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| 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 |
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TIDMUKML
UK Mortgages Limited
INTERIM MANAGEMENT REPORT AND UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
For the period from 1 July 2018 to 31 December 2018
Legal Entity Identifier: 549300388LT7VTHCIT59
(Classified Regulated Information, under DTR 6 Annex 1 section 1.2)
UK Mortgages Limited has today, in accordance with DTR 6.3.5, released its
Unaudited Condensed Consolidated Interim Financial Statements for the period
ended 31 December 2018. The Report will shortly be available via the Company's
Portfolio Manager's website www.ukmortgageslimited.com and will shortly be
available for inspection online at www.morningstar.co.uk/uk/NSM
SUMMARY INFORMATION
The Company
UK Mortgages Limited ("UKML") was incorporated with limited liability in
Guernsey, as a closed-ended investment company on 10 June 2015. UKML's shares
were admitted to trading on the Specialist Fund Segment of the London Stock
Exchange on 7 July 2015.
UKML and the affiliate structure has been designed by the Board of Directors,
the Portfolio Manager, the Corporate Broker and legal advisors to ensure the
most efficient structure for regulatory and tax purposes.
UKML established 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"). UKML, the
Acquiring Entity, the Issuer SPV and the Warehouse SPVs (collectively, the
"Company") are treated on a consolidated basis for the purpose of the Unaudited
Condensed Consolidated Interim Financial Statements.
Investment Objective
The Company's investment objective is to provide Shareholders with access to
stable income returns through the application of relatively conservative levels
of leverage to portfolios of UK mortgages. In accordance with the Listing
Rules, the Company can only make a material change to its investment policy
with the approval of its Shareholders by Ordinary Resolution.
The Company expects that income will constitute, in the long term, 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 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 period For the For the period
from 01.07.2018 year ended from 01.07.2017
to 31.12.2018 30.06.2018 to 31.12.2017
Total Net Assets at period/year end GBP228,430,207 GBP233,990,428 GBP218,489,263
Net Asset Value per ordinary share at period/year 83.65p 85.69p 87.39p
end
Share price at period/year 82.83p 87.25p 90.10p
end
(Discount)/premium to Net Asset Value at period/ (0.98%) 1.82% 3.09%
year end
Net Asset Value Total Return 0.15% (0.81%) (2.11%)
Dividends declared and paid in the period/year 3.00p 6.00p 3.00p
Ongoing Charges
-UKML 0.95% 0.93% 0.92%
-DAC and subsidiaries 1.94% 1.65% 1.24%
Total ongoing charges for the Company 2.89% 2.58% 2.16%
CHAIRMAN'S STATEMENT
for the period from 1 July 2018 to 31 December 2018
I am pleased to report the results of the Company for the half year from 1 July
2018 to 31 December 2018, a period of solid progress as the origination of
mortgages at Keystone gathers pace and the credit performance of the Company's
other portfolios continues to exceed expectations.
A detailed breakdown of the Company's five investment pools is given below in
the Portfolio Manager's Report, but this resilient performance comes against an
increasingly turbulent macroeconomic background. Trade tensions, the pace of US
monetary tightening and volatile stock markets were the dominant themes of the
fourth quarter of 2018, while here in the UK investors were also consumed by
Brexit.
It seems incredible that at the time of writing, within days of the UK's
scheduled exit from the EU, we still do not know what Brexit will mean in
practice. We do not know if a deal with the EU can be agreed that will win
parliamentary approval, or if the UK might leave with no deal, or if the whole
process is to be paused or reversed.
Whatever the eventual outcome, this long period of uncertainty has eroded
business confidence, deferred capital spending and led to downgrades in
forecasts of UK economic growth. It has also seen the Bank of England seemingly
abandon its previous plans for gradual interest rate rises.
It is impossible to know exactly what effect the Brexit process has had on the
UK housing market, but is seems reasonable to assume that it hasn't been
positive. Whilst stagnation in house prices is not a major problem for the
Company, we do have concerns and potential economic exposure if a "hard"
Brexit, or worse a "no deal" Brexit leads to the Bank of England reintroducing
the Term Funding Scheme (TFS), or something very like it, to provide cheap
money to UK banks. Funding from the TFS contributed to aggressive price
competition in the mortgage market during the early life of the Company and has
certainly reduced mortgage investment returns. If we see a return of such cheap
funding, it may have an impact on the availability of and yield from future
portfolio purchases, and unless financing rates also fall in proportion, it may
impact the returns from future securitisations. Despite coming to an end in the
early part of 2018, the effects of TFS are still being felt to a certain
extent, as financing costs are broadly unchanged, while asset yields continue
to be compressed and competition in a thinner mortgage market remains fierce,
with pricing as the primary tool for originators striving for market share.
Outlook
2019 promises to be an important year for the Company. Our first
securitisation, Malt Hill No. 1, becomes callable in the first half of the year
and also in the same period, the TML loans in the Cornhill No. 2 warehouse will
move towards their first securitisation. As I emphasised in the last annual
report, these milestones have the potential to release capital and,
importantly, will allow the Portfolio Manager to update our projections, giving
greater detail on the probable progress of the NAV and more clarity on the
vital issue of when the dividend is likely to be covered. This remains the
primary concern of the Board.
Meanwhile, the origination of mortgages will continue at TML and Keystone, and,
as noted in the Portfolio Manager's report, progress at Keystone has been
particularly encouraging. The warehouse facility used to finance the Keystone
portfolio is designed to be drawn down in stages as mortgages are written,
minimising cash drag and generating accretive returns. This refinement of terms
from those in the original TML warehouse facility is a good example of the
focussed approach of the Portfolio Manager, to be as efficient as possible in
the deployment of capital, and with the Company's capital now invested, a
similar refinement will also be negotiated for the next TML facility. This
flexibility and efficiency will be improved further with the addition of a
revolving credit facility, which we hope to finalise shortly. While we hope to
grow the Company significantly over the next few years, the cost of new equity
capital is currently high and using a credit facility is a better option.
In the face of the challenges noted, the Board are confident that all
appropriate steps are being taken while we are still concentrating on
increasing the dividend cover.
Thank you for your continuing support.
Christopher Waldron
Chairman
22 March 2019
PORTFOLIO MANAGER'S REPORT
for the period from 1 July 2018 to 31 December 2018
Market Commentary
The second half of 2018 was a generally weak, volatile and uncertain one for
all markets. News flow was dominated by geopolitical uncertainty with South
Korean sanctions, emerging markets currency volatility, Italian budget concerns
and a possible US-China trade war amongst the major headlines. The year closed
with the US Government shutdown and of course Brexit at the forefront of
investors' minds, with the uncertainty and potential for further resignations
on all sides likely to continue right up the deadline date, or even beyond if
there were to be an extension.
As usual, President Trump was never far from the headlines, but despite this
the path of US interest rates broadly followed expectations with two rate
increases in the second half of the year making four in total for 2018, albeit
the tone for future rises has softened somewhat with the final increase in
December seen as a "dovish hike".
In the UK, the base rate increase in August was also widely predicted, but
again like the US, expectations for the future path of rates have flattened
significantly albeit with Brexit uncertainty the main driver, and were there to
be a soft Brexit then the curve would be expected to steepen again as most
economic indicators have positive momentum.
In Europe, the process has only just begun with the cessation of new asset
purchases but reinvestments still ongoing for the foreseeable future, and the
ECB's recent announcement of a new TLTRO and extended forward guidance on
interest rates suggesting no rate rises in 2019 means the process will most
likely be a long one.
This uncertainty fed through into all markets, with significant falls in global
equity markets through the last quarter and high levels of volatility in fixed
income credit markets. Despite a gradual but relatively insignificant drift
wider through the summer, ABS markets mostly held firm throughout this wider
turmoil, but as all markets worsened through November and December ABS was
forced to follow suit and play catch-up, ending the year at the widest levels
seen since the early part of 2016.
This widening was also driven by a heavy primary calendar towards the end of
the year, with a broad range of deals across multiple asset classes including a
number of UK RMBS deals. Much of this was prompted by the upcoming
introduction of new regulations for European ABS markets, applicable from the
start of 2019, but as a number of technical points were not expected to be
resolved until at least Q2 so several lenders chose to pre-fund their early
2019 requirements before the new year began.
As was widely predicted, the primary market essentially came to a halt in early
2019, and with the exception of one UK bank deal from Clydesdale Bank, who
chose to issue outside the new "Simple, Transparent and Standardised" ("STS")
regulatory standard in order to meet their timely funding needs and the
expectation for the occasional specialist deal, the market is not expected to
fully re-open until the final technical guidance is clarified, most likely in
Q2. As a result, after a slow start whilst some secondary auctions were
absorbed, spreads have begun to recover, albeit initially more noticeably in
the mezzanine areas than senior.
Meanwhile, housing markets have essentially stagnated through the second half
of 2018, with sluggish house prices characterised by weakness in London and the
South offset by ongoing but slower growth in most other regions. Data variance
between the various indices is common on a month by month basis but the medium
term trend across them all is generally the same, and the broader trend points
to a further slowdown in growth.
Furthermore, both the demand and supply sides of the market remain negative
with the lack of new buyer enquiries offset by a fall in new instructions to
sell - a factor broadly attributed to uncertainty whilst Brexit remains
unresolved. Mortgage approvals remain broadly flat, albeit the weak supply and
demand dynamic meant that 2018 was a record year for re-mortgages according to
UK Finance. However, high employment and wage growth coupled with mortgage
rates only just ticking up from historical lows may help to restart sale and
purchase activity once the outcome of Brexit is known.
Portfolio Review
Having completed the second Coventry Building Society portfolio purchase and
its securitisation as Malt Hill No.2 at the end of June 2018, along with the
additional GBP20m capital raising, work began immediately and continued through
the summer to structure and complete the Keystone Property Finance ("Keystone")
transaction, the Company's fifth investment (Cornhill Mortgages No. 4 Limited),
to allow them to begin lending for UKML into the autumn market. National
Australia Bank (rated Aa3/AA-/AA-) was appointed as warehouse provider,
arranger and swap counterparty whilst Pepper UK, one of the most experienced
third party mortgage servicers was employed to manage collections and
servicing. Existing relationships with the various administrative roles
required in such arrangements (e.g. cash manager, account bank, trustee and
other similar roles) were renewed with existing providers to ensure continuity.
