We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Customisable watchlists with full streaming quotes from leading exchanges, such as LSE, NASDAQ, NYSE, AMEX, Bovespa, BIT and more.
| 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 2019 to 30 June 2020
Legal Entity Identifier: 549300388LT7VTHCIT59
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
The Company has today, in accordance with DTR 6.3.5, released its Annual Report
and Audited Consolidated Financial Statements for the year ended 30 June 2020.
The Report will shortly be available from 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", 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 of the
London Stock Exchange ("LSE") on 7 July 2015. UKML and the affiliate structure
have been designed to ensure the most efficient structure for regulatory and
tax purposes. UKML established a Dublin domiciled Acquiring Entity, UK
Mortgages Corporate Funding Designated Activity Company ("DAC") for the purpose
of acquiring and securitising mortgages via Special Purpose Vehicles ("SPVs").
The company, the Acquiring Entity, the Issuer SPVs (Malt Hill No.1 Plc
(dissolved on 7 January 2020), Malt Hill No. 2 Plc, Oat Hill No.1 Plc, Barley
Hill No.1 Plc, and the Warehouse SPVs (Cornhill Mortgages No.2 Limited
(dissolved on 27 February 2020), Cornhill Mortgages No. 4 Limited, Cornhill
Mortgages No. 5 Limited and Cornhill Mortgages No. 6 Limited (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 risk
adjusted levels of leverage to portfolios of UK mortgages. In accordance with
Chapter 15 of the LSE Listing Rules, the Company can only make a material
change to its investment policy with the approval of its Shareholders by
Ordinary Resolution. At an EGM held on 16 August 2019, the Company's investment
policy was revised to allow investment into third party "triple A" (Standard
and Poor's AAA/Moody's Aaa) rated RMBS for cash management purposes and to
allow additional leverage in the Company's securitisations via the issuance of
mezzanine notes.
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
Maitland Institutional Services Limited ("Maitland") is responsible for
calculating the Net Asset Value ("NAV") per share of the Company. Maitland has
delegated this responsibility to Northern Trust International Fund
Administration Services (Guernsey) Limited (the "Administrator"); however
Maitland still performs an oversight function. The unaudited 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
approximately 2 weeks after the last business day of the following month.
Financial Highlights
For the For the
year ended year ended
30.06.2020 30.06.2019
Total Net Assets at year end GBP220,076,963 GBP224,084,805
Net Asset Value per ordinary share at year end 80.59p 82.06p
Share price at year end 49.30p 73.50p
Discount to Net Asset Value at (38.83%) (10.43%)
year end
Net Asset Value Total Return 2.72% 1.56%
Dividends declared and paid in the 3.75p 6.00p
year
Total dividends declared in relation to the year 4.50p 5.625p
Earnings per share 2.30p 2.60p
Ongoing Charges
- UKML 0.81% 0.93%
- DAC and subsidiaries 2.34% 2.01%
Total ongoing charges for the 3.15% 2.94%
Company
CHAIRMAN'S STATEMENT
for the year ended 30 June 2020
I am pleased to report the results of the Company for the year ended 30 June
2020. This was a particularly eventful period, which began with the revision of
the Company's strategy, approved at the August 2019 EGM and saw this strategy
tested firstly by the effects of the COVID-19 pandemic, then subsequently by a
bid approach from one of M&G's specialist funds, culminating in the decision to
conduct a review into UKML's future strategy.
At the time of writing my interim statement in March, it was already clear that
the evolution of the COVID-19 pandemic and the policy responses to it would be
the defining influences on investment in 2020. UK base rates had already been
cut by then, but the extent of potential forbearance measures for mortgage
borrowers was not yet clear. In the event, borrowers were actively encouraged
to take mortgage holidays and regulated lenders were instructed to offer them
unconditionally. Whilst it was reasonable to assume that mortgage payments
would be eventually reinstated, there was considerable uncertainty in April
over the extent to which borrowers would apply for forbearance measures and for
how long these measures might persist. Based on very early indications from our
portfolios, the Board and the Portfolio Manager analysed a range of scenarios
and their effects on the Company's cash flows. This led to the decision to
announce in late April a precautionary cut in the quarterly dividend to 0.375p,
on the understanding that this could be restored to its previous level once we
had greater clarity on the evolution of the mortgage holidays.
It also became apparent in April that the effective closure of securitisation
markets meant that it would not be possible to refinance the Oat Hill No. 1
portfolio as originally anticipated at its May 2020 call date. This was
particularly frustrating, as an important part of the revised strategy, namely
share buybacks, was predicated on a successful refinancing and the release of a
significant amount of cash. As a conventional securitisation was not feasible
in May, the Portfolio Manager began to work on an alternative financing
strategy through a warehouse facility provided by Santander, to subsequently
enable Oat Hill No. 1 to be called.
However, as we moved through May and into June, it became clear that the
consequences of mortgage holidays would not be as bad as we had initially
feared. At the same time, the RMBS markets had begun to reopen and we were able
effectively to bypass the warehouse facility and move directly to a
re-securitisation of the Oat Hill No. 1 portfolio in July. COVID-19 may have
delayed UKML's strategy but it had not derailed it; consequently, we were in a
position to begin the share buyback programme originally approved in August
2019 and able to restore the 1.125p quarterly dividend. The performance of each
of the Company's mortgage portfolios and their respective mortgage holiday
experiences are covered in detail in the Portfolio Manager's report below.
Given the initial uncertainty over the consequences of the pandemic for UKML's
portfolios, and the precautionary dividend reduction, as well as the general
market weakness of early April, it was inevitable that the Company's share
price fell sharply in this period. However, to be trading at close to a 50%
discount to NAV was excessive and it was therefore unsurprising that this
attracted the attention of a potential bidder in the shape of M&G.
After a period of private engagement, M&G announced publicly in July a
potential offer price of 67p per share, conditional, amongst other things, on
the Board's recommendation. During this period, the Board, the Portfolio
Manager and their advisors conducted detailed analyses of the Company's likely
value in various scenarios and also consulted extensively with shareholders
before concluding that this offer materially undervalued UKML. A subsequent and
final potential offer of 70p was also rejected as undervaluing the Company.
However, in discussions with shareholders it was clear that the relative
illiquidity of UKML is an increasing problem for many of them, even if they
appreciate the quality of the underlying assets. Indeed, the attraction for M&G
was the uncorrelated and predictable performance of high-quality mortgage
portfolios such as UKML's. Their proposed bid was not based on a change of
strategy or even of management style; it was an attempt to buy good assets
relatively cheaply.
Therefore, in order to maximise the value of the Company for its shareholders,
the Board initiated a review of future strategy following the M&G bid
rejection. This is now ongoing and will consider primarily the liquidity,
structure and potential future return profile of UKML, with the intention to
consult further with shareholders before bringing definitive proposals to a
vote in November.
It is perhaps ironic that this review is taking place after an accretive share
repurchase programme, which has yet to be reflected in our NAV, when the
Company is well positioned to deliver on its original promise of attractive,
sustainable, non-correlated returns, as lending margins are supportive and our
origination platforms are performing well. Nevertheless, the Board recognises
that the events of this year and the evolving priorities of our shareholders
mean that this is the correct course of action.
I look forward to presenting the results of the review in the next few weeks
and thank you in the meantime for your continued support.
Christopher Waldron
Chairman
26 October 2020
PORTFOLIO OF INVESTMENTS
as at 30 June 2020
Portfolio Summary Buy-to-Let Owner Occupied
Purchased Forward Flow Originated
Cornhill Malt Oat Hill 1 Cornhill 4 Barley Cornhill
6 Hill 2 Hill 1 5
Originator Coventry Capital Home Keystone Property The Mortgage
Building Society Loans Finance Lender
Outstanding GBP170m GBP339m GBP484m GBP247m GBP175m GBP234m
Balance
Number Accounts 953 1,941 3,800 1,136 1,003 1,195
Average Mortgage GBP179k GBP175k GBP127k GBP217k GBP174k GBP196k
Size
WA Indexed LTV 61.79% 60.26% 64.80% 71.61% 65.43% 72.08%
WA Interest Rate 2.67% 2.71% 1.37% 3.41% 4.13% 3.87%
WA Remaining Term 188 216 117 266 281 311
(mth)
WA Seasoning 59 41 161 7 22 7
(mth)
3mth + Arrears (% 0.00% 0.09% 0.76% 0.00% 1.16% 0.16%
balance)
STRATEGIC REPORT
The Board has prepared this report on a voluntary basis as the Directors have
elected to comply with Premium Listing reporting and governance standards.
There is no requirement to comply with the UK regulations governing the
Directors' duty to prepare a 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 risk
adjusted 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.
Investment Policy at Launch
The Company intends to pursue its investment objective by investing in Profit
Participating Notes issued by the Acquiring Entity which will acquire one or
more leveraged Mortgage Portfolios, which will subsequently be securitised so
that ongoing leveraged exposure to the Mortgage Portfolios will be provided by
holdings of Retention Notes, being the subordinated tranche of securities
issued on securitisation.
The Company may also, or alternatively (i) use certain derivative instruments
such as credit linked notes and credit default swaps to gain leveraged exposure
to Mortgage Portfolios; and/or (ii) invest in Retention Notes or similar
subordinated instruments issued by Issuer SPVs where the portfolio of Mortgages
which back the relevant notes is not one that the Acquiring Entity has at any
time owned.
Mortgages will be selected with a view to achieving appropriate diversification
across the UK housing market in terms of geographical location of the mortgaged
property, as well as being diversified by Borrower (given the typically small
size of Mortgages relative to the size of Mortgage Portfolios being purchased),
mortgage rate type and level, and property type.
Mortgage Portfolios are initially expected to be acquired in large secondary
market transactions from building societies, banks and other holders of
Mortgage Portfolios. The Portfolio Manager is currently reviewing a number of
Mortgage Portfolios that are available for sale, but there are no specific
assets identified for acquisition by the Acquiring Entity. In due course a
primary origination mechanism may be put in place under which the Acquiring
Entity would make complementary purchases of newly originated UK Mortgages from
an existing lender or lenders with a quality track record and robust
underwriting procedures.
The Company does not intend to invest in listed closed-ended investment funds
(other than money market funds as cash equivalents) or in any other investment
fund and in any event shall not invest more than 15 per cent of its total
assets in such assets (other than money market funds as cash equivalents).
Uninvested cash or surplus capital or assets may be invested on a temporary
basis in:
· Cash or cash equivalents, namely money market funds or short term money
market funds (as defined in the 'Guidelines on a Common Definition of European
Money Market Funds' published by the Committee of European Securities
Regulators (CESR) and adopted by the European Securities and Markets Authority
(ESMA)) and other money market instruments (including certificates of deposit,
floating rate notes and fixed rate commercial paper of banks or other
counterparties having a "single A" or higher credit rating as determined by any
internationally recognised rating agency selected by the Board); and
· Any UK "government and public securities" as defined for the purposes of
the FCA Rules.
In accordance with the Company's investment objective, Mortgage Portfolios will
be acquired by the Acquiring Entity, Warehouse SPVs established for the purpose
of warehousing Mortgage Portfolios and/or Issuer SPVs established for the
purpose of securitising Mortgage Portfolios using leverage. A typical leverage
multiple on Shareholders' funds is expected to be 4 to 7 times, with an
intention not to use leverage to the extent that this would result in RMBS
Senior Notes issued by an Issuer SPV being rated less than AAA at issue.
Investment Policy Revision
At an EGM held on 16 August 2019, the Company's investment policy was revised
to allow investment into third party 'triple A' rated RMBS for cash management
purposes and to allow additional leverage in the Company's securitisations via
the issuance of mezzanine notes.
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 ("NAV")
The Company's NAV has declined from 98p per share at launch to 80.59p at the
year end. This decline in NAV is largely attributable to servicing and
warehouse costs, and total dividend payments of 22.13p per share, which have
been mostly funded from capital. The Directors and Portfolio Manager believe
that the current strategy incorporating the recent changes to the investment
policy will help to restore the capital value of the Company.
· Discount/Premium
The Company has traded at an average discount of 22.62% for the year ended 30
June 2020 (6% for the prior three years) to NAV although the Directors note
that the Company was trading at a discount of over 38% to NAV at year end and
have subsequently begun a programme of share repurchases to help address this.
· Ongoing Charges
The Company's ongoing charges ratio has increased to 3.15% from 2.94% mainly
due to costs associated with warehousing of the portfolio in Cornhill Mortgages
No. 5 Limited. 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") have
decreased from 0.93% to 0.81% of NAV, helped by the Portfolio Manager's fee of
0.60% being based on the Company's market capitalisation, which was less than
its net asset value during the year. The costs of servicing the underlying
mortgage portfolios have increased from 2.01% to 2.18% 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 two interim dividends of 1.125p in relation to the year in
accordance with the prospectus target and the dividend payment policy of 4.5p
per annum and two interim dividends of 0.375p whilst the portfolio was impacted
by mortgage holidays with an additional catch up dividend of 1.5p as the
majority of the holiday periods expired. The Company's dividends were mostly
uncovered by income. Over the expected life of the Company, the Directors
expect dividends to be fully covered by income received.
· Investment Level
At 30 June 2020, the Company had approximately GBP38m of cash and near cash
working capital compared with GBP52m at 30 June 2019. As the Company now has a
leveraged exposure to mortgage investments, the Directors monitor uncommitted
cash levels and intend to keep average working capital balances to a minimum
over the life of the Company. The year end 2019 working capital balance was
elevated due to the need for working capital to fund loan origination
commitments.
Company Structure
The Company pursues its investment objective via UK Mortgages Corporate Funding
Designated Activity Company ("DAC"). DAC is an 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 securitisations, the junior
tranches of which are 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 enables DAC to attain leverage by a factor of up to twenty
times, the directors of DAC have historically limited the size of any senior
financing in order to meet the requirements for a AAA rating on issuance.
Following the shareholder vote in August 2019 the Company's investment policy
was amended to allow DAC to issue additional tranches with a rating of BBB or
higher with a view to increasing returns to shareholders by increasing
leverage.
The Company's corporate structure, whilst complex, comprises a Guernsey
domiciled company listed on the Specialist Fund Segment with a portfolio of UK
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 Irish tax relief on the income that it distributes
which ensures that 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 (dissolved on 7 January 2020), Malt Hill No. 2 Plc, Oat Hill
No. 1 Plc and Barley 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, MLTH2, OATH1, BARLH1), ABSNet (ticker: MALTH, MALTH2, OATH,
No ticker on ABSnet for Barley Hill No.1 Plc) and Bloomberg (ticker: MALTH
1 Mtge, MALTH 2 Mtge, OATH 1 Mtge, BARLH 1 Mtge).
* Loan level data for the public securitisations 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 after 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 may 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.
To facilitate efficient portfolio management the Company may also borrow up to
20% of its net asset value in addition to any leverage within the Company's
securitisations and warehouse facilities. The borrowing powers of the Company
were increased from 10% of NAV to 20% of NAV following an EGM in August 2019.
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 regular 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 by the Management Engagement Committee.
Section 172 of the Companies Act 2006
Although the Company is domiciled in Guernsey, the Board has considered the
guidance set out in the AIC Code in relation to Section 172 of the Companies
Act 2006 in the UK.
Stakeholder group Methods of engagement Benefits of engagements
Shareholders The Company engages with its shareholders through
The major investors in the issue of regular portfolio updates in the The Company was able to
the Company's shares are form of RNS announcements and monthly secure the backing of its
set out in the Corporate factsheets. A series of Ad-hoc announcements on shareholders for a
Governance Report. the impact of COVID-19 on the Company's portfolio significant change in its
were issued to the market via the RNS. investment policy
A stable and contented required to generate a
Shareholder base is vital The Company provides in-depth commentary on the covered Dividend.
to the Company's investment portfolio, corporate governance and
long-term growth corporate outlook in its interim management The Company was able to
objectives, and report and unaudited condensed consolidated secure the backing of its
therefore, in line with interim financial statements. shareholders to reject
its objectives, the the proposed offer and to
Company seeks to maintain The Company's Portfolio Manager conducts webinars instead conduct a
shareholder satisfaction on behalf of the Company to inform and educate Strategic Review to
through: its shareholders. release value to its
Shareholders.
Progression to a fully In addition, the Company, through its brokers and
covered dividend. Portfolio Manager undertook an extensive
programme of shareholder consultation when
Enhancing Liquidity in considering a prospective unsolicited offer for
the Company's shares by the Company.
targeting a discount to
NAV of 5% or less.
Clearly communicating the
status of the Company's
portfolio and its
investment strategy.
Service providers
The Company does not have The Company has identified its key service The Feedback given by the
any direct employees; providers and on an annual basis undertakes a service providers is used
however, it works closely review of performance based on a questionnaire to review the Company's
with a number of service through which it also seeks feedback. policies and procedures
providers (the Portfolio to ensure open lines of
Manager, Administrators, Furthermore, the Board and its sub-committees communication, and
secretaries, auditor, engage regularly with its service providers on a operational efficiency.
third party valuation formal and informal basis.
agent, brokers and other The Board is able to
professional advisers). The Company will also regularly review all identify and resolve
The independence, quality material contracts for service quality and value. problems with service
and timeliness of their provider relationships
service provision is via this process.
critical to the success
of the Company.
Community & Environment
The Company does not have The Company aims to minimise its environmental Company meetings and
any direct employees. footprint by minimising air travel and by making Shareholder meetings were
maximum use of video conferencing for Company conducted exclusively via
related matters. The Company aims to protect its telephone and video
service providers by applying safe COVID-19 conference during the
working practices. final quarter of the
financial year. This has
The Portfolio Manager's Environmental, Social and minimised the use of air
Governance (ESG) considerations can be found at travel and the risk of
www.twentyfouram.com/about/ transmission of COVID-19.
our-responsible-investment-policy/ and
www.twentyfouram.com/about/
our-corporate-and-social-responsibility-statement
/
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
0.60% per annum since 1 July 2017 of the lower of NAV, which is calculated
monthly on the last business day of each month, or market capitalisation. Prior
to this date, the portfolio management fee per annum was 0.75%. 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.
Principal risks and Uncertainties
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 has
carried out a robust assessment of the principal risks facing the Company and
has looked at numerous risk factors, an overview of which is set out in the
Corporate Governance Report.
Directors
The Directors of the Company during the year and at the date of this report are
set out in Corporate Information.
Directors' and Other Interests
As at 30 June 2020, Directors of the Company held the following Ordinary Shares
beneficially:
Number of Number of
Shares Shares
30.06.2020 30.06.2019
Christopher Waldron 80,000 20,000
Richard Burrows 5,000 5,000
Paul Le Page 112,800 20,000
Helen Green 21,250 10,000
Signed on behalf of the Board of Directors on 26 October 2020 by:
Christopher Waldron
Director
Paul Le Page
Director
PORTFOLIO MANAGER'S REPORT
for the year ended 30 June 2020
Commentary
The year to 30 June 2020 began on a positive note, following the approval from
the shareholder vote at the EGM in August 2019 to implement the revised
investment policy, allowing securitisation issuance of investment grade
tranches below AAA rating along with the intention to use released capital to
buy back shares in order to close the share price discount to the NAV.
As signalled at that time, the first opportunity to implement this was expected
to be the refinancing of the Oat Hill No.1 transaction due at the end of May
2020, which was anticipated to release capital after commitments to existing
investments in the GBP30m to GBP50m range.
Having started the early groundwork for a new securitisation in the latter part
of 2019, preparations began in earnest during the first two months of 2020,
with arrangers and lead managers beauty paraded and appointed, rating agencies
engaged, and legal counsel, custodians and other service providers also
retained.
As we moved into February, a timeline was developed and the structuring process
began.
Meanwhile in the housing and mortgage markets, after more than a year of
relative sluggish behaviour mostly due to uncertainty over the hitherto
unresolved Brexit issue, confidence began to return following the decisive
General Election result and a positive trend began in almost all measures,
including house prices, transactions, approvals, lending and rental growth.
