Funding Circle Plc (FCH)
Funding Circle Plc: Half Year 2023 Results
07-Sep-2023 / 07:00 GMT/BST
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Funding Circle Holdings plc
Half Year 2023 Results
Embargoed until 7.00am, 7 September 2023
HALF YEAR PERFORMANCE IN LINE WITH EXPECTATIONS
GOOD PROGRESS EXECUTING ON MEDIUM-TERM PLAN
Funding Circle Holdings plc ("Funding Circle") today announces results for the six months ended 30 June 2023.
Lisa Jacobs, Funding Circle CEO, says:
"We delivered a solid set of results in the first half of the year, in line with our expectations, and once again
demonstrated the resilience of the business and our aptitude at responding to the changing economic environment.
"Our UK Loans business is profitable, we've seen good growth in US Loans and FlexiPay is showing great momentum as we
expand our offering to access a larger market and serve more of our customers' needs. FlexiPay transactions have more
than doubled to GBP90 million in the half, with more than GBP150 million transactions since launch. We have also extended
our track record of delivering robust and attractive loan returns for our investors.
"We're making good progress towards our medium-term targets and are in a strong position to grow as the economic
backdrop recovers."
Executive Summary:
-- We delivered another solid financial performance in H1 2023:
? Total originations and transactions of GBP771m, up 14% on H2 2022 (GBP678m) with growth in all business
units.
? Total income of GBP76.6m ahead of H2 2022 (GBP73.2m).
? UK Loans business profitable (AEBITDA of GBP8.8m and PBT of GBP1.4m).
? Group AEBITDA of negative GBP3.0m reflects planned investment in attractive growth opportunities across
US Loans business and FlexiPay.
-- We are managing the business through the changing economic environment:
? Loan returns remain robust and attractive.
? Continued institutional investor demand to fund loans, with three new forward flow agreements in the
UK and US in H1 2023. In August we launched the third iteration of the Recovery Loan Scheme ('RLS') with Allica
Bank as a new bank investor. Our first FlexiPay funding partnership is also providing senior debt funding, with
FlexiPay having reached sufficient maturity and scale.
? Customer satisfaction remained strong with Group NPS at 76 and a UK Trustpilot score of 4.6.
-- And we continue to execute against the three strategic pillars of our medium-term plan:
? Attract more businesses: strengthening existing distribution channels and expanding into new embedded
and intermediated channels to enable more businesses to reach us.
? Say yes to more businesses: serving more businesses through an expanded set of Funding Circle
products and further integration with third party lenders.
? #1 in new products: using our capabilities to enter new markets where we can develop market-leading
products. FlexiPay transactions more than doubled on H2 2022 and our customers continue to show strong
engagement.
-- The guidance provided in March 2023 for FY 2023 and FY 2025 is unchanged.
Performance Highlights
H1 2023 H2 2022[1] H1 20221
GBPm GBPm GBPm
Originations and transactions 771 678 803
Loans under Management (LuM) 3,475 3,743 4,071
Operating income 72.5 66.8 66.9
Net investment income[2] 4.1 6.4 10.9
Total income 76.6 73.2 77.8
Fair value gains 3.4 3.3 1.5
Net income 79.6 76.5 79.3
AEBITDA3 (3.0) (1.7) 11.2
Profit/(loss) before taxation (16.6) (14.5) 1.6
Cash 203.5 177.7 200.7
Net Assets 264.2 284.0 299.3
Financial Summary:
-- Originations and transactions of GBP771m up on H2 2022
following the continued growth in commercial lendingand FlexiPay.
H1 2022 originations of GBP803m included the UK government loan
scheme, RLS (second iteration), whichceased in May 2022.
-- LuM reduced to GBP3.5bn (H1 2022: GBP4.1bn) with commercial
LuM growing but at a slower rate than governmentscheme loans are
repaying.
-- Operating income grew to GBP72.5m up on H1 and H2 2022
(GBP66.9m and GBP66.8m respectively) followingorigination yield
increases, income from FlexiPay and improved interest on cash.
-- Net investment income was GBP4.1m (H1 2022: GBP10.9m) and, in
line with expectations, continues to reduceeach half as investments
amortise down.
-- Fair value gain of GBP3.4m (H1 2022: GBP1.5m) reflects
continued positive revaluations for improvedunderlying credit
performance.
-- AEBITDA of negative GBP3.0m (H1 2022: GBP11.2m) reflects
planned investment in both the US Loans business andFlexiPay with
UK Loans business AEBITDA positive at GBP8.8m and profitable at a
PBT level at GBP1.4m.
-- Loss before tax was GBP16.6m (H1 2022: profit before tax
GBP1.6m).
-- Net assets remain robust at GBP264.2m but decreased as we
continue to invest in the US Loans business andFlexiPay. Group cash
is GBP203.5m (31 December 2022: GBP177.7m), of which GBP172.5m (31
December 2022: GBP165.6m) isunrestricted[3].
To improve clarity and to better reflect our evolving business,
we have made certain changes to the presentation of our financial
results. All interest earned is now shown within Total Income (and
consequently AEBITDA), where previously interest earned on cash was
presented below operating profit. With no meaningful other items
between operating profit and profit before tax we no longer present
an operating profit line item. Comparative financial information
has been re-presented with further detail provided in Note 2.
Outlook:
FY 2023 and FY 2025 guidance provided in March 2023 is
unchanged, as shown below.
FY 2023 Medium Term (FY 2025)
UK and US Loans FlexiPay UK Loans US Loans FlexiPay
At least GBP175m
GBP150m - GBP160m
Total income Over GBP10m At least GBP70m At least GBP50m
GBP(10-20)m AEBITDA AEBITDA
AEBITDA GBP0-10m Margins of 25-30% positive positive
1 The comparative financial information has been re-presented to
include interest income on cash and cash equivalents within
'Operating Income'. Refer to Note 2 within the financial
statements
2 For definitions of non-GAAP measures refer to Glossary
section
3 Unrestricted cash refers to total cash less cash that is
restricted in use. The restricted cash is cash that is not
available for general use by the company as it is held within
investment vehicles and generally payable to third parties.
Analyst presentation:
Management will host an analyst and shareholder presentation and
conference call at 9:30am UK time (BST), on Thursday 7 September
2023, including an opportunity to ask questions.
To watch and listen to the webcast, with the opportunity to
submit written questions, please use this link to register and gain
access to the event.
For conference call access, with the opportunity to ask live
questions, please dial +44 33 0551 0200 or +1 786 697 3501. Quote
Funding Circle Half Year when prompted by the operator.
An on-demand replay and transcript will also be available on the
Funding Circle website following the presentation.
Investor relations and media relations:
Funding Circle Investor Relations
Morten Singleton (+44 7736 297 929)
ir@fundingcircle.com
Joint corporate brokers
Investec: Mark James / Bruce Garrow (+44 20 7597 4000)
Numis: Stephen Westgate / Jamie Loughborough (+44 20 7260
1000)
Funding Circle Media Relations
Abigail Whittaker (+44 7989 876 136)
press@fundingcircle.com
Headland Consultancy
Mike Smith / Stephen Malthouse (+44 20 3805 4822)
About Funding Circle:
Funding Circle (LSE: FCH) is the UK's leading SME lending
platform, with a material and growing presence in the US. Its
mission is to build the place where small businesses get the
funding they need to win.
Funding Circle enables small businesses to access funding -
offering an unrivalled customer experience powered by data and
technology.
For institutional investors, Funding Circle provides access to
an alternative asset class in an underserved market, with robust
and attractive returns.
Globally, Funding Circle has extended more than GBP16bn in
credit to c.140,000 businesses.
Forward looking statements and other important information:
This document contains forward looking statements, which are
statements that are not historical facts and that reflect Funding
Circle's beliefs and expectations with respect to future events and
financial and operational performance. These forward looking
statements involve known and unknown risks, uncertainties,
assumptions, estimates and other factors, which may be beyond the
control of Funding Circle and which may cause actual results or
performance to differ materially from those expressed or implied
from such forward looking statements. Nothing contained within this
document is or should be relied upon as a warranty, promise or
representation, express or implied, as to the future performance of
Funding Circle or its business. Any historical information
contained in this statistical information is not indicative of
future performance.
The information contained in this document is provided as of the
dates shown. Nothing in this document should be construed as legal,
tax, investment, financial, or accounting advice, or solicitation
for or an offer to invest in Funding Circle.
Business Review
Funding Circle is the UK's leading SME lending platform, with a
material and growing presence in the US. Our mission is to build
the place where small businesses get the funding they need to
win.
We enable small businesses to borrow, pay and spend - offering
an unrivalled customer experience powered by data and technology.
We give institutional investors access to an alternative asset
class in an underserved market, with robust and attractive returns.
We have now helped more than 140,000 SMEs to access more than GBP16
billion.
We have an attractive and proven business:
-- Leading SME lending platform in a large and underserved
market? GBP330bn SME lending and GBP1.3trn SME B2B payments market
opportunity.
-- Technology and data drive a superior customer experience and
sustained competitive advantage? Group Net Promoter Score (NPS) of
76 and Trustpilot score of 4.6 stars. ? 3x better risk
discrimination than traditional bureau scores, delivering high
conversion and robustand attractive loan returns.
-- Strong financial profile and proven business model,
demonstrated through the cycle? Robust balance sheet and cash
position. ? Established and profitable UK Loans business.
-- Executing on attractive growth opportunities to help more
small businesses win? Our medium-term plan is focused on expanded
distribution, increased conversion, and an expandedproduct set. ?
Significant medium-term opportunities in US Loans business and
FlexiPay.
We are delivering against our medium-term plan which brings
significant growth opportunities:
-- In March 2022, we announced our medium-term plan to transform
Funding Circle into a multi-productplatform, serving a direct and
embedded audience.
-- 18 months into this plan, we are delivering against our
strategic pillars:? Attract more businesses: strengthening existing
distribution channels and expanding into new embeddedand
intermediated channels to enable more businesses to reach us?
FlexiPay extends our product range so customers can now borrow, pay
and spend with FundingCircle. ? Completed first year of sports
sponsorship with Premiership Rugby driving increased brandmetrics.
? Expanding distribution channels with new partnerships in the UK
and US. ? Say yes to more businesses: serving more businesses
through an expanded set of personalised FundingCircle products and
further integration with third party lenders? New customer segments
launched in 2022 continued to deliver growth, with H1 UK near prime
makingup 12% of UK Loans business volume and US super prime
contributing 32% of US Loans business value. ? Marketplace (where
we refer businesses we cannot support to other lenders) showing
strongmomentum in UK and US, accounting for 13% of originations. ?
#1 in new products: using our capabilities to enter new markets
where we can develop market-leadingproducts? FlexiPay transactions
more than doubled in H1 2023 to GBP90m, with >GBP150m FlexiPay
transactionssince launch. ? >40,000 transactions since launch as
at end H1 2023. ? Following a successful beta phase, we are now
moving into launch phase which will see FlexiPaycard available to
new and existing customers. ? Secured senior debt funding from
Citibank, with FlexiPay having reached sufficient maturity
andscale.
Overview of the six months ended June 2023
The performance in H1 2023 was in line with our expectations,
with growth from each of our business units compared to H2 2022.
The Group comprises three trading business units each at differing
stages of maturity.
As expected, UK Loans business originations were down against H1
2022, when it was operating under the second iteration of the UK
government-guaranteed RLS. Since we reported in March 2023, the UK
economic recovery has been slower than we anticipated.
The US Loans business showed good growth on H2 2022 with LuM
increasing in H1 2023 and we will continue to invest in its cost
base as it scales.
Our line of credit product, FlexiPay, has demonstrated
significant growth to date and we are investing in this
opportunity. Its transaction levels continue to grow (more than
doubled in H1 2023 to GBP90m) and we are experiencing strong
customer engagement as we open up to new segments and launch new
features.