Lending activity for Cornhill Mortgages No. 4 Limited began in early September
and saw strong application flow immediately, reflecting Keystone's position as
a well-known existing originator in the portfolio landlord Buy-to-Let mortgage
marketplace. By period-end a total of 387 applications had been received
representing a total mortgage amount of over GBP85m, of which 104, worth
approximately GBP26m, had been rejected. The first completions took place in
early December reflecting a typical 3-month period from application to
completion with 18 loans worth slightly over GBP4m completed by year-end and a
further 80 applications at the binding offer stage, worth around GBP15m. After a
brief pause during the seasonal break, origination volumes have continued at a
pace, even moving slightly ahead of initial expectations which is highly
encouraging.
Similarly, origination from The Mortgage Lender, UKML's other forward-flow
investment is now seeing encouraging growth after a period of sluggish
origination, particularly during the time that the Bank of England was
providing the banking sector with extraordinary funding via its Term Funding
Scheme, and following a re-branding and some simplifying modifications to their
product range, The Mortgage Lender has recently been experiencing record
applications and completions.
The Company's other investments continue to perform well within expectations.
Having adopted IFRS 9 from 1 July 2018, (as described in note 2 to the
Condensed Consolidated Interim Financial Statements) Expected Loss Provisions
have not proved to be significantly different from our original expectations in
early 2018. However, variations in arrears from month to month, most
particularly in the Oat Hill No.1 portfolio which includes the most seasoned
loans in our portfolios and therefore the greatest likelihood of arrears
volatility, mean that the provisions in this report are higher than the
estimate indicated in the June 2018 accounts.
The key attributes and performance indicators for all investments can be seen
in the table below.
Transaction Malt Hill 1 Oat Hill 1 Malt Hill 2 Cornhill 4 Cornhill 2
Type Buy-to Let Owner
Occupied
Status Securitised Securitised Securitised Forward Forward flow
flow Warehouse
Warehouse
Portfolio Size
Completed GBP206.3m (1,201 GBP528.0m GBP348.2m GBP4.1m (18) GBP197.8m
loans) (4,456) (2,066) (1,128)
Pipeline - - - GBP59.1m GBP60.1m (306)
(265)
Senior Notes GBP169.1m GBP429.3m GBP315.7m - -
Outstanding
Leverage (as at 31st 4.1 11 7.1 2.8* -
Oct 2018)
Yield (IRR) 5.81% 10.14% 6.41% 8.31% 7.23%
First Optional May-19 May-20 May-21 - -
Redemption Date
Arrears
31-60 Count 1 23 - - 1
Loan Balance GBP24,765 GBP3,549,735 - - GBP280,445
Arrears GBP1,581 GBP10,675 - - GBP2,553
61-90 Count - 10 - - -
Loan Balance GBP864,316 - - -
-
Arrears - GBP4,983 - -
-
90+ Count 1 34 - - 3
Loan Balance GBP127,925 GBP4,313,130 - - GBP509,502
Arrears GBP1,937 GBP87,988 - - GBP16,400
IFRS 9 Expected Credit GBP17,607 GBP990,755 GBP13,301 GBP884 GBP250,696
Loss Provision
After issue costs, the NAV started at a base of 98 pence per share in July
2015. The table below shows the major contributors to the performance of the
NAV since that time. The longer time taken for the portfolio to become fully
invested and the ongoing payment of the dividend of 6p per annum have been the
major drivers of NAV performance, although the drag has reduced following the
acquisition and securitisation of the Malt Hill No.2 transaction and will
continue to do so following the securitisation of the TML portfolio, and
following the refinancing of the Malt Hill No.1 transaction and as the Keystone
portfolio and second TML portfolio grow.
The -0.9p fair value movement in the swap valuation reflects a change from
-1.1p in June 2018. The change is primarily due to the new hedge on Malt Hill
No. 2 not qualifying for hedge accounting at the year end, due to the timing of
the implementation of the hedge being mis-matched with the changeover from IAS
39 to IFRS 9, but qualifying for the period beginning July 2018 on a
prospective basis.
NAV to end December 2018
Start NAV 98.0
Net Interest 14.0
Dividend -16.5
Costs (Servicing, Operating, -10.5
Warehouse)
Swap MTM -0.9
IFRS 9 Expected Credit Losses -0.5
Fund NAV 83.6
Market and Investment Outlook
Following the volatility at the end of 2018, the tone in broader markets has
become more supportive in the New Year, but there remain numerous unpredictable
events that could alter sentiment. Here in the UK, the Brexit saga continues
with deal/no-deal, postponements, resignations and various parliamentary voting
threats, including a second referendum and even a general election all within
the realm of possibilities. The outcome remains extremely uncertain; with a lot
depending on what concessions Prime Minister May can garner from her EU
counterparts.
It was encouraging to see some confidence return to European ABS in the New
Year, with some fresh impetus in the secondary market supported by broader
credit markets. As expected, the primary market was left in limbo and therefore
virtually closed whilst waiting for clarity from the regulators, although we do
expect to see a few non-bank RMBS and consumer deals emerge later in Q1, and
possibly some bank issuers will take a pragmatic approach to funding as it is
required, as opposed to seeing it as a necessity to get deals placed with an
STS label. There appears to be strong investor demand for bonds at wider
spreads, which should provide a decent technical backdrop for the market in the
near term.
The expectation is that the TML portfolio will have achieved a suitable size
for securitisation by late Q1/early Q2 and work is in progress with the aim of
achieving this, subject of course to market conditions when the structuring of
the transaction has been completed and is ready to be marketed. The
securitisation of the current assets will also require the arrangement of a new
warehouse facility for a second follow-up portfolio. Furthermore, the first
optional call date of the Malt Hill No.1 portfolio is due in late May, and
given that a significant number of the loans in this portfolio are due to
undergo a reset during the summer of 2019, it's likely that refinancing them
into warehouse will be the optimal solution, before arranging a further term
financing once the majority of resets have occurred. These projects are
expected to occupy the bulk of the Portfolio Manager's attention in the
foreseeable future, along with ongoing work on the previously announced
intention to seek a revolving credit facility in order to more efficiently aid
the capital management of the Company. Alongside this, further investment
opportunities continue to be analysed and assessed as appropriate, and should
suitable investments be identified, these will also be progressed, along with
any potential capital raising as may be required.
BOARD OF DIRECTORS 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 JZ
Capital Partners Limited as well as 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 - 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
Mr Le Page is a director of Man Fund Management Guernsey Limited, Man Group
Japan Limited and FRM Investment Management Limited which are subsidiaries of
Man Group Plc. He is responsible for managing hedge fund portfolios. Mr Le Page
is currently the Audit Committee Chairman for Bluefield Solar Income Fund
Limited and was formerly the Audit Committee Chairman for Cazenove Absolute
Equity Limited and Thames River Multi Hedge PCC Limited. He has extensive
knowledge of, and experience in, the fund management and the hedge fund
industry. Prior to joining FRM, he was an Associate Director at Collins Stewart
Asset Management from January 1999 to July 2005, where he was responsible for
managing the firm's hedge fund portfolios and reviewing fund managers. He
joined Collins Stewart in January 1999 where he completed his MBA in July 1999.
Mr Le Page was appointed to the Board of Directors 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 Acorn Income Fund Limited, of which she is Chairman. Mrs Green was
appointed to the Board of Directors on 16 June 2016.
STATEMENT OF PRINCIPAL RISKS AND UNCERTAINTIES
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 of Directors takes
account of the risk which has been taken in order to achieve that return. The
Board of Directors considers the following principal risks to be relevant for
the next six months:
* 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 of Directors 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 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 of
Directors agreement, to the extent that Board is comfortable that future
income flows will be sufficient to restore any distributed capital.
* The risk of the Company being unable to invest or reinvest capital repaid
from mortgage loans to purchase additional mortgage portfolios in a timely
manner. The risk is mitigated by the Board of Directors monitoring the
portfolio pipeline in regular communication with the Portfolio Manager, and
in quarterly and ad hoc Board of Directors' 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 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 has been
mitigated by the Portfolio Manager hiring additional team members with
extensive securitisation experience and by being engaged with the UK RMBS
market and service providers. The Company may also use short term financing
where needed to enable it to optimise the timing of its securitisation
transactions.
* The risks associated with the UK's withdrawal from the European Union.
Whilst they remain unclear, there is an increased likelihood of a period of
macroeconomic uncertainty. The Company's mortgage portfolios are solely
focused within the United Kingdom and as such will be impacted by any risks
emerging from changes in the macroeconomic environment. In particular, any
reintroduction of short term funding facilities by the Bank of England to
support the UK banking system may depress the returns available from
mortgage portfolios.
Going Concern
Under the 2016 UK Corporate Governance Code (the "Code") and applicable
regulations, the Directors are required to satisfy themselves that it is
reasonable to assume that the Company is a going concern and to identify any
material uncertainties to the Company's ability to continue as a going concern
for at least 12 months from the date of approving the financial statements. The
Company has voluntarily elected to comply with the Code.
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 Unaudited Condensed Consolidated Interim
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 for at
least 12 months from the date of approval of these Unaudited Condensed
Consolidated Interim Financial Statements.
Related Parties
Other than fees payable in the ordinary course of business, there have been no
material transactions with related parties which have affected the financial
position or performance of the Company in the financial period. Please refer to
note 12 for further details.
RESPONSIBILITY STATEMENT
The Directors confirm that to the best of their knowledge:
· these reviewed but Unaudited Condensed Consolidated Interim Financial
Statements have been prepared in accordance with International Accounting
Standard 34, "Interim Financial Reporting" and give a true and fair view of the
assets, liabilities, financial position and profit or loss of UKML and its
subsidiaries included in the consolidation taken as a whole, as required by the
UK Listing Authority's Disclosure and Transparency Rule ("DTR") 4.2.4R.
· the interim management report includes a fair review of the information
required by:
By order of the Board of Directors
Christopher Waldron
Chairman
Paul Le Page
Director
2_ March 2019
Independent review report to UK Mortgages Limited
Our conclusion
We have reviewed the accompanying condensed consolidated interim financial
information of UK Mortgages Limited and its subsidiaries (together the
"Company") as of 31 December 2018. Based on our review, nothing has come to our
attention that causes us to believe that the accompanying condensed
consolidated interim financial information is not prepared, in all material
respects, in accordance with International Accounting Standard 34, 'Interim
Financial Reporting', and the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The accompanying condensed consolidated interim financial information
comprises:
· the condensed consolidated statement of financial position as of 31
December 2018;
· the condensed consolidated statement of comprehensive income for the
six-month period then ended;
· the condensed consolidated statement of changes in equity for the
six-month period then ended;
· the condensed consolidated statement of cash flows for the six-month
period then ended; and
· the notes, comprising a summary of significant accounting policies and
other explanatory information.
The condensed consolidated interim financial information has been prepared in
accordance with International Accounting Standard 34, 'Interim Financial
Reporting', and the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority.
