REG - ICG-Longbow Senior - Annual Financial Report
09/05/2024 07:00
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RNS Number : 7650N ICG-Longbow Snr Sec UK Prop DebtInv 09 May 2024
ICG-Longbow Senior Secured UK Property Debt Investments Limited
Annual Report And Financial Statements
For the year ended 31 January 2024
Company Number: 55917
All capitalised terms are defined in the Glossary of Capitalised Defined Terms
unless separately defined.
Corporate Summary
Investment Objective
In line with the revised Investment Objective and Policy approved by
shareholders at the Extraordinary General Meeting in January 2021, the Company
is undertaking an orderly realisation of its investments.
Structure
The Company is a non‑cellular company limited by shares and incorporated in
Guernsey on 29 November 2012 under the Companies Law. The Company's
registration number is 55917 and it has been registered with the Guernsey
Financial Services Commission (GFSC) as a registered closed‑ended collective
investment scheme. The Company's Ordinary Shares were admitted to the premium
segment of the Financial Conduct Authority's (FCA) Official List and to
trading on the Main Market of the London Stock Exchange as part of its IPO
which completed on 5 February 2013. The issued share capital comprises the
Company's Ordinary Shares denominated in Pounds Sterling.
Investment Manager
The Company has appointed ICG Alternative Investment Limited as external
discretionary investment manager, under the Alternative Investment Fund
Managers Directive (AIFMD) within a remit set by the Board.
Financial Summary
for the year ended 31 January 2024
Key Developments
· The Company is continuing to pursue an orderly realisation of
its assets, against a backdrop of difficult market conditions. During the
year, the Company returned £15.7 million of shareholder capital, equating to
12.9 pence per ordinary share.
· As at the date of this report, the Company has now returned
capital of 44.90 pence per ordinary share to shareholders, equating to £54.46
million in total.
· The Company is now seeking to realise its investments through
formal enforcement actions on all of its remaining loans with the appointment
of receivers or administrators over the properties or borrowers in each case.
· Since 31 July 2023, the Company has increased ECL provisions by
£11.16 million to £32.48 million. This brings the total ECL provisions made
during the year to 31 January 2024 to £28.54 million. The movement in ECL
provisions during the year to 31 January 2024 comprises:
- £6.31 million in respect of the Southport loan, increasing the
total provision to £8.60 million.
- £15.54 million in respect of the RoyaleLife loan, increasing
the total provision to £17.18 million.
- £6.68 million in respect of the Affinity loan, increasing the
total provision to £6.70 million.
· Total loans outstanding at gross carrying value, excluding ECL
adjustments, amount to £66.12 million as at 31 January 2024. Total loans
outstanding after ECL adjustments amount to £33.64 million as at 31 January
2024.
· Following extensive discussion between the Board and the
Investment Manager, their fee will reduce to 0.5% of Net Asset Value from 1%
previously.
Performance
· NAV of £36.22 million as at 31 January 2024 after ECL
adjustments of £(32.48 million) (31 January 2023: £77.35 million after ECL
adjustments of £(3.94 million)), (31 July 2023: £55.37 million after ECL
adjustments of £(21.32 million)).
· NAV per share as at 31 January 2024 of 29.86 pence.
· (Loss)/profit after tax of £(24.87) million for the year ended
31 January 2024 (31 January 2023: £1.96 million).
· (Loss)/Earnings per share for the year of (20.51) pence (31
January 2023: 1.62 pence).
Dividend
· No dividends were declared for the year ended 31 January 2024
(31 January 2023: 3.6 pence per share).
· A Dividend of 0.5 pence per share of £0.61 million, declared
in respect of the period ended 31 January 2023 was paid in May 2023.
Investment Portfolio
· As at 31 January 2024, the Company's investment portfolio
comprised three loans with an aggregate principal balance of £58.01 million,
and a carrying value after provision for ECL of £33.64 million (31 January
2023: five loans with an aggregate principal balance of £67.4 million, and a
carrying value of £68.96 million).
*Unless stated otherwise, loan balances are stated gross of ECL provisions for
impairment. A comparison to the carrying value of the loans is set out in
Note 5 to the accounts.
Chairman's Statement
Introduction
On behalf of the Board, I present the eleventh Annual Report for the Company,
for the year ended 31 January 2024.
The last 12 months have clearly been very difficult for commercial property
and finance markets. The headwinds have been well documented with conflicts
in Ukraine and the Middle East, inflationary pressures and a tightening of
monetary policy across most western economies creating uncertainty and
volatility in many markets. In the UK, rising short- and long-term interest
rates, combined with valuation uncertainties, have led to a severe slowdown in
commercial property transaction volumes which has continued into 2024.
At the end of 2023 the UK slipped into a technical recession and, while
monthly data for 2024 suggest a return to limited GDP growth, economic and
property market conditions are widely expected to remain sluggish in the near
term.
Focusing on the sectors relevant to the Company's remaining investments, 2023
is likely to have been one of the worst years on record for the office sector,
housing markets having been impacted by higher mortgage costs, while hotel
transactions were also at a 10-year low, as the Investment Manager notes
below. Offices have undoubtedly been affected by negative sentiment,
including from the USA where high vacancy rates across key metropolitan
markets and rising costs of finance have led to widespread loan defaults and
significant valuation declines. While UK and European markets typically have
higher occupancy rates than their US peers, investor views on the sector
remain heavily bearish.
In the context of the above, shareholders will be aware that this has been a
difficult period for the Company as it seeks to realise its remaining
investments in what continue to be challenging market conditions. While the
Company's Northlands loan repaid during the year with ahead of target returns
due to default interest and fees, the Company has, through enforcement
processes, taken control away from the borrowers of all assets securing the
remaining loans. Those assets are either on the market for sale or being
readied for sale.
It is important to be clear with shareholders that as the Company's remaining
investments are impaired with receivers or administrators in place, the only
exit route is through sale of the underlying assets or loans themselves -
refinancing by the borrowers is no longer a plausible route to exit. This
exposes the Company to the potential for further delay in realisations, with
conditions not supportive of quick or easy asset sales.
As I set out in our Interim Report, an illiquid market with few buyers is
clearly unhelpful for any seller, and it is not clear how long it may take for
liquidity to improve materially. Buyers are under no pressure to acquire
assets and demand steep discounts, as well as being able to stretch out buying
processes where there is a lack of competitive bidding. Accordingly, the
market environment for the Company to exit its remaining investments is
expected to remain challenging in the near term.
Shareholders will recall that, in recognition of the poor market conditions
and falling property values, as at 31 July 2023 we recognised Expected Credit
Loss (ECL) allowances against our three remaining assets equivalent to 17.57
pence per share. Reflecting the continuing difficult market conditions,
which have prevailed since then, along with agency advice and indicative
bidding levels for the remaining properties, the Board has determined it
necessary to make further provision for impairment against the Company's
remaining loans, totalling 5.96 pence per share, as set out further below.
This brings the total ECL allowance recognised during the year ended 31
January 2024 to 23.53 pence per share. The total provision for ECL against the
remaining investments, including those raised in prior periods, is 26.77
pence per share.
The carrying values as at 31 January 2024 included in this report and accounts
have been, as highlighted above, established in a market facing a continued
period of uncertainty, reduced credit availability and deteriorating values in
many sectors. Accordingly, shareholders' attention is drawn to the risks to
valuations as discussed in the principal risks and notes to the financial
statements. The Board believes that the stress analysis gives some guidance to
the possible impact of further deterioration in the value of the underlying
properties securing its investment portfolio, noting that any further
deterioration may not be limited to the examples given.
As a consequence of the difficult sales environment for the remaining
assets, the Board and Investment Manager have been focused on seeking to drive
operating performance at property level as well as seeking efficiencies within
the Company. In particular, I am aware that shareholders have been eager to
see improved alignment of the Investment Management fee structure.
Accordingly, as a result of extensive discussion between the Board and the
Investment Manager, their fee will reduce to 0.5% of Net Asset Value from 1%
previously. This halving of the investment management fee will result in
meaningful savings for shareholders over the remaining life of the Company and
will apply from today's date. This is discussed further below and in note 13
to the accounts.
Portfolio
At 31 January 2024, the portfolio comprised three loans with a total principal
balance outstanding of £58.01 million (before impairment).
During the year the Company received staged repayments, and ultimately full
redemption, of the £9.6 million balance of the Northlands loan. With fees
and default interest charges, this realised returns for shareholders modestly
ahead of underwritten levels.
As highlighted above, exit processes are underway for the remaining portfolio
loans, although in order to avoid having to accept a 'forced sale' price, some
of these may be protracted. The outlook for the timing of the redemption of
the RoyaleLife loan, in particular, is uncertain, and various options are
being explored by the Investment Manager as set out below. The property
securing the Affinity loan is being readied for sale following some leasing
success, although conditions for the office sector remain difficult. The
Southport hotel securing our loan continues to attract interest; however,
interested parties are under no competitive pressure to accelerate their
processes. This is discussed further in the Investment Manager's report below.
Dividend
The Company paid a 0.50 pence per share dividend in May 2023, covering the
three months to 31 January 2023. Given the current status of the portfolio,
the Board considers it unlikely that any further dividends will be declared
which is in line with previous communications to the market.
Governance and Management
As mentioned above, the Board is acutely aware that shareholders additionally
wish to see a reduction in central costs and overheads as the Company's
portfolio continues to shrink and that this includes the costs of the Board
itself. In this crucial stage of the Company's winding up process, the Board
and I feel that retaining the varied skillsets of all the Directors is
critical to ensuring the best outturn for shareholders. The Directors' fees
have remained unchanged in the past year, as they have for the past six years,
despite inflationary pressures and the intensity of oversight required of the
remaining investments.
Outlook
In our Interim Report and accounts I wrote to you highlighting that the Board
expects to have to make difficult decisions on the remaining investments in
the context of property market conditions which remain challenging. Despite
a somewhat improved economic backdrop I have to report that we have not seen
any improvement since that time: liquidity remains constrained, and the market
environment is not conducive to quick and easy exits. In my discussions with
shareholders during the year, most of you have highlighted a wish for an
orderly realisation avoiding the forced sale of assets and this has been
uppermost in the minds of the Board as we seek to balance the acceleration of
sales processes with optimising the value to be realised from the remaining
investments.