Alongside this, the RMBS market had a strong start to the year with a number of
oversubscribed new deals and of particular relevance was the refinancing of the
CHL securitisation, Auburn 11. This was essentially the sister deal to our Oat
Hill transaction, having been originally securitised simultaneously to the
initial purchase of the Oat Hill loan pool in 2017. Whilst not exactly
identical, the two pools are very similar, as the Oat Hill pool was cut as a
"vertical slice" from the same original CHL pool.
Pricing, execution and structure on the new Auburn transaction (No. 14) was
encouraging with the expectation of the Oat Hill refinancing a couple of months
later, and furthermore positive for the likely amount of capital to be released
with expectations moving towards the higher end of the previously indicated GBP
30m-GBP50m range.
However, all that was dashed as markets became subsumed by the COVID-19
pandemic spreading to European shores from China in early March, and its
evolution into a full lockdown both here and in the US. All financial markets
reacted with severe sell-offs. Spreads in RMBS were no different, albeit as is
often typical they lagged broader credit markets by a few days, but spreads
gapped wider on virtually no trading volume, retracing to levels not seen since
the last financial crisis, and whilst some pricing visibility emerged
relatively quickly in the prime bank sector, levels in non-bank deals were few
and far between, and new issue activity came to a sudden stop.
Inevitably, this meant that the planned refinancing of Oat Hill No.1 was now
highly likely to have to be postponed, particularly given that the redemption
notice for Oat Hill No.1 would need to be issued by the end of April, which was
fast approaching, in order to redeem the deal on its May Interest Payment Date.
That said, we immediately commenced work on potential alternative solutions
such as interim shorter-term warehouse funding, to enable us to call Oat Hill
as soon as possible after the May call date and began engaging with a number of
banks to explore this possibility.
Central banks and governments moved quickly to try to support markets and in
the UK, this resulted in two rate cuts, taking the base rate to just 0.1%, the
reintroduction of a new Term Funding Scheme (TFSME) alongside the furlough and
employment support schemes for workers. However, the FCA also introduced a
support scheme for borrowers - a so called Payment Holiday scheme - allowing
those borrowers who stated they had been financially affected by Coronavirus
the ability to be granted a payment deferral by their lender (initially up to 3
months), without further question. All lenders were expected to comply.
The scheme was very quickly widely taken up by borrowers, with almost one in
five mortgage holders across the country ultimately taking advantage. In some
lending sectors, particularly owner occupied mortgage portfolios with larger
populations of self-employed borrowers (such as UKML's TML portfolios) where
the financial support scheme was not due to be rolled out for up to two months,
the take up was far higher - as much as 40%. By contrast, the proportion of
Buy-to-Let ("BTL") borrowers (who make up all of UKML's other portfolio) who
took up the scheme was generally lower, given the dual recourse nature of BTL
loans to either the tenants' rental payments or the borrower's other income,
and in the case of many professional landlords with multiple properties, a
significant level of interest coverage such that rental from tenants that were
able to pay would cover those that couldn't.
For UKML's overall portfolio, at the peak, approximately 18% of borrowers were
taking a payment holiday, which was broadly in line with the experience of the
mortgage industry as a whole. With the rapid early take-up it soon became clear
that this would severely reduce the level of income being generated by the
Company's portfolios whilst the payment holidays persisted. However, during the
early stages, the scope and duration was almost impossible to quantify, and
whilst it was expected that the vast majority of forbearance would be repaid,
the timing and mechanism of that was highly uncertain. As a result, in early
April, having worked closely with the Portfolio Manager to model and assess the
possible effects, the Board took the decision to reduce the level of dividend
whilst the forbearance process developed, albeit with the consideration that a
higher level could be paid should the level of income allow, and with the
intention to restore the dividend once the disruption had passed.
Whilst corporate credit markets had begun to recover quickly from the severe
downturn, RMBS markets once again lagged through April and May, with the
primary market remaining firmly closed, possibly due to the uncertain cashflow
effects of the payment holiday scheme across the whole market, and having
bounced quickly off the wides in late March, April and May saw a slow and
grinding recovery for RMBS. Ultimately this was not fast enough to allow the
Oat Hill deal to be refinanced in May but in the background it did allow the
portfolio managers to finalise negotiations with banks over private funding
terms and ultimately to engage with Santander Corporate and Investment Banking
("Santander"), to provide a backstop warehouse that would allow the company to
redeem the Oat Hill transaction at the following Interest Payment Date in
August, and provide interim financing until such time as public securitisation
markets were at a level where a new securitisation would become economically
viable.
Structuring work on the facility progressed through May and into June as the
national lockdown came to an end and businesses slowly began reopening
including housing and mortgage markets as valuers and the like were finally
able to begin operating again. By mid-June public RMBS markets had also
returned to more viable levels, and the likely reopening of the primary market
began to be signalled. As a result, efforts began with Santander to explore the
possibility of moving directly from the backstop facility (a highly important
component as it allowed the certainty to redeem the old transaction at the
first possible opportunity on its next Interest Payment Date in August), into a
public RMBS marketing and work on the public deal subsequently restarted, with
further Joint-Lead Managers appointed alongside Santander as Arranger. The
primary market reopened in mid-June with two public RMBS deals priced in the
second half of the month, both of which were largely pre-placed and, as a
result, a small number of well-regarded RMBS investors were contacted to assess
potential interest in a new Oat Hill deal which subsequently led to early
orders for several tranches.
On 7 July the Company signed the backstop agreement with Santander allowing the
early redemption notice for Oat Hill No.1 to be issued later that day, and the
following day announced the marketing of Oat Hill No.2 with a number of
tranches already pre-placed, and following a number of investor meetings and
subsequent book building the transaction was launched and priced two days
later. Ultimately this was just six weeks later than the original expected
refinancing at the end of May.
Whilst securitisation spreads had not recovered to the levels seen in February,
prior to the COVID-19 outbreak, they had retraced to within the broad longer
term range (see chart below) such that a full securitisation became
economically viable for the Company and therefore, once the Oat Hill
transaction had settled in August, this allowed a return to the previously
stated strategy of using excess capital to enable share buybacks whilst the
share price continued to trade at a discount to the NAV.
Preparations for this strategy were fairly quickly disrupted when on 20 July,
following a number of private approaches which had already been rejected by the
Board, M&G Investment Management Limited ("M&G"), through one of its specialist
funds, made public that it had proposed an offer to acquire the shares of the
Company at a price of 67p and urged the Board to engage with shareholders.
Having considered the previous approaches following in depth portfolio and
cashflow analysis the Board rejected this proposed offer having considered that
it represented a material undervaluation of the Company.
However, this announcement put the Company into a 28 day offer period under the
Takeover Code and to a certain extent restricted some of its operations
including the ability to discuss new financial data in public without
significant, time consuming and highly expensive accounting verification.
This came at the time when the Board was finalising its cashflow analysis
following the Oat Hill refinancing with the benefit of more clarity on the
first significant evolution of the payment holiday population, as the first
three month cohort who had deferred their third payment in June, were
restarting payments. The FCA had advised that it was in borrowers' best
interests to resume payments, but had also allowed for those who were still
suffering financially due to COVID-19 to apply for an extension to their
payment deferral period for up to a further three months. Assessment of the
extension requests showed that a significant number of borrowers were
recommencing payments.
This analysis led the Board on 22 July to confirm their intention to initiate
the proposed share buyback programme once the Oat Hill transaction had settled
in August and also to reinstate the previous dividend policy. It also announced
the intention to make an additional interim dividend payment equivalent to the
reduction in dividend over the previous two quarters.
During this time both the portfolio managers and the Board consulted
extensively with shareholders to gauge their perspective on M&G's proposal, and
on the Company's strategy and prospects.
At the same time, updated analysis of the portfolios continued as further
payment holiday reversion data evolved, the housing market restarted, bolstered
by the Government's removal of the lower band of stamp duty until April 2021
and pricing in securitisation markets continued to improve as the credit market
recovery continued, thereby bolstering the valuation analysis and reinforcing
the robustness of the cashflow horizon on the reinstated dividend policy.
Following these consultations and analysis, on 7 August 2020 the Board
announced a review of future strategy including further shareholder
consultation and to consider all possible options once the Offer Period under
the Takeover Code had elapsed.
Following this, M&G made a final proposal to acquire the Company at 70p, which
having compared to their updated analysis, the Board subsequently also rejected
and following this M&G formally withdrew shortly before the end of the offer
period. Therefore, at the time of writing the aforementioned review of future
strategy has commenced and is ongoing.
The review will naturally focus on the quality and ongoing valuation of the
portfolio. Acquiring high quality assets has been a policy from the outset in
the strong belief that they will perform better when the economic environment
is more difficult.
Portfolio Review
At the time of writing, the overall portfolio has approx. GBP1.64bn of mortgages.
That number is not expected to change significantly in the coming months as
growth from forward flow arrangements is somewhat offset by prepayments in
other pools, particularly those from TML where a relatively consistent level of
origination over the last two to three years of owner occupied loans from
borrowers who typically favour 2 year rather than 5 year loans will lead to a
similarly consistent redemption stream.
Normally, portfolio reporting would focus on levels of arrears plus any loss
performance. These were covered in the half year reporting to December 2019 and
in subsequent factsheets, but since the onset of COVID-19 and the introduction
of payment holidays alongside a moratorium on both foreclosures and evictions,
analysis of arrears will be misleading, although will become more relevant
again once the payment deferral scheme comes to an end after October. In the
meantime, it is more meaningful to focus on the level of payment holidays.
The payment holiday scheme has affected all lenders' loan pools albeit some to
a greater or lesser extent as described previously. Whilst the repayment
behaviour of those borrowers who also took an extension to their initial 3
month deferral is yet to be seen, it was encouraging to see a majority of
borrowers return to making payments after the initial period. As was stressed
when the scheme was announced, it offered a deferral, not forgiveness and the
payments deferred are still required to be paid. Whilst we have seen some
borrowers now making overpayments in order to do that sooner rather than later,
and even a few who repaid the entire amount as they took the deferral more as a
precaution, the vast majority will be capitalised - i.e. the value of the
deferred payments will be added to the balance of the loan along with interest,
and the borrowers' future monthly payment adjusted upwards to reflect the new
balance.
It is important to note however that other than in the Oat Hill portfolio,
where all the loans are floating rate, most borrowers have a fixed rate
mortgage for a term between 2 and 5 years from origination after which the loan
moves to a typically more expensive reversion rate. At the expiry of the fixed
rate term, most borrowers are expected to refinance their loan causing a
repayment where, if they have taken a payment holiday, they will need to repay
the increased balance in full which in many cases means that despite the
deferral being capitalised over the rest of the life of the loan, it will
actually be paid back much quicker.
As previously described, payment holidays have affected each portfolio
differently depending on asset type, borrower type and originator. However, the
quantum for all portfolios peaked at the end of June, as the large proportion
of borrowers who took their first deferral in April, shortly after the scheme
was announced, came to the end of the initial 3 month period and resumed making
payments in July. Some borrowers however, subsequently took the option of an
extension of up to a further 3 months and those extensions will typically come
to an end from the end of September onwards. The figures in the table and text
below represent the latest available data for position at the end of August,
showing the transition of those borrowers who took a deferral initially and
subsequently returned to making payments but not yet those who took an
extension at the end of their initial 3 month period.
Purchased Buy-to-Let - The Coventry portfolios have seen the amount of payment
holidays fall from a peak of around 13% to about 3.2% currently. For
comparison, at the end of June Coventry reported overall payment holidays of
15.2% with levels in their owner occupied book at 17.9%, typifying the
experience of lower levels for BTL loans. Overall, Coventry's numbers are
slightly lower than industry average, with banks like Santander UK for example
reporting a level just over 20%, illustrating Coventry's focus on high quality,
low risk lending. The CHL portfolio experience has been similar, with 14.8% at
the peak having fallen to around 4.7%. These lower numbers will most likely be
driven by the age of the loans, with therefore smaller average balances, their
floating rate nature where base rate cuts had already benefitted the borrowers,
and the low margin leading to a low absolute payment amount for borrowers to be
able to support.
Forward Flow Buy-to-Let - The Keystone portfolio has been the outstanding
performer throughout this process, probably not a surprise given the high
quality lending but also its focus on professional landlords. Only 3.4% of the
pool took a payment holiday at all, and just two loans to a single borrower
have extended with all others resuming payments; several of which have also
made arrangements to make up the shortfall over the next 1-2 years rather than
capitalising the additional balance over the rest of the life of the loan.
Forward Flow Owner Occupied - Conversely, and unsurprisingly, the TML
portfolios have seen the highest levels of payment holidays, given they are
solely owner occupied loans and also the nature of TML's customer base is the
underserved borrower such as those with irregular incomes including many
self-employed, whose cashflow did not benefit immediately from the income and
business support schemes. The level of holidays has now fallen from a peak of
over 40% to a current level of 14.7%. It is notable that the self-employed
component, which saw a greater take-up of payment holidays initially, has now
seen a correspondingly larger decrease, probably reflecting the earlier end of
the income support scheme for the self-employed compared to the furlough scheme
for the employed.
Overall we must be pleased with the trend which has seen payment holidays
across the whole portfolio fall from a peak of almost 19% to around 5%
currently with a further reduction expected when the current extensions come to
an end. A summary can be seen in the table below.
Portfolio Summary Buy-to-Let Owner Occupied
Purchased Forward Flow Originated
Originator Coventry Capital Keystone The
Building Home Loans Property Mortgage Lender
Society Finance
Outstanding Balance GBP497m GBP481m GBP264m GBP405m
Number Accounts 2,820 3,771 1,219 2,176
Peak Payment Holidays (% 13.0% 14.8% 3.4% 40.1%
of bal.)
Payment Holidays Aug-20 3.2% 4.7% 0.7% 14.7%
However, given the economic stresses that are bound to come due to the
pandemic, some of these loans will undoubtedly fall into longer term arrears,
potentially leading to foreclosure and possibly result in losses. Our
conservative approach to lending and portfolio purchases will be highly
beneficial as our focus on lower LTVs for example will protect us against loss
levels where foreclosures are necessary, but nonetheless we have significantly
updated our loss provisioning methodology and applied more severe stress
assumptions to take account of loans with payment holidays and also factor in
the greater likelihood of a downturn.
The methodology analyses each pool on a loan-by-loan basis. Every portfolio has
a tailored set of default assumptions to reflect its characteristics and asset
type. Riskier pools have higher default probabilities across the board, and the
probability of default in each set is doubled for those loans with payment
holidays. Furthermore, the default weighting scales up further in each higher
LTV bracket. House prices are stressed in all scenarios, despite the current
buoyant housing market. The minimum stress across all our base cases is a 12.7%
asset value decline, and that rises to almost 70% in some of our severe stress
cases. Despite these stresses, the outcome of the updated analysis increased
the Company's loss provision at the year-end by a relatively modest GBP1.1m
(approx. 0.5% of NAV) to a total GBP2.55m. This addition along with the
provisioning previously applied reflects the cautious risk profile of the
overall portfolio.
The decline in the Company's NAV has slowed during the year, particularly as
assets of the forward flow portfolios grew, increasing income and therefore
dividend coverage, and the decline in the first six months of 2020 was a modest
0.47%, despite further significant growth not being possible in the last
quarter of the year due to the Coronavirus lockdown. However, further growth
should be possible now that lending markets have resumed and a reduced dividend
outgoing due to the anticipated share buybacks project a covered dividend from
the end of 2020.
The Company's NAV is calculated on an amortised cost basis - a methodology
widely used by banks and financial institutions for valuing loan portfolios and
other complex, not easily comparable assets, where no regular trading market
exists and particularly where the assets are intended to be held to maturity.
This methodology also allows any purchase discount/premium to be released into
the valuation over the life of the asset portfolio. Appropriate input
assumptions (such as expected loan prepayment speeds or losses) are modelled by
an independent third party provider to calculate the amortisation of the
premium/discount to par over the expected life, which can then be adjusted as
required should actual experience vary (e.g. loan prepayments are faster or
slower than expected).
By contrast, fair value accounting is typically applied to assets which have a
higher degree of market price transparency, and can be easily traded such as
liquid bonds and stocks. This might also include less liquid debt instruments
which are relatively easily comparable to other traded instruments, but would
simply not be suitable for regularly valuing portfolios of loans with thousands
of components and little visible comparability with other portfolios, which
themselves will have minimal pricing transparency.
That said, a fair valuation is carried out by the same independent third party
semi-annually as part of the Company's financial reporting, using the same
asset assumptions (e.g. prepayments etc.) as the amortised cost valuation.
As it is impractical to value each underlying loan (particularly for older
portfolios where the most recently available credit analysis of the borrowers
and asset valuations may be significantly outdated) the fair valuation of each
portfolio is based on the expected funding cost of a similar generic portfolio
in public or private markets, using securitisation modelling with a number of
assumptions applied, tailored to each portfolio's characteristics. This does
not take account of any existing hedging costs or funding in place (e.g.
current warehouses or securitisations that may have several years to run and
are likely to have staggered maturities to somewhat smooth the variability in
funding costs over time, as can be seen in the historic spreads graph above).
It is simply a "point in time" valuation assuming the portfolio is funded
through a full securitisation structure at perceived market levels at that
time, such that when the funding cost of a securitisation is higher, the fair
value of the portfolio will be lower and vice-versa.
The Company adopted the amortised cost methodology because its portfolios are
designed to be held to maturity and it therefore provides a smooth unwind of
the discount or premium of the portfolios over their life, whilst the fair
valuation method would introduce unwarranted volatility. The Fair Value method
does indicate the change in the level of securitisation spreads. For example,
as the chart below shows, the fair valuation increased through 2019 as
securitisation spreads generally tightened (see the RMBS spreads graph above)
but fell in the first half of 2020 as they widened due to the Coronavirus
crisis.1
Outlook
In RMBS, for mortgage and housing markets the near-term outlook is broadly
positive, despite the ongoing uncertainty over developments with the
Coronavirus situation, whether it be a return to more stringent lockdown or the
outcome of payment holidays.
In financial markets 0-5yr swap rates in the UK are close to zero, whilst
mortgage rates are broadly unchanged from before the pandemic began, with some
lenders even having increased rates as well as tightening loan origination
criteria somewhat. That means the forthcoming period represents an extremely
attractive origination opportunity for the Company's forward flow assets,
adding margin and therefore enhancing return, whilst protecting risk, with
underwriting taking account of the latest situation.
Spreads in RMBS markets meanwhile have continued to grind tighter, and whilst a
small post-summer pipeline is building in the primary market, the expectation
for supply in the near to medium term is that issuance will remain subdued
whilst demand will remain strong. Bank deals will be few and far between, given
the alternative central bank funding sources available and will be mostly
retained. Non-bank deals are expected to be largely pre-placed, as has been the
case in all transactions since the summer, and given that most non-bank lenders
have now issued since the market reopened in June they will need time to
rebuild origination volumes and loan stock before returning to issuance.
This will be positive for the Company as the forward flow portfolios approach
the time for securitisation.
Meanwhile, the Board's strategic review is underway at the time of writing and
the outcome of this will guide the future direction of the Company.
1 Whilst the fair value of the portfolio is sensitive to the level of
securitisation spreads, it has negligible sensitivity to the level of interest
rates as the portfolio is fully hedged using interest rate swaps as described
in note 9.
TwentyFour Asset Management LLP
26 October 2020
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 Crystal Amber Fund Limited and a director of a
number of unlisted companies. 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 (Risk Committee Chairman) - Senior Independent Non-Executive
Director - UK resident
Mr Burrows works as Treasurer of British Arab Commercial Bank plc in London. He
has previously held senior Treasury related roles at Bank of China, London
Branch (2015 - 2018), Co-operative Bank (2012 - 2015), Northern Rock (2009 -
2010) and Citi Alternative Investments (1994 - 2008). From 2010 to 2012, Mr
Burrows worked in the Prudential Risk Division of the Financial Services
Authority as the UK regulator rolled out its post-crisis requirements with
specific focus on the liquidity regime. Mr Burrows was appointed to the Board
on 12 June 2015.
