Funding Circle
Holdings plc
Full Year 2023
Results
Embargoed until 7.00am, 7 March
2024
THIS ANNOUNCEMENT
INCLUDES INSIDE INFORMATION AS DEFINED IN ARTICLE 7 OF THE MARKET
ABUSE REGULATION NO. 596/2014
FULL YEAR
PERFORMANCE IN LINE WITH EXPECTATIONS
GO FORWARD FOCUS
ON PROFITABLE UK BUSINESS
£25M SHARE
BUYBACK PROGRAMME ANNOUNCED
Funding Circle Holdings plc
(“Funding Circle”) today announces results for the twelve months
ended 31 December 2023.
Lisa Jacobs,
Funding Circle CEO, says:
“I’m pleased
with our 2023 performance. We delivered a solid set of results in
FY 2023, in line with our expectations, and made good progress
against our multi-product strategy. In the UK, we have expanded our
product range with the rollout of our Card product so customers can
now borrow, pay and spend with Funding Circle. Our UK Loans
business was profitable and our FlexiPay business grew strongly
with transactions nearly quadrupling. We continue to deliver a
superior experience for our customers.
“Looking ahead,
we will be focused on our UK business – comprising UK Loans and
FlexiPay – to drive improved Group cash and profits and deliver
greater shareholder value. Whilst the US business offers attractive
long term growth, it also requires a significant amount of cash and
capital to grow the SBA proposition and we don’t believe that this
is the best course of action for the Group. We have received
indications of interest for the US business and will update further
in due course.
“Our go forward
UK business will be PBT profitable in H2 2024 and has an attractive
growth and profitability profile over the medium term. We look
forward to executing against our plan to help more SMEs get the
funding they need to win and to capture growth in a large,
underserved market.
“We believe the
share price materially undervalues the business and as such will be
buying back up to £25m shares.”
Executive
Summary:
-
We delivered a
solid Group performance in line with expectations:
- Total income grew 7% to £162.2m
(FY 2022: £151.0m); Group AEBITDA of negative £3.9m (FY 2022:
£9.5m) with strong profit in UK Loans offset by continued
investment into FlexiPay and the US business.
- Profitable UK Loans business
with AEBITDA of £21.3m (FY 2022: £13.8m) and PBT of £6.5m (FY 2022:
loss before tax of £1.8m). FlexiPay transactions almost quadrupled
to £234m (FY 2022: £59m).
- Loan returns remain robust and
attractive with continued institutional investor demand to fund
loans; £1.1bn of forward flow agreements in the UK.
-
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.
- FlexiPay extends our product
range so customers can now borrow, pay and spend with Funding
Circle, driving increased relevance and attracting new
customers.
- Launched second year of sports
sponsorship with Premiership Rugby and secured Jamie George as our
brand ambassador, driving increased brand metrics.
- Say yes to
more businesses: serving more businesses
through an expanded set of Funding Circle products and further
integration with third party lenders.
- Marketplace (where we refer
businesses we cannot support to other lenders) showing continued
strong momentum, with over £100m UK lending through
2023.
- Continued innovation in core
product with expanded product offering via the third iteration of
the UK government Recovery Loan Scheme since August.
- #1 in new
products: using our capabilities to enter
new markets where we can develop market-leading products.
- FlexiPay transactions grew ~4x
in 2023, with £297m FlexiPay transactions since launch.
- Completed FlexiPay card launch
– now available to new and existing customers, with over 6,600
cards issued so far.
-
Looking ahead, we
are focused on a profitable UK business with attractive growth
prospects, which we believe will deliver greater shareholder
value:
- Received early indications of
interest in the US business and will provide an update in due
course.
- Go-forward UK business combines
scalable and profitable UK Loans business with high-growth FlexiPay
business.
- Over the next 3-4 years we
expect net income growth of 15-20% CAGR with PBT margins of
>15%
Performance
Highlights
|
|
2023
£m
|
2022[1]
£m
|
|
Originations:
|
|
|
|
i) Loans Originations
|
1,456
|
1,422
|
|
ii) FlexiPay
Transactions
|
234
|
59
|
|
Loans under
Management (LuM):
|
|
|
|
i) Loans under
Management
|
3,284
|
3,725
|
|
ii) FlexiPay Balances
|
56
|
18
|
|
Key
Financials:
|
|
|
|
Operating income
|
154.8
|
133.7
|
|
Net investment
income[2]
|
7.4
|
17.3
|
|
Total
income
|
162.2
|
151.0
|
|
Fair value gains
|
8.7
|
4.8
|
|
Net
income
|
168.2
|
155.8
|
|
AEBITDA2
|
(3.9)
|
9.5
|
|
Loss before
taxation
|
(33.2)
|
(12.9)
|
|
Cash
|
221.4
|
177.7
|
|
Net
Assets
|
246.8
|
284.0
|
Financial
Summary:
-
Loans Originations
growth of 2% to £1.5bn (2022: £1.4bn) reflects prudent approach to
lending. Commercial lending saw strong growth.
-
LuM reduced to
£3.3bn (2022: £3.7bn), reflecting the repayment of government
loans.
-
FlexiPay saw
continued momentum with transactions almost quadrupling to £234m
(2022: £59m) and end of month balances up to £56m (2022:
£18m).
-
Operating income
grew to £154.8m (2022: £133.7m) following origination yield
increases, income from FlexiPay and improved interest on corporate
cash.
-
Net investment
income was £7.4m (2022: £17.3m) and, as expected, continues to
reduce as investments amortise down or have been sold.
-
Fair value gains of
£8.7m (2022: £4.8m) from the strong credit performance of on
balance sheet loans.
-
AEBITDA of negative
£3.9m (2022: positive £9.5m) reflects planned investment in both
the US Loans business and FlexiPay.
-
The UK Loans
business was AEBITDA positive at £21.3m (2022: £13.8m) and
profitable at a PBT level at £6.5m (2022: loss before tax of
£1.8m).
-
Loss before tax was
£33.2m (2022: loss before tax of £12.9m) reflecting the above
planned investments.
-
Net assets remain
robust at £246.8m (2022: £284.0m), with the reduction down to
investment in the US Loans business and FlexiPay. Group cash is
£221.4m (2022: £177.7m), of which £169.6m (2022: £165.6m) is
unrestricted[3].
1 To improve clarity and to better reflect our
evolving business, we made certain changes to the presentation of
our financial results within our Half Year 2023 results which are
reflected in our Full Year 2023 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.
2 For definitions of
non-GAAP measures refer to Note 2.
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.
Outlook:
We set out the following guidance
for 2024:
|
|
FY
2024
|
|
|
|
|
|
|
|
UK
Loans
|
FlexiPay
|
|
|
Total
income
|
>10% growth
|
3x growth
|
|
|
PBT
|
Margins of 8-12%
(20-25%
AEBITDA margins)
|
Continued investment, with losses
at a similar level to FY23
|
|
| |
|
|
|
|
The UK businesses (UK Loans and
FlexiPay) will be PBT positive from H2 2024
Board
changes
Eric Daniels will not be standing
for re-election as a Director at the Company’s AGM on 15 May
2024.
Share
buyback
Funding Circle announces that it
intends to commence a discretionary programme to purchase ordinary
shares of £0.001 each in its share capital, up to maximum
consideration of £25 million, because the share price materially
undervalues the business. Funding Circle intends to conduct the
programme in accordance with and under the terms of and capacity
available under the general authority granted by its shareholders
at its Annual General Meeting held on 11 May 2023, subject to
available distributable reserves. Funding Circle will announce
further details of the programme separately.
Analyst
presentation:
Management will host an analyst
and shareholder presentation and conference call at 9:30am UK time
(GMT), on Thursday 7 March 2024, 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 when prompted by the
operator.
An on-demand replay and transcript
will also be available on the Funding Circle website following the
presentation.
Contacts:
Funding Circle
Investor Relations
Tony Nicol
ir@fundingcircle.com
Joint corporate
brokers
Investec: Bruce Garrow / Kamalini
Hull (+44 20 7597 4000)
Deutsche Numis: Stephen Westgate /
Jamie Loughborough (+44 20 7260 1000)
Funding Circle
Media Relations
Angeli Everitt (+44 20 3830
1325)
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. 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 £16bn in credit to c.150,000
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. We operate in a large, attractive and growing
market, with over £80bn of outstanding debt in the UK SME market
and £1.3trn of B2B SME payments each year.
What sets us apart is an
unrivalled customer experience powered by data and technology. This
advantage is clear in our credit assessment process, with our
models 3x better at discriminating risk than traditional bureau
scores. It also delivers superior results for our customers. 80% of
UK applicants receive an instant decision, we have a strong NPS of
79 and see strong repeat usage, especially with
FlexiPay.
We made good, solid progress in
2023 despite a challenging macroeconomic environment. Alongside
progressing the launch of new products and delivering against our
strategic pillars, our priority has been to serve our small
business customers responsibly and deliver robust loan returns in a
high inflation environment.
At a Group level, we delivered
financial results in line with expectations with total income of
£162.2m, up 7%, and AEBITDA loss of £3.9m, reflecting a strong
step-up in profitability from our UK Loans business and investment
in FlexiPay and in US Loans. We closed the year with a very healthy
unrestricted cash balance of £169.6m, up from £165.6m, as legacy
investments paid down, offsetting the operating cash outflow in the
US and FlexiPay.
During the year, we saw good
momentum in our two UK businesses - UK Loans and FlexiPay. Our more
mature UK Loans business is profitable and margins improved
half-on-half. In 2023, UK Loans delivered AEBITDA profit of £21.3m
and PBT of £6.5m, up from £13.8m and a loss of £1.8m in 2022,
respectively.
Our newer FlexiPay business, which
helps small businesses manage their cashflows, delivered strong
growth in 2023, building on a successful full launch of the product
in 2022. Transactions near quadrupled to £234m, compared to £59m in
2022, as we saw FlexiPay quickly become an essential and ongoing
part of customers cashflow management toolkit. We more than trebled
the number of active accounts to c.6,500 at the end of 2023 and we
have been encouraged by the increasingly predictable repeat
behaviour among users. We also continued to innovate and expand our
product set in 2023. In the second half we launched our integrated
FlexiPay card. Whilst this remains at an early stage, with its
launch, customers can now borrow, pay and spend with Funding
Circle.
In the US, we made steady
progress. We saw good growth in the first half of 2023, which
moderated as the year progressed. Total income for US Loans was
£32.5m in 2023, from £29.1m in 2022, and the business recorded an
AEBITDA loss of £10.6m, increasing from a loss of £3.1m in 2022.
During the year, the team were successful in receiving the
tentative award of an SBA 7(a) licence.
We have now reached a point where
future growth in the US will require significant cash and capital
to grow the SBA proposition. Against this, we have determined that
a focus on our profitable UK business will deliver greater
shareholder value with improved profitability and cash generation.
We have received early indications of interest in the US business
and will provide a further update in due course.
In the last two years, we’ve
transitioned our UK business from a single product line to one that
today enables SMEs to not only borrow over the long term, but also
pay and spend. We are realising our multiproduct vision, thereby
expanding our addressable market, increasing the level of
engagement with our customers and strengthening the platform from
which we can continue to grow.
We expect our go forward business
will be profitable in the second half of 2024. Over the next 3-4
years, we expect a net income growth CAGR in the range of 15-20%
with profit margins improving to greater than 15%. Within that, our
UK Loans business will grow between 10-15% with margins improving
year on year. We expect FlexiPay to reach AEBITDA profitability in
2025.
Given the strength of our business
today and the future growth and profitability profile, we believe
that our current share price materially undervalues the business.
As such we are announcing a share buyback of up to £25m.
We’re excited about the future of
the UK business. Our strategy is focused on expanded distribution,
increased conversion and an expanded product set, which is
underpinned by a robust balance sheet and strong cash position. We
are well-placed to deliver on our growth prospects and help more
SMEs get the funding they need to win.
Overview of the
year ended 31 December 2023
The performance in 2023 was in
line with our expectations, with total income growth in each
business unit compared to 2022 and controlled investment in US
Loans and FlexiPay.
The UK Loans business originations
were in line with 2022, with growth in commercial lending despite a
slower economic recovery than initially expected. UK Loans showed
AEBITDA growth to £21.3m (2022: £13.8m) and profit before tax of
£6.5m (2022: loss before tax of £1.8m).
The US Loans business showed
originations and LuM growth on 2022 with originations at £396m
(2022: £327m) and LuM at £420m (2022: £375m).