During our regular dialogue with major shareholders over the past year, we
have acknowledged the frustration you have with the apparent lack of progress
in realising loans, combined with the disappointment of having to recognise
further substantial impairment provisions and associated poor share price
performance. As I have highlighted previously, regrettably there is no easy
way to accelerate realisations without compromising unduly on price. As a
result, the Board's focus is on actively managing the remaining assets to
deliver value, to control costs and to continue to seek the optimal recovery
possible. We will continue to consult shareholders through our final wind
down.
Investment Manager's Report
The Investment Manager's Report refers to the performance of the loans and the
portfolio for the year to 31 January 2024, and the general market conditions
prevailing at that date. Any forward-looking statements in this report
reflect the latest information available as at 1 May 2024.
Investment Objective
The investment objective of the Company, as approved by its shareholders in
January 2021, is to conduct an orderly realisation of the assets of the
Company.
Summary
As at 31 January 2024 the Company had three investments remaining, all of
which are being managed and realised through enforcement processes. This
report provides a summary update on the realisation process for each
investment, and steps being taken by the Investment Manager to secure optimum
outcomes.
At the year end, and as discussed further below, the Company made further
provisions for impairment against each of its remaining loans reflecting
deteriorating market conditions and property values. The aggregate carrying
value of the investments is now £33.64 million, or 27.73 pence per ordinary
share, against the aggregate principal advanced of £58.01 million.
Company Performance
During the period, the Company received a series of partial repayments of the
Northlands loan, following sales of certain of the portfolio properties, with
full repayment received in December 2023. These payments totalled £9.6
million, together with £0.5 million in aggregate of interest, default
interest and fees.
At the period end, the Company had £2.9 million of cash, which is largely
held in high-interest accounts with rated clearing banks. The Company's
available cash balances are considered sufficient to cover all the Company's
ongoing costs and expected working capital needs while maintaining a prudent
liquidity buffer and further capital to invest in the underlying assets,
should it prove necessary. At the date of this report, no such investment
has been committed although where appropriate we will consider the merits of
modest further investment to preserve and enhance value.
Portfolio Summary
Portfolio statistics 31 January 2024 31 July 2023 (unaudited) 31 January 2023
Number of loan investments 3 4 4
Aggregate principal advanced ((1)) £58,007,806 £57,967,369 £67,443,056
Aggregate carrying value after ECL £33,639,051 £44,612,344 £68,963,675
Cash held £2,945,897 £11,348,746 £9,209,494
((1) ) During the 6 months from 31 July 2023 to 31 January 2024,
£85,389 principal in the Northlands loan was repaid, £174,174 of trapped
cash was allocated against the Affinity loan and there was a £300,000
increase to the Southport loan principal.
Reconciliation of Changes in Book Value
31 January 2024 31 July 2023 31 January 2023
(unaudited)
Project Balance outstanding (£m)((1)) Book Value after ECL (£m) Book Value per share (p) Book Value after ECL (£m) Book Value per share (p) Book Value after ECL (£m) Book Value per share (p)
Affinity 17.13 11.34 9.3 15.99 13.2 17.76 14.6
Southport 15.50 7.91 6.5 9.38 7.7 13.70 11.3
RoyaleLife 25.38 14.39 11.9 18.72 15.4 27.67 22.8
Northlands - - - 0.52 0.4 9.83 8.1
Total 58.01 33.64 27.7 44.61 36.7 68.96 56.8
((1) ) Balance outstanding excludes accrued interest. A
comparison to the carrying value of the loans is set out in Note 5 to the
accounts.
Investment Update
Southport
The Company's Southport hotel loan continues to be run by the administrator
appointed by the Company, with services provided by hotel sector specialists
Michels & Taylor. Despite the uncertainty caused by the administration
and cost pressures on hotel operations nationally, the asset traded profitably
in 2023 while maintaining the same local management team. Trading at the hotel
is seasonal, with revenues strongest from April to October. Despite the
administration, the hotel has seen revenue performance rise to close to the
pre-Covid peak. On the costs side, pressure on wages continues although
falling utilities prices should help the bottom line in 2024. Nonetheless,
given the seasonal nature of trading and impact of administration costs and
empty running costs of the adjoining leisure site, the Company does not
anticipate distributing any interest or capital repayments from the loan in
the near term.
As reported last year, the property had previously been under offer for sale
to a large trade buyer, however certain of the purchase conditions linked to
freeholder consent could not be satisfied and the buyer withdrew. Following
this process we, through the administrator, introduced a new joint selling
agent and relaunched the sales process which uncovered further interested
parties. At the time of writing, heads of terms have been agreed with a
North West focused hotelier known to ICG who have made a credible bid, albeit
subject to debt, at a level that supports the carrying value of the loan.
While that financing process is being pursued, the agents continue to speak
with other interested parties.
RoyaleLife
The Company and its co-lenders appointed administrators over parts of the
borrower group in May 2023 and the entire borrower group in August 2023. The
Investment Manager, on behalf of the Company and its co-lenders, has continued
to work to restructure the loan and underlying business to maintain existing
operations, improve efficiency and create a clean, marketable structure for
the medium term. This has been undertaken against the backdrop of a
corporate insolvency of the borrower entities and bankruptcy of the ultimate
beneficial owner, resulting in material reputational risk to the brand.
During the reporting period and concluding in January, the sites securing the
loan were transferred into a new structure with a new operator, with the
in-place debt retained. The Company's loan was fully cross-collateralised
with a second facility provided by the Company's co-lenders, allowing the
Company the benefit of a more diversified security pool, a wider operating
platform and greater economies of scale. Given the potential for a conflict
of interest in this arrangement, the Board took independent legal advice on
the cross-collateralisation before agreeing to this restructure.
Additionally, the restructure also incurred certain legal, working capital and
stamp duty costs funded by the co-lenders, and the Board determined that in
view of the Company's liquidity position it would seek to meet its share of
these costs through a dilution of its share in the transferred loan rather
than through a cash payment.
Ahead of the restructure the administrator appointed selling agents to run a
marketing process covering the majority of the security properties. The
process was short with limited data available to bidders. However, all of
the sites marketed received bids (some multiple bids) and three bids were
received for the entire marketed portfolio. While much of the bidding
interest can be characterised as opportunistic, two institutional bidders
emerged and discussions with one of these is ongoing, which, if concluded, may
lead to a partial disposal and realisation in the near term. Again, this
bidding interest is supportive of the carrying value of the loan.
In tandem, the new operator has developed an independent plan for the relaunch
of the business with a view to selling the portfolio and platform as a going
concern after stabilisation. This is being run in parallel with sales
discussions and we continue to explore the optimal route for recovery.
Whilst population demographics and housing sector tailwinds remain compelling
for the portfolio, the nature of the administration and some of the associated
publicity has undoubtedly affected buyer liquidity and pricing, which is
reflected in the carrying value of the loan. We would refer shareholders to
the sensitivity analysis set out in the financial statements (Note 5 (iv))
which reflect the range of potential outcomes for the investment. The
Investment Manager and the Board are seeking to balance the prospect of
earlier liquidity against the optimal proceeds from realisation, noting
significant shareholder feedback received advocating against any 'fire sale'
of the assets and balancing these against the holding costs of the investment.
Affinity
We have previously reported that the office property securing this loan has
been historically well occupied, and as at the date of these accounts a new
letting was in solicitors' hands with a UK Government entity on the primary
vacant space, at a new record rental level for the building. Elsewhere, a
lease extension of the lower ground floor was recently completed at a 16%
increase to prior levels, illustrative of the continued growth in rental
levels in the Bristol market and at the property.
On the downside, one of the larger office tenants exercised a break clause on
part of its space within the building which it then vacated in March 2024.
While this reduces total income, the Company will not be liable for empty
business rates (as there is a receiver appointed), mitigating the bottom line
impact. We would highlight that the overall rates shelter provided by the
receivership significantly outweighs the cost of the receivership fees
incurred and will continue to do so until closer to full occupancy is
achieved. Nonetheless, the weighted average length remaining on the leases
will continue to reduce, leading to the potential for further tenant turnover
in 2025.
Since placing the property into receivership we have worked closely with the
receiver and appointed selling agents to better prepare the property for
marketing, including discussing an extension of the head leasehold interest
with the freeholder, Bristol City Council and have commissioned several third
party reports which should help provide comfort to potential buyers and
streamline the sale process. In recent months we have seen a small number of
office sales conclude in Bristol, after a very challenged 2023, and this
combined with the recent rental evidence could allow for a somewhat improved
marketing environment. However, we would caution that liquidity remains
extremely thin in this market and pricing levels are considered unlikely to
rebound or show any signs of strengthening in the near term.
Economy and Financial Market Update
After a year of uncertainty and periods of volatility in key economic data,
the UK economy finished 2023 in a technical recession, after a contraction
between October and December. Whilst GDP growth for 2023 remained marginally
positive at 0.1%, the wider macroeconomic picture was subdued, with the UK and
European economies lagging the growth seen in the United States.
While there have undoubtedly been times where it felt otherwise, the UK's
political leadership showed more stability than in 2022, although the
significant erosion in support for the governing Conservative party has led to
ongoing speculation of the timing of a general election and the expectation of
a change in government. Often election uncertainty can lead to a period of
inactivity in markets, however there is a perception that the UK outcome is a
forgone conclusion, with the US elections perhaps more likely to cause market
jitters.
As in 2022, inflation and interest rates were key drivers of market activity.
As with other western economies, the UK saw a significant period of
disinflation in the year as base effects took historical energy price rises
out of the index. CPI inflation fell from 10.1% to 3.4% for the year to end
February, however the high inflation levels observed in the first half of 2023
led to sustained interest rate rises over the period, from 3.5% to 5.25% in
August. The combination of these factors, plus the freeze on income tax
thresholds, led to a year of heavy pressure on household finances, in many
cases more than offsetting wage increases.
As set out below, these macro factors led to a subdued level of activity in
the commercial property sector, with uncertainty affecting occupational,
purchasing and lending decisions. More recently, as inflation levels have
fallen, early GDP data has been more positive and the outlook for interest
rates points to cuts, we have seen signs of a return to optimism in certain
sectors, leaving market participants to redraw their business plans once
again.