Originations and transactions H1 2023 H2 2022 H1 2022
GBPm GBPm GBPm
Loans
United Kingdom 471 454 641
United States 210 182 145
Other - - -
681 636 786
FlexiPay 90 42 17
Total 771 678 803
Loan originations in H1 2023 totalled GBP681m. This grew from
GBP636m in H2 2022 but was below the H1 2022 levels of GBP786m when
the UK Loans business was originating loans under the second
iteration of RLS. FlexiPay line of credit transactions have grown
each half.
30 June 2023
31 December 2022
Loans under Management (LuM) GBPm
GBPm
GBPm
Loans
United Kingdom 3,021 3,311
United States 398 375
Other 22 39
3,441 3,725
FlexiPay 34 18
Total 3,475 3,743
Loans under management declined in the period by 7% to
GBP3,475m. This was principally driven by continued repayment on
the government loan schemes, CBILS, RLS and PPP, offset by growth
in loans under management from commercial lending and in FlexiPay.
Both the US Loans business and FlexiPay LuM grew in the period.
As at 30 June 2023 UK government-guaranteed loans represented
GBP1,869m (31 December 2022: GBP2,325m) and PPP loans represented
GBP8m (31 December 2022: GBP28m).
Segmental highlights
30 June 2023 30 June 2022[4]
Loans FlexiPay Total Loans FlexiPay Total
Net income/(loss)
United United Other United United United Other United
Kingdom States Kingdom Kingdom States Kingdom
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Operating income4 55.4 14.5 0.3 2.3 72.5 55.6 10.1 0.8 0.4 66.9
Net investment income 1.7 2.4 - - 4.1 6.7 4.2 - - 10.9
Total income 57.1 16.9 0.3 2.3 76.6 62.3 14.3 0.8 0.4 77.8
Fair value gains/(losses) 0.4 3.0 - - 3.4 (4.0) 5.5 - - 1.5
Cost of funds - - - (0.4) (0.4) - - - - -
Net income 57.5 19.9 0.3 1.9 79.6 58.3 19.8 0.8 0.4 79.3
Adjusted EBITDA4 8.8 (3.8) (0.2) (7.8) (3.0) 8.1 2.0 1.8 (0.7) 11.2
Discount unwind on lease (0.1) (0.3) - - (0.4) (0.1) (0.4) - - (0.5)
liabilities5
Depreciation, amortisation and (5.5) (4.3) - (0.5) (10.3) (5.3) (1.6) - - (6.9)
impairment
Share-based payments and social (1.8) (0.7) - (0.3) (2.8) (1.9) (0.4) - - (2.3)
security costs
Foreign exchange gains/(losses) - (0.1) - - (0.1) 0.1 - - - 0.1
Profit/(loss) before tax 1.4 (9.2) (0.2) (8.6) (16.6) 0.9 (0.4) 1.8 (0.7) 1.6
Operating AEBITDA[5] 6.7 (9.2) (0.2) (7.8) (10.5) 5.4 (7.7) 1.8 (0.7) (1.2)
Investment AEBITDA5 2.1 5.4 - - 7.5 2.7 9.7 - - 12.4
4The comparative financial information has been re-presented
with Operating profit now removed and instead AEBITDA is reconciled
to profit before tax. The three items below Operating profit were
finance income, finance costs and share of profit of associates.
The finance income which represents interest income on cash and
cash equivalents is now included within 'Operating Income' and was
GBP0.5m in H1 2022 and GBP3.5m in H1 2023. The share of profits of
associates is included within other operating costs and is included
within AEBITDA and was GBP0.1m in H1 2022 and GBP0.1m in H1 2023.
Finance costs which represent the discount unwind on lease
liabilities is included within other operating costs and is
included below AEBITDA alongside the depreciation associated with
our leased premises. Refer to Note 2.
5 Investment AEBITDA is defined as investment income, investment
expense and fair value adjustments, and operating AEBITDA
represents AEBITDA excluding investment AEBITDA.
United Kingdom Loans business
We saw growth from H2 2022 in our core lending, as well as
originations through our marketplace of third party lenders.
Originations were GBP471m in H1 2023, decreasing from GBP641m in H1
2022, and were higher than the GBP454m in H2 2022. Originations
were funded through forward flow agreements with institutional
investors.
Bank of England base rate increases through the half have raised
the cost of borrowing for SMEs, but targeted marketing, strong
relationships with brokers and continued focus on customer
experience have enabled us to make progress despite these
headwinds.
The UK delivered operating income of GBP55.4m in H1 2023,
compared with GBP55.6m in H1 2022. Whilst lower originations
resulted in lower transaction fees, we have been able to maintain
operating income in line with H1 2022 largely through origination
yield improvements and higher interest generated on corporate cash
balances.
Investment income of GBP1.7m decreased from GBP6.7m in H1 2022
following the sale of previously securitised loans in H2 2022, as
well as continued amortisation of trust holdings from
government-backed schemes.
The UK generated operating AEBITDA of GBP6.7m in H1 2023
compared to GBP5.4m in H1 2022, with AEBITDA margin improvement.
Investment AEBITDA was GBP2.1m in H1 2023, down slightly from
GBP2.7m in H1 2022. Despite lower net investment income, we
benefitted from favourable fair value movements, after revising
down our macroeconomic view in H1 2022, recognising a fair value
loss at that point in time.
Profit before tax was GBP1.4m in H1 2023, up from GBP0.9m in H1
2022 due to the growth in AEBITDA.
United States Loans business
The US has continued to grow originations each half year period
since commercial lending resumed after the PPP ceased in May 2021.
Originations in H1 2023 were GBP210m compared with GBP182m in H2
2022 and GBP145m in H1 2022. Originations were funded through
forward flow agreements with institutional investors.
Total income for the US was GBP16.9m (H1 2022: GBP14.3m). This
comprised growth in operating income but a reduction in investment
income. H1 2022 also included GBP2.5m of PPP deferred income.
Operating income grew to GBP14.5m (H1 2022: GBP10.1m) driven by
the increase in originations together with increased pricing on
origination fees.
With the growth in income, operating AEBITDA for the period
improved on H2 2022 but remained negative at GBP9.2m as the US
continued to implement planned investments to scale the business.
H2 2022 operating AEBITDA was negative at GBP10.1m and H1 2022 was
negative at GBP7.7m (or negative GBP10.2m excluding the benefit of
GBP2.5m deferred PPP income).
Net investment income was GBP2.4m (H1 2022: GBP4.2m). Similar to
the UK, the reduction in investment income and investment AEBITDA
reflects the amortising nature of the investment in SME loans held
on balance sheet albeit there remained strong recoveries and lower
than expected defaults driving a positive fair value.
FlexiPay
FlexiPay transactions have more than doubled each half year
since launch and were GBP90m in H1 2023. Drawn lines of credit at
30 June 2023 were GBP34m.
The transactions generated operating income of GBP2.3m (H1 2022:
GBP0.8m). The fee charged on FlexiPay for each drawdown against
lines of credit ranges from 3.0-5.9% which is paid in three equal
instalments along with the repayment of each drawdown balance.
The AEBITDA for the period was negative at GBP7.8m (H1 2022:
negative GBP0.7m). The principal costs incurred are staff-related
costs, marketing costs and expected credit losses which are
required to be recognised up front on the drawn and undrawn lines
of credit.
Until June 2023, FlexiPay was solely funded through Funding
Circle invested capital. During June 2023, the Group drew down on a
newly set up senior debt facility with Citibank. The interest
payable on this facility is shown in "cost of funds".
As the business builds, we anticipate there to be continuing
investment with a resultant growth in the cost base.
Finance review
Overview
Group total income was GBP76.6m (H1 2022: GBP77.8m), down 2%,
and net income was GBP79.6m (H1 2022: GBP79.3m).
Net income is total income plus fair value movements on SME
loans held for sale and investments in trusts and now also includes
cost of funds. In June 2023, the Group levered its funding of the
FlexiPay product with a senior debt facility and the interest
payable on this debt is shown within cost of funds.
The Group's loss before tax was GBP16.6m for the period (H1
2022: profit of GBP1.6m).
Profit and loss
30 June 2023 30 June 2022[6]
GBPm GBPm
Transaction fees 41.7 40.7
Servicing fees 22.0 24.2
Interest income 5.8 1.1
Other fees 3.0 0.9
Operating income 72.5 66.9
Investment income 4.7 14.1
Investment expense (0.6) (3.2)
Total income 76.6 77.8
Fair value gains 3.4 1.5
Cost of funds (0.4) -
Net income 79.6 79.3
People costs (44.8) (41.4)
Marketing costs (23.9) (17.3)
Depreciation, amortisation and impairment (10.3) (6.9)
(Charge)/credit for expected credit losses (1.9) 1.0
Other costs (15.3) (13.1)
Operating expenses (96.2) (77.7)
(Loss)/profit before tax (16.6) 1.6
Operating income includes transaction fees, servicing fees,
interest income from loans held at amortised cost, interest on cash
balances and other fees and was GBP72.5m (H1 2022: GBP66.9m).
-- Transaction fees, representing fees earned on originations,
increased to GBP41.7m (H1 2022: GBP40.7m). Loanoriginations and
line of credit transactions were 4% down on H1 2022, however this
was offset by improvedorigination fee yields in the UK Loans
business.
Average origination fee yields grew in the UK Loans business to
6.3% (H1 2022: 5.0%). Yields in the US Loans business averaged 5.8%
(H1 2022: 6.1%), although yields in H1 2022 were distorted by PPP
deferred income and, once this is excluded, average yields in H1
2022 were 4.4%.
-- Servicing fees were GBP22.0m (H1 2022: GBP24.2m), down in
line with LuM. These represent the fees we chargeinvestors for
servicing their loans and move in line with the fees we charge and
the quantum of loans undermanagement. Servicing fees are not
charged on FlexiPay lines of credit or on the PPP loans. Servicing
yields remainsimilar to 2022 levels.
-- Interest income represents interest earned on loans held at
amortised cost and on cash and cashequivalents. This relates to
FlexiPay (GBP2.3m), where we charge a fee which is spread over
three months, in linewith borrower repayments together with
interest earned on cash and cash equivalents (GBP3.5m) which has
increased inline with base rates.
-- Other fees arose principally from collection fees we
recovered on defaulted loans, some of which wasaccelerated through
investors selling some of their non-performing loan portfolios.
Net investment income represents the investment income, less
investment expense, on loans held on balance sheet at fair value
and declined to GBP4.1m (H1 2022: GBP10.9m). This was driven by the
continued amortisation of the remaining loans and the buyout and
wind up of the securitisation vehicles in the UK Loans business and
US Loans business during 2022 and subsequent sale of certain loan
portfolios in October 2022. The Group wound up the remaining US
securitisation vehicle (SBIZ-20A) in April 2023.
Net income, defined as total income after fair value adjustments
and cost of funds, was GBP79.6m (H1 2022: GBP79.3m). The fair value
gain in the period related to the loans on balance sheet held at
fair value reflected ongoing strong performance from the SME loans
with lower defaults and higher recoveries than expected, in part
offset by higher discount rates driven by UK and US base rates. As
the on-balance sheet loans continue to amortise down, we would
expect fair value gains/losses to continue to decline.
6 The comparative financial information has been re-presented to
include interest income on cash and cash equivalents within
'Operating Income'. The impact of this was an increase in the
interest income line of GBP0.5m in H1 2022 and GBP3.5m in H1 2023.
Finance costs were GBP0.5m in H1 2022 and GBP0.4m in H1 2023 and
the share of profits of associates was GBP0.1m and GBP0.1m in H1
2023 and are both now included in Other costs on the grounds of
materiality. Refer to Note 2.
Operating expenses
At an overall level, operating expenses increased compared with
H1 2022. Operating costs movements were driven by cost increases in
the US Loans business as it builds to scale and cost investment in
the new FlexiPay business including increased expected credit
losses. Costs reduced in the established UK Loans business as a
result of ongoing cost management.
People costs (including contractors), represent the Group's
largest ongoing operating cost. These increased during the period
by 8% to GBP51.2m (H1 2022: GBP47.2m), before the capitalisation of
development spend. This was driven by wage inflation and headcount
growth for the FlexiPay team as it scales. Headcount across UK
Loans business has reduced by 8% with US Loans business headcount
flat.