Our line of credit product,
FlexiPay, has demonstrated significant growth to date and we are
investing to support the momentum we see in this product. Its
transaction levels continue to grow (more than quadrupled in 2023
compared to 2022) following continuing strong customer engagement
and the launch of FlexiPay card in September 2023.
Segmental
highlights (unaudited)
|
|
31 December
2023
|
31 December
2022
|
|
Loans
|
FlexiPay
|
Total
|
Loans
|
FlexiPay
|
Total
|
|
United
Kingdom
|
United
States
|
Other
|
United
Kingdom
|
|
United
Kingdom
|
United
States
|
Other
|
United
Kingdom
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Originations:
|
|
|
|
|
|
|
|
|
|
|
|
Loans Originations
|
1,060
|
396
|
-
|
-
|
1,456
|
1,095
|
327
|
-
|
-
|
1,422
|
|
FlexiPay Transactions
|
-
|
-
|
-
|
234
|
234
|
-
|
-
|
-
|
59
|
59
|
|
LuM:
|
|
|
|
|
|
|
|
|
|
|
|
Loans under Management
|
2,853
|
420
|
11
|
-
|
3,284
|
3,311
|
375
|
39
|
-
|
3,725
|
|
FlexiPay Balances
|
-
|
-
|
-
|
56
|
56
|
-
|
-
|
-
|
18
|
18
|
|
|
31 December
2023
|
31 December
2022[4]
|
|
Loans
|
FlexiPay
|
Total
|
Loans
|
FlexiPay
|
Total
|
|
United
Kingdom
|
United
States
|
Other
|
United
Kingdom
|
|
United
Kingdom
|
United
States
|
Other
|
United
Kingdom
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income4
|
117.8
|
28.7
|
0.4
|
7.9
|
154.8
|
109.0
|
21.6
|
1.6
|
1.5
|
133.7
|
|
Net investment income
|
3.6
|
3.8
|
-
|
-
|
7.4
|
9.8
|
7.5
|
-
|
-
|
17.3
|
|
Total
income
|
121.4
|
32.5
|
0.4
|
7.9
|
162.2
|
118.8
|
29.1
|
1.6
|
1.5
|
151.0
|
|
Fair value
gains/(losses)
|
3.1
|
5.6
|
-
|
-
|
8.7
|
(2.4)
|
7.2
|
-
|
-
|
4.8
|
|
Cost of funds
|
-
|
-
|
-
|
(2.7)
|
(2.7)
|
-
|
-
|
-
|
-
|
-
|
|
Net
income
|
124.5
|
38.1
|
0.4
|
5.2
|
168.2
|
116.4
|
36.3
|
1.6
|
1.5
|
155.8
|
|
|
|
|
|
|
|
13.8
|
|
|
|
|
|
Adjusted
EBITDA4
|
21.3
|
(10.6)
|
(0.2)
|
(14.4)
|
(3.9)
|
13.8
|
(3.1)
|
2.8
|
(4.0)
|
9.5
|
|
Discount unwind on lease
liabilities4
|
(0.2)
|
(0.4)
|
-
|
-
|
(0.6)
|
(0.2)
|
(0.7)
|
-
|
-
|
(0.9)
|
|
Depreciation, amortisation and
impairment
|
(11.3)
|
(10.3)
|
-
|
(1.3)
|
(22.9)
|
(11.7)
|
(5.2)
|
(0.1)
|
-
|
(17.0)
|
|
Share-based payments and social
security costs
|
(3.3)
|
(1.8)
|
-
|
(0.5)
|
(5.6)
|
(3.9)
|
(0.8)
|
-
|
-
|
(4.7)
|
|
Foreign exchange
gains/(losses)
|
-
|
(0.2)
|
-
|
-
|
(0.2)
|
0.2
|
-
|
-
|
-
|
0.2
|
|
Profit/(loss)
before tax
|
6.5
|
(23.3)
|
(0.2)
|
(16.2)
|
(33.2)
|
(1.8)
|
(9.8)
|
2.7
|
(4.0)
|
(12.9)
|
|
Operating
AEBITDA[5]
|
14.6
|
(20.0)
|
(0.2)
|
(14.4)
|
(20.0)
|
6.4
|
(17.8)
|
2.8
|
(4.0)
|
(12.6)
|
|
Investment
AEBITDA5
|
6.7
|
9.4
|
-
|
-
|
16.1
|
7.4
|
14.7
|
-
|
-
|
22.1
|
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
£2.3m in 2022 and £8.7m in 2023. The share of profits of associates
is included within other operating costs and is included within
AEBITDA and was £0.4m in 2022 and £0.1m in 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.
5Investment
AEBITDA is defined as investment income, investment expense and
fair value adjustments, and operating AEBITDA represents AEBITDA
excluding investment AEBITDA.
United
Kingdom Loans business
Originations were £1,060m in 2023,
compared to £1,095m in 2022, with growth in non-government backed
(“commercial”) lending and through our marketplace of third party
lenders.
In H1 2022, the business was
originating significant levels under the government’s Recovery Loan
Scheme (“RLS2”) which ended in June 2022 and therefore we
anticipated originations would reduce in H1 2023 compared to the
previous year. A smaller Recovery Loan Scheme, (“RLS3”), has
continued since then and is due to end in June 2024 and we have
been participating in that since August 2023.
Originations continue to be funded
through forward flow agreements with institutional investors.
Funding was provided by a number of banks and asset managers during
2023 and we are well placed for funding in 2024 with forward flow
agreements in excess of £1.5bn.
Bank of England base rate
increases during 2023 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 grow
commercial lending despite these headwinds.
LuM decreased in 2023 as growth in
commercial lending was offset by continued repayment on the
government loan schemes (CBILS and RLS). As at 31 December 2023, UK
government-guaranteed loans represented £1,555m (31 December 2022:
£2,325m).
UK Loans operating income grew to
£117.8m in 2023, compared with £109.0m in 2022. Origination yield
improvements and higher interest generated on corporate cash
balances were partially offset by lower servicing fees (as a result
of lower LuM). Investment income of £3.6m decreased from £9.8m in
2022, in line with expectations and following the sale of
previously securitised loans in H2 2022, as well as continued
amortisation of remaining loans on balance sheet.
The UK AEBITDA grew to £21.3m in
2023 compared to £13.8m in 2022, with AEBITDA margin improvement as
well as increased interest from corporate cash balances (with no
additional costs and therefore resulting in undiluted AEBITDA
increase). Investment AEBITDA was £6.7m in 2023, down slightly from
£7.4m in 2022. Despite lower net investment income, we benefitted
from favourable fair value movements with overall stronger loan
performance than we expected during 2023. Profit before tax was
£6.5m in 2023, up from negative £(1.8)m in 2022 due to the growth
in AEBITDA.
United
States Loans business
Originations grew to £396m in
2023, after a strong H1 23 and despite a tough economic backdrop.
In April 2023, the SBA relaxed the requirements for loans <$500k
under its SBA7(a) programme. This has encouraged more businesses to
apply for SBA7(a) loans, which to date we have not provided, and as
a result we saw a drop in demand for our core loans.
At the same time, the SBA offered
three new SBA7(a) licences and we applied for, and were granted
subject to final approval of supporting documents, a licence to
participate in the programme by the SBA.
As with the UK Loans business,
originations were funded through forward flow agreements with
institutional investors and during 2023 we onboarded three new
financial institutions to add to our existing investor
base.
LuM grew to £420m as at 31
December 2023 (31 December 2022: £375m) with government-guaranteed
PPP loans at £4m as at 31 December 2023 (31 December 2022:
£28m).
Total income for US Loans was
£32.5m in 2023, up from £29.1m in 2022 as origination and yield
growth was partially offset by a reduction in investment income
following the amortisation of SME loans held on balance sheet.
There remained strong recoveries and lower than expected defaults
driving a positive fair value. H1 2022 benefitted from £2.5m of PPP
deferred income, this did not recur in 2023.
AEBITDA of negative £10.6m in 2023
was as expected as planned investments to scale the business
continued.
FlexiPay
FlexiPay transactions have almost
quadrupled in 2023 to £234m compared to £59m in 2022. Drawn lines
of credit at 31 December 2023 grew to £56m, in line with
transaction growth.
Total income for FlexiPay was
£7.9m in 2023, increasing from £1.5m in 2022 as a result of
transactions and fee growth. The fee charged on FlexiPay for each
drawdown against lines of credit averaged 4.6% (2022: 3.0%) which
is paid in three equal instalments along with the repayment of each
drawdown balance. FlexiPay card was launched in September 2023 and
is now issued to each new FlexiPay customer. When customers
transact using the card, we also earn an interchange fee of 1.75%
alongside existing FlexiPay drawdown fees.
The AEBITDA for the period was
negative at £14.4m (2022: negative £4.0m) as investment continues
to support product momentum. 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. From June
2023, FlexiPay has also been funded through a senior debt facility
with Citibank with interest payable on this facility shown in “cost
of funds”.
Finance Review
Overview
Group total income was £162.2m
(2022: £151.0m), up 7%, and net income was £168.2m (2022:
£155.8m).
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. Associated costs and the interest payable on this debt is
shown within cost of funds.
The Group’s loss before tax was
£33.2m for the year (2022: loss of £12.9m). This includes £5.8m
(2022: £1.8m) of impairment on the San Francisco leased offices
following the exit of tenants and a write down on capitalised
development following an annual impairment assessment on the US
Loans cash generating unit.
Profit and loss
(unaudited)
|
|
31 December 2023
|
31
December 2022[6]
|
|
|
£m
|
£m
|
|
Transaction
fees
|
88.7
|
77.5
|
|
Servicing
fees
|
42.4
|
47.9
|
|
Interest
income
|
16.7
|
4.2
|
|
Other
fees
|
7.0
|
4.1
|
|
Operating income
|
154.8
|
133.7
|
|
Investment
income
|
8.0
|
22.0
|
|
Investment
expense
|
(0.6)
|
(4.7)
|
|
Total income
|
162.2
|
151.0
|
|
Fair
value gains
|
8.7
|
4.8
|
|
Cost of
funds
|
(2.7)
|
-
|
|
Net income
|
168.2
|
155.8
|
|
|
|
|
|
People
costs
|
(94.4)
|
(85.9)
|
|
Marketing
costs
|
(48.4)
|
(38.4)
|
|
Depreciation,
amortisation and impairment
|
(22.9)
|
(17.0)
|
|
(Charge)/credit
for expected credit losses
|
(4.4)
|
1.5
|
|
Other
costs
|
(31.3)
|
(28.9)
|
|
Operating expenses
|
(201.4)
|
(168.7)
|
|
|
|
|
|
Loss before tax
|
(33.2)
|
(12.9)
|
|
|
|
|
Operating
income includes transaction
fees, servicing fees, interest income from loans held at amortised
cost, interest on cash balances and other fees and was £154.8m
(2022: £133.7m).
-
Transaction
fees,
representing fees earned on originations, increased to £88.7m
(2022: £77.5m), driven by improved origination fee yields in each
business segment. Loan originations were in line with
2022.
Average origination fee yields
grew in the UK Loans business to 6.2% (2022: 5.5%) and yields in
the US Loans business grew to 5.9% (2022: 4.6%).
-
Servicing
fees,
representing income
for servicing Loans under Management, were £42.4m (2022: £47.9m),
down on 2022. The fees move in line with the quantum of loans under
management, which decreased in the UK Loans business as growth in
UK LuM from commercial lending was offset by continued repayment on
the government loan schemes. Servicing fees are not charged on
FlexiPay lines of credit or on the PPP loans. Servicing yields
remain similar to 2022 levels.
-
Interest
income represents FlexiPay income,
interest earned on loans held at amortised cost and on cash and
cash equivalents. FlexiPay interest income has increased to £7.8m
(2022: £1.5m). This is where we charge a fee which is spread over
three months, in line with borrower repayments. Interest earned on
cash and cash equivalents has also increased to £8.7m (2022: £2.3m)
which has increased in line with base rates.
-
Other
fees arose
principally from collection fees we recovered on defaulted loans,
some of which was accelerated 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 £7.4m (2022: £17.3m) as
expected. 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 last remaining US securitisation vehicle
(SBIZ-20A) in April 2023.
6The
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 £2.3m in 2022 and £8.7m in 2023. Finance costs were £0.9m
in 2022 and £0.6m in 2023 and the share of profits of associates
was £0.4m in 2022 and £0.1m in 2023 and are both now included in
Other costs on the grounds of materiality. Refer to Note
2.
Net
income, defined as total
income after fair value adjustments and cost of funds, was £168.2m
(2022: £155.8m). 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 diminish.
