Prepayments 28,935 28,935
28,935 28,935
10. LOANS ADVANCED
The Group's accounting policy on the measurement of financial assets is
discussed in note 2(g).
31 December 31 December
2019 2018
GBP GBP
UK
Residential, London 49,522,631 -
Hotel & Residential 39,861,178 34,532,132
Hospitals 25,354,300 25,346,479
Hotel, Scotland 25,861,391 -
Hotel, Oxford 16,724,638 -
Office, London 12,697,122 -
Office, Scotland 4,470,792 -
Mixed Use Development, South 766,877 14,927,500
East
Regional Hotel Portfolio - 46,752,485
Varde Partners Mixed Portfolio - 981,502
Ireland
Hotel, Dublin 51,576,017 54,458,838
Mixed Use, Dublin 592,335 -
School, Dublin - 17,319,861
Logistics, Dublin - 13,168,789
Student Accommodation, Dublin - 9,667,282
Residential, Dublin - 6,931,790
Spain
Three Shopping Centres 31,709,624 31,527,080
Hotel 25,225,534 23,394,315
Office Portfolio 18,050,874 -
Office and Hotel, Madrid 15,832,398 16,712,680
Shopping Centre 14,672,253 15,357,522
Hotel, Barcelona - 41,697,630
France
Office Building, Paris 13,854,691 14,653,866
Rest of Europe
Mixed Portfolio, Europe 43,874,861 -
Industrial Portfolio, Europe - 46,014,659
390,647,516 413,444,410
No element of loans advanced are past due or impaired. For further
information and the associated risks see the Investment Manager's Report.
The table below reconciles the movement of the carrying value of loans
advanced in the year:
31 December 2019 31 December 2018
GBP GBP
Loans advanced at the start of 413,444,410 369,955,983
the year
Loans advanced 189,678,726 175,161,798
Loan repayments and (198,311,623) (137,158,115)
amortisation
Arrangement fees earned (2,389,453) (2,396,173)
Commitment fees earned (688,884) (575,559)
Exit fees earned (1,983,925) (2,730,382)
Origination fees for the year 1,684,798 1,543,468
Effective interest income 26,890,182 30,137,174
earned(1)
Interest payments received / (25,738,458) (26,092,214)
accrued
Foreign exchange (losses) / (11,938,257) 5,598,430
gains
Loans advanced at the end of 390,647,516 413,444,410
the year
Loans advanced at fair value 402,825,998 426,379,370
(1) The decline in effective interest income earned is mainly due to overall
decrease of average interest rate of floating interest bearing loans.
For further information on the fair value of loans advanced, refer to note
18.
11. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Financial assets at fair value through profit or loss comprise currency
forward contracts which represent contractual obligations to purchase
domestic currency and sell foreign currency on a future date at a specified
price and financial instruments designated at fair value through profit or
loss which are debt securities that are managed by the Group and their
performance is evaluated on a fair value basis.
The underlying instruments of currency forwards become favourable (assets)
or unfavourable (liabilities) as a result of fluctuations of foreign
exchange rates relative to their terms. The aggregate contractual or
notional amount of derivative financial instruments, the extent to which
instruments are favourable or unfavourable, and thus the aggregate fair
values of derivative financial assets and liabilities, can fluctuate
significantly from time to time. The foreign exchange derivatives are
subject to offsetting, enforceable master netting agreements for each
counterparty.
The fair value of financial assets and liabilities at fair value through
profit or loss are set out below:
Notional Fair values
contract
31 December amount(1) Assets Liabilities Total
2019
GBP GBP GBP GBP
Investments at
fair value
through profit
or loss
Credit Linked N/A 21,885,611 - 21,885,611
Notes, UK Real
Estate
Total - 21,885,611 - 21,885,611
Foreign
exchange
derivatives
Currency
forwards:
Lloyds Bank plc 231,251,616 8,819,545 (224,467) 8,595,078
Total 231,251,616 8,819,545 (224,467) 8,595,078
(1) Euro amounts are translated at the year end exchange rate
Notional Fair values
contract
31 December 2018 amount(1) Assets Liabilities Total
GBP GBP GBP GBP
Investments at
fair value
through profit
or loss
Credit Linked N/A 21,886,335 - 21,886,335
Notes, UK Real
Estate
Total - 21,886,335 - 21,886,335
Foreign exchange
derivatives
Currency
forwards:
Lloyds Bank plc 263,815,899 50,055 (8,803,266) (8,753,211
)
Goldman Sachs 959,174 - (28,221) (28,221)
Total 264,775,073 50,055 (8,831,487) (8,781,432
)
(1) Euro amounts are translated at the year end exchange rate
12. CREDIT FACILITIES
Under its investment policy, the Group is limited to borrowing an amount
equivalent to a maximum of 30 per cent of its NAV at the time of drawdown,
of which a maximum of 20 per cent can be longer term borrowings. In
calculating the Company's borrowings for this purpose, any liabilities
incurred under the Company's foreign exchange hedging arrangements shall be
disregarded. The Group has two credit facilities as described in note 3(g)
of these financial statements.
As at 31 December 2019 an amount of GBP29,704,000 (2018: GBP68,818,554) was
drawn and interest of GBP14,949 (2018: GBP158,660) was payable.
The revolving credit facility capitalised costs are directly attributable
costs incurred in relation to the establishment of the credit loan
facilities.
The changes in liabilities arising from financing activities are shown in
the table below.
