We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Register to chat with like-minded investors on our interactive forums.
| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Uk Mortgages Limited | LSE:UKML | London | Ordinary Share | GG00BXDZMK63 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 78.90 | 78.20 | 79.60 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
Hot Features
Premium
TIDMUKML
UK Mortgages Limited
ANNUAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the year from 1 July 2016 to 30 June 2017
Legal Entity Identifier: 549300388LT7VTHCIT59
(Classified Regulated Information, under DTR 6 Annex 1 section 1.2)
The Directors of UK Mortgages Limited announce the results for the year from 1
July 2016 to 30 June 2017. The Report will shortly be available via the
Company's Portfolio Manager's website www.ukmortgageslimited.com and will
shortly be available for inspection online at www.morningstar.co.uk/uk/NSM
SUMMARY INFORMATION
The Company
UK Mortgages Limited ("UKML") was incorporated with limited liability in
Guernsey as a closed-ended investment company on 10 June 2015. UKML's shares
were admitted to trading on the Specialist Fund Segment of the London Stock
Exchange on 7 July 2015.
UKML and affiliate structure has been designed by the Board of Directors, the
Portfolio Manager, the Corporate Broker and legal advisors to ensure the most
efficient structure for regulatory and tax purposes.
UKML established an Acquiring Entity, UK Mortgages Corporate Funding Designated
Activity Company ("DAC") for the purpose of acquiring and securitising
mortgages via Special Purpose Vehicles ("SPVs"). UKML, the Acquiring Entity,
the Issuer SPVs and the Warehouse SPVs (collectively, the "Company") are
treated on a consolidated basis for the purpose of the Audited Consolidated
Financial Statements.
Investment Objective
The Company's investment objective is to provide Shareholders with access to
stable income returns through the application of relatively conservative levels
of leverage to portfolios of UK mortgages.
The Company expects that income will constitute the vast majority of the return
to Shareholders and that the return to Shareholders will have relatively low
volatility and demonstrate a low level of correlation with broader markets.
Shareholders' Information
Northern Trust International Fund Administration Services (Guernsey) Limited
(the "Administrator") is responsible for calculating the Net Asset Value
("NAV") per share of the Company. The NAV per Ordinary Share is calculated as
at the last business day of every month by the Administrator and is announced
through a Regulatory Information Service on, or within 2 weeks following, the
last business day of the following month.
Financial Highlights
30.06.2017 30.06.2016
Total Net Assets GBP223,388,138 GBP237,363,265
Net Asset Value per ordinary 89.36p 94.95p
share
Share price at 30 June 2017 96.40p 96.75p
Premium to Net Asset Value 7.88% 1.90%
Dividends declared and paid in the year 4.50p 1.50p
/period
Total dividends declared in relation to the year/ 6.00p 3.00p
period
Ongoing Charges
- UKML 1.07% 0.96%
- DAC and subsidiaries 1.11% 0.24%
Total ongoing charges for the Company 2.18% 1.20%
CHAIRMAN'S STATEMENT
for the year ended 30 June 2017
I am pleased to present the results of the Company for the period from 1 July
2016 to 30 June 2017, during which UKML substantially completed its allocation
of the capital raised at IPO. At the beginning of the financial year, UKML had
just completed the securitisation of its initial mortgage portfolio. By the end
of this period, a second mortgage portfolio had been purchased and securitised,
and the mortgage origination business, The Mortgage Lender ("TML") had grown
its book of business from a standing start to GBP109m[1]. Based on current growth
rates, the Board and Portfolio Manager hope to be in a position to begin the
securitisation process for the TML portfolio in early 2018 and meanwhile the
Portfolio Manager is also actively seeking further suitable mortgage pools to
form the basis of UKML's fourth transaction.
During the period, the Company's first securitisation, Malt Hill No. 1 Plc.,
has continued to perform exceptionally well, with none of its underlying
mortgages in arrears. Similarly, TML has performed well to date from a credit
perspective, with no arrears to date, albeit that the pace of origination has
been slower than originally anticipated.
The purchase of the Company's third investment was completed in February 2017.
This was a GBP590m portfolio of loans originated primarily between 2004 and 2008
by Capital Home Loans, the UK BTL mortgage subsidiary of Permanent TSB. The
portfolio was purchased at a significant discount, reflecting the low interest
rates on the mortgages given the mature nature of the pool. The Portfolio
Manager moved quickly to securitise this pool and this was successfully
structured in May 2017 as Oat Hill No. 1 Ltd. The senior notes were sold at a
yield of 85 basis points over 3 month LIBOR, an improvement on the Portfolio
Manager's initial estimates, which resulted in a higher than anticipated
release of capital of approximately GBP40m. It's also worth noting that the time
taken from the purchase of this mortgage pool to its securitisation was around
half of the time taken with the Malt Hill securitisation in 2016. This was
partly due to more favourable market conditions, but also a consequence of the
Company being more established as a participant in securitisation markets and
improved processes at the Portfolio Manager.
A more detailed description of the performance of UKML's investments can be
found in the Portfolio Manager's report.
Dividend and Outlook
Whilst it is gratifying that the initial capital raised at IPO has now been
allocated, the process of investment has taken longer than envisaged when the
Company was launched. However, this slower pace of investment means that the
current annual dividend of 6p per share is still not fully covered by income.
It was always expected that the early dividends would be uncovered to some
extent, given the time involved in negotiating and structuring investments, as
well as the "back-loaded" nature of returns from the securitisation process.
Dividends to date have been paid on the basis that future revenues would not
only cover current year dividends, but would also generate a surplus sufficient
to repay the capital previously distributed. It is therefore vital that at each
quarterly dividend meeting the Board confirms with the Portfolio Manager that
these assumptions remain valid.
Once the exact terms of the Oat Hill securitisation were known, the Board and
Portfolio Manager revisited the Company's cash flow models to consider the
profile of expected returns. These were originally detailed in the webinar that
the Portfolio Manager presented to investors in June 2017, refined further in
September 2017 and can been found on the Company's website.
Whilst it is estimated that the 6p dividend will not be covered by income until
2020 when the Oat Hill securitisation is refinanced and much of its original
purchase discount is unwound, the Portfolio Manager's latest modelling confirms
that the original investment case and total return estimates remain valid. In
addition, future transactions have the potential to improve returns, not least
because any new fund raising can be deal-specific, avoiding the cash drag that
hampered UKML in its first year.
Nevertheless, the pace of investment means that full coverage of the dividend
will take longer than initially anticipated, so on September 21st 2017 the
Board approved a temporary reduction in the portfolio management fee from 0.75%
per annum to 0.6% with effect from the financial year beginning 1 July 2017.
The Board will review this arrangement at the end of the 2021 financial year,
or sooner should market conditions change.
This flexibility on the part of the Portfolio Manager is welcome and
demonstrates its commitment to the long-term success of UKML. The last two
years have certainly been challenging but the work of the Portfolio Manager and
other service providers over this period means that the Company is now well
positioned with established and repeatable processes to deliver attractive
returns from mortgage portfolios that have little or no correlation with other
financial assets.
Thank you for your continuing support.
Christopher Waldron
Chairman
18 October 2017
PORTFOLIO MANAGER'S REPORT
for the year ended 30 June 2017
Market Commentary
The summer and autumn of 2016 saw dramatic changes across the entire financial
and political landscape in the UK, Europe and the US. The UK's EU referendum
result in late June set the tone for a second half of surprises, initiating a
period of tension and political sparring within the re-formed and reshuffled UK
government under Theresa May. The government appeared determined not to show
its cards too early, whilst various UK Remain supporters, plus a host of
European politicians were equally determined to stand firm against any
potential UK proposals for favourable exit treatment. Populist movements gained
ground, with Mario Renzi effectively being ousted in Italy in what became a
highly personal vote of no confidence for his policy implementation referendum,
plus the surprise election of Donald Trump as the new US President in November.
The UK's situation in particular, led initially to concerns about the economic
damage Brexit might herald and in August the Bank of England reacted with a
raft of economic policy easing measures, including an expected 25bp base rate
cut, coupled with further QE measures including the reintroduction of a QE bond
buying programme and the inclusion of corporate bond purchases for the first
time. The programme also included a four-year Term Funding Scheme (TFS)
providing secured funds at the new base rate, designed to help banks pass on
the rate cut to borrowers. This certainly seemed to be the case as mortgage and
other consumer borrowing rates were tightened but it also led to something of a
repeat of the effect seen in 2012 following the introduction of the Funding for
Lending Scheme, when banks substantially withdrew from issuance in wholesale
funding markets in favour of cheap central bank subsidies.
The short and medium term consequences of this were to tighten issuance spreads
across all wholesale funding markets, as the expectation of reduced issuance
from the banking sector was borne out. In RMBS markets however, some of the
slack was taken up by independent non-bank issuers, but the cost of funding
continued to tighten nonetheless and this trend extended into 2017, with
spreads moving to record post-crisis lows, although there was little sign of
bank issuers being prompted back to the market by this.
In broader mortgage and housing markets, signals were very mixed, with
conflicting data from source to source and from month to month but, for the
main part, the overall market continued to show slow growth. Whilst regional
data is available less frequently, subjective evidence from wider sources
suggested that even though much of the London market had been suffering
something of a slowdown in response to Brexit uncertainty, other parts of the
country that had lagged behind were beginning to catch up.
In early 2017, the political focus shifted away from the UK somewhat towards
the imminent elections in Europe, with real concerns about the potential for
further populist victories, but in the end both the Dutch and French elections
saw these candidates defeated, and hopes of a more stable outlook prevailed. In
the US, President Trump continued attempts to push forward with his
long-signalled radical policies, attracting news headlines, animosity and
prompting potential volatility.
Meanwhile, the UK came sharply back into focus when the government finally
triggered Article 50 as promised at the end of March. However, uncertainty
remained, driven mainly by Brexit negotiations, talks and projections which
clearly had an effect both on the real economy and financial markets. The
government then called an unscheduled election in June with the intention of
providing more certainty and to gain further strength at the table with Europe,
but a poor campaign by the Conservatives resulted in a lost majority and
Theresa May was forced to seek a coalition with the DUP to continue in power.
At the same time, the message in Europe turned more stable, with the Macron
victory in the French elections driving renewed confidence for the EU. Taken
together, these results generate further uncertainty around the Brexit outcome,
with a number of market participants pricing in a hard Brexit.
In the real UK economy, this translated into growth running at half the
expected pace for the first half of the year. At the same time, whilst the
official unemployment rate continues to reduce, having reached its lowest since
1975, there has been no corresponding improvement in wages, leaving consumers
with a choice between cutting back on spending or saving less. The Bank of
England has highlighted an increase in volumes for unsecured lending and
financial institutions have responded with a tightening of criteria for new
credit.
In the financial markets, the electoral shock was effectively absorbed in the
exchange rate, with sterling down by around 3% versus the euro at the end of
June. The currency depreciation allowed UK assets to remain stable or
strengthen in sterling terms over the period.
Despite this, and as is often the case, the RMBS market showed good resilience,
as a number of UK issuers announced new transactions following the UK
elections, priced at levels in line, or tighter than, pre-election. Pricing
levels have been underpinned over the period by a shortage of primary paper, as
bank issuers continued to fund most if not all of their mortgage production via
the TFS, which still provides cheaper funding than the capital markets despite
the spread tightening. However, a level of indigestion was observed in the BTL
market following the UK government's GBP13bn disposal in May of the former
Bradford & Bingley mortgage book, which resulted in a larger than expected
placement of RMBS bonds totalling over GBP4bn, putting the brakes on further
spread tightening in that sector.
Broader mortgage and housing markets, seem to have substantially reached a
stalling point at national level, although at regional level the picture
continues to be mixed. The headline price growth rate slipped to the lowest
level since 2013, with prices on an upward path in the South West, the Midlands
and Northern Ireland, but downwards in London and the South East. The stock of
properties on offer also continues to reduce, with a steady deterioration of
fresh listings in the year to June 2017.
The volume of mortgages originated in the first half of the year remained
stable overall, with first-time buyers and re-mortgage components sustaining
volumes while BTL continued to be subdued. Lenders are facing increased
competition to gain market share, with rates reaching historical lows.
Portfolio Review
Having closed the Company's inaugural securitisation, Malt Hill No.1 plc, in
May 2016, securing the senior funding for the next three years (further details
of subsequent performance below), the Company was able to announce its second
transaction in early July.
Cornhill No. 2 Limited Portfolio (The Mortgage Lender - TML)
The Mortgage Lender (TML) is a new entrant to the UK mortgage lending market,
albeit set up and managed by the team who had previous successfully founded and
run Mortgages plc since the late 1990s. This transaction had been in
negotiation for about six months but had taken longer to complete than hoped
for, due to the newness of TML as an originator and a delay caused by a late
change in the warehouse provider.
TML opened their doors for business in July 2016 and began to take
applications. These were followed shortly afterwards with the first offers
being made (as well as the first applications to be declined) and, as would be
expected with a lag of about 2-3 months, the first completions. Applications,
offers and completions initially grew broadly in line with expectations, albeit
from a zero base, in line with initial projections of building a portfolio to
reach securitisable size towards the end of 2017.
Origination continued to progress in the first half of this year, albeit at a
slower pace than had been projected, but in line with the reduced pace of
origination in the overall mortgage market. As at the end of June the
originated portfolio and loans in the pipeline were c. GBP109m, which means that
the portfolio is now unlikely to reach securitisable size before the end of the
2017. In order to retain cost efficiency, in June, the Portfolio Manager
negotiated and implemented amendments to the warehouse facility provided by
NatWest Markets. The new terms of the facility allow significant cost savings
(c. GBP50k/month) with the committed funding adjusted to the revised portfolio
growth.
Oat Hill No. 1 Plc Portfolio (Capital Home Loans - CHL)
This portfolio was an approximately GBP590m pool of BTL loans originated
primarily between 2004 and 2008 by Capital Home Loans, then the UK specialist
BTL mortgage lending arm of Permanent TSB. CHL was sold to an affiliate of
Cerberus Capital Management, L.P. in July 2015.
The term sheet was signed with the seller, another Cerberus affiliate, at the
turn of the year. The acquisition was then completed in February, at which time
the pool comprised 4,896 loans with an average balance of GBP120,610 and a
weighted average indexed loan-to-value of 69.65%. Since acquisition, the
performance of the pool has slightly improved, with just 0.85% of the loans
more than one month in arrears, compared to 0.92% at the time of purchase.
The acquisition was initially funded through a private warehouse facility
provided by Bank of America Merrill Lynch and subsequently refinanced through
the issuance of AAA notes by the Oat Hill No.1 Plc entity in June, which
provided cheaper funding and greater leverage for the investment. The
refinancing also freed up c. GBP40m capital, for which the Portfolio Manager is
exploring appropriate investments.
Malt Hill No. 1 Plc Portfolio (Coventry Building Society)
Malt Hill No.1 continues to perform ahead of expectations, with no loans in
arrears. In May 2017 a number of loans reached the end of their initial fixed
rate period and, as expected, the majority re-fixed their rate for an equal or
longer term, with a minority prepaying and the balance switching to the
Standard Variable Rate ("SVR"). The SVR proportion was initially larger than
might have been expected, but in June further loans re-fixed or refinanced
elsewhere, and we expect this trend to continue gradually. As is typical in
these cases, some of the loans that re-fixed do not meet certain
pre-established criteria within the securitisation documentation and would be
expected to be re-purchased by the DAC. However, in this case, many of these
instances are marginal and/or technical in nature, so rather than simply allow
the loan repurchases and therefore subsequent amortisation of the senior notes,
which would not be beneficial to either the senior noteholders or the leverage
those notes give to UKML's investment, an RNS has been issued and noteholders
will be contacted to discuss a potential solution.
At origination, the Malt Hill No.1 portfolio comprised loans with either an
initial two-year fixed rate period (approx. 80%) or an initial five-year
period. At the end of the fixed rate periods the loans revert to a floating
rate (typically the SVR). Borrowers then have the option to either remain on
the SVR, prepay without penalty (likely switching to a loan with another
lender) or switch to a new fixed rate period with Coventry Building Society (a
"product switch").
Given that the loan portfolio was predominantly originated between May and July
of 2015, the portfolio recently began seeing the first of those loans with an
initial two-year fixed rate period reach the end of that term. As is typical
origination practice at Coventry and other similar lenders, the "two-year"
period is usually offered for a short period of time (e.g. three months) to a
specific date (e.g. a month end). In this case the initial two-year loans all
reached their reset date in either May 2017 or August 2017.
Prior to May 2017, a combination of scheduled repayments from the loans and
unscheduled prepayments on other loans (e.g. as borrowers sold a property)
meant the initial GBP302m pool had amortised by GBP17m. In May, approximately GBP94m
of loans reached their reset date. Of these around GBP7m prepaid, GBP30m reset to a
new two-year rate, GBP5m switched to a new longer-term fixed rate and the
remainder reverted to a floating rate, typically the SVR.
It was always expected that Coventry would have a high retention rate - as it
proved - but at this early stage it was likely that many borrowers had allowed
their loans to revert to SVR whilst they decided what to do next. In June, a
further GBP4m prepaid and further GBP9m moved to a new two-year fixed rate. We
expect this trend to continue over the next few months with a small amount of
further prepayments, and some further product switches, with the second batch
of resets (of around GBP125m) due from August.
The cut in UK interest rates, the introduction of the Term Funding Scheme in
August 2016, along with increased competition in the UK mortgage market means
that lending rates are at all-time lows and unsurprisingly the rates being
offered on new fixed rate loans are lower than those offered two years ago. The
loans that reached their reset date in May had a weighted average rate of
3.29%. By the end of June, those that had reset to a new two-year rate had a
weighted average rate of 2.26%, although the rate on the balance was 3.72%.
These lower rates are offset by product switch fees (typically either GBP999 or GBP
1,999) which, for example, boost the two-year rate by between 25bps and 50bps
respectively on an average size loan.
Key Performance Indicators
The Malt Hill No.1 portfolio is an exceptionally high quality portfolio of
loans. In its lifetime, just one loan has fallen into arrears, and by just one
month, and those arrears have now been cured. Overall, the pool is well
diversified, with low (and therefore lower risk) LTV ratios, loan balances and,
importantly for BTL properties, generally high debt service coverage ratios.
At 30 June 2017, 1,561 loans with a value of c. GBP270m remained outstanding. The
tables and charts below highlight some of the key performance metrics that are
analysed on a monthly basis.
Loan-to-Value (LTV)
With no loans >80% LTV, the vast majority of loans below 70% and a weighted
average of 63.8%, the pool exhibits low levels of risk.
Current Balances
Loan sizes are also generally moderate, with the vast majority clustered
between GBP50k and GBP350k and a weighted average of c. GBP173k, and no jumbo loans
(>GBP1m). Given the WA LTV, this suggests an average house price of c. GBP271k,
below the June 2017 Land Registry average house price for England & Wales of
just under GBP300k.
Geographic Dispersion
As might be expected of a pool of BTL loans originated in 2015, a large
concentration of properties are situated in London and the South East, where
property price performance has been strongest but also where demand for rental
property has been strong due to higher employment levels, but also where
property prices are generally higher. Notably, the pool contains no loans from
Scotland or from Northern Ireland and only minimal exposure to the North of
England and to Wales.
Region % Avg. Loan WA LTV
Size
South West England 7.3% GBP125k 63.9%
South East England 16.3% GBP163k 64.9%
Greater London 54.6% GBP246k 63.1%
East of England 9.0% GBP137k 64.8%
East Midlands 2.8% GBP94k 64.3%
West Midlands 3.9% GBP97k 64.7%
North West England 2.2% GBP99k 66.7%
Yorkshire and the Humber 2.4% GBP97k 64.7%
North East England 0.6% GBP102k 61.5%
Wales 0.9% GBP84k 62.6%
There is considerable consistency in the LTV dispersion across the regions,
meaning that with a similar WA LTV in London and the South East to the overall
pool, the exposure to higher property prices in those areas is reduced. As
shown in the table above, loans in London have an average balance of c. GBP246k
(the only sector which is higher than the pool average) and a WA LTV of 63.1%,
whilst those in the South East have WA balance of c. GBP163k and a WA LTV of
64.9%. These figures compare extremely favourably with an implied average
house price for the loans in London of c. GBP390k versus the Land Registry
regional average of c. GBP482k and an implied level of GBP252k in the South East
compared to the average for the region of c. GBP320k.
Rental Coverage
The vast majority of the pool has a very healthy Debt Service Coverage Ratio
(DSCR - the level of rental income versus the contractual monthly payment on
the loan), with more than 50% of the loans having more than 2x coverage.
Most loans in the UK BTL mortgage market are interest-only loans, as given the
stated intention to rent the property on an ongoing basis, the loan can
ultimately be repaid either by refinancing the loan or from a property sale to
a future potential landlord or occupier.
In this pool, c.19% of the loans are repayment mortgages, further enhancing the
quality of the pool. Of those loans at the lower end of the coverage spectrum
(<1.25x), 168 out of 171 loans including all 45 of the loans with <1x coverage
are repayment mortgages, reflecting that the interest portion of the
contractual monthly payment is lower than the actual payment amount, and
therefore for those loans the interest coverage ratio is higher. Coventry's
origination criteria when these loans were made required all loans to pass a
stressed interest coverage test whereby the monthly rental income had to be at
least 125% of the monthly interest amount at a stressed mortgage rate of at
least 5%.
Cornhill No.2 Portfolio (The Mortgage Lender - TML)
Origination Progress
The Mortgage Lender (TML) began offering mortgage loans in July 2016, with the
first completions occurring approximately two months later. Whilst initial
growth was in line with expectations, the acceleration of origination that had
been initially anticipated has not been realised as expected and is discussed
further in the Portfolio Manager's Report.
At 30 June 2017, completions and the mortgage application pipeline totalled 561
loans with a value of c. GBP109m, meaning an average loan size of c. GBP196k.