Occupational Demand/Supply
Offices
Central London office uptake stood flat year on year, with strong pre-let
activity and high single-digit prime rental growth indicative of a flight to
quality in the occupational markets, particularly in the prime West End
market, where prime rents moved to £140 per sq ft. Outside of London, the
market showed strength in the Thames Valley and parts of the South East,
however uptake amongst the big six regional markets was down 15% year on year
across 2023. Reflecting the continued mantra of quality over quantity,
Manchester and Edinburgh recorded both the highest rental increases (8% and
12% respectively) as well as the highest overall prime rents (£43 per sq ft),
whilst other markets lagged - Bristol take up was at a five-year low, and
prime rents remained flat year on year.
Retail & Industrial
The fate of the two other traditional property sectors has at times seemed to
be inversely correlated - as occupier demand for physical retail has suffered
in recent years, as shoppers migrated online, industrial (including logistics)
demand grew ever higher with occupiers seeking to service this consumer need.
The market in 2023 tempered this pattern somewhat, as demand for retail saw
tentative green shoots emerge just as rampant demand for the industrial sector
cooled slightly.
Contradiction in economic indicators was also present in retail. Despite an
upswing in the GfK Consumer Sentiment Index to -22 in December (+20 pts year
on year, only 10 pts below the long-term average), Christmas trading was
weaker than expected. Strong Black Friday spending coincided with an increase
in consumer credit of £2.0bn, indicating the cost of living weighing heavily
on households. Interlinking with softer industrial growth, the e-commerce
share of retail spend broadly flatlined in 2023.
The occupational retail leasing story, depressed in the earlier quarters of
2023 due to economic uncertainty, showed positive momentum, driven by
retailers competing for prime high street pitches and higher quality stores.
Locations such as Mount Street in London and Edinburgh's Princes Street saw
rental growth in 2023, as international new entrants (e.g. Sephora) and
previously online only retailers (e.g. Gymshark, Maniere de Voir) took prime
retail space. Overall, the sector remains polarised with the best space in
demand and weaker space remaining out of favour.
In the industrial sector, availability at end Q4 stood at 66.5m sq ft, 16% up
year on year, and construction slowed, hampered by factors such as lower
demand a relative lack of funding and higher build costs, helpfully mitigating
the risk of market oversupply.
Vacancy rates have increased in most markets over the course of 2023, ranging
between 4% (Midlands) and 8% (South Yorkshire) across the regions. Prime rents
have largely stabilised in the last months of 2023, and a strong Q4 took
annual industrial take up to 32.5m sq ft, just 2% below the pre-pandemic
average, signalling market normalisation. Whilst larger units lagged due to
lessened demand from third party logistics operators and retailers, small and
mid-sized units remained strong, reinforcing the sector's resilience.
Leisure
Operationally, the hotel sector witnessed one of the strongest years in memory
in terms of topline performance, with Average Daily Rates (ADR) growing 26%
over the pre-Covid 2019 baseline. Whilst occupancy remained 40 bps below 2019,
RevPAR (Revenue per available room, a key metric) was positive overall.
Notably, London's phenomenal performance over 2023 eclipsed the UK regions,
which saw much more measured growth with owners attempting to absorb
significant cost increases.
Whilst 2023 saw minimal supply growth, weakness in the office markets has
accelerated the number of conversions to hotel use underway, converging with a
strong push from the Government to return beds currently used to house asylum
seekers, implying impending growth in the supply pipeline.
Property Investment Market
Full year 2023 investment volumes stood at c. £43bn, with office, industrial
and residential at c. £10bn each. Apart from residential, volumes remain
below long term averages across the board, in what some consider may mark the
low point of the cycle. Alternative asset classes continue to be in high
demand, and the Build to Rent sector in particular catapulted forward with
landmark transactions including a 3,900 unit, £819m Blackstone purchase in
Q4, and multiple substantial student housing transactions.
Overall, 2023 saw widespread rebasing of market prices, although early 2024
has seen some signs of confidence re-emerging in certain sectors. As
government bond yields have fallen, the spread to commercial real estate
yields increased, bolstering the relative attractiveness of the asset class.
The strain on construction also eased, and while costs remain high and
contractor insolvencies persist, the most significant squeeze is believed to
be surmounted, with materials availability and labour cost becoming less of an
issue. As in previous quarters, the 2023 theme of flight to quality continued
to play out across all asset classes on the investment side. Whilst a number
of issues remain on the horizon for 2024, not least the UK and US elections
and a largely flatlining economy, the anticipated lowering of interest rates
and fall off in inflation bode positively.
In the office sector, 2023 was one of the worst years on record for investment
in both London and the regions. The continued concerns over flexible working,
occupier space requirements and ESG retrofitting costs, combined with limited
buyer appetite and debt availability being scarce, has pushed yields towards
double digit levels for many previously sought after assets.
Industrial investment, previously buoyant, likewise recorded a relatively
weaker year, driven by a lack of larger assets transacting, and yields
repricing in the face of sustained higher interest rates. A continued bid ask
spread stalemate and higher debt cost may weigh on investment volumes into
2024, albeit anecdotally some of our borrower clients are reporting highly
competitive bidding re-emerging.
Despite occupational buoyancy in the hotel market, transaction volumes were
down year on year, and stood at a 10-year low (excluding the Covid-impacted
2020). The regional market was particularly impacted, and yields moved out
75-100 bps over the year. Holiday Park operators reported a marked drop in
caravan and lodge sales in 2023, particularly at the upper end, on the back of
the economic climate, and both leisure parks and regional pubs saw outward
movements in yields over the course of year.
Finance Markets
We believe loan to value (''LTV'') ratios for new lending have restabilised at
lower levels and as such, a clearer picture of the debt funding gap is
emerging. As a consequence of reduced property values and lower LTVs, in
addition to declining interest coverage ratios, there is a significant gap
between available debt capital and that required to refinance existing
loans. Across Europe, in both the public (listed) and private sectors, this
gap has been estimated at €300bn. While this may reduce as interest rates
come off, the gap remains a significant issue to borrowers seeking refinance.
Whilst alternative debt funds were well poised to take a large slice of this
gap, a different obstacle to this has become more prominent over 2023 - the
after-effects of pension funds and insurers rebalancing their portfolios (and
reducing their real estate debt allocation) has led to a reduction in the
ability of many of these players to raise funds and take advantage of this
situation.
Investment Policy
Investment Objective
The investment objective of the Company, as approved by the shareholders, is
to conduct an orderly realisation of the Company's assets.
Investment Policy
The assets of the Company are being realised in an orderly manner, returning
cash to Shareholders at such times and in such manner as the Board may, in its
absolute discretion, determine. The Board will endeavour to realise all the
Company's investments in a manner that achieves a balance between maximising
the net value received from those investments and making timely returns to
Shareholders.
The Company may not make any new investments save that:
· investments may be made to honour commitments
under existing contractual arrangements or to preserve the value of the
underlying property security; and
· cash held by the Company may be invested in
quoted bond and other debt instruments with a final maturity of less than 365
days as well as money market funds for the purposes of cash management
provided any such instrument has a minimum credit rating.
The Company will continue to comply with the restrictions imposed by the
Listing Rules in force from time to time.
Any material change to the Company's published investment policy will be made
only with the prior approval of Shareholders by ordinary resolution at a
general meeting of the Company.
Board of Directors
Jack Perry CBE - Chairman and Non-Executive Independent Director
Appointment: Appointed to the Board and as Chairman in November 2012
Experience: Jack is an independent non-executive board member and adviser to a
number of public and private companies. He is currently a director and
Chairman of the audit committee of the Witan Investment Trust PLC. He will
retire as Chairman of European Assets Trust PLC in May 2024. He previously
served as Chief Executive of Scottish Enterprise, Scotland's enterprise,
innovation and investment agency for six years until November 2009.
Prior to this, he was the managing partner of Ernst & Young in Glasgow. In
addition, he was Regional Industry Leader for Scotland and Northern Ireland
for Ernst & Young's Technology & Communications and Consumer Products
practices.
He is a former non-executive director of FTSE 250 company, Robert Wiseman
Dairies PLC and Capital for Enterprise Ltd. He also served as a member of the
Advisory Committee of Barclays UK & Ireland Private Bank.
Jack is a member of the Institute of Chartered Accountants of Scotland.
Committee Membership: Nomination Committee, Management Engagement Committee,
Remuneration Committee
Stuart Beevor - Non-Executive Independent Director
Appointment: Appointed to the Board in November 2012
Experience: Stuart is an Independent Consultant with various roles advising
clients in real estate fund management, investment, development and asset
management. From 2004 to 2013 he was a non-executive director at Unite Group
PLC and from 2013 to 2020 a non-executive director of Metropolitan Thames
Valley Housing. Furthermore, from 2016 to 2022, he was a non-executive
director of Empiric Student Property PLC. From 2002 to 2011 he was Managing
Director of Grosvenor Fund Management Limited and a member of the Board of
Grosvenor Group Limited, the international property group. Prior to joining
Grosvenor, he was Managing Director at Legal and General Property Limited,
having previously held a number of roles at Norwich Union (now Aviva). Stuart
is a Chartered Surveyor with over 40 years' experience in real estate both in
the UK and overseas.
Committee Membership: Audit and Risk Committee, Nomination Committee,
Management Engagement Committee, Remuneration Committee
Fiona Le Poidevin - Non-Executive Independent Director
Appointment: Appointed to the Board in September 2020
Experience: A Chartered Director, Fellow of the Institute of Directors and
Chartered Accountant (FCA), Fiona is a non-executive director with over 25
years' experience working in financial services in both London and the Channel
Islands with experience in accounting, tax, strategy, marketing, PR and the
regulatory and listed company environments.
Among her appointments, in addition to that with the Company, Fiona is
director of Sequoia Economic Infrastructure Income Fund Limited, a FTSE 250
company. She is also director and Chair of Doric Nimrod Air Two Limited and
director of Doric Nimrod Air Three Limited, companies admitted to trading on
the Specialist Fund Segment of the LSE. Fiona is also a member of the
AIC Channel Islands Committee.