Paul Le Page (Audit Committee Chairman) - Independent Non-Executive Director -
Guernsey resident
Paul Le Page was formerly an Executive Director and Senior Portfolio Manager of
FRM Investment Management Limited, a subsidiary of Man Group. In this capacity
he managed alternative investment portfolios for institutional clients and was
a director of a number of group funds and structures. Prior to joining FRM, he
was employed by Collins Stewart Asset Management, a firm which was subsequently
acquired by Canaccord Genuity where he was responsible for managing the firm's
hedge fund portfolios and reviewing both traditional and alternative fund
managers in his capacity as Head of Fund Research following completion of his
MBA. He originally qualified as Chartered Electrical Engineer following a
successful career in industrial R&D where he led the development of robotic
immunoassay diagnostic equipment and software as R&D Director for Dynex
Technologies Guernsey. In addition to his private directorship roles, Mr Le
Page has chaired Audit and Risk Committees for a number of London Stock
exchange-listed Investment Companies since January 2004. 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 1998.
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, CQS Natural Resources Growth and Income plc
and JPMorgan Global Core Real Assets Limited. Mrs Green was appointed to the
Board on 16 June 2016.
The Directors named above were the directors of the Company, and held this
office during the year and up to the date of signing the financial statements.
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
Richard Burrows
None
Paul Le Page
Bluefield Solar Income Fund Limited London
Highbridge Tactical Credit Fund Limited London
RTW Venture Fund Limited London
Helen Green
Aberdeen Emerging Markets Investment Company Limited London
CQS Natural Resources Growth and Income Plc London
JPMorgan Global Core Real Assets 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 2020.
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. On 27 June
2018, the Company completed an additional capital raise. On 16 August 2019, the
Company resolved through an Extraordinary General Meeting ("EGM"), to amend the
Articles of the Company;
(i) to enable the Company to implement the reduction in the annual
dividend trigger from 6p to 4.5p;
(ii) to provide that the Continuation Resolution due to take place at
the Annual General Meeting ("AGM") in 2020 will now take place at the date of
the AGM in 2024 and every fifth AGM thereafter; and
(iii) the limit on borrowings be increased from 10 per cent. to 20 per
cent. of the NAV of the Company as at the time of drawdown.
The Company's Share Buyback Policy was also amended at the EGM. The Board does
not intend to reinvest further capital other than in the re-financing of the
existing portfolios, whilst the Company is trading at a discount in excess of 5
per cent. to NAV per Ordinary Share. At this level of discount, subject to the
Board determining that the Company has sufficient surplus cash resources
available for the ongoing funding of the existing investments, repayment of any
existing credit facilities and any other foreseeable commitments, the Company
intends to buy back Ordinary Shares.
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 19.
Shareholders' Information
Shareholders' 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 disclosure requirements of Premium Listing rules and as such
applies the Association of Investment Companies Code ("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 these
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 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.
Following the onset of the COVID-19 pandemic, the Board has reviewed a three
year cash-flow model prepared by the Portfolio Manager that simulates two
extreme scenarios, namely an indefinite continuation of the mortgage holidays
in effect at June 30 2020 and the failure to securitise or re-securitise each
of the Company's mortgage portfolios. In each of these scenarios the Company
was expected to produce sufficient income to finance its operations and
continue as a going concern.
Results
The results for the year are set out in the Consolidated Statement of
Comprehensive Income. The Company declared dividends of GBP8,191,961 in respect
of the year ended 30 June 2020, a breakdown of which can be found in note 22.
Distributions declared and paid during the year amount to GBP10,239,952 as
recognised in the Consolidated Statement of Changes in Equity.
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 partially paid out of capital
of the Company.
Signed on behalf of the Board of Directors on 26 October 2020 by:
Christopher Waldron
Director
Paul Le Page
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 Corporate Governance Code July 2018 ("UK Code") issued by the Financial
Reporting Council (the "FRC"). The Company is also required to comply with the
Guernsey Financial Services Commission's Code of Corporate Governance ("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. There is no information that is required to be disclosed
under LR 9.8.4. 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 ("Association of Investment Companies") and
by complying with the 2019 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 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 updated its Code on 5 February 2019 to reflect revised Principles and
Provisions included in the UK Corporate Governance Code which was revised in
2018. These changes apply to financial years beginning on or after 1 January
2019 and the Directors are reporting on the Company's compliance with the
changes in this Annual Report for the year ended 30 June 2020.
The AIC Code is available on the AIC's website, www.theaic.co.uk. The UK Code
is available on the FRC's website, www.frc.org.uk.
Throughout the year ended 30 June 2020, the Company has complied with the
recommendations of the 2019 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;
· Remuneration Committee; and
· Nomination Committee.
For the reasons explained in the UK Code, 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
delegates its day-to-day operations and does not have employees, hence no Chief
Executive, Executive Directors' remuneration or internal audit function is
required for the Company. The Board is satisfied that any relevant issues can
be properly considered by the Board. The Board, as a whole, fulfills the
function of a Nomination and Remuneration Committee as detailed in the
Directors' Remuneration Report.
Given the relatively small size of the board, it has been decided that it is
unnecessary to have a separate Nomination Committee and relevant matters are
considered by the whole 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 to 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 and Risk 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 Mr Christopher Waldron. The UK Code requires the Chairman of
the Board be independent. Mr 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 sixteen 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 in the 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 Group'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 Financial Statements of the Company and its subsidiaries are subject to
internal review by their respective administrator, a further review by the
Portfolio Manager, and also their respective Directors. The final review is
conducted by the Company's administrator which includes the subsidiaries'
Financial Statements. Each administrator has a robust control environment in
place, and in addition each company is subject to an annual external audit.
Malt Hill no.1 Plc, Barley Hill No.1 Plc and Cornhill Mortgages No. 2 Limited
were not subject to an annual audit at 30 June 2020 but their results are
included in the Company's consolidated results which are audited by the
independent auditor.
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 performance, asset
allocation, risk management, corporate governance, compliance, gearing,
structure, finance, marketing and general management.
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 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 Meetings Audit Committee Meetings Risk Committee
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 Meetings Ad hoc Meetings
Held Attended Held Attended
Christopher Waldron 1 1 8 6
Richard Burrows 1 1 8 7
Paul Le Page 1 1 8 8
Helen Green 1 1 8 6
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.
Retirement by Rotation
Under the terms of their appointment, each Director is required to retire by
rotation as detailed in the Director's Remuneration Report.
UK Criminal Finances Act 2017
In respect of the UK Criminal Finances Act 2017 which introduced a new
Corporate Criminal Offence of "failing to take reasonable steps to prevent the
facilitation of tax evasion", the Board confirms that it is committed to zero
tolerance towards the criminal facilitation of tax evasion.
The Board also keeps under review developments involving other social and
environmental issues, such as the General Data Protection Regulation ("GDPR"),
which came into effect on 25 May 2018, and Modern Slavery, and will report on
those to the extent they are considered relevant to the Company's operations.
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 19 March 2020 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. Given the relatively small size of the Board, it
has been decided that the Audit Committee comprises the whole Board, under Paul
le Page's chairmanship. The terms of reference of the Audit Committee provide
that the committee shall be responsible, amongst other things, for reviewing
the Consolidated Interim and Consolidated Annual Financial Statements,
considering the appointment and independence of the external auditor,
discussing with the external auditor the scope of the audit and reviewing the
Company's compliance with the AIC Code. The Board is satisfied with the
performance of the Audit Committee and is satisfied that they have fulfilled
their duties.
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 the Audit
Committee. The process of risk management also includes procedures to identify,
manage and mitigate emerging risks faced by the Company.
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 Common Reporting Standard ("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.
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.
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 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 hereafter.
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 the Company being unable to pay target dividends to
investors due to a shortfall in income received on the portfolio. The risk is
monitored by the Board receiving quarterly reports from the Portfolio Manager,
in conjunction with the Company's Administrator, which monitor the Company's
current and projected 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, mortgage holidays, forbearance
requests and the possibility and timing of defaults, all of which could reduce
cash flow to the Company. The Company does pay dividends from capital with
Board agreement, to the extent that the Board has assessed the factors
indicating that future income flows will be sufficient to restore any
distributed capital. In August 2019, a change to the Company's investment
policy was approved by a majority of the Company's shareholders with a view to
expediting progress to a fully covered dividend despite falling net interest
rate margins.
· The risk of the Company being unable to invest or reinvest capital
repaid from mortgage loans to purchase additional mortgage assets in a timely
manner. The risk is managed 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. The Board has formalised a Share
Buyback Policy and is conducting a Strategic Review with the intention of
mitigating the risk of long-term share price discounts.
· 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 through warehouse funding arrangements are likely to
increase over time 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 is mitigated by the
Portfolio Manager who retains team members with extensive securitisation
experience who are engaged with the UK RMBS market and service providers. The
Company may also use short term financing where needed to enable it to optimise
the timing of its securitisation transactions.
Emerging Risks and Uncertainties
In order to recognise any emerging risks that may impact the Company and to
ensure that appropriate controls are in place to manage those risks, the Audit
Committee undertakes regular reviews of the Company's Risk Matrix. An overview
of emerging risks is set out below:
· The risks associated with the COVID-19 global pandemic. The UK government
in common with its European neighbours has implemented unprecedented measures
to restrict the possibility of transmission of the COVID-19 virus by limiting
personal contact and international travel. Whilst the ultimate scope and
duration of these measures is currently unclear, they are likely to have a
severe impact on the UK Economy, which the government and the Bank of England
are attempting to offset with both traditional and unconventional fiscal and
monetary policy measures. The Company's mortgage portfolios are solely focused
within the United Kingdom and as such the payment profiles of the underlying
loans will be impacted by any risks emerging from changes in the macroeconomic
environment. Furthermore, monetary policy measures and the Term Funding Scheme
affect the absolute level of interest rates and therefore the spread that can
be achieved between financial assets and liabilities. The Company intends to
mitigate the risk of this uncertainty on the liquidity of its shares by
undertaking a Strategic Review in consultation with its shareholders.
· The risks associated with the UK's withdrawal from the European Union. The
UK left the EU on 31 January 2020 and entered into a transition period ending
31 December 2020. During this period, the UK's arrangements with the EU remain
unchanged. The Company engaged PwC to conduct an independent review of the
taxation status of its Dublin based Diversified Activity Company to help
mitigate this risk.
· The risks associated with UK Base Rates moving to a negative rate. The
likelihood of UK Base Rates moving to a negative rate (from the current 0.10%)
has arguably increased as the Bank of England has asked some UK banks to report
on the operational implications of implementing a negative or zero policy rate.
The direct impact on the Company is assessed as minimal as it does not maintain
significant balances of products which directly reference the Base Rate.
Negative interest rates for some GBP Sterling denominated products already
exist as some Gilts trade at effective negative interest rates in the secondary
market. Longer term interest rates relating to mortgage assets and
securitisation liabilities may adjust downwards but the risk for the Company
remains the spread between the funding and the lending. This risk is already
factored into the ongoing assessment of the Company.
Other risks and uncertainties
The Board has identified the following other risks and uncertainties along with
the steps taken to mitigate them:
Operational risks
The Company is exposed to the risk arising from any failures of systems and
controls in the operations of the Portfolio Manager, Administrator, AIFM,
Custodian and the Depositary amongst others. The Board and its Audit Committee
regularly review reports from the Portfolio Manager, AIFM, the Administrator,
Custodian and Depositary on their internal controls. The Administrator,
Custodian and Depositary will report to the Portfolio Manager any operational
issues which will be brought to the Board for final approval as required.
Accounting, legal and regulatory risks
The Company is exposed to the risk that it may fail to maintain accurate
accounting records or fail to comply with requirements of its Admission
document and fail to meet listing obligations. The accounting records prepared
by the Administrator are reviewed by the Portfolio Manager. The Portfolio
Manager, Administrator, AIFM, Custodian, Depositary and Corporate Broker
provide regular updates to the Board on compliance with the Admission document
and changes in regulation. Changes in the legal or the regulatory environment
can have a major impact on some classes of debt. The Portfolio Manager monitors
this and takes appropriate action.
Income recognition risk
The Board considers income recognition to be a principal risk and uncertainty
of the Company as the Portfolio Manager estimates the pre-payment rates for the
underlying mortgage portfolios, which has an impact on the effective interest
rate of the Asset Backed Securities which in turn impacts the calculation of
interest income. The Board asked the Audit Committee to consider this risk with
work undertaken by the Audit Committee as discussed in the Audit Committee
Report. As a result of the work undertaken by the Audit Committee, the Board is
satisfied that income is appropriately stated in all material respects in the
Financial Statements.
Cyber security risks
The Company is exposed to risk arising from a successful cyber-attack through
its service providers. The Company requests of its service providers that they
have appropriate safeguards in place to mitigate the risk of cyber-attacks
(including minimising the adverse consequences arising from any such attack),
that they provide regular updates to the Board on cyber security, and conduct
ongoing monitoring of industry developments in this area. The Board is
satisfied that the Company's service providers have the relevant controls in
place to mitigate this risk.
Viability Statement
The UK Code requires the Board to explain how they have assessed the prospects
of the Company, taking account of its current position, principal risks, the
period of this assessment and why the period is considered appropriate. 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 July 2023. The models
subject the underlying mortgage pools to a variety of stresses including
elevated levels of default, reduced levels of recovery following default and
holiday forbearance. The scenarios also simulate the impact of multiple
securitization failures so that the Company pays a step up coupon for every
securitization until July 2023.
Having considered the above, and with reference to the Company's current
position and prospects, and with the five year continuation vote not now due
until the AGM to be held in 2024, the Board is of the opinion that the Company
is viable until at least July 2023 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 26 October 2020, the Company has been notified of the following interests
in the share capital of the Company exceeding 3% of the issued share capital:
26.10.2020 17.10.2019
Number of Percentage Number of Percentage
shares of issued shares of issued
share share
capital capital
Twentyfour Asset Management* 46,759,800 20.14% 46,759,800 17.12%
Premier Miton Investors 26,083,951 11.24% 32,208,653 11.80%
Seven Investment Management 21,307,155 9.18% 20,707,325 7.58%
Investec Wealth & Investment 20,165,401 8.69% N/a N/a
Seneca Investment Managers 17,685,156 7.62% N/a N/a
Connor Broadley** 15,567,023 6.71% N/a N/a
West Yorkshire PF 9,374,583 4.04% N/a N/a
Vidacos Nominees Limited N/a N/a 13,564,532 4.97%
Brooks MacDonald Nominees N/a N/a 12,764,149 4.67%
Limited
Fidelity International N/a N/a 11,852,153 4.34%
HSBC Global Custody Nominee (UK) N/a N/a 9,374,583 3.43%
Limited
*Twentyfour Asset Management acting as investment manager of:
St. James Place Strategic Income 38,059,151 16.40% 38,059,151 13.93%
Unit Trust
MI TwentyFour Investment Funds - 8,700,649 3.75% 8,700,649 3.19%
Asset Backed Income Fund
** On 22 October 2020, Connor Broadley notified the market that their
shareholding had fallen below 5% of the issued share capital.
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%.
Independent Auditor
On 2 December 2019, Deloitte LLP, with David Becker as partner, was appointed
as auditor to replace PricewaterhouseCoopers CI LLP ("PwC").
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 as issued by the International Accounting Standards Board ("IASB") and
applicable law.
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, IFRS requires
that the Directors:
· properly select and apply accounting policies;
· present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
· provide additional disclosures when compliance with the specific
requirements in IFRSs are insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the entity's
financial position and financial performance; and
· make an assessment of the Company's ability to continue as a going
concern.
The Directors confirm that they have complied with these requirements in
preparing the Audited Consolidated Financial Statements.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
(Guernsey) Law, 2008. They are also responsible for safeguarding the assets of
the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the company's website.
Legislation in Guernsey and the United Kingdom 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 and its
subsidiaries included in the consolidation taken as a whole, as at and for the
year ended 30 June 2020.
(b) The Annual Report which includes information detailed in the Summary
Information, 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 development and performance of the Company business
during the year and the position at year end 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 the Annual Report provides the information necessary to assess the
Company's position and performance, business model and strategy.
Responsibility statement
We confirm that to the best of our knowledge the financial statements, prepared
in accordance with International Financial Reporting Standards, give a true and
fair view of the assets, liabilities, financial position and profit or loss of
the Company and the undertakings included in the consolidation taken as a
whole.
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.
Signed on behalf of the Board of Directors on 26 October 2020 by:
Christopher Waldron
Director
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 7 December 2020.
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. No
Directors have been paid additional remuneration by the Company outside their
normal Director's fees and expenses. The Management Engagement 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 Chairman of the Audit Committee.
In the year ended 30 June 2020, the Directors received the following
remuneration in the form of Director's fees:
30.06.2020 30.06.2019
GBP GBP
Christopher Waldron 40,000 40,000
Richard Burrows 30,000 30,000
Paul Le Page 35,000 35,000
Helen Green* 30,000 30,000
Total 135,000 135,000
*Fees are paid to Saffery Champness Management International Limited.
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, 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 26 October 2020 by:
Christopher Waldron
Director
Paul Le Page
Director
AUDIT COMMITTEE REPORT
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 2020.
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 an 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 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. The Board receives confirmation from all service providers that they comply with the requirements of the UK Bribery Act. As the Company does not have any employees it does not have a "whistle blowing" policy in place, however the Board has reviewed the whistleblowing procedures of the Portfolio Manager and Administrator with no issues noted. The Company delegates its main administrative functions to third-party providers who report on their policies and procedures to the Board. A review of the service provider policies took place at the Management Engagement Committee Meeting on 19 March 2020. 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 GBP1,638,952,388 (fair value of GBP1,680,454,116) as at 30 June 2020 and represent a substantial portion of net assets of the Group. 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 Group as at 30 June 2020 to be reasonable from information provided by the Portfolio Manager, AIFM, Administrator, Custodian, Depositary and Valuation Agent on their processes for the valuation of these investments with regular reporting being provided during the year to the Board as a whole. The Audit Committee reviewed and challenged key inputs into the valuation with a particular focus on Expected Credit Loss provisions and Hedge Effectiveness which are covered below. · Mortgage loan impairment provision The Audit Committee reviewed the Company's expected credit loss provision as this has an impact on the amortised cost valuation of the Company's portfolio. The provision calculations had been enhanced to reflect additional economic scenarios and the increased risk of loss for loans subject to forbearance measures and loans with higher loan to value ratios. The Audit Committee was satisfied that the mortgage loan impairment provision is appropriate in light of appropriate past trends and patterns and events since the onset of the COVID-19 pandemic. · Hedge accounting The Audit Committee reviewed the appropriateness of the designation of derivatives held by the Company as fair value hedges. The Audit Committee was satisfied that it is appropriate for the Company to apply hedge accounting to all of the hedges in these circumstances and was satisfied with the offsetting impact on the valuation of the Company's portfolio. (ii) Income recognition: The Audit Committee considered the calculation of income from investments recorded in the Audited Consolidated Financial Statements as at 30 June 2020. 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. (iii) Expense recognition: The Audit Committee reviewed schedules provided by the Administrator to ensure that the costs associated with the Company's securitisations have been fully recognised and apportioned. The Audit Committee concluded that the apportionment and expense recognition policy had been followed correctly. (iv) Taxation: The Audit Committee agreed with Deloitte LLP 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 tax structure legal opinion from Eversheds, and a subsequent review by PwC Dublin, 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 and provide information necessary for Shareholders to assess the Company's position. 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. Deloitte were appointed during the year as the auditor of the Company. During the year, the Audit Committee received and reviewed audit plans and reports from the external auditor. The Audit Committee also undertook an audit tender process which is described later in the report. 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. The Company does not utilise the external auditor for internal audit purposes, secondments or valuation advice. The Audit Committee has adopted the revised FRC whitelist of permitted services and applies the 70% non-audit service fee cap at both the UKML level and for each entity controlled by the Company. Summary of activity during the year The most significant event in the financial year was the completion of the Company's audit tender process in October 2019. Deloitte LLP was selected to replace PwC as the firm offered efficiency gains by having a single audit partner responsible for signing the statements for all three levels of the Company's structure. The Committee worked with Deloitte and the Portfolio Manager to ensure that the review of key audit risk items relating to credit impairment provisions and the assessment of hedge effectiveness began at the start of the financial year rather than the start of the audit. The Company has benefitted from the early engagement and critical reviews by Deloitte's technical teams and has developed more granular credit loss models that use more loan level data as opposed to portfolio level assumptions. The onset of COVID-19 also added its own set of challenges due to the mortgage holiday programme and whilst the Bank Of England and ESMA guidelines cautioned
lenders not to treat forbearance as evidence of default the Committee in
consultation with the Portfolio Manager felt that it was appropriate to assume
that forbearance was a potential indicator of future default risk. The
Committee worked with the Portfolio Manager to make a rapid estimate of the
potential impact on the Company's credit loss provision and this was disclosed
to the market in April.
