the Company's external auditor.
Composition at 31 December 2019
Chair: Colin Huelin FCA
Alex Ohlsson
Joanna Dentskevich
Marykay Fuller
See Audit committee report below.
Risk committee
PURPOSE:
Reviews and monitors the risks the Company is exposed to, its risk appetite and the effectiveness of the risk management framework.
Composition at 31 December 2019
Chair: Joanna Dentskevich
Alex Ohlsson
Colin Huelin FCA
Marykay Fuller
See Risk committee report below.
Management Engagement committee
PURPOSE:
Reviews the performance and continuing appointments of the Investment Manager and other service providers.
Composition at 31 December 2019
Chair: Joanna Dentskevich
Alex Ohlsson
Colin Huelin FCA
Marykay Fuller
Remuneration and Nomination committee
PURPOSE:
Considers appointments to the Board and its individual committees, makes recommendations in regard to changes to maintain a balanced and effective Board and reviews the remuneration of the Directors.
Composition at 31 December 2019
Chair: Joanna Dentskevich
Alex Ohlsson
Colin Huelin FCA
Marykay Fuller
See Remuneration and Nomination committee report below.
Post year end, on 21 January 2020, Alex Ohlsson resigned as a member of the Audit committee and Marykay Fuller became chair of the Management Engagement committee. It is intended for Ms Fuller to replace Mrs Dentskevich as chair of the Remuneration and Nomination committee upon reaching one years membership of the committee.
The terms of reference of the Board committees can be found on the Company's website www.gcpassetbacked.com.
The Board
At 31 December 2019, the Board comprised four Directors, all of whom are non-executive and are considered independent. Marykay Fuller was appointed as a Director of the Company effective 6 November 2019. Biographical details of the Directors are shown above.
Under the leadership of the Chairman, the Board is responsible for the long-term success of the Company. It provides overall leadership, sets the strategic aims of the Company and ensures that the necessary resources are in place for the Company to meet its objectives and fulfil its obligations to shareholders within a framework of high standards of corporate governance and effective internal controls. The Board has overall responsibility for the Company's investment policy, investment strategy and activities, including the review of investment activity and performance and control of the Investment Manager.
Chairman
The Chairman, Alex Ohlsson, is deemed by his fellow independent Board members to be independent in character and judgement and free of any conflicts of interest.
He considers himself to have sufficient time to spend on the affairs of the Company. He has no significant commitments other than those disclosed in his biography above .The Chairman's independence was noted by the Institutional Shareholder Services, a proxy adviser which publishes voting recommendations for its clients in respect of listed issuers, in their report for the Company's 2019 AGM due to his position as managing partner of Carey Olsen, the Company's advisers on Jersey law. The relationship between the Company and Carey Olsen is not material in nature and is not considered to present a conflict of interest.
The fees paid to Carey Olsen in the financial year ended 31 December 2019 represented 0.2% of the total expenses of the Company. Furthermore, the Company and Carey Olsen, a firm of over 50 partners, maintain procedures to ensure that the Chairman has no involvement in either the decisions concerning the engagement of Carey Olsen or the provision of legal services to the Company.
Joanna Dentskevich was appointed Senior Independent Director of the Company with effect from 21 January 2020. She acts as a sounding board for the Chairman, meets with major shareholders as appropriate, provides a channel for any shareholder concerns regarding the Chairman and takes the lead in the annual evaluation of the Chairman by the Directors. In the event the Company experiences a period of stress, the Senior Independent Director would work with the Chairman, the other Directors and/or shareholders to resolve any issues.
Matters reserved for the Board
The Board has approved a formal schedule of matters reserved for its approval which is available on the Company's website and upon request from the Company Secretary. The principal matters considered by the Board during the year included:
- the declaration of dividends; - raising new capital; - appointment of an additional Director; - creation of a Risk committee; - the Company's annual expenditure budget; - the interim and annual financial statements;
- approval of investments where the Investment Manager or any directors, officers or employees of the Investment Manager were directly or indirectly interested in any entity or asset in relation to the investment proposal;
- increasing the RCF; and - recommendations from its committees.
Committees
In October 2019, the Board separated the Audit and Risk committee to an Audit committee and a Risk committee to satisfy the recommendation of the 2018 independent performance evaluation.
At the year end, the structure included an Audit committee, a Risk committee, a Management Engagement committee and a Remuneration and Nomination committee. The terms of reference for each of the committees are available on the Company's website and upon request from the Company Secretary.
Audit committee
The membership and activities of the Audit committee are described in its report below.
Risk committee
The membership and activities of the Risk committee are described in its report below.
Management Engagement committee
The Management Engagement committee comprises all Directors. It meets at least once a year to consider the performance of the Investment Manager and other third party service providers; the terms of their engagement and continued appointment. At the annual committee meeting held in October 2019, the committee independently evaluated the performance and services provided by the Investment Manager. As with previous years, this took the form of a questionnaire completed by the Administrator and the Depositary rating the services provided by the Investment Manager and giving feedback where necessary.
The committee discussed the questionnaire, the overall performance of the Investment Manager and the terms of the investment management agreement, as set out in note 21 below, and based on results, the continued appointment of the Investment Manager is considered to be in the best interests of the shareholders as a whole. It was recommended, and subsequently approved by the Board, that Gravis Capital Management Limited be retained as Investment Manager. In addition, the continued engagement of the third party service providers whom the committee independently evaluates was recommended to, and approved by, the Board.
During the year, the Board decided it would be in the best interests of shareholders to conduct a formal broker tender process in order to assist in assessing the performance of the existing broker against other providers in the market and to determine whether it was appropriate to seek a new firm as broker. As a result of this process, the Board found that the experience within the sector as well as the strength of the overall team demonstrated by Investec Bank plc would be more aligned to the Company. Therefore, Investec Bank plc was appointed as sole broker post year end, with effect from 28 January 2020.
Remuneration and Nomination committee
The membership and activities of the Remuneration and Nomination committee are described in its report below.
Meetings
The Board holds meetings on a quarterly basis and additional meetings are held when necessary. The number of scheduled meetings of the Board and committees held during the year and the attendance of individual Directors are shown below:
Number of meetings attended during
the year
----------------------------------------
Number Alex Colin Joanna Marykay
of
Meetings meetings Ohlsson Huelin Dentskevich Fuller(1)
held
-------------------------------------- -------- -------- ------ ----------- ---------
Quarterly Board 4 4 4 4 -
Audit committee 4 4 4 4 1
Risk committee 1 1 1 1 1
Management Engagement committee 1 1 1 1 -
Remuneration and Nomination committee 3 3 3 3 -
-------------------------------------- -------- -------- ------ ----------- ---------
Total number of meetings attended 13 13 13 13 2
-------------------------------------- -------- -------- ------ ----------- ---------
1. Appointed as a Director of the Company and became a member of all committees on 6 November 2019.
During the year, 15 additional Board meetings were held. These meetings were in respect of capital raises, increasing the RCF, approval of the interim and annual financial statements, allotment of shares, conflicted investments and the appointment of an additional Director.
At each Board and committee meeting, the Directors follow a formal agenda, circulated in advance by the Company Secretary, which may include a review of the Group's investments and associated matters such as gearing, dividend policy, asset allocation, risks, marketing and investor relations, economic and sector issues, regulatory changes and corporate governance best practice. The Company's service providers also provide the Board with relevant information to support each formal agenda.
The Board also considers the Company's investment policy, objective and strategy at these meetings.
During the year, the Directors visited the offices of the Investment Manager for their annual review of the Investment Manager. At this visit the Directors and the Investment Manager considered the following:
- the Company's strategy and investment objectives; - the potential growth of the Company; - portfolio monitoring; - the principal and emerging risks and principal uncertainties;
- key controls to mitigate the principal risks and assurance work undertaken to test their effectiveness;
- shareholder engagement; - the impact of the revised AIC Code published in February 2019; - marketing; - key findings and enhancements to AML/CFT controls; and - the Investment Manager's current resources and resource planning.
Company Secretary
The Board has access to the Company Secretary to advise on governance and day-to-day administrative matters. The Company Secretary is also responsible to the Board for ensuring the timely delivery of the information and reports which the Directors require and that the statutory obligations of the Company are met.
Market Abuse Regulation
Following the implementation of MAR on 3 July 2016, the Board formally adopted revised procedures in relation to the management, identification and disclosure of inside information and share dealing in accordance with MAR.
Anti-bribery and tax evasion
The Company has developed appropriate anti--bribery policies and procedures. The Company has a zero-tolerance policy towards bribery and is committed to carry out its business fairly, honestly and openly.
The Company does not tolerate tax evasion in any of its forms in its business. The Company complies with the relevant UK law and regulation in relation to the prevention of facilitation of tax evasion and supports efforts to eliminate the facilitation of tax evasion worldwide. The Company works to make sure its stakeholders share this commitment.
AIFMD
The Company is classed as an externally managed AIF under AIFMD. The Board has appointed the Investment Manager as the authorised AIFM to the Company and Apex Financial Services (Corporate) Limited as the Company's Depositary under the Directive.
AIFM remuneration
The Company's Investment Manager is authorised as an AIFM by the FCA under the AIFMD regulations. The Company has provided disclosures on its website incorporating the requirements of the AIFMD regulations.
The total remuneration paid to the Investment Manager by the Company is disclosed in note 21 to the financial statements.
MiFID II
The ordinary shares and C shares (while in issue) of the Company are considered as 'non-complex' in accordance with MiFID II.
Non-mainstream pooled investments
The Board notes the rules of the FCA on the promotion of non-mainstream pooled investments.
The Board confirms that it conducts the Company's affairs, and intends to continue to conduct its affairs, so that the Company's shares will be 'excluded securities' under the FCA's rules. This is on the basis that the Company, which is resident outside the EEA, would qualify for approval as an investment trust by the Commissioners for HM Revenue and Customs under Sections 1158 and 1159 of the Corporation Tax Act 2010 if resident and listed in the UK. Therefore, the Company's shares will not amount to non-mainstream pooled investments. Accordingly, promotion of the Company's shares will not be subject to the FCA's restriction on the promotion of non-mainstream pooled investments.
COMPOSITION, SUCcESSION AND EVALUATION
REMUNERATION AND NOMINATION COMMITTEE REPORT
I am pleased to present the Remuneration and Nomination committee report for the year ended 31 December 2019.
Statement from the chair
At 31 December 2019, the committee comprised all four Directors of the Company, all of whom are considered independent.
The committee met three times during the year to consider, amongst other matters, the recommendations from the external Board evaluation, the appointment of an additional director to the Board and an increase in the Directors' remuneration.
The main duties of the committee are:
- to review the structure, size and composition, including skills, knowledge, experience and diversity of the Board and its committees and make recommendations to the Board to ensure a balanced, independent and effective board in the context of the requirements of the Company;
- to assist the Board in developing a fair and transparent framework for setting the levels of Directors' remuneration while having regard to the Company's financial position and performance, remuneration in other companies of comparable scale and complexity and market statistics generally; and
- to regularly review the policies of the Company on remuneration, appointments, diversity, succession planning and tenure.
A copy of the terms of reference within which the committee operates is available on the Company's website or from the Company Secretary upon request.
Board and committee composition
As a result of the external Board evaluation carried out in 2018 by Stephenson, a specialist consultancy firm independent of the Company, the Directors and the Investment Manager, the Board commenced the recruitment of a fourth director to complement and strengthen its existing skills and experience as it continues the implementation of the Company's strategy.
As Stephenson had performed the external Board evaluation they were engaged to assist with the recruitment. A number of potential candidates were identified. Further to which, Ms Fuller, having the desired background and expertise, was appointed to the Board and became a member of all committees with effect from 6 November 2019.
Additionally, as a result of the external Board evaluation, during the year a Risk committee was formed with its first meeting being held in December 2019. The members of the Risk committee at the year end comprised all Directors and its terms of reference are available on the Company's website and from the Company Secretary upon request.
Directors' attendance at all committee meetings held during the year and their relevant experience is detailed above.
Independence
The committee has reviewed the conflicts, relationships, other positions and tenure of all the Board members and continues to be satisfied that no material interests exist which would materially impact the ability of each Director to exercise independent judgement.
Accordingly, the Board considers all Directors on the Board to be independent in character and judgement and entirely independent of the Investment Manager.
The Directors' conflicts of interest are detailed in note 21.
Tenure
The Board's policy regarding tenure of service, including in respect of the Chairman, is that any decisions regarding tenure will balance the need to provide and maintain continuity, knowledge, experience and independence, against the need to periodically refresh the Board composition in order to maintain an appropriate mix of the required skills, experience, age and length of service.
Succession
The Board does not consider that lengthy service in itself necessarily undermines a Director's independence nor that each Director, including the Chairman, should serve for a finite fixed period. However, based on the revised principles of the AIC Code, the committee reviewed and recommended to the Board, subject to re-election, the staged rotation of Directors to ensure the continuity and stability of experience remains.
Diversity
Diversity is an important consideration in ensuring that the Board and its committees have the right balance of skills, experience, independence and knowledge necessary to discharge their responsibilities. The right blend of perspectives is critical to ensuring an effective board and a successful company.
Board diversity, including, but not limited to, gender, ethnicity, professional and industry specific knowledge and expertise, understanding of geographic markets and different cultures, is taken into account when evaluating the skills, knowledge and experience desirable to fill vacancies on the Board as and when they arise. Board appointments are made based on merit and calibre with the most appropriate candidate, who is the best fit for the Company, being nominated for appointment and as a result no measurable targets in relation to Board diversity have been set.
The committee believes the Directors provide, individually and collectively, the breadth of skill and experience to manage the Company.
Overboarding
The Directors consider that as an investment company, the Company demands less time commitment than would be required of an executive director of an operating company. The Directors also believe that a formulaic approach to assessing whether a director is able to effectively discharge their duties is not appropriate given the nature of the Company and directorships.
Prior to appointment to the Board, a Director must disclose existing significant commitments and confirm that they are able to allocate sufficient time to the business of the Company. In addition, a Director must consult with the Chairman or Senior Independent Director from time to time prior to taking on any new listed, conflicted, time consuming or otherwise material board appointments and promptly notify the Company Secretary of any new board appointments which they take on. On an annual basis, through the Board's internal evaluation, as described below, each Director's continuing ability to meet the time requirements of the role is assessed by considering, amongst other things, their attendance at Board, committee and other ad hoc meetings and events of the Company held during the year as well as the nature and complexity of other, both public and private, roles held.
Directors' attendance at all Board and committee meetings held during the year is detailed above. None of the Directors hold an executive position of a public company or chair a public operating company.
The committee believes all the Directors have sufficient time to meet their Board responsibilities.
Performance evaluation
The Directors are aware that they need to continually monitor and improve performance and recognise that regular Board evaluation provides a valuable feedback mechanism for improving Board effectiveness.
An external evaluation is carried out every three years with intervening years seeing internal evaluations by means of a questionnaire. The questionnaire is specifically designed to assess the strengths and independence of the Board, the Chairman and the individual Directors, the performance and focus of Board and committee meetings, the need of additional information required to facilitate Board discussions and each Director's continuing capacity.
This year, all Directors apart from Marykay Fuller, due to date of her appointment, undertook an internal evaluation.
The results of the internal evaluation were presented to the Remuneration and Nomination committee, with the below recommendations being approved by the Board on 21 January 2020.
- Alex Ohlsson to resign as a member of the Audit committee; - Marykay Fuller to become chair of the Management Engagement committee; - Marykay Fuller to become chair of the Remuneration and Nomination committee;
- Marykay Fuller to receive an additional GBP5,000 for her appointment as chair of the Management Engagement committee and the Remuneration and Nomination committee to reflect the additional duties and responsibilities for these roles; and
- Joanna Dentskevich to be appointed as Senior Independent Director.
All the recommendations are with immediate effect except for the change to the chair of the Remuneration and Nomination committee which will become effective upon Marykay Fuller reaching one year's membership of the committee.
As a result of the evaluation, the Board considers that all Directors continue to make an effective contribution and have the requisite skills and experience to continue to provide able leadership and direction for the Company.
Re-election
Beyond the requirements of the Articles, and in accordance with the AIC Code, the Board has agreed a policy whereby all Directors will seek annual re-election at the Company's AGM. Any Director not re-elected would resign in accordance with applicable Jersey regulatory requirements.
Following her appointment as a Director during the year, Marykay Fuller will be standing for election at the forthcoming AGM.