Until the end of July 2020, Fiona was Chief Executive Officer of The
International Stock Exchange Group Limited and prior to that she was CEO of
Guernsey Finance, the promotional body for Guernsey's finance industry
internationally. Previously, she was an auditor and latterly tax adviser at
PwC (London and Channel Islands) and KPMG (Channel Islands) for over 13 years.
Committee Membership: Audit and Risk Committee (Chair), Nomination Committee,
Management Engagement Committee, Remuneration Committee
Paul Meader - Non-Executive Independent Director
Appointment: Appointed to the Board in November 2012
Experience: Paul is an independent director of investment companies, insurers
and investment funds. Until 2012, he was Head of Portfolio Management for
Canaccord Genuity based in Guernsey, prior to which he was Chief Executive of
Corazon Capital. He has over 35 years' experience in financial markets in
London, Dublin and Guernsey, holding senior positions in portfolio management
and trading. Prior to joining Corazon, he was managing director of
Rothschild's Swiss private banking subsidiary in Guernsey. He is currently a
non-executive director of Schroder Oriental Income Fund Limited.
Paul is a Chartered Fellow of the Chartered Institute for Securities &
Investments, a past Commissioner of the Guernsey Financial Services Commission
and past Chairman of the Guernsey International Business Association.
He is a graduate of Hertford College, Oxford. Paul is a resident of Guernsey.
Committee Membership: Audit and Risk Committee, Nomination Committee,
Management Engagement Committee, Remuneration Committee
Report of the Directors
The Directors hereby submit the Annual Report and Financial Statements for the
Company for the year ended 31 January 2024. This Report of the Directors
should be read together with the Corporate Governance Report.
Business Review
A review of the Company's business and its likely future development is
provided in the Chairman's Statement and in the Investment Manager's Report.
Listing Requirements
Since being admitted on 5 February 2013 to the Official List maintained by the
FCA, the Company has complied with the applicable Listing Rules.
Results and Dividends
The results for the year are set out in the Financial Statements.
During the year, and since the year end, the Directors declared the following
dividends:
Dividend Quarter Ended Date of Declaration Payment Date Amount per Ordinary Share (pence)
Interim dividend 31 January 2023 06 April 2023 04 May 2023 0.5
Share Capital
The Company has one class of Ordinary Shares. The issued nominal value of the
Ordinary Shares represents 100% of the total issued nominal value of all share
capital. Under the Company's Articles of Incorporation, on a show of hands,
each shareholder present in person or by proxy has the right to one vote at
Annual General Meetings. On a poll, each shareholder is entitled to one vote
for every share held.
Holders of Ordinary Shares are entitled to all dividends paid by the Company
and, on a winding up, providing the Company has satisfied all its liabilities,
the shareholders are entitled to all of the surplus assets of the Company. The
Ordinary Shares have no right to fixed income.
Under Company Articles the Company may, from time to time, issue Redeemable B
Shares in order to return capital to holders of Ordinary Shares. The Company
made two such issuances during the year, which were redeemed and cancelled:
No. B Shares issued Purpose Date of Declaration Payment Date Par Value per Redeemable B Share (pence)
121,302,779 Return of Capital 26 January 2023 17 February 2023 5.50
121,302,779 Return of Capital 11 August 2023 1 September 2023 7.40
Shareholdings of the Directors
The Directors' beneficial interests in the shares of the Company as at 31
January 2024 and 2023 are detailed below:
Director Ordinary Shares % holding at Ordinary Shares % holding at
of £1 each held 31 January 2024 of £1 each held 31 January 2023
31 January 2024 31 January 2023
Mr Perry 108,609 0.09 108,609 0.09
Mr Beevor 30,000 0.02 30,000 0.02
Mr Meader 305,921 0.25 305,921 0.24
Mrs Le Poidevin - 0.00 - 0.00
Directors' beneficial interests in the shares of the Company as at 2 May 2024,
being the most current information available, are unchanged from those
disclosed above.
Directors' Authority to Buy Back Shares
The Directors believe that the most effective means of minimising any discount
to Net Asset Value which may arise on the Company's share price, is to realise
optimal recoveries from the Company's investment portfolio in both absolute
and relative terms. However, the Board recognises that wider market conditions
and other considerations will affect the rating of the shares in the short
term and the Board may seek to limit the level and volatility of any discount
to Net Asset Value at which the shares may trade. The means by which this
might be done could include the Company repurchasing shares. Therefore,
subject to the requirements of the Listing Rules, the Companies Law, the
Articles and other applicable legislation, the Company may purchase shares in
the market in order to address any imbalance between the supply of and demand
for shares or to enhance the Net Asset Value of shares.
In deciding whether to make any such purchases the Directors will have regard
to what they believe to be in the best interests of shareholders and in
accordance with the applicable Guernsey legal requirements which require the
Directors to be satisfied on reasonable grounds that the Company will,
immediately after any such repurchase, satisfy a solvency test prescribed by
the Companies Law and any other requirements in its Memorandum and Articles of
Incorporation. The making and timing of any buybacks will be at the absolute
discretion of the Board and not at the option of the shareholders. Any such
repurchases would only be made through the market for cash at a discount to
Net Asset Value.
Annually the Company passes a resolution granting the Directors general
authority to purchase in the market up to 14.99% of the shares in issue
immediately following Admission at a price not exceeding the higher of (i) 5%
above the average mid-market values of shares for the five business days
before the purchase is made or (ii) the higher of the last independent trade
or the highest current independent bid for shares. The Directors intend to
seek renewal of this authority from the shareholders at the Annual General
Meeting.
Pursuant to this authority, and subject to the Companies Law and the
discretion of the Directors, the Company may purchase shares in the market on
an ongoing basis with a view to addressing any imbalance between the supply of
and demand for shares.
Shares purchased by the Company may be cancelled or held as treasury shares.
The Company may borrow and/or realise investments in order to finance such
share purchases.
The Company has not purchased any shares for treasury or cancellation during
the year or to date. During the year, the Board considered if such a purchase
of shares would be appropriate and concluded that it would not be in the best
interests of shareholders.
Directors' and Officers' Liability Insurance
The Company maintains insurance in respect of Directors' and Officers'
liability in relation to their acts on behalf of the Company.
Substantial Shareholdings
As at 31 January 2024, the Company had been notified, in accordance with
Chapter 5 of the Disclosure and Transparency Rules, of the following
substantial voting rights as shareholders of the Company.
Shareholder Shareholding % holding
Close Brothers Asset Management 21,029,244 17.34%
Almitas Capital 12,372,209 10.20%
Canopius 12,276,107 10.12%
TDC Pensionskasse 10,600,000 8.74%
Premier Miton Investors 10,500,000 8.66%
Intermediate Capital Group 10,000,000 8.24%
Hargreaves Lansdown, stockbrokers (Execution Only) 6,868,641 5.66%
Philip J Milton, stockbrokers 5,467,607 4.51%
CG Asset Management 4,882,100 4.02%
RBC Brewin Dolphin, stockbrokers 3,309,670 2.73%
In addition, the Company also provides the same information as at 23 April
2024, being the most current information available.
Shareholder Shareholding % holding
Close Brothers Asset Management 20,657,247 17.03%
Canopius 12,276,107 10.12%
Almitas Capital 11,972,209 9.87%
TDC Pensionskasse 10,600,000 8.74%
Premier Miton Investors 10,500,000 8.66%
Intermediate Capital Group 10,000,000 8.24%
Hargreaves Lansdown, stockbrokers (Execution Only) 6,903,552 5.69%
Philip J Milton, stockbrokers 5,702,660 4.70%
CG Asset Management 4,882,100 4.02%
RBC Brewin Dolphin, stockbrokers 3,122,970 2.57%
The Directors confirm that there are no securities in issue that carry special
rights with regard to the control of the Company.
Independent External Auditor
Deloitte LLP has been the Company's external auditor since the Company's
incorporation. The Audit and Risk Committee reviews the appointment of the
external auditor, its effectiveness and its relationship with the Company,
which includes monitoring the use of the external auditor for non-audit
services and the balance of audit and non-audit fees paid, as included in Note
14 to the Financial Statements. Following a review of the independence and
effectiveness of the external auditor, a resolution was proposed and accepted
at the 2023 Annual General Meeting to re-appoint Deloitte LLP. Each Director
believes that there is no relevant information of which the external auditor
is unaware. Each had taken all steps necessary, as a director, to be aware of
any relevant audit information and to establish that Deloitte LLP is made
aware of any pertinent information. This confirmation is given and should be
interpreted in accordance with the provisions of Section 249 of the Companies
Law. Further information on the work of the external auditor and reasons for
not putting the audit service out to tender is set out in the Report of the
Audit and Risk Committee.
Articles of Incorporation
The Company's Articles of Incorporation may only be amended by special
resolution of the shareholders.
NMPI Status
The Company no longer meets the criteria to be an exempt NMPI and the Company
was removed from the AIC list of excluded securities in the prior year.
AIFMD
The Company is a non-EU domiciled alternative investment fund and appointed
ICG Alternative Investments Limited as its discretionary Investment Manager on
25 November 2020. Prior to this appointment the Company was internally
managed. Any offer of shares to prospective investors within selected member
states of the European Economic Area and the UK will be made in accordance
with the applicable national private placement regime, and the Company will
notify its intention to market to the competent authority in each of the
selected member states for the purposes of compliance with AIFMD.
AEOI Rules
Under AEOI Rules the Company continues to comply with both FATCA and CRS
requirements to the extent relevant to the Company.
The Board is committed to upholding and maintaining a zero-tolerance policy
towards the criminal facilitation of tax evasion.
Change of Control
There are no agreements that the Company considers significant and to which
the Company is party that may affect its control following a takeover bid.
Going Concern
The Directors, at the time of approving the Financial Statements, are required
to consider whether they have a reasonable expectation that the Company has
adequate resources to continue in operational existence for the foreseeable
future and whether there is any threat to the going concern status of the
Company. At the EGM of the Company on 14 January 2021, following a
recommendation from the Board published in a circular on 16 December 2020,
shareholders voted by the requisite majority in favour of a change to the
Company's Objectives and Investment Policy which would lead to an orderly
realisation of the Company's assets and a return of capital to shareholders.
It is intended that, following the appointment of receivers or administrators
in respect of the last remaining loans, the investments will be realised as
and when the underlying property assets, or loans upon which they are secured,
can be sold in an orderly manner. The Company may take actions with the
consequence of accelerating or delaying realisation in order to optimise
shareholders' returns in the context of the Company's size.