Another topic of critical importance to the Audit Committee and the Company as
a whole is to ensure that the Company will pay fully covered dividends as soon
as possible. The Audit Committee worked with Northern Trust to update the
dividend coverage projection model to monitor the impact of payment holidays on
the Company's portfolio. Based on this work, and taking into account the extent
to which the Company was paying dividends from capital, the Company made the
decision that in order to rebuild the NAV, improve the Company's cash flow and
reconstitute capital to generate returns in excess of the required divided, the
annual dividend should be reduced from 6p to 4.5p per annum. A further
temporary reduction to 1.5p per annum was implemented in April 2020 in the
light of the uncertainty caused by the COVID-19 pandemic. However, in July, the
Board announced its intention to restore the 4.5p annual dividend, together
with the payment of an extra dividend of 1.5p to offset the temporarily reduced
payments.
The following table summarises the remuneration paid to Deloitte LLP and to
other Deloitte member firms for audit and non-audit services for the Company in
respect of the year ended
30 June 2020.
30.06.2020
Deloitte LLP - Audit work GBP
Annual audit of the Company 30,000
Annual audit of the Company's 245,000
subsidiaries
Deloitte LLP - Non-audit work including interim 85,000
review
Ratio of non-audit to audit work 31%
The Company and the DAC do not qualify as EU Public Interest Entities ("PIEs")
and are therefore not subject to the restrictions on non-audit services
provided by its auditor under this regime. The SPVs however do qualify as EU
PIEs, and accordingly the Board has considered the impact of this on the
evaluation and approval of non-audit services performed to the Company.
The Audit Committee reviews and authorises any non-audit related services
provided by Deloitte to the Company. Deloitte currently acts as auditor to the
Company, specifically the Acquiring Entity DAC and the underlying Issuer SPVs.
Under EU PIE regulations audit partners are required to rotate every five
years. June 2020 marked the completion of Deloitte's first year as auditor.
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 26 October
2020 and signed on behalf by:
Paul Le Page
Chairman, Audit Committee
ALTERNATIVE INVESTMENT FUND MANAGER'S REPORT
Maitland Institutional Services Ltd 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;
· 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; and
· 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
The AIFM is subject to a staff remuneration policy which meets the requirements
of the AIFMD. The policy is designed to ensure remuneration practices are
consistent with, and promote, sound and effective risk management. It does not
encourage risk-taking which is inconsistent with the risk profiles, rules or
instrument of incorporation of the funds managed, and does not impair the
AIFM's compliance with its duty to act in the best interests of the funds it
manages.
The AIFM has reviewed the Remuneration Policy and its application in the last
year which has resulted in no material changes to the policy or irregularities
to process.
This disclosure does not include staff undertaking portfolio management
activities as these are undertaken by TwentyFour Asset Management LLP. The
investment manager is required to make separate public disclosure as part of
their obligations under the Capital Requirements Directive.
The AIFM also acts as Authorised Corporate director (ACD) for non-AIFs. It is
required to disclose the total remuneration it pays to its staff during the
financial year of the fund, split into fixed and variable remuneration, with
separate aggregate disclosure for staff whose actions may have a material
impact to the risk profile of a fund or the AIFM itself. This includes
executives, senior risk and compliance staff and certain senior managers.
June 2020 Number of Fixed Variable Total
Beneficiaries remuneration remuneration remuneration
paid
Total remuneration paid 85 GBP5,516,000 GBP42,920 GBP5,558,920
by the AIFM during the
year
Remuneration paid to 4 GBP909,000 GBP2,500 GBP911,500
employees of the AIFM who
have a material impact on
the risk profile of the
AIF
Further information is available in the AIFM's Remuneration Policy Statement
which can be obtained from www.maitlandgroup.com or, on request free of charge,
by writing to the registered office of the AIFM.
In so far as the AIFM is aware:
· there is no relevant audit information of which the Company's auditors 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 auditors are
aware of that information.
We hereby certify that this report is made on behalf of the AIFM, Maitland
Institutional Services Ltd.
C O'Keeffe
Director
Maitland Institutional Services Ltd
26 October 2020
DEPOSITARY STATEMENT
for the year ended 30 June 2020
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 2020, 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.
The Depositary and its affiliates is or may be involved in other financial and
professional activities which may on occasion cause a conflict of interest with
its roles with respect to the Company. The Depositary will take reasonable care
to ensure that the performance of its duties will not be impaired by any such
involvement and that any conflicts which may arise will be resolved fairly and
any transactions between the Depositary and its affiliates and the Company
shall be carried out as if effected on normal commercial terms negotiated at
arm's length and in the best interests of Shareholders.
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 period, 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
26 October 2020
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF UK MORTGAGES LIMITED
Report on the audit of the consolidated financial statements
1. Opinion
In our opinion the consolidated financial statements of UK Mortgages Limited
(the 'company') together with its subsidiaries (the 'group'):
give a true and fair view of the state of the group's affairs as at 30 June
2020 and of the group's profit for the year then ended;
have been properly prepared in accordance with International Financial
Reporting Standards (IFRSs) as issued by the International Accounting Standards
Board (IASB); and
have been prepared in accordance with the requirements of the Companies
(Guernsey) Law, 2008.
We have audited the consolidated financial statements which comprise:
the consolidated statement of comprehensive income;
the consolidated statement of financial position;
the consolidated statement of changes in equity;
the consolidated statement of cash flows; and
the related notes 1 to 25.
The financial reporting framework that has been applied in their preparation is
applicable law and IFRSs as issued by the IASB.
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. 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 are independent of the group in accordance with the ethical requirements
that are relevant to our audit of the consolidated financial statements in the
UK, including the Financial Reporting Council's (the 'FRC's') Ethical Standard
as applied to listed entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. The non-audit services
provided to the group for the year are disclosed in the audit committee report.
We confirm that the non-audit services prohibited by the FRC's Ethical Standard
were not provided to the group.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters The key audit matters that we identified in the current
year were:
Expected credit losses of mortgage loans;
Revenue recognition; and
Derivative financial instruments and hedge accounting.
Materiality The materiality that we used for the group consolidated
financial statements in the current year was GBP4.38
million which was determined on the basis of being 2% of
net asset value.
Scoping We performed a full scope audit for all components of the
group. This was the first year of our appointment as
auditor of the group. Compared to the prior year audit
scope, we have identified a new key audit matter in
relation to derivative financial instruments and hedge
accounting.
4. Conclusions relating to going concern, principal risks and viability
statement
4.1. Going concern Going concern is the
We have reviewed the directors' statement in note 2 b) to the basis of preparation of
consolidated financial statements about whether they the consolidated
considered it appropriate to adopt the going concern basis of financial statements
accounting in preparing them and their identification of any that assumes an entity
material uncertainties to the group's ability to continue to will remain in operation
do so over a period of at least twelve months from the date of for a period of at least
approval of the consolidated financial statements. 12 months from the date
of approval of the
We considered as part of our risk assessment the nature of the consolidated financial
group, its business model and related risks including where statements.
relevant the impact of the Covid-19 pandemic and Brexit, the
requirements of the applicable financial reporting framework We confirm that we have
and the system of internal control. We evaluated the nothing material to
directors' assessment of the group's ability to continue as a report, add or draw
going concern, including challenging the underlying data and attention to in respect
key assumptions used to make the assessment, and evaluated the of these matters.
directors' plans for future actions in relation to their going
concern assessment.
We are required to state whether we have anything material to
add or draw attention to in relation to that statement that
would be required by Listing Rule 9.8.6R(3) and report if the
statement is materially inconsistent with our knowledge
obtained in the audit.
4.2. Principal risks and viability statement Viability means the
Based solely on reading the directors' statements and ability of the group to
considering whether they were consistent with the knowledge we continue over the time
obtained in the course of the audit, including the knowledge horizon considered
obtained in the evaluation of the directors' assessment of the appropriate by the
group's ability to continue as a going concern, we are directors.
required to state whether we have anything material to add or
draw attention to in relation to: We confirm that we have
nothing material to
the disclosures in the corporate governance report that report, add or draw
describe the principal risks, procedures to identify emerging attention to in respect
risks, and an explanation of how these are being managed or of these matters.
mitigated;
the directors' confirmation in the corporate governance report
that they have carried out a robust assessment of the
principal and emerging risks facing the group, including those
that would threaten its business model, future performance,
solvency or liquidity; or
the directors' explanation in the corporate governance report
as to how they have assessed the prospects of the group, over
what period they have done so and why they consider that
period to be appropriate, and their statement as to whether
they have a reasonable expectation that the group will be able
to continue in operation and meet its liabilities as they fall
due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications
or assumptions.
We are also required to report whether the directors'
statement relating to the prospects of the group that would be
required by Listing Rule 9.8.6R(3) is materially inconsistent
with our knowledge obtained in the audit.
5. 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 and include the most significant assessed risks of material
misstatement (whether or not due to fraud) that we identified. These matters
included those which had the greatest effect on: the overall audit strategy,
the allocation of resources in the audit; and directing the efforts of the
engagement team.
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.
5.1. Expected credit losses of mortgage loans
Key audit matter The group's business is to acquire and securitise
description mortgage loans portfolios. As at 30 June 2020, the
aggregate value of mortgage loans amounted to GBP1,639
million (2019: GBP1,324 million) representing 96% of total
assets (2019: 95%).
The group's mortgage loans are the key value driver for
the group's NAV and interest income. As a result,
judgements over the level of potential impairment of
these loans, including the application of the expected
credit loss ("ECL") model under IFRS 9, and
recoverability of their returns have been identified as
a key audit matter. The key area of judgement is the
determination of the appropriate assumptions for
calculating the expected credit loss allowance under
IFRS 9. These include, but are not limited to: the
probability of default, the loss given default, and the
categorisation of loans into various credit stages. The
level of judgement has significantly increased given the
market conditions following the covid-19 outbreak. As a
result, inappropriate determination of these factors,
whether due to error or fraud, could result in material
misstatement of the consolidated financial statements.
This matter is explained further in the Audit committee
report. Note 2 f), note 3 set out the associated
accounting policy and disclosure in respect of critical
judgements and key sources of estimation uncertainty,
note 7 sets out the composition of the mortgage loans
balance, with note 18 setting out details of the
associated risk factors, including credit risk.
How the scope of We have:
our audit Obtained an understanding of the relevant controls over
responded to the the mortgage loans ECL estimation process;
key audit matter Assessed compliance of the group's accounting policy and
the assumptions used in the ECL model with IFRS 9
requirements;
Performed sensitivity analysis on the key inputs used in
the ECL model as part of the risk assessment procedures;
Tested, on a sample basis, the data inputs used in the
ECL model for accuracy and completeness;
Tested the clerical accuracy of the ECL model based on
the above inputs;
Challenged the judgments (including qualitative and
quantitative criteria) taken by management related to
the categorisation of loans into the various credit
stages required under IFRS 9 by comparing them to
comparable benchmarks in the market;
Evaluated the reasonableness of estimates applied to
determine the probability of default (PD), loss given
default (LGD) and exposure at default (EAD) for each
stage within which loans are classified and their
compliance with IFRS 9 requirements and in light of
covid-19 developments;
Worked with our Modelling and Analytics experts to
perform benchmarking analysis on the ECL by using
comparable benchmarks with similar risk profiles and
further to challenge management's assumptions by
determining the ECL independently using our own
assumptions; and
Evaluated the adequacy of disclosures made in the
consolidated financial statements in light of the
requirements of IFRS 7 and IFRS 9.
Key observations Based on our audit work, we noted that some of
management's assumptions used in the ECL model appear
optimistic and sat below the range identified through
our benchmarking analysis. Further, we provided
management with recommendations to improve the ECL model
and the underlying process in order for the group to
appropriately deal with ECL requirements as economic
circumstances develop in the coming period.
5.2. Revenue recognition
Key audit matter Interest income from mortgage loans totalled GBP47.6
description million for the current year (2019: GBP39.6 million).
Management applies the effective interest rate ('EIR')
method to amortise any premium/discount over the
portfolio life with further assumptions on these loans'
future cash flows, in particular prepayments. The key
judgement identified is in relation to the determination
of the loan prepayment curves as these impact the
expected life of the portfolio, and therefore the
effective interest rate. The group appointed an external
expert to calculate the EIR on the underlying mortgage
loan portfolio with the predetermined assumptions
provided by management.
There is a risk that the assumptions made in calculating
the EIR, in particular loans prepayments are not
appropriate which could result in a material
misstatement to revenue in the consolidated financial
statements, hence it is considered a key audit matter.
The key accounting policies related to this key audit
matter can be found in note 2 j) and note 3 and this
matter is also described in the Audit committee report.
How the scope of We have:
our audit Obtained an understanding of the relevant controls over
responded to the the calculation of the EIR adjustments;
key audit matter Challenged management's judgments in respect of the
estimated contractual cash flows, in particular loans
prepayment curve, by performing sensitivity and scenario
analysis as well as performing benchmarking;
Reviewed the historical accuracy of management's
estimate of the prepayment curve in previous periods,
against actual prepayments;
Assessed the competency, capabilities and objectivity of
the directors' external expert; and
Independently recalculated the EIR adjustment of the
whole portfolio, and also performed substantive
analytical procedures on overall interest income.
Key observations Based on our audit work, we identified an immaterial
uncorrected misstatement in the application of the EIR
which, if corrected, would lead to an increase in the
net asset value with a corresponding increase in
revenue.
5.3. Derivative financial instruments and hedge accounting
Key audit matter The group manages the risk associated with the fixed
description interest rate period of the mortgage loans by using
derivative financial instruments including vanilla
interest rate swaps valued at GBP8.39 million as at 30
June 2020 (2019: GBP0.64 million) and balance guarantee
interest rate swaps ("BGS") valued at GBP13.09 million as
at 30 June 2020 (2019: GBP7.17 million). These swap
instruments are valued by the counterparties to the
swaps which management consider to be the fair value in
the consolidated financial statements.
In addition, the group applies hedge accounting and has
commissioned an external expert to undertake the hedge
effectiveness testing and the calculation of the
hypothetical fair value of the hedged items.
We identified a key audit matter relating to both the
valuation of the balance guaranteed interest rate swaps
which are complex due to the dynamic profile of the
notional principal and the prepayment optionality, and
the application of hedging accounting principles which
can also be complex on both types of the derivative
financial instruments.
This matter is explained further in the Audit committee
report. Note 2 h) and note 3 set out the associated
accounting policy and disclosure in respect of critical
judgements and key sources of estimation uncertainty,
with note 21 setting out details of the BGS valuation
techniques applied and describing the related
sensitivities.
How the scope of We have:
our audit Derivatives financial instruments valuation
responded to the Obtained an understanding of the hedging instruments
key audit matter valuation process including the underlying control
activities;
Worked with our valuation specialists to revalue BGS
independently; and
Reconciled the valuation of the BGS to the
counterparties' confirmations.
Hedge accounting
Obtained an understanding of the hedge accounting
application process including the underlying control
activities;
Assessed the competence, capabilities and objectivity
of the directors' external expert;
Reviewed the hedge designation documents and the
directors' external expert hedge effectiveness testing;
and
Revalued the hedged item independently and also
recalculated the hedge effectiveness ratio with the
assistance of our hedging specialists.
Key observations Based on our audit work, we have concluded that the
valuation of the balance guaranteed interest rate swaps
and the application of the hedge accounting are
appropriate.
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the consolidated
financial statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use
materiality both in planning the scope of our audit work and in evaluating the
results of our work.
Based on our professional judgement, we determined materiality for the
consolidated financial statements as a whole as follows:
Group GBP4.38 million (2019: GBP5.60 million as determined by the predecessor
Materiality auditor)
Basis for 2% of net asset value (2019: 2.5% of the net asset value as determined
determining by the predecessor auditor).
materiality
Rationale for We believe net asset value is the most appropriate benchmark as it is
the benchmark considered to be a principal consideration for shareholders of the group
applied in assessing financial performance.
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the
probability that, in aggregate, uncorrected and undetected misstatements exceed
the materiality for the consolidated financial statements as a whole. Group
performance materiality was set at 70% of group materiality for the current
year audit. In determining performance materiality, we considered the following
factors:
Our first year audit on the group;
Our risk assessment, including our assessment of the group's overall control
environment and that we consider it appropriate to rely on controls on the
loans origination business process; and
Our review of prior year uncorrected misstatements identified by the
predecessor auditor.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all
audit differences in excess of GBP219,000, as well as differences below that
threshold that, in our view, warranted reporting on qualitative grounds. We
also report to the Audit Committee on disclosure matters that we identified
when assessing the overall presentation of the consolidated financial
statements.
7. An overview of the scope of our audit
Our audit was scoped by obtaining an understanding of the group and its
environment, including internal control, and assessing the risks of material
misstatement for the company and its subsidiaries. In assessing the control
environment, we also considered the control environments of the key service
providers, including the administrators and portfolio manager of the group, to
whom the board have delegated certain functions for the company and its
subsidiary entities. Audit work to respond to the risks of material
misstatement was performed directly by the group audit team. All subsidiaries
in the group were subject to full scope audits.
Audit work performed for the subsidiaries was executed by the group audit team
at levels of materiality applicable to each subsidiary, which in all instances
was lower than group materiality and ranged between GBP4.16 million and GBP1.55
million.
8. Other information
The directors are responsible for the other information. The other information
comprises the information included in the annual report, other than the
consolidated financial statements and our auditor's report thereon.
Our opinion on the consolidated financial statements does not cover the other
information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our
responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit or otherwise
appears to be materially misstated.
If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a material
misstatement in the consolidated financial statements or a material
misstatement of the other information. 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.
In this context, matters that we are specifically required to report to you as
uncorrected material misstatements of the other information include where we
conclude that:
Fair, balanced and understandable - the statement given by the directors that
they consider the annual report and consolidated financial statements taken as
a whole is fair, balanced and understandable and provides the information
necessary for shareholders to assess the group's position and performance,
business model and strategy, is materially inconsistent with our knowledge
obtained in the audit; or
Audit committee reporting - the section describing the work of the audit
committee does not appropriately address matters communicated by us to the
audit committee; or
Directors' statement of compliance with the UK Corporate Governance Code - the
parts of the directors' statement that would be required under the Listing
Rules relating to the company's compliance with the UK Corporate Governance
Code containing provisions specified for review by the auditor in accordance
with Listing Rule 9.8.10R(2) do not properly disclose a departure from a
relevant provision of the UK Corporate Governance Code.
We have nothing to report in respect of these matters.
9. Responsibilities of directors
As explained more fully in the statement of directors' responsibilities, the
directors are responsible for the preparation of the consolidated financial
statements and for being satisfied that they give a true and fair view, and for
such internal control as the directors determine is necessary to enable the
preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the directors are
responsible for assessing the group's ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going
concern basis of accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but to do so.
10. 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 (UK)
will always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated financial
statements.
A further description of our responsibilities for the audit of the consolidated
financial statements is located on the FRC's website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditor's report.
Report on other legal and regulatory requirements
11. Matters on which we are required to report by exception
11.1. Adequacy of explanations received and accounting records
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; or
proper accounting records have not been kept by the company; or
the consolidated financial statements are not in agreement with the accounting
records.
We have nothing to report in respect of these matters.