Taking into account matters considered above, the Board strongly recommends the re-election/election of all Directors on the basis of their experience and expertise in investment matters, their independence, capacity and continuing effectiveness and commitment to the Company.
Remuneration
The Directors' remuneration report, below, details the remuneration policy and the Directors' remuneration during the year.
Joanna Dentskevich
Chair of the Remuneration and Nomination committee
18 March 2020
AUDIT, RISK AND INTERNAL CONTROL
AUDIT committee report
I am pleased to present the Audit committee report for the year ended 31 December 2019.
Statement from the chair
On 22 October 2019, the Audit and Risk committee was separated into an Audit committee and a Risk committee to satisfy the recommendation of the 2018 external Board evaluation. In December 2019, the committee met to review its terms of reference (a copy of which is available on the Company's website or upon request from the Company Secretary) to ensure effective operation in conjunction with the Risk committee. The terms of reference require the committee to monitor the Company's financial reporting, internal controls and external audit process.
The committee is responsible for making recommendations to the Board in respect of the appointment, re-appointment or removal of the Auditor and to approve its remuneration and terms of engagement. The committee met with the Auditor in December 2019 to review, challenge and agree their audit plan, and again in March 2020 to discuss their audit report and opinion, after the conclusion of the audit.
Composition
At 31 December 2019, the committee comprised all four of the Company's independent Directors. As detailed in the Remuneration and Nomination committee report above, the Chairman, Alex Ohlsson, resigned as a member of the Audit committee on 21 January 2020 in line with corporate governance best practice as set out in the AIC Code.
The Board has agreed that the committee chair, Colin Huelin, a chartered accountant, has recent and relevant financial experience as required by the provisions of the AIC Code.
The committee formally met four times during the year ended 31 December 2019. Details of attendance at meetings held during the year under review are set out above.
Although not members of the committee, the Company Secretary, the Investment Manager, the lead audit partner and representatives from the Company's Auditor are invited to attend committee meetings. The Auditor has the opportunity to meet with the committee without representatives of the Investment Manager being present.
The committee chair meets when appropriate with the Auditor ahead of committee meetings to review key audit areas for discussion with the committee.
The Auditor is not present when their performance and/or remuneration is discussed.
Financial reporting
The committee considered the requirements of the UK Companies Act 2006 (Strategic Report and Directors' Report) Regulation 2013 with which it is complying voluntarily, in line with best practice reporting. The committee specifically reviewed the Company's annual report and financial statements to conclude whether it is fair, balanced, understandable, comprehensive and consistent with prior years and how the Board assesses the performance of the Company's business during the financial year, as required under the AIC Code.
As part of this review, the committee considered if the annual report and financial statements provided the information necessary to shareholders to assess the Company's position and performance, strategy and business model, and reviewed the description of the Company's key performance indicators as well as updating the governance section of the annual report.
The committee presented its conclusions to the Board and the Board concluded that it considered the annual report and financial statements, taken as a whole, to be fair, balanced and understandable and to provide the information necessary for the shareholders to assess the Company's position and performance, business model and strategy.
In addition to the above matters, the committee's work was focused on the following areas:
- reviewing and challenging the results of the Investment Manager's stress tests for the purpose of the viability statement having confirmed that the assumptions applied were in accordance with those previously approved by the Board, and being satisfied with the rationale for selecting the duration of five years for the viability period;
- reviewing, in conjunction with the Risk committee, the effectiveness of the internal control environment of the Company and the Company's compliance with its legal and regulatory requirements;
- reviewing and recommending to the Board significant accounting matters and accounting disclosures in the half-yearly and annual financial statements of the Company including matters of judgement in relation to valuation. This year, the areas examined included the discount rates applied in the valuation process, and the performance of the investments. The committee discussed these matters with the Valuation Agent and the Auditor, including the Auditor's valuation specialist; and
- overseeing the Company's relations with its Auditor including assessing the conduct and effectiveness of the audit process and the Auditor's independence and objectivity and recommending the Auditor's re-appointment.
The committee has direct access to the Auditor and to the key senior staff of the Investment Manager and reports its findings and recommendations to the Board, which retains the ultimate responsibility for the financial statements of the Company. All recommendations during the year were accepted by the Board.
Significant issues considered
After discussions with the Investment Manager and the Auditor, the committee determined that the key risk of material misstatement of the Company's financial statements was in relation to the valuation of investments.
Valuation of investments
As outlined in note 12, the total carrying value of financial assets at fair value at 31 December 2019 was GBP453.9 million. Market quotations are not available for these financial assets such that their valuation is undertaken using a discounted cash flow methodology. This requires a series of material judgements and estimates to be made to the financial statements, as further explained in note 19.
The Valuation Agent performs semi-annual financial asset valuations and provides semi--annual valuation reports to the Board (previously, all valuations had been performed on a quarterly basis). Any assets which may be subject to discount rate changes continue to be valued and reported to the Board on a quarterly basis. The fair value of the financial assets was discussed with the Investment Manager at each quarterly Board meeting. The committee discussed with the Valuation Agent their views of the market and relevant discount rates of individual investments in the portfolio as part of the half--year and year--end valuation process in July 2019 and January 2020 respectively. The chair of the committee and one other committee member also met with the Valuation Agent in January 2020 to discuss the valuation process and methodology.
In December 2019, the committee met with the Auditor to review and agree their plan for the audit of the financial statements and in particular their approach for the audit of valuation and their proposal to include a sample of investments that were classified as conflicted and therefore, by their nature, approved by the Board. Following discussions with the Auditor in March 2020 regarding the findings and conclusion of their audit, the committee concluded that the methodology adopted was appropriate and in accordance with the terms of engagement of the Valuation Agent.
The discount rates adopted to determine the valuation are selected and recommended by the Valuation Agent. The discount rates are applied to the expected future cash flows for each investment's financial forecasts, to arrive at a valuation (discounted cash flow valuation). The resulting valuation is sensitive to the discount rate selected. The Valuation Agent is experienced and active in the area of valuing these investments and adopts discount rates reflecting their current and extensive experience of the market.
The discount rate assumptions and the sensitivity of the valuation of the investments to this discount rate are disclosed in note 19.4 to the financial statements.
The committee discussed the material estimates and judgements applied in the valuation process and also compared this to feedback from the Investment Manager. After discussions with the Auditor, the committee was satisfied that the range of discount rates was appropriate for the valuation carried out by the Valuation Agent.
Performance of investments
The Board discusses with the Investment Manager the performance of individual investments within the portfolio each quarter. As explained in the Investment Manager's report, the Group had its first default on a loan. The loan was revalued downward by GBP0.6 million, or 13 bps of NAV, by the Valuation Agent. The Group has an exclusivity agreement in place for the sale of the Project Company and post period end it exchanged with the buyer on a sale and purchase agreement. It is anticipated that the sale will complete in Q2 2020 pending regulatory approval from Ofgem. The Group also intends to dispose of one other securitised asset, a grid entry unit, from the same business. The Investment Manager expects the recovery from the sale of both assets to be slightly higher than the current carrying value. The committee considered in detail the downward revaluation applied to this asset and were satisfied with the Valuation Agent's approach.
Accounting policies, narrative reporting, critical accounting estimates and key judgements
The committee reviewed the narrative reporting, accounting policies and note 2.2 to the financial statements that relate to critical accounting estimates and key judgements and confirmed that they are appropriate for the Company.
Going concern and viability statement
The committee considered the Investment Manager's forecasts of cash flows and net debt as well as the financing facilities available to the Company. Following this review and a discussion of the sensitivities, the committee confirmed that it continues to be appropriate to follow the going concern basis of accounting in the annual report and financial statements.
Further detail on the basis of the going concern and viability assessment by the Directors is set out in the strategic report on above.
External audit
Mr Karl Hairon is the partner from PwC responsible for the audit. The first audit performed by Mr Hairon and PwC was in respect of the annual report and financial statements for the period ended 31 December 2016.
Mr Hairon is subject to mandatory rotation at the end of the 2020 audit process.
In March 2020, the Auditor explained the results of their audit and that on the basis of their audit work, there were no adjustments proposed that were material in the context of the financial statements as a whole.
To fulfil its responsibility regarding the independence of the Auditor, the Audit committee considered:
- a report from the Auditor describing its arrangements for maintaining independence; and - the extent and nature of the non-audit services provided by the Auditor.
The Audit committee reviews the scope and nature of all proposed non-audit services before engagement, to seek to ensure that the independence and objectivity of the Auditor is safeguarded. The committee has agreed a policy whereby, in order to avoid any potential impact on the independence and objectivity of the Auditor, the Company will not seek to obtain any non-audit services from the Auditor, with the exception of the review of the half-yearly report and financial statements.
During the year under review, the Auditor carried out a review of the half-yearly report and financial statements for the period ended 30 June 2019. PwC confirmed that this had not impacted their independence and outlined the reasons for this. The committee considered this and is satisfied that these non-audit related services had no bearing on the independence of the Auditor.
The following table summarises the remuneration paid to PwC for audit and non-audit services during the year ended 31 December 2019:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
----------------------------- ----------- -----------
Audit fees
Annual audit of the Company 75 59
----------------------------- ----------- -----------
Non-audit services
Review of half-yearly report 24 15
----------------------------- ----------- -----------
Total 99 74
----------------------------- ----------- -----------
The committee reviewed the effectiveness of the audit process during the year, considering performance, fees, objectivity, independence, relevant experience and materiality with PwC. To assess the effectiveness of the Auditor, the committee reviewed:
- the Auditor's fulfilment of the agreed audit plan and variations from it;
- the Auditor's report to the committee, highlighting any issues that arose during the course of the audit; and
- feedback from the Investment Manager and the Administrator evaluating the performance of the audit team.
Following this review, the Audit committee has recommended the re-appointment of PwC as the Company's Auditor at the 2020 AGM.
Colin Huelin FCA
Chair of the Audit committee
18 March 2020
RISK committee report
I am pleased to present the Risk committee report for the year ended 31 December 2019.
Statement from the chair
The Risk committee was established on 22 October 2019 to satisfy the recommendation of the 2018 external Board evaluation. In December 2019, the committee held its inaugural meeting to approve its terms of reference to ensure effective operation in conjunction with the Audit committee, a copy of which is available on the Company's website or from the Company Secretary upon request.
Purpose
The purpose of the committee is to assist the Board in its oversight and assessment of the risks that the Company is exposed to, its risk appetite, the effectiveness of the risk management framework and ensuring the external reporting of the Company gives a fair, balanced and understandable reflection of risk having due regard to the Company's investment objective and policy and prospectus.
Composition
The committee comprises all four Directors of the Company, all of whom are considered independent. Details of attendance at meetings held during the year are set out above.
Responsibilities
The committee's key responsibilities, amongst others, are to:
- review the risks the Company is exposed to and consider their likelihood and impact if they were to materialise;
- review, in conjunction with the Audit committee, the effectiveness of the internal controls; - review the risk management framework;
- carry out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity and ability to deliver its strategy;
- review the report of the risk officer of the AIFM prior to consideration of the principal and emerging risks and the principal uncertainties to be included in the half-yearly and annual financial statements; and
- include in the annual report of the Company a description of the principal and emerging risks along with explanations on how they are being managed or mitigated and any change from previous years.
Risk monitoring and management
The Company has in place a risk register to manage and track identified risks and uncertainties and potential emerging risks that the committee believes the Company is exposed to. For each risk, the committee considers, inter alia, their impact on the Company achieving its investment policy along with the nature and extent of the risk, their mitigants and any driving factors which may increase the risk.
The level of residual risk determined as part of this analysis assists the Board (on the committee's recommendation) to determine whether it is within the Company's appetite and any actions needed to be taken. The register is reviewed at least twice a year by the committee and serves as a useful component in tracking the principal and emerging risks of the Company. The risk matrix was reviewed and updated by the committee in December 2019 and subsequently approved by the Board.
Details of the Company's risk management framework, including the role of the AIFM, are set out above.
Principal risks, emerging risks and principal uncertainties
Post year end, the Risk committee met, with the Investment Manager present, to consider and recommend for approval by the Board the principal risks, emerging risks and the principal uncertainties; descriptions of which, along with explanations on how they are being managed and mitigated where applicable and any change from previous years, are detailed above.
More recently, and in light of the emergence and spread of Coronavirus (COVID-19), the Group's portfolio was reviewed to consider the potential impact of the virus. The Chairman's commentary on this can be found above and further analysis in the risk management section also above.
Joanna Dentskevich
Chair of the Risk committee
18 March 2020
remuneration
DIRECTORS' REMUNERATION report
The Directors are pleased to present their remuneration report for the year ended 31 December 2019.
The Directors' remuneration report provides details on remuneration in the year. Although it is not a requirement under Companies Law to have the Directors' remuneration report or the Directors' remuneration policy approved by shareholders, the Board believes that as a company whose shares are admitted to trading on the LSE, it is good practice for it to do so. The Directors' remuneration policy will be put to a shareholder vote at least once every three years and in any year if there is to be a change in the Directors' remuneration policy.
A resolution will be put to shareholders at the forthcoming AGM to be held on 21 May 2020 to receive and approve the Directors' remuneration report.
This report is not subject to audit.
Voting at AGM
The Directors' remuneration reports for the year ended 31 December 2018 and the year ended 31 December 2019 were approved by shareholders at the respective AGMs held on 6 June 2018 and 23 May 2019. The votes cast by proxy were as follows:
Directors' remuneration report
------------------------------------------------
2019 2018
----------------------- -----------------------
Number % of Number % of
of of
votes cast votes cast votes cast votes cast
------------------------- ----------- ---------- ----------- ----------
For 131,653,375 99.604 127,858,984 99.99
Against - - 4,750 0.01
At Chairman's discretion 523,935 0.396 - -
------------------------- ----------- ---------- ----------- ----------
Total votes cast 132,177,310 100 127,863,734 100
------------------------- ----------- ---------- ----------- ----------
Number of votes withheld 15,427,330 - - -
------------------------- ----------- ---------- ----------- ----------
Performance of the Company
The Board is responsible for the Company's investment strategy and performance. The management of the Group's investment portfolio is delegated to the Investment Manager through the investment management agreement, as referred to in note 21.
The tables below illustrate the total shareholder return for a holding in the Company's shares as compared to the FTSE All-Share Index. The Company considers this to be an appropriate index against which to measure the Company's performance, in the absence of a meaningful quoted benchmark index.
Cumulative performance to 31 December 2019
Period Three months Six months One year Two years Four years Since launch GCP Asset Backed Income Fund Limited 1.7% 4.6% 10.2% 20.2% 33.9% 34.8% FTSE All-Share 4.2% 5.5% 19.1% 7.7% 42.3% 41.2% ------------------------------------- ------------ ---------- -------- --------- ---------- ------------
Annual performance to 31 December 2019
Year ended Year ended Year ended Year ended
31 December 31 December 31 December 31 December
Year 2019 2018 2017 2016
------------------------------------- ----------- ----------- ----------- -----------
GCP Asset Backed Income Fund Limited 10.2% 9.1% 4.4% 6.7%
FTSE All-Share 19.1% (9.5)% 13.1% 16.8%
------------------------------------- ----------- ----------- ----------- -----------
Source: Bloomberg. Basis: percentage growth, shareholder total return with net income reinvested.
Past performance is not a guide to future performance.
Directors' remuneration for the year ended 31 December 2019
The Remuneration and Nomination committee met in July 2019 to review Directors' remuneration levels in the context of the scale of the Company's operations, the level of involvement and time commitment required by the Directors and the remuneration of other companies of comparable scale and complexity. The Remuneration and Nomination committee recommended to the Board that, with effect from 1 July 2019, each Director receives GBP40,000, the Chairman receives an additional amount of GBP15,000 and the chairs of the Audit committee and the Risk committee receive an additional amount of GBP10,000. All recommendations were approved by the Board.
Post year end, the Board approved the recommendation of the Remuneration and Nomination committee for the chair of the Management Engagement committee and the Remuneration and Nomination committee to receive an additional GBP5,000.
The fees paid to the Directors in the year ended 31 December 2019 are set out below.