The share-based payment charge for the period, included in
people costs, was GBP2.8m (H1 2022: GBP2.3m).
30 June
30 June
2022
2023 Change
GBPm
GBPm %
People costs 51.2 47.2 8
Less capitalised development spend ("CDS") (6.4) (5.8) 10
People costs net of CDS 44.8 41.4 8
Average headcount (incl. contractors) 1,065 1,004 6
Period-end headcount (incl. contractors) 1,059 1,029 3
Marketing costs comprise above the line marketing channels
(direct mail and online), brand spend and commission payments made
to brokers. Marketing increased in the period to GBP23.9m (H1 2022:
GBP17.3m) and was driven by investment in the FlexiPay and US
businesses. Excluding FlexiPay, the Loans businesses invested 31%
of operating income in marketing (H1 2022: 26%) with lower
conversion in the current economic environment impacting marketing
efficiency.
Depreciation, amortisation and impairment costs of GBP10.3m (H1
2022: GBP6.9m) largely represent the amortisation of the cost of
the Group's capitalised technology development and the depreciation
of right-of-use assets related to the Group's office leases. With a
weakening commercial property market in San Francisco, the Group
has impaired its sublet office space by GBP2.0m as the carrying
values are no longer supportable. This follows an impairment of the
San Francisco office in H2 2022 of GBP1.8m.
Expected credit losses principally relate to the IFRS9 charge
for FlexiPay where we account for actual and future expected credit
losses from SME's defaulting on their lines of credit. We would
expect this charge to increase as FlexiPay grows.
Other operating costs have grown as the Group continues to
invest in growth in the US Loans and FlexiPay businesses.
Balance sheet and investments
The Group's net equity was GBP264m at 30 June 2023 (31 December
2022: GBP284m). This reduction reflects the Group's operating
losses, the purchase of own shares by the Employee Benefit Trust
("EBT") and foreign exchange losses on the retranslation of the
investment in the US Loans business.
The majority of the Group's balance sheet is represented by cash
and invested capital as shown below. The invested capital is in
certain SME loans, either directly or historically through
investment vehicles, and in the FlexiPay lines of credit.
30 June 31
Operating business Investment business 2023 December
2022
Loans Legacy securitisation, warehouse CBILS/RLS/ Private
business1 FlexiPay and other loans at fair value Commercial funds
co-investments Total Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
SME loans 10.2 30.5 31.3 25.0 2.1 99.1 141.3
Cash and cash 193.8 9.7 - - - 203.5 177.7
equivalents
Other assets/ - 1.1 - - - 1.1 0.9
(liabilities)
Borrowings/ (6.1) (30.8) - - - (36.9) (46.3)
bonds
Cash and net 197.9 10.5 31.3 25.0 2.1 266.8 273.6
investments
Other assets 58.3 - - - - 58.3 64.1
Other (60.9) - - - - (60.9) (53.7)
liabilities
Equity 195.3 10.5 31.3 25.0 2.1 264.2 284.0
1 Loans business includes GBP5.7m of PPP loans together with the
associated Federal Reserve borrowings which we expect will both
reduce as the remaining PPP loans are forgiven.
The table below provides a summation of Funding Circle's net
invested capital in products and vehicles:
30 June
31 December 2022
Investment in product/vehicles 2023
GBPm
GBPm
1. Legacy securitisation, warehouse and other loans at fair value 31 46
2. CBILS/RLS/Commercial co-investments2 25 32
3. Private funds 2 3
Net invested 58 81
4. FlexiPay2 11 16
Total net invested capital 69 97
2 These vehicles are bankruptcy remote 1. Legacy securitisation,
warehouse and other loans at fair value - This relates to the
legacy loanspreviously held in SPVs and warehouses. During H1 2023,
the Group called options to wind down the US
securitisation(SBIZ-20A) and in 2022, the Group called options to
wind down UK (SBOLT-19A) and US (SBIZ-19A) securitisations
andbought out the remaining bondholders. Additionally in previous
years the Group closed certain warehouse entities inthe UK and US
repaying related borrowings and buying the loans out of the
vehicles. The Group also holds certainloans at fair value which
were originated with the intention of on-selling. The Group retains
legacysecuritisation, warehouse and other loans held at fair value
of GBP31m which continue to amortise down. 2. CBILS/RLS/Commercial
co-investments - As part of our participation in the CBILS and RLS
UKgovernment-guaranteed loan schemes, we were required to co-invest
c.1% alongside institutional investors. 3. Private funds - There
are a small amount of other loans, comprising seed investments in
private fundsheld as associates.
Cash flow
At 30 June 2023, the Group's cash position was GBP203.5m (31
December 2022: GBP177.7m). Of this balance GBP172.5m (31 December
2022: GBP165.6m) is unrestricted in its use. Restricted cash
relates to cash held in investment and special purpose vehicles and
the funding vehicle for FlexiPay.
Total cash movements have principally been driven by: i. Trading
performance ii. Sale of temporary funding loans in the US Loans
business iii. Monetisation of on-balance sheet SME loans as they
have continued to pay down offset by the wind downand buyout of the
SBIZ-20A external bonds iv. Leveraging the investment in FlexiPay
lines of credit with external bank debt v. Timing of working
capital movements associated with UK government loan guarantee
payments received frominvestors still to be paid to the British
Business Bank
Free cash flow, which is an alternative performance measure,
represents the net cash flows from operating activities less the
cost of purchasing intangible assets, property, plant and equipment
and lease payments. It excludes the investment vehicle financing
and funding cash flows together with FlexiPay lines of credit. The
Directors view this as a key liquidity measure and it is the net
amount of cash used or generated to operate and develop the Group's
platform each year.
The table below shows how the Group's cash has been
utilised:
30 June 2023 30 June 20221
GBPm GBPm
Adjusted EBITDA (3.0) 11.2
Fair value adjustments (3.4) (1.5)
Purchase of tangible and intangible assets (6.8) (6.6)
Payment of lease liabilities (3.0) (3.0)
Working capital/other 11.1 (1.4)
Free cash flow (5.1) (1.3)
Net distributions from associates 0.7 2.0
Net movement in trusts and co-investments 3.4 (1.7)
Net originations of lines of credit 15.0 (5.6)
Net movement in other SME loans 17.2 (1.1)
Net movement in warehouses and securitisation vehicles (2.9) (15.3)
Purchase of own shares (1.8) (4.6)
Effect of foreign exchange (0.7) 4.3
Movement in the year 25.8 (23.3)
Cash and cash equivalents at the beginning of the period 177.7 224.0
Cash and cash equivalents at the end of the period 203.5 200.7
1The comparative information has been re-presented consistent
with the Income Statement.
Principal risks and uncertainties
The Group's principal risks and uncertainties were disclosed on
pages 59 to 69 of the Funding Circle Holdings plc 2022 Annual
Report and Accounts after review and approval by the Board. The
Group considers that the overall principal risks and uncertainties,
risk appetite, key risks and management of risks remain unchanged
for the six months ended 30 June 2023.
The principal risks include:
- Strategic risk, including the economic environment and
environmental, social and governance risk;
- Funding and balance sheet risk;
- Credit risk, including borrower acquisition and portfolio
management risk;
- Regulatory, reputation and conduct risk; and
- Operational risk, including process risk, information
security, technology risk, data risk, financial crime and client
money risk.
Statement of Directors' Responsibilities
The Directors confirm that these condensed interim financial
statements have been prepared in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting'
and the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority, give a true and
fair view of the assets, liabilities, financial position and profit
and loss as required by DTR 4.2.4 and that the interim management
report includes a fair review of the information required by DTR
4.2.7 and DTR 4.2.8, namely:
-- an indication of important events that have occurred during
the first six months and their impact on thecondensed set of
interim financial statements, and a description of the principal
risks and uncertainties for theremaining six months of the
financial year; and
-- material related-party transactions in the first six months
and any material changes in the related-partytransactions described
in the last Annual Report and Accounts.
The maintenance and integrity of the Funding Circle Holdings plc
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 might have occurred to the interim financial
statements since they were initially presented on the website.
The Directors of Funding Circle Holdings plc are listed in the
Funding Circle Holdings plc Annual Report and Accounts for 31
December 2022. A list of current directors is maintained on the
Funding Circle Holdings plc website:
www.corporate.fundingcircle.com.
By order of the Board
Lisa Jacobs, Chief Executive Officer
7 September 2023
Oliver White, Chief Financial Officer
7 September 2023
Condensed consolidated statement of comprehensive income
For the six months to 30 June 2023 (unaudited)
Unaudited Unaudited
6 months to 6 months to
30 June 2023 30 June 2022
(Re-presented)1
Note GBPm GBPm
Transaction fees 41.7 40.7
Servicing fees 22.0 24.2
Interest income1 5.8 1.1
Other fees 3.0 0.9
Operating income 4 72.5 66.9
Investment income 4.7 14.1
Investment expense (0.6) (3.2)
Total income 4 76.6 77.8
Fair value gains 3.4 1.5
Cost of funds (0.4) -
Net income 4 79.6 79.3
People costs (44.8) (41.4)
Marketing costs (23.9) (17.3)
Depreciation, amortisation and impairment (10.3) (6.9)
(Charge)/credit for expected credit losses2 (1.9) 1.0
Other costs (15.3) (13.1)
Operating expenses 5 (96.2) (77.7)
(Loss)/profit before taxation (16.6) 1.6
Income tax 6 (1.5) 5.5
(Loss)/profit for the period (18.1) 7.1
Other comprehensive income
Items that may be reclassified subsequently to profit and loss:
Exchange differences on translation of foreign operations (2.4) 5.5
Total comprehensive (loss)/profit for the period (20.5) 12.6
Total comprehensive (loss)/profit attributable to:
Owners of the parent (20.5) 12.6
Earnings per share
Basic (loss)/earnings per share 7 (5.2)p 2.0p
Diluted (loss)/earnings per share 7 (5.2)p 1.8p
1 The comparative consolidated statement of comprehensive income
has been re-presented to include interest income on cash and cash
equivalents within 'Interest income' which was previously presented
within 'Finance Income'. Finance costs and share of net profit of
associates are now presented within "Other costs" as these are not
considered material to present separately. Refer to note 2 of the
financial statements.
2 The comparative period has been re-presented to present
certain amounts in "(charge)/credit for expected credit losses"
which were previously included within "other costs".