TML currently originates loans graded by quality into tiers numbering from 1
(highest) to 9 (lowest). These tiers are the further grouped into 3 categories,
1-3, 4-6 and 7-9, where borrowers in each category share similar
characteristics, but are differentiated by credit score. The quality of the
portfolio has exceeded expectations, with a greater proportion of lending and
applications seen in the highest quality credit category compared to the
middle, category, with the lower category generally in line, and slowly falling
as a proportion of overall lending. This is also borne out by the current
arrears experience, with no loans having experienced arrears to date.
Key Performance Indicators
Mortgage Rates
Due to the "risk-priced" nature of loans there is a wide spread of mortgage
rates across the portfolio. However, as noted above, the portfolio has a high
concentration of loans in the higher credit quality categories and therefore
the majority of loans are concentrated in the 2% - 4% range, with a weighted
average interest rate for the whole pool at 3.51%. As might be expected of the
loans from the higher risk category they generate a higher interest rate and
are concentrated in the bands with an interest rate of 5% or more.
Around 62% of the loans have an initial two-year fixed rate period, 12% have a
five-year initial fixed rate period and the balance (around 26%) are floating
rate loans, tracking 3 month Libor. The two-year loans have a current average
interest rate of 3.41%, with the five-year loans at 4.58% and the floating rate
loans at 3.28%.
Loan-to-Value
LTV rates are broadly diverse, with a relatively high proportion of very low
LTV loans (<50%) for a newly originated pool. As might be expected from a
specialist lending business, whose primary target audience is borrowers who are
unable to meet the lending criteria of the traditional high-street lenders,
there are some higher LTV loans in the pool, although no loans are above 90%
LTV, and no loans from the higher risk category are above 80% LTV.
Oat Hill No.1 Portfolio (Capital Home Loans - CHL)
Key Performance Indicators
The Oat Hill No.1 portfolio is a high quality pool of BTL loans originated
predominantly between 2004 and 2008. As at 30 June 2017, the pool comprised
4,453 loans totalling GBP577m. Given the time they were originated, any initial
short term fixed rate periods have long since expired and all the loans pay a
floating rate of interest, with almost all of them linked to the Bank of
England base rate.
Arrears
The Oat Hill No.1 portfolio is currently the only pool that contains any
arrears, although this is not particularly surprising given the average age of
the loans is 10.4 years. However, the level of arrears still remains low, is
consistent with other portfolios originated by the same lender and has been
stable since the portfolio was acquired. Currently, 98.8% of the portfolio has
no arrears at all, and just 0.56% of the portfolio has arrears of three months
or more.
As can be seen in the graph below, the vast majority of loans were originated
in the period between 2004 and 2008. Whilst some of the later loans may still
be suffering some latent effects of house price falls following the financial
crisis, these will be offset by embedded property price gains prior to the
crisis on the earlier loans. Typically, the highly mature nature of the loan
portfolio would indicate a significant vested interest by the borrowers in
making payments against the properties and this is borne out by the low level
of arrears.
Geographic Dispersion
The distribution of properties in this pool is much more diversified than those
in the Malt Hill No.1 pool, again partially due to the seasoning and the
different property market drivers in the mid-2000s. The pool contains no
Scottish loans but does have some loans from Northern Ireland and the lower
proportion of loans in London and the South East naturally translates to the
more diversified distribution, although house prices in other areas have not
performed as well as those in London in particular.
Region %
South West England 6.96%
South East England 17.87%
Greater London 22.33%
East of England 2.54%
East Midlands 5.27%
West Midlands 5.94%
North West England 16.22%
Yorkshire and the Humber 9.75%
North East England 4.65%
Northern Ireland 5.18%
Wales 3.30%
Loan-to-Value
Again, given the age of the pool, the portfolio contains a wide spread of loans
across the LTV band spectrum, and is very evenly balanced, especially in the
bands between 50% and 80%. The weighted average LTV is 69.1%. Whilst there is a
very small proportion of higher LTV loans, which are typically either loans
where previous arrears have been capitalised or where there have been further
advances, it is notable that most of the loans that had a higher original LTV
have migrated to the lower bands. Some of this will be due to house price rises
in London and the South East, but, as detailed above, the pool has a wide
geographic dispersion and those areas which haven't seen the same level of
post-crisis property price appreciation are also well represented. Again, as
previously noted, the older loans in the pool will have benefited from
pre-crisis house price appreciation.
Current Balances
Overall the loan balances in the pool are relatively low, with the majority
clustered in a very reasonable GBP50k to GBP250k band, and with an average balance
of slightly under GBP130k. Once again this demonstrates the mature nature and
relatively low default risk of the pool.
Rental Coverage
From a risk management perspective, a notable statistic of the portfolio is the
Debt Service Coverage Ratio (note that a small proportion of the loans in the
pool - around 6% - are owner occupied loans and so these are excluded from the
DSCR figures).
With interest rates having fallen by such a large amount since these loans were
originated, and with all the loans now paying a floating rate, the monthly
interest payments are far lower than the rental income on the properties.
Virtually no loans have a DSCR less than 2x, a large majority are in the 3x to
5x coverage range and over 30% have coverage more than 5x.
If interest rates were to rise then some of this buffer would be eroded, but it
should also be borne in mind that these coverage levels do not take into
account any rises in rents during the time since origination. According to the
Office for National Statistics, rents in England have in fact risen by 24% in
the average time since origination, giving even further comfort.
In addition, should interest rates begin to rise then we would expect to see an
increasing number of borrowers begin to refinance their loans into a new fixed
rate product to lock in their payments in a rising rate environment. This would
result in early prepayments of those loans which would flow through to the
portfolio at the securitisation refinancing dates, enhancing returns for the
Company by crystallising the value of the discount paid for those loans earlier
than expected.
After issue costs, the NAV started at a base of 98 pence per share in July
2015. The table below shows the major contributors to the performance of the
NAV since that time. The longer time taken for the portfolio to become fully
invested and the increase in the dividend to 6p per annum in the second year of
operation have been the major drivers of NAV performance, along with the 0.7p
fair value movement in the swap valuation, which due to the resets of the
original two-year loans in the Coventry portfolio (approximately 80% of the
pool) has largely expired. With the change to hedge accounting from July 2017,
the 0.7p will be the only future contribution to swap fair value movements and
will naturally unwind over the subsequent three years as the remaining 20% of
the loans in the Coventry portfolio had an initial five year term.
NAV inception to end June-2017
Start NAV 98.0
Net Interest 4.2
Dividends paid -7.5
Costs (Servicing, Operating, -4.6
Warehouse)
Swap MTM -0.7
Company NAV 89.4
Whilst the NAV has continued to fall as dividends have been paid from capital,
the completion of the CHL portfolio purchase in late February and subsequent
securitisation in late June have been accretive to revenue. Due to the vintage
of the CHL loans, the running yield on the loans is low at 1.56% and therefore
the running income from these loans is also low. However the loans were
purchased at a significant discount and the "pull-to-par" effect of this
discount, whilst only realised at the securitisation refinance dates, is
accounted for on an amortised cost basis and therefore accrues to the monthly
NAV calculation.
Proposed Changes
At the end of June, TwentyFour hosted a webinar for investors along with a
number of investor meetings where some proposals were made for potential
changes to the Company's terms. Specifically TwentyFour announced that it would
be making a proposal to reduce its management fee in recognition of the longer
than anticipated time taken to fully invest the Company's initial capital,
which as Stated in the Chairman's Statement has taken effect from the current
financial year ending 30 June 2018.
Market and Investment Outlook
With a proportion of capital returned following the launch of Oat Hill No.1,
the Portfolio Manager is actively seeking further investment opportunities in
order to minimise any cash drag. The amount of available capital would allow
for the purchase of a smaller portfolio and provides an excellent starting
point to initiate conversations. Regardless, the intention is to identify and
secure any opportunities before proceeding and should that opportunity prove
larger, then to explore the possibility of raising additional capital as
required.
The RMBS and primary funding market backdrop and technicals remain strong over
the short term despite the slowdown in both the mortgage and housing markets.
We remain positive but cautious on the outlook as we continue to discuss
further opportunities.
TwentyFour Asset Management LLP
18 October 2017
PORTFOLIO OF INVESTMENTS
As at 30 June 2017
Portfolio Summary Malt Hill No. 1 Plc Cornhill No. 2 Oat Hill No. 1
as at 30 Jun 2017 Limited Plc
Originator Coventry Building The Mortgage Capital Home
Society Lender Loans
Outstanding Balance GBP270m GBP109m* GBP577m
Number Accounts 1,554 559* 4,453
Average Mortgage Size GBP177k GBP196k GBP130k
WA Current Indexed LTV 63.8% 66.6% 69.1%
WA Interest Rate 3.24% 3.54% 1.54%
WA Remaining Term 225 297 149
(mth)
WA Seasoning (mth) 23 3 125
3mth + Arrears (% 0.00% 0.00% 0.56%
balance)
* includes completions and pipeline
BOARD MEMBERS
Biographical details of the Directors are as follows:
Christopher Waldron (Chairman) - Independent Non-Executive Director - Guernsey
resident
Mr Waldron is the Chairman of Ranger Direct Lending Fund Plc and a director of
a number of listed companies, including Crystal Amber Fund Limited and JZ
Capital Partners Limited. He has over 30 years' experience as an investment
manager, specialising in fixed income, hedging strategies and alternative
investment mandates and until 2013 was Chief Executive of the Edmond de
Rothschild Group in the Channel Islands. Prior to joining the Edmond de
Rothschild Group in 1999, Mr Waldron held investment management positions with
Bank of Bermuda, the Jardine Matheson Group and Fortis. Mr Waldron is also a
member of the States of Guernsey's Policy and Resources Investment and Bond
Sub-Committee and a Fellow of the Chartered Institute of Securities and
Investment. Mr Waldron was appointed to the Board on 10 June 2015.
Richard Burrows - Senior Independent Non-Executive Director - UK resident
Mr Burrows works as Head of Treasury for Bank of China, London Branch following
a role as Senior Regulatory Policy Adviser to Bank of China UK Ltd. He
previously worked as a Capital and Liquidity Risk Consultant at Grant Thornton
and before that at the Co-operative Bank plc, taking the role of Chief of Staff
to the CEO appointed to lead the process of recapitalisation. Before
Co-operative Bank plc Mr Burrows worked in the Technical Specialist Prudential
Risk Division - Liquidity and ALM of the Financial Services Authority and led
the on-site review of BIPRU firms' Supervisory Liquidity Review Process and
subsequent panel submission to agree Individual Liquidity Guidance. In 2009 -
2010, before joining the Financial Services Authority Mr Burrows worked at
Northern Rock plc as Assistant Director, Marketing and Liquidity Risk as the
firm prepared for and completed its formal split of the balance sheet into core
banking and non-core assets. From 1994 to 2008, Mr Burrows was Director, Head
of Funding at Citi Alternative Investments and was responsible for efficient
funding via debt issuance from Euro and US domestic programmes and hedging of
all market risk via derivatives. Mr Burrows was appointed to the Board on 12
June 2015.
Paul Le Page (Audit Committee Chairman) - Independent Non-Executive Director-
Guernsey resident
Mr Le Page is a director of Man Fund Management Guernsey Limited, Man Group
Japan Limited and FRM Investment Management Limited which are subsidiaries of
Man Group Plc. He is responsible for managing hedge fund portfolios, and is a
director of a number of FRM and GLG funds. Mr Le Page is currently the Audit
Committee Chairman for Bluefield Solar Income Fund Limited and was formerly the
Audit Committee Chairman for Cazenove Absolute Equity Limited and Thames River
Multi Hedge PCC Limited. He has extensive knowledge of, and experience in, the
fund management and the hedge fund industry. Prior to joining FRM, he was an
Associate Director at Collins Stewart Asset Management from January 1999 to
July 2005, where he was responsible for managing the firm's hedge fund
portfolios and reviewing fund managers. He joined Collins Stewart in January
1999 where he completed his MBA in July 1999. He originally qualified as a
Chartered Electrical Engineer after a 12-year career in industrial research and
development, latterly as the Research and Development Director for Dynex
Technologies (Guernsey) Limited, having graduated from University College
London in Electrical and Electronic Engineering in 1987. Mr Le Page was
appointed to the Board on 10 June 2015.
Helen Green - Independent Non-Executive Director - Guernsey resident
Mrs Green is a chartered accountant and has been employed by Saffery Champness,
a top 20 firm of chartered accountants, since 1984. She qualified as a
chartered accountant in 1987 and became a partner in the London office in 1997.
Since 2000 she has been based in the Guernsey office where she is client
liaison director responsible for trust and company administration. Mrs Green
serves as a Non-Executive Director on the boards of a number of companies in
various jurisdictions, including Aberdeen Emerging Markets Investment Company
Limited, Landore Resources Limited, John Laing Infrastructure Fund Limited,
City Natural Resources High Yield Trust plc and Acorn Income Fund Limited, of
which she is Chairman. Mrs Green was appointed to the Board on 16 June 2016.
DISCLOSURE OF DIRECTORSHIPS IN PUBLIC COMPANIES LISTED
ON RECOGNISED STOCK EXCHANGES
The following summarises the Directors' directorships in other public listed
companies
Company Name Stock Exchange
Christopher Waldron (Chairman)
Crystal Amber Fund Limited AIM
JZ Capital Partners Limited London
Ranger Direct Lending Fund PLC London
Richard Burrows
None
Paul Le Page
Bluefield Solar Income Fund Limited London
Helen Green
Aberdeen Emerging Markets Investment Company London
Acorn Income Fund Limited Channel Islands and London
City Natural Resources High Yield Trust PLC London
John Laing Infrastructure Fund Limited London
Landore Resources Limited AIM
DIRECTORS' REPORT
The Directors present their Annual Report and Audited Consolidated Financial
Statements for the year ended 30 June 2017.
Business Review
The Company
The Company was incorporated with limited liability in Guernsey, as a
closed-ended investment company on 10 June 2015. The Company's shares were
admitted to trading on the Specialist Fund Segment on 7 July 2015.
Discount/Premium Management Policy
The Board of Directors monitors and has a policy to manage the level of the
share price discount/premium to NAV. See information set out in note 18.
Shareholder Information
Shareholder information is set out in the Summary Information.
Going Concern
As a Specialist Fund Segment entity, the Company has voluntarily chosen to
comply with the full requirements of Premium Listing rules and as such applies
the AIC Code and applicable regulations. Under this code, the Directors are
required to satisfy themselves that it is reasonable to assume that the Company
is a going concern and to identify any material uncertainties to the Company's
ability to continue as a going concern for at least 12 months from the date of
approving the consolidated financial statements.
Having reviewed the Company's current portfolio and pipeline of investment
transactions the Board of Directors believe that it is appropriate to adopt a
going concern basis in preparing the Audited Consolidated Financial Statements
given the Company's holdings of cash and cash equivalents and the income
deriving from those investments, meaning the Company has adequate financial
resources to meet its liabilities as they fall due over a period of 12 months
from the approval of the consolidated financial statements.
Results
The results for the year are set out in the Consolidated Statement of
Comprehensive Income. The Company declared dividends of GBP15,000,000 in respect
of the year ended 30 June 2017, a breakdown of which can be found in note 22.
Dividends paid with respect to any period comprise a significant majority of
net income for the Company. The Board expects that dividends will constitute
the principal element of the return to holders of Ordinary Shares. The
dividends for the year have, as anticipated, been mostly paid out of capital of
the Company as the portfolio was not fully invested during the financial year.
Signed on behalf of the Board of Directors on 18 October 2017 by:
Christopher Waldron Paul
Le Page
Chairman
Director
STRATEGIC REPORT
Investment Objective
The Company's investment objective is to provide Shareholders with access to
stable income returns through the application of relatively conservative levels
of leverage to portfolios of UK mortgages.
Key Performance Indicators ("KPIs")
At each Board meeting, the Directors consider a number of performance measures
to assess the Company's success in achieving its objectives. Below are the main
KPIs which have been identified by the Board for determining the progress of
the Company:
* Net Asset Value
The Company's net asset value has declined from 98p per share at launch to
89.36p at the year end. This decline in NAV is largely attributable to the mark
to market valuation of the portfolio's interest rate swap hedge, servicing and
warehouse costs, and total dividend payments of 7.5p per share, which have been
mostly funded from capital during the portfolio investment phase. The Directors
have agreed a plan with the Portfolio Manager to restore the capital value of
the Company and would expect the Company's NAV to grow over time if the plan is
successful.
* Discount/Premium
The Company has traded at an average premium of 6.1% to NAV for its second year
which the Directors regard as a pleasing result in the context of volatility
within the Investment Companies Sector.
* Ongoing Charges
The Company's ongoing charges ratio has increased to 2.18%. The Company reports
a consolidated view of the charges incurred at all levels of its structure and
effectively shows all of the underlying investment portfolio costs in addition
to its own costs and those of the Acquiring Entity. The costs of the parent
company, UK Mortgages Limited, remained approximately static at 1.07% of NAV
because the variable management fee makes up the majority of the Company's
costs. This cost is expected to decrease in the next financial year as the
management fee has reduced from 0.75% to 0.6% with effect from July 1 2017. The
costs of servicing the underlying mortgage portfolio have increased from 0.3%
to 0.9% which is in line with the increase in the size of the investment
portfolio. The Portfolio Manager incorporates servicing costs into their
portfolio models and projections and the directors expect that these costs will
rise in an approximately linear manner with the size of the underlying mortgage
portfolio.
* Quarterly Dividends
The Company declared four interim dividends of 1.5p in relation to the year in
accordance with the prospectus target. In the year to date, the Company's
dividends were mostly uncovered by income. Over the expected life of the
Company, the Directors expect dividends to be covered by income received.
* Investment Level
At 30 June 2017, the Company had approximately GBP86m of cash and near cash
working capital compared with GBP194m at 30 June 2016. As the Company now has a
substantially leveraged exposure to mortgage investments the Directors now
monitor uncommitted cash levels and intend to keep average working capital
balances below GBP10m over the life of the Company. The year end working capital
balance was in excess of the target level due to the repayment of loans in the
Malt Hill portfolio and the successful securitisation of Oat Hill which
released additional working capital at year end.
Company Structure
The Company pursues its investment objective via DAC. DAC is a SPV,
incorporated in Ireland under the Section 110 regime, which was established
prior to the Company acquiring the first mortgage portfolio from the Coventry
Building Society. DAC is responsible for acquiring and leveraging mortgage
portfolios in Warehouse SPVs. These portfolios are subsequently securitised by
selling each warehoused portfolio to an Issuer SPV. The Issuer SPV issues
tranches of securities, the junior tranche of which is then retained by DAC to
provide it with leveraged exposure to the underlying mortgages. DAC is
currently required under European law to retain a minimum of 5% of each
securitisation that it originates. Whilst this retention limit would enable
DAC to attain leverage by a factor of up to twenty times, the directors of DAC
limit the size of any senior financing in order to meet the requirements for an
AAA rating on issuance.
The structure of a typical securitisation issued by the Company is shown below.
During the year a new Warehouse SPV, Cornhill Mortgages No.2 Limited, was
incorporated to hold loans originated by TML prior to securitisation. A
further securitisation, Oat Hill No.1 Plc, was issued by DAC following the
purchase of the CHL portfolio in February. This portfolio had been held by
Cornhill Mortgages No.3 Limited prior to the securitisation.
This company structure, whilst complex, comprises a standard Guernsey domiciled
company listed on the Specialist Fund Segment with a portfolio of mortgage
securitisation structures underneath and the addition of DAC based in the EU.
DAC owns the junior class notes from each Issuer SPV and collects cash-flows
for the Company. These cash flows are paid to the Company in the form of
coupons on Eurobonds, called Profit Participating Notes that DAC sells to the
Company. DAC qualifies for tax relief on the income that it distributes which
ensures that the Company's investors are only taxed on their dividend income
once, upon payment by the Company.
A number of relevant additional explanation points are set out below for the
Malt Hill No.1 Plc and Oat Hill No. 1 Plc transactions:
* The Servicer, typically the originator of the underlying mortgages, is
responsible for servicing the loans i.e. managing the underlying borrowers
and collecting the mortgage payments. It is also common practice for third
party servicers to be employed if the originator is incapable of servicing
the loans that they have originated. A back up servicer is retained by the
Issuer SPV to ensure continuity of cash flows in the event of failure of
the main servicer.
* The Trustee provides monthly reports on the mortgage pool and ensures that
the Issuer SPV complies with its investment policy.
* The Issuer SPV is a public Securitisation Vehicle modelled on Intex
(ticker: MLTH1, OATH1), ABSNet and Bloomberg (ticker: MALTH Mtge, OATH
Mtge).
* Loan level data for Malt Hill and Oat Hill is published on EuroABS on a
monthly basis
* The Administrator is responsible for the administration and financial
reporting of the securitisation.
* The Class A notes are the most senior part of the Issuer SPV securitisation
structure and receive regular floating rate distributions and priority in
the repayment of loan principal.
* The Class Z notes receive any residual income and capital distributions
after payments have been made to the Class A note holders and the operating
fees of Issuer SPV have been met.
Investment Process
Detailed "bottom-up" credit analysis is carried out on each mortgage portfolio
before it is considered as an investment. This analysis includes a
comprehensive review of the underlying mortgages in the transaction, including,
but not limited to, a review of the original loan application documents and
approval decisions, understanding the origination criteria of the lender and
the credit approval process, reviewing the product suite within the mortgage
pool and expected ongoing drivers of performance.
In the case of a forward flow portfolio purchase arrangement such as TML, the
Portfolio Manager will initially, and in conjunction with the third party
lender and originator, agree and if necessary design the product, lending and
underwriting criteria for the pool to be originated. During the origination
period, any modifications to such criteria that may be required due to changes
in the market (e.g. interest rates) will be monitored and agreed in a similar
tripartite manner.
Each mortgage portfolio is also analysed through a Rating Agency model to
assess portfolio risks and create an initial funding structure. A bespoke cash
flow model is then developed to create base case and stress test portfolio
yield scenarios. The Portfolio Manager will also work with the mortgage
Servicers to establish the servicing standards appropriate for each mortgage
portfolio and monitor performance against these on an ongoing basis.