Audit Risk
Directors' C share issue committee fee committee fee Total
fee fee
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------ --------------- --------------- --------------- ----------
2019 2018 2019 2018 2019 2018 2019 2018 2019 2018
------------- ----- ----- ------- ------ ------- ------ ------- ------ ---- ----
Alex Ohlsson 46 37 - 5 - - - - 46 42
Colin
Huelin 35 30 - 5 7 5 - - 42 40
Joanna
Dentskevich 35 30 - 5 - - 5 - 40 35
Marykay
Fuller(1) 6 - - - - - - - 6 -
------------- ----- ----- ------- ------ ------- ------ ------- ------ ---- ----
Total 122 97 - 15 7 5 5 - 134 117
------------- ----- ----- ------- ------ ------- ------ ------- ------ ---- ----
1. Appointed as a Director of the Company on 6 November 2019.
Directors' expenses for the year ended 31 December 2019 totalled GBP2,000 (31 December 2018: GBP1,000).
Relative importance of spend on pay
The table below sets out, in respect of the year ended 31 December 2019:
a) the remuneration paid to the Directors; and
b) the distributions made to shareholders by way of dividend.
31 December 31 December
2019 2018 Change
Period GBP'000 GBP'000 %
------------------------------------------------------------------------ ----------- ----------- ------
Directors' remuneration 134 117 14.53
Dividends paid to shareholders (including dividends settled in shares1) 26,461 18,991 39.33
------------------------------------------------------------------------ ----------- ----------- ------
1. Dividends settled in shares are where shareholders have elected to take the scrip dividend alternative.
Directors' interests
There is no requirement under the Company's Articles for Directors to hold shares in the Company. At 31 December 2019, the interests of the Directors in the ordinary shares of the Company are set out below(1) :
31 December 31 December
2019 2018
Number Number
Period of shares of shares
------------------- ----------- -----------
Alex Ohlsson 50,000 50,000
Colin Huelin 34,142 34,142
Joanna Dentskevich 40,379 39,800
Marykay Fuller - -
------------------- ----------- -----------
1. The Directors' shareholdings are either direct and/or indirect holdings of the ordinary shares in the Company.
There have been no changes to any of the above holdings between 31 December 2019 and the date of this report.
DIRECTORS' REMUNERATION pOLICY
A resolution to approve the Directors' remuneration policy was proposed and passed at the Company's AGM held on 23 May 2019. The remuneration policy provisions set out below will apply until they are next put to shareholders for renewal of that approval.
In accordance with the AIC Code, no Director is involved in deciding his/her own remuneration.
The Board considers that Directors' fees should reflect duties, responsibilities and the value of their time spent and as such the Chairman and the chairs of the Board committees receive additional remuneration for these roles.
Directors are not eligible for bonuses, pension benefits, share options, long-term incentive schemes or other benefits in respect of their services as non--executive Directors of the Company. In addition, no payment will be made to a Director for loss of office, or as consideration for or in connection with his/her retirement from office.
The Board may, however, allow for additional remuneration to be paid where Directors, at the request of the Company, are involved in ad hoc duties beyond those normally expected as part of the appointment.
The remuneration of each of the Directors is subject to fixed fee arrangements, paid quarterly in arrears. Part of the Directors' fee may be paid in the form of fully paid shares in the capital of the Company.
The aggregate of all the Directors' remuneration is subject to an annual cap of GBP300,000 in accordance with the Articles and shall be reviewed annually.
The Company will reimburse the Directors all reasonable travelling, hotel and other expenses properly incurred by them in or about the proper performance of their duties and the taking of reasonable independent legal advice concerning matters relating to their directorship, provided that if and when required by the Company, they produce to the Company receipts or other evidence of actual payment of expenses.
The Company is committed to ongoing shareholder dialogue and any views expressed by shareholders on the fees being paid to Directors would be taken into consideration by the Board when reviewing the Directors' remuneration policy and in the annual review of Directors' fees.
Directors' fee levels
The Board has set fee levels as detailed below. Fees are reviewed annually in accordance with the above policy. The fee for any new Director appointed will be determined on the same basis.
At the beginning of the year each Director received GBP30,000, with an additional GBP7,000 paid to the Chairman and an additional GBP5,000 paid to the chair of the Audit committee.
As noted earlier in this Remuneration and Nomination committee report, Directors' remuneration was increased with effect from 1 July 2019 so that each Director receives GBP40,000, with an additional GBP15,000 paid to the Chairman and an additional GBP10,000 paid to the chairs of the Audit committee and the Risk committee.
In respect of the year ending 31 December 2020, it is expected that Directors' remuneration will remain the same, except for the chair of the Management Engagement committee and Remuneration and Nomination committee who will receive an additional GBP5,000 to reflect the additional duties and responsibilities for these roles.
Approval
The Directors' remuneration report was approved by the Board and signed on its behalf by:
Joanna Dentskevich
Chair of the Remuneration and Nomination committee
18 March 2020
DIRECTORS' REPORT
Directors
The Directors in office during the year and at 31 December 2019 are shown above.
The terms and conditions of the appointment of the Directors are formalised in letters of appointment, copies of which are available for inspection at the Company's registered office. None of the Directors has a contract of service with the Company nor has there been any other contract or arrangement between the Company and any Director at any time during the year.
The Company has Directors' and Officers' liability insurance and civil liability insurance. Under the Company's Articles, the Directors are provided, subject to the provisions of the Jersey legislation, with an indemnity in respect of liabilities which they may sustain or incur in connection with their appointment.
2019 general meetings
The 2019 AGM of the Company was held on 23 May 2019. Resolutions 1 to 10 related to ordinary business. Resolutions 11 and 12 related to special business as follows:
- that the Company be authorised to purchase up to 14.99% of its own ordinary shares; and
- that the Directors be authorised to allot and issue up to 38,027,209 ordinary shares (representing approximately 10% of the ordinary shares in issue as at the latest practicable date), as if the pre-emption rights in the Articles did not apply.
An EGM of the Company was also held on 23 May 2019 where the following resolution was put to shareholders:
- that in addition to Resolution 12 passed at the AGM (if passed) the Directors be authorised to allot and issue up to 38,027,209 ordinary shares (representing approximately 10% of the ordinary shares in issue as at the latest practicable date), as if the pre-emption rights in the Articles did not apply.
All resolutions put to shareholders at the AGM and EGM were passed with in excess of 90% of votes cast in favour.
2020 Annual General Meeting
The 2020 AGM will be held on 21 May 2020 at the registered office of the Company: 12 Castle Street, St Helier, Jersey JE2 3RT.
A separate notice convening the AGM will be distributed to shareholders with the annual report and financial statements on or around 7 April 2020, which includes an explanation of the items of business to be considered at the meeting. A copy of the notice will also be published on the Company's website.
Share capital
As detailed above, at the general meeting held on 23 May 2019, the Company was granted the authority to allot ordinary shares up to 20% of its total issued share capital at that date on a non pre--emptive basis, amounting to 76,054,418 ordinary shares.
On 27 June 2019, the Company issued 60,317,181 ordinary shares of no par value at a price of 105.00 pence per share, raising gross proceeds of GBP63.3 million. The placing price represented a 2.3% discount to the closing share price of 107.50 pence per ordinary share on 22 May 2019 and a 3.0% premium to the Company's last published NAV as at 31 March 2019 per ordinary share of 101.99 pence. These shares were issued under the then existing shareholder authority and made pursuant to the exemptions to publishing a prospectus set out in the prospectus rules. The shares were issued to institutional investors and professionally advised private investors and were admitted to the Official List of the FCA and admitted to trading on the Premium Segment of the Main Market of the LSE.
At the date of this report, the Company may allot a further 15,737,237 shares under its existing authority.
The Company will be seeking shareholder approval at general meetings of the Company scheduled to be held on 21 May 2020 to renew its authority in respect of the disapplication of pre-emption rights over 20% of its ordinary shares in issue which it may then be able to issue by way of placings. This is expected to achieve cost savings for the Company in respect of prospectus documentation, whilst continuing to provide it with the ability to take advantage of investment opportunities as they arise and further broaden its investor base over time.
Details of the movements in share capital during the period are set out in the statement of changes in equity below and in note 18.
At 31 December 2019, the Company's issued share capital comprised 441,544,019 ordinary shares of no par value, none of which were held in treasury. At general meetings of the Company, every ordinary shareholder shall have one vote in respect of every ordinary share and every C shareholder, if any, shall have one vote in respect of every C share.
Share repurchases
As previously mentioned, at the AGM held on 23 May 2019, the Company was granted the authority to purchase up to 14.99% of the Company's ordinary share capital in issue at the date on which the notice of the AGM was published, amounting to 57,002,786 ordinary shares. No ordinary shares have been bought back under this authority. This authority will expire at the conclusion of, and renewal will be sought at, the AGM to be held on 21 May 2020.
The Company may hold any ordinary shares that it purchases in treasury or cancel them, in accordance with the Articles and the Companies Law. The Directors believe that it is desirable for the Company to have this choice. Holding the shares purchased in treasury will give the Company the ability to re-sell or transfer them quickly and cost effectively and will provide the Company with additional flexibility in the management of its capital base. The decision whether to cancel any shares purchased by the Company or hold such shares in treasury will be made by the Directors at the time of purchase, on the basis of the Company's and shareholders' best interests.
The Company did not hold any shares in treasury during the year, or at the year end.
Dividends
Details of the dividends paid and declared during the period are set out in note 10.
As the last dividend in respect of any financial period is payable prior to the relevant AGM, it is declared as an interim dividend and, accordingly, there is no final dividend payable. The Board is conscious that this means that shareholders will not be given the opportunity to vote on the payment of a final dividend. Accordingly, it has been decided that shareholders will be asked to confirm their approval of the Company's dividend policy.
A resolution will be put to shareholders at the forthcoming AGM to renew the Company's scrip dividend facility that gives ordinary shareholders the opportunity to elect to receive new ordinary shares, these being scrip shares, in place of their cash dividend payments.
Significant voting rights
At 31 December 2019, the Company had been informed of the following holdings representing more than 3% of the voting rights of the Company:
Percentage
of
Shares total voting
Name held rights
---------------------------------- ---------- ------------
CCLA Investment Management 40,310,494 9.13%
Valu-Trac Investment Management 35,261,927 7.99%
Close Asset Management 32,571,847 7.38%
EFG Harris Allday 21,177,218 4.80%
Foresight Group 21,078,454 4.77%
West Yorkshire Pension Fund 17,421,098 3.95%
Brooks MacDonald Asset Management 17,154,118 3.89%
BMO Global Asset Management 14,510,071 3.29%
Canopius 13,398,393 3.03%
---------------------------------- ---------- ------------
The table of significant shareholders disclosed forms part of note 2.2 in the financial statements.
The Company has not been informed of any changes to the interests between 31 December 2019 and the date of this report.
Auditor
The Directors holding office at the date of this annual report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditor is unaware. Each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's Auditor is aware of that information.
PwC has expressed its willingness to continue as Auditor of the Company and resolutions for its re--appointment and to authorise the Audit committee to determine its remuneration will be proposed at the forthcoming AGM.
Financial risk management
Information about the Company's financial risk management objectives and policies is set out in note 19 to the financial statements.
Requirements of the Listing Rules
Listing Rule 9.8.4 requires the Company to include specified information in a single identifiable section of the annual report or a cross reference table indicating where the information is set out. The information required under Listing Rule 9.8.4(7) in relation to allotments of shares is set out above. The Directors confirm that there are no other disclosures required in relation to Listing Rule 9.8.4.
Approved by the Board
Alex Ohlsson
Chairman
18 March 2020
STATEMENT OF DIRECTORS' RESPONSIBILITIES
IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS
Under the terms of the DTRs of the FCA, the Directors are responsible for preparing the annual report and financial statements in accordance with applicable law and IFRS.
Companies Law requires the Directors to prepare financial statements for each year, which give a true and fair view of the state of affairs of the Company and the profit and loss for that year.
The Directors are required to:
- properly select suitable accounting policies and apply them consistently;
- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
- provide additional disclosures when compliance with the specific requirements of IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance;
- make judgements and estimates that are reasonable and prudent; and - make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that disclose with reasonable accuracy at any time the financial position of the Company. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors have overall responsibility for the maintenance and integrity of the corporate and financial information included on the Company's website.
Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors' responsibility statement
In accordance with the FCA's DTRs, each of the Directors, whose names are set out above, confirms that to the best of his or her knowledge:
- the annual report and financial statements have been prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
- the strategic report, including the Directors' report, includes a fair and balanced review of the development and performance of the business, and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.
So far as the Directors are aware, there is no relevant audit information of which the Auditor is unaware, and each Director has taken all steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit information and to establish that the Auditor is aware of that information.
The Directors confirm that they have complied with the above requirements in preparing the financial statements.
The annual report and financial statements, taken as a whole, are considered by the Board to be fair, balanced and understandable, and provide the information necessary for shareholders to assess the Company's position, performance, business model and strategy.
On behalf of the Board
Alex Ohlsson
Chairman
18 March 2020
INDEPENT AUDITOR'S REPORT
TO THE MEMBERS OF GCP ASSET BACKED INCOME FUND LIMITED
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
Our opinion
In our opinion, the financial statements give a true and fair view of the financial position of GCP Asset Backed Income Fund Limited (the "company") as at 31 December 2019, and of its financial performance and its 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 (Jersey) Law 1991.
What we have audited
The company's financial statements comprise:
- the statement of financial position as at 31 December 2019; - the statement of comprehensive income for the year then ended; - the statement of changes in equity for the year then ended; - the statement of cash flows for the year then ended; and
- the notes to the financial statements, which include a summary of significant accounting policies.
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 financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements of the company, as required by the Crown Dependencies' Audit Rules and Guidance. We have fulfilled our other ethical responsibilities in accordance with these requirements.
Our audit approach
Overview
Materiality
- Overall materiality was GBP11.3 million which represents 2.5% of net assets.
Audit scope
- The company is based in Jersey and the financial statements include its investments in subsidiaries and other investments as financial assets through profit or loss rather than consolidated in accordance with the IFRS 10 requirements for investment companies.
- Our audit work was performed solely in Jersey and London for the audit of the financial statements of the company.
- We tailored the scope of our audit taking into account the types of investments within the company, the involvement of the third parties and the accounting processes and controls.
Key audit matters
- Valuation of investments in the Subsidiary. - Acquisition of investments in the Subsidiary.
Audit scope
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the 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 financial statements as a whole, taking into account the structure of the company, the accounting processes and controls, and the industry in which the company operates.
Materiality
The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the 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 financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall company materiality for the financial statements as a whole as set out in the next column. 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 financial statements as a whole.
Overall company materiality
GBP11.3 million (2018: GBP9.6 million)
How we determined it
2.5% of net assets
Rationale for the materiality benchmark We believe that net assets is the most appropriate benchmark because this is the key metric of interest to investors. It is also a generally accepted measure used for companies in this industry.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above GBP565,000, as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED
THE KEY AUDIT MATTER
--------------------------- -----------------------------
Valuation of investments We performed the
in the Subsidiary following procedures:
Refer to Audit committee Discussions were
report, note 12 held with the directors
and 19 to the financial and Investment manager,
statements as appropriate,
The valuation of to ascertain the
investments in the controls over valuations
Subsidiary drives and gain understanding
a number of key of the portfolio
performance indicators, and movements during
such as net asset the year.
value, which is We evaluated the
of significant interest competency of the
to investors and company's external
the market. valuation agent
The fair value of in the context of
the investment in their ability to
the Subsidiary is generate a reliable
derived from the estimate of the
fair value of the fair value, by assessing
underlying loans their professional
to the end borrower. qualifications,
The valuations are experience and independence
performed using from the company.
contractual cash We engaged valuation
flows generated experts from PwC
by each loan facility UK London to assess
over a medium to the reasonableness
long term period of the methodology
and by selecting applied by management's
key assumptions expert with regards
such as the discount to a sample of investments
rate and macroeconomic and the reasonableness
assumptions such of key assumptions
as inflation, interest used.
and tax rates. We communicated
The nature of the directly with the
discounted cash investment manager
flow ("DCF") is to understand the
inherently subjective monitoring process
due to key assumptions of the borrowers'
used for the discount payments and financial
rate and the amount performance, in
or timing of cash identifying circumstances
flows supporting that can materially
the interest and impact the recoverability
capital repayments of the contractual
on debt positions cash flows.
held. We agreed a sample
The existence of of the contractual
significant estimation cash flows used
uncertainty, coupled in the DCF to the
with the fact that contractual payment
small percentage schedule of the
differences in assumptions loan facility agreements
to the valuations and checked the
when aggregated mathematical accuracy
could result in of the DCF calculation.
material misstatement, We challenged the
are the reasons assumptions used
for our specific in the valuation
audit focus and models.
attention to this We considered the
area. adequacy of the
company's disclosures
in respect of the
fair value of the
unlisted investments,
specifically the
estimates and judgements
taken by the company
in arriving at the
fair value of the
unlisted investments.