Condensed consolidated balance sheet
As at 30 June 2023 (unaudited)
Unaudited
31 December
30 June
2022
2023
Note GBPm GBPm
Non-current assets
Intangible assets 8 28.4 28.2
Property, plant and equipment 9 6.8 10.0
Investment in associates 10 2.1 2.7
Investment in trusts and co-investments 11 25.0 28.7
SME loans (other) 11 10.2 24.8
Deferred tax asset 6 5.4 6.9
Trade and other receivables 14 1.8 3.4
79.7 104.7
Current assets
SME loans (warehouse) 11 1.5 2.4
SME loans (securitised) 11 28.8 45.8
SME loans (other) 11 1.0 20.9
Lines of credit 11 30.5 16.0
Trade and other receivables 17.0 16.5
Cash and cash equivalents 16 203.5 177.7
282.3 279.3
Total assets 362.0 384.0
Current liabilities
Trade and other payables 42.2 31.8
Bonds 14 - 23.7
Bank borrowings 12 30.8 -
Short-term provisions and other liabilities 13 1.4 1.0
Lease liabilities 9 7.3 7.2
81.7 63.7
Non-current liabilities
Long-term provisions and other liabilities 13 1.1 1.1
Bank borrowings 12 6.1 22.6
Lease liabilities 9 8.9 12.6
16.1 36.3
Total liabilities 97.8 100.0
Equity
Share capital 0.4 0.4
Share premium account 293.1 293.1
Foreign exchange reserve 14.5 16.9
Share options reserve 22.0 22.2
Accumulated losses (65.8) (48.6)
Total equity 264.2 284.0
Total equity and liabilities 362.0 384.0
These condensed interim financial statements were approved by
the Board on 07 September 2023. They were signed on behalf of the
Board by:
O White
Director
Condensed consolidated statement of changes in equity
For the six months to 30 June 2023 (unaudited)
Share Share Foreign Share (Accumulated losses)/ Total
capital premium exchange options retained earnings equity
account reserve reserve
GBPm GBPm GBPm GBPm GBPm GBPm
Balance as at
0.4 293.1 16.9 22.2 (48.6) 284.0
1 January 2023
Loss for the period - - - - (18.1) (18.1)
Other comprehensive income:
Exchange differences on - - (2.4) - - (2.4)
translation of foreign operations
Transactions with owners
Issue of share capital - - - - - -
Purchase of own shares held in - - - - (1.8) (1.8)
employee benefit trust
Transfer of share option costs - - - (2.7) 2.7 -
Employee share schemes - value of - - - 2.5 - 2.5
employee services
Unaudited balance at
0.4 293.1 14.5 22.0 (65.8) 264.2
30 June 2023
Balance as at
0.4 293.0 11.1 19.1 (35.6) 288.0
1 January 2022
Profit for the period - - - - 7.1 7.1
Other comprehensive income:
Exchange differences on - - 5.5 - - 5.5
translation of foreign operations
Transactions with owners
Issue of share capital - 0.1 - - - 0.1
Purchase of own shares held in - - - - (4.6) (4.6)
employee benefit trust
Transfer of share option costs - - - (0.8) 0.8 -
Employee share schemes - value of - - - 3.2 - 3.2
employee services
Unaudited balance as at
0.4 293.1 16.6 21.5 (32.3) 299.3
30 June 2022
Condensed consolidated statement of cash flows
For the six months to 30 June 2023 (unaudited)
Unaudited
Unaudited
6 months to
6 months to
Note 30 June 2022
30 June 2023
(Re-presented)1
GBPm GBPm
Net cash (outflow)/inflow from operating activities 15 (11.1) 2.7
Investing activities
Purchase of intangible assets (6.4) (6.0)
Purchase of property, plant and equipment (0.4) (0.6)
Originations of SME loans (other) (15.5) (2.1)
Cash receipts from SME loans (other) 18.0 43.8
Cash receipts from SME loans (warehouse phase) 14 0.9 1.5
Proceeds from sale of SME loans (other) 14 30.6 -
Proceeds from sale of SME loans (securitised) 14 - 22.1
Cash receipts from SME loans (securitised) 14 19.7 56.9
Investment in trusts and co-investments 14 - (5.7)
Cash receipts from investment in trusts and co-investments 14 3.4 4.0
Redemption in associates 10 0.6 1.8
Dividends from associates 10 0.1 0.2
Net cash inflow from investing activities 51.0 115.9
Financing activities
Proceeds from bank borrowings 12 30.8 -
Repayment of bank borrowings (15.9) (42.8)
Payment of bond liabilities (23.5) (95.8)
Proceeds from the exercise of share options - -
Proceeds from subleases 0.6 0.6
Purchase of own shares (1.8) (4.6)
Payment of lease liabilities (3.6) (3.6)
Net cash outflow from financing activities (13.4) (146.2)
Net increase/(decrease) in cash and cash equivalents 26.5 (27.6)
Cash and cash equivalents at the beginning of the period 177.7 224.0
Effect of foreign exchange rate changes (0.7) 4.3
Cash and cash equivalents at the end of the period 16 203.5 200.7
1 The comparative period to 30 June 2022 has been re-presented
to present 'interest received' which was previously a component of
investing activities as a component of operating income to mirror
the re-presentation of interest on cash and cash equivalents within
'Interest income' which was previously presented within 'Finance
Income' on the consolidated statement of comprehensive income.
Notes to the condensed interim financial statements
For the six months to 30 June 2023 (unaudited)
1. Basis of preparation
General information
Funding Circle Holdings plc ('the Company') is a public limited
company which is listed on the London Stock Exchange and is
domiciled and incorporated in the United Kingdom under the
Companies Act 2006. The Company's registered office is 71 Queen
Victoria Street, London, EC4V 4AY.
These condensed interim financial statements have been prepared
as at, and for the six months to, 30 June 2023. The comparative
financial information presented has been prepared for the six
months to 30 June 2022 and as at 31 December 2022.
The interim financial information presented as at, and for the
six months to, 30 June 2023 comprise the Company and its
subsidiaries (together referred to as the "Group"). The
consolidated financial statements of the Group as at, and for the
year to, 31 December 2022 are available on request from the
Company's registered office and via the Company's website.
Going concern
The Group made a total comprehensive loss of GBP20.5 million
during the six months to 30 June 2023 (30 June 2022: GBP12.6
million profit). As at 30 June 2023 the Group had net assets of
GBP264.2 million (31 December 2022: GBP284.0 million). This
included cash and cash equivalents of GBP203.5 million (31 December
2022: GBP177.7 million) of which GBP31.0 million (31 December 2022:
GBP12.1 million) is restricted. Additionally within the net assets
the Group holds GBP68.9 million (31 December 2022: GBP96.5 million)
of invested capital, some of which is capable of being monetised if
liquidity needs arise.
The condensed interim financial statements are prepared on a
going concern basis as the Directors are satisfied that the Group
has the resources to continue in business for the foreseeable
future (which has been taken as 12 months from the date of approval
of the condensed interim financial statements).
The Group has prepared detailed cash flow forecasts for the next
15 months and has updated the going concern assessment.
The base case scenario assumes:
-- Continued growth in origination of the Group's core lending
product until December 2024;
-- there remains macroeconomic stress in 2023 from inflation and
supply chain pressures, with a peak indefaults, which gradually
de-stress in the following years, while interest rates increase
marginally in the shortterm and decrease slowly over the longer
term;
-- The continued rollout of the new FlexiPay product leveraging
the borrowing facility and the Group'sbalance sheet to fund it;
and
-- Costs and headcount grow modestly with the new product.
Management prepared a severe but plausible downside stress
scenario in which:
-- Further macroeconomic volatility continues through the period
with increased inflation and interest ratesreducing originations
and increasing costs;
-- Investment returns reduce owing to increased funding costs,
widening discount rates and deterioration inloan performance;
-- An operational event occurring requiring a cash outlay;
and
-- A downside loss scenario is applied to Funding Circle's
on-balance sheet investments in SME loans andlines of credit
resulting in higher initial fair value losses and expected credit
losses and lower cash flows tothe investments it owns.
Under the base case and severe but plausible downside scenarios,
sufficient cash is forecast to be available to meet liabilities as
they fall due without the requirement to take significant
mitigating actions or restructuring. The Group does not currently
rely on committed or uncommitted borrowing facilities with the
exception of a facility for the purpose of originating FlexiPay
lines of credit and comparatively negligible remaining balance on
the PPPLF previously used to fund PPP loans, and does not have
undrawn committed borrowing facilities available to the wider
Group.
Management have reviewed the financial covenants the Group must
adhere to in relation to its servicing agreements. These are with
institutional investors and require minimum levels of unrestricted
cash in the Group and maintaining maximum debt to tangible net
worth ratios. Even in stressed scenarios, there is not considered
to be a material risk of a covenant breach despite a narrowing of
headroom in the near term.
The Directors have made inquiries of management and considered
budgets and cash flow forecasts for the Group and have, at the time
of approving these interim financial statements, a reasonable
expectation that the Group has adequate resources to continue as a
going concern for the foreseeable future.
Basis of preparation
These condensed interim financial statements, which have been
reviewed and not audited, have been prepared in accordance with the
Disclosure and Transparency Rules of the Financial Conduct
Authority and with UK adopted IAS 34, "Interim Financial
Reporting". They do not include all of the information required for
full annual financial statements, and should be read in conjunction
with the consolidated financial statements of the Group as at and
for the year to 31 December 2022 which have been prepared in
accordance with UK-adopted International Accounting Standards and
with the requirements of the Companies Act 2006 as applicable to
companies reporting under those standards.
The financial information included in these condensed interim
financial statements does not constitute statutory accounts within
the meaning of Section 434 of the Companies Act 2006 (the 'Act').
The statutory accounts for the year ended 31 December 2022 have
been reported on by the Company's auditors and were delivered to
the Registrar of Companies following the Company's Annual General
Meeting. The auditor's report was (i) unqualified, (ii) did not
include a reference to any matters to which the auditor drew
attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 of the Act.
Significant changes in the current reporting period
The financial position and performance of the Group was affected
by the following events and transactions during the six months to
30 June 2023: i. Launch of FlexiPay leveraged warehouse
During H1 2023, the Group set up a warehouse special purpose
vehicle ("SPV"), for the purposes of scaling up the FlexiPay
product through bank borrowings. The vehicle is consolidated by the
Group as a consequence of it having control through the design of
the vehicle and ability to influence the returns and exposure to
the majority of the variability of the cash flows generated by the
vehicle. As a result the underlying lines of credit and borrowings
through the senior lending facility in the vehicle are also
consolidated. The interest and other fees associated with the
borrowing facility are presented within cost of funds. Details of
the borrowing facility terms are outlined in note 12. ii. Unwind of
US SPV
In April 2023, Funding Circle exercised the call rights
associated with the ownership of the unrated junior residual
tranches of Small Business Lending Trust 2020-A's bonds in the US.
This resulted in Funding Circle buying out the remaining
bondholders. The Group continues to consolidate 100% of the
previously securitised SME loans, which continue to be held at fair
value through profit and loss within SME Loans (securitised), as
the Group continues to hold these with the intention of selling
them.
All the Group's securitisation SPVs have now been unwound and
all bond liabilities have now been repaid. iii. Sale of SME loans
(other)
In February 2023, commercial loans in the US which had been
temporarily funded by the Group with the intention of selling
onwards and were held at fair value through profit and loss, were
sold to a third party investor for GBP30.6 million.
2. Changes in significant accounting policies
With the exception of the below, the accounting policies,
methods of computation and presentation adopted in the preparation
of the condensed interim financial statements are consistent with
those followed in the preparation of the consolidated financial
statements for the year ended 31 December 2022. The Group has not
early adopted any other standard, interpretation or amendment that
has been issued but is not yet effective.
A number of new or amended standards became applicable for the
current reporting period, however, the Group did not have to change
its accounting policies or make retrospective adjustments as a
result of adoption.
Re-presentation of interest income on cash and cash equivalents
and impact on alternative performance measures
The business uses its cash resources where it makes the platform
stronger. As a result, the Group historically invested in warehouse
and securitisation vehicles (which are now largely unwound, with
the exception of the FlexiPay warehouse), co-invested alongside
investors and more recently in the FlexiPay product. Where cash is
not invested in these areas, it is held at banks and in money
market funds earning interest. Given its use is integral to the
business and the Group is now earning interest through various
mechanisms, we now show the interest we earn on bank deposits,
money market funds and on client money, previously shown in Finance
Income, in Interest Income within Operating Income. Finance costs
and profit/(loss) from share of associates are now presented within
Other costs as these are not considered material. The comparative
financial presentation has been re-presented accordingly with an
additional GBP0.5 million presented in interest income previously
presented in finance income, GBP0.4 million presented within other
costs, GBP0.5 million of which was previously presented within
finance costs and GBP0.1 million credit which was previously
presented in share of net profit from associates. The condensed
consolidated statement of cash flows and note 15 have also been
re-presented to mirror this with interest earned now forming part
of cash flows from operating activities which were previously
disclosed as investing activities, with the comparative period
represented with GBP0.5 million included within cash flows from
operations previously within cash flows from investing
activities.
The Group's definition of the alternative performance measure,
Adjusted EBITDA, has consequently also been adjusted to take
account of this re-presentation. The definition used is now profit
for the period before finance costs (being the discount unwind on
lease liabilities), taxation, depreciation, amortisation and
impairment ("AEBITDA") and additionally excludes share-based
payment charges and associated social security costs, foreign
exchange and exceptional items. The comparative period AEBITDA is
re-presented higher by GBP0.6 million including the representation
of interest income on bank deposits and share of net profit from
associates.