The funding process for each transaction is an integral part of the Company's
investment proposition. The Portfolio Manager will establish a committed
funding line with a third-party lender to allow for the purchase of each
mortgage portfolio. The funding is expected to be a short/medium term facility
utilised by the relevant Warehouse SPV which will ultimately be replaced by
senior notes issued to securitisation investors via the relevant Issuer SPV. As
appointed by the Portfolio Manager, a lead investment bank will then arrange
the structuring, ratings and marketing of the senior notes of the relevant
Issuer SPV to provide long-term funding of the mortgage portfolio.
The Portfolio Manager will monitor performance of the mortgage portfolios.
Individual investment performance will be compared to the initial investment
hypothesis, and models will be updated to reflect differences in predicted and
actual performance. Differences will be analysed and discussed with the
relevant Servicers. The Portfolio Manager will continue to monitor the UK
residential mortgage market and the UK securitisation market for comparative
performance and to validate the ongoing investment thesis. The Portfolio
Manager provides updates to the Directors of the Company in relation to the
performance of the Company's investments.
Key Service Providers
The Company does not have any employees and as such the Board delegates
responsibility for its day to day operations to a number of key service
providers. The activities of each service provider are closely monitored by the
Board and they are required to report to the Board at each quarterly meeting.
In addition, a formal review of the performance of each service provider is
carried out once a year.
Portfolio Manager
The Portfolio Manager provides a comprehensive range of portfolio management,
securitisation and investment monitoring services as detailed above. In
exchange for these services a fee is payable, quarterly in arrears at a rate of
0.75% per annum of the lower of NAV, which is calculated monthly on the last
business day of each month, or market capitalisation. This fee was reduced to
0.60% per annum with effect from 1 July 2017 until further notice to compensate
shareholders for a slower than expected investment of their capital. For
additional information refer to note 16.
The Board considers that the interests of Shareholders, as a whole, are best
served by the ongoing appointment of the Portfolio Manager to achieve the
Company's investment objectives.
Alternative Investment Fund Manager ("AIFM")
Alternative investment fund management services are provided by Maitland
Institutional Services Limited ("Maitland"). In consideration for the services
provided by the AIFM under the AIFM Agreement, the AIFM is entitled to receive
from the Company a minimum fee of GBP20,000 per annum and fees payable quarterly
in arrears at a rate of 0.07% of the NAV of the Company below GBP50 million,
0.05% on Net Assets between GBP50 million and GBP100 million and 0.03% on Net
Assets in excess of GBP100 million. For additional information refer to note 17.
Custodian and Depositary
Custodian and Depositary services are provided by Northern Trust (Guernsey)
Limited. The terms of the Depositary agreement allow Northern Trust (Guernsey)
Limited to receive depositary fees at a rate of 0.03% of the NAV of the Company
as at the last business day of the month subject to a minimum GBP40,000 per annum
payable monthly in arrears. The Depositary will charge an additional fee of GBP
20,000 for performing due diligence on each service provider/administrator
employed. The Depositary is also entitled to a custody fee at a rate of 0.01%
of the NAV of the Company as at the last business day of the month subject to a
minimum of GBP8,500 per annum. For additional information refer to note 17.
Directors
The Directors of the Company during the year and at the date of this report are
set out on Board Members section.
Directors' and Other Interests
As at 30 June 2017, Directors of the Company held the following Ordinary Shares
beneficially:
No. of shares No. of shares
30.06.17 30.06.16
Christopher 5,000 5,000
Waldron
Richard Burrows 5,000 5,000
Paul Le Page 20,000 20,000
Helen Green - -
Signed on behalf of the Board of Directors on 18 October 2017 by:
Christopher Waldron Paul
Le Page
Chairman
Director
CORPORATE GOVERNANCE REPORT
The Board is committed to high standards of corporate governance and has
implemented a framework for corporate governance which it considers to be
appropriate for an investment company in order to comply with the principles of
the UK Code issued by the Financial Reporting Council (the "FRC"). The Company
is also required to comply with the GFSC Code.
The UK Listing Authority requires all UK premium listing companies to disclose
how they have complied with the provisions of the UK Code. As a company with a
Specialist Fund Segment listing, the Company has voluntarily chosen to report
against the UK Code. This Corporate Governance Statement, together with the
Going Concern Statement, Viability Statement and the Statement of Directors'
Responsibilities, indicate how the Company has complied with the principles of
good governance of the UK Code and its requirements on Internal Control.
The Company is a member of the AIC and by complying with the AIC Code is deemed
to comply with both the UK Code and the GFSC Code.
The Board has considered the principles and recommendations of the AIC Code, by
reference to the guidance notes provided by the AIC Guide, and consider that
reporting against these will provide appropriate information to Shareholders.
To ensure ongoing compliance with these principles the Board reviews a report
from the Corporate Secretary at each quarterly meeting, identifying how the
Company is in compliance and identifying any changes that might be necessary.
The AIC Code and the AIC Guide are available on the AIC's website,
www.theaic.co.uk. The UK Code is available in the FRC's website,
www.frc.org.uk.
Throughout the year ended 30 June 2017, the Company has complied with the
recommendations of the AIC Code and thus the relevant provisions of the UK
Code, except as set out below.
The UK Code includes provisions relating to:
* the role of the Chief Executive;
* Executive Directors' remuneration;
* annually assessing the need for an internal audit function;
* the whistle blowing policy;
* Remuneration Committee; and
* Nomination Committee.
For the reasons set out in the AIC Guide, the Board considers these provisions
are not relevant to the position of the Company as it is an externally managed
investment company. The Company has therefore not reported further in respect
of these provisions. The Directors are all non-executive and the Company does
not have employees, hence no Chief Executive or whistle-blowing policy is
required for the Company. The key service-providers all have whistleblowing
policies in place. The Board is satisfied that any relevant issues can be
properly considered by the Board.
Details of compliance with the AIC Code are noted below. There have been no
other instances of non-compliance, other than those noted above.
The Company has adopted a policy that the composition of the Board of
Directors, which is required by the Company's Articles comprise of at least two
persons, that at all times a majority of the Directors are independent of the
Portfolio Manager and any company in the same group as the Portfolio Manager;
the Chairman of the Board of Directors is free from any conflicts of interest
and is independent of the Portfolio Manager and of any company in the same
group as the Portfolio Manager; and that no more than one director, partner,
employee or professional adviser to the Portfolio Manager or any company in the
same group as the Portfolio Manager may be a director of the Company at any one
time.
The Company's risk exposure and the effectiveness of its risk management and
Internal Control systems are reviewed by the Audit Committee at its meetings
and annually by the Board. The Board believes that the Company has adequate and
effective systems in place to identify, mitigate and manage the risks to which
it is exposed.
Role, Composition and Independence of the Board
The Board is the Company's governing body and has overall responsibility for
maximising the Company's success by directing and supervising the affairs of
the business and meeting the appropriate interests of Shareholders and relevant
stakeholders, while enhancing the value of the Company and also ensuring
protection of investors' interests. A summary of the Board's responsibilities
is as follows:
* statutory obligations and public disclosure;
* strategic matters and financial reporting;
* risk assessment and management including reporting compliance, governance,
monitoring and control; and
* other matters having a material effect on the Company.
The Board's responsibilities for the Annual Report and Audited Consolidated
Financial Statements are set out in the Statement of Directors'
Responsibilities.
The Board currently consists of four non-executive Directors, all of whom are
considered to be independent of the Portfolio Manager and as prescribed by the
Listing Rules.
Chairman
The Chairman is Christopher Waldron. The Chairman of the Board must be
independent for the purposes of Chapter 15 of the Listing Rules. Christopher
Waldron is considered independent because he:
* has no current or historical employment with the Portfolio Manager; and
* has no current directorships in any other investment funds managed by the
Portfolio Manager.
Senior Independent Director
Mr Richard Burrows is the Senior Independent Director of the Company. Mr
Burrows has extensive knowledge of the UK banking sector and mortgage lending
and co-ordinates the annual reviews of key service providers in his capacity as
Chairman of the Management Engagement Committee.
Chairman of the Audit Committee
Mr Paul Le Page is the Chairman of the Audit Committee. Mr Le Page was selected
for this role as he has over thirteen years' experience in this capacity with a
detailed knowledge of financial risk management and alternative asset classes.
Chairman of the Risk Committee
Mr Richard Burrows is the Chairman of the Risk Committee. Mr Burrows was
selected for this role as he has extensive knowledge of securitisations.
Biographies for all the Directors can be found on Board Members section.
Composition of the Board
The Board considers that it has the appropriate balance of diverse skills and
experience, independence and knowledge of the Company and the wider sector, to
enable it to discharge its duties and responsibilities effectively and that no
individual or group of individuals dominates decision making. The Chairman is
responsible for leadership of the Board and ensuring its effectiveness.
Financial Reporting
The Board needs to ensure that the Annual Report and Audited Consolidated
Financial Statements, taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to assess the Company's
position and performance, business model and strategy. In seeking to achieve
this, the Directors have set out the Company's investment objective and policy
and have explained how the Board and its delegated committees operate and how
the Directors review the risk environment within which the Company operates and
set appropriate risk controls.
Furthermore, throughout the Annual Report and Audited Consolidated Financial
Statements the Board has sought to provide further information to enable
Shareholders to have a fair, balanced and understandable view.
The Board has contractually delegated responsibility for the management of its
investment portfolio, the arrangement of custodial and depositary services and
the provision of accounting and company secretarial services.
The Board is responsible for the appointment and monitoring of all service
providers to the Company.
The Board recognises the importance of diversity, including gender, and has
given careful consideration to the recommendations of both of the Davies and
the Hampton-Alexander reviews. The Board operates a policy that aims to promote
diversity in its composition. Under this policy, director appointments are
evaluated against the existing balance of skills, knowledge and experience on
the Board, with directors asked to be mindful of diversity and inclusiveness
considerations when examining nominations to the Board. During its annual
evaluation, the Board considered diversity as part of the review of its
performance and effectiveness.
The Board has 25% female representation which is slightly in excess of the 23%
level achieved by FTSE 350 companies in the Hampton-Alexander review when it
was published in 2016. Our female representation is however below the
increased 33% target set for calendar year 2020. Whilst the Board is fully
aware of this revised target, the structure of the Board is determined by the
need to achieve an appropriate balance of skills and experience whilst
minimising operational costs in what is a relatively small company.
Directors' Attendance at Meetings
The Board holds quarterly Board meetings to discuss general management,
structure, finance, corporate governance, marketing, risk management,
compliance, asset allocation and gearing, contracts and performance. The
quarterly Board meetings are the principal source of regular information for
the Board enabling it to determine policy and to monitor performance,
compliance and controls but these meetings are also supplemented by
communication and discussions throughout the year.
A representative of the Portfolio Manager, AIFM, Administrator, Custodian and
Depositary and Corporate Broker attends each Board meeting either in person or
by telephone thus enabling the Board to fully discuss and review the Company's
operation and performance. Each Director has direct access to the Portfolio
Manager and Company Secretary and may, at the expense of the Company, seek
independent professional advice on any matter.
The Audit Committee meets at least twice a year, the Management Engagement
Committee meets at least once a year and dividend meetings are held quarterly.
In addition, ad hoc meetings of the Board to review specific items between the
regular scheduled quarterly meetings can be arranged. Between formal meetings
there is regular contact with the Portfolio Manager, AIFM, Administrator,
Custodian and Depositary and the Corporate Broker.
Attendance at the Board and committee meetings during the year was as follows:
Board Audit Committee Risk Committee
Meetings Meetings
Held Attended Held Attended Held Attended
Christopher Waldron 4 4 4 4 2 2
Richard Burrows 4 4 4 4 2 2
Paul Le Page 4 4 4 4 2 2
Helen Green 4 4 4 4 2 2
Management Engagement Committee Ad hoc Meetings
Meetings
Held Attended Held Attended
Christopher Waldron 1 1 6 4
Richard Burrows 1 1 6 4
Paul Le Page 1 1 6 6
Helen Green 1 1 6 4
At the Board meetings, the Directors review the management of the Company's
assets and liabilities and all other significant matters so as to ensure that
the Directors maintain overall control and supervision of the Company's
affairs.
The Board has a breadth of experience relevant to the Company and the Directors
believe that any changes to the Board's composition can be managed without
undue disruption. With any new director appointment to the Board, consideration
will be given as to whether an induction process is appropriate.
Board Performance and Training
The Directors consider how the Board functions as a whole taking balance of
skills, experience and length of service into consideration and also reviews
the individual performance of its members on an annual basis.
To enable this evaluation to take place, the Company Secretary will circulate a
detailed questionnaire plus a separate questionnaire for the evaluation of the
Chairman. The questionnaires, once completed, are returned to the Company
Secretary who collates responses, prepares a summary and discusses the Board
evaluation with the Chairman prior to circulation to the remaining Board
members. The performance of the Chairman is evaluated by the other Directors.
The board also conducts a 360 degree approach to their performance evaluation
and requests that service providers each complete board performance
questionnaires which are reviewed to understand whether there are any aspects
such as communication which require improvement. On occasions, the Board may
seek to employ an independent third party to conduct a review of the Board.
These evaluations consider the balance of skills, experience, independence and
knowledge of the Board, its diversity and how the Board works together as a
unit as well as other factors relevant to its effectiveness.
Training is an on-going matter as is discussion on the overall strategy of the
Company and the Board has met with the Portfolio Manager at their offices and
elsewhere during the year to discuss these matters. Such meetings will be an
on-going occurrence. The Portfolio Manager organised a workshop for all service
providers and Directors in advance of the year end, for further information on
the Company's structure and deals in progress.
Retirement by Rotation
Under the terms of their appointment, each Director is required to retire by
rotation as detailed in the Directors' report.
Board Committees and their Activities
Terms of Reference
All Terms of Reference of the Board's Committees are available from the
Administrator upon request.
Management Engagement Committee
The Board has established a Management Engagement Committee with formal duties
and responsibilities. The Management Engagement Committee commits to meeting at
least once a year and comprises the entire Board with Richard Burrows appointed
as Chairman. These duties and responsibilities include the regular review of
the performance of and contractual arrangements with the Portfolio Manager and
other service providers and the preparation of the Committee's annual opinion
as to the Portfolio Manager's services.
At its meeting held on 31 March 2017, the Management Engagement Committee
carried out its review of the performance and capabilities of the Portfolio
Manager and other service providers and the Committee recommended that the
continued appointment of TwentyFour Asset Management LLP as Portfolio Manager
was in the best interests of Shareholders. The Committee also recommended that
the appointment of all of the Company's current service providers should
continue.
Audit Committee
An Audit Committee has been established consisting of all Directors with Paul
Le Page appointed as Chairman. The terms of reference of the Audit Committee
provide that the committee shall be responsible, amongst other things, for
reviewing the Consolidated Interim and Annual Financial Statements, considering
the appointment and independence of external auditor, discussing with the
external auditor the scope of the audit and reviewing the Company's compliance
with the AIC Code.
Further details on the Audit Committee can be found in the Audit Committee
Report.
Risk Committee
The Board has established a Risk Committee with formal duties and
responsibilities. The Risk Committee commits to meeting at least twice a year
and comprises the entire Board with Richard Burrows appointed as Chairman.
These duties and responsibilities include the review of the effectiveness of
the Company's internal control policies and systems and to report to Audit
Committee.
Nomination Committee
There is no separate Nomination Committee. The Board as a whole fulfils the
function of a Nomination Committee. Whilst the Directors take the lead in the
appointment of new Directors, any proposal for a new Director will be discussed
and approved by all members of the Board.
Remuneration Committee
In view of its non-executive and independent nature, the Board considers that
it is not appropriate for there to be a separate Remuneration Committee as
anticipated by the AIC Code. The Board as a whole fulfils the functions of the
Remuneration Committee, although the Board has included a separate Directors'
Remuneration Report.
International Tax Reporting
For purposes of the US Foreign Account Tax Compliance Act, the Company
registered with the US Internal Revenue Service ("IRS") as a Guernsey reporting
FFI, received a Global Intermediary Identification Number
(IV8HG9.99999.SL.831), and can be found on the IRS FFI list.
The CRS is a global standard for the automatic exchange of financial account
information developed by the Organisation for Economic Co-operation and
Development ("OECD"), which has been adopted in Guernsey and which came into
effect on 1 January 2016. The CRS has replaced the inter-governmental agreement
between the UK and Guernsey to improve international tax compliance that had
previously applied in respect of 2014 and 2015.
The Board has taken the necessary actions to ensure that the Company is
compliant with Guernsey regulations and guidance in this regard.
Strategy
Having purchased and securitised two existing pools of Buy-to-Let mortgages and
committed to a customised residential mortgage origination programme the
Company is preparing to securitise this third portfolio whilst the lender
originates mortgages under the supervision of the Portfolio Manager. This
parallel work-flow should enable a rapid securitisation process on completion
of the loan portfolio. In addition, following the release of capital from the
Oat Hill securitisation, the Company is seeking to commit the available capital
to its next transaction, with a view to achieving a covered 6p dividend as soon
as practically possible.
Internal Controls
The Board is ultimately responsible for establishing and maintaining the
Company's system of internal financial and operating control and for
maintaining and reviewing its effectiveness. The Company's risk matrix is the
basis of the Company's risk management process in establishing the Company's
system of internal financial and reporting control. The risk matrix is prepared
and maintained by the Board and identifies the risks facing the Company and
then collectively assesses the likelihood of each risk, the impact of those
risks and the strength of the controls operating over each risk. The Board uses
the product of risk and impact scores to determine key areas requiring their
attention. The system of internal financial and operating control is designed
to manage rather than to eliminate the risk of failure to achieve business
objectives and by their nature can only provide reasonable and not absolute
assurance against misstatement and loss.
These controls aim to ensure that assets of the Company are safeguarded, proper
accounting records are maintained and the financial information for publication
is reliable. The Board confirms that there is an ongoing process for
identifying, evaluating and managing the significant risks faced by the
Company.
Internal Controls
This process has been in place for the year under review and up to the date of
approval of this Annual Report and Audited Consolidated Financial Statements
and is reviewed by the Board and is in accordance with the AIC Code.
The AIC Code requires Directors to conduct at least annually a review of the
Company's system of internal financial and operating control, covering all
controls, including financial, operational, compliance and risk management. The
Board has evaluated the systems of Internal Controls of the Company. In
particular, it has prepared a process for identifying and evaluating the
significant risks affecting the Company and the policies by which these risks
are managed. The Board also considers whether the appointment of an internal
auditor is required and has determined that there is no requirement for a
direct internal audit function.
The Board has delegated the day to day responsibilities for the management of
the Company's investment portfolio, the provision of depositary services and
administration, registrar and corporate secretarial functions including the
independent calculation of the Company's NAV and the production of the Annual
Report and Audited Consolidated Financial Statements which are independently
audited.
Formal contractual agreements have been put in place between the Company and
providers of these services. Even though the Board has delegated responsibility
for these functions, it retains accountability for these functions and is
responsible for the systems of Internal Control. At each quarterly Board
meeting, compliance reports are provided by the Administrator, Company
Secretary, Portfolio Manager, AIFM and Depositary. The Board also receives
confirmation from the Administrator of its accreditation under its Service
Organisation Controls 1 report.
The Company's risk exposure and the effectiveness of its risk management and
Internal Control systems are reviewed by the Audit Committee and the Risk
Committee at meetings and annually by the Board. The Board believes that the
Company has adequate and effective systems in place to identify, mitigate and
manage the risks to which it is exposed. Principal Risks and Uncertainties are
set out below.
Principal Risks and Uncertainties
In respect to the Company's system of Internal Controls and reviewing its
effectiveness, the Directors:
* are satisfied that they have carried out a robust assessment of the
principal risks facing the Company, including those that would threaten its
business model, future performance, solvency or liquidity; and
* have reviewed the effectiveness of the risk management and Internal Control
systems including material financial, operational and compliance controls
(including those relating to the financial reporting process) and no
significant failings or weaknesses were identified.
When considering the total return of the Company, the Board takes account of
the risk which has been taken in order to achieve that return. The Board looks
at the principal risks and uncertainties, an overview of which is set out
below:
* The risk of failing to securitise purchased mortgage portfolios. If there
is any significant delay in the ability to securitise a portfolio, the
interest rates payable by the Warehouse SPV to third party providers of
loan finance are likely to increase over time leading to falls in the value
and/or yield of the instruments held by the Acquiring Entity, the value of
which will impact the yield of the Company. In addition, the underlying
portfolios will need to be re-financed periodically in order to maintain
optimal levels of leverage. Failure to re-securitise at a suitable rate and
/or reinvest the proceeds of subsequent securitisations may also adversely
impact the yield of the Company. The risk has been mitigated by the
Portfolio Manager hiring additional team members with extensive
securitisation experience and by being engaged with the UK RMBS market and
service providers. This enables the Company to optimise the timing of its
securitisation transactions.
* The risk of the Company's hedges being deemed ineffective following the
adoption of hedge accounting which will be applied from 1 July 2017. With
the adoption of hedge accounting, the Company will be required to assess
the historic and future effectiveness of the company's hedges. Should the
hedges be deemed ineffective the company's net asset value would need to be
adjusted to reflect the hedge ineffectiveness which could result in changes
to the Company's NAV.
* The risk of the Company being unable to pay target dividends to investors
due to a shortfall in income received on the portfolio. The risk is
controlled by the Board receiving quarterly reports from the Portfolio
Manager, in conjunction with the Company's Administrator, which monitor the
Company's cash flow and income position, as well as the macro economic
environment, paying particular attention to movements in the house price
index, unemployment levels and interest rates as well as loan level and
portfolio attributes such as prepayment rates and the possibility and
timing of defaults, all of which could reduce cash flow to the Company. The
Company can also pay dividends from capital with Board agreement.
* The risk of the Company being unable to invest or reinvest capital repaid
from mortgage loans to purchase additional mortgage portfolios in a timely
manner. The risk is mitigated by the Board monitoring the portfolio
pipeline in regular communication with the Portfolio Manager, and in
quarterly and ad hoc Board meetings.