31 December 2019 31 December 2018
GBP GBP
Borrowings at the start of the 68,977,214 13,338,329
year
Proceeds during the year 148,035,219 129,979,408
Repayments during the year (185,401,045) (75,603,281)
Arrangement fees payable - 432,738
Arrangement fees retained - (432,738)
Interest expenses recognised 1,003,580 1,074,308
for the year
Interest paid during the year (1,137,413) (924,480)
Foreign exchange and (1,758,606) 1,112,930
translation difference
Borrowings at the end of the 29,718,949 68,977,214
year
13. TRADE AND OTHER PAYABLES
31 December 2019 31 December 2018
GBP GBP
Loan amounts payable 1,717,003 405,855
Investment management fees 801,074 723,652
payable
Refinancing and restructuring 207,098 239,081
fees payable
Commitment fees payable 104,055 82,900
Audit fees payable 86,131 95,943
Tax provision 76,773 64,401
Origination fees payable 31,572 309,375
Administration fees payable 12,980 74,360
Accrued expenses - 60,196
Legal and professional fees - 12,475
payable
3,036,686 2,068,238
14. COMMITMENTS
As at 31 December 2019 the Group had outstanding commitments in respect of
loans not fully drawn of GBP77,997,899 (2018: GBP45,572,999).
As at 31 December 2019 the Group has entered into forward contracts under
the Hedging Master Agreement with Lloyds Bank plc to sell &euro270,913,327
(2018: &euro292,511,253) to receive Sterling. At the end of the reporting
period, these forward contracts have a fair value of GBP8,595,078 asset (2018:
GBP8,753,211 liability).
As at 31 December 2019 the Group has entered into forward contracts under
the Professional Client Agreement with Goldman Sachs to sell &euronil (2018:
&euro1,063,504) and receive Sterling. At the end of the reporting period,
these forward contracts have a fair value of GBPnil liability (2018: GBP28,221
liability).
15. SHARE CAPITAL
The share capital of the Company consists of an unlimited number of
redeemable Ordinary Shares of no par value which upon issue the Directors
may classify into such classes as they may determine. The Ordinary Shares
are redeemable at the discretion of the Board.
At the year end the Company had issued and fully paid up share capital as
follows:
31 December 2019 31 December 2018
Number of shares Number of shares
Ordinary Shares of no par 413,219,398 375,019,398
value Issued and fully paid
Rights attached to shares
The Company's share capital is denominated in Sterling. At any general
meeting of the Company each ordinary share carries one vote. The Ordinary
Shares also carry the right to receive all income of the Company
attributable to the Ordinary Shares, and to participate in any distribution
of such income made by the Company, such income shall be divided pari passu
among the holders of Ordinary Shares in proportion to the number of Ordinary
Shares held by them.
Significant share movements
1 January 2019 to 31 December 2019:
Ordinary Shares Number GBP
Balance at the start of the year 375,019,398 379,480,650
Shares issued in 2019 38,200,000 40,014,500
Balance at the end of the year 413,219,398 419,495,150
Issue costs since inception (8,289,989)
Net proceeds 411,205,161
1 January 2018 to 31 December 2018:
Ordinary Shares Number GBP
Balance at the start of the year 375,019,398 379,480,650
Shares issued in 2018 - -
Balance at the end of the year 375,019,398 379,480,650
Issue costs since inception (7,550,668)
Net proceeds 371,929,982
16. DIVIDS
Dividends will be declared by the Directors and paid in compliance with the
solvency test prescribed by Guernsey law. Under Guernsey law, companies can
pay dividends in excess of accounting profit provided they satisfy the
solvency test prescribed by the Companies (Guernsey) Law, 2008. The solvency
test considers whether a company is able to pay its debts when they fall
due, and whether the value of a company's assets is greater than its
liabilities. The Group passed the solvency test for each dividend paid.
Subject to market conditions, the financial position of the Group and the
investment outlook, it is the Directors' intention to pay quarterly
dividends to shareholders (for more information see Chairman's Statement).
The Group paid the following dividends in respect of the year to 31 December
2019:
Dividend rate Net dividend Payment date
per
Period to: Share (pence) paid (GBP)
31 March 2019 1.625 6,094,065 24 May 2019
30 June 2019 1.625 6,714,815 30 August 2019
30 September 2019 1.625 6,714,815 22 November
2019
After the end of the year, the Directors declared a dividend in respect of
the financial year ended 31 December 2019 of 1.625 pence per share,
GBP6,714,815 to be paid on 21 February 2020 to shareholders on the register as
at 31 January 2020.
The Group paid the following dividends in respect of the year to 31 December
2018:
Dividend rate Net dividend Payment date
per
Period to: Share (pence) paid (GBP)
31 March 2018 1.625 6,094,065 17 May 2018
30 June 2018 1.625 6,094,065 31 August 2018
30 September 2018 1.625 6,094,065 16 November
2018
31 December 2018 1.625 6,094,065 22 February
2019
17. RISK MANAGEMENT POLICIES AND PROCEDURES
The Group through its investment in whole loans, subordinated loans,
mezzanine loans, bridge loans, loan- on-loan financings and other debt
instruments is exposed to a variety of financial risks, including market
risk (including currency risk and interest rate risk), credit risk and
liquidity risk. The Group's overall risk management programme focuses on the
unpredictability of financial markets and seeks to minimise potential
adverse effects on the Group's financial performance.
It is the role of the Board to review and manage all risks associated with
the Group, mitigating these either directly or through the delegation of
certain responsibilities to the Audit Committee, Investment Manager and
Investment Adviser.
The Board of Directors has established procedures for monitoring and
controlling risk. The Group has investment guidelines that set out its
overall business strategies, its tolerance for risk and its general risk
management philosophy.
In addition, the Investment Manager monitors and measures the overall risk
bearing capacity in relation to the aggregate risk exposure across all risk
types and activities. Further details regarding these policies are set out
below:
a) Market risk
Market risk includes market price risk, currency risk and interest rate
risk.
i) Market price risk
If a borrower defaults on a loan and the real estate market enters a
downturn it could materially and adversely affect the value of the
collateral over which loans are secured. However, this risk is considered by
the Board to constitute credit risk as it relates to the borrower defaulting
on the loan and not directly to any movements in the real estate market. The
Group's exposure to market price risk arises from Credit Linked Notes held
by the Group and classified as financial assets at fair value through profit
or loss. The Investment Manager regularly monitors the fair value of Credit
Linked Notes and no specific hedging activities are undertaken in relation
to this investment. The Investment Manager moderates market risk through a
careful selection of loans within specified limits. The Group's overall
market position is monitored by the Investment Manager and is reviewed by
the Board of Directors on an ongoing basis.
ii) Currency risk
The Group, via the subsidiaries, operates across Europe and invests in loans
that are denominated in currencies other than the functional currency of the
Company. Consequently the Group is exposed to risks arising from foreign
exchange rate fluctuations in respect of these loans and other assets and
liabilities which relate to currency flows from revenues and expenses.