3. Critical accounting estimates and judgments
The preparation of the consolidated interim financial statements
requires the Group to make estimates and judgements that affect the
application of policies and reported amounts. Critical judgements
represent key decisions made by management in the application of
the Group accounting policies. Where a significant risk of
materially different outcomes exists due to management assumptions
or sources of estimation uncertainty, this will represent a key
source of estimation uncertainty.
Estimates and judgements are continually evaluated and are based
on experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
Although these estimates are based on management's best knowledge
of the amount, event or actions, actual results ultimately may
differ from those estimates.
The significant judgements and estimates applied by the Group in
the interim financial statements have been applied on a consistent
basis with the financial statements for the year to 31 December
2022.
Critical judgements
a) Consolidation and deconsolidation of special purpose vehicles
("SPVs")
As part of its asset-backed securitisation programmes in the
past, and more recently in scaling up the FlexiPay product, the
Group has established SPVs. Judgement is required in determining
who is most exposed to the variability of returns and who has the
ability to affect those returns and therefore who should
consolidate these vehicles and subsequently deconsolidate them.
Where the Group has a significant interest in the junior notes or
tranches of the SPVs, the Group is deemed to be exposed to the
majority of the variability of the returns of those vehicles and
controls them, and therefore consolidates them. Where this
proportional interest is reduced, the Group considers whether the
vehicles should be deconsolidated.
b) Loans originated through the platform
The Group originates SME loans through its platform which are
funded primarily by banks, asset managers and other institutional
investors or by usage of its own capital. Judgement is required to
determine whether these loans should be recognised on the Group's
balance sheet. Where the Group, its subsidiaries or SPVs which it
consolidates have legal and beneficial ownership to the title of
those SME loans, they are recognised on the Group's balance sheet.
Where this is not the case, the loans are not recognised at the
point of origination.
Key sources of estimation uncertainty
The following are the key sources of estimation uncertainty that
the Directors have made in the process of applying the Group's
accounting policies and have the most significant effect on the
amounts recognised in the interim financial statements.
a) Fair value of financial instruments (note 14)
At 30 June 2023, the carrying value of the Group's financial
assets held at fair value was GBP197.5 million (31 December 2022:
GBP219.4 million).
In accordance with IFRS 13 Fair Value Measurement, the Group
categorises financial instruments carried on the consolidated
balance sheet at fair value using a three-level hierarchy.
Financial instruments categorised as level 1 are valued using
quoted market prices and therefore there is minimal estimation
applied in determining fair value. However, the fair value of
financial instruments categorised as level 2 and, in particular,
level 3 is determined using valuation estimation techniques
including discounted cash flow analysis and valuation models. The
most significant estimation is with respect to discount rates and
estimated default rates.
Since 31 December 2022 the assumptions related to estimating
fair value have remained consistent, with expected increases in
defaults due to the inflationary cost pressures experienced by
small businesses and their customers in the foreseeable
macroeconomic environment. However, there has been favourable
observed performance with lower defaults and stable recoveries.
This has led to a lower lifetime cumulative default expectation and
a higher relative estimation of fair value compared to the carrying
value of the loans than at 31 December 2022.
This has been partially offset by increased discount rates used
to discount the estimated cash flows, primarily driven by increases
in the risk free rate, due to central bank interest rate rises in
order to curb inflationary pressures. This in turn has led to a
lower relative estimation of fair value compared to carrying value
of the loans.
With respect to investments in trusts and co-investments, where
the Group holds a small pari-passu co-investment structured through
leveraged warehouse vehicles which are majority owned by the
majority equity investor, the increase in interest rates over the
last year decreased the estimated fair value in these structures.
This was caused by floating rate interest paid on senior borrowing
facilities within the vehicle expected to decrease the returns to
the equity holders compared to previous expectations. The
macroeconomic stress assumptions utilised are consistent with those
used at 31 December 2022. The nature of the vehicles is such that,
while the loans may be government guaranteed, an uptick in defaults
in combination with higher borrowing costs will still reduce the
lifetime return to the equity holder and the inbuilt mechanisms of
the vehicles which prioritise protection of repayments to the
senior lender could lead to cash flowing to the equity holder later
and as a result the estimated fair value of the investment has
decreased.
Sensitivities to assumptions in the valuation of SME loans
(warehouse), SME loans (other) and money market funds within cash
and cash equivalents are not disclosed below as reasonably possible
changes in the current assumptions would not be expected to result
in material changes in the carrying values.
Sensitivities to the default rates and discount rate are
illustrated below.
Fair
Description value Unobservable input Inputs Relationship of unobservable inputs to fair value
(GBPm)
A change in the lifetime cumulative default rate would have the
following impact:
US 14.5% US SPV11: +24/-12 bps would decrease/increase fair value by GBP
SME loans - Lifetime cumulative and (0.3) million/ GBP0.2 million respectively.
(securitised) 28.8 default rate as % of 11.2%1
original US SPV21: +53/-27 bps would decrease/increase fair value by GBP
UK 6.6%1 (1.1) million/ GBP0.5 million respectively.
UK: +8/-26 bps would decrease/increase fair value by GBP(0.2)
million/ GBP0.3 million respectively.
Investments in Lifetime cumulative Blended: A change in the blended lifetime cumulative default rate by
Trusts and 25.0 default rate as % of 16.0% +100/-440 bps would decrease/increase fair value by GBP(0.5)
co-investments original million/ GBP2.2 million respectively.
1Two cumulative default rates are presented for the US
representing the portfolios in each of the two respective pools of
SME loans (securitised) related to the legacy securitisation
vehicle loans. Separate sensitivities to default rates for the US
legacy securitisation vehicle loans represent the respective
seasoning of the loans and the different reasonably possible range
of outcomes. All default definitions are based on "contractual
default" definition of 90+ days past due based on current
contractual terms which may have been revised since the original
contract. The default definitions previously utilised were
'synthetic', being 90+days past due based on original contractual
terms including where borrowers became 90+ days late due to going
on approved forbearance measures such as payment holidays, but were
amended after the loans were sold from the respective SPV.
The above sensitivities represent management's estimate of the
reasonably possible range of outcomes and as a result the fair
value of the assets and liabilities measured at fair value could
materially diverge from management's estimate.
Fair Unobservable
Description value input Inputs Relationship of unobservable inputs to fair value
(GBPm)
SME loans - Risk-adjusted US 15.8% A change in the discount rate by +/-200 bps would decrease
(securitised) 28.8 discount rate /increase fair value by GBP0.7 million.
UK 20.1%
Investments in Trusts 25.0 Risk-adjusted 9.0% to A change in the discount rate by +/-200 bps would decrease
and co-investments discount rate 22.2% /increase fair value by GBP0.8 million.
It is considered that the range of reasonably possible outcomes
in relation to the discount rates used is presented above and, as a
result, the fair value of the assets could materially diverge from
management's estimate.
As the discount rate is risk-adjusted, it should be noted that
the sensitivities to discount rate and to lifetime cumulative
default rate contain a level of overlap regarding credit risk. The
sensitivity in expected lifetime cumulative defaults should not
also be applied to the sensitivity of the credit risk element of
the risk-adjusted discount rate and the sensitivities are most
meaningful viewed independently of each other.
b) Expected credit loss impairment of FlexiPay lines of credit
(notes 13, 14 and 18)
At 30 June 2023 the Group held GBP33.6 million of drawn FlexiPay
lines of credit and GBP78.5 million of undrawn lines of credit,
gross of expected credit loss impairment allowances.
While other financial assets of the Group are held at amortised
cost, the FlexiPay lines of credit are the most sensitive to
estimation uncertainty due to the higher balance outstanding and
more limited historic data.
An expected credit loss impairment allowance is held against the
lines of credit of GBP4.2 million (GBP3.1m related to drawn lines
of credit and GBP1.1 million related to undrawn).
The Group estimates the expected credit loss allowance following
IFRS 9 through modelling the exposure at default based on observed
trends related to the overall line of credit facility and the
proportion drawn at the time of default. The probability of default
is estimated utilising observed trends and combining these with
forward looking information including different macro-economic
scenarios which are probability weighted. The loss given default is
driven by assumptions regarding the level of recoveries collected
after defaults occur.
The area most sensitive to estimation uncertainty is the
probability of default related to stage 1 lines of credit and the
probability weighting of the forward looking scenarios utilised.
Currently a baseline scenario, upside scenario and downside
scenario are utilised which are probability weighted 60% baseline,
20% upside and 20% downside which provide a blended stage 1
probability of default of 6.9%. If 100% probability weighting were
to be applied to the upside scenario the probability of default
related to stage 1 lines of credit would decrease by 330bps to 3.6%
and the expected credit loss impairment provision would decrease by
GBP1.1 million (GBP0.6 million on drawn lines of credit and GBP0.5
million on undrawn lines of credit). If a 100% probability
weighting were to be applied to the downside scenario, the stage 1
probability of default would increase 114bps to 8.0%, the expected
credit loss impairment would increase by GBP0.4 million (GBP0.2
million on drawn lines of credit and GBP0.2 million on undrawn
lines of credit). It is considered that the above sensitivities
represent the range of reasonably possible outcomes in relation to
the probability of default on stage 1 FlexiPay lines of credit.
4. Segmental information
IFRS 8 Operating Segments requires the Group to determine its
operating segments based on information which is used internally
for decision making. Based on the internal reporting information
and management structures within the Group, it has been determined
that there are four operating segments, three of which are term
loans businesses arranged geographically consistent with the prior
year and the fourth which is a line of credit business, FlexiPay,
based in the United Kingdom. Reporting on this basis is reviewed by
the Global Leadership Team ("GLT") which is the chief operating
decision maker ("CODM"). The GLT is made up of the Executive
Directors and other senior management and is responsible for the
strategic decision making of the Group.
The four reportable segments are as shown in the table below.
The Other segment includes the Group's term loan businesses in
Germany and the Netherlands.
The GLT measures the performance of each segment by reference to
a non-GAAP measure, Adjusted EBITDA, which is defined as profit for
the period before finance costs (being the discount unwind on lease
liabilities), taxation, depreciation, amortisation and impairments
("AEBITDA") and additionally excludes share-based payment charges
and associated social security costs, foreign exchange and
exceptional items. Together with profit before tax, Adjusted EBITDA
is a key measure of Group performance as it allows better
comparability of the underlying performance of the business. The
segment reporting, including Adjusted EBITDA, excludes the impact
of the Group's transfer pricing arrangements as this is not
information presented to, or used by, the CODM in decision making
or the allocation of resources.
30 June 2023 30 June 2022 (re-presented see note 2)
Term loans FlexiPay Term loans FlexiPay
Net income/(loss) United United United United Other United Total
Kingdom States Other United Total Kingdom States Kingdom
Kingdom
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Transaction fees 29.6 12.1 - - 41.7 31.9 8.8 - - 40.7
Servicing fees 20.2 1.6 0.2 - 22.0 22.8 1.0 0.4 - 24.2
Other fees 2.8 0.1 0.1 - 3.0 0.5 0.2 0.2 - 0.9
Interest Income 2.8 0.7 - 2.3 5.8 0.4 0.1 0.2 0.4 1.1
(including FlexiPay)
Operating income 55.4 14.5 0.3 2.3 72.5 55.6 10.1 0.8 0.4 66.9
Net investment income 1.7 2.4 - - 4.1 6.7 4.2 - - 10.9
Total income 57.1 16.9 0.3 2.3 76.6 62.3 14.3 0.8 0.4 77.8
Fair value gains/(losses) 0.4 3.0 - - 3.4 (4.0) 5.5 - - 1.5
Cost of funds - - - (0.4) (0.4) - - - - -
Net income 57.5 19.9 0.3 1.9 79.6 58.3 19.8 0.8 0.4 79.3
Adjusted EBITDA 8.8 (3.8) (0.2) (7.8) (3.0) 8.1 2.0 1.8 (0.7) 11.2
Discount unwind on lease liabilities (0.1) (0.3) - - (0.4) (0.1) (0.4) - - (0.5)
Depreciation, amortisation & impairment (5.5) (4.3) - (0.5) (10.3) (5.3) (1.6) - - (6.9)
Share-based payments and social security costs (1.8) (0.7) - (0.3) (2.8) (1.9) (0.4) - - (2.3)
Foreign exchange gains/(losses) - (0.1) - - (0.1) 0.1 - - - 0.1
Profit/(loss) before tax 1.4 (9.2) (0.2) (8.6) (16.6) 0.9 (0.4) 1.8 (0.7) 1.6
5. Operating expenses
30 June 30 June
2023 2022
GBPm
GBPm
(re-presented)
Depreciation and amortisation 8.3 6.9
Impairment of ROU assets and net investment in subleases1 2.0 -
Rental income and other recharges (0.2) (0.5)
Employment costs (including contractors) 44.8 41.4
Marketing costs (excluding employee costs) 23.9 17.3
Data and technology costs 4.6 4.9
(Charge)/credit for expected credit losses 1.9 (1.0)
Other expenses 10.9 8.7
Total operating expenses 96.2 77.7
1. Certain right-of-use assets related to the US San Francisco
office have been sublet under operating and financing subleases.