* The risk of investor dissatisfaction leading to a weaker share price,
causing the Company to trade at a discount to its underlying asset value
and a potential lack of market liquidity. The risk is mitigated by regular
updates to Shareholders from the Portfolio Manager, and regular shareholder
engagement both directly and via the company's brokers.
Viability Statement
The UK Code requires the boards of investment companies such as the Company to
review the longer term strategic risks faced by the business. The Board has
conducted a robust assessment of the principal risks faced by the Company and
has conducted detailed reviews of the Company's underlying mortgage portfolio
models for the period up to and including May 2020. The models subject the
underlying mortgage pools to a variety of stresses including elevated levels of
default, reduced levels of recovery following default, financing stresses and
delays in loan origination.
Having considered the above, and with reference to the Company's current
position and prospects, and assuming that in the event of a dividend trigger
(see note 19) a continuation vote would be passed, the Board is of the opinion
that the Company is viable until at least May 2020 and in all scenarios, would
be able to meet its liabilities as they fall due.
Shareholder Engagement
The Board welcomes Shareholders' views and places great importance on
communication with its Shareholders. Shareholders wishing to meet the Chairman
and other Board members should contact the Company's Administrator.
The Portfolio Manager and Corporate Broker maintain a regular dialogue with
institutional Shareholders, the feedback from which is reported to the Board.
In addition, the Company maintains a website which contains comprehensive
information, including links to regulatory announcements, share price
information, financial reports, investment objective and investor contacts
(www.ukmortgagesltd.com).
The Company's Annual General Meeting ("AGM") provides the Shareholders a forum
to meet and discuss issues of the Company and as well as the opportunity to
vote on the resolutions as specified in the Notice of AGM. The Notice of the
AGM and the results are released to the London Stock Exchange in the form of an
announcement. Board members will be available to respond to Shareholders'
questions at the AGM.
Significant Shareholdings
As at 18 October 2017, the Company has been notified of the following interests
in the share capital of the Company exceeding 3% of the issued share capital:
Number of Percentage of
shares issued
share capital
Investec Wealth & Investment 10.99%
27,492,407
Twentyfour Asset Management * 10.05%
25,118,649
Seven Investment Management 7.80%
19,496,689
Coutts & Co 7.27%
18,181,250
Old Mutual Global Investors 5.94%
14,855,777
Fidelity International 5.28%
13,209,817
City Financial Investment Company 4.52%
11,304,984
*Twentyfour Asset Management acting as investment manager
of:
St. James's Place Strategic Income Unit 6.27%
Trust 15,668,000
MI TwentyFour Investment Funds - Asset 3.78%
Backed Income Fund 9,450,649
The percentage of Ordinary Shares shown above represents the ownership of
voting rights at the year end.
It is the responsibility of the shareholders to notify the Company of any
change to their shareholdings when it reaches 3% of shares in issue and any
change which moves up or down through any whole percentage figures above 3%.
Disclosure of Information to Auditor
The Directors who held office at the date of approval of these Audited
Consolidated Financial Statements confirm that, so far as they are each aware,
there is no relevant audit information of which the Company's auditor is
unaware; and each Director has taken all the steps that 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.
Independent Auditor
A resolution for the reappointment of PricewaterhouseCoopers CI LLP ("PwC")
will be proposed at the forthcoming AGM.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Audited
Consolidated Financial Statements in accordance with International Financial
Reporting Standards and applicable Guernsey law and regulations.
Guernsey Company law requires the Directors to prepare Audited Consolidated
Financial Statements for each financial year. Under that law, they have elected
to prepare the Audited Consolidated Financial Statements in accordance with
IFRS and the Companies (Guernsey) Law, 2008.
The Audited Consolidated Financial Statements are required to give a true and
fair view of the state of affairs of the Company and of the profit or loss of
the Company for that period.
In preparing these Audited Consolidated Financial Statements, the Directors are
required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and estimates that are reasonable and prudent;
* state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the Audited
Consolidated Financial Statements; and
* prepare the Audited Consolidated Financial Statements on the going concern
basis unless it is inappropriate to presume that the Company will continue
in business.
The Directors confirm that they have complied with these requirements in
preparing the Audited Consolidated Financial Statements.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the Audited Consolidated Financial
Statements have been properly prepared in accordance with the International
Financial Reporting Standards and the Companies (Guernsey) Law, 2008. They have
general responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Company and to prevent and detect fraud and other
irregularities.
So far as the Directors are aware, there is no relevant audit information of
which the Company's auditor is unaware, and each Director has taken all the
steps that he 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
Company's auditor is aware of that information.
The Directors are responsible for the oversight of the maintenance and
integrity of the corporate and financial information in relation to the Company
website; the work carried out by the auditor does not involve consideration of
these matters and, accordingly, the auditor accepts no responsibility for any
changes that may have occurred to the financial statements since they were
initially presented on the website.
Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
The Directors confirm that to the best of their knowledge:
(a) The Annual Report and Audited Consolidated Financial Statements have been
prepared in accordance with IFRS and give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company as at and for
the year ended 30 June 2017.
(b) The Annual Report which includes information detailed in the Chairman's
Statement, Portfolio Manager's Report, Directors' Report, Strategic Report,
Corporate Governance Report, Directors' Remuneration Report, Audit Committee
Report, Alternative Investment Fund Manager's Report and Depositary Statement
provides a fair review of the information required by:
(i) DTR 4.1.8 and DTR 4.1.9 of the Disclosure and Transparency
Rules, being a fair review of the Company business and a description of the
principal risks and uncertainties facing the Company; and
(ii) DTR 4.1.11 of the Disclosure and Transparency Rules, being
an indication of important events that have occurred since the end of the
financial year and the likely future development of the Company.
In the opinion of the Board, the Annual Report and Audited Consolidated
Financial Statements taken as a whole, are fair, balanced and understandable
and provide the information necessary to assess the Company's position and
performance, business model and strategy.
Signed on behalf of the Board of Directors on 18 October 2017 by:
Christopher Waldron
Chairman
Paul Le Page
Director
DIRECTORS' REMUNERATION REPORT
The Directors' remuneration report has been prepared by the Directors in
accordance with the UK Code as issued by the UK Listing Authority. An ordinary
resolution for the approval of the annual remuneration report will be put to
the Shareholders at the AGM to be held on 4 December 2017.
Remuneration Policy
The Company's policy in regard to Directors' remuneration is to ensure that the
Company maintains a competitive fee structure in order to recruit, retain and
motivate non-executive Directors of excellent quality in the overall interests
of Shareholders.
The Directors do not consider it necessary for the Company to establish a
separate Remuneration Committee. All of the matters recommended by the UK Code
that would be delegated to such a committee are considered by the Board as a
whole.
It is the responsibility of the Board as a whole to determine and approve the
Directors' remuneration, following a recommendation from the Chairman who will
have given the matter proper consideration, having regard to the level of fees
payable to non-executive Directors in the industry generally, the role that
individual Directors fulfil in respect of Board and Committee responsibilities
and the time committed to the Company's affairs. The Chairman's remuneration is
decided separately and is approved by the Board as a whole.
No element of the Directors' remuneration is performance related, nor does any
Director have any entitlement to pensions, share options or any long term
incentive plans from the Company.
Remuneration
The Directors of the Company are remunerated for their services at such a rate
as the Directors determine provided that the aggregate amount of such fees does
not exceed GBP200,000 per annum.
Directors are remunerated in the form of fees, payable quarterly in arrears, to
the Director personally. No Directors have been paid additional remuneration by
the Company outside their normal Director's fees and expenses.
In the year ended 30 June 2017, the Directors received the following
remuneration in the form of Director's fees:
Directors'
Fees for
the Year
GBP
Christopher 30,000
Waldron
Richard Burrows 25,000
Paul Le Page 27,500
Helen Green 25,000
Total 107,500
The remuneration policy set out above is the one applied for the year ended 30
June 2017 and will be reviewed at the next meeting of the Management Engagement
Committee. At the last meeting of the committee in June 2017, it was proposed
that the Directors' fees should be increased to reflect market levels of
remuneration and the significant time commitment required by the chairman and
the sub-committee chairmen. The Committee recommended that with effect from 1
July 2017, the base Director fee level should be GBP30,000 per annum with an
additional GBP10,000 per annum for the chairman and GBP5,000 per annum for the
chairmen of the audit and risk committees.
Directors' and Officers' liability insurance cover is maintained by the Company
on behalf of the Directors.
The Directors were appointed as non-executive Directors by letters issued prior
to their appointment. Each Director's appointment letter provides that, upon
the termination of his/her appointment, that he/she must resign in writing and
all records remain the property of the Company. The Directors' appointments can
be terminated in accordance with the Articles of Incorporation and without
compensation.
There is no notice period specified in the articles for the removal of
Directors. The articles provide that the office of Director shall be terminated
by, among other things: (a) written resignation; (b) unauthorised absences from
board meetings for six months or more; (c) unanimous written request of the
other Directors; and (d) an ordinary resolution of the Company.
Under the terms of their appointment, given its non-executive nature, the Board
does not think it is appropriate for the Directors to be appointed for a
specified term of no more than 3 years as recommended by the AIC Code. The
Directors are also required to seek re-election if they have already served for
more than nine years. The Company may terminate the appointment of a Director
immediately on serving written notice and no compensation is payable upon
termination of office as a Director of the Company becoming effective. All
Directors have agreed to stand for re-election annually.
The amounts payable to Directors shown in note 16 are for services as
non-executive Directors.
No Director has a service contract with the Company, nor are any such contracts
proposed.
Signed on behalf of the Board of Directors on 18 October 2017 by:
Christopher Waldron
Chairman
Paul Le Page
Director
AUDIT COMMITTEE REPORT
In the following sections, we present the Audit Committee's Report, setting out
the responsibilities of the Audit Committee and its key activities for the year ended 30 June 2017. The Audit Committee has scrutinised the appropriateness of the Company's system of risk management and Internal Controls, the robustness and integrity of the Company's financial reporting, along with the external audit process. The Committee has devoted time to ensuring that controls and processes have been properly established, documented and implemented. During the course of the year, the information that the Audit Committee has received has been timely and clear and has enabled the Committee to discharge its duties effectively. The Audit Committee supports the aims of the UK Code and best practice recommendations of other corporate governance organisations such as the AIC, and believes that reporting against the AIC Code allows the Audit Committee to further strengthen its role as a key independent oversight Committee. Role and Responsibilities The primary function of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities. This includes reviewing the financial reports and other financial information and any significant financial judgement contained therein, before publication. In addition, the Audit Committee reviews the systems of internal financial and operating controls on a continuing basis that the Administrator, Portfolio Manager, AIFM, Custodian and Depositary and the Board have established with respect to finance, accounting, risk management, compliance, fraud and audit. The Audit Committee also reviews the accounting and financial reporting processes, along with reviewing the roles, independence and effectiveness of the external auditor. The AIC Code requires the Audit Committee to annually consider the need for internal audit function. The ultimate responsibility for reviewing and approving the Annual Report and Audited Consolidated Financial Statements remains with the Board. The Audit Committee's full terms of reference can be obtained by contacting the Company's Administrator. Risk Management and Internal Control The Board, as a whole, considers the nature and extent of the Company's risk management framework and the risk profile that is acceptable in order to achieve the Company's strategic objectives. As a result, it is considered that the Board has fulfilled its obligations under the AIC Code. The Audit Committee has delegated responsibility for reviewing the adequacy and effectiveness of the Company's on-going risk management systems and processes to a newly constituted Risk Committee. The system of Internal Controls, along with its design and operating effectiveness, is subject to review by the Risk Committee through reports received from the Portfolio Manager, AIFM and Custodian and Depositary, along with those from the Administrator and external auditor. Fraud, Bribery and Corruption The Audit Committee has relied on the overarching requirement placed on the service providers under the relevant agreements to comply with applicable law, including anti-bribery laws. A review of the service provider policies took place at the Management Engagement Committee Meeting on 23 March 2017. The Board receives confirmation from all service providers that there has been no fraud, bribery or corruption. Financial Reporting and Significant Financial Issues The Audit Committee assesses whether suitable accounting policies have been adopted and whether the Portfolio Manager has made appropriate estimates and judgements. The Audit Committee reviews accounting papers prepared by the Portfolio Manager and Administrator which provides details on the main financial reporting judgements. The Audit Committee also reviews reports by the external auditor which highlight any issues with respect to the work undertaken on the audit. The significant issues considered during the year by the Audit Committee in relation to the Annual Report and Audited Consolidated Financial Statements and how they were addressed are detailed below: (i) Valuation of investments: The Company's investments in mortgage loans are carried at amortised cost, have a carrying value of GBP841,876,173 (fair value of GBP881,512,233) as at 30 June 2017 and represent a substantial portion of net assets of the Company. As such this is the largest factor in relation to the consideration of the Audited Consolidated Financial Statements. These investments are valued in accordance with the Accounting Policies set out in note 2 with further details in notes 20 and 21 to the Audited Consolidated Financial Statements. The Audit Committee considered the valuation of the investments held by the Company as at 30 June 2017 to be reasonable from information provided by the Portfolio Manager, AIFM, Administrator, Custodian and Depositary on their processes for the valuation of these investments with regular reporting being provided during the year to the Board as a whole. (ii) Income Recognition: The Audit Committee considered the calculation of income from investments recorded in the Audited Consolidated Financial Statements as at 30 June 2017. Following the Issuer SPV securitisation just before the start of the financial year, the Company's auditor agreed with the Audit Committee that going forward a detailed review of the cash-flow management process would be required to ensure that income from the underlying mortgages was being fully captured and distributed to holders of the Class A and Class Z notes in the correct proportions. Consistent with the prior audit, the auditor carried out testing of the year end accruals and reported to the Committee in this respect. The Audit Committee reviewed the Portfolio Manager's processes for income recognition and found it to be reasonable based on the explanations provided and information obtained from the Portfolio Manager. The Audit Committee was therefore satisfied that income was appropriately stated in all material aspects in the Audited Consolidated Financial Statements. (i) Expense Recognition: The Audit Committee reviewed schedules provided by the Administrator to ensure that the costs associated with the transfer of the Company's mortgage portfolio from the Warehouse SPV to the Issuer SPV for the securitisations have been fully recognised and apportioned. The Audit Committee concluded that the apportionment and expense recognition policy had been followed correctly. PwC, as part of the audit process, also verified the treatment of the expenses and were satisfied that the accounting policy had been complied with. (ii) Taxation: The Audit Committee agreed with PwC that it would be appropriate to review the tax status of the Acquiring Entity to confirm that it was being managed in accordance with Section 110 rules. On the basis of a review by PwC Dublin and a tax structure legal opinion from Eversheds, the committee was satisfied that the Acquiring Entity was being managed in accordance with Section 110 rules. Following a review of the presentations and reports from the Portfolio Manager and Administrator and consulting where necessary with the external auditor, the Audit Committee is satisfied that the Audited Consolidated Financial Statements appropriately address the critical judgements and key estimates (both in respect to the amounts reported and the disclosures). The Audit Committee is also satisfied that the significant assumptions used for determining the value of assets and liabilities have been appropriately scrutinised, challenged and are sufficiently robust. At the request of the Audit Committee, the Administrator and Portfolio Manager confirmed that they were not aware of any material misstatements including matters relating to Consolidated Annual Financial Statement presentation. At the Audit Committee meeting to review the Annual Report and Audited Consolidated Financial Statements, the Audit Committee received and reviewed a report on the audit from the external auditor. On the basis of its review of this report, the Audit Committee is satisfied that the external auditor have fulfilled their responsibilities with diligence and professional scepticism. The Audit Committee advised the Board that these Audited Consolidated Financial Statements, taken as a whole, are fair, balanced and understandable. The Audit Committee is satisfied that the judgements made by the Portfolio Manager and Administrator are reasonable, and that appropriate disclosures have been included in the Audited Consolidated Financial Statements. Going concern The going concern consideration and disclosures can be found in the Directors' Report. External Auditor The Audit Committee has responsibility for making a recommendation on the appointment, re-appointment and removal of the external auditor. PwC were appointed as the first auditor of the Company. During the year, the Audit Committee received and reviewed audit plans and reports from the external auditor. It is standard practice for the external auditor to meet privately with the Audit Committee without the Portfolio Manager and other service providers being present at each Audit Committee meeting. To assess the effectiveness of the external audit process, the auditor was asked to articulate the steps that they have taken to ensure objectivity and independence, including where the auditor provides non-audit services. The Audit Committee monitors the auditor's performance, behaviour and effectiveness during the exercise of their duties, which informs the decision to recommend reappointment on an annual basis. As a general rule, the Company does not utilise the external auditor for internal audit purposes, secondments or valuation advice. Services which are in the nature of audit, such as tax compliance, private letter rulings, accounting advice, quarterly reviews and disclosure advice are normally permitted but will be pre-approved by the Audit Committee. Summary of Activity during the year
As we entered the second year of the Company's life the Audit Committee met
with the Portfolio Manager and the directors of DAC to review the Company's
business model for loan origination. The committee also worked with the
Portfolio Manager and PwC UK LLP to oversee the implementation of hedge
accounting to take effect from the start of our new financial year in July
2017. This work was necessary to ensure that the portfolio valuation would not
be impacted by differences in valuation methodologies between the portfolio
which is valued at amortised cost and the portfolio interest rate hedges which
are valued on a mark to market basis.
At the end of our financial year the Committee reviewed whether it would be
appropriate to split the Company's financial reporting into three segments to
reflect the purchase of third party portfolios and the origination of mortgage
portfolios respectively. The Committee concluded that given that the Company
has three distinct sub portfolios with very different risk profiles that our
shareholders would benefit from the transparency offered by disclosing the key
characteristics of each sub portfolio at this stage in its life and our
reporting reflects this.
The following table summarises the remuneration paid to PwC CI LLP and to other
PwC member firms for audit and non-audit services for the Company in respect of
the year ended 30 June 2017.
For the year For the
from 01.07.2016 period from
to 30.06.2017 10.06.2015 to
30.06.2016
PricewaterhouseCoopers CI LLP - Assurance work GBP GBP
- Annual audit of the Company 31,000 30,000
- Annual audit of the Company's subsidiaries 25,000 15,000
- Interim review 25,000 55,000
Other PwC member firms - Assurance work
- Annual audit of the Company's subsidiaries 125,523 50,557
PricewaterhouseCoopers CI LLP - Non assurance
services
- Reporting Accountant services on IPO of - 86,650
Company *
Other PwC member firms - Non assurance work
- Due diligence - 74,974
services **
*Reporting Accountant services are included in
issue costs
**Due diligence services are amortised over 7.5
years
The Audit Committee reviews and authorises any non-audit related services
provided by PwC to the Company. PwC currently acts as auditor to the Company,
specifically the Acquiring Entity DAC and the underlying securitisation SPVs.
The Reporting Accountant fee formed part of the 2% launch costs of the Company
and as such does not form part of the recurring total expense ratio. This work
was undertaken before PwC was appointed as auditor.
The Interim Review fee in the financial year ending June 2016 contained a
substantial element of preparatory work for the year-end financial reporting at
a cost of approximately GBP20,000.
For any questions on the activities of the Audit Committee not addressed in the
foregoing, a member of the Audit Committee will attend each AGM to respond to
such questions.
The Audit Committee Report was approved by the Audit Committee on 18 October
2017 and signed on behalf by:
Paul Le Page
Chairman, Audit Committee
ALTERNATIVE INVESTMENT FUND MANAGER'S REPORT
Maitland Institutional Services Limited acts as the Alternative Investment Fund
Manager ("AIFM") of UK Mortgages Limited ("the Company") providing portfolio
management and risk management services to the Company.
The AIFM has delegated the following of its alternative investment fund
management functions:
* It has delegated the portfolio management function for listed investments
to TwentyFour Asset Management LLP.
* It has delegated the portfolio management function for unlisted investments
to TwentyFour Asset Management LLP.
The AIFM is required by the Alternative Investment Fund Managers Directive
2011, 61/EU (the "AIFM Directive") and all applicable rules and regulations
implementing the AIFM Directive in the UK (the "AIFM" Rules):
* to make the annual report available to investors and to ensure that the
annual report is prepared in accordance with applicable accounting
standards, the Company's articles of incorporation and the AIFM Rules and
that the annual report is audited in accordance with International
Standards on Auditing;
* be responsible for the proper valuation of the Company's assets, the
calculation of the Company's net asset value and the publication of the
Company's net asset value; and,
* to make available to the Company's shareholders, a description of all fees,
charges and expenses and the amounts thereof, which have been directly or
indirectly borne by them,
* ensure that the Company's shareholders have the ability to redeem their
share in the capital of the Company in a manner consistent with the
principle of fair treatment of investors under the AIFM Rules and in
accordance with the Company's redemption policy and its obligations.
The AIFM is required to ensure that the annual report contains a report that
shall include a fair and balanced review of the activities and performance of
the Company, containing also a description of the principal risks and
investment or economic uncertainties that the Company might face.
AIFM Remuneration
Under the Alternative Investment Fund Managers Directive, acting as the AIFM,
Maitland Institutional Services Ltd is required to disclose how those whose
actions have a material impact on the Company are remunerated.
Due to the nature of the activities conducted by Maitland Institutional
Services Ltd, it has deemed itself as a lower risk firm in accordance with SYSC
19B and the remuneration code. The only employees at Maitland Institutional
Services Ltd permitted to have a material impact on the risk profile of the AIF
are the Board and the Head of Risk and Compliance.
The delegated Portfolio Manager, TwentyFour Asset Management LLP, is subject to
regulatory requirements on remuneration that are broadly equivalent to those
detailed in the Alternative Investment Fund Managers Directive, which include
the Capital Requirements Directive or Markets in Financial Instruments
Directive. While a portion of the remuneration paid by the Portfolio Manager
is variable and based, in part, on the performance of the investment portfolio,
the investment discretion of the Portfolio Manager is strictly controlled
within certain pre-defined parameters as detailed in the prospectus of the
Company.
Under the AIFM Directive, the AIFM is required to stipulate how much it pays to
its staff, in relation to fixed and variable remuneration and how much, in
relation to the Company, is firstly attributed to all staff and those that are
deemed, under the directive, to have an impact on the risk profile of the
Company. Maitland Institutional Services Ltd does not pay any form of variable
remuneration.