Exposure to foreign currency risk is hedged and monitored by the Investment
Manager on an ongoing basis and is reported to the Board accordingly.
The Group and Lloyds Bank plc entered into an international forward exchange
master agreement dated 5 April 2013 and on 7 February 2014 the Group entered
into a Professional Client Agreement with Goldman Sachs, pursuant to which
the parties can enter into foreign exchange transactions with the intention
of hedging against fluctuations in the exchange rate between Sterling and
other currencies. The Group does not trade in derivatives but holds them to
hedge specific exposures and have maturities designed to match the exposures
they are hedging. The derivatives are held at fair value which represents
the replacement cost of the instruments at the reporting date and movements
in the fair value are included in the Consolidated Statement of
Comprehensive Income under net foreign exchange losses/(gains). The Group
does not adopt hedge accounting in the financial statements. At the end of
the reporting period the Group had 113 (2018: 165) open forward contracts.
As at 31 December 2019 the Group had the following currency exposure:
Danish Krone Sterling Euro Total
31 December 2019 GBP GBP GBP GBP
Assets
Loans advanced - 125,736,29 264,911,21 390,647,51
8 8 6
Financial assets - 30,480,689 - 30,480,689
at fair value
through profit or
loss
Other receivables - 28,935 - 28,935
and prepayments
Cash and cash 671 6,566,136 30,226,867 36,793,674
equivalents
Liabilities
Revolving credit - - (29,718,94 (29,718,94
facility 9) 9)
Trade and other - (139,704) (2,896,982 (3,036,686
payables ) )
Net currency 671 162,672,35 262,522,15 425,195,17
exposure 4 4 9
Danish Sterling Euro Total
Krone
31 December 2018 GBP GBP GBP GBP
Assets
Loans advanced - 122,540,098 290,904,3 413,444,410
12
Financial assets - 21,886,335 - 21,886,335
at fair value
through profit or
loss
Other receivables - 28,935 - 28,935
and prepayments
Cash and cash (249) 13,953,085 14,295,67 28,248,515
equivalents 9
Liabilities
Financial - (8,781,432) - (8,781,432)
liabilities at
fair value
through profit or
loss
Revolving credit - (11,010,233) (57,966,9 (68,977,214
facility 81) )
Trade and other - (297,883) (1,770,35 (2,068,238)
payables 5)
Net currency (249) 138,318,905 245,462,6 383,781,311
exposure 55
Currency sensitivity analysis
Should the exchange rate of the Euro against Sterling increase or decrease
by 10 per cent with all other variables held constant, the net assets of the
Group at 31 December 2019 would increase or decrease by GBP26,252,215 (2018:
GBP24,546,266). Should the exchange rate of the Danish Krone against Sterling
increase or decrease by 10 per cent with all other variables held constant,
the net assets of the Group at 31 December 2019 would increase or decrease
by GBP67 (2018: GBP25). These percentages have been determined based on
potential volatility and deemed reasonable by the Directors. This does not
include the impact of hedges in place which would be expected to reduce the
impact.
In accordance with the Group's policy, the Investment Manager monitors the
Group's currency position, and the Board of Directors reviews this risk on a
regular basis.
iii) Interest rate risk
Interest rate risk is the risk that the value of financial instruments and
related income from loans advanced and cash and cash equivalents will
fluctuate due to changes in market interest rates.
The majority of the Group's financial assets are loans advanced at amortised
cost, credit linked notes, receivables and cash and cash equivalents. The
Group's investments have some exposure to interest rate risk but this is
limited to interest earned on cash deposits and floating interbank rate
exposure for investments designated as loans advanced. Loans advanced have
been structured to include a combination of fixed and floating interest and
79.1% (2018: 80.1%) of investments designed as loans advanced at 31 December
2019 have a floating interbank interest rate. The interest rate risk is
mitigated by the inclusion of interbank rate floors on floating rate loans,
preventing interest rates from falling below certain levels.
The following table shows the portfolio profile of the financial assets at
31 December 2019:
31 December 2019 31 December 2018
GBP GBP
Floating rate
Loans advanced(1) 309,007,305 327,185,839
Cash and cash equivalents 36,793,674 28,248,515
Financial assets at fair value 21,885,611 21,886,335
through profit or loss
Fixed rate
Loans advanced 81,640,211 86,258,571
Total financial assets subject 449,326,801 463,579,260
to interest rate risk
(1) Loans advanced at floating rates include loans with interbank rate
floors.
At 31 December 2019, if interest rates had changed by 50 basis points, with
all other variables remaining constant, the effect on the net profit and
equity would have been as shown in the table below:
31 December 2019 31 December 2018
GBP GBP
Floating rate
Increase of 50 basis points 1,838,433 943,302
(2018: 25 basis points)(1)
Decrease of 50 basis points (1,838,433) (943,302)
(2018: 25 basis points)
(1) Loans advanced at floating rates include loans with interbank rate
floors.
These percentages have been determined based on potential volatility and
deemed reasonable by the Directors.
b) Credit risk
Credit risk is the risk that a counterparty will be unable to pay amounts in
full when due. The Group's main credit risk exposure is in the investment
portfolio, shown as loans advanced at amortised cost and credit linked notes
designated at fair value through profit or loss, where the Group invests in
whole loans and also subordinated and mezzanine debt which rank behind
senior debt for repayment in the event that a borrower defaults. There is a
spread concentration of risk as at 31 December 2019 due to several loans
being advanced since inception. There is also credit risk in respect of
other financial assets as a portion of the Group's assets are cash and cash
equivalents or accrued interest. The banks used to hold cash and cash
equivalents have been diversified to spread the credit risk to which the
Group is exposed. The Group also has credit risk exposure in its derivative
assets classified as financial assets through profit or loss which is
diversified between hedge providers in order to spread credit risk to which
the Group is exposed.