Due to a reduction in market values since inception of the sublets,
the estimated cash flows expected on expiry of the existing sublets
and expectations regarding the negotiation of further sublets are
lower and as a result an impairment of GBP2.0 million was
recognised in the six months ended 30 June 2023 (30 June 2022:
GBPnil) against the right-of-use assets and the net investment in
sublease. The impairment is disclosed in the condensed consolidated
statement of comprehensive income within depreciation, amortisation
and impairment.
6. Taxation
The Group calculates the period income tax expense using the tax
rate that would be applicable to the expected total annual
earnings. The estimated average annual tax rate used for the six
months to 30 June 2023 (excluding the tax charge on Research and
Development Expenditure Credits (RDEC)) is (8.07%), compared to
351.62% for the six months to 30 June 2022, which was primarily
driven by the initial recognition in 2022 of a deferred tax asset.
The major components of income tax expense in the condensed
consolidated statement of comprehensive income are:
30 June 30 June
2023 2022
GBPm GBPm
Current tax
Corporation taxation 0.3 0.7
Total current tax 0.3 0.7
Deferred tax
Deferred taxation 1.2 (6.2)
Total deferred tax 1.2 (6.2)
Total tax charge/(credit) 1.5 (5.5)
The above tax charge includes the amount of tax deducted from
the gross RDEC credit receivable for 2023 of GBP0.2 million (2022:
GBP0.1 million) and the state taxes of GBP0.1 million (2022: GBP0.7
million) expected to be paid in the US on taxable profits for the
six months to 30 June 2023.
The Group has unrelieved tax losses of GBP185.8m that are
available for offset against future taxable profits (2022:
GBP172.2m).
Based on the Group's current financial projections and current
transfer pricing arrangements, the estimate of the deferred tax
asset in respect of a portion of these losses arising in the US was
GBP5.4 million at 30 June 2023 (June 2022: GBP6.2 million, December
2022: GBP6.9 million).
7. (Loss) / Earnings per share
30 June 30 June
2023 2022
GBPm GBPm
(Loss)/profit for the period (18.1) 7.1
Basic weighted average number of ordinary shares in issue (million) 344.8 354.2
Basic (Loss)/profit per share (5.2)p 2.0p
(Loss)/profit for the period (18.1) 7.1
Diluted weighted average number of ordinary shares in issue (million) 344.8 387.3
Diluted (loss)/profit per share (5.2)p 1.8p
8. Intangible assets
Capitalised development costs Computer software Total
GBPm GBPm GBPm
Net book value
At 31 December 2022 28.0 0.2 28.2
At 30 June 2023 28.2 0.2 28.4
9. Property, plant and equipment, right-of-use assets and lease
liabilities
Analysis of property, plant and equipment between owned and
leased assets
30 June 31 December
2023 2022
GBPm GBPm
Property, plant and equipment (owned) 2.3 2.7
Right-of-use assets 4.5 7.3
6.8 10.0
Certain right-of-use assets related to the US San Francisco
office have been sublet under an operating sublease. Due to a
further weakening of the San Francisco commercial property market,
the estimated cash flows on the sublet no longer support the
carrying value of the asset. As a result, an impairment of GBP1.2
million was recognised in the six months ended 30 June 2023 (31
December 2022: GBP1.8 million).
Lease liabilities
30 June 31 December
2023 2022
GBPm GBPm
Current 7.3 7.2
Non-current 8.9 12.6
Total 16.2 19.8
10. Interest in associates
The Group holds 8.3% of Funding Circle UK SME Direct Lending
Fund I at 30 June 2023 (31 December 2022 and 30 June 2022: 8.3%)
which is accounted for as investment in associates.
During 2022 Funding Circle European Private Fund DAC I sold its
remaining loans and the corresponding investment in associates held
by the Group was reduced to nil (30 June 2022: 23.6%).
The Group's share of profit from associates in the period was
GBP0.1 million (30 June 2022: share of profit of GBP0.1 million),
the Group received capital distributions of GBP0.6 million (30 June
2022: GBP1.8 million) and dividends of GBP0.1 million (30 June
2022: GBP0.2 million).
11. SME loans and lines of credit
30 June 31 December
2023 2022
GBPm GBPm
Non-current
SME loans (other) - amortised cost 10.2 24.8
Investment in trusts and co-investments- FVTPL 25.0 28.7
Total non-current 35.2 53.5
Current
Lines of credit - amortised cost 30.5 16.0
SME loans (other) - FVTPL 1.0 20.9
SME loans (warehouse) - FVTPL 1.5 2.4
SME loans (securitised) - FVTPL 28.8 45.8
Total Current 61.8 85.1
Total 97.0 138.6
12. Borrowings
During 2023, in the US the Group has a drawn balance of GBP6.1
million (31 December 2022: GBP22.6 million) on the PPP Liquidity
Facility available from the Federal Reserve Bank at a fixed
interest rate of 0.35% to fund PPP loans held on the Group's
balance sheet. The balance of both loans and borrowings reduces as
the loans are forgiven by the SBA.
During 2023 the Group set up a leveraged warehouse for the
purposes of scaling up the FlexiPay product with a total committed
facility of up to GBP150m which can be upsized to GBP325m. The
drawn balance on the facility at 30 June 2023 was GBP30.8m.
Interest is charged on the drawn balance at SONIA plus a margin,
together with a commitment fee, and the facility matures in May
2024 unless extended.
13. Provisions and other liabilities
Dilapidation Loan Total
Restructuring Other1
repurchase
GBPm GBPm GBPm GBPm GBPm
At 1 January 2022 0.6 2.2 0.2 1.1 4.1
Exchange differences - - - - -
Additional provision/liability 0.2 - - 0.4 0.6
Amount utilised - (0.7) (0.2) (0.3) (1.2)
Amount reversed - (0.4) - (0.7) (1.1)
At 30 June 2022 0.8 1.1 - 0.5 2.4
Exchange differences - 0.1 - 0.1 0.2
Additional provision/liability 0.3 - - 0.1 0.4
Amount utilised - (0.2) - 0.1 (0.1)
Amount reversed - (0.5) - (0.3) (0.8)
At 31 December 2022 1.1 0.5 - 0.5 2.1
Exchange differences - - - - -
Additional provision/liability - 0.3 - 0.8 1.1
Amount utilised - (0.3) - (0.2) (0.5)
Amount reversed - (0.2) - - (0.2)
At 30 June 2023 1.1 0.3 - 1.1 2.5
1Other includes provisions for operational buybacks in the
comparative period. GBP1.1 million (31 December 2022: GBP0.3
million) of expected credit loss impairment allowance related to
undrawn FlexiPay lines of credit is included within Other.
Current and non-current
30 June 31 December
2023 2022
GBPm GBPm
Current 1.4 1.0
Non-current 1.1 1.1
Total 2.5 2.1
14. Financial risk management
The Group's financial risks and risk management objectives and
policies are consistent with those disclosed in the consolidated
financial statements as at and for the year to 31 December
2022.
Financial risks arising from financial instruments are analysed
into credit risk, liquidity risk, market risk (including currency
risk, interest rate risk and other price risk) and foreign exchange
risk. These condensed interim financial statements do not include
all financial risk management information and disclosures required
in the annual financial statements. Details of how these risks are
managed are discussed in the Funding Circle Holdings plc's
financial statements for the year ended 31 December 2022.
There has not been a significant change in the Group's financial
risk management processes or policies since the year end. The
assumptions used in determining the level of defaults and
recoveries which determine the fair value of loans remain
consistent with those used at 31 December 2022.
The principal financial instruments used by the Group, from
which financial instrument risk arises, are as follows:
-- SME loans;
-- lines of credit;
-- trade and other receivables;
-- cash and cash equivalents;
-- trade and other payables;
-- loan repurchase liabilities;
-- bonds;
-- bank borrowings; and
-- lease liabilities.
Categorisation of financial assets and financial liabilities
The table shows the carrying amounts of financial assets and
financial liabilities by category of financial instrument:
30 June 2023 31 December 2022
Fair value through
profit Amortised Other Total Fair value through Amortised Other Total
cost profit and loss cost
and loss
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
SME loans (other) 1.0 10.2 - 11.2 20.9 24.8 - 45.7
SME loans (warehouse) 1.5 - - 1.5 2.4 - - 2.4
SME loans (securitised) 28.8 - - 28.8 45.8 - - 45.8
Lines of credit - 30.5 - 30.5 - 16.0 - 16.0
Investment in trusts and 25.0 - - 25.0 28.7 - - 28.7
co-investments
Trade and other receivables - 14.4 - 14.4 - 16.2 - 16.2
Cash and cash equivalents 141.2 62.3 - 203.5 121.6 56.1 - 177.7
197.5 117.4 - 314.9 219.4 113.1 - 332.5
Liabilities
Trade and other payables - (25.1) - (25.1) - (12.2) - (12.2)
Loan repurchase liability - - (0.3) (0.3) - - (0.5) (0.5)
Bank borrowings - (36.9) - (36.9) - (22.6) - (22.6)
Bonds - - - - - (23.7) - (23.7)
Lease liabilities - (16.2) - (16.2) - (19.8) - (19.8)
- (78.2) (0.3) (78.5) - (78.3) (0.5) (78.8) Financial instruments measured at amortised cost
Financial instruments measured at amortised cost, rather than
fair value, include cash and cash equivalents, trade and other
receivables, certain SME loans (other), lines of credit, bank
borrowings, lease liabilities, bonds, and trade and other payables.
Due to their nature, the carrying value of each of the above
financial instruments approximates to their fair value. Other
financial instruments
Loan repurchase liabilities are measured at the amount of loss
allowance determined under IFRS 9. Financial instruments measured
at fair value
IFRS 13 requires certain disclosures which require the
classification of financial assets and financial liabilities
measured at fair value using a fair value hierarchy that reflects
the significance of the inputs used in making the fair value
measurement.
Disclosure of fair value measurements by level is according to
the following fair value measurement hierarchy:
The fair value hierarchy has the following levels:
-- level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities thatthe entity can
access at the measurement date;
-- level 2 inputs are inputs other than quoted prices included
within Level 1 that are observable for theasset or liabilities,
either directly or indirectly; and
-- level 3 inputs are unobservable inputs for the asset or
liability.
The definitions, details of the inputs and the valuation
techniques in determining the fair values of the Group's financial
instruments are shown in the Funding Circle Holdings plc financial
statements for the year to 31 December 2022.
The Group's finance department performs the valuations of
financial assets and liabilities required for financial reporting
purposes, including Level 3 fair values.
There have been no changes in the valuation techniques for any
of the Group's financial instruments held at fair value in each of
the periods presented. Details regarding the assumptions used
within such valuations are detailed in note 3.