June 2017 Number of Total remuneration Fixed remuneration
Beneficiaries paid
Total remuneration 67 GBP96,730 GBP96,730
paid by the AIFM
during the year
Remuneration paid 5 GBP17,411 GBP17,411
to employees of the
AIFM who have a
material impact on
the risk profile of
the AIF
In so far as the AIFM is aware:
* there is no relevant audit information of which the Company's auditor or
the Company's board of directors are unaware; and
* the AIFM has taken all steps that it ought to have taken to make itself
aware of any relevant audit information and to establish that the auditor
is aware of that information.
We hereby certify that this report is made on behalf of the AIFM, Maitland
Institutional Services Limited.
R.W. Leedham
D. Jones
Directors
Maitland Institutional Services Limited
18 October 2017
DEPOSITARY STATEMENT
for the year ended 30 June 2017
Report of the Depositary to the Shareholders
Northern Trust (Guernsey) Limited has been appointed as Depositary to UK
Mortgages Limited (the "Company") in accordance with the requirements of
Article 36 and Articles 21(7), (8) and (9) of the Directive 2011/61/EU of the
European Parliament and of the Council of 8 June 2011 on Alternative Investment
Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations
(EC) No 1060/2009 and (EU) No 1095/2010 (the "AIFM Directive").
We have enquired into the conduct of Maitland Institutional Services Limited
(the "AIFM") and the Company for the year ended 30 June 2017, in our capacity
as Depositary to the Company.
This report including the review provided below has been prepared for and
solely for the Shareholders. We do not, in giving this report, accept or assume
responsibility for any other purpose or to any other person to whom this report
is shown.
Our obligations as Depositary are stipulated in the relevant provisions of the
AIFM Directive and the relevant sections of Commission Delegated Regulation
(EU) No 231/2013 (collectively the "AIFMD legislation").
Amongst these obligations is the requirement to enquire into the conduct of the
AIFM and the Company in each annual accounting period.
Our report shall state whether, in our view, the Company has been managed in
that period in accordance with the AIFMD legislation. It is the overall
responsibility of the AIFM and the Company to comply with these provisions. If
the AIFM, the Company or their delegates have not so complied, we as the
Depositary will state why this is the case and outline the steps which we have
taken to rectify the situation.
Basis of Depositary Review
The Depositary conducts such reviews as it, in its reasonable discretion,
considers necessary in order to comply with its obligations and to ensure that,
in all material respects, the Company has been managed (i) in accordance with
the limitations imposed on its investment and borrowing powers by the
provisions of its constitutional documentation and the appropriate regulations
and (ii) otherwise in accordance with the constitutional documentation and the
appropriate regulations. Such reviews vary based on the type of Company, the
assets in which a Company invests and the processes used, or experts required,
in order to value such assets.
Review
In our view, the Company has been managed during the year, in all material
respects:
(i) in accordance with the limitations imposed on the investment and
borrowing powers of the Company by the constitutional document; and by the
AIFMD legislation; and
(ii) otherwise in accordance with the provisions of the constitutional
document; and the AIFMD legislation.
For and on behalf of
Northern Trust (Guernsey) Limited
18 October 2017
INDEPENT AUDITOR'S REPORT
To the Members of UK Mortgages Limited
Report on the audit of the consolidated financial statements
_________________________________________________________________________
Our opinion
In our opinion, the consolidated financial statements give a true and fair view
of the consolidated financial position of UK Mortgages Limited (the "Company")
and its subsidiaries (together "the Group") as at 30 June 2017, and of their
consolidated financial performance and their consolidated cash flows for the
year then ended in accordance with International Financial Reporting Standards
and have been properly prepared in accordance with the requirements of The
Companies (Guernsey) Law, 2008.
_________________________________________________________________________
What we have audited
The Group's consolidated financial statements comprise:
* the Consolidated Statement of Financial Position as at 30 June 2017;
* the Consolidated Statement of Comprehensive Income for the year then ended;
* the Consolidated Statement of Changes in Equity for the year then ended;
* the Consolidated Statement of Cash flows for the year then ended; and
* the notes to the consolidated financial statements, which include a summary
of significant accounting policies.
_________________________________________________________________________
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
("ISAs"). Our responsibilities under those standards are further described in
the Auditor's responsibilities for the audit of the consolidated financial
statements section of our report.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
________________________________________________________________________________
Independence
We are independent of the Group in accordance with the International Ethics
Standards Board for Accountants' Code of Ethics for Professional Accountants
("IESBA Code"). We have fulfilled our other ethical responsibilities in
accordance with the IESBA Code.
________________________________________________________________________________
Our audit approach
Overview
Materiality
- Overall Group materiality was GBP5.6 million which
represents 2.5% of Group net assets.
Audit scope
- UK Mortgages Limited is incorporated and based in
Guernsey.
- The Group has a number of subsidiaries, which are based
in both Ireland and the United Kingdom ("UK"), and we perform
our audit of the consolidated financial statements of the
Group.
- The subsidiaries were established for the purposes of
acquiring, securitising and holding mortgages.
- Group audit scoping was performed based on net assets
held within the Group.
- As the Group auditor we conducted our audit in Guernsey
from information provided by Northern Trust International
Fund Administration Services (Guernsey) Limited (the
'Administrator') to whom the board of directors has delegated
the provision of certain functions. The Group engages
TwentyFour Asset Management LLP (the 'Portfolio Manager') to
manage its assets.
- Our component audit team performed their audit work on
the relevant subsidiaries in the UK and we perform our audit
of UK Mortgages Limited and the one Irish subsidiary.
- We have included in scope all subsidiaries within the
Group. We have confirmed that one immaterial subsidiary was
dormant and is in liquidation and thus no further audit work
was performed on this entity.
- We tailored the scope of our audit taking into account
the types of investments within the Group, the accounting
processes and controls, and the industry in which the Group
operates.
Key audit matters
- Valuation of mortgage loans
- Risk of fraud in revenue recognition pertaining to
interest income on mortgage loans
- Errors in the priority of payments to noteholders
("waterfalls")
Audit scope
As part of designing our audit, we determined materiality and assessed the
risks of material misstatement in the consolidated financial statements. In
particular, we considered where the directors made subjective judgements; for
example, in respect of significant accounting estimates that involved making
assumptions and considering future events that are inherently uncertain. As in
all of our audits, we also addressed the risk of management override of
internal controls, including among other matters, consideration of whether
there was evidence of bias that represented a risk of material misstatement due
to fraud.
We tailored the scope of our audit in order to perform sufficient work to
enable us to provide an opinion on the consolidated financial statements as a
whole, taking into account the structure of the Group, the accounting processes
and controls, and the industry in which the Group operates.
________________________________________________________________________________
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 consolidated financial statements.
Based on our professional judgement, we determined certain quantitative
thresholds for materiality, including the overall Group materiality for the
consolidated financial statements as a whole as set out in the table below.
These, together with qualitative considerations, helped us to determine the
scope of our audit and the nature, timing and extent of our audit procedures
and to evaluate the effect of misstatements, both individually and in aggregate
on the financial statements as a whole.
Overall Group materiality GBP5.6 million
How we determined it 2.5% of net assets
Rationale for the materiality We believe that net assets is the most
benchmark 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 GBP280,000, 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 consolidated financial statements of
the current period. These matters were addressed in the context of our audit of
the consolidated financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
Key audit matter How our audit addressed the key audit
matter
Valuation of mortgage loans · We assessed the accounting
Mortgage loans, carried at GBP841.9 policy for mortgage loans for
million at year end as shown under note compliance with International
7 of these Consolidated Financial Financial Reporting Standards and we
Statements, are measured at amortised ensured the mortgage loans have been
cost and comprise three distinct measured in accordance with the
portfolios of UK mortgages including stated accounting policy.
buy-to-let and owner-occupied · We understood and evaluated
mortgages. the internal control environment in
place at the Portfolio Manager and
We note that the mortgage loans the relevant service providers to the
represent the most significant balance Group in relation to the servicing
on the Consolidated Statement of and valuation of the mortgage loans.
Financial Position and the valuation of · We tested the mortgage loan
these loans is driven by complex models data , on a sample basis, by
that take into account management performing the following substantive
judgement and estimation. audit procedures:
· We agreed each of the three
The models rely on the accuracy of portfolio balances at year end to the
underlying loan book data including underlying loan books.
interest rates, principal amounts, term · We verified standing data
structures and delinquency status. within the mortgage loan books, such
as interest rates, principal and
Such factors mean there is a high maturity dates, to the relevant
degree of subjectivity and reliance on supporting documentation.
information accuracy in the valuation · We agreed cash collections /
of mortgage loans and we therefore advances / redemptions to supporting
consider this to be a key area of focus documentation and bank statements.
for our audit. · We recalculated the split of
interest and principal repayments
during the year and confirmed these
were correctly captured in the
accounting records.
· Title deeds were inspected to
validate the existence of the
underlying properties.
· We agreed the mortgage loan
balances through to management's
appointed third party valuation
specialist's models. We reviewed
these effective interest rate ("EIR")
models and understood the methodology
adopted and the key assumptions
applied within each model and
assessed the assumptions for
reasonableness.
· We reviewed investor reporting
and the loan books for balances in
arrears for indications of
impairment. Further, we reviewed
customer complaints raised during the
year to assess whether the nature of
these complaints indicated a
heightened risk of arrears due to
inaccurate servicing of the loans. No
impairment indicators were
identified.
No significant issues or concerns
were noted with regards to the
valuation of mortgage loans which
required reporting to those charged
with governance.
Risk of fraud in revenue recognition · We assessed the accounting
pertaining to interest income on policy for the recognition of
mortgage loans interest income for compliance with
Interest income for the year of GBP15.6 International Financial Reporting
million as reflected in the Standards and we ensured that
Consolidated Statement of Comprehensive interest income has been recognised
Income, was measured in accordance with in accordance with the stated
the effective interest rate method as accounting policy.
required by International Financial · We understood and evaluated
Reporting Standards. the internal control environment in
place at the Portfolio Manager and
The requirement to estimate the associated service providers to the
expected cash flows when forming an Group in relation to the recognition
effective interest rate model is of interest income.
subject to management judgement and · We verified the interest rates
estimation, and as such could be open and mortgage portfolio standing data,
to manipulation by management which is as detailed in the key audit matter
why we considered this a key area of above, and thereby confirmed, inputs
focus to our audit. used in the EIR models were
appropriate and supportable.
· We reviewed management's third
party specialist's EIR models,
assessed the reasonableness of
assumptions used in the models and
recalculated the initial EIR computed
(arising from purchase price premium
/ discount, fees and expected
prepayments on the mortgage loan
portfolios) and tested the unwinding
of this EIR adjustment which impacts
revenue recognition for the year.
· We performed substantive
analytical procedures to assess the
reasonableness of interest income
recognised for the year based on
average monthly interest rates and
the average monthly portfolio
balances, as obtained from the loan
servicers.
· No indications of management
bias or manipulation of data with
regards to revenue recognition were
noted which required reporting to
those charged with governance.
Errors in the priority of payments to · We have understood the
noteholders ("waterfalls") controls in place over the priority
There is a risk that payments to of payments structure and noted the
noteholders are not processed in line high level of segregation in duties
with the priority of payments as and layers of review within the
prescribed by the transaction documents process.
and prospectus, and as noted under note
13 of these Consolidated Financial · We have reviewed the
Statements, given the complexity of the transaction documents and prospectus
transactions and the inherent risk of and ensured that the waterfall
fraud through intentional calculation, as set out in these
misinterpretation of the terms of the documents, had been correctly applied
underlying agreements. We consider this in accordance with these agreements.
to be a key area of focus relevant to
one subsidiary company, Malt Hill No.1 · We tested all payments to
Plc only, due to this being the only noteholders made per the waterfall by
subsidiary in the Group that has been agreeing interest payments through to
securitised and has made payments to the bank statements.
noteholders.
No significant issues or concerns
with the priority of payments to the
noteholders were noted which required
reporting to those charged with
governance.
Other information
The directors are responsible for the other information. The other information
comprises all information listed within the Contents page of the Annual Report
other than the consolidated financial statements and our auditor's report
thereon.
Other than as specified in our report, our opinion on the consolidated
financial statements does not cover the other information and we do not express
any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our
responsibility is to read the other information identified above and, in doing
so, consider whether the other information is materially inconsistent with the
consolidated financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If, based on the work we have
performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in
this regard.
_______________________________________________________________________________
Responsibilities of the directors for the consolidated financial statements
The directors are responsible for the preparation of the consolidated financial
statements that give a true and fair view in accordance with International
Financial Reporting Standards, the requirements of Guernsey law and for such
internal control as the directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the consolidated financial statements, the directors are
responsible for assessing the Group's ability to continue as a going concern,
disclosing, as applicable, matters relating to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the Group or to cease operations, or have no realistic alternative
but to do so.
________________________________________________________________________________
Auditor's responsibilities for the audit of the consolidated financial
statements
Our objectives are to obtain reasonable assurance about whether the
consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor's report
that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs will
always detect a material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or in
aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated financial
statements.
As part of an audit in accordance with ISAs, we exercise professional judgement
and maintain professional scepticism throughout the audit. We also:
* Identify and assess the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that
is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher
than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal
control.
* Obtain an understanding of internal control relevant to the audit in order
to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Group's internal control.
* Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by the
directors.
* Conclude on the appropriateness of the director's use of the going concern
basis of accounting and, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that may cast
significant doubt on the Group's ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw
attention in our auditor's report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor's report. However, future events or
conditions may cause the Group to cease to continue as a going concern.
* Evaluate the overall presentation, structure and content of the
consolidated financial statements, including the disclosures, and whether
the consolidated financial statements represent the underlying transactions
and events in a manner that achieves fair presentation.
* Obtain sufficient appropriate audit evidence regarding the financial
information of the entities or business activities within the Group to
express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the Group
audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with governance, we determine
those matters that were of most significance in the audit of the consolidated
financial statements of the current period and are therefore the key audit
matters. We describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should not be communicated in
our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
________________________________________________________________________________
Report on other legal and regulatory requirements
Under The Companies (Guernsey) Law, 2008 we are required to report to you if,
in our opinion:
* we have not received all the information and explanations we require for
our audit;
* proper accounting records have not been kept; or
* the consolidated financial statements are not in agreement with the
accounting records.
We have no exceptions to report arising from this responsibility.
The directors' have volunteered to report on how they have applied the UK
Corporate Governance Code (the "Code"). We have nothing to report in respect of
the following matters which we have reviewed:
* the directors' statement set out on Directors' Report in relation to going
concern. As noted in the directors' statement, the directors have
concluded that it is appropriate to adopt the going concern basis in
preparing the financial statements. The going concern basis presumes that
the Group has adequate resources to remain in operation, and that the
directors intend it to do so, for at least one year from the date the
financial statements were signed. As part of our audit we have concluded
that the directors' use of the going concern basis is appropriate. However,
because not all future events or conditions can be predicted, these
statements are not a guarantee as to the Group's ability to continue as a
going concern;
* the directors' statement that they have carried out a robust assessment of
the principal risks facing the Group and the directors' statement in
relation to the longer-term viability of the Group. Our review was
substantially less in scope than an audit and only consisted of making
inquiries and considering the directors' process supporting their
statements; checking that the statements are in alignment with the relevant
provisions of the UK Corporate Governance Code; and considering whether the
statements are consistent with the knowledge acquired by us in the course
of performing our audit; and
* the part of the Corporate Governance Statement relating to the Group's
compliance with the ten further provisions of the UK Corporate Governance
Code specified for our review.
This report, including the opinion, has been prepared for and only for the
members as a body in accordance with Section 262 of The Companies (Guernsey)
Law, 2008 and for no other purpose. We do not, in giving this opinion, accept
or assume responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where expressly
agreed by our prior consent in writing.
Evelyn Brady
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
18 October 2017
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 June 2017
For the year For the
from period from
01.07.2016 10.06.2015
to to
30.06.2017 30.06.2016
Note GBP GBP
Income
Interest income on mortgage loans 15,594,254 6,164,354
Interest income on cash and cash 11,423 256,391
equivalents
Net interest expense on financial liabilities at fair (2,487,186) (1,134,372)
value through profit and loss
Unrealised gain/(loss) on financial 9 2,269,926 (4,077,975)
liabilities at fair value through profit
and loss
Total income 15,388,417 1,208,398
Interest expense on loan notes 13 4,526,663 390,507
Interest expense on borrowings 14 2,216,204 805,092
Portfolio management fees 16 1,714,555 1,781,283
Loan note issue fees 1,533,495 40,137
Mortgage loans servicing fees 1,416,073 347,460
Borrowings facility fees 14 1,261,233 554,189
Mortgage loan write offs 7 405,699 -
Administration & secretarial fees 17 279,518 93,268
Legal & professional fees 246,456 289,095
General expenses 235,979 313,775
Audit fees 182,246 85,000
Directors' fees 16 107,500 82,341
AIFM fees 17 96,730 102,047
Depositary fees 17 68,503 93,023
Corporate broker fees 17 50,131 48,907
Custody fees 17 22,559 69,009
Total expenses 14,363,544 5,095,133
Total comprehensive gain/(loss) for the year/ 1,024,873 (3,886,735)
period
Earnings /(loss) per ordinary 4
share - 0.004 (0.017)
basic & diluted
All items in the above statement derive from continuing operations.
The notes form an integral part of these Audited Consolidated Financial
Statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 30 June 2017
30.06.2017 30.06.2016
Assets Note GBP GBP
Non-current assets
Mortgage loans 7 829,201,473 302,251,423
Reserve fund 8 13,157,350 4,739,400
Total non-current assets 842,358,823 306,990,823
Current assets
Mortgage loans 7 12,674,700 1,334,277
Trade and other receivables 10 3,522,323 4,792,524
Cash and cash equivalents 11 86,022,869 194,218,249
Total current assets 102,219,892 200,345,050
Total assets 944,578,715 507,335,873
Liabilities
Non-current liabilities
Loan notes 13 715,734,468 261,784,493
Total non-current liabilities 715,734,468 261,784,493
Current liabilities
Financial liabilities at fair value 9 1,808,049 4,077,975
through profit and loss
Trade and other payables 12 3,648,060 4,110,140
Total current liabilities 5,456,109 8,188,115
Total liabilities 721,190,577 269,972,608
Net assets 223,388,138 237,363,265
Equity
Share capital account 15 245,000,000 245,000,000
Accumulated losses (21,611,862) (7,636,735)
Total equity 223,388,138 237,363,265
Ordinary shares in issue 15 250,000,000 250,000,000
Net Asset Value per ordinary share 5 0.8936 0.9495
The Audited Consolidated Financial Statements were approved and authorised for
issue by the Board of Directors on 18 October 2017 and signed on its behalf by:
Christopher Waldron
Paul Le Page
Chairman Director
The notes form an integral part of these Audited Consolidated Financial
Statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 30 June 2017
Share capital Accumulated Total
account losses equity
GBP GBP GBP
Balance at 1 July 2016 245,000,000 (7,636,735) 237,363,265
-
Dividends paid - (15,000,000) (15,000,000)
Total comprehensive gain for the - 1,024,873 1,024,873
year
Balance at 30 June 2017 245,000,000 (21,611,862) 223,388,138
Share capital Accumulated Total
account losses equity
GBP GBP GBP
Balance at 10 June 2015 - - -
Issue of shares 250,000,000 - 250,000,000
Share issue costs (5,000,000) - (5,000,000)
Dividends paid - (3,750,000) (3,750,000)
Total comprehensive loss for the - (3,886,735) (3,886,735)
period
Balance at 30 June 2016 245,000,000 (7,636,735) 237,363,265
The notes form an integral part of these Audited Consolidated Financial
Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 30 June 2017
For the year For the period
from from 10.06.2015
01.07.2016 to 30.06.2016
to
30.06.2017
Note GBP GBP
Cash flows from operating activities
Total comprehensive gain/(loss) for the 1,024,873 (3,886,735)
year/period
Adjustments for:
Amortisation adjustment under effective 7 (1,626,884) 669,501
interest rate method
Decrease/(Increase) in trade and other 1,270,201 (4,792,524)
receivables
Unrealised (gain)/loss on financial liabilities at (2,269,926) 4,077,975
fair value through profit and loss
Increase in reserve fund 8 (8,417,950) (4,739,400)
(Decrease)/Increase in trade and other (462,080) 4,055,522
payables
Borrowings charges amortised 7 (424,709) (297,374)
Mortgage loans written off 7 405,699 -
Amortised borrowing charges released 7 52,218 26,433
Purchase of mortgage loans 7 (576,732,728) (316,819,347)
Mortgage loans repaid 7 40,035,931 12,835,087
Net cash outflow from operating (547,145,355) (308,870,862)
activities
Cash flows from financing activities
Proceeds from issue of ordinary shares - 246,153,156
Share issue costs - (1,098,538)
Proceeds from borrowings 14 437,381,692 94,762,500
Repayment of borrowings 14 (437,381,692) (94,762,500)
Proceeds from issue of loan notes 13 474,695,416 263,300,000
Repayments of loan notes 13 (19,433,084) -
Increase in loan note issue fees 13 (1,312,357) (1,515,507)
amortised
Dividends paid (15,000,000) (3,750,000)
Net cash inflow from financing activities 438,949,975 503,089,111
(Decrease)/increase in cash and cash (108,195,380) 194,218,249
equivalents
Cash and cash equivalents at beginning of year/ 194,218,249 -
period
Cash and cash equivalents at end of year/ 86,022,869 194,218,249
period
The notes form an integral part of these Audited Consolidated Financial
Statements.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 30 June 2017
1. General Information
UKML was incorporated with limited liability in Guernsey, as a closed-ended
investment company on 10 June 2015. UKML's Shares were listed with the UK
Listing Authority and admitted to trading on the Specialist Fund Segment of the
London Stock Exchange on 7 July 2015.