Whilst the Directors are satisfied that the Company has adequate resources to
continue in operation throughout the realisation period and to meet all
liabilities as they fall due, given the Company is now in a managed wind down,
the Directors consider it appropriate to adopt a basis other than going
concern in preparing the financial statements.
In the absence of a ready secondary market in real estate loans by which to
assess market value of the loans, the basis of valuation for investments is
amortised cost net of impairment, recognising the realisable value of each
property in the orderly wind down of the Company. In accordance with the
Company's IFRS 9 Policy the staging of each loan has been reviewed and all
loans are now considered to be at Stage 3. Consequently, valuations reflect
the ECL assuming a twelve month realisation period, as detailed in Note 5. No
material adjustments have arisen solely as a result of ceasing to apply the
going concern basis.
Viability Statement
The AIC Code requires that, the Directors make a viability statement in which
they assess the prospects of the Company over a period longer than the 12
months required by the going concern provision.
A change in Investment Policy was approved by the shareholders at the EGM on
14 January 2021 with the resultant intention that the Company undergo an
orderly realisation of assets, returning capital to shareholders.
For this reason, and as discussed above, the Company is preparing the
financial statements on a basis other than going concern due to the Company
being in a managed wind down.
Since the EGM, 8 loans have repaid in full and £54.46 million of capital has
been returned to Shareholders. The Company's remaining three loans are now
past due and receivers or administrators have been appointed to accelerate the
realisation of the security underpinning the loans. As discussed elsewhere
in this report, market conditions have been, and remain, unfavourable to near
term realisations except to opportunistic buyers seeking material discounts to
value in the face of high funding costs in order to generate their target
returns.
The valuations applied to the loans reflect the Board's current expectations
of realisable values in a twelve month period, however the Board have
considered the Company's working capital requirements, assuming no further
income or capital receipts over a two year period.
Cashflow projections are prepared regularly. The Board intends to return
surplus capital to investors following each loan repayment, whilst it remains
prudent to do so and taking into account the commitments, liabilities and
expected duration of the Company at the time.
Having conducted a robust analysis on this basis, the Directors remain
satisfied that the Company can meet its liabilities as they fall due over the
period under consideration to February 2026, if the Company continues in
operation up until that date. The Company is likely to operate with a cashflow
deficit in some quarters. Cash reserves are held to cover these periods and
will be re-assessed with each loan repayment. The Company will, on a prudent
basis, maintain working capital reserves to meet all liabilities as they fall
due through to the latest expected repayment date.
Directors' Responsibilities to Stakeholders
Section 172 of the UK Companies Act 2006 applies directly only to UK domiciled
companies. Nonetheless, the AIC Code requires that the matters set out in
section 172 are reported on by all companies, irrespective of domicile. This
requirement does not conflict with Guernsey company law.
Section 172 recognises that Directors are responsible for acting in a way that
they consider, in good faith, is the most likely to promote the success of the
Company for the benefit of its shareholders as a whole. In doing so, they are
also required to consider the broader implications of their decisions and
operations on other key stakeholders and their impact on the wider community
and the environment. Key decisions are those that are either material to the
Company or are significant to any of the Company's key stakeholders. The
Company's engagement with key stakeholders and the key decisions that were
made or approved by the Directors during the year are described below.
Stakeholder Group Methods of Engagement Benefits of Engagements
Shareholders
The Company engages with its shareholders through the issue of portfolio In the financial year the Company issued:
Following a series of economic shocks and the Company share price falling to a updates in the form of RNS announcements.
deep discount to NAV, shareholders supported a recommendation by the Board in
- 4 Portfolio updates by way of RNS
2021, to wind down the Company.
The Company provides in depth commentary on the investment portfolio,
corporate governance and corporate outlook in its semi-annual and annual The Company has continued in its objective to execute the orderly realisation
The Company sought to maintain shareholder satisfaction through: financial statements. of assets of the Company during the year. During a period when market
conditions have not been favourable towards this goal, discussions involving
· Transparency of communication Directors, the Investment Manager and the Company's brokers have been held
directly with major shareholders during the year.
· Capital preservation The Board receives quarterly feedback from its Broker in respect of their
investor engagement and investor sentiment. Engagement with shareholders through these announcements enables shareholders
· Payment of regular and sustainable dividends for as long as
to take informed decision as to the winding up process and timetable.
considered prudent and
· Return of capital on loan repayments The engagement with shareholders,
through update calls and the AGM, will continue through the wind down period
as capital is returned to investors.
The Company engages with its shareholders through the issue of portfolio
updates in the form of RNS announcements.
The Company provides in depth commentary on the investment portfolio,
corporate governance and corporate outlook in its semi-annual and annual
financial statements.
The Board receives quarterly feedback from its Broker in respect of their
investor engagement and investor sentiment.
The engagement with shareholders,
through update calls and the AGM, will continue through the wind down period
as capital is returned to investors.
In the financial year the Company issued:
- 4 Portfolio updates by way of RNS
The Company has continued in its objective to execute the orderly realisation
of assets of the Company during the year. During a period when market
conditions have not been favourable towards this goal, discussions involving
Directors, the Investment Manager and the Company's brokers have been held
directly with major shareholders during the year.
Engagement with shareholders through these announcements enables shareholders
to take informed decision as to the winding up process and timetable.
Borrowers/Administrators and Receivers
The Company's principal clients are the borrowers to whom the Company provides The Company engaged with its Borrowers, and now engages with the During the course of the year, the
term finance. administrators and receivers, through its Investment Manager.
Investment Manager has provided and the Board reviewed regular updates to the
portfolio and investments. Further specific updates have been provided on
investment specific matters throughout the year.
During the year, other than in respect of its Northlands loan which was The Investment Manager has formed and maintained a close working relationship
repaid, the Company has appointed administrators or receivers in respect of with these parties through regular update calls and the ongoing quarterly
its remaining loans, and, consequently the receiver/administrator now fulfils monitoring of loans over their respective terms.
the duties of the borrower and acts on behalf of any other relevant creditors
The Investment Manager regularly engaged with all its Borrowers during the
to the borrower entity. year to seek orderly repayment of the Company's loans, as was the case with
Northlands, but has ultimately appointed of receivers/administrators due to
Following the appointment of receivers/administrators, the Investment Manager the borrowers' defaults under the terms of the original loans.
holds regular meetings to monitor the performance of the underlying properties
and actions being undertaken to protect, enhance and ultimately realise their
value.
Through its engagement with the administrators and receivers, the Investment
Manager is able to advise on and monitor all actions being taken to prepare
assets for sale and the ensuing sales process, and take actions to support the
The Board monitors the timeliness and asset level performance to protect or enhance value.
quality of these engagements through its
regular engagement with the Investment
Manager.
A Director of the Company has met with two of the administrators/receivers and
conducted site visits at certain of the secured properties to understand the
specific market dynamics impacting liquidity and value of the subject
properties.
Service Providers
The Company does not have any direct employees; however, it works closely with The Company's Management Engagement Committee has identified its key service The information provided given by the service providers is used to review the
a number of service providers (the Investment Manager, Administrator, Company providers. On an annual basis it undertakes a review of performance based on a Company's policies, controls, and procedures to ensure open lines of
Secretary, Broker and other professional service providers) whose interests questionnaire through which it also seeks feedback. communication, operational efficiency, robustness and, appropriate pricing for
are aligned to the success of the Company.
services provided. Feedback has been given to all relevant service providers
during the year.
Furthermore, the Board and its sub-committees engage regularly with its
The quality and timeliness of their service provision is critical to the service providers on both a formal and informal basis.
success of the Company.
In addition, following extensive discussion between the Board and the
Investment Manager, their fee will reduce to 0.5% of Net Asset Value from 1%
previously, as discussed in the Chairman's statement.
The Management Engagement Committee will also regularly review all material
contracts for service quality and value.
Community & Environment
As an investment company whose purpose was the provision of and investment in Within its investment strategy, the environmental and social impact of the In the year to 31 January 2024, the Company made no new loans.
commercial real estate debt, the Company's direct engagement with the local properties on which the Company's loans are secured was an important
community and the environment is limited. consideration when it had made its investments, and has remained so through
the monitoring of the loans and actions of the Borrowers.
In monitoring its investments and providing working capital facilities for the
protection of development of the properties the Investment Manager and the
However, the Board recognises the role the Company can play in terms of the
Board have continued to consider the environmental and social impact or such
environment by supporting and guiding Borrowers to find environmentally The community, environmental and social impact has also been a consideration developments or expenditure.
friendly sustainable solutions in the maintenance of their properties and in the choice to appoint receivers/administrators in respect of the Company's
delivery of their business plan objectives more generally. remaining loans.
With respect to the loans now in administration or receivership the Investment
Manager, on behalf of the Company, continues to engage with the relevant
parties to ensure that the properties are being maintained in good order for
their occupants and in the case of operational properties a duty of care to
all stakeholders is being observed.
The ESG report provides further information on the Investment Manager's
approach to this important subject.
Key Decisions
Key decisions are defined as both those that are material to the Company but
also those that are significant to any of our key stakeholders as discussed
above.
In making the following key decisions, the Board considered the outcome from
its stakeholder engagement as well as the need to maintain a reputation for
high standards of business conduct and the need to act fairly between the
members of the Company:
Given that further of the Company's loans were fully repaid, the Board
approved two distributions of capital equating to 5.50 and 7.40 pence per
share for the year.
The Board agreed to the Investment Manager's recommendation that the Company
exercise its security interests and appoint an administrator over the
RoyaleLife borrower companies and a receiver over the Spectrum Affinity
property.
In order to protect the value of its underlying property security, the Board
approved a restructure of the RoyaleLife loan, which resulted in the cross
collateralisation of its security with other assets securing a similar loan
made to the same borrower group by its co-lenders.
The Board determined to retain a working capital buffer to ensure the
Company's viability in the absence of any further income or capital receipts
during the foreseeable realisation period of the remaining investments.
The Board reviewed the performance of the Investment Manager, which was
considered to be satisfactory. The Board has agreed to a reduction to the
Investment Manager's fees to control the Company's cost base and improve the
ultimate value returned to shareholders. Accordingly, the Investment Manager's
reappointment was confirmed.