Our responsibilities and those of the directors
The Directors are responsible for the preparation and presentation of this
condensed consolidated interim financial information in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
Our responsibility is to express a conclusion on this condensed consolidated
interim financial information based on our review. This report, including the
conclusion, has been prepared for and only for the Company for the purpose of
complying with the Disclosure Guidance and Transparency Rules sourcebook of the
United Kingdom's Financial Conduct Authority and for no other purpose. We do
not, in giving this conclusion, accept or assume responsibility for any other
purpose or to any other person to whom this report is shown or into whose hands
it may come save where expressly agreed by our prior consent in writing.
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements 2410, 'Review of interim financial information performed by the
independent auditor of the entity' issued by the International Auditing and
Assurance Standards Board. A review of interim financial information consists
of making inquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing and consequently does not enable us to
obtain assurance that we would become aware of all significant matters that
might be identified in an audit. Accordingly, we do not express an audit
opinion.
We have read the other information contained in the Interim Management Report
and considered whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed consolidated interim
financial statements.
PricewaterhouseCoopers CI LLP
Chartered Accountants
Guernsey, Channel Islands
22 March 2019
(a) The maintenance and integrity of the Company's website is the
responsibility of the directors; the work carried out by the auditors does not
involve consideration of these matters and, accordingly, the auditors accept no
responsibility for any changes that may have occurred to the Interim Management
Report and Unaudited Condensed Consolidated Interim Financial Statements since
they were initially presented on the website.
(b) Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
CONDENSED CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
for the period from 1 July 2018 to 31 December 2018
For the For the
period from period from
01.07.2018 01.07.2017
to to
31.12.2018 31.12.2017
Unaudited Unaudited
Note GBP GBP
Income
Interest income on mortgage 19,712,544 12,498,485
loans
Interest income on cash and cash - 2,433
equivalents
Net gain from derivative financial 7 434,896 123,814
instruments
Total income 20,147,440 12,624,732
Interest expense on loan notes 11 7,348,625 4,185,782
Mortgage loans servicing fees 1,473,694 1,019,194
Loan note issue fees and borrowing costs 10 & 11 1,367,279 831,735
amortised
Net interest expense on financial 1,299,710 1,281,012
liabilities at fair value through profit
and loss
Amortisation of discount on loan 11 1,279,788 -
notes
Interest expense on borrowings 10 1,253,677 313,546
Mortgage loan write offs and 2 & 5 735,070 333,121
provision
Portfolio management fees 12 692,806 663,464
General expenses 425,563 243,352
Legal and professional fees 333,633 466,610
Swap costs amortised 234,419 -
Audit fees 13 189,114 177,267
Administration and secretarial 13 104,574 87,111
fees
Directors' fees 12 67,500 67,500
Borrowings facility fees 10 52,502 230,770
AIFM fees 13 49,763 48,243
Depositary fees 13 34,700 38,841
Corporate broker fees 24,015 24,053
Custody fees 13 11,095 12,006
Total expenses 16,977,527 10,023,607
Total comprehensive gain for the 3,169,913 2,601,125
period
Earnings per ordinary share - 0.012 0.010
basic & diluted 3
All items in the above statement derive from continuing operations.
The notes form an integral part of these Unaudited Condensed Consolidated
Interim Financial Statements.
CONDENSED CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
as at 31 December 2018
31.12.2018 30.06.2018
Unaudited Audited
Assets Note GBP GBP
Non-current assets
Mortgage loans 5 1,228,481,285 1,205,151,843
Reserve fund 6 18,061,100 17,761,100
Total non-current assets 1,246,542,385 1,222,912,943
Current assets
Mortgage loans 5 11,610,401 10,652,022
Trade and other receivables 8 4,653,301 3,722,809
Cash and cash equivalents 40,096,828 43,784,286
Total current assets 56,360,530 58,159,117
Total assets 1,302,902,915 1,281,072,060
Liabilities
Non-current liabilities
Borrowings 10 3,068,229 104,445,310
Loan notes 11 910,994,891 937,924,240
Total non-current liabilities 914,063,120 1,042,369,550
Current liabilities
Borrowings 10 155,164,572 -
Financial liabilities at fair value through 7 1,380,642 1,371,362
profit and loss
Trade and other payables 9 3,864,374 3,340,720
Total current liabilities 160,409,588 4,712,082
Total liabilities 1,074,472,708 1,047,081,632
Net assets 228,430,207 233,990,428
Equity
Share capital account 264,749,999 264,749,999
Other reserves (36,319,792) (30,759,571)
Total equity 228,430,207 233,990,428
Ordinary shares in issue 273,065,390 273,065,390
Net Asset Value per ordinary share 4 0.8365 0.8569
The Unaudited Condensed Consolidated Interim Financial Statements were approved
and authorised for issue by the Board of Directors on 22 March 2019 and signed
on its behalf by:
Christopher Waldron
Chairman
Paul Le Page
Director
The notes form an integral part of these Unaudited Condensed Consolidated
Interim Financial Statements.
CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
for the period from 1 July 2018 to 31 December 2018
Share capital Other Total
account reserves equity
Unaudited Unaudited Unaudited
GBP GBP GBP
Balance at 30 June 2018 264,749,999 (30,759,571) 233,990,428
Effect of adoption of IFRS 9 (note 2) - (538,172) (538,172)
Balance at 1 July 2018 264,749,999 (31,297,743) 233,452,256
Dividends paid - (8,191,962) (8,191,962)
Total comprehensive gain for the - 3,169,913 3,169,913
period
Balance at 31 December 2018 264,749,999 (36,319,792) 228,430,207
Share capital Other Total
account reserves equity
Unaudited Unaudited Unaudited
GBP GBP GBP
Balance at 1 July 2017 245,000,000 (21,611,862) 223,388,138
Dividends paid - (7,500,000) (7,500,000)
Total comprehensive gain for the - 2,601,125 2,601,125
period
Balance at 31 December 2017 245,000,000 (26,510,737) 218,489,263
The notes form an integral part of these Unaudited Condensed Consolidated
Interim Financial Statements.
CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
for the period from 1 July 2018 to 31 December 2018
For the For the
period from period from
01.07.2018 to 01.07.2017 to
31.12.2018 31.12.2017
Unaudited Unaudited
Note GBP GBP
Cash flows from operating activities
Total comprehensive gain for the period 3,169,913 2,601,125
Adjustments for:
Mortgage acquisition fees capitalised 5 (10,621) -
Amortised mortgage acquisition fees 5 64,969 98,420
released
Mortgage loans written off and provision 5 735,070 333,121
Net gain from derivative financial 7 (434,896) (123,814)
instruments
Amortisation adjustment under effective
interest rate method 5 (3,234,627) (3,000,425)
Borrowing charges amortised 10 373,002 -
Loan note issue fees amortised 11 994,277 573,999
Amortisation of discount on loan notes 11 1,279,788 -
Purchase of mortgage loans 5 (56,910,650) (61,812,863)
Mortgage loans repaid 5 34,974,042 61,796,447
Increase in reserve fund 6 (300,000) -
Increase/(decrease) in trade and other 523,654 (1,084,773)
payables
(Increase)/decrease in trade and other (930,492) 674,213
receivables
Net cash (outflow)/inflow from operating (19,706,571) 55,450
activities
Cash flows from financing activities
Proceeds from borrowings 10 54,500,000 66,000,000
Increase in borrowing fees capitalised 10 (1,085,511) -
Increase in loan note issue fees 11 (269,539) (44,202)
capitalised
Repayments of loan notes 11 (28,933,875) (67,612,589)
Dividends paid 17 (8,191,962) (7,500,000)
Net cash inflow/(outflow) from financing 16,019,113 (9,156,791)
activities
Decrease in cash and cash equivalents (3,687,458) (9,101,341)
Cash and cash equivalents at beginning of 43,784,286 86,022,869
period
Cash and cash equivalents at end of period 40,096,828 76,921,528
The notes form an integral part of these Unaudited Condensed Consolidated
Interim Financial Statements.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
for the period from 1 July 2018 to 31 December 2018
1. General Information
UKML was incorporated with limited liability in Guernsey, as a closed-ended
investment company on 10 June 2015. UKML's Shares were listed with the UK
Listing Authority and admitted to trading on the Specialist Fund Segment of the
London Stock Exchange on 7 July 2015.
The Unaudited Condensed Consolidated Interim Financial Statements comprise the
financial statements of UK Mortgages Limited, UK Mortgages Corporate Funding
Designated Activity Company, Malt Hill No.1 Plc, Malt Hill No. 2 Plc, Oat Hill
No.1 Plc, and the Warehouse SPVs; Cornhill Mortgages No.2 Limited, Cornhill
Mortgages No.3 Limited (until placed into liquidation on 9 February 2018) and
Cornhill Mortgages No. 4 Limited (incorporated 7 August 2018) as at 31 December
2018, together referred to as the "Company". The Warehousing SPVs are placed
into liquidation on 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 Unaudited Condensed Consolidated Interim Financial
Statements. Cornhill Mortgages No.1 Limited was fully dissolved 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 Unaudited Condensed Consolidated Interim Financial Statements for the
period from 1 July 2018 to 31 December 2018 have been prepared on a going
concern basis in accordance with IAS 34 "Interim Financial Reporting", the
Listing Rules of the London Stock Exchange and applicable legal and regulatory
requirements.
The Unaudited Condensed Consolidated Interim Financial Statements should be
read in conjunction with the Annual Consolidated Financial Statements for the
year ended 30 June 2018 which were prepared in accordance with International
Financial Reporting Standards ("IFRS") and which received an unqualified audit
report.
b) Changes in accounting policy
In the current financial period, there have been no other changes to the
accounting policies from those applied in the most recent audited annual
financial statements aside for those listed below.
IFRS 9 Financial Instruments
IFRS 9 'Financial Instruments', brings together the classification and
measurement, impairment and hedge accounting phases of the IASB project to
replace IAS 39, and is effective for annual periods beginning on or after 1
January 2018. IFRS 9 replaces the provisions of IAS 39 that relate to the
recognition, classification and measurement of financial assets and financial
liabilities, impairment of financial assets and hedge accounting.
The key elements of IFRS 9 are as follows:
Classification and measurement
IFRS 9 contains a new classification and measurement approach for financial
assets that reflects the business model in which assets are managed and their
cash flow characteristics. IFRS 9 introduces a principal based approach and
applies one classification approach for all types of financial assets. 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).
IFRS 9 includes 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. These categories
replace the existing IAS 39 classifications of fair value through profit and
loss, available for sale ("AFS"), loans and receivables, and held-to-maturity.
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:
(a) it is held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets; 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.