We also considered
the disclosure of
the degree of sensitivity
when a reasonably
possible change
in a key assumption
could give rise
to a change in the
fair value of the
unlisted investments.
Based on the above
procedures and the
audit of the Subsidiary
we found the fair
values adopted by
the company and
the disclosures
to be appropriate
and the assumptions
used to be supportable
and within a reasonable
range.
--------------------------- -----------------------------
Acquisition of investments Our audit procedures
in the Subsidiary with respect to
Refer to note 12 the acquisition
to the financial of the new underlying
statements loans included understanding
During the year, the controls over
the company has the process and
acquired new secured approval of the
loan notes to the new loan notes.
value of GBP89.5 For a sample of
million through new secured loan
the Subsidiary. notes advanced during
The acquisition the year, we tested
of the new secured the movement to
loan notes were facility agreements,
the most prominent note certificates
investment activity and cash payments.
for the company For a sample of
during the year secured loan notes
and represents a repaid during the
significant balance year, we tested
on the statement the movement to
of financial position, facility agreements
as a result was and cash payments.
an areas of audit We tested the existence
focus. of the loans to
independent confirmations
from the entities
to which the loan
has been advanced
to confirm the outstanding
balance at year
end on a sample
basis.
Based on the above
procedure, no differences
were identified
by our testing which
required reporting
to those charged
with governance.
--------------------------- -----------------------------
Other information
The directors are responsible for the other information. The other information comprises all the information included in the Annual report and financial statements ("the Annual Report") but does not include the financial statements and our auditor's report thereon.
Our opinion on the 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 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 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.
Responsibilities of the directors for the financial statements
The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards, the requirements of Jersey law and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the company'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 company or to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the 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 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 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 company'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 company's ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the 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 company to cease to continue as a going concern. For example, the terms of the United Kingdom's withdrawal from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the company and the wider economy.
- Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
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 financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Use of this report
This independent auditor's report, including the opinions, has been prepared for and only for the members as a body in accordance with Article 113A of the Companies (Jersey) Law 1991 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Report on other legal and regulatory requirements
Company Law exception reporting
Under the Companies (Jersey) Law 1991 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 financial statements are not in agreement with the accounting records.
We have no exceptions to report arising from this responsibility.
Listing Rules of the Financial Conduct Authority (FCA)
The company has reported compliance against the 2019 AIC Code of Corporate Governance (the "Code") which has been endorsed by the UK Financial Reporting Council as being consistent with the UK Corporate Governance Code for the purposes of meeting the company's obligations, as an investment company, under the Listing Rules of the FCA.
We have nothing material to add or draw attention to in respect of the following matters which we have reviewed based on the requirements of the Listing Rules of the FCA:
- The directors' confirmation that they have carried out a robust assessment of the principal and emerging risks facing the company, including a description of the principal risks, what procedures are in place to identify emerging risks, and an explanation of how those risks are being managed or mitigated.
- The disclosures that describe those risks and explain how they are being managed or mitigated.
- The directors' explanation as to how they have assessed the prospects of the company, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the directors' statement that they have carried out a robust assessment of the principal and emerging risks facing the company and the directors' statement in relation to the longer--term viability of the company. 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 Code; and considering whether the statements are consistent with the knowledge and understanding of the company and its environment obtained in the course of the audit.
Additionally, we have nothing to report in respect of our responsibility to report when:
- The directors' statement relating to going concern in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.
- The statement given by the directors that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the company's position and performance, business model and strategy is materially inconsistent with our knowledge of the company obtained in the course of performing our audit.
- The section of the Annual Report describing the work of the Audit committee does not appropriately address matters communicated by us to the Audit committee.
- The directors' statement relating to the company's compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for review by the auditors.
Karl Hairon
For and on behalf of
PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognized Auditor
Jersey, Channel Islands
18 March 2020
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARED 31 DECEMBER 2019
Year ended Year ended
31 December 31 December
Notes 2019 2018
----------------------------------------------------------------------------------- ----- ----------- -----------
Income GBP'000 GBP'000
Net changes in fair value of financial assets at fair value through profit or loss 3 33,675 26,506
Fee income 3 274 541
Deposit interest income 12 11
----------------------------------------------------------------------------------- ----- ----------- -----------
Total income 33,961 27,058
----------------------------------------------------------------------------------- ----- ----------- -----------
Expenses
Investment management fees 21 (3,715) (2,896)
Operating expenses 4 (1,198) (1,217)
Directors' remuneration 6 (136) (103)
----------------------------------------------------------------------------------- ----- ----------- -----------
Total expenses (5,049) (4,216)
----------------------------------------------------------------------------------- ----- ----------- -----------
Total operating profit before finance costs 28,912 22,842
----------------------------------------------------------------------------------- ----- ----------- -----------
Finance costs
Finance income 7 - 787
Finance expense 8 (875) (1,992)
----------------------------------------------------------------------------------- ----- ----------- -----------
Total finance costs (875) (1,205)
----------------------------------------------------------------------------------- ----- ----------- -----------
Total profit and comprehensive income 28,037 21,637
----------------------------------------------------------------------------------- ----- ----------- -----------
Basic earnings per share (pence) 11 6.81 7.27
----------------------------------------------------------------------------------- ----- ----------- -----------
Diluted earnings per share (pence) 11 6.81 6.54
----------------------------------------------------------------------------------- ----- ----------- -----------
All items in the above statement are derived from continuing operations.
STATEMENT OF FINANCIAL POSITION
AS AT YEARED 31 DECEMBER 2019
At At
31 December 31 December
2019 2018
Notes GBP'000 GBP'000
------------------------------------------------------ ----- ----------- -----------
Assets
Financial assets at fair value through profit or loss 12 453,877 378,350
Other receivables and prepayments 13 63 1,796
Derivative financial instruments 19 4 33
Cash and cash equivalents 14 8,687 9,206
------------------------------------------------------ ----- ----------- -----------
Total assets 462,631 389,385
------------------------------------------------------ ----- ----------- -----------
Liabilities
Other payables and accrued expenses 17 (1,473) (2,795)
Revolving credit facilities 15 (9,312) -
------------------------------------------------------ ----- ----------- -----------
Total liabilities (10,785) (2,795)
------------------------------------------------------ ----- ----------- -----------
Net assets 451,846 386,590
------------------------------------------------------ ----- ----------- -----------
Equity
Share capital 18 443,915 380,235
Retained earnings 7,931 6,355
------------------------------------------------------ ----- ----------- -----------
Total equity 451,846 386,590
------------------------------------------------------ ----- ----------- -----------
Ordinary shares in issue 18 441,544,019 379,962,298
------------------------------------------------------ ----- ----------- -----------
NAV per ordinary share (pence per share) 102.33 101.74
------------------------------------------------------ ----- ----------- -----------
The financial statements were approved and authorised for issue by the Board of Directors on 18 March 2020 and signed on its behalf by:
Alex Ohlsson Colin Huelin FCA Chairman Director
STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2019
Share Retained Total
capital earnings equity
Notes GBP'000 GBP'000 GBP'000
--------------------------------------------------- ----- ------- -------- --------
Balance as at 1 January 2019 380,235 6,355 386,590
Total profit and comprehensive income for the year - 28,037 28,037
Equity shares issued 18 64,690 - 64,690
Share issue costs 18 (1,010) - (1,010)
Dividends paid 10 - (26,461) (26,461)
--------------------------------------------------- ----- ------- -------- --------
Balance at 31 December 2019 443,915 7,931 451,846
--------------------------------------------------- ----- ------- -------- --------
STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2018
Share Retained Total
capital earnings equity
Notes GBP'000 GBP'000 GBP'000
--------------------------------------------------- ----- ------- -------- --------
Balance at 1 January 2018 241,326 3,709 245,035
Total profit and comprehensive income for the year - 21,637 21,637
Equity shares issued 18 139,151 - 139,151
Share issue costs 18 (242) - (242)
Dividends paid 10 - (18,991) (18,991)
--------------------------------------------------- ----- ------- -------- --------
Balance at 31 December 2018 380,235 6,355 386,590
--------------------------------------------------- ----- ------- -------- --------
STATEMENT OF CASH FLOWS
FOR THE YEARED 31 DECEMBER 2019
Year ended Year ended
31 December 31 December
2019 2018
Notes GBP'000 GBP'000
---------------------------------------------------------------------------------- ----- ----------- -----------
Cash flows from operating activities
Total operating profit before finance costs 28,912 22,842
Adjustments for:
Net changes in fair value of financial asset at fair value through profit or loss 3 (33,675) (26,506)
Realised gains/(losses) on forward foreign exchange contracts 3 352 (106)
(Decrease)/increase in other payables and accrued expenses (137) 410
Decrease/(increase) in other receivables and prepayments 240 (1,187)
---------------------------------------------------------------------------------- ----- ----------- -----------
Total (4,308) (4,547)
---------------------------------------------------------------------------------- ----- ----------- -----------
Interest received from Subsidiary 36,929 22,656
Investment in Subsidiary (89,865) (130,605)
Capital repayments from Subsidiary 12 10,761 16,041
---------------------------------------------------------------------------------- ----- ----------- -----------
Net cash flow used in operating activities (46,483) (96,455)
---------------------------------------------------------------------------------- ----- ----------- -----------
Cash flows from financing activities
Proceeds from revolving credit facilities 15 48,808 14,000
Repayment of revolving credit facilities 15 (39,332) (14,000)
Proceeds from issue of ordinary shares 18 63,333 13,000
Share issue costs (1,033) (231)
Proceeds from issues of C shares - 51,500
Finance costs paid (708) (1,652)
Dividends paid 10 (25,104) (18,050)
---------------------------------------------------------------------------------- ----- ----------- -----------
Net cash flow generated from financing activities 45,964 44,567
---------------------------------------------------------------------------------- ----- ----------- -----------
Net decrease in cash and cash equivalents (519) (51,888)
Cash and cash equivalents at beginning of the year 9,206 61,094
---------------------------------------------------------------------------------- ----- ----------- -----------
Cash and cash equivalents at end of the year 8,687 9,206
---------------------------------------------------------------------------------- ----- ----------- -----------
Net cash flow used in operating activities includes:
Interest received from bank deposits 12 11
Interest received from Subsidiary 36,929 22,656
---------------------------------------------------------------------------------- ----- ----------- -----------
Non-cash items:
Purchase of financial assets: indexation (420) (504)
Interest received from Subsidiary 420 504
Scrip dividend 10 (1,357) (941)
Equity issue in respect of scrip dividend 18 1,357 941
---------------------------------------------------------------------------------- ----- ----------- -----------
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARED 31 DECEMBER 2019
1. General information
The Company is a public closed-ended investment company incorporated on 7 September 2015 and domiciled in Jersey, with registration number 119412. The Company is governed by the provisions of the Companies Law and the CIF Law.
The ordinary shares and C shares (when in issue) of the Company are admitted to the Official List of the FCA and are traded on the Premium Segment of the Main Market of the LSE.
The Company makes its investments through its wholly owned Subsidiary, by subscribing for the Secured Loan Notes issued by the Subsidiary, the majority of which are listed on the TISE. The Subsidiary subsequently on-lends the funds to borrowers. At 31 December 2019, the Company had one wholly owned Subsidiary, GABI UK (31 December 2018: one), incorporated in England and Wales on 23 October 2015 (registration number 9838893). GABI GS is a wholly owned Subsidiary of GABI UK and was incorporated in England and Wales on 4 January 2017 (registration number 10546087) and is indirectly wholly owned by the Company. The Company, GABI UK and GABI GS comprises the Group. The registered office address for GABI UK and GABI GS is 24 Savile Row, London W1S 2ES. The Company, through its Subsidiary, seeks to meet its investment objective through a diversified portfolio of investments which are secured against, or comprise, contracted, predictable medium to long--term cash flows and/or physical assets. The Group's investments will predominantly be in the form of medium to long--term fixed or floating rate loans which are secured against cash flows and/or physical assets which are predominantly UK based.
The Group's investments will typically be unquoted and will include, but not be limited to, senior loans, subordinated loans, mezzanine loans, bridge loans and other debt instruments. The Group may also make limited investments in equities, equity--related derivative instruments such as warrants, controlling equity positions (directly or indirectly) and/or directly in physical assets.
The Group will at all times invest and manage its assets in a manner which is consistent with the objective of spreading investment risk.
Where possible, investments are structured to benefit from partial inflation and/or interest rate protection.
GABI GS has been set up to hold class A shares as security for a loan issued to an underlying borrower. This is intended to isolate the holding of shares as security (and any associated liabilities under the shareholder agreement associated with such shares from the Company). The class A shares carry no economic or voting rights except in the event of default under the loan. In the event of default by the underlying borrower, the class A shares become effective, whereby GABI GS is entitled to control voting rights over the underlying borrower. Post year end, the loan was refinanced and GABI GS is now a dormant company.
2. Significant accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below and in the subsequent notes. These policies, except for those changes discussed in this note, have been consistently applied throughout the years presented.
2.1 Basis of preparation
The annual report and financial statements for the year ended 31 December 2019 have been prepared on a going concern basis and in accordance with IFRS, which includes standards and interpretations approved by the IASB, and as applied in accordance with the Companies Law.
In accordance with the investment entities exemption contained in IFRS 10 Consolidated Financial Statements, the Directors have determined that the Company continues to meet the definition of an investment entity and as a result the Company is not required to prepare consolidated financial statements. The Company's investment in its Subsidiary is measured at fair value and treated as a financial asset through profit or loss in the statement of financial position (refer to note 2.2(b)).
The Company raises capital through the issue of ordinary shares and C shares. The net assets attributable to the C share class, when in issue, are accounted for and managed by the Company as a distinct pool of assets, with the Company ensuring that separate cash accounts are created and maintained. Expenses are either specifically allocated to an individual share class or split proportionately by the NAV of each share class. Refer to note 16 for further information.
New standards, amendments and interpretations adopted in the year
In the current period, the Company has applied a number of amendments to IFRS. These include annual improvements to IFRS, changes in standards, legislative and regulatory amendments, changes in disclosure and presentation requirements. The adoption of these updates has not had any material impact on these or prior years' financial statements.
Further to the above, there are no new IFRS or IFRIC interpretations that are issued but not effective that would be expected to have a material impact on the Company's financial statements.
Going concern
The Directors have made an assessment of the Company's ability to continue as a going concern and are satisfied that the Company has the resources to continue in business for the foreseeable future, being a period of at least twelve months from the date of authorisation of these financial statements. Furthermore, the Directors are not aware of any material uncertainties that may cast doubt upon the Company's ability to continue as a going concern. Therefore, the financial statements have been prepared on a going concern basis. In addition to a going concern statement, the Directors have undertaken a longer--term assessment of the Company, the result of which can be seen in the viability statement above.
2.2 Significant accounting estimates and judgements
The preparation of financial statements, in accordance with IFRS, requires the Directors to make estimates and judgements that affect the reported amounts recognised in the financial statements. However, uncertainty about these assumptions and judgements could result in outcomes that require a material adjustment to the carrying amount of the asset or liability in the future. There are no changes in estimates reported in prior financial statements that require disclosure in these financial statements.
(a) Critical accounting estimates and assumptions
Fair value of instruments not quoted in an active market
The Company's investments are made by subscribing for the Secured Loan Notes issued by the Subsidiary. The Subsidiary's assets consist of investments held by the Subsidiary, which represent secured loan facilities issued to the Project Companies. The Subsidiary's assets are not quoted in an active market, therefore, the fair value is determined using a discounted cash flow methodology, adjusted as appropriate for market, credit and liquidity risk factors (refer to note 19.4 for further information). This requires assumptions to be made regarding future cash flows and the discount rate applied to these cash flows. The Subsidiary's investments are valued by a third party Valuation Agent on a semi-annual basis. Investments which may be subject to discount rate changes are valued on a quarterly basis (previously, all valuations had been performed on a quarterly basis).
The models used by the Valuation Agent use observable data to the extent practicable. However, areas such as credit risk (both own and counterparty), volatilities and correlations require estimates to be made. Changes in assumptions about these factors could affect the reported fair value of the financial instruments.
The determination of what constitutes 'observable' requires significant judgement by the Company. The Company considers observable data to be market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The investment in the Subsidiary is held at fair value through profit or loss, with income distributions and interest payments from the Subsidiary included as part of the fair value movement calculation together with any unrealised movement in the fair value of the holding in the Subsidiary.