With respect to the credit linked notes designated at fair value through
profit or loss, the Group holds junior notes linked to the performance of a
portfolio of high quality UK real estate loans owned by a major commercial
bank. The transaction is structured as a synthetic securitisation with risk
transfer from the bank to the Group achieved via the purchase of credit
protection by the bank on the most junior tranches. The credit risk to the
Group is the risk that one of the underlying borrowers defaults on their
loan and the Group is required to make a payment under the credit protection
agreement. Despite the different way in which the transaction has been
structured the Group considers the risks to be fundamentally the same as any
other junior loan in the portfolio and monitors and manages this risk in the
same way as the other loans advanced by the Group.
The total exposure to credit risk arises from default of the counterparty
and the carrying amounts of financial assets best represent the maximum
credit risk exposure at the year-end date. As at 31 December 2019, the
maximum credit risk exposure was GBP457,921,879 (2018: GBP463,579,260).
The Investment Manager has adopted procedures to reduce credit risk exposure
by conducting credit analysis of the counterparties, their business and
reputation which is monitored on an ongoing basis. After the advancing of a
loan a dedicated debt asset manager employed by the Investment Adviser
monitors ongoing credit risk and reports to the Investment Manager, with
quarterly updates also provided to the Board. The debt asset manager
routinely stresses and analyses the profile of the Group's underlying risk
in terms of exposure to significant tenants, performance of asset management
teams and property managers against specific milestones that are typically
agreed at the time of the original loan underwriting, forecasting headroom
against covenants, reviewing market data and forecast economic trends to
benchmark borrower performance and to assist in identifying potential future
stress points. Periodic physical inspections of assets that form part of the
Group's security are also completed in addition to monitoring the identified
capital expenditure requirements against actual borrower investment.
The Group measures credit risk and expected credit losses using probability
of default, exposure at default and loss given default. The Directors
consider both historical analysis and forward looking information in
determining any expected credit loss. The Directors consider the loss given
default to be close to zero as all loans are the subject of very detailed
underwriting, including the testing of resilience to aggressive downside
scenarios with respect to the loan specifics, the market and general macro
changes. As a result, no loss allowance has been recognised based on
12-month expected credit losses as any such impairment would be wholly
insignificant to the Group.
The Group uses both quantitative and qualitative criteria for monitoring the
loan portfolio as described in note 2(h). The gross carrying amount of loan
portfolio is presented in the table below and also represents the Group's
maximum exposure to credit risks on these assets.
Stage 1 Stage 2 Stage 3 Total as Total as at
at 31 December
31 2018
December
2019
GBP GBP GBP GBP GBP
Loans advanced 390,647,51 - - 390,647,51 413,444,410
6 6
Gross carrying 390,647,51 - - 390,647,51 413,444,410
amount 6 6
Less ECL - - - - -
allowance
Carrying 390,647,51 - - 390,647,51 413,444,410
amount 6 6
A reconciliation of changes in the ECL allowance was not presented as the
allowance recognised at the end of the reporting period was GBPnil (2018:
GBPnil).
The Group maintains its cash and cash equivalents across various different
banks to diversify credit risk which have been all rated A1 or higher by
Moody's and this is subject to the Group's credit risk monitoring policies
as mentioned above.
Total as at Total as at
31 December 2019 31 December 2018
GBP GBP
Barclays Bank plc 35,818,792 27,634,114
Lloyds Bank plc 818 816
HSBC Bank plc 331 424
Royal Bank of Scotland 81 88
International
ING Luxembourg, SA 973,652 613,073
Total cash and cash 36,793,674 28,248,515
equivalents
The carrying amount of cash and cash equivalents approximates their fair
value.
c) Liquidity risk
Liquidity risk is the risk that the Group will not have sufficient resources
available to meet its liabilities as they fall due. The Group's loans
advanced are illiquid and may be difficult or impossible to realise for cash
at short notice.
The Group manages its liquidity risk through short term and long term cash
flow forecasts to ensure it is able to meet its obligations. In addition,
the Company is permitted to borrow up to 30 per cent of NAV and has entered
into revolving credit facilities of total of GBP126,000,000 (2018:
GBP114,000,000) of which GBP29,704,000 (2018: GBP68,818,554) was drawn at the end
of the reporting period.
The table below shows the maturity of the Group's non-derivative financial
assets and liabilities arising from the advancement of loans by remaining
contractual maturities at the end of the reporting date. The amounts
disclosed under assets are contractual, undiscounted cash flows and may
differ from the actual cash flows received in the future as a result of
early repayments:
Up to 3 Between 3 and Over 12 Total
months 12 months months
31 December 2019 GBP GBP GBP GBP
Assets
Loans advanced 766,877 28,526,943 361,353,69 390,647,516
6
Financial assets - - 21,885,611 21,885,611
at fair value
through profit or
loss
Liabilities and
commitments
Loan (14,896,1 (31,183,758) (25,455,38 (71,535,294
commitments(1) 52) 4) )
Credit facilities (29,718,9 - - (29,718,949
49) )
Trade and other (3,036,68 - - (3,036,686)
payables 6)
(46,884,9 (2,656,815) 357,783,92 308,242,198
10) 3
(1) Loan commitments are estimated forecasted drawdowns at year end.
31 December 2018 Up to 3 Between 3 and Over 12 Total
months 12 months months GBP
GBP GBP GBP
Assets
Loans advanced - 22,840,793 390,603,61 413,444,410
7
Financial assets - - 21,886,335 21,886,335
at fair value
through profit or
loss
Liabilities and
commitments
Loan (13,300,3 (14,166,013) (15,091,63 (42,557,994
commitments(1) 50) 1) )
Credit facilities (13,663,1 - (55,314,05 (68,977,214
61) 3) )
Trade and other (2,068,23 (2,068,238)
payables 8)
(29,031,7 8,674,780 342,084,26 321,727,299
49) 8
(1) Loan commitments are estimated forecasted drawdowns at year end.