The Audited Consolidated Financial Statements comprise the financial statements
of UK Mortgages Limited, UK Mortgages Corporate Funding Designated Activity
Company, Malt Hill No.1 Plc (UK based company), Oat Hill No.1 Plc (UK based
company) and the Warehouse SPVs; Cornhill Mortgages No.1 Limited, until being
placed into liquidation on 4 May 2017 (UK based company), Cornhill Mortgages
No.2 Limited (UK based company) and Cornhill Mortgages No.3 Limited (UK based
company) as at 30 June 2017, together referred to as the "Company".
The Company's investment objective is to provide Shareholders with access to
stable income returns through the application of relatively conservative levels
of leverage to portfolios of UK mortgages.
The Company expects that income will constitute the vast majority of the return
to Shareholders and that the return to Shareholders will have relatively low
volatility and demonstrate a low level of correlation with broader markets.
The Portfolio Manager to the Company and Portfolio Adviser to the UK Mortgages
Corporate Funding Designated Activity Company is TwentyFour Asset Management
LLP.
2. Accounting Policies
Statement of compliance
The Audited Consolidated Financial Statements have been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Conduct Authority
and with IFRS which comprise standards and interpretations approved by the
International Accounting Standards Board, and interpretations issued by the
International Financial Reporting Standards Interpretations Committee as
approved by the International Accounting Standards Committee which remain in
effect and are in compliance with the Companies (Guernsey) Law, 2008.
The Audited Consolidated Financial Statements have been prepared on a going
concern basis. The Directors are satisfied that, at the time of approving the
Audited Consolidated Financial Statements, it is appropriate to adopt the going
concern basis in preparing the Audited Consolidated Financial Statements as
they anticipate that the Company will be able to continue to operate and meet
its liabilities as they fall due over a period of 12 months from the approval
of these financial statements. In December 2016 a Continuation Vote was held
where the Shareholders decided that the Company would continue to operate.
The Company has not been deemed an Investment Entity under the definitions of
IFRS 10 'Consolidated Financial Statements' as the majority of Company's
investments are measured at amortised cost rather than fair value and these
Audited Consolidated Financial Statements are therefore prepared on a
consolidated basis.
Standards, amendments and interpretations issued but not yet effective
New standards, amendments and interpretations to existing standards that become
effective in the future accounting periods and have not been adopted by the
Company;
International Financial Reporting Standards (IFRS) Effective for
periods beginning
on or after
* IFRS 9 - Financial Instruments - Classifications and 1 January 2018
Measurement
* IFRS 15 - Revenue from Contracts with Customers 1 January 2018
The Directors anticipate that the adoption of these standards effective in a
future period will not have a material impact on the Audited Consolidated
Financial Statements of the Company, other than IFRS 9. The Company is
currently evaluating the potential effect of this standard and a quantified
assessment will be performed in the year to 30 June 2018, ahead of adoption on
1 July 2018.
IFRS 9 'Financial Instruments' amends IAS 39. IFRS 9 specifies how an entity
should classify and measure financial assets, including some hybrid contracts.
The standard requires all financial assets to be classified on the basis of the
entity's business model for managing the financial assets and the contractual
cash flow characteristics of the financial asset. There are three principal
classification categories for financial assets which are, measured at amortised
cost, fair value through other comprehensive income and fair value through
profit or loss.
IFRS 9 will also replace the existing incurred loss impairment approach with an
expected credit loss approach. Under this approach at initial recognition of a
financial instrument, an allowance is required for expected credit losses
("ECL") resulting from default events that are possible within the next 12
months. In the event of a significant increase in credit risk, an allowance is
required for ECL resulting from all possible default events over the expected
life of the financial instrument. The assessment of whether credit risk has
increased significantly since initial recognition is performed for each
reporting period by considering the change in the risk of default occurring
over the remaining life of the financial instrument, rather than by considering
an increase in ECL. The assessment of credit risk and the estimation of ECL
must be unbiased and probability weighted, and should incorporate all available
information which is relevant to the assessment including information about
past events, current conditions and reasonable and supportable forecasts of
economic conditions at the reporting date.
Consolidation
Subsidiaries are all entities (including structured entities) over which the
Company has control. The Company controls an entity when the Company has power
over the entity, is exposed to, or has rights to, variable returns from its
involvement with the entity and has the ability to affect those returns through
its power over the entity. Subsidiaries are fully consolidated from the date on
which control is transferred to the Company. They are derecognised from the
date that control ceases.
The Company applies the acquisition method to account for business
combinations. The consideration transferred for the acquisition of a subsidiary
(for accounting purposes) is the fair value of the assets transferred, the
liabilities incurred to the former owners of the acquiree and the equity
interests issued by the Company. The consideration transferred includes the
fair value of any asset or liability resulting from a contingent consideration
arrangement. Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured initially at their
fair values at the acquisition date. The Company recognises any non-controlling
interest in the acquiree on an acquisition-by-acquisition basis, either at fair
value or at the non-controlling interest's proportionate share of the
recognised amounts of acquiree's identifiable net assets.
The following table outlines the consolidated entities.
Subsidiaries Date of Country of Principal Place
Control Incorporation of Business
UK Mortgages Corporate 19/11/2015 Ireland Ireland
Funding Designated Activity
Company
Cornhill Mortgages No.1 19/11/2015 UK UK
Limited*
Cornhill Mortgages No.2 02/03/2016 UK UK
Limited
Malt Hill No.1 Plc 02/06/2016 UK UK
Cornhill Mortgages No.3 21/02/2017 UK UK
Limited
Oat Hill No.1 Plc 23/06/2017 UK UK
*placed into liquidation on 4 May 2017.
Based on control, the results of the Acquiring Entity, the Issuer SPVs (Malt
Hill No.1 Plc and Oat Hill No.1 Plc) and the Warehouse SPVs (Cornhill Mortgages
No.1 Limited, Cornhill Mortgages No.2 Limited and Cornhill Mortgages No.3
Limited) are consolidated into the Audited Consolidated Financial Statements.
Acquisition-related costs are expensed as incurred.
Inter-company transactions, notes, balances and unrealised gains on
transactions between group companies are eliminated on consolidation.
Unrealised losses are also eliminated. When necessary, amounts reported by
subsidiaries have been adjusted to conform to the Company's accounting
policies. During the year no such adjustments have been made given all
subsidiaries have uniform accounting policies.
Financial Assets
Financial assets are classified into two categories: financial assets at fair
value through profit and loss, and loans and receivables.
Derivative Instruments are classified as financial assets or liabilities at
fair value through profit and loss.
Mortgage loans are classified as loans and receivables.
Loans and receivables are non-derivative financial assets with fixed or
determinable repayments that are not quoted in an active market and include
mortgage loans. Loans and receivables are initially recognised at fair value
and subsequently carried at amortised cost using the effective interest rate
method. Amortised cost is the amount at which the financial instrument was
recognised at initial recognition less any principal and interest repayments,
and where relevant less any write-down for incurred impairment provision. They
are included in current assets, except for maturities greater than 12 months
after the end of the reporting period, which are classified as non-current
assets. Accrued interest includes amortisation of transaction costs deferred at
initial recognition and any premium or discount to maturity using the effective
interest method.
Mortgage loans impairment provisions
All mortgage loans are secured on residential property, and the Company places
strong emphasis on the market value of the properties and the borrower's
ability to service the loan.
Impairment provisions are recorded on mortgage loans in arrears where the value
of the loan in arrears is in excess of the estimated forced sale value of the
underlying property held as security based on the probability of the loan going
to repossession. Estimates are required of the likely forced sale discount on
the property and likelihood of the loan going to repossession based on the
limited historical loss experience of the Company. Impairment provisions made
during the year are charged to the Consolidated Statement of Comprehensive
Income.
Impaired mortgages are written off after all the necessary collections
procedures have been completed, the property repossessed and sold and the
shortfall charged to Consolidated Statement of Comprehensive Income.
Recognition and de-recognition of financial assets
Financial assets are recognised on the Consolidated Statement of Financial
Position when, and only when, the entity becomes a party to the contractual
provisions of the instrument.
Financial assets are derecognised only when either the contractual rights to
cash flows from the financial assets expire or the transfer otherwise qualifies
for de-recognition in accordance with IAS 39 " Financial Instruments:
Recognition and Measurement".
Loan notes
Loan notes are initially recognised in the Consolidated Statement of Financial
Position at proceeds received net of any direct issue costs. Loan notes are
subsequently measured at amortised cost.
Financial assets or liabilities held at fair value through the profit and loss
Interest rate swaps
Financial assets or liabilities held at fair value through profit and loss
include interest rate swaps, which are utilised by the Company to reduce
exposures to fluctuations in interest rates, and to exchange fixed rate income
payments on mortgage portfolios for floating rates required to access
borrowings and hedge floating rate payments on issued loan notes. These
interest rate swaps are recognised at their fair value, with movements in fair
value taken to the Consolidated Statement of Comprehensive Income.
The fair values of interest rate swaps are based on external valuations. The
valuation of the interest rate swaps' fair value means fluctuations in interest
rates will be reflected in the unrealised gains or losses on financial assets
or liabilities held at fair value through profit and loss.
Derivatives are carried in the Consolidated Statement of Financial Position as
financial assets when their fair value is positive and as financial liabilities
when their fair value is negative.
On 1 July 2017 the Directors designated both derivatives as fair value hedges
and began hedge accounting from that date.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the
Consolidated Statement of Financial Position when there is a legally
enforceable right to offset the recognised amounts and there is an intention to
settle on a net basis or realise the asset and settle the liability
simultaneously.
Interest income and interest expense
Interest income on financial assets that are classified as mortgage loans,
interest expense on borrowings and loan notes are recorded using the effective
interest rate method. Interest income also includes income from cash and cash
equivalents and interest expense on financial liabilities held at fair value
through profit and loss, are recorded on an accruals basis.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, short-term deposits held at
call with banks and other short-term investments in an active market with
original maturities of three months or less and bank overdrafts. Bank
overdrafts are shown in current liabilities in the Consolidated Statement of
Financial Position.
Reserve fund
Reserve fund includes all cash held with banks with maturities of over three
months. This cash is held on reserve with depositories and is not readily
available to the Company and may only be used in accordance with the Issue and
Programme Documentation for related securitisations.
Borrowings
Borrowings are recognised initially at fair value, net of transaction costs
incurred. Borrowings are subsequently carried at amortised cost; any difference
between the proceeds (net of transaction costs) and the redemption value is
recognised in the Consolidated Statement of Comprehensive Income and amortised
over the period of the borrowing facility using the effective interest method.
Borrowings are classified as current liabilities unless the Company has an
unconditional right to defer settlement of the liability for at least 12 months
after the date of the Consolidated Statement of Financial Position.
Share capital
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new Ordinary Shares are shown in equity as a
deduction, net of tax, from the proceeds.
Foreign currency translation
a) Functional and presentation currency
Items included in the financial statements are measured using Sterling the
currency of the primary economic environment in which the entity operates,
('the functional currency'). The financial statements are presented in
Sterling, which is the Company's presentation currency.
b) Transactions and balances
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign
currency assets and liabilities are translated into the functional currency
using the exchange rate prevailing at the Consolidated Statement of Financial
Position date.
Foreign exchange gains and losses relating to the financial assets and
liabilities carried at fair value through profit and loss are presented in the
Consolidated Statement of Comprehensive Income.
Transaction costs
Transaction costs on financial assets or liabilities at fair value through
profit and loss include fees and commissions paid to agents, advisers, brokers
and dealers. Transaction costs, when incurred, are immediately recognised in
the Consolidated Statement of Comprehensive Income.
Transaction costs on mortgage loans are amortised over the average life of the
mortgage portfolio. Issuer costs on the set up of the warehousing and issuer
entities will be capitalised and expensed over 7.5 years and will be written
off on securitisation.
Expenses
All other expenses are included in the Consolidated Statement of Comprehensive
Income on an accruals basis.
Segment reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision-maker. The chief operating
decision-maker, who is responsible for allocating resources and assessing
performance of the operating segments, has been identified as the Board of
Directors. The Directors are of the opinion that the Company is engaged in
three segments of business, being investments in diversified portfolios of
loans secured against UK residential property; Malt Hill No.1 Plc, Oat Hill
No.1 Plc and Cornhill Mortgages No.2 Limited. The Directors manage the business
in this way.
Taxation
The Company is a tax-exempt Guernsey limited company. Please refer to note 6
for additional information.
Trade and other receivables
Trade and other receivables are amounts due in the ordinary course of business.
If collection is expected in one year or less, they are classified as current
assets. If not, they are presented as non-current assets. Trade and other
receivables are recognised initially at fair value and subsequently measured at
amortised cost using the effective interest method, less provision for
impairment.
Included in the trade and other receivables are formation expenses which have
been capitalised and will be expensed over the expected life of the SPV.
Trade and other payables
Trade and other payables are obligations to pay for services that have been
acquired in the ordinary course of business. Trade and other payables are
classified as current liabilities if payment is due within one year or less. If
not, they are presented as non-current liabilities. Trade and other payables
are recognised initially at fair value and subsequently measured at amortised
cost using the effective interest method.
Dividend distributions
Dividend distributions to the Company's Shareholders are recognised as a
liability in the Company's financial statements in the period in which the
dividends are approved by the Board.
3. Critical accounting judgements and estimates and assumptions
The preparation of financial statements in conformity with IFRS requires the
use of estimates and judgements that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting year. Although these estimates are
based on management's knowledge of the amount, actual results may differ from
these estimates. If actual results differ from the estimates, the impact will
be recorded in future years.
Estimates and judgements are regularly reviewed based on past experience,
expectations of future events and other factors. The key areas where estimates
and judgements are made are as follows:
Fair value
Fair values are used in these financial statements for recognition and
disclosure purposes and to assess impairment of the carrying value. Fair value
is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable and willing parties in an arm's length transaction. The
existence of published price quotation in an active market is the best evidence
of fair value and when they are available they are used. If the market for a
financial instrument is not active, fair value is established using a valuation
technique. Fair value represents point in-time estimates that may change in
subsequent reporting years due to market conditions or other factors. The only
financial instruments included in the Company's Consolidated Statement of
Financial Position that are measured at fair value are the interest rate swaps.
Refer to note 21 for additional information.
Amortised cost and effective interest rate model assumptions
In determining the amortised cost of the mortgage portfolio using the effective
interest rate method, the Portfolio Manager exercises significant judgement in
estimating the remaining life of the underlying mortgages. In doing so the
Portfolio Manager uses cash flow models which include assumptions on the likely
macroeconomic environment, including the house price index, unemployment levels
and interest rates, as well as loan level and portfolio attributes and the
Company's limited history used to derive prepayment rates, and the probability
and timing of defaults. The estimated life of the mortgage portfolio, impacts
the effective interest rate of the mortgage portfolio which in turn impacts the
interest income recognised during the accounting period.
4. Gain/(loss) per Ordinary Share - basic & diluted
The gain per Ordinary Share of GBP0.004 (30 June 2016: loss of GBP0.017) - basic
and diluted has been calculated based on the weighted average number of
Ordinary Shares of 250,000,000 (30 June 2016: 232,558,140) and a net gain of GBP
1,024,873 (30 June 2016: net loss of GBP3,886,735).
5. Net Asset Value per Ordinary Share
The Net Asset Value of each share of GBP0.8936 (30 June 2016: GBP0.9495) is
determined by dividing the net assets of the Company GBP223,388,138 (30 June
2016: GBP237,363,265) by the number of shares in issue at 30 June 2017 of
250,000,000 (30 June 2016: 250,000,000).
6. Taxation
The Company has been granted Exempt Status under the terms of The Income Tax
(Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in Guernsey. Its
liability for Guernsey taxation is limited to an annual fee of GBP1,200.
The Acquiring Entity should qualify as a qualifying company within the meaning
of Section 110 of the Irish Taxes Consolidation Act, 1997 ("TCA 1997"). As
such, the profits are chargeable to corporation tax under Case III of Schedule
D of S.110, at the rate of 25%, but are computed in accordance with the
provisions applicable to schedule D case I of TCA 1997 subject to one important
distinction, that being interest payments made by the Company on its PPN should
be tax deductible thereby leaving it with nominal profits of GBP1,000 per annum.
UK based companies (Malt Hill No.1 Plc, Cornhill Mortgages No.1 Limited (until
its liquidation),Cornhill Mortgages No.2 Limited, Cornhill Mortgages No.3
Limited and Oat Hill No.1 Plc) should, in relation to any business they carried
on in the year, be treated as being securitisation companies for the purposes
of the United Kingdom's Taxation of Securitisation Companies Regulations 2006
and should only be liable for UK corporation tax on amounts that form part of
their "retained profit" for the purposes of those regulations. UK based company
Cornhill Mortgages No.2 Limited should not be liable for corporation tax in
respect of the prior year as it carried on no business during it. UK based
company Cornhill Mortgages No.1 Limited should not be liable for corporation
tax in respect of the year as it carried on no business during it.
7. Mortgage loans
For the year For the period
from 01.07.2016 from 10.06.2015
to 30.06.2017 to 30.06.2016
GBP GBP
Mortgage loans at start of the year/period 303,585,700 -
Mortgage loans purchased 576,732,728 316,819,347
Amortisation adjustment under effective interest rate 1,626,884 (669,501)
method
Mortgage loans repaid (40,035,931) (12,835,087)
Borrowings charges amortised 424,709 297,374
Amortised borrowing charges released (52,218) (26,433)
Mortgage loans written off (405,699) -
Mortgage loans at end of the year/period 841,876,173 303,585,700
Amounts falling due after more than one year 829,201,473 302,251,423
Amounts falling due within one year 12,674,700 1,334,277
841,876,173 303,585,700
*Realisation of impairment provision at acquisition of the Oat Hill No.1
portfolio.
Mortgage loans at 30 June 2017 comprise of two securitised mortgage portfolios
legally held in Malt Hill No.1 Plc and Oat Hill No.1 Plc and one mortgage
portfolio held with Cornhill Mortgages No.2 Limited. Please refer to the
Portfolio of Investments for breakdown of portfolios.
Note 18 sets out the liquidity and credit risk profile of the mortgage loans.
8. Reserve fund
The reserve fund is held with Citibank N.A. London Branch within the
securitisation structure. The Company is required to maintain this reserve
which is not readily available to the Company and may only be used in
accordance with the Issue and Programme Documentation.
9. Financial liabilities held at fair value through profit and loss
Derivative instruments - Malt Hill No.1 Plc
On 3 November 2015, the Company entered into an Interest Rate Swap (under an
ISDA agreement) at the point of the initial mortgage loan portfolio purchase to
convert the fixed rate loan exposure back into 3 Month Libor. The notional
value of the swap is balance guaranteed in order to track the principal balance
of the mortgage loan portfolio and changes thereto quarterly in line with the
movement in the mortgage loan portfolio.
On 2 June 2016, the initial mortgage loan portfolio was securitised and the
swap was novated (transferred from the Warehouse SPV to the Issuer SPV),
minimising risk of an interest rate exposure at that time.
The maximum notional amount of the swap per the agreement is GBP360m. The
notional amount as at 30 June 2017 is GBP288.5m. The fair value of this swap at
30 June 2017 is GBP1,734,294 (2016: GBP4,077,975).
Collateral of GBP3m was held with BNP Paribas in relation to the interest rate
swap. However on securitisation of the initial mortgage loan portfolio, the
interest rate swap was novated and this collateral was due back to the Company.
Payment was received for this on 12 August 2016.
Derivative instruments - Cornhill Mortgages No.2 Limited
On 7 July 2016, the Company entered into an Interest Rate Swap (under an ISDA
agreement) to hedge the fixed rate loan exposure of the mortgages in the
portfolio into 1 Month Libor. The notional value of the swap is balance
guaranteed in order to track the new originations and the amortisation of the
mortgage loan portfolio and changes on a monthly basis to reflect the principal
balance of the portfolio.
The maximum notional amount of the swap as per the agreement is GBP350m. The
notional amount as at 30 June 2017 is GBP35.5m. The fair value of this swap at 30
June 2017 is GBP73,755.
10. Trade and other receivables
As at As at
30.06.2017 30.06.2016
GBP GBP
Collateral due from BNP Paribas - 3,000,000
Interest receivable on mortgage loans 1,343,479 834,356
Capitalised formation expenses 1,431,138 621,517
Other receivables and prepayments 747,706 332,123
Interest receivable on cash and cash equivalents - 4,528
3,522,323 4,792,524
Capitalised formation expenses are the set up costs of Cornhill Mortgages No.2
Limited, which are being amortised over 3 years.
11. Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise
the following balances with original maturity of less than 90 days.
As at As at
30.06.2017 30.06.2016
GBP GBP
Cash at bank 86,022,869 182,970,882
Short-term deposits - 11,247,367
86,022,869 194,218,249
The short-term deposits are investments into a BlackRock-managed institutional
money-market fund - "Institutional Cash Series Plc - Institutional Sterling
Liquidity Fund".
12. Trade and other payables
As at As at
30.06.2017 30.06.2016
GBP GBP
Loan note issue fees payable 1,707,580 1,975,461
Portfolio management fees payable 832,816 1,348,312
Interest due on loan 398,870 390,507
notes
Audit fees payable 199,316 85,000
Administration & secretarial fees 176,533 27,389
payable
Mortgage loans servicing fees payable 104,054 55,441
Legal & professional fees payable 81,201 74,508
General expenses 63,376 29,304
payable
AIFM fees payable 48,148 25,804
Directors' fees 26,875 20,568
payable
Depositary fees payable 5,498 51,362
Custody fees payable 3,793 26,484
3,648,060 4,110,140
13. Loan notes
The Malt Hill No.1 Plc and Oat Hill No.1 Plc mortgage portfolio acquisitions
are partially financed by the issue of notes. The notes are repaid as the
underlying mortgage loans repay. The terms and conditions of the notes provide
that the note holders will receive interest and principal only to the extent
that sufficient funds are generated from the underlying mortgage loans. The
priority and amount of claims on the portfolio proceeds are determined in
accordance with strict priority of payments. Note holders have no recourse to
the Company in any form.