The value of the investment in the Subsidiary is based on the aggregate of the NAV of the Subsidiary and the value of the Secured Loan Notes issued by the Subsidiary. Refer to note 12 for further details.
(b) Critical judgements
Assessment as an investment entity
The Directors have concluded that the Company continues to meet the definition of an investment entity.
Entities that meet the definition of an investment entity within IFRS 10 Consolidated Financial Statements are required to measure their subsidiaries at fair value through profit or loss rather than consolidate. The criteria which define an investment entity are as follows:
- an entity that obtains funds from one or more investors for the purpose of providing those investors with investment services;
- an entity that commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both; and
- an entity that measures and evaluates the performance of substantially all of its investments on a fair value basis.
The Directors have concluded that the Company continues to meet the characteristics of an investment entity in that it:
- raises funds from investors through the issue of equity, has more than one investor and its investors are not related parties other than those disclosed in note 21;
- invests in a portfolio of investments held by the Subsidiary for the purpose of generating risk-adjusted returns through regular distributions and capital appreciation; and
- the Company investments are held at fair value through profit or loss with the performance of its portfolio is evaluated on a fair value basis.
Accordingly, the Company's Subsidiary is not consolidated, but rather the investment in the Subsidiary is accounted for at fair value through profit or loss. The value of the investment in the Subsidiary is based on the aggregate of the NAV of the Subsidiary and the value of the Secured Loan Notes issued by the Subsidiary.
Accounting for C share class
(i) Classification as financial liability or equity instrument
The Directors have assessed the characteristics of the C share class and concluded that the C shares while in issue meet the definition of a liability under IAS 32 Financial Instruments: Presentation. The C shares are non-derivatives that include a contractual obligation under the terms of the issue to deliver a variable number of an issuer's own ordinary shares. The C shares (under IAS 32) therefore meet the definition of a financial liability, and are classified as such while in issue. At 31 December 2019, there were no C shares in issue.
(ii) Recognition and measurement of the financial liability
Whilst in issue, the C shares are recognised as a financial liability and measured at amortised cost within the financial statements.
(c) Functional and presentation currency
The primary objective of the Company is to generate returns in Pound Sterling, its capital--raising currency. The Company's performance is evaluated in Pound Sterling. Therefore the Directors consider Pound Sterling as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.
The financial statements are presented in Pound Sterling and all values have been rounded to the nearest thousand pounds (GBP'000), except where otherwise indicated.
(d) Segmental information
The Directors view the operations of the Company as one operating segment, being the investment portfolio of asset backed loans held through the Subsidiary, which is a registered UK company. All significant operating decisions are based upon analysis of the Subsidiary's investments as one segment. The financial results from this segment are equivalent to the financial results of the Company as a whole, which are evaluated regularly by the Directors.
Significant shareholders are disclosed in the Directors' report above.
3. Operating income
The table below analyses the operating income derived from the Company's financial assets at fair value through profit or loss:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
------------------------------------------------------------------------------------- ----------- -----------
Loan interest realised (cash received)(1) 36,516 23,149
Unrealised (loss)/gain on financial assets at fair value through profit or loss(2) :
Debt - Secured Loan Notes up to GBP1,000,000,000 (3,525) 3,223
Equity - representing one ordinary share in the Subsidiary 362 190
Unrealised gain on forward foreign exchange contracts - 50
Unrealised loss on forward foreign exchange contracts (30) -
Realised gain on forward foreign exchange contracts 544 103
Realised loss on forward foreign exchange contracts (192) (209)
------------------------------------------------------------------------------------- ----------- -----------
Total 33,675 26,506
------------------------------------------------------------------------------------- ----------- -----------
1. Represents interest received from the Subsidiary and is included as part of the fair value movement calculation in line with the Company's accounting policy under IFRS.
2. Refer to note 12 for further information.
The table below analyses the fees and other income earned from borrowers of the Company by type:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
----------------------- ----------- -----------
Arrangement fee income 200 431
Commitment fee income 44 5
Early repayment fees 30 105
----------------------- ----------- -----------
Total 274 541
----------------------- ----------- -----------
Accounting policy
Interest income and interest expense other than interest received on financial assets held at fair value through profit or loss are recognised on an accruals basis in the statement of comprehensive income.
Net movements in fair value of financial assets at fair value through profit or loss includes changes in the fair value of the investment in the Subsidiary held at fair value through profit or loss and loan interest realised.
Arrangement fee income comprises fees relating to the issue and set up of Secured Loan Notes. The Investment Manager, at its discretion, is entitled to an arrangement fee of up to 1% of the value of each investment made by the Group. The Investment Manager expects the costs of any such fee to be covered by the borrowers, and not the Company. To date, such fee in respect of all but three of the Group's investments has been met and paid by borrowers. To the extent any arrangement fee negotiated by the Investment Manager with a borrower exceeds 1%, the benefit of any such excess is paid to the Company.
Commitment fees are accounted for on an accruals basis and are paid by the borrowers.
Early repayment fee income is income in relation to the redemption of loans before maturity and is recognised in the financial statements when contractual provisions are met and the amounts become due.
The Company holds derivative financial instruments comprising forward foreign exchange contracts to hedge its exposure to movements in foreign currency exchange rates on loans denominated in currency other than Pound Sterling. It is not the Company's policy to trade in derivative financial instruments.
Forward foreign exchange contracts are stated at fair value, being the difference between the agreed price of selling or buying the financial instrument on a future date and the price quoted for selling or buying the same or similar instrument on the statement of financial position date. The Company does not apply hedge accounting and consequently all gains or losses in fair value are recognised in the statement of comprehensive income.
4. Operating expenses
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
--------------------------------------------- ----------- -----------
Corporate administration and Depositary fees 606 531
Registrar fees 48 49
Audit fees 75 59
Legal and professional fees 97 80
Valuation Agent fees 162 222
Other 210 276
--------------------------------------------- ----------- -----------
Total 1,198 1,217
--------------------------------------------- ----------- -----------
Key service providers other than the Investment Manager (refer to note 21 for disclosures of transactions with the Investment Manager):
Administrator and Company Secretary
The Company has appointed Apex Financial Services (Alternative Funds) Limited (formerly known as Link Alternative Fund Services (Jersey) Limited) as Administrator and Company Secretary. Fund accounting, administration and company secretarial services are provided to the Company pursuant to an agreement dated 28 September 2015. All Directors have access to the Company Secretary, who provides guidance to the Board, through the Chairman, on governance and administrative matters. The fee for the provision of administration and company secretarial services during the year was GBP475,000 (31 December 2018: GBP430,000) of which GBP123,000 remains payable at year end (31 December 2018: GBP108,000).
Depositary
Depositary services are provided to the Company by Apex Financial Services (Corporate) Limited (formerly known as Link Corporate Services (Jersey) Limited) pursuant to an agreement dated 28 September 2015. The fee for the provision of these services during the year was GBP131,000 (31 December 2018: GBP101,000) of which GBP34,000 remains payable at year end (31 December 2018: GBP28,000).
Accounting policy
Operating expenses and investment management fees in the statement of comprehensive income are recognised on an accruals basis.
5. Auditor's remuneration
The following table summarises the remuneration paid to the Auditor for audit and non-audit related services:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
--------------------------------- ----------- -----------
Audit fees
Annual audit of the Company 75 59
--------------------------------- ----------- -----------
Non-audit services
Review of the half-yearly report 24 15
--------------------------------- ----------- -----------
Total 99 74
--------------------------------- ----------- -----------
In order to maintain auditor independence, the Board appointed BDO LLP as reporting accountant of the Company on 25 September 2017. Since BDO's appointment, no non-audit related services have been carried out by PwC, with the exception of the review of the half-yearly report.
6. Directors' remuneration
The Directors of the Company were remunerated as follows:
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
---------------------- ----------- -----------
Alex Ohlsson 46 37
Colin Huelin 42 35
Joanna Dentskevich(1) 40 30
Marykay Fuller(2) 6 -
---------------------- ----------- -----------
134 102
---------------------- ----------- -----------
Directors' expenses 2 1
---------------------- ----------- -----------
Total 136 103
---------------------- ----------- -----------
1. Appointed as Risk committee chair with effect from 1 July 2019.
2. Appointed as a Director of the Company on 6 November 2019.
Increases to Directors' remuneration during the year are detailed in the Directors' remuneration report above.
7. Finance income
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
----------------------------------------- ----------- -----------
Return on C share financial liability(1) - 787
----------------------------------------- ----------- -----------
Total - 787
----------------------------------------- ----------- -----------
1. C shares issued in October 2018, converted in December 2018. There were no C shares issued during 2019.
Accounting policy
Finance income in the statement of comprehensive income represents the return on the C shares. The return on the C shares represents an increase in the net assets attributable to the C shares over and above the funds raised from their issue.
8. Finance expenses
Year ended Year ended
31 December 31 December
2019 2018
GBP'000 GBP'000
----------------------------------------- ----------- -----------
Return on C share financial liability(1) - 518
Amortisation of C share issue costs(2) - 1,022
Arrangement fees relating to the RCF 262 181
Commitment fees relating to the RCF 254 156
Interest expense relating to the RCF 359 115
----------------------------------------- ----------- -----------
Total 875 1,992
----------------------------------------- ----------- -----------
1. C shares issued in October 2017, converted in April 2018.
2. C shares issued in October 2018, converted in December 2018.
Accounting policy
Finance expenses in the statement of comprehensive income comprise loan arrangement and commitment fees which are accounted for on an accruals basis, along with interest accrued on the RCF (refer to note 15) incurred in connection with the borrowing of funds. Arrangement fees are amortised over the life of the RCF.
Included in finance expenses, when C shares are in issue, are the C share amortisation fees, which are expensed in the year they occur. The C shares issued represent contracts for conversion into a variable number of ordinary shares and therefore the C shares are classified as liabilities under IAS 32. The classification results in the amortisation of the C share issue costs being presented as finance costs in the statement of comprehensive income.
9. Taxation
Profits arising in the Company for the year ended 31 December 2019 are subject to tax at the standard rate of 0% (31 December 2018: 0%) in accordance with the Income Tax (Jersey) Law 1961, as amended.
10. Dividends
Year ended Year ended
31 December 31 December
2019 2018
Pence Dividends paid Dividends paid
Quarter ended Dividend per share GBP'000 GBP'000
-------------------------------------------- ----------------------------- --------- -------------- --------------
Current year dividends
31 December 2019(1) 2019 fourth interim dividend 1.550 - -
30 September 2019 special dividend 0.250 1,103 -
30 September 2019 2019 third interim dividend 1.550 6,837 -
30 June 2019 2019 second interim dividend 1.550 6,833 -
31 March 2019 2019 first interim dividend 1.550 5,894 -
-------------------------------------------- ----------------------------- --------- -------------- --------------
Total 6.450 20,667 -
--------------------------------------------------------------------------- --------- -------------- --------------
Prior year dividends
31 December 2018 2018 fourth interim dividend 1.525 5,794 -
30 September 2018 2018 third interim dividend 1.525 - 4,835
30 June 2018 special dividend 0.250 - 792
30 June 2018 2018 second interim dividend 1.525 - 4,831
31 March 2018 2018 first interim dividend 1.525 - 4,828
-------------------------------------------- ----------------------------- --------- -------------- --------------
Total 6.350 5,794 15,286
--------------------------------------------------------------------------- --------- -------------- --------------
31 December 2017 2017 fourth interim dividend 1.525 - 3,705
-------------------------------------------- ----------------------------- --------- -------------- --------------
Dividends in statement of changes in equity 26,461 18,991
--------------------------------------------------------------------------- --------- -------------- --------------
Dividends settled in shares(2) (1,357) (941)
--------------------------------------------------------------------------- --------- -------------- --------------
Dividends in the statement of cash flows 25,104 18,050
--------------------------------------------------------------------------- --------- -------------- --------------
On 22 January 2020, the Company announced a fourth interim dividend of 1.55 pence per ordinary share amounting to GBP6,844,000 (including dividends settled in shares(2) ) which was paid on 28 February 2020 to ordinary shareholders on the register at 31 January 2020.
Accounting policy
In accordance with the Company's Articles, in respect of the ordinary shares and the C shares whilst in issue, the Company will distribute the income it receives to the fullest extent that is deemed appropriate by the Directors. Dividends due to the Company's shareholders are recognised as a liability in the period in which they are paid or approved by the Directors and are reflected in the statement of changes in equity. Dividends declared and approved by the Company after the statement of financial position date have not been recognised as a liability of the Company at the statement of financial position date.
The Company pays dividends on a quarterly basis with dividends typically declared in January, April, July and October and paid in or around February, May, August and November in each financial year.
1. The current year fourth interim dividend was declared after the year end and is therefore not accrued for as a provision in the financial statements.
2. Dividends settled in shares are where shareholders have elected to take the scrip dividend alternative.
11. Earnings per share
Basic earnings per ordinary share are calculated by dividing profit for the year attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares in issue during the year. Diluted earnings per ordinary share are calculated by dividing the profit attributable to ordinary shareholders by the diluted weighted average number of ordinary shares and the C shares issued in the year up to the date of conversion, based on their value at issue.
Weighted
average
Profit number Pence per
of
GBP'000 ordinary share
shares
------------------------------------ ------- ----------- ---------
Year ended 31 December 2019
Basic earnings per ordinary share 28,037 411,559,294 6.81
------------------------------------ ------- ----------- ---------
Diluted earnings per ordinary share 28,037 411,559,294 6.81
------------------------------------ ------- ----------- ---------
Year ended 31 December 2018
Basic earnings per ordinary share 21,637 297,617,066 7.27
------------------------------------ ------- ----------- ---------
Diluted earnings per ordinary share 21,637 330,685,559 6.54
------------------------------------ ------- ----------- ---------
12. Financial assets at fair value through profit or loss: investment in Subsidiary
The Company's financial assets at fair value through profit or loss comprise its investment in the Subsidiary, which represents amounts advanced to finance the Group's investment portfolio in the form of Secured Loan Notes and equity, in addition to derivatives (see note 19.1) utilised for the purpose of hedging foreign currency exposure. The Company's investment in the Subsidiary at 31 December 2019 comprised:
31 December 31 December
2019 2018
Debt - Secured Loan Notes up to GBP1,000,000,000 GBP'000 GBP'000
-------------------------------------------------------------------------------- ----------- -----------
Opening balance 377,916 261,507
Purchase of financial assets 89,451 129,227
Repayment of financial assets (10,761) (16,041)
Unrealised (loss)/gain on investments at fair value through or profit or loss:
Unrealised valuation (loss)/gain (1,001)(1) 889
Unrealised foreign exchange (loss)/gain (386) 163
Other unrealised movements on investments(2) (2,138) 2,171
-------------------------------------------------------------------------------- ----------- -----------
Total unrealised (loss)/gain on investment at fair value through profit or loss (3,525) 3,223
-------------------------------------------------------------------------------- ----------- -----------
Total(3) 453,081 377,916
-------------------------------------------------------------------------------- ----------- -----------
1. Comprises downward revaluation in respect of defaulted loan of GBP0.6 million and unwinding of premia associated with the historic reduction in discount rates.
2. Other unrealised movements on investments at fair value through profit or loss are attributable to the timing of the debt service payments and principal indexation applied.
3. The difference between the valuation of the Secured Loan Notes and the underlying investments of the Subsidiary is as a result of payment timings and differing application of the effective interest rate in respect of the underlying investments.
31 December 31 December
2019 2018
Equity - representing one ordinary share in the Subsidiary GBP'000 GBP'000
-------------------------------------------------------------------- ----------- -----------
Opening balance 434 244
Unrealised gains on investment at fair value through profit or loss 362 190
-------------------------------------------------------------------- ----------- -----------
Total 796 434
-------------------------------------------------------------------- ----------- -----------
Financial assets at fair value through profit or loss 453,877 378,350
-------------------------------------------------------------------- ----------- -----------
The above represents a 100% interest in the Subsidiary at year end 31 December 2019 (31 December 2018: 100%).
Secured Loan Notes
The Subsidiary has issued a loan note instrument to the Company for a programme of up to GBP1 billion variable funding notes limited to the cash available by the Company. Each series of loan notes issued has a maximum nominal amount, fixed at the date of issue, a base amount and a subscribed amount. The majority of the loan notes are secured and listed on the TISE.
Accounting policy
The Company classifies its investment in the Subsidiary as financial assets at fair value through profit or loss in accordance with IFRS 9 Financial Instruments as set out below.