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.
For financial liabilities, most of the pre-existing requirements for
classification and measurement previously included in IAS 39 were carried
forward unchanged into IFRS 9.
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 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 the 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
The "incurred loss model" under IAS 39 is replaced with a new forward looking
"expected loss model". Impairment provisions are driven by changes in credit
risk of instruments, with a provision for lifetime expected credit losses
recognised where the risk of default of an instrument has increased
significantly since initial recognition. Risk of default and expected credit
losses must incorporate forward-looking and macroeconomic information.
Under IFRS 9, no impairment loss is recognised on equity investments. IFRS 9
requires a loss allowance to be recognised at an amount equal to either 12
month expected credit loss ("ECL"), or lifetime ECL.
Credit loss allowances will be 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 ECLs will be 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.
Stage 1 and Stage 2 effectively replace the collectively-assessed allowance for
loans not yet identified as impaired recorded under IAS 39, while Stage 3
effectively replaces the individually and collectively assessed allowances for
impaired loans. Under IFRS 9, the population of financial assets and
corresponding allowances disclosed as Stage 3 will not necessarily correspond
to the amounts of financial assets currently disclosed as impaired in
accordance with IAS 39. Consistent with IAS 39, loans are written off when
there is no realistic probability of recovery.
Given all financial assets within the scope of the IFRS 9 impairment model will
be assessed for at least 12-months of ECLs, and the population of financial
assets to which full lifetime ECL applies is larger than the population of
impaired loans for which there is objective evidence of impairment in
accordance with IAS 39, loss allowances will be higher under IFRS 9 relative to
IAS 39.
Changes in the required credit loss allowance, including the impact of
movements between Stage 1 and Stage 2, will be recorded in profit or loss. The
impact of moving between 12 month and lifetime ECLs and the application of
forward looking information, means provisions are expected to be more volatile
under IFRS 9 than IAS 39.
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. The
main difference between Stage 1 and Stage 2 is the respective PD horizon. Stage
1 estimates will use a maximum of a 12- month PD while Stage 2 estimates will
use a lifetime PD. Stage 3 estimates will continue to leverage existing
processes for estimating losses on impaired loans, however, these processes
will be updated to reflect the requirements of IFRS 9, including the
requirement to consider multiple forward-looking scenarios.
Movements between Stage 1 and Stage 2 are based on whether an instrument's
credit risk as at the reporting date has increased significantly relative to
the date it was initially recognised. Movements between Stage 2 and Stage 3 are
based on whether financial assets are credit-impaired as at the reporting date.
The determination of credit-impairment under IFRS 9 will be similar to the
individual assessment of financial assets for objective evidence of impairment
under IAS 39. Assets can move in both directions through the stages of the
impairment model.
In assessing whether a borrower is credit impaired the following indicators
will be considered:
· Qualitative; e.g. breaches of covenant;
· Quantitative; e.g. overdue status; and
· Based on data developed internally and obtained from external sources.
Inputs into the assessment of whether a financial instrument is in default and
their significant may vary over time to reflect changes in circumstances.
Under IFRS 9, when determining whether the credit risk (i.e. the risk of
default) on a financial instrument has increased significantly since initial
recognition, reasonable and supportable information that is relevant and
available without undue cost or effort, including both quantitative and
qualitative information is used to complete an analysis based on historical
experience, credit assessment and forward looking information.
The criteria for determining whether credit risk has increased significantly
will vary by portfolio and will include a backstop based on delinquency.
The measurement of ECLs for each stage and the assessment of significant
increases in credit risk must consider information about past events and
current conditions as well as reasonable and supportable forward looking
information. A 'base case' view of the future direction of relevant economic
variables and a representative range of other possible forecast scenarios. The
process will involve developing two or more additional economic scenarios and
considering the relative probabilities of each outcome.
The base case will represent a most likely outcome and be aligned with
information used for other purposes, such as strategic planning and budgeting.
The other scenarios will represent more optimistic and more pessimistic
outcomes.
The estimation and application of forward-looking information requires
significant judgement. PD, LGD and EAD inputs used to estimate Stage 1 and
Stage 2 credit loss allowances are modelled based on the macroeconomic
variables (or changes in macroeconomic variables) that are most closely
correlated with credit losses in the relevant portfolio. The Bank of England
macroeconomic scenarios as well as baseline upside and downside economic
scenarios have been used in the expected credit loss calculation by the
Company.
Hedge accounting
The Company has adopted hedge accounting from 1 July 2017 to reduce volatility
in the Consolidated Statement of Comprehensive Income. The hedge accounting
requirements of IFRS 9 have been simplified and are more closely aligned to an
entity's risk management strategy. Under IFRS 9 all existing hedging
relationships will qualify as continuing hedging relationships.
Transition
To manage the transition to IFRS 9, the Portfolio Manager implemented a
comprehensive program that focused on the key areas of impact, including
financial reporting, data, systems and processes. Throughout the project the
Audit Committee has been provided with updates, to ensure escalation of key
issues and risks. As part of the implementation of IFRS 9 the Portfolio Manager
has:
· reviewed the classification and measurement of financial instruments
under the requirements of IFRS 9;
· developed and validated a set of IFRS 9 models for calculating expected
credit losses on the Company's mortgage portfolios; and
· implement internal governance processes which are appropriate for IFRS
9.
Impact of adoption
The adoption of IFRS 9 from 1 July 2018 resulted in changes in accounting
policies and adjustments to the amounts in these Unaudited Condensed
Consolidated Interim Financial Statements. The new accounting policies are set
out within this note. In accordance with the transitional provisions of IFRS 9
(7.2.15) and (7.2.26), comparative figures have not been restated.
Differences in the carrying amounts of financial assets and financial
liabilities resulting from the adoption of IFRS 9 were recognised in other
reserves in the Condensed Consolidated Statement of Changes in Equity as at 1
July 2018.
I. Classification
Loans and advances that were categorised as loans and receivables and measured
at amortised cost under IAS 39 are now categorised as financial assets measured
at amortised cost under IFRS 9. 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.
II. Hedge accounting
On 1 July 2017, the Directors designated the Malt Hill No.1 Plc and Cornhill
No.2 Limited derivatives as fair value hedges and began hedge accounting from
that date. Hedge accounting in relation to Malt Hill No.2 Plc derivative
commenced on 1 July 2018. At 30 June 2018, Malt Hill No.2 and Cornhill No.2 did
not qualify for hedge accounting due to the retrospective testing being
ineffective. As such the movement in Cornhill No.2's fair value swap since
December 2017, which was the date previously tested and proved to be effective,
and all of the movement in Malt Hill No.2's fair values had been charged
directly to the Statement of Comprehensive Income for the year ended 30 June
2018. Prospective testing has shown all of swaps to which the Company is a
counterparty as effective, therefore they qualify for hedge accounting under
IFRS 9 from the 1 July 2018 and there is no impact of adopting IFRS 9.
III. Expected credit losses
The key impact of adoption of IFRS 9 for the Company is the requirement to
record impairment charges at the inception of a mortgage loan based on the
future losses that are expected to be incurred and this could result in a
negative movement on the mortgage portfolio at the commencement of a mortgage
loan relationship. Implementation of IFRS 9 results in changes in the
recognition of impairment, as a consequence, the accounting value of the
Company's mortgage loan portfolio has changed. The impact of adopting the new
accounting standard on 1 July 2018 has been charged to equity in accordance
with the transition rules of IFRS 9. The ongoing impact on profit varies
according to the stage of development of the mortgage loan portfolio, the LTVs
and credit quality of the portfolios.
The implementation resulted in a reduction to retained earnings of GBP538,172
(0.20 per cent of NAV as at 30 June 2018). The impact of 0.20% is relatively
minimal in the context of the entire portfolio and reflects the high credit
quality of the loans as demonstrated by the low LTVs and prudent lending
criteria on the underlying mortgages. The expected credit losses provision as
at 31 December 2018 is GBP1,273,243, a movement of GBP735,070 in the period to 31
December 2018, and is included in the Condensed Consolidated Statement of
Comprehensive Income.
GBP
Closing other reserves 30 June 2018 - IAS 39 (30,759,571)
Effect of adopting IFRS 9 on expected credit loss provision on
mortgage loans on 1 July 2018 (538,172)
Effect of adopting IFRS 9 on hedge accounting on 1 July 2018 -
Opening other reserves 1 July 2018 - IFRS 9 (31,297,743)
The Company has assessed the impact of adopting IFRS 9 on its other financial
assets held at amortised cost, and has confirmed no impact on adoption.
IFRS 15 'Revenue from Contracts with Customers'
IFRS 15 'Revenue from Contracts with Customers' was published in May 2016 and
specifies how and when to recognise revenue as well as requiring entities to
provide users of financial statements with more informative, relevant
disclosures. IFRS 15 provides a single, principles based five-step model to be
applied to all contracts with customers. IFRS 15 is effective for annual
reporting periods beginning on or after 1 January 2018. There is no material
impact on the Company's financial statements as a result of this new standard.
c) Critical judgements and estimates
In the current financial period, aside for the impact of adopting IFRS 9 and
recognition of the expected credit loss provision, there have been no changes
to the significant critical accounting judgements, estimates and assumptions
from those applied in the most recent audited annual financial statements.
d) Standards, amendments and interpretations issued but not yet effective
The standards endorsed by the EU that are not yet required to be applied but
can be early adopted are set out below. These standards have not been applied
in the current period. The Directors are currently assessing whether these
standards will have a material impact on the financial statements of the
Company.
· Amendments to IFRS 9: Prepayment features with negative compensation -
Effective date 1 January 2019
· IFRIC 23: Uncertainty over income tax treatments - Effective date 1
January 2019
· IFRS 16: Leases - Effective date 1 January 2019
3. Earnings per Ordinary Share - basic & diluted
The gains per Ordinary Share of GBP0.012 (31 December 2017: GBP0.010) - basic and
diluted are equivalent and have been calculated based on the weighted average
number of Ordinary Shares of 273,065,390 (31 December 2017: 250,000,000) and a
net gain of GBP3,169,913 (31 December 2017: GBP2,601,125).
4. Net Asset Value per Ordinary Share
The Net Asset Value of each share of GBP0.84 (30 June 2018: GBP0.86) is determined
by dividing the net assets of the Company GBP228,430,207 (30 June 2018: GBP
233,990,428) by the number of shares in issue at 31 December 2018 of
273,065,390 (30 June 2018: 273,065,390).