Operating
expenses
At an overall level, operating
expenses increased compared with 2022. Operating costs movements
were driven by cost increases in the US Loans business and cost
investment in the FlexiPay business including increased expected
credit losses. Costs remained flat 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 10% to £94.4m
(2022: £85.9m), after the capitalisation of development spend. This
was driven by wage inflation and headcount growth for the FlexiPay
and US Loans teams, whilst headcount across UK Loans business has
reduced by 7%. The average salary per head increased by 3.5% but
below wage inflation.
The share-based payment charge for
the period, included in people costs, was £5.6m (2022:
£4.7m).
|
|
31 December
2023
£m
|
31
December
2022
£m
|
Change
%
|
|
People
costs
|
105.7
|
98.4
|
7
|
|
Less
capitalised development spend (“CDS”)
|
(11.3)
|
(12.5)
|
(10)
|
|
People
costs net of CDS
|
94.4
|
85.9
|
10
|
|
|
|
|
|
|
Average
headcount (incl. contractors)
|
1,074
|
1,035
|
4
|
|
Period-end
headcount (incl. contractors)
|
1,101
|
1,075
|
2
|
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 £48.4m (2022: £38.4m), and reached 31% of operating
income (2022: 29%), driven by media spend investments in the
FlexiPay and US businesses and higher broker commissions. Excluding
FlexiPay, the Loans businesses invested 30% of operating income in
marketing (2022: 28%) with lower conversion in the current economic
environment impacting marketing efficiency.
Depreciation,
amortisation and impairment costs of £22.9m (2022: £17.0m) 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 £2.0m.
This follows an impairment of the San Francisco office in 2022 of
£1.8m. Additionally we impaired the capitalised development spend
in the US Loans business following our annual impairment exercise
as near term cash flows of the cash generating unit do not support
the carrying amounts.
Following these impairments we
would expect a reduction in these costs going forwards.
Expected credit
losses principally relate
to the IFRS9 charge for FlexiPay where we account for actual and
expected credit losses from SMEs defaulting on their lines of
credit. We would expect this charge to increase as FlexiPay grows.
The probability of default is estimated utilising observed trends
and combining these with forward-looking information including
different macroeconomic scenarios which are probability weighted.
The loss given default is driven by assumptions regarding the level
of recoveries collected after defaults occur.
Other operating
costs, which consist of
loan processing costs, data and technology, professional fees and
staff and office related costs, have grown as the Group continued
to invest in growth in the US Loans and FlexiPay businesses. The
increase is driven by inflation, higher volumes, loan processing
costs and higher office costs, with lower subtenant contributions
received in the US for its San Francisco office.
Balance sheet
and investments
The Group’s net equity was £247m
at 31 December 2023 (31 December 2022: £284m). This reduction
reflects the Group’s loss after tax, 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.
|
|
Operating
business
|
Investment
business
|
31 December
2023
|
31 December 2022
|
|
|
Loans
business1
|
FlexiPay
|
Legacy
securitisation, warehouse and other loans at fair value
|
CBILS/RLS/
Commercial co-investments
|
Private
funds
|
Total
|
Total
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
SME loans/Lines of
credit
|
6.7
|
50.0
|
18.6
|
25.2
|
1.5
|
102.0
|
141.3
|
|
Cash and cash
equivalents
|
|
|
|
|
|
|
|
|
Unrestricted
|
169.0
|
0.6
|
-
|
-
|
-
|
169.6
|
165.6
|
|
Restricted
|
1.1
|
19.6
|
-
|
31.1
|
-
|
51.8
|
12.1
|
|
Other
assets/(liabilities)
|
-
|
2.7
|
-
|
-
|
-
|
2.7
|
0.9
|
|
Borrowings/bonds
|
(2.2)
|
(54.7)
|
-
|
-
|
-
|
(56.9)
|
(46.3)
|
|
Cash and net
investments
|
174.6
|
18.2
|
18.6
|
56.3
|
1.5
|
269.2
|
273.6
|
|
Other assets
|
47.1
|
-
|
-
|
-
|
-
|
47.1
|
64.1
|
|
Other liabilities
|
(38.4)
|
-
|
-
|
(31.1)
|
-
|
(69.5)
|
(53.7)
|
|
Equity
|
183.3
|
18.2
|
18.6
|
25.2
|
1.5
|
246.8
|
284.0
|
1
Loans business includes £2.2m 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:
|
Investment
in product/vehicles
|
31 December
2023
£m
|
31
December 2022
£m
|
-
Legacy securitisation,
warehouse and other loans at fair value
|
19
|
46
|
-
CBILS/RLS/Commercial
co-investments2
|
25
|
32
|
-
Private funds
|
2
|
3
|
|
Net invested
|
46
|
81
|
|
FlexiPay2
|
18
|
16
|
|
Total net invested capital
|
64
|
97
|
2
These vehicles are
bankruptcy remote
-
SME loans at fair
value – this relates to the
legacy loans previously held in SPVs and warehouses. During 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 and bought out the
remaining bondholders. These loans continue to amortise
down.
-
CBILS/RLS/Commercial
co-investments – as part of our
participation in the CBILS and RLS UK government-guaranteed loan
schemes, we were required to co-invest c.1% alongside institutional
investors.
-
Private funds
– there are a small amount of
other loans, comprising seed investments in private funds held as
associates.
Cash
flow
At 31 December 2023, the Group’s
cash position was £221.4m (31 December 2022: £177.7m). Of this
balance £169.6m (31 December 2022: £165.6m) is unrestricted in its
use with £51.8m (£12.1m) being restricted.
Restricted cash relates to cash
held in the funding vehicle of FlexiPay together with amounts due
to be paid to the British Business Bank (“BBB”) for guarantee fees
collected from institutional investors under the participation of
the CBILS and RLS schemes.
Total cash movements have
principally been driven by:
-
Trading performance
-
Sale of temporary funding loans in the US Loans
business
-
Monetisation of on-balance sheet SME loans as they have
continued to pay down offset by the wind down and buyout of the
SBIZ-20A external bonds
-
Leveraging the investment in FlexiPay lines of credit with
external bank debt
-
Timing of working capital movements associated with UK
government loan guarantee payments received from investors 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:
|
|
31 December
2023
|
31 December
20221
|
|
£m
|
£m
|
|
Adjusted
EBITDA
|
(3.9)
|
9.5
|
|
Fair value adjustments
|
(8.7)
|
(4.8)
|
|
Purchase of
tangible and intangible assets
|
(12.2)
|
(13.9)
|
|
Payment of
lease
liabilities
|
(6.0)
|
(6.1)
|
|
Working capital/other
|
25.9
|
0.9
|
|
Free cash
flow
|
(4.9)
|
(14.4)
|
|
Net distributions from
associates
|
1.2
|
5.4
|
|
Net movement in trusts and
co-investments
|
4.8
|
3.6
|
|
Net movement in lines of
credit
|
15.8
|
(16.0)
|
|
Net movement in other SME
loans
|
15.8
|
(22.4)
|
|
Net movement in warehouses and
securitisation vehicles
|
13.6
|
-
|
|
Purchase of own shares
|
(1.8)
|
(8.7)
|
|
Other
|
-
|
2.4
|
|
Effect of foreign
exchange
|
(0.8)
|
3.8
|
|
Movement in the
year
|
43.7
|
(46.3)
|
|
Cash and cash equivalents at the
beginning of the period
|
177.7
|
224.0
|
|
Cash and cash
equivalents at the end of the period
|
221.4
|
177.7
|
1The
comparative information has been re-presented consistent with the
Income Statement.
Principal risks
and uncertainties
The principal risks and
uncertainties for the Group are as follows:
|
Strategic
Risk
Strategic risk is defined as the
failure to build a sustainable, diversified and profitable business
that can successfully adapt to environment changes due to the
inefficient use of Funding Circle’s available resources.
|
-
Strategic risk
The risk that Funding Circle does
not achieve its key business objectives and maintain its
competitive advantage and business operations.
-
Economic environment
Financial risk that is associated
with macroeconomic or political factors that may affect Funding
Circle’s financial and/or credit performance.
-
Environmental, social and governance risk
Environment, social and/or
governance events or circumstances could cause an actual or
potential material negative impact on Funding Circle’s financial
performance or reputation.
|
|
Funding and
Balance Sheet Risk
Funding and balance sheet risk is
defined as the risks associated with platform funding (matching
borrower demand and supply of funding), capital commitments and
corporate liquidity through normal and stress scenarios.
|
-
Funding Risk
The risk that demand from
borrowers for loans cannot be fulfilled or can only be met at an
uneconomic price. This risk varies with the economic attractiveness
of Funding Circle loans as an investment, the level of
diversification of funding sources and the level of resilience of
these funding sources through economic cycles.
-
Balance Sheet Risk
The risk that Funding Circle
investment positions reduce in value or cannot be exited at an
economically viable price. The risk that Funding Circle liabilities
cannot be met when and where they fall due or can only be met at an
uneconomic price.
|
|
Credit
Risk
Credit risk is the risk of
financial loss to an investor should any borrower fail to fulfil
their contractual repayment obligations. Credit risk management is
the sum of activities necessary to deliver a risk profile at
portfolio level in line with Funding Circle management’s
expectations, in terms of net loss rate, risk-adjusted rate of
return and its volatility through economic cycles.
|
-
Credit Risk
-
Borrower acquisition
Credit performance and returns of
new loans can deviate from expectations due to several factors:
changes in credit quality of incoming applications, calibration of
risk models or strategy parameters, and control gaps in processing
loan applications.
-
Portfolio risk management
Credit performance and returns of
existing portfolio can deviate from expectations due to several
factors: deterioration of credit environment, increased competition
driving higher prepayment rates, effectiveness of portfolio
monitoring, collections and recoveries.
|
|
Regulatory,
Reputation and Conduct Risk
Regulatory, reputation and conduct
risk is defined as engaging in activities that detract from Funding
Circle’s goal of being a trusted and reputable company with
products, services and processes designed for customer success and
delivered in a way that will not cause customer detriment or
regulatory censure.
|
-
Regulatory Risk
The risk that Funding Circle’s
ability to effectively manage its regulatory relationships is
compromised or diminished, that the Group’s governance and controls
framework is not satisfactory given business growth, or that there
is business interruption by reason of non-compliance with
regulation or the introduction of business-impacting
regulation.
-
Reputation Risk
Operational or performance
failures could lead to negative publicity that could adversely
affect our brand, business, results, operations, financial
condition or prospects.
-
Conduct Risk/Treating Customers Fairly
Funding Circle’s activities (or
the failure to satisfactorily perform its activities) could impact
the delivery of fair customer outcomes.
|
|
Operational
Risk
Operational risk is the risk of
loss resulting from inadequate or failed internal processes, people
and systems or from external events.
|
-
Process Risk
Failure to originate and service
loans in line with Funding Circle internal policies, investor
guidelines and third party loan guarantees (e.g. the British
Business Bank) may result in Funding Circle repurchasing loans from
investors. The risk of operational incident could impact the
ability to originate new loans or the ability to service loans
through collections from borrowers and return of money to
investors.
-
Financial Crime
Risk of regulatory breach,
financial loss or reputational damage arising from a failure to
adequately manage or prevent money laundering, terrorist financing,
bribery and corruption, or to comply with sanctions
regulations.
-
Client Money Risk
Failure of Funding Circle to
adequately protect and segregate client money may lead to financial
loss, reputational damage and regulatory censure.
|
|
Technology
Risk
Technology Risk refers to the
potential negative consequences that can arise from the use or
implementation of technology, including hardware, software, and
data management systems. Technology risks can arise from a variety
of sources, including hardware failures, software bugs, cyber
attacks, data breaches, and user errors. In response to evolving
threats and the rise of Gen AI, Technology risk has been designated
a “Principle Risk” for 2024, ensuring stringent oversight and
proactive mitigation.
|
-
Technology Risk
Failure of the technology platform
could have a material adverse impact on Funding Circle’s business,
results of operations, financial condition or prospects.
-
Information Risk
Failure to protect the
confidential information of Funding Circle’s borrowers, investors
and IT systems may lead to financial loss, reputational damage and
regulatory censure.