Financial Risk Management Policies and Procedures
Financial Risk Management Policies and Procedures are disclosed in Note 11 to
the Financial Statements.
Principal Risks and Uncertainties
Principal Risks and Uncertainties are discussed in the Corporate Governance
Report.
Subsequent Events
Significant subsequent events have been disclosed in Note 17 to the Financial
Statements.
Alternative Performance Measures
The Directors believe that the performance indicators detailed in the
Financial Summary, which are typical for entities investing in real estate
debt, will provide shareholders with sufficient information to assess how
effectively the Company is meeting its objectives.
Annual General Meeting
The AGM of the Company will be held at 12pm BST on 18 June 2024 at Floor 2,
Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 4LY. Details of the
resolutions to be proposed at the AGM, together with explanations of the AGM
arrangements, will appear in the Notice of Meeting to be distributed to
shareholders.
Members of the Board will be in attendance at the AGM and will be available to
answer shareholder questions.
By order of the Board
Jack Perry
Chairman
8 May 2024
Directors' Responsibilities Statement
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable law and regulations.
The Companies Law requires the Directors to prepare Financial Statements for
each financial year. Under that law the Directors are required to prepare
the Financial Statements in accordance with UK adopted international
accounting standards (''IFRS''). Under the Companies Law, the Directors must
not approve the Financial Statements unless they are satisfied that they give
a true and fair view of the state of affairs of the Company and of the profit
or loss of the Company for that period. In preparing these Financial
Statements, the Directors are required to:
· select suitable accounting policies in accordance with IAS 8:
Accounting Policies, Changes in Accounting Estimates and Errors and then apply
them consistently;
· make judgements and estimates that are reasonable and prudent;
· present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable information;
· provide additional disclosures when compliance with the specific
requirements in IFRS are insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the Company's
financial position and financial performance;
· state that the Company has complied with IFRS, subject to any
material departures disclosed and explained in the Financial Statements; and
· prepare the Financial Statements on a going concern basis unless
it is inappropriate to presume that the Company will continue in business.
The Directors confirm that they have complied with the above requirements in
preparing the Financial Statements.
The Directors are responsible for keeping proper accounting records, which
disclose with reasonable accuracy at any time, the financial position of the
Company and enable them to ensure that the Financial Statements comply with
Companies Law. They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention and detection
of fraud, error and non-compliance with law and regulations.
The Directors are responsible for ensuring that the Annual Report and
Financial Statements, taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to assess the
Company's performance, business model and strategy.
The Directors are also responsible under the AIC Code to promote the success
of the Company for the benefit of its members as a whole and in doing so have
regard for the needs of wider society and other stakeholders.
As part of the preparation of the Annual Report and Financial Statements the
Directors have received reports and information from the Company's
Administrator and Investment Manager. The Directors have considered,
reviewed and commented upon the Annual Report and Financial Statements
throughout the drafting process in order to satisfy themselves in respect of
the content.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the website (www.lbow.co.uk).
Legislation in Guernsey governing the preparation and dissemination of the
Financial Statements may differ from legislation in other jurisdictions.
Responsibility Statement of the Directors in Respect of the Annual Report
under the Disclosure and Transparency Rules
Each of the Directors confirms to the best of their knowledge and belief that:
· the Financial Statements, prepared in accordance with IFRS, give
a true and fair view of the assets, liabilities, financial position and profit
or loss of the Company taken as a whole;
· the Annual Report includes a fair review of the development and
performance of the business and the position of the Company, together with a
description of the principal risks and uncertainties faced.
Responsibility Statement of the Directors in Respect of the Annual Report
under the Corporate Governance Code
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable law and regulations. Having taken
advice from the Audit and Risk Committee, the Directors consider the Annual
Report and Financial Statements, taken as a whole, as fair, balanced and
understandable and that it provides the information necessary for shareholders
to assess the Company's performance, business model and strategy.
By order of the Board
Jack Perry Fiona Le Poidevin
Chairman Director
8 May 2024 8 May 2024
Corporate Governance Report
As a UK premium listed Company, ICG-Longbow Senior Secured UK Property Debt
Investment Limited's governance policies and procedures are based on the
principles of the Corporate Governance Code as required under the Listing
Rules. The Corporate Governance Code is available on the Financial Reporting
Council's website, www.frc.org.uk (http://www.frc.org.uk) .
The Company became a member of the AIC effective 27 February 2013 and has
therefore put in place arrangements to comply with the AIC Code of Corporate
Governance (''AIC Code'') and thereby complies with the UK Corporate
Governance Code. The Directors recognise the importance of sound corporate
governance, particularly the Principles and Provisions addressed within the
AIC Code. The AIC Code is available on the AIC's website www.theaic.co.uk
(http://www.theaic.co.uk) .
The Company is subject to the GFSC Code, which applies to all companies
registered as collective investment schemes in Guernsey. The GFSC has also
confirmed that companies which report against the UK Corporate Governance Code
or AIC Code are deemed to meet the GFSC Code.
The AIC Code addresses all the principles set out in the UK Corporate
Governance Code, as well as setting out additional principles and
recommendations on issues that are of specific relevance to investment
companies such as the Company. The Board considers that reporting against the
principles and recommendations of the AIC Code provides appropriate
information to shareholders.
The Board monitors developments in corporate governance to ensure the Board
remains aligned with best practice.
Throughout the year ended 31 January 2024, the Company has complied with the
recommendations of the AIC Code and the relevant provisions of Section 1 of
the Corporate Governance Code, except as set out below.
The Corporate Governance Code includes provisions relating to:
· the role of the chief executive;
· executive directors' remuneration;
· the need for an internal audit function;
· succession.
For the reasons set out in the AIC Code, and as explained in the UK Corporate
Governance Code, the Board considers that the above provisions other than
succession are not currently relevant to the position of the Company, which
delegates most day-to-day functions to third parties.
The Directors have access to the services provided by the Company Secretary,
Ocorian Administration (Guernsey) Limited, who ensure statutory obligations of
the Company are achieved.
As an investment company, the Company has no employees, all Directors are
non-executive and independent of the Investment Manager and, therefore, the
Directors consider the Company has no requirement for a Chief Executive or
Senior Independent Director and the Board is satisfied that any relevant
issues can be properly considered by the Board. The absence of an internal
audit function is discussed in the Report of the Audit and Risk Committee.
As the Company is in wind down, the Board has determined not to implement a
succession plan for Directors. The Board considers all Directors remain
independent.
Environmental, Social and Governance Report
As an investment company, the Company's activities only have a limited direct
impact on the environment.
Following the change in Investment Objective and Policy approved by
shareholders in January 2021, the Company is now conducting an orderly
realisation of its investments. As such, the opportunity to implement material
ESG changes across its portfolio is relatively limited and ESG considerations
are expected to be limited to monitoring the existing investments for their
own performance in this area.
Nonetheless, the Board continues to believe that it is in shareholders'
interests to consider environmental, social and governance factors in
monitoring its investments. The parent of the Investment Manager is a
longstanding signatory to the UN Principles for Responsible Investment and has
a fully formalised and embedded Responsible Investing Policy which is applied
to all investment decisions and the monitoring of each investment opportunity.
The parent of the Investment Manager continues to develop its ESG policies and
procedures. Its responsible investment policy is available to view at: ICG
Website
(https://www.icgam.com/sustainability/investing-responsibly/responsible-investing-policy/)
As the Company will no longer make any new investments and is actively seeking
to realise the remaining assets in its portfolio, the opportunities to support
borrowers in ESG matters is limited. However, where receivers and
administrators have been appointed to realise the value of the underlying
security assets, the Company and the Investment Manager remain mindful of its
ESG responsibilities particularly toward the stakeholders in the operating
assets.
Culture and Values
The Board recognises that its tone and culture is important and will greatly
impact its interactions with shareholders and service providers as well as the
development of long-term shareholder value. The importance of sound ethical
values and behaviours is crucial to the ability of the Company to achieve its
objectives successfully.
The Board individually and collectively seeks to act with diligence, honesty
and integrity. It encourages its members to express differences of perspective
and to challenge but always in a respectful, open and cooperative fashion. The
Board encourages diversity of thought and approach and chooses its members
with this approach in mind. The governance principles that the Board has
adopted are designed to ensure that the Company delivers long term value to
its shareholders and treats all shareholders equally. All shareholders are
encouraged to have an open dialogue with the Board.
The Board recognises that the Company will take risks in order to achieve its
objectives, but these risks are monitored and managed. The Company seeks to
avoid excessive risk-taking in pursuit of returns. A large part of the Board's
activities are centred upon what is necessarily an open and respectful
dialogue with the Investment Manager. In holding the Investment Manager to
account, the Board regularly raises robust challenges of the choices and
recommendations made by them.
The Board
The Company is led and controlled by a Board of Directors, which is
collectively responsible for the remaining realisation period of the Company.
It does so by acting in the interests of the Company, creating and preserving
value and has as its foremost principle to act in the interests of all
shareholders.
The Company believes that the composition of the Board is a fundamental driver
of its success as the Board must provide strong and effective leadership of
the Company. The current Board was selected, as their biographies illustrate,
to bring a breadth of knowledge, skills and business experience to the
Company. All Directors are members of professional bodies and serve or have
served on other boards, which ensures that they are kept abreast of the latest
technical developments in their areas of expertise. In terms of gender
balance, the Board has 25% female and 75% male representation. Fiona Le
Poidevin is the Chair of the Audit and Risk Committee.
The Chairman leads the Board and is responsible for its overall effectiveness
in directing the Company. The Chairman must be independent and is appointed in
accordance with the Company's Articles of Incorporation. In considering the
independence of the Chairman, the Board took note of the provisions of the AIC
Code relating to independence and has determined that Mr Perry is an
independent Director.
The Board meets at least four times a year and, in addition, there is regular
contact between the Board, the Investment Manager and the Administrator. At
each meeting the Board follows a formal agenda that covers the business to be
discussed. Directors meet regularly with the senior management employed by the
Investment Manager both formally and informally to ensure the Board remains
regularly updated on all issues. Ordinarily, the Board also has regular
contact with the Administrator and the Board is supplied in a timely manner
with information by the Investment Manager, the Company Secretary and other
advisers in a form and of a quality to enable it to discharge its duties.