Financial assets at fair value through profit or loss
The category which includes financial assets at fair value through profit or loss consists of financial instruments that have been designated at fair value through profit or loss upon initial recognition. These financial assets are designated on the basis that they are part of a group of financial assets which are managed and have their performance evaluated on a fair value basis, in accordance with the risk management and investment strategies of the Company.
Upon initial recognition, the Company designates the investment in the Subsidiary as part of 'financial assets at fair value through profit or loss'. The investment in the Subsidiary is included initially at fair value, which is taken to be its cost (excluding expenses incidental to the acquisition which are written off in the statement of comprehensive income).
All financial assets for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy.
The financial information about the financial assets of the Company is provided by the Investment Manager to the Directors with the valuation of the portfolio being carried out by the Valuation Agent.
The Company recognises a financial asset when, and only when, it becomes a party to the contractual provisions of the instrument. Purchases or sales of financial assets that require delivery of assets within the timeframe generally established by regulation or convention in the marketplace are recognised on the trade date, i.e. the date that the Company commits to purchase or sell the asset.
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:
- the rights to receive cash flows from the asset have expired; or
- the Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; and
- either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
When the Company transfers its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Company's continuing involvement in the asset.
After initial measurement, the Company measures financial instruments classified at fair value through profit or loss at fair value. Subsequent changes in the fair value of financial instruments are recorded in the statement of comprehensive income.
Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. For all other financial instruments not traded in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques used by the Valuation Agent include using recent arm's length market transactions, referenced to appropriate current market data, and discounted cash flow analysis, at all times making as much use of available and supportable market data as possible.
An analysis of fair values of financial instruments and further details as to how they are measured are provided in note 19.9.
13. Other receivables and prepayments
31 December 31 December
2019 2018
GBP'000 GBP'000
---------------------------------- ----------- -----------
Arrangement fees 2 59
Intercompany receivable 7 101
Loan arrangement fees unamortised - 290
Loan interest receivable - 1,302
Other income debtors 6 -
Prepayments 48 44
---------------------------------- ----------- -----------
Total 63 1,796
---------------------------------- ----------- -----------
Accounting policy
Other receivables and prepayments are recognised and carried at the lower of their original invoiced value and recoverable amount or, where the time value of money is material, at amortised cost. The Company recognises a loss allowance for expected credit losses on other receivables where necessary.
14. Cash and cash equivalents
31 December 31 December
2019 2018
GBP'000 GBP'000
-------------------------- ----------- -----------
Cash and cash equivalents 8,687 9,206
-------------------------- ----------- -----------
Total 8,687 9,206
-------------------------- ----------- -----------
Accounting policy
Cash comprises cash in hand and demand deposits. Cash equivalents are short-term with original maturities of three months or less and highly liquid investments, that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
15. Revolving credit facilities
31 December 31 December
2019 2018
GBP'000 GBP'000
--------------------------------------- ----------- -----------
Opening balance - -
Proceeds from amounts drawn on the RCF 48,808 14,000
Repayment of amounts drawn on the RCF (39,332) (14,000)
Loan arrangement fees unamortised (164) -
--------------------------------------- ----------- -----------
Total 9,312 -
--------------------------------------- ----------- -----------
Any amounts drawn under the RCF are to be used in, or towards, the making of investments (including a reduction of available commitment as an alternative to cash cover for entering into forward foreign exchange contracts) in accordance with the Company's investment policy.
The tables below show the amounts drawn under the RCF during the year:
Amount
of
drawdown
Date of drawdown GBP'000
------------------------------------------ --------
20 February 2019 20,000
29 March 2019 3,000
11 April 2019 5,000
29 April 2019 4,000
9 May 2019 1,932
21 May 2019 4,000
20 June 2019 1,400
Total amount repayable at 30 June 2019(1) 39,332
------------------------------------------ --------
Loan arrangement fees unamortised (300)
------------------------------------------ --------
Total 39,032
------------------------------------------ --------
The Company repaid the balance of GBP39.3 million on 1 July 2019, resulting in early repayment breakage costs of GBP19,000.
Amount
of
drawdown
Date of drawdown GBP'000
---------------------------------------------- --------
26 September 2019 1,200
16 October 2019 2,100
31 October 2019 6
7 November 2019 500
5 December 2019 2,440
6 December 2019 2,730
20 December 2019 500
Total amount repayable at 31 December 2019(1) 9,476
---------------------------------------------- --------
Loan arrangement fees unamortised (164)
---------------------------------------------- --------
Total 9,312
---------------------------------------------- --------
1. Excluding the amount drawn down as an alternative to cash cover for the open forward foreign exchange contracts.
The amounts drawn down, as described in the tables above, are all related to the tranche A facility. The tranche B facility was undrawn during the year. Total drawdowns of tranche A of GBP9.5 million were repayable at 31 December 2019 (31 December 2018: GBPnil).
On 16 April 2019, the Company entered into an agreement with RBSI to increase the existing RCF from GBP30 million to GBP50 million, comprising tranche A of GBP40 million and tranche B of GBP10 million. The Company incurred additional arrangement fee costs of GBP110,000 (split tranche A: GBP75,000, and tranche B: GBP35,000) and legal costs of GBP7,000 (split 50:50 between the two tranches) which will be amortised over the life of the facilities.
In December 2019, a utilisation request for the sum of GBP358,000 (31 December 2018: GBP612,000) was submitted to RBSI in relation to the open forward currency contract at year end. This has restricted the amount available for drawdown on the RCF to GBP49.6 million.
A total of GBP262,000 (2018: GBP182,000) of costs were amortised as loan arrangement fees during the year and charged through the statement of comprehensive income.
At 31 December 2019, the Company is in full compliance with all loan covenants in the RCF agreement.
Interest on amounts drawn under the RCF is charged at LIBOR plus 2.10% per annum on the tranche A facility and LIBOR plus 1.70% per annum on the tranche B facility. A commitment fee is payable on undrawn amounts at a rate of 0.84% per annum on the tranche A facility and 0.68% per annum on the tranche B facility.
The RCF with RBSI is secured against the investment in the Subsidiary. The GBP40 million tranche A facility is due to terminate in August 2020, extendable to August 2021 if required. The GBP10 million tranche B facility was initially due to terminate in January 2020 but has, post year end, been extended to terminate in August 2020.
Post year end, the Company drew down an aggregate amount of GBP9.9 million on the RCF with RBSI, resulting in a total drawn amount of GBP19.4 million, not including the amount drawn down as an alternative to cash cover for the forward foreign exchange contracts. The Company repaid the balance of GBP19.4 million on 17 February 2020, incurring early repayment breakage costs of GBP1,850.
For the purposes of the AIFMD, leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company's exposure and its NAV and is calculated under the gross and commitment methods, in accordance with the AIFMD.
The Company is required to state its maximum and actual leverage levels, calculated as prescribed by the AIFMD, at 31 December 2019; figures are as follows:
Leverage
Maximum Actual
Leverage exposure limit exposure
------------------ ------- --------
Gross method 1.25 1.00
Commitment method 1.25 1.02
------------------ ------- --------
The leverage figures above represent leverage calculated under the AIFMD methodology as follows:
Gross Commitment
Leverage exposure GBP'000 GBP'000
------------------------------------------------- ------- ----------
Investments at fair value through profit or loss 453,877 453,877
Cash and cash equivalents - 8,687
------------------------------------------------- ------- ----------
Total exposure under the AIFMD 453,877 462,564
------------------------------------------------- ------- ----------
Total shareholders' funds 451,846 451,846
------------------------------------------------- ------- ----------
Leverage 1.00 1.02
------------------------------------------------- ------- ----------
The Company's leverage limit under the AIFMD is 1.25, which equates to a gearing limit of 25% of NAV. The Company has maintained significant headroom against the limit throughout the year.
Accounting policy
All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Borrowing costs are amortised over the lifetime of the facility through the statement of comprehensive income.
16 Financial liabilities at amortised cost: C shares
C shares were issued during and converted in the prior year ended 31 December 2018. There were no C shares issued or converted in the current year. Further details of these C shares are disclosed in the 2018 annual report and financial statements, a copy of which is available on the Company's website.
Whilst the C shares are in issue, the results of the assets and liabilities attributable to the C shares are accounted for as a separate pool to the results of the assets and liabilities attributable to the ordinary shares. A share of Company expenses for the period the C shares have been in issue is allocated to the C share pool based on the net assets of each share class. On conversion, each holder of C shares will receive such number of ordinary shares as equals the number of C shares held multiplied by the NAV per C share and divided by the NAV per ordinary share, in each case at a date shortly prior to conversion. The C shares carry the right to receive notice of, attend and vote at general meetings of the Company and, on a poll, to one vote for each C share held. C shares carry the right to receive all dividends resolved by the Directors to be paid out of the pool of assets attributable to the C shares which shall be divided pro rata among the holders of the C shares. The C shares are no par value shares.
C shares, whilst in issue, are classified as a financial liability in line with the accounting treatment noted in note 2.2(b).
Accounting policy
In accordance with IFRS, C shares are recognised on issue as a liability at fair value, less directly attributable transaction costs. After initial recognition C shares are measured at amortised cost using the effective interest method. Amortisation is credited or charged to finance income or finance costs in the statement of comprehensive income. Transaction costs are amortised up until the conversion date.
The C shares convert into ordinary shares once at least 90% of all the assets representing the net proceeds (or such other percentage as the Board and Investment Manager agree upon) have been invested in accordance with the Company's investment policy or, if earlier, nine months after the date of issue of the C shares. On conversion, each holder of C shares receives such number of ordinary shares as equals the number of C shares held multiplied by the NAV per C share and divided by the NAV per ordinary share, in each case at a date shortly prior to conversion.
17 Other payables and accrued expenses
31 December 31 December
2019 2018
GBP'000 GBP'000
---------------------------- ----------- -----------
Accruals 356 446
Amounts due to Subsidiary 15 232
Loan commitment fee accrued 74 52
Loan interest accrued 20 -
Investment in Subsidiary(1) - 1,203
Investment management fees 1,008 838
Share issue costs - 24
---------------------------- ----------- -----------
Total 1,473 2,795
---------------------------- ----------- -----------
1. Amounts due to the Subsidiary for the making of investments, which represents commitments outstanding by the Subsidiary to the Project Companies.
Accounting policy
Other payables and accrued expenses are recognised initially at fair value and subsequently stated at amortised cost using the effective interest method where appropriate.
18 Authorised and issued share capital
31 December 2019 31 December 2018
-------------------- --------------------
Number Number
Share capital of shares GBP'000 of shares GBP'000
------------------------------------------------------ ----------- ------- ----------- -------
Ordinary shares issued at no par value and fully paid
Shares in issue at beginning of the year 379,962,298 380,235 242,966,606 241,326
------------------------------------------------------ ----------- ------- ----------- -------
Equity shares issued through:
Placing and offer for subscription 60,317,181 63,333 12,440,190 13,000
Dividends settled in shares(1) 1,264,540 1,357 911,857 941
Ordinary shares issued upon conversion of C shares - - 123,643,645 125,210
------------------------------------------------------ ----------- ------- ----------- -------
Total shares issued in the year 61,581,721 64,690 136,995,692 139,151
------------------------------------------------------ ----------- ------- ----------- -------
Share issue costs - (1,010) - (242)
------------------------------------------------------ ----------- ------- ----------- -------
Total 441,544,019 443,915 379,962,298 380,235
------------------------------------------------------ ----------- ------- ----------- -------
1. Dividends settled in shares are where shareholders have elected to take the scrip dividend alternative.
The Company's share capital is represented by ordinary shares.
The authorised share capital of the Company on incorporation was represented by an unlimited number of no par value ordinary shares.
The ordinary shares carry the right to dividends out of the profits available for distribution as determined by the Board. Each holder of an ordinary share is entitled to attend meetings of shareholders and, on a poll, to one vote for each share held.
The C shares, while in issue, are classified as a financial liability. Refer to note 2.2(b). At the year end there were no C shares in issue (31 December 2018: no C shares in issue).
Accounting policy
Upon issuance of equity shares, the consideration received is included in equity.
Transaction costs incurred by the Company in issuing, acquiring or reselling its own equity instruments are accounted for as a deduction from equity to the extent that they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided.
No gain or loss is recognised in the statement of comprehensive income in respect of the purchase, sale, issuance or cancellation of the Company's own equity instruments.
19. Financial instruments
The table below sets out the classifications of the carrying amounts of the Company's financial assets and financial liabilities into categories of financial instruments.
31 December 31 December
2019 2018
GBP'000 GBP'000
------------------------------------------------------ ----------- -----------
Financial assets
Cash and cash equivalents 8,687 9,206
Other receivables and prepayments 63 1,796
------------------------------------------------------ ----------- -----------
Financial assets at amortised cost 8,750 11,002
------------------------------------------------------ ----------- -----------
Derivative financial instruments 4 33
Investment in the Subsidiary 453,877 378,350
------------------------------------------------------ ----------- -----------
Financial assets at fair value through profit or loss 453,881 378,383
------------------------------------------------------ ----------- -----------
Total 462,631 389,385
------------------------------------------------------ ----------- -----------
Financial liabilities
Other payables and accrued expenses (1,473) (2,795)
Revolving credit facilities (9,312) -
------------------------------------------------------ ----------- -----------
Financial liabilities at amortised cost (10,785) (2,795)
------------------------------------------------------ ----------- -----------
Total (10,785) (2,795)
------------------------------------------------------ ----------- -----------
19.1 Derivative financial instruments
Derivative financial assets and liabilities comprise forward foreign exchange contracts for the purpose of hedging foreign currency exposure of the Company to a Euro denominated loan investment made by the Subsidiary (for which the final repayment date is 1 June 2025), the investment represents c.1% of the portfolio by value at the year end. The Company intends to utilise the forward foreign exchange contract on a rolling three month basis for the term of the investment.
The table below sets out the forward foreign exchange contract held by the Company at year end:
Principal Hedged Fair value
31 December 2019 Maturity amount amount GBP'000
----------------- --------- --------------- ------------ ----------
23 March
Contract EUR/GBP 2020 (GBP5,466,129) EUR6,401,384 4
----------------- --------- --------------- ------------ ----------
Principal Hedged Fair value
31 December 2018 Maturity amount amount GBP'000
----------------- --------- --------------- ------------ ----------
21 March
Contract EUR/GBP 2019 (GBP6,977,774) EUR7,733,467 33
----------------- --------- --------------- ------------ ----------
Accounting policy
Recognition of derivative financial assets and liabilities takes place when the hedging contracts are entered into. They are initially recognised and subsequently measured at fair value; transaction costs, where applicable, are included directly in finance costs. The Company does not apply hedge accounting and consequently all gains or losses are recognised in the statement of comprehensive income in net change in fair value of financial assets and financial liabilities through profit or loss.
19.2 Capital management
The Company's capital is represented by share capital comprising issued ordinary share capital and ordinary shares issued upon conversion of C shares, as detailed in note 18, as well as credit facilities, as detailed in note 15.
The Company may seek to raise additional capital from time to time to the extent that the Directors and the Investment Manager believe the Company will be able to make suitable investments. The Company raises capital only when it has a clear view of a robust pipeline of advanced investment opportunities to ensure the rapid deployment of capital.
The Company may borrow up to 25% of its NAV at such time any such borrowings are drawn down. Refer to note 15 for further information in relation to the RCF.
19.3 Financial risk management objectives
The Company has an investment policy and strategy that sets out the Company's overall investment strategy and general risk management philosophy and has established processes to monitor and control these in a timely and accurate manner. These guidelines are subject to regular operational reviews undertaken by the Investment Manager to ensure that the Company's policies are adhered to as it is the Investment Manager's duty to identify and assist in the management of risk. The Investment Manager reports regularly to the Directors who have ultimate responsibility for the overall risk management approach.
The Directors and the Investment Manager ensure that all investment activity is performed in accordance with investment guidelines. The Company's investment activities expose it to various types of risks that are associated with the financial instruments and markets in which it invests. Risk is inherent in the Company's activities and it is managed through a process of ongoing identification, measurement and monitoring. The financial risks to which the Company is exposed include market risk (which includes interest rate risk), credit risk, currency risk and liquidity risk.
As explained in note 12 and note 19.1, the Company's financial assets and liabilities at fair value through profit or loss comprise the investment in the Subsidiary and derivatives used for the purpose of hedging foreign currency exposure. The Subsidiary is a holding vehicle existing solely to hold the Company's investments and, therefore, exposure to market risk, interest rate risk, credit risk, liquidity risk and credit and counterparty risk are highly dependent on the performance of the Subsidiary's investments.