12. Use of our report
This report is made solely to the company's members, as a body, in accordance
with Section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been
undertaken so that we might state to the company's members those matters we are
required to state to them in an auditor's report for no other purpose. To the
fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body, for our
audit work, for this report, or for the opinions we have formed.
David Becker (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Recognised Auditor
St. Peter Port, Guernsey
26 October 2020
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 June 2020
For the year For the
from 01.07.2019 year from
to 30.06.2020 01.07.2018
to
30.06.2019
Note GBP GBP
Income
Interest income on mortgage loans 7 47,611,908 39,647,510
Interest income on cash and cash 224,439 22,535
equivalents
Net gain from derivative financial 9 430,440 828,934
instruments
Total income 48,266,787 40,498,979
Interest expense on loan notes 13 13,799,827 15,845,380
Interest expense on borrowings 14 7,171,939 2,353,540
Net interest expense on financial 9 4,078,557 2,335,629
liabilities at fair value through profit
and loss
Loan note issue fees and borrowing costs 13 & 14 3,326,446 3,153,789
amortised
Mortgage loans servicing fees 3,455,141 2,989,859
Trail fees 2,624,259 -
Mortgage loan write offs 7 1,543,544 -
Expected credit loss provision 7 1,195,954 776,994
Portfolio management fees 16 1,022,296 1,337,090
Legal and professional fees 904,437 579,600
General expenses 806,655 537,150
Amortisation of discount on loan notes 13 752,837 1,686,544
Financing costs 2 329,373 412,257
Audit fees 310,000 333,821
Administration and secretarial fees 17 259,050 221,654
Directors' fees 16 135,000 135,000
AIFM fees 17 95,845 97,755
Borrowings facility fees 14 93,519 75,338
Depositary fees 17 65,947 67,916
Corporate broker fees 40,532 48,000
Custody fees 17 23,519 23,355
Swap costs amortised - 471,835
Total expenses 42,034,677 33,482,506
Total comprehensive gain for the year 6,232,110 7,016,473
Gain per ordinary share - 0.023 0.026
basic & diluted 4
All items in the above statement derive from continuing operations. There is no
other comprehensive income during the year.
The notes form an integral part of these Audited Consolidated Financial
Statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 30 June 2020
30.06.2020 30.06.2019
Reclassed*
Assets Note GBP GBP
Non-current assets
Mortgage loans 7 1,619,485,743 1,309,858,044
Reserve fund 8 6,683,000 17,704,519
Total non-current assets 1,626,168,743 1,327,562,563
Current assets
Mortgage loans 7 19,466,645 13,863,465
Reserve fund 8 13,521,519 -
Trade and other receivables 10 4,260,753 4,831,262
Cash and cash equivalents 11 37,905,366 51,521,524
Total current assets 75,154,283 70,216,251
Total assets 1,701,323,026 1,397,778,814
Liabilities
Non-current liabilities
Borrowings 14 604,296,701 228,283,804
Loan notes 13 848,876,889 932,982,970
Total non-current 1,453,173,590 1,161,266,774
liabilities
Current liabilities
Financial liabilities at 9 21,477,899 7,775,666
fair value through profit
and loss
Trade and other payables 12 6,594,574 4,651,569
Total current liabilities 28,072,473 12,427,235
Total liabilities 1,481,246,063 1,173,694,009
Net assets 220,076,963 224,084,805
Equity
Share capital account 264,749,999 264,749,999
Other reserves (44,673,036) (40,665,194)
Total equity 220,076,963 224,084,805
Ordinary shares in issue 273,065,390 273,065,390
Net Asset Value per 5 0.8059 0.8206
ordinary share
* Refer to note 13 for details of the prior year reclassification.
UK Mortgages Limited is a closed-ended investment company incorporated in
Guernsey with registration number 60440.
The Audited Consolidated Financial Statements were approved and authorised for
issue by the Board of Directors on 26 October 2020 and signed on its behalf by:
Christopher Waldron
Director
Paul Le Page
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 2020
Share Other Total
capital
account reserves equity
Note GBP GBP GBP
Balance at 30 June 2019 264,749,999 (40,665,194) 224,084,805
Dividends paid 22 - (10,239,952) (10,239,952)
Total comprehensive gain for the year - 6,232,110 6,232,110
Balance at 30 June 2020 264,749,999 (44,673,036) 220,076,963
Share Other Total
capital
account reserves equity
GBP GBP GBP
Balance at 1 July 2018 264,749,999 (30,759,571) 233,990,428
Effect of adoption of IFRS 9 - (538,172) (538,172)
Balance at 1 July 2018 264,749,999 (31,297,743) 233,452,256
Dividends paid 22 - (16,383,924) (16,383,924)
Total comprehensive gain for the year - 7,016,473 7,016,473
Balance at 30 June 2019 264,749,999 (40,665,194) 224,084,805
The notes form an integral part of these Audited Consolidated Financial
Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 30 June 2020
For the year For the year from
from 01.07.2018 to
01.07.2019 to 30.06.2019
30.06.2020
Reclassed
Note GBP GBP
Cash flows from operating activities
Total comprehensive gain for the year 6,232,110 7,016,473
Adjustments for:
Mortgage acquisition fees capitalised 7 - (10,621)
Amortised mortgage acquisition fees 7 130,580 134,776
released
Expected credit loss provision 7 1,195,954 776,994
Mortgage loan write offs 7 1,543,544 -
Net gain from derivative financial 9 (430,440) (828,934)
instruments
Interest on derivative financial 9 534,221 -
instruments
Amortisation adjustment under effective 7 (5,227,777) (4,366,433)
interest rate method
Loan note issue fees amortised 13 1,768,885 928,937
Borrowings issue fees amortised 1,437,561 2,008,812
Amortisation of discount on loan notes 752,836 1,651,747
Purchase of mortgage loans 7 (474,740,452) (184,085,141)
Mortgage loans repaid 7 175,465,726 86,327,847
(Increase)/ decrease in reserve fund 8 (2,500,000) 56,581
Increase in trade and other payables 1,943,005 1,629,581
Decrease/ (increase) in trade and other receivables 570,509 (1,108,453)
Net cash outflow from operating activities (291,323,738) (89,867,834)
Cash flows from financing activities
Proceeds from borrowings 401,000,000 118,500,000
Repayment of borrowings (24,926,647) (173,500,000)
Increase in borrowing fees capitalised (1,498,018) (1,085,512)
Increase in loan note issue fees capitalised - (3,471,087)
Proceeds from issue of loan notes - 393,133,354
Repayments of loan notes 13 (86,627,803) (219,269,027)
Decrease in payables related to issue costs - (318,732)
Dividends paid 22 (10,239,952) (16,383,924)
Net cash inflow from financing activities 277,707,580 97,605,072
(Decrease)/ increase in cash and cash equivalents (13,616,158) 7,737,238
Cash and cash equivalents at beginning of year 51,521,524 43,784,286
Cash and cash equivalents at end of year 37,905,366 51,521,524
The notes form an integral part of these Audited Consolidated Financial
Statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 30 June 2020
1. General Information
UK Mortgages Limited (the "Company") was incorporated with limited liability in
Guernsey, as a closed-ended investment company on 10 June 2015. The Company'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.
These Consolidated Financial Statements comprise the financial statements of UK
Mortgages Limited, UK Mortgages Corporate Funding Designated Activity Company,
Malt Hill No.1 Plc (dissolved on 7 January 2020), Malt Hill No. 2 Plc, Oat Hill
No.1 Plc, Barley Hill No.1 Plc (incorporated 18 February 2019), and the
Warehouse SPVs; Cornhill Mortgages No.2 Limited (dissolved on 27 February
2020), Cornhill Mortgages No. 4 Limited (incorporated 7 August 2018), Cornhill
Mortgages No. 5 Limited (incorporated 24 May 2019) and Cornhill Mortgages No. 6
Limited (incorporated 18 March 2019) as at 30 June 2019, together referred to
as the "Company". The Warehousing SPVs are placed into liquidation upon the
transfer of the mortgage loans to the Issuer SPVs.
Cornhill Mortgages No.3 Limited was fully dissolved on 15 August 2018. The
Company had previously included the financial statements for Cornhill Mortgages
No.1 Limited in its Audited Consolidated Financial Statements. Cornhill
Mortgages No.1 Limited was fully dissolved on
19 January 2018.
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
a) Statement of compliance
The Audited Consolidated Financial Statements have been prepared under the
historic cost convention as modified by financial instruments recognised at
fair value and in accordance 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.
b) Going concern
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 Consolidated Financial Statements. In addition following the onset of
the COVID-19 pandemic the Board has reviewed a three year cash-flow model
prepared by the Portfolio Manager that simulates two extreme scenarios, namely
an indefinite continuation of the mortgage holidays in effect at 30 June 2020
and the failure to securitise or re-securitise each of the Company's mortgage
portfolios. In each of these scenarios the Company was expected to produce
sufficient income to finance its operations and continue as a going concern.
c) Standards, amendments and interpretations effective during the year
At the reporting date of these Consolidated Financial Statements, the following
standards, interpretations and amendments, were adopted for the year ended 30
June 2020:
IFRS 9
IFRS 9 Prepayment Features with Negative Compensation amends the existing
requirements in IFRS 9 regarding termination rights in order to allow
measurement at amortised cost (or, depending on the business model, at fair
value through other comprehensive income) even in the case of negative
compensation payments. The amendment is to be applied retrospectively for
fiscal periods beginning on or after 1 January 2019.
IFRIC 23
IFRIC 23 was issued in June 2017 and addresses the determination of taxable
profit (tax loss), tax bases, unused tax losses, unused tax credits and tax
rates, when there is uncertainty over income tax treatments under IAS 12. The
standard is effective for periods beginning on or after 1 January 2019.
IFRS 16
IFRS 16 was issued on 13 January 2016 and replaces IAS 17 Leases. The standard
is effective for annual periods beginning on or after 1 January 2019. IFRS 16
requires that all operating leases in excess of one year, where the Company is
the lessee, are included on the Company's Statement of Financial Position. This
will result in the Company being required to recognise a right-of-use ("ROU")
asset and a lease liability (representing the obligation to make lease
payments). The ROU asset and lease liability are calculated based on the
expected payments, requiring an assessment as to the likely effect of renewal
options, and are discounted using the relevant incremental borrowing rate.
The adoption of these new and amended standards did not impact the Company's
financial statements.
d) Standards, amendments and interpretations issued but not yet effective
At the reporting date of these Consolidated Financial Statements, the following
standards, interpretations and amendments, which have not been applied in these
Consolidated Financial Statements, were in issue but not yet effective:
IFRS 17 Insurance Contracts (Effective 1 January 2021)
The Company expects that the adoption of IFRS 17 in the future period will not
have an impact on the Company's Consolidated Financial Statements, as it does
not hold any insurance contracts.
e) Consolidation
The Company has not been deemed an Investment Entity under the definitions of
IFRS 10 'Consolidated Financial Statements' as the majority of the Company's
investments are measured at amortised cost rather than fair value and these
Consolidated Financial Statements are therefore prepared on a consolidated
basis.
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. All subsidiaries are
100% held.
Subsidiaries Date of Country of Principal Originator
Control Incorporation Place of
Business
UK Mortgages Corporate 19/11/2015 Ireland Ireland
Funding Designated Activity
Company
Cornhill Mortgages No.2 02/03/2016 UK UK The Mortgage Lender
Limited*
Malt Hill No.1 Plc* 02/06/2016 UK UK Coventry Building
Society
Oat Hill No.1 Plc 23/06/2017 UK UK Capital Home Loans
Malt Hill No.2 Plc 28/06/2018 UK UK Coventry Building
Society
Cornhill Mortgages No.4 07/08/2018 UK UK Keystone Property
Limited Finance
Barley Hill No.1 Plc 18/02/2019 UK UK The Mortgage Lender
Cornhill Mortgages No.5 24/05/2019 UK UK The Mortgage Lender
Limited
Cornhill Mortgages No.6 18/03/2019 UK UK Coventry Building
Limited Society
* Malt Hill No.1 Plc was dissolved on 7 January 2020 and Cornhill Mortgages
No.2 Limited was dissolved on 27 February 2020.
Based on control, the results of the Acquiring Entity, the Issuer SPVs (Malt
Hill No.1 Plc (dissolved on 7 January 2020), Malt Hill No.2 Plc, Oat Hill No.1
Plc, Barley Hill No.1 Plc) and the Warehouse SPVs (Cornhill Mortgages No.2
Limited (dissolved on 27 February 2020), Cornhill Mortgages No. 4 Limited
(incorporated 7 August 2018), Cornhill Mortgages No. 5 Limited and Cornhill
Mortgages No. 6 Limited) are consolidated into the Consolidated Financial
Statements.
Inter-company transactions, notes, balances and unrealised gains/losses on
transactions between group companies are eliminated on consolidation. 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.
f) Financial Assets
Classification and measurement
Two criteria are used to determine how financial assets should be classified
and measured: (a) the entity's business model (i.e. how an entity manages its
financial assets in order to generate cash flows by collecting contractual cash
flows, selling financial assets or both); and (b) the contractual cash flow
characteristics of the financial asset (i.e. whether the contractual cash flows
are solely payments of principal and interest).
There are three principal classification categories for financial assets which
must be designated at initial recognition. Financial assets are measured at
fair value through profit or loss ("FVTPL"), fair value through other
comprehensive income ("FVOCI") or amortised cost based on the nature of the
cash flows of the assets and an entity's business model.
A financial asset is measured at amortised cost if it meets both of the
following conditions and is not designated as at FVTPL: (a) it is held within a
business model whose objective is to hold assets to collect contractual cash
flows; and (b) its contractual terms give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal amount
outstanding.
A financial asset is measured at FVOCI if it meets both of the following
conditions and is not designated as at FVTPL:
i. it is held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets; and
ii. its contractual terms give rise on specified dates to cash flows that
are solely payments of principal and interest on the principal amount
outstanding.
Equity instruments are measured at FVTPL, unless they are not held for trading
purposes, in which case an irrevocable election can be made on initial
recognition to measure them at FVOCI with no subsequent reclassification to
profit or loss. This election is made on an investment by investment basis.
All financial assets not classified as measured at amortised cost or FVOCI as
described above are measured at FVTPL. In addition, on initial recognition the
Company may irrevocably designate a financial asset that otherwise meets the
requirements to be measured at amortised cost or at FVOCI as FVTPL if doing so
eliminates or significantly reduces an accounting mismatch that would otherwise
arise.
Financial assets have been classified into two categories: financial assets at
fair value through profit and loss, and financial assets at amortised cost.
Derivative Instruments are classified as financial assets or liabilities at
fair value through profit and loss.
Financial assets 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.
Business model assessment
The Company has made an assessment of the objective of the business model in
which a financial asset is held at a mortgage portfolio level because this best
reflects the way the business is managed and information is provided to the
Portfolio Manager.
The information that was considered included:
· The stated policies and objectives for each portfolio and the operation
of those policies in practice, including whether the strategy focuses on
earning contractual interest revenue, maintaining a particular interest rate
profile, matching duration of the financial assets to the duration of the
liabilities that are funding those assets or realising cash flows through the
sale of assets;
· How the performance of the portfolio is evaluated and reported to the
Portfolio Manager; and
· The risks that affect the performance of the business model (and the
financial assets held within that business model) and how those risks are
managed.
Assessments whether contractual cash flows are solely payments of principal and
interest
For the purposes of this assessment, 'principal' is defined as the fair value
of the financial asset on initial recognition. 'Interest' is defined as
consideration for the time value of money, for the credit risk associated with
the principal amount outstanding during a particular period of time and for
other basic lending risks and costs (e.g. liquidity risk and administrative
costs), as well as a reasonable profit margin.
In assessing whether the contractual cash flows are solely payments of
principal and interest, the contractual terms of the instrument will be
considered. This will include assessing whether the financial asset contains a
contractual term that could change the timing or amount of contractual cash
flows such that it would not meet this condition. In making the assessment the
following features will be considered:
· Contingent events that would change the amount and timing of cash flows;
· Leverage features;
· Prepayment and extension terms;
· Terms that limit the Company's claim to cash flows from specified assets
e.g. non-recourse asset arrangements; and
· Features that modify consideration for the time value of money, e.g.
periodic reset of interest rates.
Impairment
All mortgage loans are secured on residential property. Refer to note 18 for
the value of the past due loans and their respective collateral value.
The measurement of expected credit losses will primarily be based on the
product of the instrument's probability of default ("PD"), loss given default
("LGD"), and exposure at default ("EAD"), discounted to the reporting date.
Credit loss allowances are measured on each reporting date according to a
three-stage expected credit loss impairment model:
· Stage 1 - From initial recognition of a financial asset to the date on
which the asset has experienced a significant increase in credit risk relative
to its initial recognition, a loss allowance is recognised equal to the 12
month ECL.
· Stage 2 - Following a significant increase in credit risk relative to
the initial recognition of the financial asset, a loss allowance is recognised
equal to the lifetime ECL.
· Stage 3 - When a financial asset is considered to be credit-impaired, a
loss allowance equal to full lifetime expected credit losses is recognised.
Interest revenue is calculated based on the carrying amount of the asset, net
of the loss allowance, rather than on its gross carrying amount.
The Company presumes that the credit risk on a financial asset has increased
significantly since initial recognition when contractual payments are more than
30 days past due.
For estimated credit loss provisioning, the Company considers that default has
occurred when a financial asset is more than 3 months in arrears.
Write off policy
The Company writes off financial assets when it has exhausted all practical
recovery efforts and has concluded that there is no reasonable expectation of
recovery.
g) Recognition and de-recognition of financial assets and liabilities
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 and liabilities are derecognised only when either the
contractual rights to cash flows from the financial assets or liabilities
expire or the transfer otherwise qualifies for de-recognition in accordance
with IFRS 9.
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.
h) 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.
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 the derivatives as a fair value hedge
and applied hedge accounting from that date.
Hedge accounting
The Company adopted hedge accounting from 1 July 2017 to reduce volatility in
the Consolidated Statement of Comprehensive Income. All existing hedging
relationships qualify as continuing hedging relationships.
The hedge accounting requirements of IFRS 9 are designed to create a stronger
link with financial risk management. However, this does not cover macro hedge accounting. Pending development of the IASB's proposals for dynamic risk management covering this area, to be considered in a separate accounting standard, IFRS 9 allows the option to continue to apply the existing hedge accounting requirements of IAS 39. Accordingly, the Company continues to apply IAS 39 requirements for the hedge accounting. The Company uses derivatives only for interest rate risk management purposes. It does not use derivatives for trading purposes. All derivatives entered into by the Company are to provide an economic hedge of the exposure to changes in fair value of a recognised asset or liability (such as fixed rate mortgages) or an unrecognised firm commitment that is attributable to a particular risk (changes in benchmark interest rates impacting the fair value of fixed coupons) and could affect profit or loss. All hedge relationships designated by the Company are therefore classified as fair value hedges. To qualify for hedge accounting, the hedge relationship must be formally designated and documented. Additionally, there must be an expectation that the hedging instrument will be highly effective in offsetting the changes in the fair value of the hedged item. Effectiveness must then be assessed on an ongoing basis over the life of the hedge relationship. On each reporting date, both retrospective and prospective analyses are performed to assess the effectiveness of the hedging relationship. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into, and are subsequently remeasured at their fair value. Fair values of derivative financial instruments are calculated by discounted cash flow models using yield curves and counterparty credit risk assumptions that are based on observable market data. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are recognised immediately in the Consolidated Statement of Comprehensive Income. If a hedging relationship is designated at a point where the fair value of the hedged item is not nil, an additional adjustment (known as a "pull to par" adjustment) is typically required to ensure that the fair value hedge adjustment fully reverses over the remaining life of the hedged item. If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, hedge accounting is discontinued prospectively. If the underlying instrument is sold or repaid, the unamortised fair value adjustment is immediately recognised in the Consolidated Statement of Comprehensive Income. A summary of the effects of hedging and the associated fair value adjustments can be found in note 9. i) 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. j) Interest income and interest expense Interest income on mortgage loans is recorded using the effective interest rate method. Interest income and expense on derivative financial instruments is based on the net settlement of the periodic interest using contracted notional principals and the relevant interest rates. Interest income also includes income from cash and cash equivalents. Interest expense on borrowings and loan notes are recorded using the effective interest rate method. k) 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. l) Reserve funds Reserve funds 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. m) 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. n) 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. o) Other reserves Other reserves consist of dividends paid and cumulative comprehensive gain or loss since establishment. p) 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 amortised over the expected life of the warehousing phase or securitisation, as appropriate. q) Expenses All other expenses are included in the Consolidated Statement of Comprehensive Income on an accruals basis. As part of the Company's commercial agreements, the purchase price of the loans includes an upfront origination premium paid at the time of acquisition and a performance related trail fee that is paid over the life of the mortgage. r) 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 Portfolio Manager. The Directors are of the opinion that the Company is engaged in two segments of business, being Buy to Let and Owner Occupied Mortgage portfolios, secured against UK residential property. This has been subdivided into Forward Flow and Purchased. The Directors manage the business in this way. s) Taxation The Company is a tax-exempt Guernsey limited company. Please refer to note 6 for additional information. t) 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 ECL using simplified approach. 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. u) 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. v) 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 declared by the Board. w) Comparative amounts Certain comparative numbers have been reclassed to conform to current year presentation. These balances include a reclass between loan notes and borrowings. See note 13 for further details. 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 are made are as follows: The key areas where estimates are made are as follows: Mortgage loan ECL provision All mortgage loans are assigned an expected credit loss provision, with the expected credit loss provision amounted of GBP2,511,120 as at 30 June 2020 (2019: GBP1,315,166) being based on the staging of the loan, the loan size and the quality of the underlying security. The key source of estimation uncertainty on the ECL provision is the market outlook, in particular housing price index estimation which support the valuation of the underlying collateral. In applying these policies, the Directors consider how appropriate past trends
and patterns could impact the economic climate and may make any adjustments
they believe are necessary to reflect the current, future economic and market
conditions.