5. Mortgage loans
For the period For the year
from from 01.07.2017
01.07.2018 to to 30.06.2018
31.12.2018
Unaudited Audited
GBP GBP
Mortgage loans at start of the period*/year 1,215,265,693 841,876,173
Mortgage loans purchased 56,910,650 465,950,403
Effective interest rate adjustment 3,234,627 5,845,006
Mortgage loans repaid (34,974,042) (96,390,819)
Mortgage acquisition fees capitalised 10,621 -
Amortised mortgage acquisition fees released (64,969) (159,658)
Fair value adjustment for hedged 444,176 (1,292,873)
risk**
Mortgage loans written off - (24,367)
Expected credit loss provision (735,070) -
Mortgage loans at end of the period/year 1,240,091,686 1,215,803,865
Amounts falling due after more than one year 1,228,481,285 1,205,151,843
Amounts falling due within one year 11,610,401 10,652,022
1,240,091,686 1,215,803,865
* Please refer to note 2 which explains the difference in the mortgage loans
closing balance at 30 June 2018 and the mortgage loans opening balance at 1
July 2018.
** Please refer to note 7 which explains how the fair value adjustment is
calculated and note 14 sets out the liquidity and credit risk profile of the
mortgage loans.
Mortgage loans at 31 December 2018 comprise of three securitised mortgage
portfolios legally held in Malt Hill No.1 Plc, Malt Hill No.2 Plc and Oat Hill
No.1 Plc and two mortgage portfolios held with Cornhill Mortgages No.2 Limited
and Cornhill Mortgages No.4 Limited. Please refer to the Portfolio of
Investments for breakdown of portfolios, contained within the Portfolio
Manager's Report. The Company does not experience any seasonality or
cyclicality in its investment activities.
6. Reserve fund
The reserve fund is 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.
7. Financial liabilities held at fair value through profit and loss
Derivative instruments - Malt Hill No.1 Plc
On 3 November 2015, the Company entered into an Interest Rate Swap (under an
ISDA agreement) at the point of the initial mortgage loan portfolio purchase to
convert the fixed rate loan exposure 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.
Derivative instruments - Cornhill Mortgages No.2 Limited
On 7 July 2016, the Company entered into an Interest Rate Swap (under an ISDA
agreement) to hedge the fixed rate loan exposure of the mortgages in the
portfolio into 1 Month Libor. The notional value of the swap is balance
guaranteed in order to track the new originations and the amortisation of the
mortgage loan portfolio and changes on a monthly basis to reflect the principal
balance of the portfolio.
Derivative instruments - 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.
Notional and fair value balances:
Malt Hill Cornhill Malt Hill 31.12.2018
No. 1 Plc No. 2 No. 2 Plc Total
Limited
Unaudited Unaudited Unaudited Unaudited
GBP GBP GBP GBP
Notional amount of Interest Rate Swap 182.0m 160.8m 350.4m 693.2m
Fair value of Interest Rate Swap (193,006) (425,517) (762,119) (1,380,642)
Malt Hill Cornhill Malt Hill 30.06.2018
No. 1 Plc No. 2 No. 2 Plc Total
Limited
Audited Audited Audited Audited
GBP GBP GBP GBP
Notional amount of Interest Rate Swap 182.1m 116.7m 351.1m 649.9m
Fair value of Interest Rate Swap (415,880) (225,982) (729,500) (1,371,362)
On 1 July 2017, the Directors designated the Malt Hill No.1 Plc and Cornhill
No.2 Limited derivatives as fair value hedges and began hedge accounting from
that date. Hedge accounting in relation to Malt Hill No.2 Plc derivative
commenced on 1 July 2018. The Company entered into a swap relating to Cornhill
Mortgages No. 4 Limited in January 2019.
Net gain from derivative financial instruments:
Malt Hill Cornhill Malt Hill 31.12.2018
No. 1 Plc No. 2 No. 2 Plc Total
Limited
Unaudited Unaudited Unaudited Unaudited
GBP GBP GBP GBP
Movement on derivatives in designated 222,874 (199,535) (32,619) (9,280)
fair value hedge relationships
Adjustment to mortgage loans in fair 221,580 204,400 18,196 444,176
value hedge relationship
Net ineffectiveness 444,454 4,865 (14,423) 434,896
Malt Hill Cornhill Malt Hill 31.12.2017
No. 1 Plc No. 2 No. 2 Plc Total
Limited
Unaudited Unaudited Unaudited Unaudited
GBP GBP GBP GBP
Movement on derivatives in designated 655,522 (64,667) - 590,855
fair value hedge relationships
Adjustment to mortgage loans in fair (537,527) 70,486 - (467,041)
value hedge relationship
Net ineffectiveness 117,995 5,819 - 123,814
The net gain 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.
8. Trade and other receivables
As at As at
31.12.2018 30.06.2018
Unaudited Audited
GBP GBP
Other receivables and prepayments 2,851,315 1,448,181
Interest receivable on mortgage loans 1,606,877 1,627,428
Capitalised formation expenses 195,109 647,200
4,653,301 3,722,809
Capitalised expenses are the swaps costs, which are being amortised until the
call date in May 2019.
9. Trade and other payables
As at As at
31.12.2018 30.06.2018
Unaudited Audited
GBP GBP
Interest due on loan 1,475,482 848,058
notes
Loan note issue fees payable 880,653 1,303,113
Mortgage loans servicing fees payable 532,426 301,552
Portfolio management fees payable 344,184 329,854
Audit fees 216,719 252,446
payable
Legal and professional fees payable 124,632 109,818
General expenses payable 116,800 120,939
Administration and secretarial fees 91,638 2,714
payable
Directors' fees 33,750 33,750
payable
AIFM fees 24,824 23,469
payable
Depositary fees 17,269 11,223
payable
Custody fees payable 5,997 3,784
3,864,374 3,340,720
10. Borrowings
Cornhill Mortgages No.2 Limited was paying a commitment fee for GBP150m until 1
June 2017. The facility was restructured in June 2017, in order to improve the
cost efficiency of the structure, with changes involving reduction of
commitment fees and drawn margins on the facility. Any increase to the
commitment amount is subject to NatWest Markets approval and the total facility
size remains at GBP250m. This facility has a repayment date of March 2019 and is
classified as a current liability.
Cornhill Mortgages No.4 Limited has agreed a borrowing facility of GBP200m from
September 2018, with National Australia Bank Limited. Cornhill Mortgages No. 4
Limited is only required to pay a commitment fee if the drawn amount is less
than 75% of the total facility amount. 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.
At the period end, the Company had a liability of GBP158,232,801 consisting of GBP
159,500,000 of the utilised borrowing facilities and GBP1,267,199 of borrowing
costs (30 June 2018: a liability of GBP104,445,310 consisting of GBP105,000,000 of
the utilised borrowing facility and GBP554,690 of borrowing costs) which are
being amortised over the life of the borrowing facility. Borrowing costs
amortised during the current period amount to GBP373,002 (31 December 2017: GBP
248,931). At the period end, the Company had utilised GBP155,500,000 of the
borrowing facility (30 June 2018: GBP105,000,000) from NatWest Markets, and GBP
4,000,000 of the borrowing facility from National Australia Bank Limited (30
June 2018: GBPnil).
The interest expense charged on borrowings of GBP1,253,677 was expensed in the
period (31 December 2017: GBP313,546), and facility fees of GBP52,502 were expensed
in the period (31 December 2017: GBP230,770).
11. Loan notes
The Malt Hill No.1 Plc and Oat Hill No.1 Plc mortgage portfolio acquisitions
are partially financed by the issue of notes. The notes are repaid as the
underlying mortgage loans repay. The terms and conditions of the notes provide
that the note holders will receive interest and principal only to the extent
that sufficient funds are generated from the underlying mortgage loans. The
priority and amount of claims on the portfolio proceeds are determined in
accordance with strict priority of payments. Note holders have no recourse to
the Company in any form.
Malt Hill No.1 Plc completed the public sale of GBP263.3m of AAA-rated bonds on
26 May 2016. The AAA notes were issued with a coupon of 3 month LIBOR plus
1.35% which is payable quarterly and are listed on the Irish Stock Exchange.
The issue fees on loan notes will be amortised over the expected life of the
loan notes, which is 3 years, being the call date. These loan notes have been
classified as non-current based on their contractual obligations.
Oat Hill No.1 Plc completed the public sale of GBP477.1m of AAA-rated bonds on 26
June 2017. The AAA notes were issued with a coupon of 3 month LIBOR plus 0.65%
and a step up margin of 1.30% which is payable quarterly and are listed on the
Irish Stock Exchange. The issue fees on loan notes will be amortised over the
expected life of the loan notes, which is 3 years, being the call date. These
loans notes have been classified as non-current based on their contractual
obligations.
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 call date. These loans notes have been
classified as non-current based on their contractual obligations.
Interest expense on loan notes for the period amounted to GBP7,348,625 (31
December 2017: GBP4,185,782). The balance of the discount to be amortised on loan
notes is GBP1,159,594 at 31 December 2018 (30 June 2018: GBP2,439,382). The balance
of loan note issue fees to be amortised is GBP1,990,187 at 31 December 2018 (30
June 2018: GBP2,714,925).
As at As at
31.12.2018 30.06.2018
Unaudited Audited
GBP GBP
Loan notes at start of the period/year 937,924,240 715,734,468
Loan notes issued - 317,500,000
Loan notes repaid (28,933,875) (95,431,974)
Loan note issue fees capitalised during the (269,539) (1,028,869)
period/year
Amortisation of discount on loan notes 1,279,788 -
Loan note issue fees amortised 994,277 1,150,615
Loan notes at end of the period/year 910,994,891 937,924,240
12. Related Parties
a) Directors' Remuneration & Expenses
The Directors of the Company are remunerated for their services at such a rate
as the Directors determine. The aggregate fees of the Directors will not exceed
GBP200,000.
The annual Directors' fees comprise GBP40,000 (30 June 2018: GBP40,000) payable to
Mr Waldron, the Chairman, GBP35,000 (30 June 2018: GBP35,000) to Mr Le Page as
Chairman of the Audit Committee, and GBP30,000 (30 June 2018: GBP30,000) each to
Mrs Green and Mr Burrows. During the period ended 31 December 2018, Directors'
fees of GBP67,500 (31 December 2017: GBP67,500) were charged to the Company, of
which GBP33,750 remained payable at the end of the period (30 June 2018: GBP
33,750).
b) Shares held by related parties
As at 31 December 2018, Directors of the Company held the following shares in
the Company beneficially:-
Number of Number of
Shares Shares
31.12.2018 30.06.2018
Unaudited Audited
Christopher Waldron 20,000 20,000
Richard Burrows 5,000 5,000
Paul Le Page 20,000 20,000
Helen Green 10,000 10,000
As at 31 December 2018, the Portfolio Manager held Nil shares (30 June 2018:
Nil) and partners and employees of the Portfolio Manager held 6,805,799 shares
(30 June 2018: 7,048,299), which is 2.492% of the issued share capital (30 June
2018: 2.581%).
c) Portfolio Manager
With effect from 1 July 2017, the portfolio management fee is payable to the
Portfolio Manager quarterly on the last business day of the quarter at a rate
of 0.60% per annum of the lower of NAV, which is calculated monthly on each
valuation day, 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 ("Numis")
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 period amounted to GBP692,806 (31
December 2017: GBP663,464) of which GBP344,184 (30 June 2018: GBP329,854) remained
payable at the period end.