19.4 Market risk
The value of the investment in the Subsidiary is based on the aggregate of the NAV of the Subsidiary and the value of the Secured Loan Notes issued by the Subsidiary.
There is a risk that market movements in interest rates, credit markets and observable yields may decrease or increase the value of the Subsidiary's assets without regard to the assets' underlying performance. The Subsidiary's portfolio of assets is held at fair value, and their values are monitored on a semi-annual basis by the Valuation Agent. Investments subject to discount rate changes are valued on a quarterly basis. The Company's assets are stable with predictable cash flows and are not exchange traded.
In assessing the expected future cash flows from each of the investments, the Valuation Agent considers the movements in comparable credit markets and publicly available information around each project.
The valuation principles used are based on a discounted cash flow methodology. A fair value for each asset acquired by the Group is calculated by applying a relevant market discount rate to the contractual cash flow expected to arise from each asset.
The Valuation Agent determines the discount rate that it believes the market would reasonably apply to each underlying investment taking, inter alia, into account the following significant inputs:
-
- Pound Sterling interest rates; - movements of comparable credit markets; and - observable yield on other comparable instruments.
In addition, the following are also considered as part of the overall valuation process:
- market activity and investor sentiment; and - changes to the economic, legal, taxation or regulatory environment.
The Valuation Agent exercises its judgement in assessing the expected future cash flows from each investment. Given that the investments are generally fixed income debt instruments (in some cases with elements of inflation and/or interest rate protection) or other investments with a similar economic effect, the focus of the Valuation Agent is on assessing the likelihood of any interruptions to the debt service payments, in light of the operational performance of the underlying asset.
The valuations are reviewed by the Investment Manager and the Directors and the subsequent NAV produced is reviewed by the Investment Manager and the Directors on a quarterly basis.
The key driver of the Subsidiary's NAV is the valuation of its portfolio of secured loan facilities issued to the Project Companies.
The table below shows how changes in discount rates affect the changes in the valuation of financial assets through profit or loss. The range of discount rate changes has been determined with reference to historic discount rate changes made by the Valuation Agent.
31 December 2019 Change in discount rates (0.50%) 0.00% 0.50% ----------------------------------------------------------------------------- ------- ------- ------- Valuation of financial assets at fair value through profit or loss (GBP'000) 461,743 453,877 446,274 Change in value of financial assets at fair value (GBP'000) 7,866 - (7,603) ----------------------------------------------------------------------------- ------- ------- ------- 31 December 2018 Change in discount rates (0.50%) 0.00% 0.50% ----------------------------------------------------------------------------- ------- ------- ------- Valuation of financial assets at fair value through profit or loss (GBP'000) 386,500 378,350 370,567 Change in value of financial assets at fair value (GBP'000) 8,150 - (7,783) ----------------------------------------------------------------------------- ------- ------- -------
19.5 Interest rate risk
Interest rate risk arises from the effects of fluctuations in the prevailing level of market interest rates on the fair value of financial assets, future cash flows and borrowings.
Interest rate risk has the following effect:
Fair value of financial assets
Interest rates are one of the factors which the Valuation Agent takes into account when valuing the financial assets.
Future cash flows
The Company primarily invests, via its Subsidiary, in a diversified portfolio of projects which have contracted predictable medium to long-term cash flows and/or physical assets, such investments being asset backed. The Group's investments will predominantly be in the form of medium to long-term fixed or floating rate loans which are secured against cash flows and/or physical assets which are predominantly UK based.
Interest rate hedging may be carried out to seek to provide protection against falling interest rates in relation to assets that do not have a minimum fixed rate of return acceptable to the Company in line with its investment policy and strategy. The Company has not entered into an interest rate hedging agreement during the year, or in the prior year.
Borrowings
During the year the Company made use of its RCF, which was used towards the making of investments in accordance with the Company's investment policy. Details of the RCF are given in note 15.
Any potential financial impact of movements in interest rates on the cost of borrowings to the Company is mitigated by the short-term nature of such borrowings.
19.6 Credit risk
Credit risk refers to the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. Credit risk is generally higher when a non-exchange traded financial instrument is involved because the counterparty is not an exchange clearing house. The assets classified at fair value through profit or loss do not have a published credit rating, however the Investment Manager monitors the financial position and performance of the Project Companies on a regular basis to ensure that credit risk is appropriately managed.
The Company is exposed to differing levels of credit risk on all its assets. Per the statement of financial position, the Company's total exposure to credit risk is GBP462.6 million (31 December 2018: GBP389.4 million) represented by its cash, receivables and investment assets.
Cash is held at a number of financial institutions to spread credit risk. Cash awaiting investment is currently held on behalf of the Company at banks carrying a minimum rating of A-2, P-2 or F2 from Standard and Poor's, Moody's and Fitch respectively.
The Company's investments are debt and equity securities in the Subsidiary and, therefore, the credit risk of the Company's investments is highly dependent on the performance of the Subsidiary's investment portfolio, which is valued on a semi-annual basis by the Valuation Agent. Investments which may be subject to discount rate changes are valued on a quarterly basis. The Valuation Agent takes into account the credit risk associated with these investments in their valuation.
Credit risk is considered by the Valuation Agent both during the origination process and at valuation updates. The Company's investments are stable with predictable cash flows and are not exchange traded. Depending on the nature of the underlying projects, residual credit risk is considered by reference to a number of factors including, but not limited to: relative benchmark analysis, comparable bond pricing, market analysis such as the capital asset pricing model, and fundamental credit analysis of a borrower's underlying performance by reference to any applicable loan covenants.
After an investment is made, the forecasts are regularly updated with information provided by the borrowers in order to monitor ongoing financial performance. In addition, the credit risk associated with each borrower is mitigated by way of the assets of the Project Company, being secured on either a senior or subordinated basis. At year end, the concentration of credit risk to any one counterparty did not exceed 20% (31 December 2018: <20%) of the Company's total assets, in line with its investment restrictions.
The Directors currently consider the fair value of the financial instruments at par plus accumulated interest to be reasonable. The impact of such fair value attributable to any change in credit risk will continue to be reviewed at each quarter end and specifically when investments mature and their ongoing performance can be assessed. Therefore, no additional sensitivity analysis to that disclosed in note 19 has been provided in this respect.
19.7 Currency risk
All of the Group's investments at 31 December 2019 are denominated in Sterling, save for one investment which is denominated in Euros (31 December 2018: one Euro-denominated investment) and secured against Euro-valued contracted cash flows. The Company's only currency exposure is through the trading activities of its investee companies. The Company engages in currency hedging, in the form of a forward foreign exchange contract, to reduce the risk of adverse movements in currency exchange rates in relation to its Euro-denominated investment. Realised and unrealised gains or losses on forward foreign exchange contracts are disclosed in note 3.
As an alternative to cash cover/margin required on these forward foreign exchange contracts, the Company has made use of its RCF, as disclosed in note 15.
19.8 Liquidity risk
Liquidity risk is the risk that the Company may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous. The Company ensures it maintains adequate reserves by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. During the year ended 31 December 2019, all investments made by the Group were funded by proceeds from issuance of shares and utilisation of the RCF.
The table below analyses all of the Company's assets and liabilities into relevant maturity groupings based on the remaining period from 31 December 2019 to the contractual maturity date. The Directors have elected to present both assets and liabilities in the liquidity disclosure below to illustrate the net liquidity exposure of the Company.
All cash flows in the table below are presented on an undiscounted basis.
Less than One to Three to Greater
than
one month three months twelve twelve Total
months months
31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------------------ --------- ------------ -------- ------- --------
Financial assets
Financial assets at fair value through profit or loss 16 34,637 70,616 508,092 613,361
Other receivables and prepayments 15 6 42 - 63
Derivative financial instruments - 4 - - 4
Cash and cash equivalents 8,687 - - - 8,687
------------------------------------------------------ --------- ------------ -------- ------- --------
Total financial assets 8,718 34,647 70,658 508,092 622,115
------------------------------------------------------ --------- ------------ -------- ------- --------
Financial liabilities
Other payables and accrued expenses (21) (1,395) (57) - (1,473)
Revolving credit facilities (9,312) - - - (9,312)
------------------------------------------------------ --------- ------------ -------- ------- --------
Total financial liabilities (9,333) (1,395) (57) - (10,785)
------------------------------------------------------ --------- ------------ -------- ------- --------
Net exposure (615) 33,252 70,601 508,092 611,330
------------------------------------------------------ --------- ------------ -------- ------- --------
Less than One to Three to Greater
than
one month three months twelve twelve Total
months months
31 December 2018 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------------------ --------- ------------ -------- ------- -------
Financial assets
Financial assets at fair value through profit or loss 236 14,189 42,692 513,923 571,040
Other receivables and prepayments 1,463 4 40 289 1,796
Derivative financial instruments - 33 - - 33
Cash and cash equivalents 9,206 - - - 9,206
------------------------------------------------------ --------- ------------ -------- ------- -------
Total financial assets 10,905 14,226 42,732 514,212 582,075
------------------------------------------------------ --------- ------------ -------- ------- -------
Financial liabilities
Other payables and accrued expenses (1,528) (1,088) (179) - (2,795)
------------------------------------------------------ --------- ------------ -------- ------- -------
Total financial liabilities (1,528) (1,088) (179) - (2,795)
------------------------------------------------------ --------- ------------ -------- ------- -------
Net exposure 9,377 13,138 42,553 514,212 579,280
------------------------------------------------------ --------- ------------ -------- ------- -------
The Directors' assessment of the Company's ability to continue as a going concern, noted in note 2.1, includes an assessment of liquidity risk. The Board has concluded that the Company will be able to generate sufficient cash resources to settle its obligations in full as they fall due. Therefore, no additional sensitivity analysis for liquidity risk has been provided in this respect.
19.9 Fair values of financial assets
Valuation of financial instruments
The Company measures fair values using the following fair value hierarchy that reflects the significance of inputs used in making the measurements. Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to their fair value measurement of the relevant assets as follows:
- Level 1 - valued using quoted prices unadjusted in active markets for identical assets or liabilities;
- Level 2 - valued by reference to valuation techniques using observable inputs for the asset or liability other than quoted prices included in Level 1;
- Level 3 - valued by reference to valuation techniques using inputs that are not based on observable market data for the asset or liability.
An investment is always categorised as Level 1, 2 or 3 in its entirety. In certain cases the fair value measurement for an investment may use a number of different inputs that fall into different levels of the fair value hierarchy. In such cases, an investment level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgement and is specific to the investment.
The Valuation Agent has carried out semi-annual fair valuations of the financial assets of the Subsidiary (quarterly for investments which may be subject to discount rate changes). The same discount rates, determined by the Valuation Agent, are applied to the future cash flows of the Secured Loan Notes, to determine the fair value of the assets of the Company.
The Company recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.
The table below sets out fair value measurements of financial instruments as at the year end, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the value recognised in the statement of financial position. All fair value measurements are recurring.
Date of Level 1 Level 2 Level 3 Total
valuation GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------------------------------- ----------------- ------- ------- ------- -------
Financial assets measured at fair value through profit or loss:
Assets:
Investment in Subsidiary 31 December 2019 - - 453,877 453,877
Derivative financial instruments 31 December 2019 - 4 - 4
--------------------------------------------------------------- ----------------- ------- ------- ------- -------
Investment in Subsidiary 31 December 2018 - - 378,350 378,350
Derivative financial instruments 31 December 2018 - 33 - 33 --------------------------------------------------------------- ----------------- ------- ------- ------- -------
The derivative financial instruments are classified as Level 2 as observable market data is used for valuation and pricing.
The Directors have classified the financial instruments relating to 'Investments in Subsidiary' as Level 3 due to the limited number of comparable and observable market transactions in this sector. The current input for Level 3 at year end is the discount rates for these investments which are considered to be primarily modelled rather than market observed. The secured loan facilities that the Subsidiary has invested in are also classified as Level 3.
The following table shows a reconciliation of all movements in the fair value of financial instruments categorised within Level 3 between the beginning and end of the year:
31 December 31 December
2019 2018
GBP'000 GBP'000
------------------------------------------------------------------------------------- ----------- -----------
Opening balance 378,350 261,751
Investment in Subsidiary 89,451 129,227
Capital repayments from Subsidiary (10,761) (16,041)
Unrealised (loss)/gain on financial assets at fair value through profit or loss(1) :
Debt - Secured Loan Notes up to GBP1,000,000,000 (3,525) 3,223
Equity - representing one ordinary share in the Subsidiary 362 190
------------------------------------------------------------------------------------- ----------- -----------
Closing balance 453,877 378,350
------------------------------------------------------------------------------------- ----------- -----------
1. Refer to note 12 for further information.
For the Company's financial instruments categorised as Level 3, changing the discount rate used to value the underlying instruments alters the fair value. In determining the discount rate for calculating the fair value of financial assets at fair value through profit or loss, reference is made to Pound Sterling interest rates, movements of comparable credit markets and observable yield on comparable instruments. Hence, movements in these factors could give rise to changes in the discount rate. A change in the discount rate used to value the Level 3 investments would have the effect on the valuation as shown in the table in note 19.4.
The value of the investment in the Subsidiary is based on the aggregate of the NAV of the Subsidiary and the value of the Secured Loan Notes issued by the Subsidiary. At 31 December 2019, the NAV was as follows:
31 December 31 December
2019 2018
GBP'000 GBP'000
-------- ----------- -----------
GABI UK 796 434
-------- ----------- -----------
The key driver of the NAV is the valuation of its portfolio of secured loan facilities issued to the Project Companies.
The Secured Loan Notes issued by the Subsidiary that the Company has subscribed for, are valued on a discounted cash flow basis in line with the model used by the Valuation Agent, applying the following discount rates:
Key
Fair value(1) unobservable Discount
GBP'000 Valuation technique inputs rate
------------------------------------------------------ ------------- -------------------- ------------- --------
Financial assets at fair value through profit or loss
- 31 December 2019 453,877 Discounted cash flow Discount rate 8.1%
------------------------------------------------------ ------------- -------------------- ------------- --------
Financial assets at fair value through profit or loss
- 31 December 2018 378,350 Discounted cash flow Discount rate 8.1%
------------------------------------------------------ ------------- -------------------- ------------- --------
1. Including the NAV of the Subsidiary.
The investments held by the Subsidiary are valued on a discounted cash flow basis, in line with the model used by the Valuation Agent. At the year end, discount rates ranged from 6-10% (31 December 2018: 6-14%).
The Directors review the valuation report provided by the Valuation Agent which includes reference to the inputs used in the valuation of investments and the appropriateness of their classification in the fair value hierarchy. In particular, the Directors are satisfied that the significant inputs into the determination of the discount rate adopted by the Valuation Agent are pursuant to the Valuation Agent engagement letter. Should the valuation approach change, causing an investment to meet the characteristics of a different level of the fair value hierarchy, it will be reclassified accordingly.
During the year, there were no transfers of investments between levels.
20. Note to the cash flow statement
The table below sets out a reconciliation of the movement of liabilities arising from financing activities.
Interest
bearing
loans
and borrowings Total
GBP'000 GBP'000
------------------------------------------ -------------- --------
Balance at 1 January 2019 - -
Changes from cash flows
Proceeds from revolving credit facilities 48,808 48,808
Repayment of revolving credit facilities (39,332) (39,332)
------------------------------------------ -------------- --------
Total changes from cash flows 9,476 9,476
------------------------------------------ -------------- --------
Balance at 31 December 2019 9,476 9,476
------------------------------------------ -------------- --------
Liability Interest
in respect bearing
loans
of C shares and borrowings Total
GBP'000 GBP'000 GBP'000
------------------------------------------------------------------------------ ----------- -------------- ---------
Balance at 1 January 2018 73,980 - 73,980
Changes from cash flows
Proceeds from issue of C shares 51,500 - 51,500
C share issue costs (1,022) - (1,022)
Proceeds from revolving credit facilities - 14,000 14,000
Repayment of revolving credit facilities - (14,000) (14,000)
------------------------------------------------------------------------------ ----------- -------------- ---------
Total changes from cash flows 50,478 - 50,478
------------------------------------------------------------------------------ ----------- -------------- ---------
Non-cash changes
Net changes in fair value of financial assets at fair value through profit or
loss 752 - 752
Extinguishment of C share liability on conversion to ordinary shares (125,210) - (125,210)
------------------------------------------------------------------------------ ----------- -------------- ---------
Total non-cash changes (124,458) - (124,458)
------------------------------------------------------------------------------ ----------- -------------- ---------
Balance at 31 December 2018 - - -
------------------------------------------------------------------------------ ----------- -------------- ---------
21. Related party disclosures
As defined by IAS 24 Related Party Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. Subsidiary companies are also deemed to be related parties as they are members of the same group of companies.