-
Data Risk
Failure in our ability to acquire,
use, secure and transform our data assets could result in adverse
material impacts across Funding Circle.
|
Unaudited
consolidated statement of comprehensive income
for the year ended 31 December 2023
|
|
Note
|
31 December
2023
£m
|
31
December
2022
(re-presented)1
£m
|
|
Transaction
fees
|
|
88.7
|
77.5
|
|
Servicing
fees
|
|
42.4
|
47.9
|
|
Interest
income2
|
|
16.7
|
4.2
|
|
Other
fees
|
|
7.0
|
4.1
|
|
Operating income
|
|
154.8
|
133.7
|
|
Investment
income
|
|
8.0
|
22.0
|
|
Investment
expense
|
|
(0.6)
|
(4.7)
|
|
Total income
|
|
162.2
|
151.0
|
|
Fair
value gains
|
|
8.7
|
4.8
|
|
Cost of
funds
|
|
(2.7)
|
—
|
|
Net income
|
3
|
168.2
|
155.8
|
|
People
costs
|
4,
5
|
(94.4)
|
(85.9)
|
|
Marketing
costs
|
4
|
(48.4)
|
(38.4)
|
|
Depreciation,
amortisation and impairment
|
4
|
(22.9)
|
(17.0)
|
|
(Charge)/credit
for expected credit losses
|
4,
13
|
(4.4)
|
1.5
|
|
Other
costs
|
4
|
(31.3)
|
(28.9)
|
|
Operating expenses
|
4
|
(201.4)
|
(168.7)
|
|
Loss before taxation
|
|
(33.2)
|
(12.9)
|
|
Income
tax (charge)/credit
|
6
|
(5.1)
|
6.0
|
|
Loss for the year
|
|
(38.3)
|
(6.9)
|
|
Other comprehensive income/(expense)
|
|
|
|
|
Items
that may be reclassified subsequently to profit and
loss:
|
|
|
|
|
Exchange
differences on translation of foreign operations
|
|
(2.7)
|
5.8
|
|
Total comprehensive loss for the year
|
|
(41.0)
|
(1.1)
|
|
Total comprehensive loss attributable to:
|
|
|
|
|
Owners of the Parent
|
|
(41.0)
|
(1.1)
|
|
Loss per share
|
|
|
|
|
Basic and diluted loss per share
|
7
|
(11.1)p
|
(2.0)p
|
-
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.
-
Interest income recognised on
assets held at amortised cost under the effective interest rate
method and £6.5 million (2022: £1.6 million) on money market funds
at fair value through profit and loss.
All
amounts relate to continuing activities.
Unaudited
consolidated balance sheet
as at 31 December 2023
|
|
Note
|
31 December
2023
£m
|
31
December
2022
£m
|
|
Non-current assets
|
|
|
|
|
Intangible
assets
|
8
|
23.0
|
28.2
|
|
Property,
plant and equipment
|
9
|
5.0
|
10.0
|
|
Investment
in associates
|
|
1.5
|
2.7
|
|
Investment
in trusts and co-investments
|
10,
13
|
25.2
|
28.7
|
|
SME
loans (other)
|
10,
13
|
6.7
|
24.8
|
|
Deferred
tax asset
|
6
|
—
|
6.9
|
|
Trade
and other receivables
|
11
|
1.4
|
3.4
|
|
|
|
62.8
|
104.7
|
|
Current assets
|
|
|
|
|
SME
loans (warehouse)
|
10,
13
|
1.3
|
2.4
|
|
SME
loans (securitised)
|
10,
13
|
16.4
|
45.8
|
|
SME
loans (other)
|
10,
13
|
0.9
|
20.9
|
|
Lines of
credit
|
10,
13
|
50.0
|
16.0
|
|
Trade
and other receivables
|
11
|
20.4
|
16.5
|
|
Cash and
cash equivalents
|
14
|
221.4
|
177.7
|
|
|
|
310.4
|
279.3
|
|
Total assets
|
|
373.2
|
384.0
|
|
Current liabilities
|
|
|
|
|
Trade
and other payables
|
12
|
54.3
|
31.8
|
|
Bonds
|
10,
13
|
—
|
23.7
|
|
Bank
borrowings
|
10,
13
|
54.7
|
—
|
|
Short-term
provisions and other liabilities
|
|
1.5
|
1.0
|
|
Lease
liabilities
|
|
7.2
|
7.2
|
|
|
|
117.7
|
63.7
|
|
Non-current liabilities
|
|
|
|
|
Long-term
provisions and other liabilities
|
|
1.1
|
1.1
|
|
Bank
borrowings
|
10,
13
|
2.2
|
22.6
|
|
Lease
liabilities
|
|
5.4
|
12.6
|
|
Total liabilities
|
|
126.4
|
100.0
|
|
Equity
|
|
|
|
|
Share
capital
|
|
0.4
|
0.4
|
|
Share
premium account
|
|
293.1
|
293.1
|
|
Foreign
exchange reserve
|
|
14.2
|
16.9
|
|
Share
options reserve
|
|
24.0
|
22.2
|
|
Accumulated
losses
|
|
(84.9)
|
(48.6)
|
|
Total equity
|
|
246.8
|
284.0
|
|
Total equity and liabilities
|
|
373.2
|
384.0
|
The
condensed financial statements were approved by the Board and
authorised for issue on 7 March 2024. They were signed on behalf of
the Board by:
Oliver White
Director
Company
registration number 07123934
Unaudited
consolidated statement of changes in equity
for the year ended 31 December 2023
|
|
|
Share
capital
£m
|
Share
premium
account
£m
|
Foreign
exchange
reserve
£m
|
Share
options
reserve
£m
|
Accumulated
losses
£m
|
Total
equity
£m
|
|
Balance at 1 January 2022
|
|
0.4
|
293.0
|
11.1
|
19.1
|
(35.6)
|
288.0
|
|
Loss for
the year
|
|
—
|
—
|
—
|
—
|
(6.9)
|
(6.9)
|
|
Other comprehensive income/(expense)
|
|
|
|
|
|
|
|
|
Exchange
differences on translation of foreign operations
|
|
—
|
—
|
5.8
|
—
|
—
|
5.8
|
|
Total comprehensive income/(expense)
|
|
—
|
—
|
5.8
|
—
|
(6.9)
|
(1.1)
|
|
Transactions with owners
|
|
|
|
|
|
|
|
|
Transfer
of share option costs
|
|
—
|
—
|
—
|
(2.6)
|
2.6
|
—
|
|
Purchase
of own shares held in employee benefit trust
|
|
—
|
—
|
—
|
—
|
(8.7)
|
(8.7)
|
|
Issue of
share capital
|
|
—
|
0.1
|
—
|
—
|
—
|
0.1
|
|
Employee
share schemes – value of employee services
|
|
—
|
—
|
—
|
5.7
|
—
|
5.7
|
|
Balance at 31 December 2022
|
|
0.4
|
293.1
|
16.9
|
22.2
|
(48.6)
|
284.0
|
|
Loss for
the year
|
|
—
|
—
|
—
|
—
|
(38.3)
|
(38.3)
|
|
Other comprehensive income/(expense)
|
|
|
|
|
|
|
|
|
Exchange
differences on translation of foreign operations
|
|
—
|
—
|
(2.7)
|
—
|
—
|
(2.7)
|
|
Total comprehensive income/(expense)
|
|
—
|
—
|
(2.7)
|
—
|
(38.3)
|
(41.0)
|
|
Transactions with owners
|
|
|
|
|
|
|
|
|
Transfer
of share option costs
|
|
—
|
—
|
—
|
(3.8)
|
3.8
|
—
|
|
Purchase
of own shares held in employee benefit trust
|
|
—
|
—
|
—
|
—
|
(1.8)
|
(1.8)
|
|
Issue of
share capital
|
|
—
|
—
|
—
|
—
|
—
|
—
|
|
Employee
share schemes – value of employee services
|
|
—
|
—
|
—
|
5.6
|
—
|
5.6
|
|
Balance at 31 December 2023
|
|
0.4
|
293.1
|
14.2
|
24.0
|
(84.9)
|
246.8
|
Unaudited
consolidated statement of cash flows
for the year ended 31 December 2023
|
|
Note
|
31 December
2023
£m
|
31
December
2022
(re-presented)1
£m
|
|
Net cash outflow from operating activities
|
14
|
(25.6)
|
(8.1)
|
|
Investing activities
|
|
|
|
|
Purchase
of intangible assets
|
8
|
(11.5)
|
(12.7)
|
|
Purchase
of property, plant and equipment
|
9
|
(0.7)
|
(1.2)
|
|
Originations
of SME loans (other)
|
13
|
(16.6)
|
(24.0)
|
|
Cash
receipts from SME loans (other)
|
13
|
21.8
|
59.5
|
|
Cash
receipts from SME loans (warehouse phase)
|
13
|
2.0
|
2.8
|
|
Proceeds
from sale of SME loans (other)
|
13
|
30.4
|
—
|
|
Cash
receipts from SME loans (securitised)
|
13
|
35.0
|
86.8
|
|
Proceeds
from sale of SME loans (securitised)
|
13
|
—
|
39.5
|
|
Investment
in trusts and co-investments
|
13
|
(1.8)
|
(6.4)
|
|
Cash
receipts from investments in trusts and co-investments
|
13
|
6.6
|
10.0
|
|
Redemption
in associates
|
|
1.1
|
5.1
|
|
Dividends
from associates
|
|
0.1
|
0.3
|
|
Net cash inflow from investing activities
|
|
66.4
|
159.7
|
|
Financing activities
|
|
|
|
|
Proceeds
from bank borrowings
|
14
|
55.8
|
—
|
|
Repayment
of bank borrowings
|
14
|
(20.9)
|
(57.9)
|
|
Payment
of bond liabilities
|
14
|
(23.4)
|
(129.1)
|
|
Proceeds
from the exercise of share options
|
|
—
|
0.1
|
|
Proceeds
from subleases
|
|
1.2
|
1.2
|
|
Purchase
of own shares
|
|
(1.8)
|
(8.7)
|
|
Payment
of lease liabilities
|
14
|
(7.2)
|
(7.3)
|
|
Net cash inflow/(outflow) from financing activities
|
|
3.7
|
(201.7)
|
|
Net increase/(decrease) in cash and cash equivalents
|
|
44.5
|
(50.1)
|
|
Cash and
cash equivalents at the beginning of the year
|
|
177.7
|
224.0
|
|
Effect
of foreign exchange rate changes
|
|
(0.8)
|
3.8
|
|
Cash and cash equivalents at the end of the year
|
14
|
221.4
|
177.7
|
1. The
comparative year to 31 December 2022 has been re-presented to
classify “Interest received”, which was previously a component of
investing activities, as a component of operating income. This
mirrors the re-presentation of interest on cash and cash
equivalents within “Interest income” on the consolidated statement
of comprehensive income.
Notes
forming part of the unaudited consolidated financial
statements
for the year ended 31 December 2023
1. Basis of accounting
The
unaudited consolidated financial statements are prepared under the
historical cost basis except for certain financial instruments that
are carried at fair value through profit and loss
(“FVTPL”).
2. Basis of preparation
The
financial statements included in this preliminary announcement have
been prepared in accordance with the Disclosure and Transparency
Rules of the UK Financial Conduct Authority, and the principles of
UK-adopted international accounting standards, but do not comply
with the full disclosure requirements of these standards. The
financial information for the year ended 31 December 2022 is
derived from the statutory financial statements for that year which
have been delivered to the Registrar of Companies. The auditor
reported on those financial statements: their report was
unqualified, did not draw attention to any matters by way of
emphasis and did not contain a statement under s498(2) or (3) of
the Companies Act 2006.
The
unaudited financial information contained in this announcement does
not constitute the statutory financial statements of the Group as
at and for the year ended 31 December 2023, but is derived from
those financial statements, which have been prepared in accordance
with UK-adopted international accounting standards. The financial
statements themselves will be approved by the Board of Directors
and reported on by the auditor and then subsequently delivered to
the Registrar of Companies in due course. Accordingly, the
financial information for FY22/23 is presented as unaudited in this
announcement.
Going concern
The
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 at least 12 months from the date of approval of the
financial statements).
The
Group made a total comprehensive loss of £41.0 million during the
year ended 31 December 2023 (2022: loss of £1.1 million). As at 31
December 2023, the Group had net assets of £246.8 million (2022:
£284.0 million). This includes £221.4 million of cash and cash
equivalents (2022: £177.7 million) of which £51.8 million (2022:
£12.1 million) is held for specific purposes and is restricted in
use. Additionally, within the net assets, the Group holds £63.5
million (2022: £96.5
million) of invested capital, some of which is capable of being
monetised if liquidity needs arise.
The
Group has prepared detailed cash flow forecasts for the next 15
months and has updated the going concern assessment
to factor
in the potential ongoing impact of inflation and related economic
stress.