The table below analyses the Group's derivative financial instruments that
will be settled on a gross basis into relevant maturity groupings based on
the remaining period at the end of the reporting date. The amounts disclosed
are the contractual undiscounted cash flows:
31 December 2019
Between 3 and Over Total as at
Up to 3 12 months 12 months 31 December
months 2019
Derivatives GBP GBP GBP GBP
Lloyds Bank plc:
Foreign exchange
derivatives
Outflow(1) 2,753,44 7,160,751 221,337,422 231,251,615
2
Inflow 2,735,21 7,156,425 228,928,347 238,819,989
7
31 December 2018
Between 3 and Over Total as at
Up to 3 12 months 12 months 31 December
months 2018
Derivatives GBP GBP GBP GBP
Goldman Sachs:
Foreign exchange
derivatives
Outflow(1) - - 959,174 959,174
Inflow - - 991,632 991,632
Lloyds Bank plc:
Foreign exchange
derivatives
Outflow(1) 3,515,09 12,752,592 247,548,215 263,815,899
2
Inflow 3,505,93 12,824,551 257,003,592 273,334,080
7
(1) Euro amounts translated at year end exchange rate.
Capital management policies and procedures
The Group's capital management objectives are:
· To ensure that the Group will be able to continue as a going concern;
and
· To maximise the income and capital return to equity shareholders through
an appropriate balance of equity capital and long-term debt.
The capital of the Company is represented by the net assets attribute to the
holders of the Company's shares.
In accordance with the Group's investment policy, the Group's principal use
of cash (including the proceeds of the IPO and subsequent tap issues and
placings) has been to fund investments in the form of loans sourced by the
Investment Adviser and the Investment Manager, as well as initial expenses
related to the issue, ongoing operational expenses and payment of dividends
and other distributions to shareholders in accordance with the Company's
dividend policy.
The Board, with the assistance of the Investment Manager, monitors and
reviews the broad structure of the Company's capital on an ongoing basis.
The Company has no imposed capital requirements.
The Company's capital at the end of the reporting period comprises:
31 December 2019 31 December 2018
GBP GBP
Equity
Equity share capital 411,205,161 371,929,982
Retained earnings and 15,349,920 13,063,600
translation reserve
Total capital 426,555,081 384,993,582
18. FAIR VALUE MEASUREMENT
IFRS 13 requires the Group to classify fair value measurements using a fair
value hierarchy that reflects the significance of the inputs used in making
the measurements. The fair value hierarchy has the following levels:
a) Quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1).
b) Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as
prices) or indirectly (that is, derived from prices including interest
rates, yield curves, volatilities, prepayment rates, credit risks and
default rates) or other market corroborated inputs (level 2).
c) Inputs for the asset or liability that are not based on observable
market data (that is, unobservable inputs) (level 3).
The following table analyses within the fair value hierarchy the Group's
financial assets and liabilities (by class) measured at fair value:
31 December 2019
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Derivative assets - 8,595,078 - 8,595,078
Investments at fair - - 21,885,611 21,885,611
value through profit or
loss
Total - 8,595,078 21,885,611 30,480,689
Liabilities
Derivative liabilities - - - -
Total - - - -
31 December 2018
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Investments at fair - - 21,886,335 21,886,335
value through profit
or loss
Total - - 21,886,335 21,886,335
Liabilities
Derivative - (8,781,432) - (8,781,432)
liabilities
Total - (8,781,432) - (8,781,432)
There have been no transfers between levels for the year ended 31 December
2019 (2018: nil).
Investments classified within Level 3 consist of Credit Linked Notes
("CLNs"). The fair value of the CLNs is determined by the Investment Adviser
using a discounted cash flow valuation model. The main inputs into the
valuation model for the CLNs are discount rates, market risk factors,
probabilities of default, expected credit loss levels and cash flow
forecasts. The Investment Adviser also considers the original transaction
price and recent transactions of comparable instruments (where available),
the credit quality on the underlying reference portfolios and adjusts the
valuation model as deemed necessary.
The Directors are responsible for considering the methodology and
assumptions used by the Investment Adviser and for approving the fair values
reported at the financial period end.
The most significant input to the valuation model is the discount rate
applied to the cash flows. As at 31 December 2019, if the discount rate was
to increase/decrease by 1%, the fair value of the CLNs would reduce/increase
by GBP298,155 / GBP306,372 (2018: GBP474,000 / GBP494,000).
The table below presents the movement in level 3 investments.
31 December 2019 31 December 2018
GBP GBP
Balance at the start of the 21,886,335 22,112,820
year
Cash interest received (2,339,946) (2,245,256)
Net gains recognised in profit 2,339,222 2,018,771
or loss(1)
Balance at the end of the year 21,885,611 21,886,335
Changes in unrealised gains or - -
losses for Level 3 assets held
at year end and included in
net changes in fair value of
financial assets at fair value
through profit or loss
(1) The net gains comprise of GBP2,339,222 interest income recognised on CLNs
(2018: GBP2,306,921 of interest income net of GBP288,150 origination fees).