The Portfolio Management Agreement dated 23 June 2015 remains in force until
determined by the Company or the Portfolio Manager giving the other party not
less than twelve months' notice in writing. Under certain circumstances, the
Company or the Portfolio Manager are entitled to immediately terminate the
agreement in writing. No placings occurred in the period and no fees were paid
under this agreement.
13. Material Agreements
a) Alternative Investment Fund Manager
The Company's Alternative Investment Fund Manager (the "AIFM") is Maitland
Institutional Services 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 period ended 31 December 2018, AIFM fees of
GBP49,763 (31 December 2017: GBP48,243) were charged to the Company, of which GBP
24,824 (30 June 2018: GBP23,469) remained payable at the end of the period.
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 (31 December 2017: GBP45,000) will be
charged for corporate governance and company secretarial services and
accounting services. Total administration and secretarial fees for the period
amounted to GBP104,574 (31 December 2017: GBP87,111) of which GBP91,638 (30 June
2018: GBP2,714) remained payable at the period 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 period amounted to GBP34,700 (31 December 2017: GBP38,841) of
which GBP17,269 (30 June 2018: GBP11,223) remained payable at the period 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 on 19 November 2015 being the
date the Company acquired its initial investment. Total custody fees for the
period amounted to GBP11,095 (31 December 2017: GBP12,006) of which GBP5,997 (30 June
2018: GBP3,784) remained payable at the period end.
d) Auditor
Audit fees paid to PwC CI LLP and other PwC member firms includes amounts
charged for the current period of GBP189,114 (31 December 2017: GBP94,372) and the
under accruals for previous periods of GBPNil (31 December 2017: GBP82,895). Non
audit fees of GBP12,000 pertaining to accounting advice are included under legal
and professional fees.
14. Financial Risk Management
The Company's objective in managing risk is the creation and protection of
shareholder value. Risk is inherent in the Company's activities, but it is
managed through an ongoing process of identification, measurement and
monitoring.
The Company's financial instruments include financial assets or liabilities at
fair value through profit and loss, loans and receivables, and cash and cash
equivalents. The main risks arising from the Company's financial instruments
are market risk, liquidity risk, and credit risk. The techniques and
instruments utilised for the purposes of portfolio management are those which
are reasonably believed by the Board of Directors to be economically
appropriate to the efficient management of the Company.
Market risk
Market risk embodies the potential for both losses and gains and includes
interest rate risk, price risk and currency risk. The Company's strategy on the
management of market risk is driven by the Company's investment objective. The
Company's investment objective is to provide investors with access to stable
income returns through the application of relatively conservative levels of
leverage to portfolios of UK mortgage loans.
1.1 Interest rate risk: Interest rate risk is the risk that the value of
financial instruments will fluctuate due to changes in market interest rates.
The current underlying mortgage portfolios are payable on fixed rates, meaning
the current exposure to interest rate fluctuations on the portfolios are
limited. However, floating rate interest is payable on loan notes. In order to
hedge this differential, interest rate swaps were transacted by the Warehouse
SPVs with a market counterparty to pay the fixed rate and receive the floating
rate payments.
On 1 July 2017, the Directors designated derivatives as fair value hedges and
began hedge accounting from that date therefore hedging the interest risk
exposure on the fixed rate mortgage loans shown in the following tables.
The retrospective testing completed at 30 June 2018 identified that both the
Cornhill Mortgages No.2 Limited and Malt Hill No.2 Plc hedges were ineffective.
The hedge on Malt Hill No. 2 Plc was not effective as at the 30 June 2018 due
to the write down of the initial premium paid on the balance guaranteed swap,
however it is effective at 31 December 2018. The hedge on Cornhill Mortgages
No. 2 Limited and Malt Hill No. 1 Plc are also effective at 31 December 2018.
Please refer to note 7 for further details.
The following tables show exposure to interest rate risk if the portfolio was
unhedged.
Non interest Total as at
Floating rate Fixed rate bearing 31.12.2018
GBP GBP GBP GBP
Unaudited Unaudited Unaudited Unaudited
Assets
Mortgage loans (note 5) 582,074,350 701,129,776 (43,112,440) 1,240,091,686
Reserve fund (note 6) 18,061,100 - - 18,061,100
Trade and other receivables - - 4,653,301 4,653,301
(note 8)
Cash and cash equivalents 40,096,828 - - 40,096,828
Total assets 640,232,278 701,129,776 (38,459,139) 1,302,902,915
Liabilities
Financial liabilities at (1,380,642) - - (1,380,642)
fair value through profit
and loss (note 7)
Trade and other payables (note - - (3,864,374) (3,864,374)
9)
Borrowings (note 10) (159,500,000) - 1,267,199 (158,232,801)
Loan notes (note 11) (914,144,671) - 3,149,780 (910,994,891)
Total liabilities (1,075,025,313) - 552,605 (1,074,472,708)
Total interest sensitivity (434,793,035) 701,129,776 (37,906,534) 228,430,207
gap
Non interest Total as at
Floating rate Fixed rate bearing 30.06.2018
GBP GBP GBP GBP
Audited Audited Audited Audited
Assets
Mortgage loans (note 5) 604,295,653 656,990,009 (45,481,797) 1,215,803,865
Reserve fund (note 6) 17,761,100 - - 17,761,100
Trade and other receivables - - 3,722,809 3,722,809
(note 8)
Cash and cash equivalents 43,784,286 - - 43,784,286
Total assets 665,841,039 656,990,009 (41,758,988) 1,281,072,060
Liabilities
Financial liabilities at (1,371,362) - - (1,371,362)
fair value through profit
and loss (note 7)
Trade and other payables (note - - (3,340,720) (3,340,720)
9)
Borrowings (note 10) (105,000,000) - 554,690 (104,445,310)
Loan notes (note 11) (942,489,058) - 4,564,818 (937,924,240)
Total liabilities (1,048,860,420) - 1,778,788 (1,047,081,632)
Total interest sensitivity (383,019,381) 656,990,009 (39,980,200) 233,990,428
gap
The Company is protected against interest rate risk by virtue of the fact that
there is balance guarantee swaps in place to limit the exposure on the fixed
rate interest rates.
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 accounted for on an amortised cost basis by an
independent third party valuation provider. Any such valuation may therefore
differ from the actual realisable market value of the relevant mortgage
portfolio.
The interest rate swap hedge trade 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.
1.3 Currency risk: As at 31 December 2018, 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 and when they fall due. The Company makes
its investments by purchasing Profit Participating Notes issued by the
Acquiring Entity. The Acquiring Entity is bound by EU securities law and will
be unable to fully liquidate, sell, hedge or otherwise mitigate its credit risk
under or associated with the Retention Notes issued by the Warehouse SPV or
Issuer SPV until such time as the securities of the relevant Issuer SPV 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
period end, Cornhill Mortgages No. 2 Limited and Cornhill Mortgages No. 4
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 10% of NAV for short term liquidity
purposes, including financing share repurchases or redemptions, making
investments or satisfying working capital requirements. This can be either
through a loan facility or other types of collateralised borrowing instruments
including stock lending or repurchase transactions.
The following liquidity analysis is based on contractual payment terms and
maturity dates (consistent with the disclosure in the Unaudited Condensed
Consolidated Statement of Financial Position). Expected cash flows are expected
to be different to these contractual cash flows.
Less than More than Total as at
one year one year 31.12.2018
GBP GBP GBP
Assets Unaudited Unaudited Unaudited
Mortgage loans 11,610,401 1,228,481,285 1,240,091,686
Reserve fund - 18,061,100 18,061,100
Trade and other receivables 4,653,301 - 4,653,301
Cash and cash equivalents 40,096,828 - 40,096,828
Total assets 56,360,530 1,246,542,385 1,302,902,915
Liabilities
Financial liabilities at fair 1,380,642 - 1,380,642
value through profit and loss
Trade and other payables 3,864,374 - 3,864,374
Borrowings 155,164,572 3,068,229 158,232,801
Loan notes - 910,994,891 910,994,891
Total liabilities 160,409,588 914,063,120 1,074,472,708
Less than More than Total as at
one year one year 30.06.2018
GBP GBP GBP
Assets Audited Audited Audited
Mortgage loans 10,652,022 1,205,151,843 1,215,803,865
Reserve fund - 17,761,100 17,761,100
Trade and other receivables 3,722,809 - 3,722,809
Cash and cash equivalents 43,784,286 - 43,784,286
Total assets 58,159,117 1,222,912,943 1,281,072,060
Liabilities
Financial liabilities at fair 1,371,362 - 1,371,362
value through profit and loss
Trade and other payables 3,340,720 - 3,340,720
Borrowings - 104,445,310 104,445,310
Loan notes - 937,924,240 937,924,240
Total liabilities 4,712,082 1,042,369,550 1,047,081,632
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 SPV transacts 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).
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).
Mortgage loans written off during the period amounted to GBP215,090 (30 June
2018: GBP24,367). An expected loss provision exists in the amount of GBP1,273,242
(30 June 2018: GBPnil). The current indexed loan to value ratio in order to give
an indication of credit quality is as follows:
As at As at
31.12.2018 30.06.2018
Unaudited Audited
Loan to value GBP GBP
0-49% 191,070,251 185,723,429
50-75% 772,730,866 753,485,955
75-100%+ 276,290,569 276,594,481
1,240,091,686 1,215,803,865
The value of the loans past due but not yet impaired and their respective
collateral value at the period/year end are shown in the table below.