Malt Hill No.1 Plc completed the public sale of GBP263.3m of AAA-rated bonds on
26 May 2016. The AAA notes were issued with a coupon of 3 month LIBOR plus
1.35% which is payable quarterly and are listed on the Irish Stock Exchange.
The issue fees on loan notes will be amortised over the expected life of the
loan notes, which is 3 years, being the call date.
Oat Hill No.1 Plc completed the public sale of GBP477.1m of AAA-rated bonds on 26
June 2017. The AAA notes were issued with a coupon of 3 month LIBOR plus 0.65%
and a step up margin of 1.30% which is payable quarterly and are listed on the
Irish Stock Exchange. The issue fees on loan notes will be amortised over the
expected life of the loan notes, which is 3 years, being the call date.
As at As at
30.06.2017 30.06.2016
GBP GBP
Loan notes at start of the year/ 261,784,493 -
period
Loan notes issued 474,695,416 263,300,000
Loan notes repaid (19,433,084) -
Loan note issue fees amortised (1,312,357) (1,515,507)
Loan notes at end of the year/period 715,734,468 261,784,493
Interest expense on loan notes for the year amounted to GBP 4,526,663 (30 June
2016: GBP390,507).
14. Borrowings
Cornhill Mortgages No.2 Limited was paying a commitment fee for GBP150m until
1 June 2017. The facility was restructured in June 2017, in order to improve
the cost efficiency of the structure, with changes involving reduction of
commitment fees and drawn margins on the facility. Any increase to the
commitment amount is subject to NatWest Markets approval and the total facility
size remains at GBP250m. The facility fees of GBP1,261,233 were expensed in the
year.
Cornhill Mortgages No.3 Limited had a loan from Bank of America Merrill Lynch
International Limited of GBP437,381,692 that commenced on 20th February 2017 and
was repaid on 26 June 2017. Interest expense of GBP2,216,204 was incurred during
the year.
During the period end to June 2016, the Company had a loan from Bank of America
Merrill Lynch International Limited of GBP95,000,000. The loan commenced on 19
November 2015 and was repaid early during the period. The facility fees of GBP
554,189 were expensed in the prior year.
Interest expense on borrowings of GBP805,092 was incurred during the prior
period.
15. Share Capital
Authorised Share Capital
The share capital of the Company consists of an unlimited number of shares with
or without par value which, upon issue, the Directors may designate Ordinary
Shares or C shares or such other classes of shares as the Board shall
determine, in each case of such classes and denominated in such currencies as
the Directors may determine.
As at 30 June 2017, one share class has been issued, being the Ordinary Shares
of the Company.
The Ordinary Shares carry the following rights:
a) are entitled to participate in dividends which the Company declares from
time to time proportionate to the amounts paid or credited as paid on such
Ordinary Shares.
b) all Ordinary Shares are entitled to a distribution of capital in the same
proportions as capital is attributable to them (including on winding up).
c) every shareholder shall have one vote for each Ordinary Share held by it.
Issued Share Capital
As at As at
30.06.2017 30.06.2016
Ordinary shares
GBP GBP
Share capital at the beginning of the year/period 245,000,000 -
Issued share capital - 250,000,000
Share issue costs - (5,000,000)
Total share capital at the end of the year/period 245,000,000 245,000,000
As at As at
30.06.2017 30.06.2016
Ordinary shares shares shares
Shares at the beginning of the year/ 250,000,000 -
period
Issue of - 250,000,000
shares
Total shares in issue at the end of the year/ 250,000,000 250,000,000
period
16. Related Parties
a) Directors' Remuneration & Expenses
The Directors of the Company are remunerated for their services at such a rate
as the Directors determine. The aggregate fees of the Directors will not exceed
GBP200,000.
The annual Directors' fees comprise GBP30,000 (30 June 2016: GBP30,000) payable to
Mr Waldron, the Chairman, GBP27,500 (30 June 2016: GBP27,500) to Mr Le Page as
Chairman of the Audit Committee, and GBP25,000 (30 June 2016: GBP25,000) each to
Mrs Green and Mr Burrows. During the year ended 30 June 2017, Directors' fees
of GBP107,500 were charged to the Company (30 June 2016: GBP82,341), of which GBP
26,875 remained payable at the end of the year (30 June 2016: GBP20,568).
b) Shares held by related parties
As at 30 June 2017, Directors of the Company held the following shares in the
Company beneficially:-
Directors' and Other Interests
Number of Shares
30.06.2017 30.06.2016
Christopher Waldron 5,000 5,000
Richard Burrows 5,000 5,000
Paul Le Page 20,000 20,000
Helen Green - -
As at 30 June 2017, the Portfolio Manager held Nil shares (30 June 2016: Nil)
and partners and employees of the Portfolio Manager held 7,040,076 shares (30
June 2016: 8,040,076), which is 2.812% of the issued share capital (30 June
2016: 3.22%).
c) Portfolio Manager
The portfolio management fee is payable to the Portfolio Manager quarterly on
the last business day of the quarter at a rate of 0.75% per annum of the lower
of NAV, which is calculated monthly on each valuation day, or market
capitalisation of each class of shares. For the period beginning six months
after admission and ending when at least 75% of the net proceeds have been
contractually exposed to mortgage portfolios, the amount of the net proceeds
which have not been contractually exposed to mortgage portfolios will be
deducted from the NAV and the market capitalisation for the purposes of
calculating the fee payable to the Portfolio Manager. This fee was reduced to
0.60% per annum with effect from 1 July 2017.
The Company has also agreed to pay a marketing fee equal to 12.5% of the
Placing commission calculated and payable to Numis Securities Limited in
respect of the issue and each Placing whether under the Placing Programme or
otherwise, to the Portfolio Manager in respect of its marketing activities.
Total portfolio management fees for the year amounted to GBP1,714,555 (30 June
2016: GBP1,781,283) of which GBP832,816 (30 June 2016: GBP1,348,312) remained payable
at the year end.
The Portfolio Management Agreement dated 23 June 2015 remains in force until
determined by the Company or the Portfolio Manager giving the other party not
less than twelve months' notice in writing. Under certain circumstances, the
Company or the Portfolio Manager are entitled to immediately terminate the
agreement in writing.
17. Material Agreements
a) Alternative Investment Fund Manager
The Company's Alternative Investment Fund Manager (the "AIFM") is Maitland
Institutional Services Limited (formerly Phoenix Fund Services (UK) Limited).
In consideration for the services provided by the AIFM under the AIFM Agreement
the AIFM is entitled to receive from the Company a minimum fee of GBP20,000 per
annum and fees payable quarterly in arrears at a rate of 0.07% of the NAV of
the Company below GBP50 million, 0.05% on Net Assets between GBP50 million and GBP100
million and 0.03% on Net Assets in excess of GBP100 million. During the year
ended 30 June 2017, AIFM fees of GBP96,730 (30 June 2016: GBP102,047) were charged
to the Company, of which GBP48,148 (30 June 2016: GBP25,804) remained payable at
the end of the year.
b) Administrator and Secretary
Administration fees are payable to Northern Trust International Fund
Administration Services (Guernsey) Limited monthly in arrears at a rate of
0.06% of the NAV of the Company below GBP100 million, 0.05% on net assets between
GBP100 million and GBP200 million and 0.04% on net assets in excess of GBP200 million
as at the last business day of the month subject to a minimum GBP75,000 per
annum. These NAV based fees commenced from 19 November 2015 being the date
Company acquired its initial investment.
In addition, an annual fee of GBP45,000 will be charged for corporate governance
and company secretarial services and accounting services. Total administration
and secretarial fees for the year amounted to GBP279,518 (30 June 2016: GBP93,268)
of which GBP176,533 (30 June 2016: GBP27,389) remained payable at the year end.
c) Depositary and Custodian
Depositary fees are payable to Northern Trust (Guernsey) Limited, monthly in
arrears, at a rate of 0.03% of the NAV of the Company as at the last business
day of the month subject to a minimum GBP40,000 per annum. Total depositary fees
and charges for the year amounted to GBP68,503 (30 June 2016: GBP93,023) of which GBP
5,498 (30 June 2016: GBP51,362) remained payable at the year end.
The Depositary will charge an additional fee of GBP20,000 for performing due
diligence on each service provider/administrator employed.
The Depositary is also entitled to a custody fee at a rate of 0.01% of the NAV
of the Company as at the last business day of the month subject to a minimum of
GBP8,500 per annum. These NAV based fees commence from 19 November 2015 being the
date Company acquired its initial investment. Total custody fees for the year
amounted to GBP22,559 (30 June 2016: GBP69,009) of which GBP3,793 (30 June 2016: GBP
26,484) remained payable at the year end.
d) IPO Sponsor's and Placing Agreement
In connection with the Company's IPO, the Company engaged the services of Numis
to act as corporate broker, co-ordinators, placement agents, arrangers and
sponsors in connection with the issue of the Ordinary Shares ("the Issue") and
the application for Admission.
The Company agreed to pay Numis:
- a corporate finance fee of GBP200,000, and
- a Placing commission equal to 2% of the gross proceeds of the Issue less (i)
an amount equal to reasonably and properly incurred costs payable by the
Company in respect of the Issue, Placing Programme and the Trading Applications
and agreed in advance with Numis and (ii) an amount equal to the marketing fee
payable to the Portfolio Manager. Total Issue fees amounted to GBP5,000,000 of
which Nil (30 June 2016: GBP54,618) is due and payable at the year end. The
Sponsor and Placing agreement is governed by the laws of England. The Company
also agreed to pay Numis an annual retainer fee of GBP50,000 of which nil
remained payable at the year end. The charge for the year was GBP50,131 (30 June
2016: GBP48,907).
18. Financial Risk Management
The Company's objective in managing risk is the creation and protection of
shareholder value. Risk is inherent in the Company's activities, but it is
managed through an ongoing process of identification, measurement and
monitoring.
The Company's financial instruments include financial assets or liabilities at
fair value through profit and loss, loans and receivables, and cash and cash
equivalents. The main risks arising from the Company's financial instruments
are market risk, liquidity risk, and credit risk. The techniques and
instruments utilised for the purposes of portfolio management are those which
are reasonably believed by the Board to be economically appropriate to the
efficient management of the Company.
Market risk
Market risk embodies the potential for both losses and gains and includes
interest rate risk, price risk and currency risk. The Company's strategy on the
management of market risk is driven by the Company's investment objective. The
Company's investment objective is to provide investors with access to stable
income returns through the application of relatively conservative levels of
leverage to portfolios of UK mortgage loans.
1.1 Interest rate risk: Interest rate risk is the risk that the value of
financial instruments will fluctuate due to changes in market interest rates.
The current underlying mortgage portfolios are payable on fixed rates, meaning
the current exposure to interest rate fluctuations on the portfolios are
limited. However, floating rate interest is payable on loan notes. In order to
hedge this differential, interest rate swaps were transacted by the Warehouse
SPVs with a market counterparty to pay the fixed rate and receive the floating
rate payments.
On 2 June 2016, the interest rate swap transacted by Cornhill No.1 Limited was
novated to the Issuer SPV on securitisation of its mortgage portfolio.
On 1 July 2017 the Directors designated both derivatives as fair value hedges
and began hedge accounting from that date.
The below table shows exposure to interest rate risk.
Non Total as at
interest
Floating rate Fixed rate bearing 30.06.2017
GBP GBP GBP GBP
Assets
Mortgage loans 585,541,265 256,334,908 - 841,876,173
Reserve fund 13,157,350 - - 13,157,350
Trade and other 1,343,479 - 2,178,844 3,522,323
receivables
Cash and cash 86,022,869 - - 86,022,869
equivalents
Total assets 686,064,963 256,334,908 2,178,844 944,578,715
Financial liabilities at (1,808,049) - - (1,808,049)
fair value through profit
and loss
Trade and other payables - - (3,648,060) (3,648,060)
Loan notes (715,734,468) - - (715,734,468)
Total liabilities (717,542,517) - (3,648,060) (721,190,577)
Total interest (31,477,554) 256,334,908 (1,469,216) 223,388,138
sensitivity gap
Non Total as at
interest
Floating rate Fixed rate bearing 30.06.2016
GBP GBP GBP GBP
Assets
Mortgage loans - 303,585,700 - 303,585,700
Reserve fund 4,739,400 - - 4,739,400
Trade and other 838,884 - 3,953,640 4,792,524
receivables
Cash and cash 194,218,249 - - 194,218,249
equivalents
Total assets 199,796,533 303,585,700 3,953,640 507,335,873
Financial liabilities at (4,077,975) - - (4,077,975)
fair value through profit
and loss
Trade and other payables - - (4,110,140) (4,110,140)
Loan notes (261,784,493) - - (261,784,493)
Total liabilities (265,862,468) - (4,110,140) (269,972,608)
Total interest (66,065,935) 303,585,700 (156,500) 237,363,265
sensitivity gap
If interest rates were to change by 50 basis points, with all other variables
remaining constant, the effect on the net profit and equity would have been as
shown on the table below. The movement has been calculated on the notional
amounts of the swaps of GBP324m (30 June 2016: GBP301m) which is not shown in the
table above. These percentages have been determined based on potential
volatility and are deemed reasonable by the Directors.
30.06.2017 30.06.2016
GBP GBP
Increase of 50 basis (1,473,965) 1,175,104
points
Decrease of 50 basis 1,473,965 (1,175,104)
points
1.2 Price risk: An active market does not exist in the underlying instruments
based on the illiquidity of the mortgage loans, and for this reason the
mortgage portfolios are valued on an amortised cost basis by an independent
third party valuation provider. Any such valuation may therefore differ from
the actual realisable market value of the relevant mortgage portfolio.
The interest rate swap hedge trades are valued on a fair value mark-to-market
basis by the swap counterparty, using the observable information on swap rates.
The difference in fair value of the interest rate swap and amortised cost
valuation of the mortgage loans has led to volatility in the Company's NAV
which the company intends to mitigate by the adoption of hedge accounting for
future reporting periods.
1.3 Currency risk: As at 30 June 2017, the Company had no material exposure to
foreign exchange fluctuations or changes in foreign currency interest rates.
Consequently there is no material movement in assets and liabilities arising
from foreign exchange fluctuations.
Liquidity Risk
Liquidity risk is the risk that the Company will not have sufficient resources
available to meet its liabilities as they fall due. The Company makes its
investments by purchasing Profit Participating Notes issued by the Acquiring
Entity. The Acquiring Entity is bound by EU securities law and will be unable
to fully liquidate, sell, hedge or otherwise mitigate its credit risk under or
associated with the Retention Notes issued by the Warehouse SPVs or Issuer SPVs
until such time as the securities of the relevant Issuer SPVs have been
redeemed in full (whether at final maturity or early redemption). This places
limitations on the Company's ability to redeem the Profit Participating Notes
issued by the Acquiring Entity. It is not expected that any party will make a
secondary market in relation to the Retention Notes, and that there will
usually be a limited market for the Retention Notes. Any partial sales of
Retention notes would need to be negotiated on a private counterparty to
counterparty basis and could result in a liquidity discount being
applied. There may be additional restrictions on divestment in the terms and
conditions of the underlying investments. The illiquidity of the Retention
Notes may therefore adversely affect the value of the Profit Participating
Notes in the event of a forced sale which would, in turn, adversely affect the
Company's business, business prospects, financial condition, returns to
Shareholders including dividends, NAV and/or the market price of the shares.
During the warehousing phase, the Company's mortgage loans advanced are
illiquid and may be difficult or impossible to realise for cash at short
notice. At the year end, Cornhill Mortgages No. 2 was in the warehousing
phase.
The Company manages its liquidity risk through short term and long term cash
flow forecasts to ensure it is able to meet its obligations. In addition, the
Company is permitted to borrow up to 10% of NAV for short term liquidity
purposes, including financing share repurchases or redemptions, making
investments or satisfying working capital requirements. This can be either
through a loan facility or other types of collateralised borrowing instruments
including stock lending or repurchase transactions.
Less than More than Total as at
one year one year 30.06.2017
GBP GBP GBP
Assets
Mortgage loans 12,674,700 829,201,473 841,876,173
Reserve fund - 13,157,350 13,157,350
Trade and other receivables 3,522,323 - 3,522,323
Cash and cash equivalents 86,022,869 - 86,022,869
Total assets 102,219,892 842,358,823 944,578,715
Liabilities
Financial liabilities at fair value 1,808,049 - 1,808,049
through profit and loss
Trade and other payables 3,648,060 - 3,648,060
Loan notes - 715,734,468 715,734,468
Total 5,456,109 715,734,468 721,190,577
liabilities
Less than More than Total as at
one year one year 30.06.2016
GBP GBP GBP
Assets
Mortgage loans 1,334,277 302,251,423 303,585,700
Reserve fund - 4,739,400 4,739,400
Trade and other receivables 4,792,524 - 4,792,524
Cash and cash equivalents 194,218,249 - 194,218,249
Total assets 200,345,050 306,990,823 507,335,873
Liabilities
Financial liabilities at fair value 4,077,975 - 4,077,975
through profit and loss
Trade and other payables 4,110,140 - 4,110,140
Loan notes - 261,784,493 261,784,493
Total liabilities 8,188,115 261,784,493 269,972,608
Credit risk
Credit risk is the risk that a counterparty to a financial instrument will fail
to discharge an obligation or commitment that it has entered into with the
Company.
The Company's primary fundamental credit risk exposure is to borrowers of the
underlying mortgages, with the risk of borrowers defaulting on interest and
principal payments. The Portfolio Manager manages the reduction of borrower
credit risk with extensive due diligence on portfolios conducted by internal
and external analysts and stress testing.
The Company also has credit risk to the counterparty with which the Warehouse
or Issuer SPVs transact the derivative trades for hedging purposes, or to gain,
increase or decrease exposure to mortgages. Default by any hedging counterparty
in the performance of its obligations could subject the investments to unwanted
credit risks. The Portfolio Manager manages the reduction of credit risk
exposure to the derivative counterparty through ongoing credit analysis of the
counterparty in addition to implementing clauses into derivative transactions
whereby collateral is required to be posted upon a downgrade of the
counterparty's credit rating. The current credit rating of the counterparty is
A+.
The Company's exposure to the credit risk of cash and deposit holders
defaulting is managed through the use of investments into money market funds,
to diversify cash holdings away from single custodians. Money market fund
vehicles are chosen after extensive due diligence focusing on manager
performance, controls and track record. Currently the cash is held with
Northern Trust London (credit rating A+ per Standards and Poor). The money
market fund is held in a BlackRock-managed institutional money-market fund -
"Institutional Cash Series Plc - Institutional Sterling Liquidity Fund" and
their current rating is AAAm from Standards and Poor. The reserve fund is held
with Citibank N.A. London Branch (credit rating A+ per Standards and Poor).
The Realisation of impairment provision at acquisition of the Oat Hill No.1
portfolio during the year amounted to GBP405,699. The current indexed loan to
value ratio in order to give an indication of credit quality is as follows:
As at As at
30.06.2017 30.06.2016
Loan to value
GBP GBP
0-49% 101,602,362 23,638,593
50-75% 473,438,989 228,935,897
75-100%+ 266,834,822 51,011,210
841,876,173 303,585,700
The loans past due but not yet impaired at the year end are shown in the table
below.
As at
30.06.2017
GBP
>1 month but <2 months 1,552,194
>2 month but <3 months 1,075,168
>3 months but <6 months 1,109,153
>6 months 1,186,031
4,922,546
19. Capital risk management
The Company manages its capital to ensure that it is able to continue as a
going concern while following the Company's stated investment policy. The
capital structure of the Company consists of Shareholders' equity, which
comprises share capital and other reserves. To maintain or adjust the capital
structure, the Company may return capital to Shareholders or issue new shares.
There are no regulatory requirements to return capital to Shareholders.
(i) Share Buybacks
Under the articles of incorporation, the Company may purchase shares in the
market at prices which represent a discount to the prevailing NAV per share of
that class so as to enhance the NAV per share for the remaining holders of
shares of the same class. Subject to satisfying a statutory solvency test, the
Company is authorised to make market purchases of up to 14.99% of the aggregate
number of issued shares immediately following admission. This authority is
subject to approval by a shareholder vote at each Annual General Meeting.
The Directors will consider whether the Company should purchase shares where
such shares are quoted in the market at a discount in excess of 5% to NAV per
share of that class. The making and timing of any Share Buybacks is at the
absolute discretion of the Directors and is expressly subject to the Directors
determining that the Company has sufficient surplus cash resources available
(excluding borrowed monies). The listing rules published by the UK Listing
Authority prohibit the Company from conducting any Share Buybacks during close
periods immediately preceding the publication of annual and interim results.
(ii) Continuation Vote
Shareholders will have the opportunity to vote on the continuation of the
Company at the fifth Annual General Meeting ("AGM") following admission of the
Ordinary Shares issued pursuant to the Issue, or every fifth AGM thereafter,
and otherwise if: (i) a dividend trigger event (where the total dividend per
Ordinary Share in respect of any financial year, commencing on or after 1 July
2016, being less than 6 pence) occurs, the articles of incorporation provide
that if this events occur a general meeting will be convened at which the
Directors will propose an ordinary resolution that the Company should continue
as an investment company.