The fair value of financial instruments that are not traded in
an active market (for example, SME loans) is determined by using
valuation techniques. These valuation techniques maximise the use
of observable market data where it is available and rely as little
as possible on entity-specific estimates. If all significant inputs
required to fair value an instrument are observable, the instrument
is included in level 2. The investments categorised as level 2
relate to derivative financial instruments. If one or more of the
significant inputs is not based on observable market data, the
instrument is included in level 3.
There were no transfers between Level 1, Level 2 and Level 3
fair value measurements (year ended 31 December 2022: none).
Fair value measurement using
30 June 2023 31 December 2022
Significant Significant Significant Significant
observable unobservable observable unobservable
Quoted prices in inputs inputs Quoted prices in inputs
active markets active markets Inputs
(level 1) (level 1)
(level 2) (level 3) (level 3)
(level 2)
GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
SME loans (warehouse) - - 1.5 - - 2.4
SME loans - - 28.8 - - 45.8
(securitised)
SME loans (other) - - 1.0 - - 20.9
Investment in trusts - - 25.0 - - 28.7
and co-investments
Cash and cash 141.2 - - 121.6 - -
equivalents
141.2 - 56.3 121.6 - 97.8
The fair value of all SME loans held at fair value have been
estimated by discounting future cash flows of the loans using
discount rates that reflect the changes in market interest rates
and observed market conditions at the reporting date. The estimated
fair value and carrying amount of the SME loans (warehouse) was
GBP1.5 million at 30 June 2023 (31 December 2022: GBP2.4
million).
The fair value of SME loans (securitised) represents loan assets
in the securitisation vehicles and legacy loans of this nature. The
estimated fair value and carrying amount of the SME loans
(securitised) was GBP28.8 million at 30 June 2023 (31 December
2022: GBP45.8 million).
Investment in trusts and co-investments represents the Group's
investment in the trusts and other vehicles used to fund CBILS, RLS
and certain commercial loans and is measured at fair value through
profit and loss. The government-owned British Business Bank will
guarantee up to 80% of the balance of CBILS loans in the event of
default and between 70% and 80% of RLS loans. The estimated fair
value and carrying amount of the investment in trusts and
co-investments was GBP25.0 million at 30 June 2023 (31 December
2022: GBP28.7 million).
The fair value of SME loans (other) represents loan assets
temporarily funded by the Group in relation to the relaunch of Core
loans. The estimated fair value and carrying amount of the SME
loans (other) was GBP1.0 million at 30 June 2023 (31 December 2022:
GBP20.9 million).
Fair value movements on SME loans (warehouse), SME loans
(securitised), SME loans (other) and investments in trusts are
recognised through the profit and loss as part of net income.
A reconciliation of the movement in level 3 financial
instruments is shown as follows:
SME SME
SME loans Bonds Investment in trusts loans
(warehouse) loans (unrated) and co-investments (other)
(Securitised)
GBPm GBPm GBPm
GBPm
GBPm
Balance as at 1 January 2022 3.2 148.1 (12.8) 39.1 -
Additions - - - 6.4 22.6
Repayments (2.8) (86.8) 16.3 (10.0) (0.8)
Disposal - (39.5) - - -
Net (loss)/gain on the change in fair value of
financial instruments at fair value through profit or 2.0 14.7 (3.5) (7.0) (1.4)
loss
Foreign exchange (loss)/gain - 9.3 - 0.2 0.5
Balance as at 31 December 2022 2.4 45.8 - 28.7 20.9
Additions - - - - 12.0
Repayments (0.9) (19.7) - (3.4) (0.5)
Disposal - - - - (30.6)
Net gain/(loss) on the change in fair value of
financial instruments at fair value through profit or 0.1 3.9 - (0.2) (0.4)
loss
Foreign exchange loss (0.1) (1.2) - (0.1) (0.4)
Balance as at 30 June 2023 1.5 28.8 - 25.0 1.0 Financial risk factors Credit risk
Credit risk is the risk of financial loss to the Group if a
customer or counterparty to a financial instrument fails to meet
its contractual obligations, and arises principally from the
Group's receivables from customers and cash and cash equivalents
held at banks. The Group's maximum exposure to credit risk by class
of financial asset is as follows:
30 June 31 December
2023 2022
GBPm GBPm
Non-current
SME loans (other) 10.2 24.8
Investment in trusts and co-investments 25.0 28.7
Trade and other receivables:
- Other receivables 1.8 3.4
Current
SME loans (Other) 1.0 20.9
SME loans (warehouse) 1.5 2.4
SME loans (securitised) 28.8 45.8
Lines of credit 30.5 16.0
Trade and other receivables
- Trade receivables 0.9 0.4
- Other receivables 5.5 5.3
- Accrued income 3.9 4.8
- Rent and other deposits 2.3 2.3
Cash and cash equivalents 203.5 177.7
Total gross credit risk exposure 314.9 332.5
Less bank borrowings and bond liabilities1 (36.9) (46.3)
Total net credit risk exposure 278.0 286.2 1. Included within bank borrowings are GBP6.1m (31 December 2022: GBP22.6 million) in relation to draw downs onthe PPPLF.
In addition, the Group is subject to financial guarantees it has
issued to buy back loans detailed in the loan repurchase liability
in note 13. The Group's maximum exposure to credit risk on this
financial guarantee were every eligible loan required to be bought
back would be GBP1.3 million (31 December 2022: GBP2.8
million).
Additionally, an expected credit loss allowance related to
undrawn lines of credit on the FlexiPay product of GBP1.1 million
(31 December 2022: GBP0.3 million) is held within provisions and
other liabilities. The Group's maximum exposure to credit risk on
the undrawn lines of credit if they were all to be fully drawn
would be GBP78.5 million (31 December 2022: GBP41.6 million).
SME loans (warehouse) and SME loans (securitised) relate to the
underlying pool of SME loans which were in securitisation vehicles
or which are loans which are from the legacy warehouses and SPVs
but have since been purchased or novated into other Funding Circle
entities, but remain held at FVTPL with the business model of
holding the loans for sale. The majority of lines of credit are
held within a bankruptcy remote vehicle including bank borrowings.
If the lines of credit were to all default, the senior lender would
not receive all their money back. Therefore the overall exposure of
the Group for this investment is the Group's net investment in the
lines of credit which is after taking account of third party
borrowings.
SME loans (other) includes PPP loans funded by the use of the
PPPLF. The loans are guaranteed by the US Government in the event
of default and the loans are anticipated to be forgiven. At the
point of default and subsequent collection of the guarantee or
point of forgiveness, the loan and the respective borrowings under
the PPPLF are extinguished.
SME loans (other) also includes loans which have been brought
back from investors and are held at amortised cost. SME loans
(other) includes GBP1.0 million (31 December 2022: GBP20.9 million)
loans originated by the Group with the intention of selling
onwards, which are held at FVTPL and are therefore disclosed as
current.
Lines of credit includes GBP30.5 million (2022: GBP16.0 million)
of drawn amounts through the FlexiPay product, enabling businesses
to spread UK invoices or payments over three months with the
initial payment made on a borrowers behalf.
The gross principal value of SME loans (other) is GBP24.5
million (2022: GBP39.6 million) and drawn lines of credit held at
amortised cost is GBP33.6 million (2022: GBP17.6 million),
totalling GBP58.1 million (2022: GBP57.2 million), and an allowance
for expected credit losses of GBP14.3 million (2022: GBP14.8
million) and GBP3.1 million (2022: GBP1.6 million) respectively,
totalling GBP17.4 million (2022: GBP16.4 million), is held against
these loans and drawn lines of credit as detailed below.
An expected credit loss impairment charge of GBP1.2 million (30
June 2022: GBP0.7 million credit) was recognised through the
statement of comprehensive income in the period to 30 June 2023
within (charge)/credit for expected credit losses.
Additionally, an expected credit loss impairment charge was
recognised relating to undrawn FlexiPay lines of credit of GBP0.8
million (30 June 2022: GBP0.1 million) and an expected credit loss
impairment credit of GBP0.1 million (30 June 2022: GBP0.4 million)
related to the loan repurchase liability were recognised as
detailed in notes 13 and 18.
Performing: Underperforming: Non-performing: POCI
12-month Lifetime Lifetime Lifetime Total
ECL ECL ECL ECL
GBPm GBPm GBPm GBPm GBPm
At 1 January 2022 0.6 0.3 1.1 13.3 15.3
Impairment against new lending and purchased assets - - - 0.7 0.7
Exchange differences - - - 0.7 0.7
Impairment against loans transferred from/(to) performing - 0.1 (0.3) - (0.2)
Loans repaid (0.1) (0.3) (0.3) (0.7) (1.4)
Change in probability of default - - (0.1) (0.3) (0.4)
At 30 June 2022 0.5 0.1 0.4 13.7 14.7
Impairment against new lending and purchased assets 0.1 - - 0.4 0.5
Exchange differences 0.1 - 0.1 0.3 0.5
Impairment against loans transferred from/(to) performing (0.1) 0.2 0.6 - 0.7
Loans repaid (0.2) - (0.2) (0.5) (0.9)
Change in probability of default 0.7 - - 0.2 0.9
At 31 December 2022 1.1 0.3 0.9 14.1 16.4
Impairment against new lending and purchased assets 4.8 0.1 - 0.3 5.2
Exchange differences - - - (0.4) (0.4)
Impairment against loans transferred from /(to) performing (0.1) 0.2 1.0 - 1.1
Loans repaid (4.0) - (0.1) (0.6) (4.7)
Change in probability of default or loss given default (0.5) - - 0.3 (0.2)
assumptions
At 30 June 2023 1.3 0.6 1.8 13.7 17.4
Expected Net
Expected credit Basis for recognition of Gross lines of credit credit loss carrying
loss coverage expected credit loss and SME loans (other) impairment amount
(%) impairment (GBPm)
(GBPm) (GBPm)
As at 31 December 2022
Performing (due in 30 days or 2.7 12-month ECL 39.2 (1.1) 38.1
less)
Underperforming (31-90 days 36.5 Lifetime ECL 0.7 (0.3) 0.4
overdue)
Non-performing (90+ days 43.1 Lifetime ECL 2.3 (0.9) 1.4
overdue)
POCI -Purchased or originated
as credit impaired (90+ days 94.2 Lifetime ECL 15.0 (14.1) 0.9
overdue)
Total 57.2 (16.4) 40.8
As at 30 June 2023
Performing (due in 30 days or 3.9 12 month ECL 37.3 (1.3) 36.0
less)
Underperforming (31-90 days 14.8 Lifetime ECL 3.7 (0.6) 3.1
overdue)
Non-performing (90+ days 61.2 Lifetime ECL 3.0 (1.8) 1.2
overdue)
POCI -Purchased or originated
as credit impaired (90+ days 96.0 Lifetime ECL 14.1 (13.7) 0.4
overdue)
Total 58.1 (17.4) 40.7
Trade receivables represent invoiced amounts in respect of
servicing fees due from institutional investors. The risk of
financial loss is deemed minimal because the counterparties are
well established financial institutions.
Ongoing credit evaluation is performed on the financial
condition of other receivables and, where appropriate, a provision
for impairment is recorded in the interim financial statements.
Other receivables include net investment in subleases of offices
representing the present value of future sublease payments
receivable. Where appropriate, impairment is recorded where the
receivable is in doubt. The credit risk on cash and cash
equivalents is limited because the counterparties are banks with
the majority holding credit ratings assigned by international
credit rating agencies of A- or higher.
Impairment of net investment in subleases:
Certain right-of-use assets related to the US San Francisco
office have been sublet under a financing sublease and are
represented as net investments in subleases within other
receivables. Due to a reduction in market values since inception of
the sublet, the estimated cash flows expected on expiry of the
existing sublet and expectations of further sublet are lower and as
a result an impairment of GBP0.8 million was recognised in the six
months ended 30 June 2023 (31 December 2022: GBPnil). The
impairment is disclosed in the condensed consolidated statement of
comprehensive income within depreciation, amortisation and
impairment. Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due. The Group's
approach to managing liquidity is to ensure that it will have
sufficient liquidity to meet its liabilities when due, under both
normal and stressed conditions, without incurring unacceptable
losses or risking damage to the Group's position.