The base
case scenario assumes:
-
The
economic environment still contains a high degree of uncertainty,
this is factored into the 2024 credit risk strategies which include
stressed assumptions;
-
Ongoing
investment in FlexiPay along with growth in UK loans with an exit
of the US loans business;
-
FlexiPay
sees significant growth in top line as lines of credit become
established and the card offering becomes a fully functional
offering;
-
The Group
continues to fund the lines of credit through balance sheet along
with the senior banking facility;
-
Costs are
controlled with any growth driven by marketing, expected credit
losses (ECL) and cost of funds. Remaining costs grow but
predominantly through inflation.
Management
prepared a severe but plausible downside scenario in
which:
-
further
macroeconomic volatility continues through the period with
increased inflation and interest rates reducing originations and
increasing costs;
-
investment
returns reduce owing to increased funding costs, widening discount
rates and deterioration in loan performance;
-
an
operational event occurs requiring a cash outlay;
-
a downside
loss scenario is applied to Funding Circle’s on-balance sheet
investment in SME loans resulting in higher initial fair value
losses and lower cash flows to the investments it owns;
and
-
a combined
credit and liquidity risk stress for FlexiPay.
Management
has reviewed financial covenants the Group must adhere to in
relation to its servicing agreements. These are with institutional
investors for which there are unrestricted cash, tangible net worth
and debt to tangible net worth ratios. Management has also reviewed
regulatory capital requirements. In the downside scenario the risk
of covenant or capital requirement breach is considered
remote. 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 a small
remaining balance on the PPPLF previously used to fund PPP loans,
and does not have undrawn committed borrowing facilities available
to the wider Group.
The Directors have made enquiries
of management and considered budgets and cash flow forecasts for
the Group and have, at the time of approving these financial
statements, a reasonable expectation that the Company and the Group
have adequate resources to continue in operational existence for
the foreseeable future.
Significant changes in the current reporting year
The
financial position and performance of the Group were affected by
the following events and transactions during the year ended 31
December 2023:
i) Launch of FlexiPay leveraged warehouse
During
the year ended 31 December 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
13.
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
recognise 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 £30.4 million with a fair value
loss of £0.4 million from the sale.
Re-presentation of interest income on cash and cash equivalents and
impact on AEBITDA
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 all unwound),
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 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 £2.3 million presented
in “Interest income” previously presented in “Finance income”, £0.5
million presented within “Other costs”, £0.9 million of which was
previously presented within “Finance costs” and £0.4 million credit
which was previously presented in “Share of net profit from
associates”. The consolidated statement of cash flows and note 14
have also been re-presented to mirror this with interest received
now forming part of cash flows from operating activities which were
previously disclosed as investing activities, with the comparative
period re-presented with £2.3 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 (refer note 3). 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 £2.7 million including the re-presentation
of interest income on bank deposits and share of net profit from
associates.
3. 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 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 following table. 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/loss 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/loss 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.
Net income
|
|
31 December 2023
|
|
|
31
December 2022 (re-presented, see note 2)
|
|
|
|
Loans
|
|
FlexiPay
|
Total
|
|
|
|
Loans
|
|
FlexiPay
|
Total
|
|
|
United
Kingdom
£m
|
United
States
£m
|
Other
£m
|
United
Kingdom
£m
|
£m
|
|
|
United
Kingdom
£m
|
United
States
£m
|
Other
£m
|
United
Kingdom
£m
|
£m
|
|
Transaction
fees
|
65.2
|
23.4
|
—
|
0.1
|
88.7
|
|
|
59.8
|
17.7
|
—
|
—
|
77.5
|
|
Servicing
fees
|
38.8
|
3.4
|
0.2
|
—
|
42.4
|
|
|
44.8
|
2.4
|
0.7
|
—
|
47.9
|
|
Other
fees
|
6.3
|
0.6
|
0.1
|
—
|
7.0
|
|
|
2.4
|
1.0
|
0.7
|
—
|
4.1
|
|
Interest
income (including FlexiPay)
|
7.5
|
1.3
|
0.1
|
7.8
|
16.7
|
|
|
2.0
|
0.5
|
0.2
|
1.5
|
4.2
|
|
Operating income
|
117.8
|
28.7
|
0.4
|
7.9
|
154.8
|
|
|
109.0
|
21.6
|
1.6
|
1.5
|
133.7
|
|
Net investment income
|
3.6
|
3.8
|
—
|
—
|
7.4
|
|
|
9.8
|
7.5
|
—
|
—
|
17.3
|
|
Total income
|
121.4
|
32.5
|
0.4
|
7.9
|
162.2
|
|
|
118.8
|
29.1
|
1.6
|
1.5
|
151.0
|
|
Fair
value gains/(losses)
|
3.1
|
5.6
|
—
|
—
|
8.7
|
|
|
(2.4)
|
7.2
|
—
|
—
|
4.8
|
|
Cost of
funds
|
—
|
—
|
—
|
(2.7)
|
(2.7)
|
|
|
—
|
—
|
—
|
—
|
—
|
|
Net income
|
124.5
|
38.1
|
0.4
|
5.2
|
168.2
|
|
|
116.4
|
36.3
|
1.6
|
1.5
|
155.8
|
Segment profit/(loss)
|
|
31 December 2023
|
|
31
December 2022 (re-presented, see note 2)
|
|
|
|
Loans
|
|
FlexiPay
|
Total
|
|
|
Loans
|
|
FlexiPay
|
Total
|
|
|
United
Kingdom
£m
|
United
States
£m
|
Other
£m
|
United
Kingdom
£m
|
£m
|
|
United
Kingdom
£m
|
United
States
£m
|
Other
£m
|
United
Kingdom
£m
|
£m
|
|
Adjusted EBITDA
|
21.3
|
(10.6)
|
(0.2)
|
(14.4)
|
(3.9)
|
|
13.8
|
(3.1)
|
2.8
|
(4.0)
|
9.5
|
|
Discount
unwind on lease liabilities
|
(0.2)
|
(0.4)
|
—
|
—
|
(0.6)
|
|
(0.2)
|
(0.7)
|
—
|
—
|
(0.9)
|
|
Depreciation,
amortisation and impairment
|
(11.3)
|
(10.3)
|
—
|
(1.3)
|
(22.9)
|
|
(11.7)
|
(5.2)
|
(0.1)
|
—
|
(17.0)
|
|
Share-based
payments and social security costs
|
(3.3)
|
(1.8)
|
—
|
(0.5)
|
(5.6)
|
|
(3.9)
|
(0.8)
|
—
|
—
|
(4.7)
|
|
Foreign
exchange (losses)/gains
|
—
|
(0.2)
|
—
|
—
|
(0.2)
|
|
0.2
|
—
|
—
|
—
|
0.2
|
|
Profit/(loss) before tax
|
6.5
|
(23.3)
|
(0.2)
|
(16.2)
|
(33.2)
|
|
(1.8)
|
(9.8)
|
2.7
|
(4.0)
|
(12.9)
|
4. Operating expenses
|
|
31 December
2023
£m
|
|
31
December
2022
(re-presented,
see
note 2)
£m
|
|
Depreciation
|
4.3
|
|
5.1
|
|
Amortisation
|
12.4
|
|
10.1
|
|
Rental
income and other recharges
|
(0.2)
|
|
(1.0)
|
|
Operating
lease rentals:
|
|
|
|
|
– Land
and buildings
|
0.4
|
|
0.3
|
|
Employment
costs (including contractors)
|
94.4
|
|
85.9
|
|
Marketing
costs
(excluding
employment costs)
|
48.4
|
|
38.4
|
|
Data and
technology
|
9.3
|
|
9.7
|
|
Expected
credit loss impairment charge/(credit)
|
4.4
|
|
(1.5)
|
|
Impairment
of intangible and
tangible
assets and investment in sublease (See notes 8, 9 and
13)
|
6.2
|
|
1.8
|
|
Other
expenses
|
21.8
|
|
19.9
|
|
Total operating expenses
|
201.4
|
|
168.7
|
| |
|
|
|
|
5. Employees
The
average monthly number of employees (including Directors) during
the year was:
|
|
2023
Number
|
2022
Number
|
|
UK
|
666
|
686
|
|
FlexiPay
|
81
|
20
|
|
US
|
203
|
177
|
|
Other
|
9
|
10
|
|
|
959
|
893
|
In
addition to the employees above, the average monthly number of
contractors during the year was 115 (2022: 142).
Employment
costs (including Directors’ emoluments) during the year
were:
|
|
31 December
2023
£m
|
31
December
2022
£m
|
|
Wages
and salaries
|
80.9
|
72.2
|
|
Social
security costs
|
7.8
|
7.6
|
|
Pension
costs
|
2.2
|
1.9
|
|
Share-based
payments
|
5.6
|
4.7
|
|
|
96.5
|
86.4
|
|
Contractor
costs
|
9.2
|
12.0
|
|
Less:
capitalised development costs
|
(11.3)
|
(12.5)
|
|
Employment
costs net of capitalised development costs
|
94.4
|
85.9
|
6. Income tax charge/(credit)
The
Group is subject to all taxes applicable to a commercial company in
its countries of operation. The UK (losses)/profits of the Company
are subject to UK income tax at the standard corporation tax rate
of 25% (23.5% is applied to the table below for 2023 as a blended
rate for the year, as the increase in the statutory corporation tax
rate to 25% was effective from 1 April 2023) (2022:
19%).
|
|
31 December
2023
£m
|
31
December
2022
£m
|
|
Current tax
|
|
|
|
UK
|
|
|
|
Current
tax on (losses)/profits for the year
|
0.3
|
0.3
|
|
Adjustment
in respect of prior years
|
(2.0)
|
(0.3)
|
|
|
(1.7)
|
—
|
|
US and Other
|
|
|
|
Current
tax on (losses)/profits for the year
|
0.3
|
0.4
|
|
Adjustment
in respect of prior years
|
(0.1)
|
0.5
|
|
|
0.2
|
0.9
|
|
Total current tax (credit)/charge
|
(1.5)
|
0.9
|
|
Deferred tax
|
|
|
|
UK
|
|
|
|
Deferred
tax on (losses)/profits for the year
|
—
|
—
|
|
Adjustment
in respect of prior years
|
—
|
—
|
|
|
—
|
—
|
|
US and Other
|
|
|
|
Deferred
tax on profits/(losses) for the year
|
6.6
|
(6.9)
|
|
Adjustments
in respect of prior years
|
—
|
—
|
|
|
6.6
|
(6.9)
|
|
Total deferred tax charge/(credit)
|
6.6
|
(6.9)
|
|
Total tax charge/(credit)
|
5.1
|
(6.0)
|
The
above current tax charge represents the expected tax on the
Research and Development Expenditure Credit (“RDEC”) receivable for
2023 and US state taxes. In the prior year, the tax charge
represents the tax liability on the Group’s taxable profit,
including state taxes, and the amount of tax deducted from the RDEC
receivable for 2022.
The
adjustment in respect of prior years in the UK relates to an
expected tax refund from HMRC of £2m following the resubmission of
a tax return for 2021. The deferred tax movement represents the
write off of the deferred tax asset in respect of uncertainty
related to the use of US losses.
The
Group charge/(credit) for the year can be reconciled to the loss
before tax shown per the consolidated statement
of comprehensive
income as follows.
Factors affecting the tax charge/(credit) for the year
|
|
31 December
2023
£m
|
31
December
2022
£m
|
|
Loss
before taxation
|
(33.2)
|
(12.9)
|
|
Taxation
on loss at 23.5% (2022: 19.0%)
|
(7.8)
|
(2.4)
|
|
Effects
of:
|
|
|
|
Research
and development
|
0.3
|
0.3
|
|
Effect
of foreign tax rates
|
0.3
|
0.3
|
|
Non-taxable/non-deductible
expenses
|
0.7
|
1.0
|
|
Unrecognised
timing differences
|
1.7
|
5.3
|
|
Unrecognised
tax losses accumulated/(utilised)
|
5.6
|
(4.0)
|
|
Adjustment
in respect of prior years
|
(2.1)
|
0.2
|
|
Deferred
tax assets de-recognised/(recognised)
|
6.6
|
(6.9)
|
|
Impairment
charge
|
(0.2)
|
0.2
|
|
Total tax charge/(credit)
|
5.1
|
(6.0)
|
The
Group is taxed at different rates depending on the country in which
the profits arise. The key applicable tax rates include the UK
23.5%, the US 21%, Germany 30% and the Netherlands 25%. The
effective tax rate for the year was (-15.4%) (2022:
46.5%).