The following table summarises within the fair value hierarchy the Group's
assets and liabilities (by class) not measured at fair value at 31 December
2019 but for which fair value is disclosed:
31 December 2019
Total fair Total
carrying
Level 1 Level 2 Level 3 values amount
GBP GBP GBP GBP GBP
Assets
Cash and cash - 36,793,674 - 36,793,674 36,793,67
equivalents 4
Other - 28,935 - 28,935 28,935
receivables
and
prepayments
Loans advanced - - 402,825, 402,825,998 390,647,5
998 16
Total - 36,822,609 402,825, 439,648,607 427,470,1
998 25
Liabilities
Trade and - 3,036,686 - 3,036,686 3,036,686
other payables
Credit - 29,718,949 - 29,718,949 29,718,94
facility 9
Total - 32,755,635 - 32,755,635 32,755,63
5
The following table summarises within the fair value hierarchy the Group's
assets and liabilities (by class) not measured at fair value at 31 December
2018 but for which fair value is disclosed:
31 December 2018
Total fair Total
carrying
Level 1 Level 2 Level 3 values amount
GBP GBP GBP GBP GBP
Assets
Cash and cash - 28,248,515 - 28,248,515 28,248,51
equivalents 5
Other - 28,935 - 28,935 28,935
receivables
and
prepayments
Loans advanced - - 426,379, 426,379,370 413,444,4
370 10
Total - 28,277,450 426,379, 454,656,820 441,721,8
370 60
Liabilities
Trade and - 2,068,238 - 2,068,238 2,068,238
other payables
Credit - 68,977,214 - 68,977,214 68,977,21
facility 4
Total - 71,045,452 - 71,045,452 71,045,45
2
The carrying values of the assets and liabilities included in the above
table are considered to approximate their fair values, except for loans
advanced. The fair value of loans advanced has been determined by
discounting the expected cash flows at a market rate of interest using the
discounted cash flow model. For the avoidance of doubt, the Group carries
its loans advanced at amortised cost in the consolidated financial
statements, consistent with the requirement of IFRS 9 as the Group's
intention and business model is to collect both interest and the capital
repayments thereof.
Cash and cash equivalents include cash at hand and fixed deposits held with
banks. Other receivables and prepayments include the contractual amounts and
obligations due to the Group and consideration for advance payments made by
the Group. Credit facilities and trade and other payables represent the
contractual amounts and obligations due by the Group for contractual
payments.
19. CONTROLLING PARTY
In the opinion of the Directors, on the basis of the shareholdings advised
to them, the Company has no immediate or ultimate controlling party.
20. TAXATION
The Company is exempt from Guernsey taxation under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of GBP1,200.
The Luxembourg indirect subsidiaries of the Company are subject to the
applicable tax regulations in Luxembourg. The table below analyses the tax
charges incurred at Luxembourg level:
31 December 2019 31 December 2018
GBP GBP
Current tax
Tax expenses on profit of the 62,307 50,384
reporting period
Tax adjustments on profit of (395) 17,684
previous periods
Tax refund for previous (1,014) -
periods
Total current tax 60,898 68,068
The Luxco had no operating gains on ordinary activities before taxation and
were therefore for the year ended 31 December 2019 subject to the Luxembourg
minimum corporate income taxation at &euro4,815 (2018: &euro3,810). The
Luxco 3 and Luxco 4 are subject to Corporate Income Tax and Municipal
Business Tax based on a margin calculated on an arm's-length principle. The
effective tax rate in Luxembourg during the reporting period was 24.94%
(2018: 26.01%).
21. RECONCILIATION OF IFRS TO US GAAP
To meet the requirements of Rule 206(4)-2 under the Investment Advisors Act
1940 (the "Custody Rule") the consolidated financial statements of the Group
have also been audited in accordance with Generally Accepted Auditing
Standards applicable in the United States ("US GAAS"). As such two
independent Auditor's reports are included, one under International
Standards on Auditing as required by the Crown Dependencies Audit Rules and
the other under US GAAS. Compliance with the Custody Rule also requires a
reconciliation of the operating profit and net assets under IFRS to US GAAP.
The principal differences between IFRS and US GAAP relate to accounting for
financial assets that are carried at amortised cost. Under US GAAP the
calculation of the effective interest rate is based on contractual cash
flows over the asset's contractual life. International Financial Reporting
Standards, however, base the effective interest rate calculation on the
estimated cash flows over the expected life of the asset.
The Directors have assessed the operating profit and NAV of the Company and
Group under both IFRS and US GAAP and have concluded that no material
differences were identified and therefore no reconciliation has been
presented in these consolidated financial statements.
22. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to control
the other party or exercise significant influence over the other party in
making financial or operational decisions. Details on the Investment Manager
and other related party transactions are included in note 3 to the
consolidated financial statements.
The following tables summarise the transactions occurred with related
parties during the reporting period and outstanding at 31 December 2019 and
31 December 2018:
2019
Outstanding at For the year
ended
31 December 31 December 2019
2019
Fees, expenses and other GBP GBP
payments
Directors' fees and expenses
paid
Stephen Smith - 50,000
John Whittle - 45,000
Jonathan Bridel - 42,500
Expenses paid - 2,828
Investment Manager
Investment management fees 801,074 3,077,665
Origination fees 31,572 1,684,798
Expenses - 100,624
2018
Outstanding at For the year
ended
31 December 31 December 2018
2018
Fees, expenses and other GBP GBP
payments
Directors' fees and expenses
paid
Stephen Smith - 50,000
John Whittle - 45,000
Jonathan Bridel - 42,500
Expenses paid - 4,321
Investment Manager
Investment management fees 723,652 2,858,556
Origination fees 309,375 1,543,468
Expenses paid - 175,531
The following tables summarise the dividends paid to related parties during
the reporting period and number of Company's shares held by related parties
at 31 December 2019 and 31 December 2018:
2019
Dividends paid for As at
the year ended
31 December 2019
31 December 2019
Shareholdings and GBP Number of shares
dividends paid
Starwood Property Trust 594,100 9,140,000
Inc.
SCG Starfin Investor LP 148,525 2,285,000
Stephen Smith 5,130 78,929
John Whittle 771 11,866
Jonathan Bridel and 771 11,866
Spouse
2018
Dividends paid for As at
the year ended
31 December 2018
31 December 2018
Shareholdings and GBP Number of shares
dividends paid
Starwood Property Trust 594,100 9,140,000
Inc.
SCG Starfin Investor LP 148,525 2,285,000
Stephen Smith 5,130 78,929
John Whittle 771 11,866
Jonathan Bridel and 771 11,866
Spouse
Other
The Group continues to participate in a number of loans in which Starwood
Property Trust, Inc. ("STWD") acted as a co-lender. The details of these
loans are shown in the table below.