The accuracy of ECL calculations would therefore be affected by unexpected
changes to the economic situation, variances between the models used and the
actual results, or assumption which differ from the actual outcomes. See a
sensitivity analysis on the key source of estimation uncertainty in note 18.
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 loans using the
effective interest rate method, the Portfolio Manager uses its judgement at the
outset of the acquisition of the portfolio in estimating the remaining life of
the underlying mortgages, based on the same judgements used in determining the
acquisition value of the portfolio. In doing so the Portfolio Manager uses cash
flow models which include comparable assumptions on the likely macroeconomic
environment factors, including interest rates, loan level and portfolio level
attributes to derive prepayment rates. 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.
Hedge accounting
The effectiveness of the Company's hedges represents an area of judgement and
the degree of ineffectiveness in each period represents an area of estimation.
At each reporting date, there is retrospective and prospective testing
completed in order to review the estimates that have been used. Refer to note 2
(h) for further detail.
The key areas where judgements are made are as follows:
Determining operating segments
An operating segment is a component of the Company that engages in business
activities from which it may earn revenues and incur expenses.
The Directors reported the Company is engaged in two segments of business,
being Buy-to-Let and Owner Occupied mortgage portfolios, and their sub-segments
Flow-forward and Purchased, secured against UK residential property.
In order to determine the operating segments, the following factors have been
considered by the Directors:
* The information sent to the Board of Directors; and
* Whether the level of the organisation viewed makes sense as operating
segments in the context of the core principles/business activities.
The Directors will continue to monitor financial information for each segment
and will ensure this financial information is considered when decisions of how
to allocate the resources of the Company are being made.
4. Gain per Ordinary Share - basic and diluted
The gain per Ordinary Share of GBP0.023 (30 June 2019: GBP0.026) - basic and
diluted has been calculated based on the weighted average number of Ordinary
Shares of 273,065,390 (30 June 2019: 273,065,390) and a net gain of GBP6,232,110
(30 June 2019: GBP7,016,473).
5. Net Asset Value per Ordinary Share
The Net Asset Value of each share of GBP0.8059 (30 June 2019: GBP0.8206) is
determined by dividing the net assets of the Company GBP220,076,963 (30 June
2019: GBP224,084,805) by the number of shares in issue at 30 June 2020 of
273,065,390 (30 June 2019: 273,065,390).
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 qualifies 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.
UK based companies (Malt Hill No.1 Plc (until it was dissolved), Malt Hill No.2
Plc, Cornhill Mortgages No.1 Limited (until it was dissolved), Cornhill
Mortgages No.2 Limited (until it was dissolved), Cornhill Mortgages No.3
Limited (until it was dissolved), Oat Hill No.1 Plc, Barley Hill No.1 Plc,
Cornhill Mortgages No.4 Limited, Cornhill Mortgages No.5 Limited and Cornhill
Mortgages No. 6 Limited) 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 '(SI2006
/3296)'. Therefore these companies are not required to pay corporation tax on
their accounting profit or loss and should only be liable for UK corporation
tax on amounts that form part of their "retained profit" as specified in the
transaction documentation. UK based companies Cornhill Mortgages No.1 Limited
and Cornhill Mortgages No.3 Limited should not be liable for corporation tax in
respect of the year as no business was carried on.
7. Mortgage loans
For the year For the year
from 01.07.2019 from
to 30.06.2020 01.07.2018 to
30.06.2019
GBP GBP
Mortgage loans at start of the year 1,323,721,509 1,215,265,693
Mortgage loans purchased 474,740,452 184,085,141
Effective interest rate adjustment 5,227,777 4,366,433
Mortgage loans repaid (175,465,726) (86,327,847)
Mortgage acquisition fees capitalised - 10,621
Amortised mortgage acquisition fees released (130,580) (134,776)
Fair value adjustment for hedged risk* 13,598,454 7,233,238
Expected credit loss provision (1,195,954) (776,994)
Mortgage loan write offs (1,543,544) -
Mortgage loans at end of the year 1,638,952,388 1,323,721,509
Amounts falling due within one year 19,466,645 13,863,465
Amounts falling due after more than one year 1,619,485,743 1,309,858,044
1,638,952,388 1,323,721,509
* Please refer to note 9 which explains how the fair value adjustment is
calculated and note 18 sets out the liquidity and credit risk profile of the
mortgage loans.
Mortgage loan write offs relates to mortgages that have been written off during
the year while the expected credit loss provision relates to mortgages that are
still outstanding.
As at As at
30.06.2020 30.06.2019
GBP GBP
Non-current mortgage loans
Mortgage loans 1,621,967,037 1,310,425,769
Impairment allowance (2,481,294) (567,725)
1,619,485,743 1,309,858,044
Current mortgage loans
Mortgage loans 19,496,471 14,610,906
Impairment allowance (29,826) (747,441)
19,466,645 13,863,465
Mortgage loans at 30 June 2020 comprise of three securitised mortgage
portfolios legally held in Malt Hill No. 2 Plc, Oat Hill No. 1 Plc and Barley
Hill No. 1 Plc (securitised vehicle for part of the Cornhill Mortgages No. 2
Limited's portfolio) and three mortgage portfolios held with Cornhill Mortgages
No. 4 Limited, Cornhill Mortgages No. 5 Limited and Cornhill Mortgages No. 6
Limited (portfolio for this entity was previously held by Malt Hill No. 1 Plc).
Please refer to the Portfolio of Investments for breakdown of portfolios.
During the year, the Company recognised GBP47,611,908 (2019: GBP39,647,510) of
interest income on the mortgage loans.
8. Reserve funds
The reserve funds are held with Citibank N.A. London Branch. The Company is
required to maintain this reserve for both the securitised entities, for which
these funds may only be used in accordance with the Issue and Programme
Documentation, and for the unsecuritised entities, as a contractual requirement
for the senior debt facility. These funds are therefore not readily available
to the Company.
9. Financial liabilities held at fair value through profit and loss
Derivative instruments
Malt Hill No.1 Plc / Cornhill Mortgages No. 6 Limited
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. In May 2019, the Interest Rate Swap
was novated to Cornhill Mortgages No. 6 Limited on the refinancing of Malt Hill
No. 1 Plc.
Cornhill Mortgages No.2 Limited / Barley Hill No. 1 Plc
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 3 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. In April 2019, the Interest Rate Swap was novated to
Barley Hill No. 1 Plc on the securitisation of the Cornhill Mortgages No. 2
Limited portfolio.
Malt Hill No.2 Plc
On 29 June 2018, 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.
Cornhill Mortgages No. 4 Limited
The Company has entered into a series of vanilla Interest Rate Swaps (under an
ISDA agreement) to convert the fixed rate loan exposure into 3 Month LIBOR.
Swaps are added on a regular basis, at varying maturities, in order to align
with the fixed rate reset profile of new originations.
Cornhill Mortgages No. 5 Limited
The Company has entered into a series of vanilla Interest Rate Swaps (under an
ISDA agreement) to convert the fixed rate loan exposure into 1 month LIBOR.
Swaps are added on a regular basis, at varying maturities, in order to align
with the fixed rate reset profile of new originations.
Notional and fair value balances:
Cornhill Barley Hill Malt Hill Cornhill Cornhill 30.06.2020
Mortgages No. 1 Plc No. 2 Plc Mortgages Mortgages Total
No. 6 No. 4 No. 5
Limited Limited Limited
GBP GBP GBP GBP GBP GBP
Notional amount of 152.3m 132.5m 339.9m 248.3m 232.2m 1,105.2m
Interest Rate Swap
Fair value of Interest (1,561,269) (2,386,002) (9,144,159) (5,679,631) (2,706,838) (21,477,899)
Rate Swap
Cornhill Barley Hill Malt Hill Cornhill Cornhill 30.06.2019
Mortgages No. 1 Plc No. 2 Plc Mortgages Mortgages Total
No. 6 No. 4 No. 5
Limited Limited Limited
GBP GBP GBP GBP GBP
Notional amount of 168m 175.2m 347.6m 55.2m - 746m
Interest Rate Swap
Fair value of Interest (620,045) (1,761,513) (4,790,127) (603,981) - (7,775,666)
Rate Swap
On 1 July 2017, the Directors designated the Malt Hill No.1 Plc and Cornhill
No.2 Limited derivatives as fair value hedges and applied hedge accounting from
that date. The swaps on Malt Hill No. 1 and Cornhill No. 2 were subsequently
novated into Cornhill No. 6 and Barley Hill No.1, respectively upon
refinancing. Hedge accounting in relation to Malt Hill No.2 Plc derivative
commenced on 1 July 2018. The vanilla swaps on Cornhill No. 4 and Cornhill No.
5 were designated as fair value hedges since June 2019 and June 2020,
respectively. Additional vanilla swaps are added to each of the portfolios on
an ongoing basis as the portfolios grow.
Interest income and expense on derivative financial instruments is based on the
net settlement of the periodic interest using contracted notional principals
and the relevant interest rates.
Net gain/(loss) from derivative financial instruments
Cornhill Barley Hill Malt Hill Cornhill Cornhill 30.06.2020
Mortgages No. 1 Plc No. 2 Plc Mortgages Mortgages Total
No. 6 No. 4 No. 5
Limited Limited Limited
GBP GBP GBP GBP GBP GBP
Movement on derivatives (941,224) (445,455) (4,020,255) (5,054,243) (2,706,837) (13,168,014)
in designated fair value
hedge relationships*
Adjustment to mortgage 2,416,507 256,072 4,345,241 4,473,866 2,106,768 13,598,454
loans in fair value
hedge relationship
Net ineffectiveness 1,475,283 (189,383) 324,986 (580,377) (600,069) 430,440
Cornhill Barley Hill Malt Hill Cornhill Cornhill 30.06.2019
Mortgages No. 1 Plc No. 2 Plc Mortgages Mortgages Total
No. 6 No. 4 No. 5
Limited Limited Limited
GBP GBP GBP GBP GBP GBP
Movement on derivatives (204,165) (1,535,531) (4,060,617) (603,981) - (6,404,294)
in designated fair value
hedge relationships
Adjustment to mortgage 537,929 1,905,655 4,321,654 468,000 - 7,233,238
loans in fair value
hedge relationship
Net ineffectiveness 333,764 370,124 261,037 (135,981) - 828,944
*The movement on derivative financial instruments in designated fair value
hedge relationships includes GBP534,221 of interest on derivative financial
instruments.
The net gain/(loss) from derivative financial instruments represents the net
fair value movement on derivative instruments that are matching risk exposure
on an economic basis. Some accounting volatility arises on these items due to
accounting ineffectiveness on designated hedges.
The net ineffectiveness is primarily due to timing differences in income
recognition between derivative instruments and the hedged assets. This gain or
loss will trend to zero over time and this is taken into account by the Board
when considering the Company's underlying performance.
10. Trade and other receivables
As at As at
30.06.2020 30.06.2019
GBP GBP
Other receivables and prepayments 697,677 2,230,279
Interest receivable on mortgage loans 3,563,076 1,699,530
Capitalised formation expenses - 901,453
4,260,753 4,831,262
Capitalised formation expenses are the set up costs of Cornhill Mortgages No.2
Limited, Malt Hill No.2 plc, and Barley Hill No. 1 Plc which are being
amortised over 3 years. These expenses have been fully amortised as at 30 June
2020.
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
30.06.2020 30.06.2019
GBP GBP
Cash at bank 37,905,366 51,521,524
37,905,366 51,521,524
12. Trade and other payables
As at As at
30.06.2020 30.06.2019
GBP GBP
Interest due on loan notes and borrowings 3,940,655 1,989,635
Loan notes and borrowings issue fees payable 909,660 984,381
Mortgage loans servicing fees payable 711,347 646,035
Portfolio management fees payable 444,763 316,964
Legal and professional fees payable 219,668 143,795
Audit fees payable 115,357 303,441
Administration and secretarial fees 105,507 53,978
payable
General expenses payable 68,531 133,542
Directors' fees payable 33,750 33,750
AIFM fees payable 23,638 24,024
Depositary fees payable 16,263 16,606
Custody fees payable 5,435 5,418
6,594,574 4,651,569
13. Loan notes
The Malt Hill No.1 Plc, Oat Hill No.1 Plc, Malt Hill No. 2 Plc and Barley 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 was payable quarterly and were listed on the Irish Stock Exchange.
The issue fees on loan notes were amortised over the expected life of the loan
notes, which is 3 years, being the period up to the call date. On 7 June 2019,
the Company announced the redemption of the Portfolio Option on the loans
underlying the Malt Hill No.1 plc securitisation, and the loans have been
refinanced into a new warehouse SPV with Lloyds Bank Corporate Markets plc,
called Cornhill Mortgages No.6. Limited. The refinanced amount was GBP183,983,354
which has been included within loan notes in the prior year financial
statements, to match the previous presentation of the Malt Hill No 1 Plc
funding. This has been reclassified to borrowings to reflect its nature.
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 was payable quarterly and was listed on the
Irish Stock Exchange. In May 2020 the discount on the loan notes and issue
costs were amortised. The step up margin costs were incurred for the period
since 27 May 2020 till the transaction call date of 27 August 2020. The issue
fees on loan notes will be amortised over the expected life of the loan notes,
which is 3 years, being the period up to the call date. Loan notes have been
classified as non-current based on their contractual obligations. These have
been refinanced post year end, refer to note 25 for further details.
Malt Hill No. 2 Plc completed the public sale of GBP317.5m of AAA-rated bonds on
27 June 2018. The AAA notes were issued with a coupon of 3 month LIBOR plus
0.75% 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 period up to the call date. Loan notes
have been classified as non-current based on their contractual obligations.
On 8 April 2019, the Company announced that Barley Hill No.1 PLC had
successfully completed the public sale of GBP209.15m of senior notes. The
securitisation is backed by a pool of owner-occupied mortgages originated by
The Mortgage Lender ("TML") completed between October 2016 and 8 April 2019 and
purchased on a forward flow basis. The transaction also contained a
"Prefunding" feature which allowed for further purchases of future completions
by TML up until the securitisation's first Interest Payment Date in August
2019. Due to the nature of the origination of the pool, which took place on a
highly consistent basis over more than two years, the loans that were
originated with a two-year fixed rate term are expected to pre-pay relatively
quickly and therefore the notes were split into two tranches - GBP202.2m of Class
A notes, rated Aaa/AAA by Moody's and DBRS, and GBP6.95m of Class B notes rated
Aa1/AA (high) respectively. The Class A notes were issued with a coupon of 3m
GBP LIBOR plus 1.10%, with a 2.24yr Weighted Average Life ("WAL") to the
refinancing date in February 2022, and the Class B notes carry a coupon of 3m
GBP LIBOR plus 1.60% with a 2.89yr WAL. Loan notes have been classified as
non-current based on their contractual obligations.
For the year For the year
30.06.2020 30.06.2019
Reclassed
GBP GBP
Loan notes at start of the year 932,982,970 937,924,240
Loan notes issued - 209,150,000
Loan notes repaid (86,627,803) (214,913,863)
Discount on loan notes to be amortised 752,837 1,651,747
Loan note issues fees incurred - (2,804,188)
Loan note issue fees amortised 1,768,885 1,975,034
Loan notes at end of the 848,876,889 932,982,970
year
Interest expense on loan notes for the year amounted to GBP13,799,827 (30 June
2019: GBP15,845,380).
Any covenant breaches will be dealt with in line with the documentation for
each facility.
14. Borrowings
At the start of the year ended 30 June 2019, Cornhill Mortgages No.2 Limited
had a facility with NatWest Markets of GBP250m. On 8 April 2019, the Company
announced that Cornhill Mortgages No.2 Limited had securitised its portfolio
into Barley Hill No.1 Plc. This saw a completed public sale of GBP209.15m of
senior notes and the repayment of this facility.
Cornhill Mortgages No.4 Limited agreed a borrowing facility of GBP200m from
September 2018, with National Australia Bank Limited, with the facility size
increased to GBP300m as part of amendments signed in March 2020. National
Australia Bank Limited has permitted Cornhill Mortgages No.4 Limited to
dynamically change the facility amount, which has resulted in no commitment
fees being incurred to date on the facility. This facility has a repayment date
of October 2022 and is classified as a non-current liability.
Cornhill Mortgages No.5 Limited agreed a borrowing facility of GBP250m from
August 2019, with Regency Assets Designated Activity Company, a bankruptcy
remote asset backed commercial paper conduit sponsored by HSBC Bank plc. This
facility has a repayment date of February 2022 and is classified as a
non-current liability.
Cornhill Mortgages No.6 Limited agreed a borrowing facility of GBP184m from May
2019, with Lloyds Bank Corporate Markets Plc. The total facility was utilised
on day one. To date Cornhill Mortgages No.6 has a repaid GBP23m of the total
facility. This facility has a final repayment date of April 2056 and is
classified as a non-current liability.
The Group is subject to covenants, representations and warranties commonly
associated with corporate bank debt and credit facilities. The Group was
compliant with all covenants at the year end.
At the year end, the Company had a liability of GBP228,698,014 consisting of GBP
229,000,000 of the utilised borrowing facilities in respect of Cornhill
Mortgages No. 4 Limited and GBP301,986 of borrowing costs (30 June 2019: a
liability of GBP49,288,735 consisting of GBP50,000,000 of the utilised borrowing
facilities in respect of Cornhill Mortgages No. 4 Limited and GBP711,265 of
borrowing costs).
For the year For the year
30.06.2020 30.06.2019
Reclassed
GBP GBP
Borrowings at start of the year 228,283,804 104,445,310
Borrowings 401,000,000 302,483,354
issued
Borrowings (24,926,646) (177,855,164)
repaid
Borrowings issues fees incurred (1,618,018) (1,797,808)
Borrowings issue fees amortised 1,557,561 1,008,112
Borrowings at end of the year 604,296,701 228,283,804
The facility fees of GBP93,519 (2019: GBP75,338) were expensed in the year. The
interest expense charged on borrowings of GBP7,171,939 (2019: GBP2,353,540) were
expensed in the year.
Any covenant breaches will be dealt with in line with the documentation for
each facility.
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 as 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 2020, 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 them.