The
statutory UK corporation tax rate is currently 25% (effective 1
April 2023). There is a blended rate in the UK of 23.5% for
2023.
The
Group has de-recognised the deferred tax asset relating to the use
of historic tax losses in the US (2022: asset recognised of £6.9
million in respect of £32.9 million of the US federal
losses).
The
Group utilised historical tax losses in the US for the first time
in 2021. The Group’s existing transfer pricing arrangements between
the UK and US currently entitle the US to earn an agreed profit
margin. Following the granting of a provisional SBA license in the
US, the nature of the transfer pricing arrangements between the UK
and US are expected to change.
This,
together with anticipated near-term trading losses in the US means
that there are not expected to be taxable profits to utilise
brought forward trading losses in the near term.
Accordingly
the deferred tax asset associated with brought forward US trading
losses has been de-recognised.
7. Loss per share
Basic
loss per share amounts are calculated by dividing the loss for the
year attributable to ordinary equity holders of the Company by the
weighted average number of ordinary shares outstanding during the
year.
For
diluted loss per share, the weighted average number of ordinary
shares in issue is adjusted to assume conversion of all dilutive
potential ordinary shares. The dilutive potential ordinary shares
include those share options granted to employees under the Group’s
share-based compensation schemes which do not have an exercise
price or where the exercise price is less than the average market
price of the Company’s ordinary shares during the year.
There is
no difference in the weighted average number of shares used in the
calculation of basic and diluted loss per share as the effect of
all potentially dilutive shares outstanding was
anti-dilutive.
The
following table reflects the loss and share data used in the basic
and diluted loss per share computations:
|
|
31 December
2023
|
31
December
2022
|
|
Loss for
the year (£m)
|
(38.3)
|
(6.9)
|
|
Weighted
average number of ordinary shares in issue (million)
|
344.4
|
348.6
|
|
Basic
and diluted loss per share
|
(11.1)p
|
(2.0)p
|
8. Intangible assets
|
|
Capitalised
development
costs
£m
|
Computer
software
£m
|
Other
intangibles
£m
|
Total
£m
|
|
Cost
|
|
|
|
|
|
At 1
January 2022
|
49.0
|
0.9
|
1.2
|
51.1
|
|
Exchange
differences
|
1.9
|
—
|
—
|
1.9
|
|
Additions
|
12.7
|
—
|
—
|
12.7
|
|
Disposals
|
(8.8)
|
(0.1)
|
—
|
(8.9)
|
|
At 31
December 2022
|
54.8
|
0.8
|
1.2
|
56.8
|
|
At 1
January 2023
|
54.8
|
0.8
|
1.2
|
56.8
|
|
Exchange
differences
|
(0.8)
|
—
|
—
|
(0.8)
|
|
Additions
|
11.3
|
0.2
|
—
|
11.5
|
|
Disposals
|
(4.1)
|
(0.6)
|
—
|
(4.7)
|
|
At 31 December 2023
|
61.2
|
0.4
|
1.2
|
62.8
|
|
Accumulated amortisation
|
|
|
|
|
|
At 1
January 2022
|
24.4
|
0.6
|
1.2
|
26.2
|
|
Exchange
differences
|
1.2
|
—
|
—
|
1.2
|
|
Charge
for the year
|
10.0
|
0.1
|
—
|
10.1
|
|
Disposals
|
(8.8)
|
(0.1)
|
—
|
(8.9)
|
|
At 31
December 2022
|
26.8
|
0.6
|
1.2
|
28.6
|
|
At 1
January 2023
|
26.8
|
0.6
|
1.2
|
28.6
|
|
Exchange
differences
|
(0.5)
|
0.1
|
—
|
(0.4)
|
|
Charge
for the year
|
12.3
|
0.1
|
—
|
12.4
|
|
Impairment
|
3.9
|
—
|
—
|
3.9
|
|
Disposals
|
(4.1)
|
(0.6)
|
—
|
(4.7)
|
|
At 31 December 2023
|
38.4
|
0.2
|
1.2
|
39.8
|
|
Carrying amount
|
|
|
|
|
|
At 31 December 2023
|
22.8
|
0.2
|
—
|
23.0
|
|
At 31
December 2022
|
28.0
|
0.2
|
—
|
28.2
|
Intangible
assets of £3.9 million (2022: £nil) predominantly related to the US
business have been fully impaired. This is as a result of the
annual impairment review assessment of each cash generating
unit.
Given the
uncertainty as to the near-term cash flows of the US
business, the
value in use assessment did not support the non-financial assets
and the capitalised development costs of the US were
impaired.
9. Property, plant and equipment, right-of-use assets and lease
liabilities
The
Group has right-of-use assets which comprise property leases held
by the Group. Information about leases for which the Group is a
lessee is presented below.
Analysis of property, plant and equipment between owned and leased
assets
|
|
31 December
2023
£m
|
31
December
2022
£m
|
|
Property,
plant and equipment (owned)
|
1.7
|
2.7
|
|
Right-of-use
assets
|
3.3
|
7.3
|
|
|
5.0
|
10.0
|
Reconciliation of amount recognised in the balance sheet
|
|
Leasehold
improvements
£m
|
Computer
equipment
£m
|
Furniture
and
fixtures
£m
|
Right-of-use
assets
(property)
£m
|
Total
£m
|
|
Cost
|
|
|
|
|
|
|
At 1
January 2022
|
4.7
|
2.7
|
1.9
|
31.0
|
40.3
|
|
Disposals
|
—
|
(0.8)
|
—
|
—
|
(0.8)
|
|
Additions1
|
0.5
|
1.0
|
0.1
|
0.7
|
2.3
|
|
Exchange
differences
|
—
|
0.1
|
0.1
|
1.0
|
1.2
|
|
At 31
December 2022
|
5.2
|
3.0
|
2.1
|
32.7
|
43.0
|
|
At 1
January 2023
|
5.2
|
3.0
|
2.1
|
32.7
|
43.0
|
|
Disposals
|
—
|
(1.1)
|
—
|
—
|
(1.1)
|
|
Additions1
|
—
|
0.7
|
—
|
0.2
|
0.9
|
|
Exchange
differences
|
—
|
—
|
—
|
(0.6)
|
(0.6)
|
|
Derecognition
of right-of-use assets
|
—
|
—
|
—
|
—
|
—
|
|
At 31 December 2023
|
5.2
|
2.6
|
2.1
|
32.3
|
42.2
|
|
Accumulated depreciation
|
|
|
|
|
|
|
At 1
January 2022
|
3.2
|
1.9
|
1.5
|
19.6
|
26.2
|
|
Disposals
|
—
|
(0.8)
|
—
|
—
|
(0.8)
|
|
Charge
for the year
|
0.7
|
0.7
|
0.2
|
3.5
|
5.1
|
|
Impairment
|
—
|
—
|
—
|
1.8
|
1.8
|
|
Exchange
differences
|
—
|
0.1
|
0.1
|
0.5
|
0.7
|
|
At 31
December 2022
|
3.9
|
1.9
|
1.8
|
25.4
|
33.0
|
|
At 1
January 2023
|
3.9
|
1.9
|
1.8
|
25.4
|
33.0
|
|
Disposals
|
—
|
(1.1)
|
—
|
—
|
(1.1)
|
|
Charge
for the year
|
0.7
|
0.8
|
0.1
|
2.7
|
4.3
|
|
Impairment
|
—
|
0.1
|
0.1
|
1.3
|
1.5
|
|
Exchange
differences
|
(0.1)
|
—
|
—
|
(0.4)
|
(0.5)
|
|
Derecognition
of right-of-use assets
|
—
|
—
|
—
|
—
|
—
|
|
At 31 December 2023
|
4.5
|
1.7
|
2.0
|
29.0
|
37.2
|
|
Carrying amount
|
|
|
|
|
|
|
At 31 December 2023
|
0.7
|
0.9
|
0.1
|
3.3
|
5.0
|
|
At 31
December 2022
|
1.3
|
1.1
|
0.3
|
7.3
|
10.0
|
1.
Leasehold
improvement and right-of-use asset additions in the year are
non-cash in nature.
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 £1.3 million was recognised in
the year ended 31 December
2023 (2022: £1.8 million).
Property,
plant and equipment of £0.2 million (2022: £nil) related to the US
business has been fully impaired. See note 8 for further details of
this impairment.
10. SME loans and lines of credit
|
|
31 December
2023
£m
|
31
December
2022
£m
|
|
Non-current
|
|
|
|
SME
loans (other) – amortised cost
|
6.7
|
24.8
|
|
Investment
in trusts and co-investments – FVTPL
|
25.2
|
28.7
|
|
Total non-current
|
31.9
|
53.5
|
|
Current
|
|
|
|
Lines of
credit – amortised cost
|
50.0
|
16.0
|
|
SME
loans (other) – FVTPL
|
0.9
|
20.9
|
|
SME
loans (warehouse) – FVTPL
|
1.3
|
2.4
|
|
SME
loans (securitised) – FVTPL
|
16.4
|
45.8
|
|
Total current
|
68.6
|
85.1
|
|
Total
|
100.5
|
138.6
|
11. Trade and other receivables
|
|
31 December
2023
£m
|
31
December
2022
£m
|
|
Other
receivables
|
1.4
|
3.4
|
|
Non-current trade and other receivables
|
1.4
|
3.4
|
|
Trade
receivables
|
0.4
|
0.4
|
|
Other
receivables
|
7.3
|
5.3
|
|
Prepayments
|
5.2
|
3.7
|
|
Accrued
income
|
5.3
|
4.8
|
|
Rent and
other deposits
|
2.2
|
2.3
|
|
Current trade and other receivables
|
20.4
|
16.5
|
|
|
21.8
|
19.9
|
The
maximum exposure to credit risk at the reporting date is the
carrying value of each class of receivables described
earlier.
No trade
receivables were overdue or impaired.
Included
in rent and other deposits are £1.6 million of rental deposits
(2022: £1.3 million) in respect of the Group’s property leases
which expire over the next five years.
The
Directors consider that the carrying amount of trade and other
receivables approximates to their fair value.
12. Trade and other payables
|
|
31 December
2023
£m
|
31
December
2022
£m
|
|
Trade
payables
|
2.4
|
2.5
|
|
Other
taxes and social security costs
|
4.2
|
5.0
|
|
Other
creditors1
|
32.6
|
9.7
|
|
Accruals
and deferred income
|
15.1
|
14.6
|
|
|
54.3
|
31.8
|
1. Other
creditors includes £30.7 million (2022: £7.5 million) due to the
British Business Bank (BBB) primarily related to scheme lender fees
collected from investors associated with government-guaranteed
products.
The
Directors consider that the carrying amount of trade and other
payables approximates to their fair value.
13. Financial risk management
The
Board of Directors has overall responsibility for the establishment
and oversight of the Group’s risk management framework.
The risk
management policies are established to identify and analyse the
risks faced by the Group, to set appropriate risk limits and
controls and to monitor risks and ensure any limits are adhered to.
The Group’s activities are reviewed regularly and potential risks
are considered.
Risk factors
The
Group has exposure to the following risks from its use of financial
instruments:
• credit
risk;
• liquidity
risk; and
• market
risk (including foreign exchange risk, interest rate risk and other
price risk).
Principal financial instruments
The
principal financial instruments used by the Group, from which
financial instrument risk arises, are as follows:
• SME
loans;
• investments
in trusts and co-investments;
• lines
of credit;
• trade
and other receivables;
• cash
and cash equivalents;
• trade
and other payables;
• bank
borrowings;
• bonds;
• lease
liabilities; and
• loan
repurchase liabilities.