The Company has adopted a share dealing code which is complied with by the
Directors of ICG Longbow Senior Secured UK Property Debt Investments Limited
and relevant personnel of the Investment Manager.
Board Tenure and Re-election
Three of the four remaining Directors were appointed in November 2012 and
Fiona Le Poidevin was appointed on 1 September 2020. Therefore, three of the
four members of the Board have served for longer than nine years to date. The
issue with respect to long tenure has arisen and, in accordance with the AIC
Code, when and if any Director shall have been in office (or on re-election
would have at the end of that term of office) for more than nine years, the
Company will consider further whether there is a risk that such a Director
might reasonably be deemed to have lost independence through such long
service.
The Nomination Committee takes the lead in any discussions relating to the
appointment or re-appointment of Directors and gives consideration to Board
rotation in advance of the nine-year tenure limit. The Board recognises that
Directors serving nine years or more may appear to have their independence
impaired. However, the Board nonetheless considers the Directors to remain
independent as noted further below. In addition, the Board believes it is
beneficial for shareholders that there is continuity of Board leadership
during this final managed realisation phase before placing the Company in
liquidation.
Directors are appointed under letters of appointment, copies of which are
available at the registered office of the Company. The Board considers its
composition and succession planning on an ongoing basis. The Company's
Articles of Incorporation specify that at each annual general meeting of the
Company all Directors shall retire from office and may offer themselves for
election or re‐election by the Members. Mr Perry, Mr Beevor,
Mr Meader and Mrs Le Poidevin will retire as Directors of the Company in
accordance with the Articles and will be put forward for re-election at the
forthcoming AGM.
Any Director who is elected or re-elected at that meeting is treated as
continuing in office throughout. If they are not elected or re-elected, they
shall retain office until the end of the meeting or (if earlier) when a
resolution is passed to appoint someone in their place or when a resolution to
elect or re-elect the Director is put to the meeting and lost.
The Board remains confident that its membership respects the spirit of the
Code regarding Board composition, diversity, particularly with respect to
gender, and how effectively members work together to achieve the Company's
objectives.
The Company's policy on Chair tenure is that the Chair should not normally
serve longer than nine years as a Director and/ or Chair unless it is
determined to be in the best interests of the Company, its shareholders and
stakeholders.
On 14 January 2021, the Company's shareholders voted for the orderly
realisation of the Company's assets and the return of capital to shareholders.
As the Company now has a finite remaining operating life, not expected to
exceed one year from the date of this report, it is considered in the best
interests of shareholders and stakeholders to maintain the continuity and
experience of the existing Board. In addition, it is considered impractical to
attract, recruit and induct new Board members for such a short period of time.
Accordingly, the current Chair of the Company, barring unforeseen
circumstances, is expected to remain in office until the Company is placed
into liquidation. In practice this means that his tenure will continue to
exceed the recommended nine-year term. Similarly, Mr Beevor and Mr Meader will
also continue to exceed the recommended nine-year term for the reasons stated,
until the Company is placed in liquidation.
Directors' Remuneration
The level of remuneration of the Directors reflects the time commitment and
responsibilities of their roles. The Chairman is entitled to annual
remuneration of £50,000 (31 January 2023: £50,000). The Chair of the Audit
and Risk Committee is entitled to annual remuneration of £40,000 (31 January
2023: £40,000). The other independent Directors are entitled to annual
remuneration of £35,000 (31 January 2023: £35,000). These levels of
remuneration have remained unchanged since July 2017.
During the year ended 31 January 2024 and the year ended 31 January 2023, the
Directors' remuneration was as follows:
Expected fees 1 February 2024 to 31 January 2025 1 February 2023 to 31 January 2024 1 February 2022 to 31 January 2023
Director £ £ £
Jack Perry 50,000 50,000 50,000
Paul Meader 35,000 35,000 35,000
Stuart Beevor 35,000 35,000 35,000
Fiona Le Poidevin 40,000 40,000 40,000
The Company Directors' fees for the year amounted to £160,000 (31 January
2023: £160,000) with outstanding fees of £31,250 due to the Directors at 31
January 2024 (31 January 2023: £31,250) (see Note 8).
All of the Directors are non-executive and are each considered independent for
the purposes of Chapter 15 of the Listing Rules.
Duties and Responsibilities
The Board has overall responsibility for maximising the Company's success by
directing and supervising the affairs of the business and meeting the
appropriate interests of shareholders and relevant stakeholders, while
enhancing the value of the Company and also ensuring the protection of
investors. The Board has adopted a Schedule of Matters which sets out the
particular duties of the Board. Such reserved powers include the following:
• strategic matters;
• risk assessment and management including reporting,
compliance, governance, monitoring and control and financial reporting;
• statutory obligations and public disclosure;
• declaring Company dividends;
• managing the Company's advisers;
• appointment of a liquidator; and
• other matters having a material effect on the Company.
The Directors have access to the advice and services of the Administrator, who
is responsible to the Board for ensuring that Board procedures are followed
and that it complies with Companies Law and applicable rules and regulations
of the GFSC and the London Stock Exchange. Where necessary, in carrying out
their duties, the Directors may seek independent professional advice and
services at the expense of the Company. The Company maintains appropriate
Directors' and Officers' liability insurance in respect of legal action
against its Directors, should this occur.
The Board's responsibilities for the Annual Report are set out in the
Directors' Responsibility Statement. The Board is also responsible for issuing
appropriate Interim Reports and other price-sensitive public reports.
One of the key criteria the Company uses when selecting non-executive
Directors, is their confirmation prior to their appointment that they will be
able to allocate sufficient time to the Company to discharge their
responsibilities in a timely and effective manner. The Board assesses the
training needs of Directors on an annual basis.
The Board formally met four times during the year and ad-hoc Board meetings
were called in relation to specific events or to issue approvals, often at
short notice and did not necessarily require full attendance. Each Board
member receives a comprehensive Board pack at least five days prior to each
meeting which incorporates a formal agenda together with supporting papers for
items to be discussed at the meeting. Directors are encouraged when they are
unable to attend a meeting to give the Chairman their views and comments on
matters to be discussed, in advance. Representatives of the Investment Manager
attend relevant sections of the Board meetings by invitation and the Directors
also liaise with the Investment Manager whenever required and there is regular
contact outside the Board meeting schedule.
Attendance is further set out below :
Director Scheduled Board Ad-hoc Board Audit and Risk Committee Ad-hoc
Meetings Meetings Meetings Committee
4 5 6 Meetings Management Engagement
2 Nomination Committee Remuneration
Committee Meeting Committee
Meeting 2 Meeting
0 0
Stuart Beevor 4 5 6 2 - 2 -
Paul Meader 4 2 6 2 - 2 -
Jack Perry(1) 4 5 - 2 - 2 -
Fiona Le Poidevin 4 5 6 2 - 2 -
(1) Mr Perry has a standing invitation to Audit and Risk Committee
meetings, however his attendance at the meetings is as an observer only and is
not recorded.
The quorum for any Board meeting is two directors but attendance by all
Directors at each meeting is encouraged.
Conflicts of interest
A Director has a duty to avoid a situation in which he or she has, or can
have, a direct or indirect interest that conflicts, or possibly may conflict,
with the interests of the Company. The Board requires Directors to declare all
appointments and other situations that could result in a possible conflict of
interest and has adopted appropriate procedures to manage and, if appropriate,
approve any such conflicts. The Board is satisfied that there is no compromise
to the independence of those Directors who have appointments on the boards of,
or relationships with, companies outside the Company.
Committees of the Board
The Board believes that it and its committees have an appropriate composition
and blend of backgrounds, skills and experience to discharge their duties
effectively. The Board is of the view that no one individual or small group
dominates decision-making. The Board keeps its membership, and that of its
committees, under review to ensure that an acceptable balance is maintained
and that the collective skills and experience of its members continue to be
refreshed. It is satisfied that all Directors have sufficient time to devote
to their roles and that undue reliance is not placed on any individual.
Each committee of the Board has written terms of reference, approved by the
Board, summarising its objectives, remit and powers and are reviewed on an
annual basis. Each committee has access to such external advice as it may
consider appropriate.
All committee members are provided with an appropriate induction on joining
their respective committees, as well as ongoing access to training. Minutes of
all meetings of the committees are made available to all Directors and
feedback from each of the committees is provided to the Board by the
respective committee Chairs at the next Board meeting.
The Board and its committees are supplied with regular, comprehensive, and
timely information in a form and of a quality that enables them to discharge
their duties effectively. All Directors are able to make further enquiries of
the Investment Manager and Administrator whenever necessary and have access to
the services of the Company Secretary.
Audit and Risk Committee
The Audit and Risk Committee is chaired by Mrs Le Poidevin. The Committee also
comprises Mr Beevor and Mr Meader, who held office throughout the year. Mr
Perry has a standing invitation to attend meetings. However, his attendance at
these meetings is as an observer only. The Chair of the Audit and Risk
Committee, the Investment Manager and the external auditor, Deloitte LLP, have
held discussions regarding the audit approach and identified risks. The
external auditors attend Audit and Risk Committee meetings and a private
meeting is held routinely with the external auditor to afford them the
opportunity of discussions without the presence of the Investment Manager or
Administrator. The Audit and Risk Committee's activities are contained in the
Report of the Audit and Risk Committee.
Management Engagement Committee
The Management Engagement Committee is chaired by Mr Perry and also comprises
Mr Meader, Mr Beevor and Mrs Le Poidevin, all of whom held office throughout
the year. The Management Engagement Committee meets not less than once a year
pursuant to its terms of reference, which are available on the Company's
website.
The Management Engagement Committee's main function is to review and make
recommendations in relation to the Company's service providers. The Management
Engagement Committee will review, in particular, any proposed amendment to the
Investment Management Agreement and will keep under review the performance of
the Investment Manager (including effective and active monitoring and
supervision of the activities of the Investment Manager) in its role as
investment manager to the Company as well as the performance of other
principal service providers to the Company. The Audit and Risk Committee also
reports on its relationship with the external auditor.