Book value Collateral value
As at As at As at As at
31.12.2018 30.06.2018 31.12.2018 30.06.2018
GBP GBP GBP GBP
Unaudited Audited Unaudited Audited
>1 month but <2 months 4,975,836 8,552,587 4,975,836 8,548,958
>2 months but <3 months 2,160,925 1,118,202 2,160,925 1,118,202
>3 months but <6 months 2,887,691 853,657 859,180 853,657
>6 months 2,062,865 1,018,857 1,811,653 799,089
12,087,317 11,543,303 9,807,594 11,319,906
15. Analysis of Financial Assets and Liabilities by Measurement Basis
Financial Assets at Financial
Assets
fair value through at amortised
profit and loss cost Total
GBP GBP GBP
31 December 2018
Financial Assets as per Unaudited Condensed Unaudited Unaudited Unaudited
Consolidated Statement of Financial Position
Mortgage loans - 1,240,091,686 1,240,091,686
Reserve fund - 18,061,100 18,061,100
Cash and cash equivalents - 40,096,828 40,096,828
Trade and other - 4,653,301 4,653,301
receivables
- 1,302,902,915 1,302,902,915
Financial Financial
Liabilities at
fair value through Liabilities at
profit and loss amortised cost Total
Financial Liabilities as per Unaudited GBP GBP GBP
Condensed Consolidated Statement of
Financial Position Unaudited Unaudited Unaudited
Financial liabilities at fair 1,380,642 - 1,380,642
value through profit and loss
Trade and other - 3,864,374 3,864,374
payables
Borrowings - 158,232,801 158,232,801
Loan notes - 910,994,891 910,994,891
1,380,642 1,073,092,066 1,074,472,708
Financial Assets at Financial Assets
fair value through at amortised
profit and loss cost Total
GBP GBP GBP
30 June 2018
Financial Assets as per Audited Consolidated Audited Audited Audited
Statement of Financial Position
Mortgage loans - 1,215,803,865 1,215,803,865
Reserve fund - 17,761,100 17,761,100
Cash and cash equivalents - 43,784,286 43,784,286
Trade and other - 3,722,809 3,722,809
receivables
- 1,281,072,060 1,281,072,060
Financial Liabilities Financial
at
fair value through Liabilities at
profit and loss amortised cost Total
Financial Liabilities as per Audited GBP GBP GBP
Consolidated Statement of Financial Position
Audited Audited Audited
Financial liabilities at fair value 1,371,362 - 1,371,362
through profit and loss
Trade and other payables - 3,340,720 3,340,720
Borrowings 104,445,310 104,445,310
Loan notes - 937,924,240 937,924,240
1,371,362 1,045,710,270 1,047,081,632
16. 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
period ended 31 December 2018 and the year ended 30 June 2018.
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Unaudited Unaudited Unaudited Unaudited
Liabilities
Financial liabilities at - - (1,380,642) (1,380,642)
fair value through profit
and loss (note 7)
Total liabilities as at
31 December 2018 - - (1,380,642) (1,380,642)
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Audited Audited Audited Audited
Liabilities
Financial liabilities at - (1,371,362) (1,371,362)
fair value through profit
and loss (note 7)
Total liabilities as at
30 June 2018 - - (1,371,362) (1,371,362)
Due to the balance guarantee nature of the swaps, they have been classified as
Level 3. Please refer to note 7 for a reconciliation of the movement for the
period on the interest rate swaps.
The following table analyses within the fair value hierarchy the Company's
assets and liabilities not measured at fair value at 31 December 2018 but for
which fair value is disclosed.
Level 1 Level 2 Level 3 Total
31.12.2018 31.12.2018 31.12.2018 31.12.2018
GBP GBP GBP GBP
Assets Unaudited Unaudited Unaudited Unaudited
Mortgage loans - - 1,268,232,833 1,268,232,833
Reserve fund - 18,061,100 - 18,061,100
Cash and cash equivalents - 40,096,828 - 40,096,828
Trade and other - 4,653,301 - 4,653,301
receivables
Total - 62,811,229 1,268,232,833 1,331,044,062
Liabilities
Trade and other - 3,864,374 - 3,864,374
payables
Borrowings - 158,232,801 - 158,232,801
Loan notes - 910,994,891 - 910,994,891
Total - 1,073,092,066 - 1,073,092,066
Level 1 Level 2 Level 3 Total
30.06.2018 30.06.2018 30.06.2018 30.06.2018
GBP GBP GBP GBP
Assets Audited Audited Audited Audited
Mortgage loans - - 1,274,227,755 1,274,227,755
Reserve fund - 17,761,100 - 17,761,100
Cash and cash equivalents - 43,784,286 - 43,784,286
Trade and other - 3,722,809 - 3,722,809
receivables
Total - 65,268,195 1,274,227,755 1,339,495,950
Liabilities
Trade and other payables - 3,340,720 - 3,340,720
Borrowings - 104,445,310 - 104,445,310
Loan notes - 937,924,240 - 937,924,240
Total - 1,045,710,270 - 1,045,710,270
The fair value of the mortgage loans is calculated through a shadow
securitisation structure based on existing deals with current and transparent
pricing.
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.
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 three months.
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 period there were no
transfers between the levels.
Trade and other payables represent the contractual amounts and obligations due
by the Company for settlement of trades and expenses.
17. Dividend Policy
The Company has declared the following interim dividends in relation to the
period to 31 December 2018:
Period to Dividend Net Record date Ex-dividend Pay date
rate per dividend date
Share payable
(pence) (GBP)
30 September 2018 1.5 4,095,981 19 October 18 October 2018 31 October 2018
2018
31 December 2018 1.5 4,095,981 18 January 17 January 2019 31 January 2019
2019
In each subsequent financial year, it is intended that dividends on the
Ordinary Shares will be payable quarterly, all in the form of interim dividends
(the Company does not intend to pay any final dividends). It is intended that
the first three interim dividends of each financial year will be paid at a
minimum of 1.5p per Ordinary Share with the fourth interim dividend of each
financial year including an additional amount such that a significant majority
of the Company's net income for that financial year is distributed to
Shareholders.
The Board of Directors 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 of Directors 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 of Directors confirms that the Company
passed the solvency test for each dividend paid.
18. 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 Purchased Buy to Let contains Malt Hill
No.1, Malt Hill No.2 and Oat Hill No.1. Flow Forward Buy to Let contains
Cornhill Mortgages No. 4 Limited. Owner Occupied Forward Flow contains Cornhill
Mortgages No.2 Limited. This is a change from the previously reported segmental
reporting as it was considered by the Portfolio Manager and the Audit Committee
that with the addition of the second Coventry portfolio and likely future
growth of the Company's portfolio that it would be better to analyse the
Company's portfolio under two broad headings : (1) Owner Occupied vs Buy to Let
as the repayment profiles and contractual cash flows are very different; (2)
Purchased vs Forward Flow portfolios as Forward Flow portfolios are subject to
origination completion across multiple lenders.
The segmental comparatives for the period ended 31 December 2017 have been
reclassified from their previous segments which related to their individual
portfolios, which were managed by separate specialist teams at the Portfolio
Manager. These portfolios comprised of UK mortgages and consisted of a loan
portfolio bought at a premium (Malt Hill No.1 Plc), a loan portfolio bought at
a discount (Oat Hill No.1 Plc) and a commitment to originate loans up to a
limit (Cornhill Mortgages No. 2 Limited). Malt Hill No.1 Plc and Oat Hill No.1
Plc are now reclassified as Buy to Let / Purchased, with Cornhill Mortgages No.
2 Limited reclassified to Owner Occupied / Forward Flow.
There are no differences from the last annual financial statements in the basis
of segmentation or in the basis of measurement of segment profit or loss.
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 Purchased 31.12.2018
Flow Flow
GBP GBP GBP GBP GBP
Unaudited Unaudited Unaudited Unaudited Unaudited
Interest income on 51,834 16,534,418 3,126,292 - 19,712,544
mortgage loans
Net interest expense on - (1,102,693) (197,017) - (1,299,710)
financial liabilities at
fair value through profit
and loss
Net gain from derivative - 430,031 4,865 - 434,896
financial instruments
Interest expense on (3,676) - (1,250,001) - (1,253,677)
borrowings
Interest expense on loan - (7,348,625) - - (7,348,625)
notes
Servicer fees (7,636) (1,135,939) (330,119) - (1,473,694)
Other expenses (203,412) (3,238,871) (548,652) - (3,990,935)
Total net segment income (162,890) 4,138,321 805,368 - 4,780,799
Buy-to-Let Owner Occupied Total as at
Forward Purchased Forward Purchased 31.12.2017
Flow Flow
GBP GBP GBP GBP GBP
Unaudited Unaudited Unaudited Unaudited Unaudited
Interest income on - 10,987,532 1,510,953 - 12,498,485
mortgage loans
Net interest expense on - (1,180,378) (100,634) - (1,281,012)
financial liabilities at
fair value through profit
and loss
Net gain from derivative - 117,995 5,819 - 123,814
financial instruments
Interest expense on - - (313,546) - (313,546)
borrowings
Interest expense on loan - (4,185,782) - - (4,185,782)
notes
Servicer fees - (891,024) (128,170) - (1,019,194)
Other expenses - (1,108,617) (606,345) - (1,714,962)
Total net segment income - 3,739,726 368,077 - 4,107,803
A reconciliation of total net segmental income to total comprehensive gain is
provided as follows.
31.12.2018 31.12.2017
GBP GBP
Unaudited Unaudited
Total net segment income 4,780,799 4,107,803
Other fees and expenses (1,610,886) (1,506,678)
3,169,913 2,601,125
There are no transactions between the reportable segments.
Total segment assets include:
Buy-to-Let Owner Occupied Total as at
Forward Purchased Forward Flow Purchased 31.12.2018
Flow
GBP GBP GBP GBP GBP
Unaudited Unaudited Unaudited Unaudited Unaudited
Mortgage loans 4,289,933 1,036,473,190 199,328,563 - 1,240,091,686
Reserve fund - 16,261,100 1,800,000 - 18,061,100
Other 177,447 15,720,065 10,744,983 - 26,642,495
4,467,380 1,068,454,355 211,873,546 - 1,284,795,281
Buy-to-Let Owner Occupied Total as at
Forward Purchased Forward Flow Purchased 30.06.2018
Flow
GBP GBP GBP GBP GBP
Audited Audited Audited Audited Audited
Mortgage loans - 1,061,021,766 154,782,099 - 1,215,803,865
Reserve fund - 16,261,100 1,500,000 - 17,761,100
Other - 17,131,723 3,148,927 - 20,280,650
- 1,094,414,589 159,431,026 - 1,253,845,615
31.12.2018 30.06.2018
GBP GBP
Unaudited Audited
Segment assets for reportable 1,284,795,281 1,253,845,615
segments
Other 18,107,634 27,226,445
Total assets 1,302,902,915 1,281,072,060
Total segment liabilities:
Buy-to-Let Owner Occupied Total as at
Forward Purchased Forward Flow Purchased 31.12.2018
Flow
GBP GBP GBP GBP GBP
Unaudited Unaudited Unaudited Unaudited Unaudited
Borrowings 3,068,229 - 155,164,572 - 158,232,801
Loan notes - 910,994,891 - - 910,994,891
Financial liabilities - 955,124 425,518 - 1,380,642
at fair value through
profit and loss
Other 312,322 2,807,636 139,906 - 3,259,864
3,380,551 914,757,651 155,729,996 - 1,073,868,198
Buy-to-Let Owner Occupied Total as at
Forward Purchased Forward Flow Purchased 30.06.2018
Flow
GBP GBP GBP GBP GBP
Audited Audited Audited Audited Audited
Borrowings - - 104,445,310 - 104,445,310
Loan notes - 937,924,240 - - 937,924,240
Financial liabilities - 1,145,380 225,982 - 1,371,362
at fair value through
profit and loss
Other - 2,598,009 71,128 - 2,669,137
- 941,667,629 104,742,420 - 1,046,410,049
31.12.2018 30.06.2018
GBP GBP
Unaudited Audited
Segment liabilities for reportable 1,073,868,198 1,046,410,049
segments
Trade and other 604,510 671,583
payables
Total liabilities 1,074,472,708 1,047,081,632
19. Ultimate Controlling Party
In the opinion of the Directors on the basis of shareholdings advised to them,
the Company has no ultimate controlling party.
20. Subsequent Events
The second interim dividend for period ending 31 December 2018 of 1.5p per
Ordinary Share was declared on 10 January 2019 and paid on 31 January 2019.
These Unaudited Condensed Consolidated Interim Financial Statements were
approved for issuance by the Board of Directors on 22 March 2019. There were no
subsequent events, apart from those mentioned above until this date.
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 or Maitland Maitland Institutional Services Limited, the
Company's alternative investment fund manager
for the purposes of regulation 4 of the AIFM
Regulations
Amortised Cost Accounting The process by which mortgages in the
Company's portfolio are valued at cost less
capital repayments and any provisions
required for impairment.
Audit Committee an operating committee of the Board of
Directors charged with oversight of financial
reporting and disclosure
Audited Consolidated Financial Audited Consolidated Financial Statements of
Statements the Company
BofA Securities BofA Securities, previously Bank of America
Merrill Lynch (BAML)
BTL Buy-to-let
BoE Bank of England
Board of Directors or Board or the Directors of the Company
Directors
CHL Capital Home Loans. Registered in England &
Wales No 2174236.
Class A Notes means the Class A Mortgage Backed Floating
Rate Notes issued by the Issuer and admitted
to trading on the Irish Stock Exchange
Company means UKML, Acquiring Entity, Issuer SPV and
Warehouse SPVs
Company's Articles or Articles the articles of incorporation of the Company
Continuation Vote An ordinary resolution that gives
shareholders the ability to instruct the
Board of Directors to prepare a proposal to
restructure or wind up a company by means of
a simple majority vote.
Corporate Broker Numis Securities Limited
CRS The Common Reporting Standard, a global
standard for the automatic exchange of
financial account information developed by
OECD
Custodian and Depositary Northern Trust (Guernsey) Limited (a
non-cellular company limited by shares
incorporated in the Island of Guernsey with
registered number 2651)
Derivative Instruments means instruments used to gain leveraged
exposure to mortgage portfolios, including
but not limited to Credit Linked Notes and
Credit Default Swaps
DAC UK Mortgages Corporate Funding Designated
Activity Company an independently managed,
Dublin based, section 110 designated activity
company that is responsible for the
warehousing and securitisation of mortgage
portfolios under the supervision of TFAM the
investment adviser. DAC is wholly financed by
the Company via Profit Participating Notes
and distributes substantially all of its
profits to the Company thereby qualifying for
a reduced rate of taxation, commonly known as
a Eurobond exemption. From a financial
reporting perspective DAC is consolidated
with the Company as it provides its services
exclusively to the Company
DSCR Debt Service Coverage Ratio
FFI Foreign Financial Institution
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
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.
IASB International Accounting Standards Board
IFRS International Financial Reporting Standards
Investment Company a company whose main business is holding
securities for investment purposes
Internal Control a process for assuring achievement of an
organisation's objectives in operational
effectiveness and efficiency, reliable
financial reporting, and compliance with
laws, regulations and policies
IPO, Initial Public Offering means the initial public offering of shares
in the Company on the specialist fund segment
of the London Stock Exchange
IPD Interest Payment Date
IRR internal rate of return
IRS the US Internal Revenue Service
Issue means together the Placing and the Offer (or
as the context requires both of them
Issuer SPVs means special purpose vehicles established
for the specific purpose of securitisation
and issuing Retention Notes for purchase by
the Acquiring Entity
Junior Note These notes have the lowest priority claim on
capital and income from the securitisation
SPV and offer the highest potential returns
in exchange for bearing the first loss
experienced by the SPV.
Keystone Keystone Property Finance Limited is a
subsidiary of The Property Business Group
Limited. Registered in England & Wales No
06262873.
Loan Financing Facility means a facility in terms of which ongoing
finance is provided by BofA Securities,
previously Bank of America Merrill Lynch
(BAML) for a period of up to two-years, or
National Australia Bank Limited for a period
up to four-years
LSE London Stock Exchange plc. Registered in
England & Wales No 2075721
LTV means Loan to Value
Mortgage Pool/ Mortgage Portfolio The underlying mortgage loans that produce
the income for the securitised portfolios.
NAV means net asset value
OECD the Organisation for Economic Co-operation
and Development
Offer means the offer for subscription of Ordinary
Shares at 1 pence each to the public in the
United Kingdom on the terms and conditions
set out in Part 12 of the Prospectus and the
Application Form
Official List in reference to DAC and Issuer SPV refers to
the official list of the Irish Stock Exchange
p.l.c
In reference to the Company refers to the
official list of the London Stock Exchange
Ordinary Shares ordinary shares of 100p each in the capital
of the Company
Placing means the conditional placing by the
Corporate Broker, as agent for the Company,
of up to 250 million ordinary shares at 1
pence each on the terms and conditions set
out or referred to in the placing documents,
being the Prospectus, the Presentation, the P
Proof, the flyer, the press announcements,
the contract note, any other document
prepared in connection with the pre-marketing
of the issue or the placing programme
Portfolio Manager TwentyFour Asset Management LLP (a limited
liability partnership incorporated in England
and Wales with registered number OC335015)
Profit Participating Notes/PPN these are Eurobond notes issued by DAC to the
Company. The capital paid by the Company to
DAC to buy the notes is invested in mortgage
pools and DAC in turn pays income to the
Company via coupon payments on the notes
QE Quantitative easing (QE), also known as Large
Scale Assets Purchases, is an expansionary
monetary policy whereby a central bank buys
predetermined amounts of government bonds or
other financial assets in order to stimulate
the economy.
Rating Agency companies that assess the creditworthiness of
both debt securities and their issuers, for
these purposes Standard and Poor's, Moody's
and Fitch
Retention Notes means a Subordinated tranche of securities
which as part of the securitisation issuance
structure are issued for purchase by the
Acquiring Entity
RMBS Residential Mortgage-Backed Security
RNS Regulatory News Service
Section 110 Section 110 of the Irish Taxes Consolidation
Act 1997 (as amended). A Section 110 company
is an Irish resident special purpose vehicle
("SPV") which holds and/or manages
"qualifying assets" and usually distributes
substantially all of its income net of a
fixed annual tax payment.
Seasoning The weighted average age of a mortgage
portfolio.
Securitisation Vehicle special purpose vehicle incorporated in the
UK established for the purpose of issuing
notes collateralised by underlying mortgage
pool
Senior Note Senior note holders receive first priority
with respect to income and capital
distributions and effectively provide long
term leverage finance to the Junior note
holders.
Servicer Means the entity that maintains the
relationship with the underlying mortgage
borrower to answer questions, collect
payments and refinance existing loans if
required.
Share Buyback the Company purchases shares in the market
Shareholders holders of Shares
Specialist Fund Segment the Specialist Fund Segment of the London
Stock Exchange
SPV means a special purpose vehicle
SVR Standard variable rate
TFS Term Funding Scheme
TML The Mortgage Lender Limited. Registered in
England & Wales No 9280057.
UK Code The UK Corporate Governance Code 2016
UKML UK Mortgages Limited
Valuation Agent Kinson Advisors LLP
WA LTV Weighted average loan-to-value
Warehousing the process by which mortgages are acquired
in a portfolio prior to securitisation. The
portfolio is typically leveraged by borrowing
from a warehouse credit facility. Four
warehouse SPVs; Cornhill Mortgages No. 1
Limited (liquidated), Cornhill Mortgages No.
2 Limited, Cornhill Mortgages No. 3 Limited
(liquidated) and Cornhill Mortgages No. 4
Limited, have been established for the
purpose of warehousing the transactions of
the company.
Warehouse SPV a special purpose vehicle, incorporated in
the UK, established for the purpose of
warehousing the mortgage portfolio
CORPORATE INFORMATION
Directors Custodian, Principal Banker and
Christopher Waldron - Chairman Depositary
Richard Burrows Northern Trust (Guernsey) Limited
Paul Le Page PO Box 71
Helen Green Trafalgar Court
Les Banques
St Peter Port
Guernsey, GY1 3DA
Registered Office Secretary and Administrator
PO Box 255 Northern Trust International Fund
Trafalgar Court Administration
Les Banques Services (Guernsey) Limited
St Peter Port PO Box 255
Guernsey, GY1 3QL Trafalgar Court
Les Banques
St Peter Port
Guernsey, GY1 3QL
Alternative Investment Fund Manager Corporate Broker
Maitland Institutional Services Limited Numis Securities Limited
Springfield Lodge The London Stock Exchange Building
Colchester Road 10 Paternoster Square
Chelmsford, CM2 5PW London, EC4M 7LT
Portfolio Manager Independent Auditor
TwentyFour Asset Management LLP PricewaterhouseCoopers CI LLP
8th Floor PO Box 321
The Monument Building Royal Bank Place
11 Monument Street 1 Glategny Esplanade
London, EC3R 8AF St Peter Port
Guernsey, GY1 4ND
UK Legal Advisers to the Company Receiving Agent
Eversheds Sutherland LLP Computershare Investor Services plc
One Wood Street The Pavilions
London, EC2V 7WS Bridgwater Road
Bristol, BS13 8AE
Guernsey Legal Advisers to the Company
Carey Olsen Registrar
Carey House Computershare Investor Services
Les Banques (Guernsey) Limited
St Peter Port 1st Floor
Guernsey, GY1 4BZ Tudor House
Le Bordage
St Peter Port
Guernsey, GY1 1DB
END
(END) Dow Jones Newswires
March 22, 2019 09:32 ET (13:32 GMT)
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