Categorisation of financial assets and financial
liabilities
The
tables show the carrying amounts of financial assets and financial
liabilities by category of financial instrument as at
31 December
2023:
|
Assets
|
Fair
value through
profit and loss
£m
|
Amortised
cost
£m
|
Other
£m
|
Total
£m
|
|
SME
loans (other)
|
0.9
|
6.7
|
—
|
7.6
|
|
SME
loans (warehouse)
|
1.3
|
—
|
—
|
1.3
|
|
SME
loans (securitised)
|
16.4
|
—
|
—
|
16.4
|
|
Lines of
credit
|
—
|
50.0
|
—
|
50.0
|
|
Investment
in trusts and co-investments
|
25.2
|
—
|
—
|
25.2
|
|
Trade
and other receivables
|
0.8
|
15.8
|
—
|
16.6
|
|
Cash and
cash equivalents
|
150.1
|
71.3
|
—
|
221.4
|
|
|
194.7
|
143.8
|
—
|
338.5
|
|
Liabilities
|
Fair
value through
profit and loss
£m
|
Amortised
cost
£m
|
Other
£m
|
Total
£m
|
|
Trade
and other payables
|
—
|
(35.0)
|
—
|
(35.0)
|
|
Loan
repurchase liability
|
—
|
—
|
(0.1)
|
(0.1)
|
|
Bank
borrowings
|
—
|
(56.9)
|
—
|
(56.9)
|
|
Bonds
|
—
|
—
|
—
|
—
|
|
Lease
liabilities
|
—
|
(12.6)
|
—
|
(12.6)
|
|
|
—
|
(104.5)
|
(0.1)
|
(104.6)
|
The
tables show the carrying amounts of financial assets and financial
liabilities by category of financial instrument as at
31 December
2022:
|
Assets
|
Fair
value
through
profit
and loss
£m
|
Amortised
cost
£m
|
Other
£m
|
Total
£m
|
|
SME
loans (other)
|
20.9
|
24.8
|
—
|
45.7
|
|
SME
loans (warehouse)
|
2.4
|
—
|
—
|
2.4
|
|
SME
loans (securitised)
|
45.8
|
—
|
—
|
45.8
|
|
Lines of
credit
|
—
|
16.0
|
—
|
16.0
|
|
Investment
in trusts and co-investments
|
28.7
|
—
|
—
|
28.7
|
|
Trade
and other receivables
|
—
|
16.2
|
—
|
16.2
|
|
Cash and
cash equivalents
|
121.6
|
56.1
|
—
|
177.7
|
|
|
219.4
|
113.1
|
—
|
332.5
|
|
Liabilities
|
Fair
value
through
profit
and loss
£m
|
Amortised
cost
£m
|
Other
£m
|
Total
£m
|
|
Trade
and other payables
|
—
|
(12.2)
|
—
|
(12.2)
|
|
Loan
repurchase liability
|
—
|
—
|
(0.5)
|
(0.5)
|
|
Bank
borrowings
|
—
|
(22.6)
|
—
|
(22.6)
|
|
Bonds
|
—
|
(23.7)
|
—
|
(23.7)
|
|
Lease
liabilities
|
—
|
(19.8)
|
—
|
(19.8)
|
|
|
—
|
(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), FlexiPay lines of credit, bank
borrowings, lease liabilities, certain 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.
Bank
borrowings consist of drawn amounts in the US of $2.8 million
(2022: $27.3 million) on the PPP Liquidity Facility available from
the Federal Reserve Bank at a fixed interest rate of 0.35%. They
also comprise the drawn balance on a committed lending facility in
the FlexiPay warehouse of £54.7 million (2022: £nil) at a floating
rate of interest based on SONIA plus a margin.
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:
• level
1 inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities that the entity can access at the
measurement date;
• level
2 inputs are inputs other than quoted prices included within level
1 that are observable for the assets or liabilities, either
directly or indirectly; and
• level
3 inputs are unobservable inputs for the assets or
liabilities.
The fair
value of financial instruments that are not traded in an active
market (for example, investments in 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. If one or more of the
significant inputs are not based on observable market data, the
instrument is included in level 3. An assessment that the level
applied to financial instruments is appropriate and whether a
transfer between levels is required is undertaken at the end of
each accounting period. There were no transfers between levels
during the year or prior year.
The
Finance department of the Group performs the valuations of items
required for financial reporting purposes, including level 3 fair
values. This team reports to the Chief Financial Officer (“CFO”).
Discussions of valuation processes and results are held regularly
at Balance Sheet Management and Investment Valuation Committees
along with regular updates provided to the Audit Committee.
|
|
Fair value measurement using
|
|
31 December 2023
|
Quoted prices
in active
markets
(level 1)
£m
|
Significant
observable
inputs
(level 2)
£m
|
Significant
unobservable
inputs
(level 3)
£m
|
Total
£m
|
|
Financial assets
|
|
|
|
|
|
SME
loans (warehouse)
|
—
|
—
|
1.3
|
1.3
|
|
SME
loans (securitised)
|
—
|
—
|
16.4
|
16.4
|
|
SME
loans (other)
|
—
|
—
|
0.9
|
0.9
|
|
Trade
and other receivables
|
0.8
|
—
|
—
|
0.8
|
|
Investment
in trusts and co-investments
|
—
|
—
|
25.2
|
25.2
|
|
Cash and
cash equivalents
|
150.1
|
—
|
—
|
150.1
|
|
|
150.9
|
—
|
43.8
|
194.7
|
|
Financial liabilities
|
|
|
|
|
|
Bonds
|
—
|
—
|
—
|
—
|
|
|
—
|
—
|
—
|
—
|
|
|
Fair
value measurement using
|
|
31
December 2022
|
Quoted
prices
in
active
markets
(level
1)
£m
|
Significant
observable
inputs
(level
2)
£m
|
Significant
unobservable
inputs
(level
3)
£m
|
Total
£m
|
|
Financial assets
|
|
|
|
|
|
SME
loans (warehouse)
|
—
|
—
|
2.4
|
2.4
|
|
SME
loans (securitised)
|
—
|
—
|
45.8
|
45.8
|
|
SME
loans (other)
|
—
|
—
|
20.9
|
20.9
|
|
Investment
in trusts and co-investments
|
—
|
—
|
28.7
|
28.7
|
|
Cash and
cash equivalents
|
121.6
|
—
|
—
|
121.6
|
|
|
121.6
|
—
|
97.8
|
219.4
|
|
Financial liabilities
|
|
|
|
|
|
Bonds
|
—
|
—
|
—
|
—
|
|
|
—
|
—
|
—
|
—
|
The fair
value of all SME loans held at fair value has 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 £1.3 million
at 31 December 2023 (2022: £2.4 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 £16.4 million at 31 December 2023 (2022: £45.8
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
£25.2 million at 31 December 2023 (2022: £28.7 million).
The fair
value of SME loans (other) represents loan assets temporarily
funded by the Group in relation to the commercial loans. The
estimated fair value and carrying amount of the SME loans (other)
was £0.9 million (2022: £20.9 million).
The most
relevant significant unobservable inputs relate to the default rate
estimate and discount rates applied to the fair value calculation.
However, it was determined that the reasonably possible range of
outcomes from these inputs into the estimates are not material to
the accounts.
Since 31
December 2022, the assumptions related to estimating fair value
have been revised. The expected increases in defaults due to the
macro environment of inflationary cost pressures experienced by
small businesses and their customers in the year did not
materialise to the extent expected as base rates peaked and
plateaued and borrowers remained resilient. This has led to
favourable observed performance with lower defaults and stable
recoveries relative to expectations on many of the portfolios
particularly the legacy SME loans (securitised) in the
US.
The
expectation of a macro stress is now expected to occur later and
grow at a slower pace, with a more marked impact in the UK from
forward looking assumption changes than in the
US.
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.
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 certain of these
structures which were not hedged. 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 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.
RLS and
certain commercial loans which the Group holds through investments
in trusts, have additionally underperformed against expectations,
even relative to un-stressed assumptions.
A
revision to the underlying performance assumptions of this cohort
of loans partially offset the favourable performance of CBILS loans
and the favourable changes in UK macro assumptions.
There
has additionally been increases in discount rates used to discount
the estimated cash flows in the year, 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.
The
result of the various factors outlined above is an £8.7 million net
fair value gain during the year primarily driven by favourable
performance of legacy securitisation loans relative to expectations
of stressed performance over the year, however as these loans
continue to amortise they are expected to become less sensitive to
estimation uncertainty.
Sensitivities
to unobservable assumptions in the valuation of SME loans and money
market funds within cash and cash equivalents are not disclosed as
reasonably possible changes in the current assumptions inclusive of
default rates, discount rates and recovery rates would not be
expected to result in material changes in the carrying
values.
Fair
value movements on SME loans (warehouse), SME loans (securitised),
SME loans (other), investments in trusts and bonds (unrated) are
recognised through the profit and loss account in fair value
gains/(losses).
A
reconciliation of the movement in level 3 financial instruments is
shown as follows:
|
|
SME
loans
(warehouse)
£m
|
SME
loans
(securitised)
£m
|
Bonds
(unrated)
£m
|
Investment
in
trusts and
co-investments
£m
|
SME
loans
(other)
£m
|
|
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
gain/(loss) on the change in fair value of financial instruments at
fair value through profit and loss
|
2.0
|
14.7
|
(3.5)
|
(7.0)
|
(1.4)
|
|
Foreign
exchange gain
|
—
|
9.3
|
—
|
0.2
|
0.5
|
|
At 31
December 2022
|
2.4
|
45.8
|
—
|
28.7
|
20.9
|
|
Additions
|
—
|
—
|
—
|
1.8
|
11.9
|
|
Repayments
|
(2.0)
|
(35.0)
|
—
|
(6.6)
|
(0.6)
|
|
Disposal
|
—
|
—
|
—
|
—
|
(30.4)
|
|
Net
gain/(loss) on the change in fair value of financial instruments at
fair value through profit and loss
|
1.0
|
6.8
|
—
|
1.3
|
(0.4)
|
|
Foreign
exchange loss
|
(0.1)
|
(1.2)
|
—
|
—
|
(0.5)
|
|
At 31 December 2023
|
1.3
|
16.4
|
—
|
25.2
|
0.9
|
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:
|
|
31 December
2023
£m
|
31
December
2022
£m
|
|
Non-current
|
|
|
|
SME
loans (other)
|
6.7
|
24.8
|
|
Investment
in trusts and co-investments
|
25.2
|
28.7
|
|
Trade
and other receivables:
|
|
|
|
– Other
receivables
|
1.4
|
3.4
|
|
Current
|
|
|
|
Lines of
credit
|
50.0
|
16.0
|
|
SME
loans (other)
|
0.9
|
20.9
|
|
SME
loans (warehouse)
|
1.3
|
2.4
|
|
SME
loans (securitised)
|
16.4
|
45.8
|
|
Trade
and other receivables:
|
|
|
|
– Trade
receivables
|
0.4
|
0.4
|
|
– Other
receivables
|
7.3
|
5.3
|
|
–
Accrued income
|
5.3
|
4.8
|
|
– Rent
and other deposits
|
2.2
|
2.3
|
|
Cash and
cash equivalents
|
221.4
|
177.7
|
|
Total
gross credit risk exposure
|
338.5
|
332.5
|
|
Less
bank borrowings and bond liabilities1
|
(56.9)
|
(46.3)
|
|
Total
net credit risk exposure
|
281.6
|
286.2
|
1. Included
within bank borrowings are £2.2 million (2022: £22.6 million) in
relation to draw downs on the PPPLF and £54.7 million related to
the FlexiPay warehouse.
In
addition, the Group is subject to financial guarantees it has
issued to buy back loans. The Group’s maximum exposure to credit
risk on financial guarantees were every eligible loan required to
be bought back would be £0.4 million (2022: £2.8
million).
An
expected credit loss allowance related to undrawn lines of credit
on the FlexiPay product of £1.4 million (2022: £0.3 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 £157.3 million (2022: £41.6
million).
SME
loans (warehouse) and SME loans (securitised) relate to the
underlying pool of SME loans from the legacy warehouses and SPVs
that 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.
SME
loans (other) includes £0.9 million (2022: £20.9 million) loans
originated by the Group with the intention of selling onwards,
which are held at FVTPL and are therefore disclosed as
current.
Under
IFRS 9, the Group is required to provide for loans measured at
amortised cost under the expected credit loss (“ECL”) model. The
impairment related to each loan is based on the ECLs associated
with the probability of default of that loan in the next 12 months
unless there has been a significant increase in credit risk of that
loan since origination. The Group assumes there has been a
significant increase in credit risk if outstanding amounts on the
loan investment exceed 30 days, in line with the rebuttable
presumption per IFRS 9.
The
Group defines a default, classified within non-performing, as a
loan investment with any outstanding amounts exceeding
a 90-day
due date, which reflects the point at which the loan is considered
to be credit impaired. In some circumstances where loans are bought
back by the Group, the financial asset associated with the purchase
meets the definition of purchased or originated credit impaired
(“POCI”); this element of the impairment is therefore based on
lifetime ECLs.
Lines of
credit utilises the same default definition and probability of
default under IFRS 9, however, they are assessed based on 12-month
probability of default at the overall available line of credit
level, estimating the expected utilisation of the line of credit
at the
estimated point of default.
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.
Lines of
credit comprises £50.0 million (2022: £16.0 million) of drawn
amounts through the FlexiPay product net of expected credit loss
impairment.
The
gross principal value of SME loans (other) is £21.4 million (2022:
£39.6 million) and drawn lines of credit held at amortised cost is
£55.4 million (2022: £17.6 million), totalling £76.8 million (2022:
£57.2 million), and an allowance for expected credit losses of
£14.7 million (2022: £14.8 million) and £5.4 million (2022: £1.6
million) respectively, totalling £20.1 million (2022: £16.4
million), is held against these loans and drawn lines of credit as
detailed below.
An
impairment charge of £3.3 million (2022: impairment credit of £0.9
million) was recognised through the statement of comprehensive
income in the year to 31 December 2023 within (provision)/credit
for expected credit losses in the income statement related to drawn
lines of credit and SME loans (other).
Additionally,
an expected credit loss impairment charge was recognised relating
to undrawn FlexiPay lines of credit of £1.1 million (31 December
2022: £0.3 million) and an expected credit loss impairment of £nil
(31 December 2022: credit of £0.9 million) related to the loan
repurchase liability were recognised.
The Group
bands each loan investment at origination using an internal risk
rating and assesses credit losses on a collective portfolio basis
by product. Credit risk grades are not reported to management on an
ongoing basis and the only borrower specific information that is
produced and used is past due status. There is no significant
concentration of credit risk to specific industries or geographical
regions.
|
|
Performing:
12-month
ECL
£m
|
Underperforming:
Lifetime
ECL
£m
|
Non-performing:
Lifetime
ECL
£m
|
POCI:
Lifetime
ECL
£m
|
Total
£m
|
|
At 1
January 2022
|
0.6
|
0.3
|
1.1
|
13.3
|
15.3
|
|
Impairment
against new lending and purchased assets
|
0.1
|
—
|
—
|
1.1
|
1.2
|
|
Exchange
differences
|
0.1
|
—
|
0.1
|
1.0
|
1.2
|
|
Impairment
against loans transferred from/(to) performing
|
(0.1)
|
0.3
|
0.3
|
—
|
0.5
|
|
Loans
repaid
|
(0.3)
|
(0.3)
|
(0.5)
|
(1.2)
|
(2.3)
|
|
Change
in probability of default or loss given default
assumptions
|
0.7
|
—
|
(0.1)
|
(0.1)
|
0.5
|
|
At 31
December 2022
|
1.1
|
0.3
|
0.9
|
14.1
|
16.4
|
|
Impairment
against new lending and purchased assets
|
12.6
|
0.1
|
0.1
|
0.6
|
13.4
|
|
Exchange
differences
|
—
|
—
|
—
|
(0.5)
|
(0.5)
|
|
Impairment
against loans transferred from/(to) performing
|
(0.3)
|
0.5
|
2.5
|
—
|
2.7
|
|
Loans
repaid
|
(10.5)
|
—
|
(0.2)
|
(0.9)
|
(11.6)
|
|
Change
in probability of default or loss given default
assumptions
|
(1.3)
|
0.1
|
0.4
|
0.5
|
(0.3)
|
|
At 31 December 2023
|
1.6
|
1.0
|
3.7
|
13.8
|
20.1
|
|
|
Expected
credit
loss
coverage
%
|
Basis
for
recognition
of
expected
credit
loss
impairment
|
Gross
lines
of
credit and
SME
loans (other)
£m
|
Provision
for
expected
credit
loss
£m
|
Net
carrying
amount
£m
|
|
As at 31 December 2022
|
|
|
|
|
|
|
Performing
(due in 30 days or less)
|
2.7
|
12 month
ECL
|
39.2
|
(1.1)
|
38.1
|
|
Underperforming
(31–90 days overdue)
|
36.5
|
Lifetime
ECL
|
0.7
|
(0.3)
|
0.4
|
|
Non-performing
(90+ days overdue)
|
43.1
|
Lifetime
ECL
|
2.3
|
(0.9)
|
1.4
|
|
POCI
(90+ days overdue)
|
94.2
|
Lifetime
ECL
|
15.0
|
(14.1)
|
0.9
|
|
|
|
Total
|
57.2
|
(16.4)
|
40.8
|
|
As at 31 December 2023
|
|
|
|
|
|
|
Performing
(due in 30 days or less)
|
2.9
|
12 month
ECL
|
55.8
|
(1.6)
|
54.2
|
|
Underperforming
(31–90 days overdue)
|
50.0
|
Lifetime
ECL
|
2.0
|
(1.0)
|
1.0
|
|
Non-performing
(90+ days overdue)
|
86.0
|
Lifetime
ECL
|
4.3
|
(3.7)
|
0.6
|
|
POCI
(90+ days overdue)
|
93.9
|
Lifetime
ECL
|
14.7
|
(13.8)
|
0.9
|
|
|
|
Total
|
76.8
|
(20.1)
|
56.7
|
|
Of which is FlexiPay drawn lines of credit
|
Expected
credit
loss
coverage
%
|
Basis
for
recognition
of
expected
credit
loss
impairment
|
Gross
lines
of
credit
£m
|
Provision
for
expected
credit
loss
£m
|
Net
carrying
amount
£m
|
|
As at 31 December 2022
|
|
|
|
|
|
|
Performing
(due in 30 days or less)
|
5.3
|
12 month
ECL
|
16.5
|
(0.8)
|
15.7
|
|
Underperforming
(31–90 days overdue)
|
48.4
|
Lifetime
ECL
|
0.5
|
(0.3)
|
0.2
|
|
Non-performing
(90+ days overdue)
|
85.0
|
Lifetime
ECL
|
0.6
|
(0.5)
|
0.1
|
|
POCI
(90+ days overdue)
|
—
|
Lifetime
ECL
|
—
|
—
|
—
|
|
|
|
Total
|
17.6
|
(1.6)
|
16.0
|
|
As at 31 December 2023
|
|
|
|
|
|
|
Performing
(due in 30 days or less)
|
2.8
|
12 month
ECL
|
50.3
|
(1.4)
|
48.9
|
|
Underperforming
(31–90 days overdue)
|
52.6
|
Lifetime
ECL
|
1.9
|
(1.0)
|
0.9
|
|
Non-performing
(90+ days overdue)
|
93.8
|
Lifetime
ECL
|
3.2
|
(3.0)
|
0.2
|
|
POCI
(90+ days overdue)
|
—
|
Lifetime
ECL
|
—
|
—
|
—
|
|
|
|
Total
|
55.4
|
(5.4)
|
50.0
|
The risk
and finance functions of the Group monitor the performance of the
FlexiPay Lines of credit and SME loans (other) and calculate the
ECL estimate required for financial reporting purposes. These teams
report to the Chief Financial Officer (“CFO”) and Chief Risk
Officer (“CRO”). Discussions of estimates, processes and results
are held regularly at Balance Sheet Management and Investment
Valuation Committees along with regular updates provided to the
Audit Committee.
The
percentages above are a calculation based on the Group’s past
experience of delinquencies and loss trends, as well as
forward-looking information in the form of macroeconomic scenarios
governed by an impairment committee, which considers macroeconomic
forecasts such as changes in interest rates, GDP and inflation
which are incorporated into scenarios and probability
weighted.
Estimation
is required in assessing individual loans and when applying
statistical models for collective assessments, using historical
trends from past performance as well as forward-looking information
including macroeconomic forecasts in each market together with the
impact on loan defaults.
Trade
receivables represent the 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 expected
credit losses is recorded in the 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.
Individual
risk limits for banks and financial institutions are set by the
Group with reference to external rating agencies. The Group’s
treasury policy has set limits and quantities that the Group must
remain within. No credit or counterparty limits were exceeded
during the year. The Group’s cash and cash equivalents split by
S&P counterparty rating were A/A- rated: £71.3 million (2022:
£56.2 million), A+ or better rated: £150.1 million (2022: £121.5
million) and below A- rated: £nil (2022: £nil).
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 £0.8 million was recognised in the year ended 31
December 2023 (31 December 2022: £nil). The impairment is disclosed
in the condensed consolidated statement of comprehensive income
within depreciation, amortisation and impairment.
14. Notes to the consolidated statement of cash flows
Cash outflow from operating activities
|
|
31 December
2023
£m
|
31
December
2022
(re-presented)1
£m
|
|
Loss
before taxation
|
(33.2)
|
(12.9)
|
|
Adjustments for:
|
|
|
|
Depreciation
of property, plant and equipment
|
4.3
|
5.1
|
|
Amortisation
of intangible assets
|
12.4
|
10.1
|
|
Impairment
of ROU assets, tangible and intangible assets and investment in
sublease
|
6.2
|
1.8
|
|
Interest
payable
|
0.6
|
0.9
|
|
Non-cash
employee benefits expense – share-based payments and associated
social security costs
|
5.6
|
4.7
|
|
Fair
value losses/(gains)
|
(8.7)
|
(4.8)
|
|
Movement
in restructuring provision
|
—
|
(0.2)
|
|
Movement
in loan repurchase liability
|
(0.4)
|
(1.8)
|
|
Movement
in other provisions
|
0.9
|
(0.1)
|
|
Share of
gains of associates
|
(0.1)
|
(0.4)
|
|
Other
non-cash movements
|
5.1
|
1.4
|
|
Changes in working capital
|
|
|
|
Movement
in trade and other receivables
|
(13.5)
|
8.8
|
|
Movement
in trade and other payables
|
34.7
|
(3.7)
|
|
Tax
paid
|
(0.6)
|
(1.0)
|
|
Originations
of lines of credit
|
(230.4)
|
(59.6)
|
|
Cash
receipts from lines of credit
|
191.5
|
43.6
|
|
Net cash
outflow from operating activities
|
(25.6)
|
(8.1)
|
1. The
comparative year to 31 December 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.
Cash and cash equivalents
|
|
31 December
2023
£m
|
31
December
2022
£m
|
|
Cash and
cash equivalents
|
221.4
|
177.7
|
The cash
and cash equivalents balance is made up of cash and money market
funds. The carrying amount of these assets is approximately equal
to their fair value. Included within cash and cash equivalents
above is a total of £51.8 million (2022: £12.1 million) in cash
which is restricted in use. Of this, £1.1 million (2022: £1.1
million) is restricted in use in the event of rental payment
defaults and cash held in the securitisation SPVs of £nil (2022:
£2.9 million) which has been collected for on-payment to bond
holders and is therefore restricted in its use. £31.1 million
(2022: £8.1 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. A further £19.6 million (2022: £nil) of
cash is held which is restricted for use in the FlexiPay
warehouse.
At 31
December 2023, money market funds totalled £150.1 million (2022:
£121.6 million).
The
group holds money on behalf of customers (client monies) in
accordance with local regulatory rules. Since the group is not
beneficially entitled to these amounts, they are excluded from the
consolidated balance sheet and consolidated cash flow
statement.
Analysis of changes in liabilities from financing
activities
|
|
1
January
2022
£m
|
Cash
flow
£m
|
Exchange
movements
£m
|
Other
non-cash
movements
£m
|
31
December
2022
£m
|
|
Bank
borrowings
|
(73.2)
|
57.9
|
(7.3)
|
—
|
(22.6)
|
|
Bonds
|
(140.3)
|
129.1
|
(8.1)
|
(4.4)
|
(23.7)
|
|
Lease
liabilities
|
(23.9)
|
7.3
|
(1.6)
|
(1.6)
|
(19.8)
|
|
Liabilities from financing activities
|
(237.4)
|
194.3
|
(17.0)
|
(6.0)
|
(66.1)
|
|
|
1 January
2023
£m
|
Cash flow
£m
|
Exchange
movements
£m
|
Other non-cash
movements
£m
|
31 December
2023
£m
|
|
Bank
borrowings
|
(22.6)
|
(34.9)
|
0.6
|
—
|
(56.9)
|
|
Bonds
|
(23.7)
|
23.4
|
0.6
|
(0.3)
|
—
|
|
Lease
liabilities
|
(19.8)
|
7.2
|
0.6
|
(0.6)
|
(12.6)
|
|
Liabilities from financing activities
|
(66.1)
|
(4.3)
|
1.8
|
(0.9)
|
(69.5)
|
15. Subsequent events
At the year end date, the
Directors were considering the future direction of the US business.
Whilst the US continues to offer attractive growth, it will require
significant cash and capital under the SBA programme. Against this,
we have determined that a simpler, more profitable UK business will
deliver greater shareholder value with improved profitability and
cash generation.
We have now reached a point, in
March 2024, where we have announced our decision to focus on the UK
opportunity and that we are in discussion with third parties
regarding the US business. The financial impact of this is yet to
be quantified.