The Group's liquidity position is monitored and reviewed on an
ongoing basis by the Directors. As the business model is to sell
investments in loans held at fair value through profit and loss
where an attractive price can be found, these are classified as
current assets.
Interest rate risk a) Interest rate risk sensitivity analysis -
fixed rate
Interest on SME loans and on the PPPLF borrowings and bond
liabilities (in the US) is fixed until the maturity of the
investment and is not impacted by market rate changes. All
remaining US bond liabilities were repaid during the period to 30
June 2023. b) Interest rate risk sensitivity analysis - floating
rate
Interest on cash and cash equivalent balances is subject to
movements in base rates. The Directors monitor interest rate risk
and note that there have recently been sustained rate rises
observed. The Directors believe that any reasonable increase in the
base rate would not significantly impact the Group's cash.
Interest on bonds (in the UK) were subject to movements in the
Sterling Overnight Index Average Rate ("SONIA"). However, the Group
mitigated the risk of increases in interest rates through the use
of interest rate caps and the bonds were fully repaid during the
period to 30 June 2022.
Interest on bank borrowings related to the FlexiPay lines of
credit are subject to movements in SONIA. The Group has partially
protected itself through the use of an interest rate Cap with a
strike price of 6.5% and a notional amount that increases in line
with the projected draw downs on the senior borrowing facility,
however this was entered into after the 30 June 2023 balance sheet
date.
If SONIA were to increase by 100bps, based on the drawn balance
at 30 June 2023, the annualised interest expense recognised in
borrowing costs would increase by GBP0.3m (excluding any impact of
the interest rate cap subsequently entered into).
The Group's co-investment in trusts are partly through leveraged
warehouse vehicles where the Group is a minority equity investor.
The senior borrowing facilities utilised in these vehicles pay
interest on borrowings in priority to payments to the equity
investors at SONIA plus a margin. As a result of the increase in
SONIA and anticipated future increases, the increased borrowing
costs have partly reduced the expected cash returns to the equity
investors of the investment held at fair value through profit and
loss. The impact is recognised in fair value gains and losses in
the statement of comprehensive income. Some, but not all of the
vehicles, have interest rate caps within their structures which can
mitigate the impact of future rate rises. Further increases in
SONIA or the expected future increases in SONIA could reduce the
fair value further. A 100bps increase in projected SONIA rates over
the life of the trusts would reduce the fair value of the
co-investments in trusts at 30 June 2023 by GBP0.3 million.
Following the financial crisis, the reform and replacement of
benchmark interest rates such as GBP LIBOR and other inter-bank
offered rates ("IBORs") has become a priority for global
regulators. The Group's contracts that reference LIBOR have been
amended to reference the alternative benchmark which is complete
for the UK and the US.
15. Cash (outflow)/inflow from operations
30 June 30 June
2023 2022
(Re-presented)1
GBPm GBPm
(Loss)/profit before taxation (16.6) 1.6
Adjustments for:
Depreciation of property, plant and equipment 2.3 2.5
Amortisation of intangible assets 6.0 4.4
Impairment of ROU assets and investment in sublease 2.0 -
Interest payable 0.4 0.5
Non-cash employee benefits expense - share based payments and associated social security costs 2.8 2.5
Fair value adjustments (3.4) (1.5)
Movement in restructuring provision (exceptional item) - (0.2)
Movement in loan repurchase liability (0.2) (1.1)
Movement in other provisions 0.6 (0.4)
Share of gains of associates (0.1) (0.1)
Other non-cash movements 1.1 (0.6)
Changes in working capital:
Movement in trade and other receivables (4.7) 7.0
Movement in trade and other payables 14.8 (5.6)
Tax paid (0.3) (0.7)
Originations of lines of credit (90.2) (16.5)
Cash receipts from lines of credit 74.4 10.9
Net cash (outflow)/inflow from operating activities (11.1) 2.7
1 The comparative period to 30 June 2022 has been re-presented
to present 'interest received' which was previously a component of
investing activities as a component of operating income to mirror
the re-presentation of interest on cash and cash equivalents within
'Interest income' which was previously presented within 'Finance
Income' on the consolidated statement of comprehensive income. As a
result it is not disclosed separately above.
Analysis of changes in liabilities from financing activities
1 January
Cash flows Exchange movements Other non-cash movements 30 June 2022
2022
GBPm GBPm GBPm GBPm GBPm
Bank borrowings (73.2) 42.8 (5.2) - (35.6)
Bonds (140.3) 95.8 (6.8) (4.1) (55.4)
Lease liabilities (23.9) 3.6 (1.6) (1.2) (23.1)
Liabilities from financing activities (237.4) 142.2 (13.6) (5.3) (114.1)
1 January
Cash flows Exchange movements Other non-cash movements 30 June 2023
2023
GBPm GBPm GBPm GBPm GBPm
Bank borrowings (22.6) (14.9) 0.6 - (36.9)
Bonds (23.7) 23.5 0.5 (0.3) -
Lease liabilities (19.8) 3.6 0.4 (0.4) (16.2)
Liabilities from financing activities (66.1) 12.2 1.5 (0.7) (53.1)
16. Cash and cash equivalents
30 June 31 December
2023 2022
GBPm GBPm
Cash and cash equivalents 203.5 177.7
The cash and cash equivalents balance is made up of cash, money
market funds and bank deposits. The carrying amount of these assets
is approximately equal to the fair value.
Included within cash and cash equivalents above is a total of
GBP31.0 million (31 December 2022: GBP12.1 million) in cash which
is restricted in use. Of this: i) GBP1.1 million (31 December 2022:
GBP1.1 million) is held in the event of rental payment defaults;
ii) GBPnil (31 December 2022: GBP2.9 million) is held in the
securitisation SPVs which has been collected for on-payment to bond
holders and is therefore restricted in its use; iii) a further
GBP20.2 million (31 December 2022: GBP8.1 million) of cash is held
which is restricted in use to repaying investors in CBILS and RLS
loans and paying CBILS and RLS-related costs to the UK government
and iv) a further 9.7 million (31 December 2022: GBPnil) of cash is
held which is restricted for use in the FlexiPay warehouse.
At 30 June 2023, cash equivalents relating to money market funds
totalled GBP141.2 million (31 December 2022: GBP121.6 million).
17. Related party transactions
The basis of remuneration of key management personnel remains
consistent with that disclosed in the 2022 Annual Report and
Accounts.
18. Contingent liabilities and commitments
As part of the ongoing business, the Group has operational
requirements with its investors. At any point in time, it is
possible that a particular investor may expect the Group to buy
back their loan if the terms of business had not been fully
complied with. Where a loan is bought back it is presented within
Investment in SME loans (other) on the face of the consolidated
balance sheet and held at amortised cost under IFRS 9.
In common with other businesses, the Group is involved from time
to time in disputes in the ordinary course of business. There are
no active cases expected to have a material adverse financial
impact on the Group.
The Group has commitments related to undrawn amounts on issued
FlexiPay lines of credit. At 30 June 2023, there were undrawn
commitments of GBP78.5 million (31 December 2022: GBP41.6 million).
An expected credit loss impairment allowance is held within other
provisions by the Group of GBP1.1 million (2022: GBP0.3 million) in
relation to the estimated credit losses the Group may be exposed to
on these undrawn lines of credit.
19. Subsequent events
There have been no subsequent events since the balance sheet
date.
Glossary
Alternative performance measures
The Group uses a number of alternative performance measures
("APMs") within its financial reporting. These measures are not
defined under the requirements of IFRS and may not be comparable
with the APMs of other companies. The Group believes these APMs
provide stakeholders with additional useful information in
providing alternative interpretations of the underlying performance
of the business and how it is managed and are used by the Directors
and management for performance analysis and reporting. These APMs
should be viewed as supplemental to, but not as a substitute for,
measures presented in the interim financial statements which are
prepared in accordance with IFRS.
Adjustments
Closest equivalent to
APM IFRS measure reconcile Definition
to IFRS
measure
Income statement
Profit for the period before finance costs (being the discount unwind on
EBITDA, while not lease liabilities), taxation, depreciation, amortisation and impairment
Adjusted defined under IFRS, Refer to ("AEBITDA") and additionally excludes share-based payment charges and
EBITDA is a widely Finance associated social security costs, foreign exchange and exceptional items.
accepted profit Review.
measure The definition of AEBITDA has been updated and the comparative
re-presented as described in Note 2.
Investment EBITDA, while not
AEBITDA and defined under IFRS, Refer to Investment AEBITDA is defined as investment income, investment expense
Operating is a widely Finance and fair value adjustments and operating AEBITDA represents AEBITDA
AEBITDA accepted profit Review. excluding investment AEBITDA.
measure
Net Refer to Net investment income, represents investment income less investment
investment Net income performance expense.
income highlights
Items which the Group excludes from Adjusted EBITDA in order to present a
measure of the Group's performance. Each item is considered to be
Exceptional significant in nature or size and is treated consistently between
items None n/a periods. Excluding these items from profit metrics provides the reader
with additional performance information on the business across the
business as it is consistent with how information is reported to the
Board and GLT.
Cash flow
Cash generated from Refer to Net cash flows from operating activities plus the cost of purchasing
Free cash operating Finance intangible assets, property, plant and equipment, lease payments and
flow activities Review. interest received. It excludes the warehouse and securitisation financing
and funding cash flows along with movements in FlexiPay lines of credit.
Independent review report to Funding Circle Holdings plc
Report on the condensed consolidated interim financial
statements
Our conclusion
We have reviewed Funding Circle Holdings plc's condensed
consolidated interim financial statements (the "interim financial
statements") in the Half Year 2023 Results of Funding Circle
Holdings plc for the 6 month period ended 30 June 2023 (the
"period").
Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting'
and the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority.
The interim financial statements comprise:
-- the Condensed consolidated balance sheet as at 30 June
2023;
-- the Condensed consolidated statement of comprehensive income
for the period then ended;
-- the Condensed consolidated statement of cash flows for the
period then ended;
-- the Condensed consolidated statement of changes in equity for
the period then ended; and
-- the explanatory notes to the interim financial
statements.
The interim financial statements included in the Half Year 2023
Results of Funding Circle Holdings plc have been prepared in
accordance with UK adopted International Accounting Standard 34,
'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410, 'Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity' issued by the Financial Reporting Council for use in the
United Kingdom. A review of interim financial information consists
of making enquiries, 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 (UK) 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 Half Year
2023 Results and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
conclusion section of this report, nothing has come to our
attention to suggest that the directors have inappropriately
adopted the going concern basis of accounting or that the directors
have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on
the review procedures performed in accordance with this ISRE.
However, future events or conditions may cause the group to cease
to continue as a going concern.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The Half Year 2023 Results, including the interim financial
statements, is the responsibility of, and has been approved by the
directors. The directors are responsible for preparing the Half
Year 2023 Results in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority. In preparing the Half Year 2023 Results,
including the interim financial statements, the directors are
responsible for assessing the group's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or to cease
operations, or have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim
financial statements in the Half Year 2023 Results based on our
review. Our conclusion, including our Conclusions relating to going
concern, is based on procedures that are less extensive than audit
procedures, as described in the Basis for conclusion paragraph of
this report. 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.
PricewaterhouseCoopers LLP
Chartered Accountants
London
7 September 2023
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Dissemination of a Regulatory Announcement that contains inside
information in accordance with the Market Abuse Regulation (MAR),
transmitted by EQS Group. The issuer is solely responsible for the
content of this announcement.
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ISIN: GB00BG0TPX62
Category Code: IR
TIDM: FCH
LEI Code: 2138003EK6UAINBBUS19
OAM Categories: 3.1. Additional regulated information required to be disclosed under the laws of a Member State
Sequence No.: 269730
EQS News ID: 1720597
End of Announcement EQS News Service
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