Issued Share Capital
As at As at
30.06.2020 30.06.2019
Ordinary shares GBP GBP
Share capital at the beginning of the 264,749,999 264,749,999
year
Issued share capital - -
Share issue costs - -
Total share capital at the end of the 264,749,999 264,749,999
year
As at As at
30.06.2020 30.06.2019
Ordinary shares shares shares
Shares at the beginning of the year 273,065,390 273,065,390
Issue of shares - -
Total shares in issue at the end of 273,065,390 273,065,390
the year
16. Related Parties
a) Directors' Remuneration and 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 GBP40,000 (30 June 2019: GBP40,000) payable to
Mr Waldron, the Chairman, GBP35,000 (30 June 2019: GBP35,000) to Mr Le Page as
Chairman of the Audit Committee, and GBP30,000 (30 June 2019: GBP30,000) each to
Mrs Green and Mr Burrows. During the year ended 30 June 2020, Directors' fees
of GBP135,000 were charged to the Company (30 June 2019: GBP135,000), of which GBP
33,750 remained payable at the end of the year (30 June 2019: GBP33,750).
b) Shares held by related parties
As at 30 June, Directors of the Company held the following shares in the
Company beneficially:-
Number of Number of
Shares Shares
30.06.2020 30.06.2019
Christopher Waldron 80,000 20,000
Richard Burrows 5,000 5,000
Paul Le Page 112,800 20,000
Helen Green 21,250 10,000
As at 30 June 2020, the Portfolio Manager held Nil shares (30 June 2019: Nil)
and partners and employees of the Portfolio Manager held 6,719,088 shares (30
June 2019: 5,864,783), which is 2.461% of the issued share capital (30 June
2019: 2.148%).
c) Portfolio Manager
With effect from 1 July 2017, the portfolio management fee payable to the
Portfolio Manager quarterly on the last business day of the quarter was at a
rate of 0.60% per annum of the lower of NAV, or market capitalisation of each
class of shares. Prior to this date, the portfolio management fee per annum was
0.75%.
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 GBP1,022,296 (30 June
2019: GBP1,337,090) of which GBP444,763 (30 June 2019: GBP316,964) 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 is entitled to immediately terminate the
agreement in writing.
d) Group entities
The Company's subsidiaries are as disclosed under note 2.
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 2020, AIFM fees of GBP95,845 (30 June 2019: GBP97,755) were charged
to the Company, of which GBP23,638 (30 June 2019: GBP24,024) 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 the
Company acquired its initial investment.
In addition, an annual fee of GBP60,500 will be charged for corporate governance
and company secretarial services and accounting services. Total administration
and secretarial fees for the year amounted to GBP259,050 (30 June 2019: GBP221,654)
of which GBP105,507 (30 June 2019: GBP53,978) 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 GBP65,947 (30 June 2019: GBP67,916) of which GBP
16,263 (30 June 2019: GBP16,606) 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 commenced from 19 November 2015 being
the date Company acquired its initial investment. Total custody fees for the
year amounted to GBP23,519 (30 June 2019: GBP23,355) of which GBP5,435 (30 June 2019:
GBP5,418) remained payable at the year end.
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, loan notes, borrowings and trade payables. 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 and floating
rates, meaning the current exposure to interest rate fluctuations on the
portfolios are limited. However, floating rate interest is payable on the loan
notes. Where the mortgage portfolios are payable on fixed rates, interest is
hedged using swaps. Interest on all liabilities is payable on floating rates.
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 securitisation, these swaps were novated to the
relevant Issuer SPV.
On 1 July 2017, the Directors designated the derivatives as a fair value hedge
and began hedge accounting from that date therefore hedging the interest risk
exposure on the fixed rate mortgages shown in the table below. Refer to note 9
for further details.
The below table shows exposure to interest rate risk if the portfolio was
unhedged.
Non interest Total as at
Floating rate Fixed rate bearing 30.06.2020
GBP GBP GBP GBP
Assets
Mortgage loans 546,265,951 1,102,128,153 (9,441,716) 1,638,952,388
Reserve fund 20,204,519 - - 20,204,519
Trade and other - - 4,260,753 4,260,753
receivables
Cash and cash 37,905,366 - - 37,905,366
equivalents
Total assets 604,375,836 1,102,128,153 (5,180,963) 1,701,323,026
Liabilities
Financial 1,105,147,058 (1,105,147,058) - -
liabilities at fair
value through profit
and loss *
Trade and other - - (6,594,574) (6,594,574)
payables
Borrowings (605,701,543) - 1,404,842 (604,296,701)
Loan notes (note 13) (850,652,082) - 1,775,193 (848,876,889)
Total liabilities (315,206,567) (1,105,147,058) (3,414,539) (1,459,768,164)
Total interest 253,169,269 (3,018,905) (8,595,502) 241,554,862
sensitivity gap
Non interest Total as at
Floating rate Fixed rate bearing 30.06.2019
Reclassed Reclassed
GBP GBP GBP GBP
Assets
Mortgage loans 575,393,092 780,738,352 (32,409,935) 1,323,721,509
Reserve fund 17,704,519 - - 17,704,519
Trade and other - - 4,831,262 4,831,262
receivables
Cash and cash 51,521,524 - - 51,521,524
equivalents
Total assets 644,619,135 780,738,352 (27,578,673) 1,397,778,814
Liabilities
Financial 746,041,275 (746,041,275) - -
liabilities at fair
value through profit
and loss*
Trade and other - - (4,651,569) (4,651,569)
payables
Borrowings (228,283,804) - - (228,283,804)
Loan notes (note 13) (932,982,970) - - (932,982,970)
Total liabilities (415,225,499) (746,041,275) (4,651,569) (1,165,918,343)
Total interest 229,393,636 34,697,077 (32,230,242) 231,860,471
sensitivity gap
* Financial liabilities at fair value through profit and loss is shown as the
notional amounts which represent the gross exposure to interest rate risk and
not the fair value of GBP21,477,899 (2019: GBP7,775,666).
Borrowings and loan notes for the year ended 30 June 2019 were reclassed to
classify Cornhill Mortgages No. 6 facility as borrowings instead of loan notes
as it was shown in the prior year.
If interest rates had been 50 basis points higher and all other variables were
held constant, the Company's total comprehensive gain for the year ended 30
June 2020 would have increased by approximately GBP189,527 (2019: GBP257,608) or
0.011% (2019: 0.018%) of total assets, due to an increase in the amount of
interest receivable.
If interest rates had been 50 basis points lower and all other variables were
held constant, the Company's total comprehensive gain for the year ended 30
June 2020 would have decreased by approximately GBP188,584 (2019: GBP256,326) or
0.011% (2019: 0.018%) of total assets, due to a decrease in the amount of
interest receivable.
This basis point is taken as it is the maximum rate change based on the recent
movements of interest rates in the market.
The Company's exposure to interest rate risk on loans with fixed interest rates
is protected by virtue of the fact that there are balance guarantee swaps and
vanilla swaps in place to limit the exposure on the fixed rate interest rates.
For the exposure in relation of floating interest rate risk, the Portfolio
Manager is managing this by matching the asset exposures to the liabilities
exposures using the interest rate swaps derivatives.
With the adoption of hedge accounting, the Company has reduced its exposure to
interest rate risk as changes in the fair value of the interest rate swaps are
offset by adjustments to the fair value of the mortgage loans. Consequently,
there is no material movement in net assets of the Company arising from
interest rate fluctuations.
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 is 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 could lead to volatility in the Company's NAV, had hedge
accounting not been adopted.
The following details the Company's sensitivity to an increase and decrease of
50 basis points in the interest rate swap valuations, with 50 basis points
being the sensitivity rate used when reporting price risk internally to key
management personnel and representing management's assessment of the possible
change in market prices and is similar to the interest rate risk.
At 30 June 2020, if the interest rate swap valuation had been 50 basis points
higher with all the other variables held constant, the return attributable to
shareholders for the year would have been GBP107,389 (2019: GBP38,878) greater.
This would represent an increase in Net Assets of 0.049% (2019: 0.017%).
If the interest rate swap valuation had been 50 basis points lower with all the
other variables held constant, the return attributable to shareholders for the
year would have been GBP106,855 (2019: GBP38,685) lower. This would represent a
decrease in Net Assets of 0.049% (2019: 0.017%).
1.3 Currency risk: As at 30 June 2020 and 2019, 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, using the funds raised from equity issuances. 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 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. 4 Limited, Cornhill Mortgages
No. 5 Limited and Cornhill Mortgages No. 6 Limited portfolios were 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 20% of NAV for short term liquidity
purposes, including financing share repurchases or redemptions, making
investments or satisfying working capital requirements. This can be through a
loan facility or other types of collateralised borrowing instruments including
stock lending or repurchase transactions.
The Company's funding providers are entitled to receive repayment of principal
from principal funds generated by the mortgage loans, but their right to the
repayment of principal is limited to the cash available in the relevant SPV.
Similarly, payment of accrued interest to the funding providers is limited to
cash generated within the relevant SPV. There is no requirement for any Group
company other than the issuing SPV to make principal or interest payments in
respect of the loan notes or borrowings. This matching of the maturities of the
assets and the related funding substantially reduces the Group's exposure to
liquidity risk. Due to the contractual nature of the funding, the Directors do
not consider there to be any difference between the Group's discounted and the
undiscounted liquidity position in relation to the loan notes and borrowings.
The following liquidity analysis is based on contractual payment terms and
maturity dates. Expected cash flows are expected to be different to these
contractual cash flows.
Less than More than More than Total as at
one year one year five years 30.06.2020
GBP GBP GBP GBP
Assets
Mortgage loans 19,466,645 104,896,456 1,514,589,287 1,638,952,388
Reserve fund 13,521,519 6,683,000 - 20,204,519
Trade and other 4,260,753 - - 4,260,753
receivables
Cash and cash equivalents 37,905,366 - - 37,905,366
Total assets 75,154,283 111,579,456 1,514,589,287 1,701,323,026
Liabilities
Financial liabilities at 21,477,899 - - 21,477,899
fair value through profit
and loss
Trade and other payables 6,594,574 - - 6,594,574
Borrowings - 604,296,701 - 604,296,701
Loan notes - - 848,876,889 848,876,889
Total liabilities 28,072,473 604,296,701 848,876,889 1,481,246,063
Less than More than More than Total as at
one year one year five years 30.06.2019
Reclassed Reclassed Reclassed Reclassed
GBP GBP GBP GBP
Assets
Mortgage loans 13,863,465 77,434,308 1,232,423,736 1,323,721,509
Reserve fund 17,704,519 - - 17,704,519
Trade and other 4,831,262 - - 4,831,262
receivables
Cash and cash equivalents 51,521,524 - - 51,521,524
Total assets 87,920,770 77,434,308 1,232,423,736 1,397,778,814
Liabilities
Financial liabilities at 7,775,666 - - 7,775,666
fair value through profit
and loss
Trade and other payables 4,651,569 - - 4,651,569
Borrowings - 228,283,804 - 228,283,804
Loan notes - - 932,982,970 932,982,970
Total liabilities 12,427,235 228,283,804 932,982,970 1,173,694,009
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+ (per Standards and Poor). At year end, there is no such exposure in place as
they are in a liability position.
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 reserve
fund is held with Citibank N.A. London Branch (credit rating A+ per Standards
and Poor).
The following table shows the maximum exposure to credit risk:
As at As at
30.06.2020 30.06.2019
GBP GBP
Mortgage 1,648,394,104 1,356,131,444
loans
Reverse 20,204,519 17,704,519
fund
Trade and 4,260,753 4,831,262
other
receivables
Cash and 37,905,366 51,521,524
cash
equivalents
1,710,764,742 1,430,188,749
Mortgage loans written off during the year amounted to GBP1,543,544 (2019: GBP
711,394, none of which was charged to the Consolidated Statement of
Comprehensive Income), with an expected credit loss provision of GBP1,195,954
(2019: GBP776,994). In order to give an indication of credit quality the below
table, shown as book value, is the current indexed loan to value ratio:
As at As at
30.06.2020 30.06.2019
Loan to value GBP GBP
0-49% 211,966,217 197,564,996
50-75% 954,101,240 822,288,275
75-100%+ 482,326,647 336,278,173
1,648,394,104 1,356,131,444
The value of the past due loans and their respective collateral value at the
year-end are shown in the table below. In accordance with the Company's policy,
the credit impaired loans amounted GBP7,445,962 as at 30 June 2020 (2019: GBP
7,488,103) with underlying collateral value of GBP14,093,217 (2019: GBP10,279,387).
Book value Collateral value
As at As at As at As at
30.06.2020 30.06.2019 30.06.2020 30.06.2019
GBP GBP GBP GBP
>1 month but <2 months 3,216,112 4,782,851 4,795,785 7,317,654
>2 months but <3 months 4,801,137 430,127 7,063,327 911,325
>3 months but <6 months 3,525,284 2,071,973 6,728,027 2,835,843
>6 months 3,920,678 3,131,200 7,365,190 4,267,398
15,463,211 10,416,151 25,952,329 15,332,220
The table below discloses the maximum exposure to credit risk at 30 June 2020
of mortgage loans with exposure to credit risk, the transfers between ECL
levels in the year ended 30 June 2020, and the allowance for ECL allowance for
each stage at 30 June 2020. Refer to note 2(f) for further information
regarding the measurement of credit loss allowances according to a three-stage
expected credit loss impairment model.
Principal Principal Principal Principal
balance balance balance balance
Mortgage Loans Mortgage Mortgage Total
Loans Loans
ECL Stage 1 ECL Stage 2 ECL Stage 3
GBP GBP GBP GBP
Principal balance at 1 1,342,553,680 6,089,662 7,488,103 1,356,131,445
July 2019
Increase due to new loans 417,197,938 253,861 371,525 417,823,324
purchased
Transfers between stages (14,228,164) 9,274,137 4,954,027 -
Increase/(decrease) in (119,679,835) (513,136) (3,824,640) (124,017,611)
mortgage loans
Mortgage loans written off - - (1,543,053) (1,543,053)
during the year
Principal balance at 30 1,625,843,619 15,104,524 7,445,962 1,645,394,105
June 2020
The table below discloses the movements in ECL provisioning during the year.
ECL ECL ECL Total
Provisioning Provisioning Provisioning
ECL Stage 1 ECL Stage 2 ECL Stage 3
GBP GBP GBP GBP
ECL Provisioning at 1 747,441 104,298 463,427 1,315,166
July 2019
Increase in ECL due to 658,333 1,974 43,777 704,084
new loans purchased
Transfers between stages (398,053) (90,700) 488,753 -
Increase/(decrease) in 689,995 115,153 (313,277) 491,871
credit risk
ECL Provisioning at 30 1,697,716 130,725 682,680 2,511,121
June 2020
Refer to note 2(f) for details on the assessment of collective ECLs.
Concentration of credit risk related to any mortgage borrower does not exceed 5
per cent of gross mortgage assets of the Company at any time during the year.
The concentration of credit risk is limited due to the fact that the customer
base is large, diverse and unrelated.
At 30 June 2020, if the housing price index forecasts in the ECL model had been
decreased by 10% with all the other variables held constant, the expected
credit loss for the year would have been GBP1,463,272 greater. In contrast, if
the housing price index forecasts had been increased by 10% with all the other
variables held constant, the expected credit loss for the year would have been
GBP1,055,652 lower.
It should be noted that such a change produces a non-linear result as stresses
are calculated on a loan-by-loan basis and changes in asset values will
therefore affect loans with different LTVs to a greater or lesser extent. These
calculations are therefore a guide to variation not further expected losses.
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. The Company also has reserves that
they are required to meet. These reserve funds are detailed further in note 8.
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.
Following the EGM on 16 August 2019, the Company has adopted the changes to its
Articles, changes to the Company's investment policy and to the Company's share
buyback policy; continuation vote, to reflect asset yield reductions and the
compression of the margin between 5 year and 2 year rates from around 100 bps
to approximately 25 bps. The changes have resulted in the following:
(i) Share Buybacks
The Board will not reinvest further capital other than in the re-financing of
the existing portfolio, whilst the Company is trading at a discount in excess
of 5 per cent. to Net Asset Value per Ordinary Share. At this level of
discount, subject to the Board determining that the Company has sufficient
surplus cash resources available for the ongoing funding of the existing TML
and Keystone investments, repayment of any existing credit facilities and any
other foreseeable commitments, the Company intends to buy back Ordinary Shares.
The making and timing of any share buybacks is at the absolute direction of the
Board. 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. 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. There were no share buybacks during the current
year, but a series of transactions took place after the year end and are
detailed in Note 25.
(ii) Continuation Vote
The Continuation Resolution which was scheduled for the AGM of the Company to
be held in 2020 will now be proposed at the AGM held in 2024 and every fifth
AGM thereafter as it was agreed to defer the continuation vote at an EGM held
in August 2019. The Company is also required to propose a continuation
resolution to shareholders in the event that it does not pay total dividends of
4.5p per share in any given calendar year.
(iii) Dividend Reduction
The Company was paying dividends from capital since its launch, and this had a
consequential decrease in the NAV of the Company on an ongoing basis. Following
the EGM on 19 August 2019, the Company reduced the annual dividend to 4.5p per
annum. A further temporary reduction to 1.5p per annum was implemented in April
2020 in the light of the uncertainty caused by the COVID-19 pandemic. However,
on 8 October 2020, the Company declared a dividend of 1.1125p in relation to
the 3 month period to 30 September 2020 plus a catch up fifth interim dividend
of 1.5p in relation to 30 June 2020.
(iv) Cash Management Policy
The Company will have the ability to invest uninvested cash into AAA rated UK
RMBS. This should allow the Portfolio Manager to more effectively manage cash
and improve returns as AAA rated UK RMBS ordinarily provide a real return over
cash equivalent instruments, as they typically have stable pricing and deep
liquidity.
20. Analysis of Financial Assets and Liabilities by Measurement Basis
Financial Assets Financial Assets
at
30 June 2020 fair value at amortised
through
profit and loss cost Total
Financial Assets as per Audited GBP GBP GBP
Consolidated Statement of
Financial Position
Mortgage loans - 1,638,952,388 1,638,952,388
Reserve fund - 20,204,519 20,204,519
Cash and cash equivalents - 37,905,366 37,905,366
Trade and other receivables - 4,260,753 4,260,753
- 1,701,323,026 1,701,323,026
Financial Financial
Liabilities at
fair value Liabilities at
through
profit and loss amortised cost Total
Financial Liabilities as per GBP GBP GBP
Audited Consolidated Statement
of Financial Position
Financial liabilities at fair 21,477,899 - 21,477,899
value through profit and loss
Trade and other payables - 6,594,574 6,594,574
Borrowings - 604,296,701 604,296,701
Loan notes - 848,876,889 848,876,889
21,477,899 1,459,768,164 1,481,246,063
Financial Assets Financial Assets
at
30 June 2019 fair value at amortised
through
profit and loss cost Total
Financial Assets as per Audited GBP GBP GBP
Consolidated Statement of
Financial Position
Mortgage loans - 1,323,721,509 1,323,721,509
Reserve fund - 17,704,519 17,704,519
Cash and cash equivalents - 51,521,524 51,521,524
Trade and other receivables - 4,831,262 4,831,262
- 1,397,778,814 1,397,778,814
Financial Financial
Liabilities at
fair value Liabilities at
through
profit and loss amortised cost Total
Reclassed Reclassed Reclassed
Financial Liabilities as per GBP GBP GBP
Audited Consolidated Statement
of Financial Position
Financial liabilities at fair 7,775,666 - 7,775,666
value through profit and loss
Trade and other payables - 4,651,569 4,651,569
Borrowings - 228,283,804 228,283,804
Loan notes - 932,982,970 932,982,970
7,775,666 1,165,918,343 1,173,694,009
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
years ended 30 June 2020 and 30 June 2019.