Directors
The non-executive Directors of the Company are considered to be the key management personnel of the Company. Directors' remuneration for the year (including reimbursement of Company related expenses) totalled GBP136,000 (31 December 2018: GBP103,000). At 31 December 2019, liabilities in respect of these services amounted to GBP42,000 (31 December 2018: GBP25,000).
At 31 December 2019, the Directors of the Company held directly or indirectly, and together with their family members, 124,521 ordinary shares (31 December 2018: 123,942).
Alex Ohlsson is the managing partner of Carey Olsen, the Company's Jersey legal advisers. Carey Olsen has provided legal services to the Company during the year. Carey Olsen maintains procedures to ensure that the Chairman has no involvement in the provision of legal services to the Company. The Company maintains procedures to ensure that the Chairman takes no part in any decision to engage the services of Carey Olsen. During the year, the aggregate sum of GBP10,000 (2018: GBP27,000) was paid to Carey Olsen in respect of legal work undertaken, of which GBPnil (31 December 2018: GBP10,000) is outstanding at year end.
During the year, Joanna Dentskevich was a non-executive director and chair of the risk committee of RBSI, the lender under the RCF. In her role as a non--executive director, Mrs Dentskevich was not involved in the day-to-day services or operational aspects of the business. Mrs Dentskevich resigned from RBSI on 31 July 2019.
Investment Manager
The Company is party to an investment management agreement with the Investment Manager dated 28 September 2015 and as novated in April 2017, pursuant to which the Company has appointed the Investment Manager to provide discretionary portfolio and risk management services relating to the assets on a day--to--day basis in accordance with its investment objective and policies, subject to the overall control and supervision of the Directors.
As a result of the responsibilities delegated under this investment management agreement, the Company considers it to be a related party by virtue of being 'key management personnel'. Under the terms of the investment management agreement, the notice period of the termination of the Investment Manager by the Company is twelve months, with such notice not being given prior to the fifth anniversary of the Company's IPO.
For its services to the Company, the Investment Manager receives an investment management fee which is calculated and paid quarterly in arrears at an annual rate of 0.9% per annum of the prevailing NAV of the Company less the value of the cash holdings of the Company pro rata for the period for which such cash holdings have been held. The Investment Manager receives an annual fee of GBP25,000 in relation to its role as the Company's AIFM, which has been increased annually at the rate of the RPI since IPO.
The Investment Manager has committed additional resource in providing its client funds, including the Company, a more comprehensive service which increases the level of transaction advisory and marketing support received by the Company. The Investment Manager receives additional fees from any issue of new shares, in consideration for the provision of marketing and investor introduction services. The Investment Manager has appointed Highland Capital to assist it with the provision of such services and pays all fees due to Highland Capital out of the fees it receives from the Company.
During the year, the Company incurred GBP3,899,000 (2018: GBP3,102,000) in respect of the services outlined above: GBP3,715,000 (2018: GBP2,896,000) in respect of investment management and advisory services, GBP158,000 in relation to the issuance of ordinary shares (2018: GBP180,000 in relation to C and ordinary shares) and GBP26,000 (2018: GBP26,000) in respect of AIFM services provided by the Investment Manager. At 31 December 2019, liabilities in respect of these services amounted to GBP1,014,000 (31 December 2018: GBP845,000).
The Investment Manager, at its discretion, is entitled to an arrangement fee of up to 1% of the value of each investment made by the Company. The Investment Manager typically expects the cost of any such fee to be covered by the borrowers, and not the Company. To date, such fee in respect of all but three of the Group's investments has been met and paid by borrowers. During the year, the Investment Manager received GBP358,000 (2018: GBP968,000) from arrangement fees which had been met by the borrowers and GBP90,000 (2018: GBP40,000) from arrangement fees which had been met by the Company. To the extent any arrangement fee negotiated by the Investment Manager with a borrower exceeds 1%, the benefit of any such excess is paid to the Company.
A number of the directors of the Investment Manager also sit on the board of the Subsidiary.
At 31 December 2019, the key management personnel of the Investment Manager held directly or indirectly, and together with their family members, 1,450,961 ordinary shares in the Company (31 December 2018: 1,777,577 ordinary shares).
At 31 December 2019, the directors of the Investment Manager, and their family members, directly or indirectly own an equity interest in five of the Subsidiary's student accommodation investments. These investments are valued by the Valuation Agent in line with the remaining portfolio and were approved by the Board at the time of acquisition.
Subsidiary
At 31 December 2019, the Company owns a 100% (31 December 2018: 100%) controlling stake in the Subsidiary. The Subsidiary is considered to be a related party by virtue of being part of the same group. The Company indirectly owns GABI GS as part of the same group; for further information refer to note 1.
The following tables disclose the transactions and balances between the Company and Subsidiary:
31 December 31 December
2019 2018
Transactions GBP'000 GBP'000
------------------------------ ----------- -----------
Intercompany income received
Other income 74 110
Arrangement fee income 200 431
Loan interest income received 36,516 23,149
------------------------------ ----------- -----------
Total 36,790 23,690
------------------------------ ----------- -----------
31 December 31 December
2019 2018
Balances GBP'000 GBP'000
-------------------------------------------------------------------------------------------- ----------- -----------
Intercompany balances payable (15) (1,435)
-------------------------------------------------------------------------------------------- ----------- -----------
Intercompany balances receivable 9 1,462
-------------------------------------------------------------------------------------------- ----------- -----------
Principal value of intercompany holdings within financial assets at fair value through
profit
or loss 451,722 373,031
-------------------------------------------------------------------------------------------- ----------- -----------
22. Reconciliation of NAV
This note reconciles the NAV reported in the financial statements to the published NAV.
Total Per share
GBP'000 pence
-------------------------------------------------------------------- ------- ---------
NAV at 31 December 2019 as published on 16 January 2020 (unaudited) 451,846 102.33
NAV at 31 December 2019 as per the financial statements 451,846 102.33
-------------------------------------------------------------------- ------- ---------
Total Per share
GBP'000 pence
-------------------------------------------------------------------- ------- ---------
NAV at 31 December 2018 as published on 17 January 2019 (unaudited) 386,590 101.74
NAV at 31 December 2018 as per the financial statements 386,590 101.74
-------------------------------------------------------------------- ------- ---------
23. Subsequent events after the report date
On 16 January 2020, the Company extended its RCF in respect of the GBP10 million tranche, such that it will now mature in August 2020 alongside the rest of the credit facilities. Refer to note 15 for further details.
On 22 January 2020, the Company announced a fourth interim dividend of 1.55 pence per ordinary share amounting to GBP6,844,000 (including dividends settled in shares(1) ) which was paid on 28 February 2020 to ordinary shareholders on the register at 31 January 2020.
Post year end, the Company drew down an aggregate amount of GBP9.9 million on the RCF with RBSI, resulting in a total drawn amount of GBP19.4 million, not including the amount drawn down as alternative to cash cover for the forward exchange contracts. The Company repaid the balance of GBP19.4 million on 17 February 2020, incurring early repayment breakage costs of GBP1,850.
On 28 February 2020, 489,499 ordinary shares were admitted to the Official List of the FCA and to trading on the Premium Segment of the Main Market of the LSE, pursuant to the scrip dividend alternative in lieu of cash for the interim dividend declared on 22 January 2020.
Post year end, the Company received a repayment on two of its co-living investments, along with receiving a prepayment fee of c.GBP1 million. The Company was able to immediately recommit GBP53 million to the same borrower group in a larger facility of up to GBP140 million alongside Deutsche Bank for a term of up to four years.
Post year end, the Group made a further five advances totalling GBP40.3 million and received four repayments totalling GBP60.9 million which included repayments on two of its co-living investments, along with prepayment fees of c.GBP1 million. The Company was able to immediately recommit GBP53 million (of which GBP30.3 million has been drawn) to the same borrower group in a larger facility of up to GBP140 million alongside Deutsche Bank for a term of up to four years.
On 18 March 2020, the Company repurchased 100,000 ordinary shares in the capital of the Company at a price of 76.76 pence. Following this transaction, the Company has in issue 442,033,518 ordinary shares of which 100,000 are held in treasury. The total voting rights of the Company at the date of the report is 441,933,518.
1. Dividends settled in shares are where shareholders have elected to take the scrip dividend alternative.
24. Ultimate controlling party
It is the view of the Board that there is no ultimate controlling party.
SHAREHOLDER INFORMATION
Key dates 2020
February Payment of fourth interim dividend
March Annual results announced
May Annual General Meeting
June Payment of first interim dividend
Company's half year end
August Payment of second interim dividend
September Interim results announced
November Payment of third interim dividend
December Company's year end
NAV publication
The Company's NAV is released to the LSE on a quarterly basis and is published on the Company's website.
Further information
Copies of the Company's annual and half-yearly reports, quarterly investor reports, stock exchange announcements and further information on the Company can be obtained from the Company's website.
Warning to users of this report
This report is intended solely for the information of the person to whom it is provided by the Company, the Investment Manager or the Administrator. This report is not intended as an offer or solicitation for the purchase of shares in the Company and should not be relied on by any person for the purpose of accounting, legal or tax advice or for making an investment decision. The payment of dividends and the repayment of capital are not guaranteed by the Company. Any forecast, projection or target is indicative only and not guaranteed in any way, and any opinions expressed in this report are not statements of fact and are subject to change, and neither the Company nor the Investment Manager is under any obligation to update such opinions.
Past performance is not a reliable indicator of future performance, and investors may not get back the original amount invested. Unless otherwise stated, the sources for all information contained in this report are the Investment Manager and the Administrator. Information contained in this report is believed to be accurate at the date of publication, but none of the Company, the Investment Manager and the Administrator gives any representation or warranty as to the report's accuracy or completeness. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation. None of the Company, the Investment Manager and the Administrator accepts any liability whatsoever for any loss (whether direct or indirect) arising from any use of this report or its contents.
ALTERNATIVE PERFORMANCE MEASURES
The Board and the Investment Manager assess the Company's performance using a variety of measures that are not defined under IFRS and are therefore classed as APMs. Where possible reconciliations to IFRS are presented from the APMs to the most appropriate measure prepared in accordance with IFRS.
All items listed below are IFRS financial statement line items unless otherwise stated. APMs should be read in conjunction with the statement of comprehensive income, statement of financial position and statement of cash flows, which are presented in the financial statements section of this report. The APMs below may not be directly comparable with measures used by other companies.
Annualised total shareholder return since IPO
Total shareholder return expressed as a time weighted annual percentage.
Average LTV
The ratio of a loan or mortgage to a property valuation, averaged across the Company's property investments, expressed as a percentage. This ratio demonstrates the headroom in the underlying asset values to absorb negative movements in property valuations.
Dividend cover
Ratio of the Company's earnings per share under IFRS to the dividend per share.
IRR
IRR is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.
The internal rate of return is used to evaluate the attractiveness of a project or investment.
Ongoing charges ratio
Ongoing charges (previously "total expense ratios" or "TERs") is a measure of the annual percentage reduction in shareholder returns as a result of recurring operational expenses assuming markets remain static and the portfolio is not traded.
This is a standard performance metric across the investment industry and allows comparability across the sector.
Total shareholder return
A measure of the performance of a company's shares over time. It combines share price movements and dividends to show the total return to the shareholder expressed as a percentage.
It assumes that dividends are reinvested in the shares at the time the shares are quoted ex dividend.
This is a standard performance metric across the investment industry and allows comparability across the sector.
Source: Bloomberg
Weighted average annualised yield
The weighted average yield on the investment portfolio calculated based on the yield of each investment weighted by the principal balance outstanding on such investment, expressed as a percentage.
The yield forms a component of investment cash flows used for the valuation of financial assets at fair value through profit or loss under IFRS 9.
GLOSSARY
AGM
The Annual General Meeting of the Company
AIC
Association of Investment Companies
AIC Code
AIC Code of Corporate Governance
AIF
Alternative Investment Fund
AIFM
Alternative Investment Fund Manager
AIFMD
Alternative Investment Fund Managers Directive
APM
Alternative performance measure
Articles
The articles of association of the Company
Borrower
Owner of a Project Company to which the Group advances loans
Carey Olsen
Carey Olsen Jersey LLP
CIF Law
Collective Investment Funds (Jersey) Law 1988
CNG
Compressed natural gas
Companies Law
Companies (Jersey) Law 1991, as amended
Company
GCP Asset Backed Income Fund Limited
CPI
Consumer price index
DTRs
Disclosure Guidance and Transparency Rules of the FCA
EBITDA
Earnings before interest, taxes, depreciation and amortisation
EGM
Extraordinary general meeting
EPS
Earnings per share
FCA
Financial Conduct Authority
GABI GS
GABI GS Limited
GABI UK
GCP Asset Backed Income (UK) Limited
GCP Infra
GCP Infrastructure Investments Limited, a third party company advised by the Investment Manager
Group
The Company, GABI UK and GABI GS
Highland Capital
Highland Capital Partners Limited
IAS
International Accounting Standards
IASB
International Accounting Standards Board
IFRIC
International Financial Reporting Interpretations Committee
IFRS
International Financial Reporting Standards
IPO
Initial public offering
IRR
Internal rate of return
JFSC
Jersey Financial Services Commission
Listing Rules
FCA Listing Rules
LSE
London Stock Exchange
LTV
Loan-to-value
MAR
EU Market Abuse Regulation
Market capitalisation
Value of a company traded on the LSE, calculated as total number of shares multiplied by closing share price
MiFID II
Markets in Financial Instruments Directive II
NAV
Net asset value
O&M
Operations and maintenance
Project Company
A special purpose company which owns and operates an asset
RBSI
Royal Bank of Scotland International Limited
RCF
Revolving credit facility
RPI
Retail price index
Secured Loan Notes
Loan notes issued to the Company
Stephenson
Stephenson Executive Search Limited
Subsidiary and/or GABI UK
GCP Asset Backed Income (UK) Limited
TISE
The International Stock Exchange
UK Code
UK Corporate Governance Code
Weighted average discount rate
A rate of return used in valuation to convert a series of future anticipated cash flows to present value under a discounted cash flow approach. The rate is calculated with reference to the relative size of each investment
CORPORATE INFORMATION
The Company
GCP Asset Backed Income Fund Limited
12 Castle Street
St Helier
Jersey JE2 3RT
Directors and/or the Board
Alex Ohlsson (Chairman)
Colin Huelin
Joanna Dentskevich
Marykay Fuller
Administrator, secretary and registered office of the Company
Apex Financial Services (Alternative Funds) Limited
(Formerly Link Alternative Fund Services (Jersey) Limited)
12 Castle Street
St Helier
Jersey JE2 3RT
Advisers on English law
Gowling WLG (UK) LLP
4 More London Riverside
London SE1 2AU
Advisers on Jersey law
Carey Olsen Jersey LLP
47 Esplanade
St Helier
Jersey JE1 0BD
Broker
Cenkos Securities plc
(resigned 28 January 2020)
6, 7, 8 Tokenhouse Yard
London EC2R 7AS
Investec Bank plc
(appointed 28 January 2020)
30 Gresham Street
London EC2V 7QP
Depositary
Apex Financial Services (Corporate) Limited
(Formerly Link Corporate Services (Jersey) Limited)
12 Castle Street
St Helier
Jersey JE2 3RT
Independent Auditor
PricewaterhouseCoopers CI LLP
37 Esplanade
St Helier
Jersey JE1 4XA
Investment Manager and AIFM
Gravis Capital Management Limited
24 Savile Row
London W1S 2ES
Principal banker and lender
Royal Bank of Scotland International Limited
71 Bath Street
St Helier
Jersey JE4 8PJ
Registrar
Link Market Services (Jersey) Limited
12 Castle Street
St Helier
Jersey JE2 3RT
Security Trustee
Gravis Capital Partners LLP
24 Savile Row
London W1S 2ES
Valuation Agent
Mazars LLP
Tower Bridge House
St Katharine's Way
London E1W 1DD
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
FR ZZGMFFRGGGZZ
(END) Dow Jones Newswires
March 19, 2020 03:00 ET (07:00 GMT)
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