20. Analysis of Financial Assets and Liabilities by Measurement Basis
Financial Assets Financial Assets
at
fair value at amortised
through
profit and cost Total
loss
GBP GBP GBP
30 June 2017
Financial Assets as per Audited
Consolidated Statement of
Financial Position
Mortgage loans - 841,876,173 841,876,173
Reserve fund - 13,157,350 13,157,350
Cash and cash equivalents - 86,022,869 86,022,869
Trade and other - 3,522,323 3,522,323
receivables
- 944,578,715 944,578,715
Financial
Financial Liabilities
at
fair value through Liabilities at
profit and amortised cost Total
loss
GBP GBP GBP
Financial Liabilities as per Audited
Consolidated Statement of Financial
Position
Financial liabilities at fair value 1,808,049 - 1,808,049
through profit and loss
Trade and other payables - 3,648,060 3,648,060
Loan notes - 715,734,468 715,734,468
1,808,049 719,382,528 721,190,577
Financial Assets at Financial Assets
fair value through at amortised
profit and cost Total
loss
GBP GBP GBP
30 June 2016
Financial Assets as per
Audited Consolidated
Statement of Financial
Position
Mortgage loans - 303,585,700 303,585,700
Reserve fund - 4,739,400 4,739,400
Cash and cash equivalents - 194,218,249 194,218,249
Trade and other - 4,792,524 4,792,524
receivables
- 507,335,873 507,335,873
Financial
Financial Liabilities at
fair value through Liabilities at
profit and amortised cost Total
loss
GBP GBP GBP
Financial Liabilities as per Audited
Consolidated Statement of Financial
Position
Financial liabilities at fair value 4,077,975 - 4,077,975
through profit and loss
Trade and other payables - 4,110,140 4,110,140
Loan notes - 261,784,493 261,784,493
4,077,975 265,894,633 269,972,608
21. Fair Value Measurement
IFRS 13 requires the Company to classify fair value measurements using a fair
value hierarchy that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy has the following levels:
(i) Quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1).
(ii) Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices including interest rates, yield
curves, volatilities, prepayment speeds, credit risks and default rates) or
other market corroborated inputs (level 2).
(iii) Inputs for the asset or liability that are not based on observable market
data (that is, unobservable inputs) (level 3).
The following tables analyse within the fair value hierarchy the Company's
financial assets and liabilities (by class) measured at fair value for the year
ended 30 June 2017 and the period ended 30 June 2016.
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Liabilities
Financial liabilities at - (1,808,049) - (1,808,049)
fair value through profit
and loss
Total liabilities as at
30 June 2017 - (1,808,049) - (1,808,049)
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Liabilities
Financial liabilities at - (4,077,975) - (4,077,975)
fair value through profit
and loss
Total liabilities as at
30 June 2016 - (4,077,975) - (4,077,975)
The following table analyses within the fair value hierarchy the Company's
assets and liabilities not measured at fair value at 30 June 2017 but for which
fair value is disclosed.
Level 1 Level 2 Level 3 Total
30.06.2017 30.06.2017 30.06.2017 30.06.2017
GBP GBP GBP GBP
Assets
Mortgage loans - - 881,512,233 881,512,233
Reserve fund - 13,157,350 - 13,157,350
Cash and cash - 86,022,869 - 86,022,869
equivalents
Trade and other - 3,522,323 - 3,522,323
receivables
Total - 102,702,542 881,512,233 984,214,775
Liabilities
Trade and other - 3,648,060 - 3,648,060
payables
Loan notes - 715,734,468 - 715,734,468
Total - 719,382,528 - 719,382,528
Level 1 Level 2 Level 3 Total
30.06.2016 30.06.2016 30.06.2016 30.06.2016
GBP GBP GBP GBP
Assets
Mortgage loans - - 303,314,760 303,314,760
Reserve fund - 4,739,400 - 4,739,400
Cash and cash - 194,218,249 - 194,218,249
equivalents
Trade and other - 4,792,524 - 4,792,524
receivables
Total - 203,750,173 303,314,760 507,064,933
Liabilities
Trade and other - 4,110,140 - 4,110,140
payables
Loan notes - 261,784,493 - 261,784,493
Total - 265,894,633 - 265,894,633
The value of the mortgage loans is calculated through a shadow securitisation
structure based on existing deals with current and transparent pricing.
The other assets and liabilities included in the above table are carried at
amortised cost; their carrying values are a reasonable approximation of fair
value. Cash and cash equivalents include cash in hand and short-term deposits
with original maturities of three months or less. During the year there were no
transfers between the levels.
Trade and other receivables includes collateral due and interest receivable due
within 3 months.
Trade and other payables represent the contractual amounts and obligations due
by the Company for settlement of trades and expenses.
Reserve fund includes cash held as part of the securitisation structure and so
can only be used in accordance with the Issue and Programme Documentation.
22. Dividend Policy
The Company declared the following interim dividends in relation to the year
ended 30 June 2017:
Period to Dividend Net dividend Record date Ex-dividend date Pay date
rate per payable (GBP)
Share
(pence)
30 September 2016 1.5 3,750,000 21 October 20 October 2016 31 October
2016 2016
31 December 2016 1.5 3,750,000 20 January 19 January 2017 31 January
2017 2017
31 March 2017 1.5 3,750,000 21 April 2017 20 April 2017 30 April 2017
30 June 2017 1.5 3,750,000 21 July 2017 20 July 2017 31 July 2017
In each subsequent financial year, it is intended that dividends on the
Ordinary Shares will be payable quarterly, all in the form of interim dividends
(the Company does not intend to pay any final dividends). It is intended that
the first three interim dividends of each financial year will be paid at a
minimum of 1.5p per Ordinary Share with the fourth interim dividend of each
financial year including an additional amount such that a significant majority
of the Company's net income for that financial year is distributed to
Shareholders.
The Board reserves the right to retain within a revenue reserve a proportion of
the Company's net income in any financial year, such reserve then being
available at the Board's absolute discretion for subsequent distribution to
Shareholders. The Company may offer Shareholders the opportunity to elect to
receive dividends in the form of further Ordinary Shares.
Under Guernsey law, companies can pay dividends in excess of accounting profit
provided they satisfy the solvency test prescribed by The Companies (Guernsey)
Law, 2008. The solvency test considers whether a company is able to pay its
debts when they fall due, and whether the value of a company's assets is
greater than its liabilities. The Board confirms that the Company passed the
solvency test for each dividend paid.
23. Segment reporting
Operating segments are reported in a manner consistent with the internal
reporting used by the chief operating decision-maker. The chief operating
decision-maker, who is responsible for allocating resources and assessing
performance of the operating segments, has been identified as the Portfolio
Manager. The Portfolio Manager makes the strategic resource allocations on
behalf of the Company. The Company has determined the operating segments based
on the reports reviewed by the Portfolio Manager that are used to make
strategic decisions. The reports are measured in a manner consistent with IFRS
for all operating segments.
The Portfolio Manager considers the business as three portfolios, which are
managed by separate specialist teams at the Portfolio Manager. These portfolios
comprise of UK mortgages and consist of a loan portfolio bought at a premium
(Malt Hill No.1 Plc), a loan portfolio bought at a discount (Oat Hill No.1 Plc)
and commitment to originate loans up to a limit (Cornhill Mortgages No.2
Limited).
The reportable operating segments derive their income by seeking investments to
achieve targeted returns consummate with an acceptable level of risk within
each portfolio. These returns consist of interest and the release of the
discount/premium.
The segment information provided to the Portfolio Manager for the reportable
segments is as follows:
Cornhill Mortgages Malt Hill Oat Hill Total as at
No.2 Limited No.1 Plc No.1 Plc 30.06.2017
GBP GBP GBP GBP
Interest income on mortgage 576,350 8,732,206 6,285,698 15,594,254
loans
Net interest expense on (28,648) (2,458,538) - (2,487,186)
financial liabilities at fair
value through profit and loss
Unrealised gain/(loss) on (73,755) 2,343,681 - 2,269,926
financial liabilities at fair
value through profit and loss
Interest expense on loan - (4,476,972) (49,691) (4,526,663)
notes
Other expenses (2,024,710) (1,303,251) (3,763,387) (7,091,348)
Total net segment income (1,550,763) 2,837,126 2,472,620 3,758,983
Total segment assets 59,018,339 279,754,960 518,005,571 856,778,870
Total segment liabilities (193,876) (245,453,251) (473,889,675) (719,536,802)
Cornhill Malt Hill Oat Hill Total as at
Mortgages
No.2 Limited No.1 Plc No.1 Plc 30.06.2016
GBP GBP GBP GBP
Interest income on mortgage - 6,164,354 - 6,164,354
loans
Net interest expense on - (1,134,372) - (1,134,372)
financial liabilities at fair
value through profit and loss
Unrealised gain/(loss) on - (4,077,975) - (4,077,975)
financial liabilities at fair
value through profit and loss
Interest expense on loan - (390,507) - (390,507)
notes
Other expenses - (1,690,339) - (1,690,339)
Total net segment loss - (1,128,839) - (1,128,839)
Total segment assets - 318,095,273 - 318,095,273
Total segment liabilities - (269,123,368) - (269,123,368)
A reconciliation of total net segmental income to total comprehensive gain/
(loss) is provided as follows.
30.06.2017 30.06.2016
GBP GBP
Total net segment income/ 3,758,983 (1,128,839)
(loss)
Other fees and (2,734,110) (2,757,896)
expenses
Total comprehensive gain/(loss) for the year/period 1,024,873 (3,886,735)
There are no transactions between the reportable segments.
Total segment assets include:
Cornhill Malt Hill Oat Hill Total as at
Mortgages
No.2 Limited No.1 Plc No.1 Plc 30.06.2017
GBP GBP GBP GBP
Mortgage loans 57,494,863 274,567,106 509,814,204 841,876,173
Reserve fund 1,500,000 4,739,400 6,917,950 13,157,350
Other 23,476 448,454 1,273,417 1,745,347
59,018,339 279,754,960 518,005,571 856,778,870
GBP GBP
Segment assets for reportable 856,778,870 318,095,273
segments
Other 87,799,845 189,240,600
Total assets 944,578,715 507,335,873
Total segment liabilities include:
Cornhill Malt Hill Oat Hill Total as at
Mortgages
No.2 No.1 Plc No.1 Plc 30.06.2017
Limited
GBP GBP GBP GBP
Loan notes - 242,914,405 472,820,063 715,734,468
Financial liabilities 73,755 1,734,294 - 1,808,049
at fair value through
profit and loss
Other 120,121 804,552 1,069,612 1,994,285
193,876 245,453,251 473,889,675 719,536,802
30.06.2017 30.06.2016
GBP GBP
Segment liabilities for reportable 719,536,802 269,123,368
segments
Other trade and payables 1,653,775 849,240
Total liabilities 721,190,577 269,972,608
24. Ultimate Controlling Party
In the opinion of the Directors on the basis of shareholdings advised to
them, the Company has no ultimate controlling party.
25. Reconciliation of net assets reported to the London Stock Exchange to net
assets per financial statements
30.06.2017 30.06.2017
NAV NAV per share
GBP GBP
Net assets reported to the London Stock Exchange 222,754,160 0.8910
Adjustment to interest income on mortgage loans 633,978 0.0026
Net assets per Financial Statements 223,388,138 0.8936
26. Subsequent Events
On 1 July 2017, the Directors designated both derivatives as fair value hedges
and began hedge accounting from that date.
With effect from 1 July 2017, the Portfolio Manager fee was reduced to 0.60%
per annum.
The fourth interim dividend of 1.5p per Ordinary Share in respect of year
ending 30 June 2017 was declared on 13 July 2017 and paid from the capital on
31 July 2017.
On 11 October 2017, the Company declared a dividend of 1.5p in relation to the
3 month period to 30 September 2017.
Cornhill Mortgage No.1 Limited and Cornhill Mortgage No.3 Limited are currently
in liquidation as the mortgage portfolios held have been securitised. At the
date of approval of the Audited Consolidated Financial Statements, these
entities have not yet been fully liquidated.
These Audited Consolidated Financial Statements were approved for issuance by
the Board on 18 October 2017. There were no other subsequent events until this
date.
GLOSSARY OF TERMS
Acquiring Entity means UK Mortgages Corporate Funding Designated
Activity Company, a designated activity company
incorporated in Ireland qualifying within the
meaning of section 110 of the Taxes
Consolidation Act 1997 to acquire mortgage
portfolios for on-selling to Warehouse SPVs and
issuing PPNs
Administrator Northern Trust International Fund
Administration Services (Guernsey) Limited (a
non-cellular company limited by shares
incorporated in the Island of Guernsey with
registered number 15532)
AIC Association of Investment Companies
AIC Code the AIC Code of Corporate Governance for
companies incorporated in Guernsey
AIC Guide the AIC Guide to Corporate Governance
AIFM or Maitland Maitland Institutional Services Limited, the
Company's alternative investment fund manager
for the purposes of regulation 4 of the AIFM
Regulations
Amortised Cost Accounting The process by which mortgages in the Company's
portfolio are valued at cost less capital
repayments and any provisions required for
impairment.
Audit Committee an operating committee of the Board of
Directors charged with oversight of financial
reporting and disclosure
Audited Consolidated Financial Audited Consolidated Financial Statements of
Statements the Company
BoAML the Bank of America Merrill Lynch
BTL Buy-to-let
Board of Directors or Board or the Directors of the Company
Directors
CHL Capital Home Loans
Class A Notes means the Class A Mortgage Backed Floating Rate
Notes issued by the Issuer and admitted to
trading on the Irish Stock Exchange
Company means UKML, Acquiring Entity, Issuer SPV and
Warehouse SPVs
Company's Articles or Articles the articles of incorporation of the Company
Continuation Vote An ordinary resolution that gives shareholders
the ability to instruct the board to prepare a
proposal to restructure or wind up a company by
means of a simple majority vote.
Corporate Broker Numis Securities Limited
CRS The Common Reporting Standard, a global
standard for the automatic exchange of
financial account information developed by OECD
Custodian and Depositary Northern Trust (Guernsey) Limited (a
non-cellular company limited by shares
incorporated in the Island of Guernsey with
registered number 2651)
Derivative Instruments means instruments used to gain leveraged
exposure to mortgage portfolios, including but
not limited to Credit Linked Notes and Credit
Default Swaps
DAC UK Mortgages Corporate Funding Designated
Activity Company an independently managed,
Dublin based, section 110 designated activity
company that is responsible for the warehousing
and securitisation of mortgage portfolios under
the supervision of TFAM the investment adviser.
DAC is wholly financed by the Company via
Profit Participating Notes and distributes
substantially all of its profits to the Company
thereby qualifying for a reduced rate of
taxation, commonly known as a Eurobond
exemption. From a financial reporting
perspective DAC is consolidated with the
Company as it provides its services exclusively
to the Company
DSCR Debt Service Coverage Ratio
FFI Foreign Financial Institution
FRC the Financial Reporting Council
GFSC Code Code of Corporate Governance issued by the
Guernsey Financial Services Commission
Government and Public Securities means per the FCA definition, the investment,
specified in article 78 of the Regulated
Activities Order (Government and public
securities), which is in summary: a loan stock,
bond government and public security FCA PRA or
other instrument creating or acknowledging
indebtedness, issued by or on behalf of:
(a) the government of the United Kingdom; or
(b) the Scottish Administration; or
(c) the Executive Committee of the Northern
Ireland Assembly; or
(d) the National Assembly of Wales; or
(e) the government of any country or territory
outside the United Kingdom; or
(f) a local authority in the United Kingdom or
elsewhere; or
(g) a body the members of which comprise: (i)
States including the United Kingdom or another
EEA State; or
(ii) bodies whose members comprise States
including the United Kingdom or another EEA
State; but excluding: (A) the instruments
specified in article 77(2)(a) to (d) of the
Regulated Activities Order; (B) any instrument
creating or acknowledging indebtedness in
respect of: (I) money received by the Director
of Savings as deposits or otherwise in
connection with the business of the National
Savings Bank; or (II) money raised under the
National Loans Act 1968 under the auspices of
the Director of Savings or treated as so raised
under section 11(3) o
Hedge Accounting This is the process by which the change in fair
value of a hedging instrument is offset by a
proportionate change in the fair value of the
company's portfolio to neutralise the
volatility of the company's net asset value.
It requires initial proof and ongoing
monitoring of the hedge effectiveness.
IFRS International Financial Reporting Standards
Investment Company a company whose main business is holding
securities for investment purposes
Internal Control a process for assuring achievement of an
organisation's objectives in operational
effectiveness and efficiency, reliable
financial reporting, and compliance with laws,
regulations and policies
IPO, Initial Public Offering means the initial public offering of shares in
the Company on the specialist fund segment of
the London Stock Exchange
IPD Interest Payment Date
IRR internal rate of return
IRS the US Internal Revenue Service
Issue means together the Placing and the Offer (or as
the context requires both of them
Issuer SPVs means special purpose vehicles established for
the specific purpose of securitisation and
issuing Retention Notes for purchase by the
Acquiring Entity
Junior Note These notes have the lowest priority claim on
capital and income from the securitisation SPV
and offer the highest potential returns in
exchange for bearing the first loss experienced
by the SPV.
Loan Financing Facility means a facility in terms of which ongoing
finance is provided by Bank of America Merrill
Lynch International Limited for a period of up
to two-years
LSE London Stock Exchange plc (a company registered
in England and Wales with registered number
2075721)
LTV means Loan to Value
Mortgage Pool/ Mortgage Portfolio The underlying mortgage loans that produce the
income for the securitised portfolios.
NAV means net asset value
OECD the Organisation for Economic Co-operation and
Development
Offer means the offer for subscription of Ordinary
Shares at 1 pence each to the public in the
United Kingdom on the terms and conditions set
out in Part 12 of the Prospectus and the
Application Form
Official List in reference to DAC and Issuer SPV refers to
the official list of the Irish Stock Exchange
p.l.c
In reference to the Company refers to the
official list of the London Stock Exchange
Ordinary Shares ordinary shares of 100p each in the capital of
the Company
Placing means the conditional placing by the Corporate
Broker, as agent for the Company, of up to 250
million ordinary shares at 1 pence each on the
terms and conditions set out or referred to in
the placing documents, being the Prospectus,
the Presentation, the P Proof, the flyer, the
press announcements, the contract note, any
other document prepared in connection with the
pre-marketing of the issue or the placing
programme
Portfolio Manager TwentyFour Asset Management LLP (a limited
liability partnership incorporated in England
and Wales with registered number OC335015)
Profit Participating Notes/PPN these are Eurobond notes issued by DAC to the
Company. The capital paid by the Company to DAC
to buy the notes is invested in mortgage pools
and DAC in turn pays income to the Company via
coupon payments on the notes
QE Quantitative easing (QE), also known as Large
Scale Assets Purchases, is an expansionary
monetary policy whereby a central bank buys
predetermined amounts of government bonds or
other financial assets in order to stimulate
the economy.
Rating Agency companies that assess the creditworthiness of
both debt securities and their issuers, for
these purposes Standard and Poor's, Moody's and
Fitch
Retention Notes means a Subordinated tranche of securities
which as part of the securitisation issuance
structure are issued for purchase by the
Acquiring Entity
RMBS Residential Mortgage-Backed Security
RNS Regulatory News Service
Section 110 Section 110 of the Irish Taxes Consolidation
Act 1997 (as amended). A Section 110 company is
an Irish resident special purpose vehicle
("SPV") which holds and/or manages "qualifying
assets" and usually distributes substantially
all of its income net of a fixed annual tax
payment.
Seasoning The weighted average age of a mortgage
portfolio.
Securitisation Vehicle special purpose vehicle incorporated in the UK
established for the purpose of issuing notes
collateralised by underlying mortgage pool
Senior Note Senior note holders receive first priority with
respect to income and capital distributions and
effectively provide long term leverage finance
to the Junior note holders.
Servicer Means the entity that maintains the
relationship with the underlying mortgage
borrower to answer questions, collect payments
and refinance existing loans if required.
Share Buyback the Company purchases shares in the market
Shareholders holders of Shares
Specialist Fund Segment the Specialist Fund Segment of the London Stock
Exchange
SPV means a special purpose vehicle
SVR Standard variable rate
TFS Term Funding Scheme
TML The Mortgage Lender
UK Code The UK Corporate Governance Code 2016
UKML UK Mortgages Limited
Valuation Agent Kinson Advisors LLP
WA LTV Weighted average loan-to-value
Warehousing the process by which mortgages are acquired in
a portfolio prior to securitisation. The
portfolio is typically leveraged by borrowing
from a warehouse credit facility. Three
warehouse SPVs; Cornhill Mortgages No. 1
Limited, Cornhill Mortgages No. 2 Limited and
Cornhill Mortgages No. 3 Limited, have been
established for the purpose of warehousing the
first and second transactions of the company
respectively
Warehouse SPV a special purpose vehicle, incorporated in the
UK, established for the purpose of warehousing
the mortgage portfolio
CORPORATE INFORMATION
Directors Custodian, Principal Banker and
Christopher Waldron - Chairman Depositary
Richard Burrows Northern Trust (Guernsey) Limited
Paul Le Page PO Box 71
Helen Green Trafalgar Court
Les Banques
St Peter Port
Guernsey, GY1 3DA
Registered Office Secretary and Administrator
PO Box 255 Northern Trust International Fund
Trafalgar Court Administration
Les Banques Services (Guernsey) Limited
St Peter Port PO Box 255
Guernsey, GY1 3QL Trafalgar Court
Les Banques
St Peter Port
Guernsey, GY1 3QL
Alternative Investment Fund Manager Corporate Broker
Maitland Institutional Services Limited Numis Securities Limited
Springfield Lodge The London Stock Exchange Building
Colchester Road 10 Paternoster Square
Chelmsford, CM2 5PW London, EC4M 7LT
Portfolio Manager Independent Auditor
TwentyFour Asset Management LLP PricewaterhouseCoopers CI LLP
8th Floor PO Box 321
The Monument Building Royal Bank Place
11 Monument Street 1 Glategny Esplanade
London, EC3R 8AF St Peter Port
Guernsey, GY1 4ND
UK Legal Advisers to the Company Receiving Agent
Eversheds LLP Computershare Investor Services plc
One Wood Street The Pavilions
London, EC2V 7WS Bridgwater Road
Bristol, BS13 8AE
Guernsey Legal Advisers to the Company
Carey Olsen Registrar
Carey House Computershare Investor Services
Les Banques (Guernsey) Limited
St Peter Port 1st Floor
Guernsey, GY1 4BZ Tudor House
Le Bordage
St Peter Port
Guernsey, GY1 1DB
[1] Includes completions and pipeline (i.e. a decision in principle granted,
and full formal application processed but not completed)
END
(END) Dow Jones Newswires
October 18, 2017 11:41 ET (15:41 GMT)
1 Year Uk Mortgages Chart |
1 Month Uk Mortgages Chart |
It looks like you are not logged in. Click the button below to log in and keep track of your recent history.
Support: +44 (0) 203 8794 460 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions