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Liabilities
Financial liabilities at - (8,386,469) (13,091,430) (21,477,899)
fair value through profit
and loss
Total liabilities as at
30 June 2020 - (8,386,469) (13,091,430) (21,477,899)
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Liabilities
Financial liabilities at - (7,775,666) (7,775,666)
fair value through profit
and loss
Total liabilities as at
30 June 2019 - - (7,775,666) (7,775,666)
Vanilla swaps have been classified as Level 2. Balance guarantee swaps have
been classified as Level 3 as they are based on unobservable market data such
as counterparty's assumptions of prepayments and the Company's
creditworthiness. Please refer to note 9 for a reconciliation of the movement
for the year on the interest rate swaps.
The following details the Company's sensitivity to an increase and decrease of
50 basis points in the interest rate, with 50 basis points being the
sensitivity rate used when reporting price risk internally to key management
personnel and representing management's assessment of the possible change in
market prices and is similar to the interest rate risk.
At 30 June 2020, if interest rate had been 50 basis points higher with all the
other variables held constant, the return attributable to shareholders for the
year would have been GBP65,457 (2019: GBP38,878) greater. This would represent an
increase in Net Assets of 0.030% (2019: 0.017%).
The following table analyses within the fair value hierarchy the Company's
assets and liabilities not measured at fair value at 30 June 2020 but for which
fair value is disclosed.
Level 1 Level 2 Level 3 Total
30.06.2020 30.06.2020 30.06.2020 30.06.2020
GBP GBP GBP GBP
Assets
Mortgage loans - - 1,680,454,116 1,680,454,116
Reserve fund 20,204,519 - - 20,204,519
Cash and cash 37,905,366 - - 37,905,366
equivalents
Trade and other 4,260,753 - - 4,260,753
receivables
Total 62,370,638 - 1,680,454,116 1,742,824,754
Liabilities
Trade and other 6,594,574 - - 6,594,574
payables
Borrowings - 604,296,701 - 604,296,701
Loan notes - 848,876,889 - 848,876,889
Total 6,594,574 1,453,173,590 - 1,459,768,164
Level 1 Level 2 Level 3 Total
30.06.2019 30.06.2019 30.06.2019 30.06.2019
Reclassed Reclassed Reclassed Reclassed
GBP GBP GBP GBP
Assets
Mortgage loans - - 1,373,078,652 1,373,078,652
Reserve fund 17,704,519 - - 17,704,519
Cash and cash 51,521,524 - - 51,521,524
equivalents
Trade and other 4,831,262 - - 4,831,262
receivables
Total 74,057,305 - 1,373,078,652 1,447,135,957
Liabilities
Trade and other 4,651,569 - - 4,651,569
payables
Borrowings - 228,283,804 - 228,283,804
Loan notes - 932,982,970 - 932,982,970
Total 4,651,569 1,161,266,774 - 1,165,918,343
The fair value of the mortgage loans is calculated through an appropriate proxy
securitisation structure based on existing deals with current and transparent
pricing. For movement from opening to closing of the mortgage loans classified
as level 3 see note 7.
The fair value of borrowings and loan notes is deemed to equate to their
notional amounts, as they are at an entirely variable rate and have been
secured within the last three years on an arm's length basis.
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. Loan notes and borrowings approximate fair value as the underlying
interest rates are linked to the market rates. During the year there were no
transfers between the levels. Cash and cash equivalents include cash in hand
and short-term deposits with original maturities of three months or less.
Trade and other receivables includes collateral due and interest receivable due
within 3 months. Their fair value is deemed to approximate their book value,
due to their short duration.
Trade and other payables represent the contractual amounts and obligations due
by the Company for settlement of trades and expenses. Their fair value is
deemed to approximate their book value, due to their short duration.
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 2020:
Period to Dividend Net Record date Ex-dividend Pay date
rate per dividend date
Share payable
(pence) (GBP)
30 September 2019 1.125 3,071,986 18 October 2019 17 October 2019 31 October 2019
31 December 2019 1.125 3,071,985 17 January 2020 16 January 2020 31 January 2020
31 March 2020 0.375 1,023,995 17 April 2020 16 April 2020 30 April 2020
30 June 2020 0.375 1,023,995 17 July 2020 16 July 2020 31 July 2020
The original dividend policy for the Company was that in each subsequent
financial year, it was intended that dividends on the Ordinary Shares would be
payable quarterly, all in the form of interim dividends (the Company does not
intend to pay any final dividends). It was intended that the first three
interim dividends of each financial year was to 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.
Following the EGM on the 16 August 2019, the Company made the decision that in
order rebuild the NAV, improve the Company's cash flow and reconstitute capital
to generate returns in excess of the required divided, to reduce the annual
dividend to 4.5p per annum (the "new dividend policy"). The dividend paid on 31
March 2020 reflected this new dividend policy. A temporary reduction to 1.5p
per annum was implemented in April 2020 in the light of the uncertainty caused
by the COVID-19 pandemic. However, on 8 October 2020, the Company declared a
dividend of 1.1125p in relation to the 3 month period to 30 September 2020 plus
a catch up fifth interim dividend of 1.5p in relation to 30 June 2020.
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 two segments which are
categorised as Buy-to-Let and Owner Occupied. These are further sub-divided
into Forward Flow and Purchased with each being managed by separate specialist
teams at the Portfolio Manager. The Buy to Let Forward Flow contains Cornhill
No. 4 and Cornhill No. 5. The Buy to Let Purchased contains Malt Hill No.2, Oat
Hill No.1 and Cornhill No. 6. Owner Occupied Forward Flow contains Barley Hill
No. 1. For the year ended 30 June 2019 the Buy to Let Purchased contained Malt
Hill No.1, Malt Hill No.2 and Oat Hill No.1 and Owner Occupied Forward Flow
contained Cornhill No.2.
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:
Buy-to-Let Owner Occupied Total as at
Forward Purchased Forward Flow Purchased 30.06.2020
Flow
GBP GBP GBP GBP GBP
Interest income 11,833,953 28,607,975 7,389,587 - 47,831,515
on mortgage
loans
Net interest (352,412) (2,690,082) (1,014,656) - (4,057,150)
expense on
financial
liabilities at
fair value
through profit
and loss
Net gain from (7,914,359) (5,158,172) (656,484) - (13,729,015)
derivative
financial
instruments
Interest expense (4,283,701) (2,888,238) - - (7,171,939)
on borrowings
Interest expense - (10,235,020) (3,564,808) - (13,799,828)
on loan notes
Servicer fees (650,417) (2,127,206) (677,518) - (3,455,141)
Other expenses 9,902,059 (1,206,716) (1,124,603) - 7,570,740
Total net 8,535,123 4,302,541 351,518 - 13,189,182
segment income
Buy-to-Let Owner Occupied Total as at
Forward Purchased Forward Flow Purchased 30.06.2019
Flow
GBP GBP GBP GBP GBP
Interest income 1,148,640 31,042,817 7,456,053 - 39,647,510
on mortgage
loans
Net gain from (135,981) 261,027 703,888 - 828,934
derivative
financial
instruments
Net interest (34,689) (1,947,908) (353,032) - (2,335,629)
expense on
financial
liabilities at
fair value
through profit
and loss
Interest expense (240,683) - (2,112,857) - (2,353,540)
on borrowings
Interest expense - (14,927,566) (917,814) - (15,845,380)
on loan notes
Servicer fees (112,279) (2,234,347) (643,233) - (2,989,859)
Other expenses (549,676) (3,735,910) (1,116,179) - (5,401,765)
Total net 75,332 8,458,113 3,016,826 - 11,550,271
segment income
A reconciliation of total net segmental income to total comprehensive gain is
provided as follows.
30.06.2020 30.06.2019
GBP GBP
Total net segment income 13,189,182 11,550,271
Other fees and expenses (6,957,072) (4,533,798)
6,232,110 7,016,473
There are no transactions between the reportable segments.
Total segment assets include:
Buy-to-Let Owner Occupied Total as at
Forward Flow Purchased Forward Flow Purchased 30.06.2020
GBP GBP GBP GBP GBP
Mortgage loans 496,014,014 964,506,625 178,431,751 - 1,638,952,390
Reserve fund 2,500,000 13,521,519 4,183,000 - 20,204,519
Other 13,353,469 7,781,642 10,600,291 - 31,735,402
511,867,483 985,809,786 193,215,042 - 1,690,892,311
Buy-to-Let Owner Occupied Total as at
Forward Flow Purchased Forward Flow Purchased 30.06.2019
GBP GBP GBP GBP GBP
Mortgage loans 57,282,891 1,013,805,539 252,633,079 - 1,323,721,509
Reserve fund - 13,521,519 4,183,000 - 17,704,519
Other 1,466,140 14,025,730 14,250,480 - 29,742,350
58,749,031 1,041,352,788 271,066,559 - 1,371,168,378
30.06.2020 30.06.2019
GBP GBP
Segment assets for 1,690,892,311 1,371,168,378
reportable segments
Other 10,430,715 26,610,436
Total assets 1,701,323,026 1,397,778,814
Total segment liabilities include:
Buy-to-Let Owner Occupied Total as at
Forward Flow Purchased Forward Flow Purchased 30.06.2020
GBP GBP GBP GBP GBP
Borrowings 449,911,285 154,385,416 - - 604,296,701
Loan notes - 689,925,877 158,951,012 - 848,876,889
Financial 8,365,062 10,705,428 2,386,002 - 21,456,492
liabilities at
fair value
through profit
and loss
Other 3,681,808 1,710,646 432,871 - 5,825,325
461,958,155 856,727,367 161,769,885 - 1,480,455,407
Buy-to-Let Owner Occupied Total as at
Forward Flow Purchased Forward Flow Purchased 30.06.2019
Reclassed Reclassed
GBP GBP GBP GBP GBP
Borrowings 49,288,735 178,995,069 - - 228,283,804
Loan notes - 726,157,169 206,825,801 - 932,982,970
Financial 603,981 5,410,172 1,761,513 - 7,775,666
liabilities at
fair value
through profit
and loss
Other 403,586 2,256,199 1,245,396 - 3,905,181
50,296,302 912,818,609 209,832,710 - 1,172,947,621
30.06.2020 30.06.2019
GBP GBP
Segment liabilities for 1,480,455,407 1,172,947,621
reportable segments
Trade and other 790,656 746,388
payables
Total 1,481,246,063 1,173,694,009
liabilities
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. Subsequent Events
The fourth interim dividend of 0.375p per Ordinary Share in respect of year
ending 30 June 2020 was declared on 9 July 2020 and paid from the capital on 31
July 2020.
On 7 July 2020, the Company signed an agreement with Santander Corporate and
Investment Banking providing a senior backstop facility to enable the Company
to issue a call notice to redeem the outstanding notes of the Oat Hill No.1
transaction. That call notice was issued shortly before the close of business
on 6 July 2020 and the notes were redeemed on the
27 August 2020.
On 22 July 2020, the Board of the Company granted approval for proposals
including revised investment and share buyback policies. As signalled at that
time, the first opportunity to enact the revised share buyback policy was the
refinancing of the Oat Hill transaction anticipated at the end of May 2020.
The Oat Hill transaction was not called at its first refinancing call date of
27 May 2020 due to the COVID-19 pandemic, but the securitisation was
successfully launched and priced just six weeks later on 10 July 2020 with the
transaction being settled on 28 August 2020. The securitisation was issued on
terms which will release a significant amount of capital and therefore allow
the Company to return to its previously stated proposal of using excess capital
to enable share buybacks whilst the Company's share price continues to trade at
a discount to the NAV per share.
On 1 September 2020, the Company purchased 100,000 ordinary shares of GBP0.01
each in the capital of the Company at a price of GBP0.64 per share in accordance
with the Company's share repurchase programme. These shares will be cancelled
upon settlement.
On 3 September 2020, the Company purchased 50,000 ordinary shares of GBP0.01 each
in the capital of the Company at a price of GBP0.65 per share in accordance with
the Company's share repurchase programme. These shares will be cancelled upon
settlement.
On 8 September 2020, the Company purchased 350,000 ordinary shares of GBP0.01
each in the capital of the Company at a price of GBP0.665 per share in accordance
with the Company's share repurchase programme. These shares will be cancelled
upon settlement.
On 10 September 2020, the Company purchased 250,000 ordinary shares of GBP0.01
each in the capital of the Company at a price of GBP0.67 per share in accordance
with the Company's share repurchase programme. These shares will be cancelled
upon settlement.
On 14 September 2020, the Company purchased 925,000 ordinary shares of GBP0.01
each in the capital of the Company at a price of GBP0.675 per share in accordance
with the Company's share repurchase programme. These shares will be cancelled
upon settlement.
On 15 September 2020, the Company purchased 1,600,000 ordinary shares of GBP0.01
each in the capital of the Company at a price of GBP0.6775 per share in
accordance with the Company's share repurchase programme. These shares will be
cancelled upon settlement.
On 16 September 2020, the Company purchased 4,390,000 ordinary shares of GBP0.01
each in the capital of the Company at a price of GBP0.68 per share in accordance
with the Company's share repurchase programme. These shares will be cancelled
upon settlement.
On 17 September 2020, the Company purchased 2,311,920 ordinary shares of GBP0.01
each in the capital of the Company at a price of GBP0.68 per share in accordance
with the Company's share repurchase programme. These shares will be cancelled
upon settlement.
On 18 September 2020, the Company purchased 1,735,000 ordinary shares of GBP0.01
each in the capital of the Company at a price of GBP0.68 per share in accordance
with the Company's share repurchase programme. These shares will be cancelled
upon settlement.
On 21 September 2020, the Company purchased 18,123,000 ordinary shares of GBP0.01
each in the capital of the Company at a price of GBP0.68 per share in accordance
with the Company's share repurchase programme. These shares will be cancelled
upon settlement.
On 22 September 2020, the Company purchased 11,097,582 ordinary shares of GBP0.01
each in the capital of the Company at a price of GBP0.68 per share in accordance
with the Company's share repurchase programme. These shares will be cancelled
upon settlement.
Following the above transactions, the total number of shares in issue
(excluding Treasury shares) and the total number of voting rights in the
Company is 232,132,888 as at
30 September 2020.
On 8 October 2020, the Company declared a dividend of 1.1125p in relation to
the 3 month period to 30 September 2020 plus a catch up fifth interim dividend
of 1.5p in relation to 30 June 2020. The ex-dividend date for this distribution
was 15 October 2020, with a record date of 16 October 2020, and a payment date
of 30 October 2020.
The UK government in common with its European neighbours has implemented
unprecedented measures to restrict the possibility of transmission of the
COVID-19 virus by limiting personal contact and international travel. Whilst
the ultimate scope and duration of these measures is currently unclear, they
are likely to have a severe impact on the UK Economy, which the government and
the Bank of England are attempting to offset with both traditional and
unconventional fiscal and monetary policy measures. The Company's mortgage
portfolios are solely focused within the United Kingdom and as such the payment
profiles of the underlying loans will be impacted by any risks emerging from
changes in the macroeconomic environment. Furthermore, monetary policy measures
and the Term Funding Scheme affect the absolute level of interest rates and
therefore the spread that can be achieved between financial assets and
liabilities. The Company intends to mitigate the risk of this uncertainty on
the liquidity of its shares by undertaking a Strategic Review in consultation
with its shareholders.
These Audited Consolidated Financial Statements were approved for issuance by
the Board on 26 October 2020. There were no other subsequent events up until
this date.
SUBSIDIARY DETAILS
Company Registered Office
UK Corporate Funding Designated 5 George's Dock, IFSC, Dublin 1, Ireland.
Activity Company
Cornhill Mortgages No.2 Limited 35 Great St. Helen's, London, EC3A 6AP, United
(Dissolved 27 February 2020) Kingdom.
Cornhill Mortgages No.4 Limited 35 Great St. Helen's, London, EC3A 6AP, United
Kingdom.
Cornhill Mortgages No.5 Limited 35 Great St. Helen's, London, EC3A 6AP, United
Kingdom.
Cornhill Mortgages No.6 Limited 35 Great St. Helen's, London, EC3A 6AP, United
Kingdom.
Malt Hill No.1 Plc 35 Great St. Helen's, London, EC3A 6AP, United
(Dissolved 7 January 2020) Kingdom.
Malt Hill No.2 Plc 35 Great St. Helen's, London, EC3A 6AP, United
Kingdom.
Oat Hill No.1 Plc 35 Great St. Helen's, London, EC3A 6AP, United
Kingdom.
Barley Hill No.1 Plc 35 Great St. Helen's, London, EC3A 6AP, United
Kingdom.
GLOSSARY OF TERMS
ABS Asset-backed security whose income
payments and hence value are derived from
and collateralised (or "backed") by a
specified pool of underlying assets
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 Directive Alternative Investment Fund Managers
Directive 2011, 61/EU
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
Statements of the Company
BoAML the Bank of America Merrill Lynch
BTL Buy-to-let
BoE Bank of England
Board of Directors or Board or the Directors of the Company
Directors
CCJs County Court Judgements
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 UK Mortgages Limited
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
ECL Expected Credit Loss
EGM Extraordinary general meeting. An
extraordinary general meeting (EGM) is a
meeting other than a company's annual
general meeting (AGM)
FFI Foreign Financial Institution
FLS Funding for Lending Scheme
Forward Flow transaction Forward flow transactions involve the
appointment of a third party to originate
mortgages that meet criteria defined by
the investment manager with the intention
of securitising these mortgages at a
future date. These transactions have the
advantage that they can be customised
with a view to meeting desired levels of
risk and return. The disadvantage of this
type of transaction is that the timing of
loan origination is a function of the
market demand for the mortgages and the
size and quality of the originator's
sales infrastructure.
FRC the Financial Reporting Council
FTBs First Time Buyers
FVTPL Fair value through profit or loss
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)
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
ICR Interest Coverage Ratio, a debt ratio and
profitability ratio used to determine how
easily a company can pay interest on its
outstanding debt
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
Issuer 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
Net Asset Value Total Return the total return is calculated by adding
dividends since inception to the absolute
change in NAV and dividing it by the NAV
on the starting date
OECD the Organisation for Economic
Co-operation and Development
Offer means the offer for subscription of
Ordinary Shares at 1.000p 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
Purchased portfolio A purchased portfolio is the purchase of
a large group of related financial assets
in a single transaction
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 warehouse
or 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 an
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
SONIA the Sterling Overnight Interest Average
rate which is replacing LIBOR as a cost
of interbank funding
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 2018
(published in July 2018) applies to
accounting periods beginning on or after
1 January 2019. It places greater
emphasis on relationships between
companies, shareholders and stakeholders.
It also promotes the importance of
establishing a corporate culture that is
aligned with the company purpose,
business strategy, promotes integrity and
values diversity. All companies with a
Premium Listing of equity shares in the
UK are required under the Listing Rules
to report in their annual report and
accounts on how they have applied the
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. Five warehouse
SPVs; Cornhill Mortgages No. 1 Limited,
Cornhill Mortgages No. 2 Limited,
Cornhill Mortgages No. 3 Limited,
Cornhill Mortgages No. 4 Limited,
Cornhill Mortgages No. 5 Limited,
Cornhill Mortgages No. 6 Limited have
been established for the purpose of
warehousing
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 Corporate Broker
Manager Numis Securities Limited
Maitland Institutional Services The London Stock Exchange Building
Limited 10 Paternoster Square
Hamilton Centre London, EC4M 7LT
Rodney Way
Chelmsford, CM1 3BY
Portfolio Manager Independent Auditor
TwentyFour Asset Management LLP Deloitte LLP (appointed 2 December
8th Floor 2019)
The Monument Building PO Box 137
11 Monument Street Regency Court
London, EC3R 8AF Glategny Esplanade
St Peter Port
Guernsey, GY1 3HW
UK Legal Advisers to the Company Receiving Agent
Eversheds Sutherland LLP Computershare Investor Services plc
One Wood Street The Pavilions
London, EC2V 7WS Bridgwater Road
Bristol, BS99 6ZZ
Guernsey Legal Advisers to the Registrar
Company Computershare Investor Services
Carey Olsen (Guernsey) Limited
Carey House 1st Floor
Les Banques Tudor House
St Peter Port Le Bordage
Guernsey, GY1 4BZ St Peter Port
Guernsey, GY1 1DB
END
(END) Dow Jones Newswires
October 27, 2020 03:00 ET (07:00 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