Loan Related party co-lenders
Hotel and Residential, UK STWD
Mixed Use Development, South East UK STWD
Hotel, Spain STWD
Credit Linked Notes, UK Real Estate STWD
Mixed Portfolio, Europe STWD
Office Portfolio, Spain STWD
Mixed Use, Ireland STWD
23. EVENTS AFTER THE REPORTING PERIOD
The following new investments have closed since the year end, up to the date
of publication of this report:
Local Currency
Office, Retail & Residential, Dublin &euro35,150,000
Hotel, North Berwick, Scotland GBP15,000,000
Hotel & Residential, UK GBP9,975,000
The following cash amounts have been funded since the year end up to the
date of publication of this report:
Local Currency
Hotel, Spain &euro8,073,256
Residential, London GBP1,547,853
Mixed Use, Dublin &euro1,091,164
Office, London GBP174,510
Office, Scotland GBP77,711
The following loan amortisation (both scheduled and unscheduled) has been
received since the year end up to the date of publication of this report:
Local Currency
Residential, London GBP11,534,596
Mixed Portfolio, Europe &euro12,096,659
Three Shopping Centres, Spain &euro167,344
Office Building, Paris totaling &euro16,000,000 and Mixed Use Development,
South East UK totaling GBP698,442 have been repaid in full since 31 December
2019.
Following the above activity the Company has repaid part of the revolving
credit facilities. At the date of publication of this report the amount
drawn under each facility are:
· Lloyds Facility: GBP24.06 million
· Morgan Stanley Facility: &euronil
On 23 January 2020 the Company declared a dividend of 1.625 pence per
Ordinary Share payable to shareholders on the register on 31 January 2020.
Management and the Board have considered the impact of COVID-19 on the
current and future operations of the Group and its portfolio of loans
advanced. Because of the cash and loan facilities available to the Group and
the underlying quality of the portfolio of loans advanced, both management
and the Board still believe the fundamentals of the portfolio remain
optimistic and that the Group can adequately support the portfolio of loans
advanced despite current market conditions. See further the comments in the
Chairman's statement.
As stated previously, the Company's share price in the early part of 2020
has been severely impacted by the general market volatility. In common with
the overall equity market, the Company's share price has fallen sharply and
continues to be volatile. These moves have been driven by market conditions
and flow rather than a change in the Company's NAV.
Further Information
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance Measures
("APMs") the Board has considered what APMs are included in the Annual
Financial Report and Audited Consolidated Financial Statements which require
further clarification. An APM is defined as a financial measure of
historical or future financial performance, financial position, or cash
flows, other than a financial measure defined or specified in the applicable
financial reporting framework. APMs included in the financial statements,
which are unaudited and outside the scope of IFRS, are deemed to be as
follows:
NAV PER ORDINARY SHARE
The NAV per Ordinary Share represents the net assets attributable to equity
shareholders divided by the number of Ordinary Shares in issue, excluding
any shares held in treasury. The NAV per Ordinary Share is published
monthly. This APM relates to past performance and is used as a comparison to
the share price per Ordinary Share to assess performance. There are no
reconciling items between this calculation and the Net Asset Value shown on
the balance sheet (other than to calculate by Ordinary Share).
NAV TOTAL RETURN
The NAV total return measures the combined effect of any dividends paid,
together with the rise or fall in the NAV per Ordinary Share. This APM
relates to past performance and takes into account both capital returns and
dividends paid to shareholders. Any dividends received by a shareholder are
assumed to have been reinvested in the assets of the Company at its NAV per
Ordinary Share.
SHARE PRICE TOTAL RETURN
The share price total return measures the combined effects of any dividends
paid, together with the rise or fall in the share price. This APM relates to
past performance and assesses the impact of movements in the share price on
total returns to investors. Any dividends received by a shareholder are
assumed to have been reinvested in additional shares of the Company at the
time the shares were quoted ex-dividend.
NAV TO MARKET PRICE DISCOUNT / PREMIUM
The discount / premium is the amount by which the share price of the Company
is lower (discount) or higher (premium) than the NAV per Ordinary Share at
the date of reporting and relates to past performance. The discount or
premium is normally expressed as a percentage of the NAV per Ordinary Share.
INVESTMENT LOAN PORTFOLIO UNLEVERED ANNUALISED TOTAL RETURN
The unlevered annualised return is a calculation at the quarterly reporting
date of the estimated annual return on the portfolio at that point in time.
It is calculated individually for each loan by summing the one-off fees
earned (such as up-front arrangement or exit fees charged on repayment) and
dividing these over the full contractual term of the loan, and adding this
to the annual returns. Where a loan is floating rate (partially or in whole
or with floors), the returns are based on an assumed profile for future
interbank rates, but the actual rate received may be higher or lower. The
return is calculated only on amounts funded at the quarterly reporting date
and excludes committed but undrawn loans and excludes cash un-invested. The
calculation also excludes origination fees paid to the Investment Manager,
which are accounted for within the interest line in the financial
statements.
An average, weighted by loan amount, is then calculated for the portfolio.
This APM gives an indication of the future performance of the portfolio (as
constituted at the reporting date). The calculation, if the portfolio
remained unchanged, could be used to estimate "income from loans advanced"
in the Consolidated Statement of Comprehensive Income if adjusted for the
origination fee of 0.75 basis points amortised over the average life of the
loan. As discussed earlier in this report the figure actually realised may
be different due to the following reasons:
· In the quoted return, we amortise all one-off fees (such as arrangement
and exit fees) over the contractual life of the loan, which is currently
four years for the portfolio. However, it has been our experience that
loans tend to repay after approximately 2.5 years and as such, these fees
are actually amortised over a shorter period.
· Many loans benefit from prepayment provisions, which means that if they
are repaid before the end of the protected period, additional interest or
fees become due. As we quote the return based on the contractual life of
the loan these returns cannot be forecast in the return.
· The quoted return excludes the benefit of any foreign exchange gains on
Euro loans. We do not forecast this as the loans are often repaid early
and the gain may be lower than this once hedge positions are settled.
Generally speaking, the actual annualised total return is likely to be
higher than the reported return for these reasons, but this is not
incorporated in the reported figure, as the benefit of these items cannot be
assumed.
PORTFOLIO LEVERED ANNUALISED TOTAL RETURN
The levered annualised total return is calculated on the same basis as the
unlevered annual return but takes into account the amount of leverage in the
Group and the cost of that leverage at current LIBOR/EURIBOR rates.
ONGOING CHARGES PERCENTAGE
Ongoing charges represents the management fee and all other operating
expenses excluding finance costs and transactions costs, expressed as a
percentage of the average monthly net asset values during the year and
allows users to assess the running costs of the Group. This is calculated in
accordance with AIC guidance and relates to past performance. The charges
include the following lines items within the Consolidated Statement of
Comprehensive Income:
· Investment management fees
· Administration fees
· Audit and non-audit fees
· Other expenses
· Legal and professional fees
· Directors' fees and expenses
· Broker's fees and expenses
· Agency fees
The calculation adds back any expenses unlikely to occur absent any loan
originations or repayments and as such, the costs associated with hedging
Euro loans back to sterling have been added back. The calculation does not
include origination fees paid to the Investment Manager; these are
recognised through "Income from loans advanced".
WEIGHTED AVERAGE PORTFOLIO LTV TO GROUP FIRST AND LAST GBP
These are calculations made as at the quarterly reporting date of the loan
to value ("LTV") on each loan at the lowest and highest point in the capital
stack in which the Group participates. LTV to "Group last GBP" means the
percentage which the total loan commitment less any amortisation received to
date (when aggregated with any other indebtedness ranking alongside and/or
senior to it) bears to the market value determined by the last formal lender
valuation received by the quarterly reporting date. LTV to "first Group GBP"
means the starting point of the loan to value range of the loan commitments
(when aggregated with any other indebtedness ranking senior to it). For
development projects, the calculation includes the total facility available
and is calculated against the assumed market value on completion of the
project.
An average, weighted by the loan amount, is then calculated for the
portfolio.
This APM provides an assessment of future credit risk within the portfolio
and does not directly relate to any financial statement line items.
PERCENTAGE OF INVESTED PORTFOLIO IN FLOATING RATE LOANS
This is a calculation made as at the quarterly reporting date, which
calculates the value of loans, which have an element of floating rate in
part, in whole and including loans with floors, as a percentage of the total
value of loans. This APM provides an assessment of potential future
volatility of the income on loans, as a large percentage of floating rate
loans would mean that income would move up or down with changes in EURIBOR
or LIBOR.
AVERAGE LOAN TERM AND AVERAGE REMAINING LOAN TERM
The average loan term is calculated at the quarterly reporting date by
calculating the average length of each loan from initial advance to the
contractual termination date. An average, weighted by the loan amount, is
then calculated for the portfolio.
The average remaining loan term is calculated at the quarterly reporting
date by calculating the average length of each loan from the quarterly
reporting date to the contractual termination date. An average, weighted by
the loan amount, is then calculated for the portfolio.
This APM provides an assessment of the likely level of repayments occurring
in future years (absent any early repayments) which will need to be
reinvested. In the past, the actual term of loans has been shorter than the
average contractual loan term due to early repayments and so the level of
repayments is likely to be higher than this APM would suggest. However, this
shorter actual loan term cannot be assumed as it may not occur and therefore
it is not reported as part of this APM.
NET CASH
Net cash is the result of the Group's total cash and cash equivalents minus
total credit facility utilised as reported on its consolidated financial
statements.
UNUSED LIQUID FACILITIES
Unused liquid facilities is the result of the Group's total cash and cash
equivalents plus the available balance to withdraw under existing credit
facilities at the reporting date.
PORTFOLIO DIVERSIFICATION
The portfolio diversification statistics are calculated by allocating each
loan to the relevant sectors and countries based on the value of the
underlying assets. This is then summed for the entire portfolio and a
percentage calculated for each sector / country.
This APM provides an assessment of future risk within the portfolio due to
exposure to specific sectors or countries and does not directly relate to
any financial statement line items.
Corporate Information
Directors
Stephen Smith (Non-executive Chairman)
Jonathan Bridel (Non-executive Director)
John Whittle (Non-executive Director)
(all care of the registered office)
Investment Manager
Starwood European Finance Partners Limited
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Solicitors to the Company (as to English law and U.S. securities law)
Norton Rose LLP
3 More London Riverside
London
SE1 2AQ
United Kingdom
Registrar
Computershare Investor Services (Guernsey) Limited
3rd Floor
Natwest House
Le Truchot
St Peter Port
Guernsey
GY1 1WD
Broker
Stifel Nicolaus Europe Limited
trading as Stifel
150 Cheapside
London
EC2V 6ET
United Kingdom
Administrator, Designated Manager and Company Secretary
Apex Fund and Corporate Services
(Guernsey) Limited
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Registered Office
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Investment Adviser
Starwood Capital Europe Advisers, LLP
2nd Floor
One Eagle Place
St. James's
London
SW1Y 6AF
United Kingdom
Advocates to the Company (as to Guernsey law)
Carey Olsen
PO Box 98
Carey House, Les Banques
St Peter Port
Guernsey
GY1 4HP
Independent Auditor
PricewaterhouseCoopers CI LLP
Royal Bank Place
1 Glategny Esplanade
St Peter Port
Guernsey
GY1 4ND
Principal Bankers
Barclays Private Clients International Limited
PO Box 41
Le Marchant House
St Peter Port
Guernsey
GY1 3BE
Website:
www.starwoodeuropeanfinance.com
ISIN: GG00B79WC100
Category Code: ACS
TIDM: SWEF
LEI Code: 5493004YMVUQ9Z7JGZ50
Sequence No.: 56929
EQS News ID: 1016949
End of Announcement EQS News Service
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