Nomination Committee
The Nomination Committee is chaired by Mr Perry and also comprises Mr Beevor,
Mr Meader and Mrs Le Poidevin, all of whom held office throughout the year.
Given that the Company is in orderly wind-down and that there is no
expectation for the Committee/Board composition to change for the reasons
provided in this Report, it was no longer deemed necessary for the committee
to meet at least once a year. The Nomination Committee's remit is to review
regularly the structure, size and composition of the Board, to give full
consideration to succession planning for Directors, to keep under review the
leadership needs of the Company and be responsible for identifying and
nominating, for the approval of the Board, candidates to fill Board vacancies
as and when they arise. The Nomination Committee met on 4 April 2024 and
confirmed that its terms of reference remained appropriate. Board
composition and tenure were discussed and the policy on both issues was agreed
as disclosed in the Corporate Governance Report above. The directors'
independence was also reviewed and each individual director was considered as
independent.
Board Performance Evaluation
In accordance with Provision 26 of the AIC Code, the Board is required to
undertake a formal and rigorous evaluation of its performance on an annual
basis. The Board believes that annual evaluations are helpful and provide a
valuable opportunity for continuous improvement. Such an evaluation of the
performance of the Board as whole, the Audit and Risk Committee, the
Nomination Committee, the Management Engagement Committee, the Remuneration
Committee, individual Directors and the Chairman is carried out and the
results are considered by the whole Board.
The internal evaluation conducted by the Board during the year took the form
of self-appraisal questionnaires and discussion to determine effectiveness and
performance as well as the Directors' continued independence. The responses
were consolidated and anonymised and common themes identified in order for the
Board to determine key actions and next steps for improving Board and
Committee effectiveness and performance.
The evaluation concluded that the Board is performing satisfactorily and is
acquitting its responsibilities well in the areas reviewed which incorporated:
investment matters; Board composition and independence; relationships and
communication; shareholder value; knowledge and skills; Board processes; and
the performance of the Chairman. The Board believes that the current mix of
skills, experience and knowledge of the Directors is appropriate to the
requirements of the Company.
The Nomination Committee has also reviewed the composition, structure and
diversity of the Board, the independence of the Directors and whether each of
the Directors has sufficient time available to discharge their duties
effectively. The Committee and the Board confirm that they believe that the
Board has an appropriate mix of skills and backgrounds and that all Directors
should be considered as independent in accordance with the provisions of the
AIC Code and have the time available to discharge their duties effectively.
Accordingly, the Board recommends that shareholders vote in favour of the
re-election of all Directors at the forthcoming AGM.
Succession Planning
The Board recognises that Directors serving nine years or more may appear to
have their independence impaired. However, the Board may nonetheless consider
Directors to remain independent. The Board considers it beneficial for
shareholders that there is continuity of Board leadership during this final,
managed realisation phase before placing the Company in liquidation.
Therefore, the Board has determined that, barring any unforeseen
circumstances, the present complement of Directors will continue in office
until the appointment of a liquidator.
Remuneration Committee
The Remuneration Committee is chaired by Mr Perry and comprises of Mr Meader
and Mr Beevor who have held office from 12 December 2019, when the
Remuneration Committee was formed, and Mrs Le Poidevin who was appointed to
the Committee on 10 December 2020. The Remuneration Committee is responsible
for recommending and monitoring the level and structure of remuneration for
all the Directors, including any compensation payments, taking into account
the time commitments and responsibilities of Directors and any other factors
which it deems necessary, including the recommendations of the AIC Code.
There had been no changes to the Director fees since they were set on 1 July
2017 and they were not expected to change, subject to any unforeseen
circumstances, so an annual meeting was no longer deemed necessary. The
Remuneration Committee met on 4 April 2024 and confirmed that its terms of
reference remained appropriate. It was agreed that there will be no increase
to fees during the realisation period subject to any unforeseen circumstances.
No change in remuneration is therefore proposed for the year to 31 January
2025.
Internal Control and Financial Reporting
The Directors acknowledge that they are responsible for establishing and
maintaining the Company's system of internal controls and reviewing its
effectiveness. Internal control systems are designed to manage rather than
eliminate the failure to achieve business objectives and can only provide
reasonable but not absolute assurance against material misstatements or loss.
The Directors can confirm they have carried out a robust assessment of the
principal risks facing the Company, including those that would threaten its
business model, future performance, solvency or liquidity. The key
procedures which have been established to provide internal control are:
• the Board has delegated the day-to-day operations of the
Company to the Administrator and Investment Manager, however it remains
accountable for all functions it delegates;
• the Board clearly defines the duties and responsibilities of
the Company's agents and advisers, and appointments are made by the Board
after due and careful consideration. The Board monitors the on-going
performance of such agents and advisers and continues to do so through the
Management Engagement Committee;
• the Board monitors the actions of the Investment Manager at
regular Board meetings and is also given frequent updates on developments
arising from the operations and strategic direction of the underlying
borrowers; and
• the Administrator provides administration and corporate
secretarial services to the Company. The Administrator maintains a system of
internal controls on which it reports to the Board.
The Board has reviewed the need for an internal audit function and has decided
that the systems and procedures employed by the Administrator and Investment
Manager, including their own internal controls and procedures, provide
sufficient assurance that an appropriate level of risk management and internal
control, which safeguards shareholders' investment and the Company's assets,
is maintained. An internal audit function specific to the Company is therefore
considered unnecessary.
Internal controls over financial reporting are designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes. The Administrator and
Investment Manager both operate risk-controlled frameworks on a continual
ongoing basis within a regulated environment. The Administrator undertakes an
ISAE3402 report: Assurance Report on Controls at a Service Organisation Audit
which is provided to the Board when finalised. The last available report is
dated 23 March 2023 and covers the year to 31 October 2021. The report for the
period to 31 October 2022 is expected shortly. For the period to 31 October
2023, the Administrator is undertaking a Global Service Organisation Control
(SOC-1) Report which will be available in Q2 2024. The Board has received an
assurance from the Administrator that there have been no material changes in
their control environment that would adversely affect the Auditor's Opinion in
the most recently published ISAE 3402 and the Directors have held further
satisfactory discussions with the Administrator around key controls employed.
The Administrator also formally reports to the Board quarterly through a
compliance report. The Investment Manager formally reports to the Board
quarterly, including relevant updates regarding their policies and procedures,
and also engages with the Board on an ad-hoc basis as required. No major
weaknesses or failings within the Administrator or Investment Manager have
been identified.
The systems of control referred to above are designed to ensure effectiveness
and efficient operation, internal control and compliance with laws and
regulations. In establishing the systems of internal control, regard is paid
to the materiality of relevant risks, the likelihood of costs being incurred
and costs of control. It follows, therefore, that the systems of internal
control can only provide reasonable but not absolute assurance against the
risk of material misstatement or loss. This process has been in place for the
year under review and up to the date of approval of this Annual Report and
Financial Statements. It is reviewed by the Board and is in accordance with
the FRC's internal control publication: Guidance on Risk Management, Internal
Control and Related Financial and Business Reporting.
The Company has delegated the provision of services to external service
providers whose work is overseen by the Management Engagement Committee at its
regular scheduled meetings. Each year a detailed review of performance
pursuant to their terms of engagement is undertaken by the Management
Engagement Committee. An on-site review of the Investment Manager was
undertaken by the Directors on 8 February 2024 as part of the internal control
environment. Given the uncertainty in regards to the remaining life of the
Company, the Board may consider a further visit to the Investment Manager's
office, if required. The conclusions of these reviews have been satisfactory,
providing assurance on the control environment to the Board. In addition, the
Company maintains a website which contains comprehensive information,
including regulatory announcements, share price information, financial
reports, investment objectives and strategy, investor contacts and information
on the Board.
Investment Management Agreement
The Company has entered into an agreement with the Investment Manager. This
sets out the Investment Manager's key responsibilities, this includes being
responsible to the Board for all issues relating to the maintenance and
monitoring of existing investments.
In accordance with Listing Rule 15.6.2(2) R and having formally appraised the
performance and resources of the Investment Manager, in the opinion of the
Directors the continuing appointment of the Investment Manager on the terms
agreed is in the interest of the shareholders as a whole.
Whistleblowing
The Board has considered the AIC Code recommendations in respect of
arrangements by which staff of the Investment Manager or Administrator may, in
confidence, raise concerns within their respective organisations about
possible improprieties in matters of financial reporting or other matters.
It has concluded that adequate arrangements are in place for the proportionate
and independent investigation of such matters and, where necessary, for
appropriate follow-up action to be taken within their organisation.
Principal risks and uncertainties
During the year the Board has overseen the Company's risk management framework
and risk culture. The Audit and Risk Committee undertook a robust assessment
of the Company's principal risks and associated risk appetite, taking into
account changes in the business and the external environment. Determination of
the risk appetite allows the Company to assess the nature and extent of
principal risks that it is exposed to and/or willing to take to achieve
objectives.
The Board considers the process for identifying, evaluating and managing any
significant risks faced by the Company on an ongoing basis and these risks are
reported and discussed at Board meetings. This ensures that effective controls
are in place to mitigate these risks and that a satisfactory compliance regime
exists to ensure all applicable local and international laws and regulations
are adhered to.
The Board can confirm that it has agreed all recommendations proposed by the
Audit and Risk Committee. The risks set out below represent a snapshot of the
Company's current principal risk profile. These risks have been ranked
considering the magnitude of potential impact, probability and taking into
account the effectiveness of existing controls. This is not an exhaustive list
of all risks the Company faces. As the macro environment changes and country
and industry circumstances evolve, new risks may arise and existing risks may
recede or the rankings of these risks may change.
For each material risk, the likelihood and potential impact are identified.
The Company's financial instrument risks are discussed in Note 11 to the
Financial Statements.
The Directors have identified the following as the principal risks faced by
the Company:
Description Nature of Risk Potential Impact Mitigation
Inability to secure sales of underlying properties to facilitate timely Market, geopolitical and economic conditions are currently volatile and the This could result in delayed sale of the underlying properties and/or reduced The Investment Manager has appointed a receiver or administrator to each of
capital repayments outlook unsure. The Company's three key loans are in administration or quantum of capital proceeds. the three key loans remaining and is ensuring the property securing each loan
receivership.
is being actively managed, with income and condition being maintained wherever
possible and economic to do so.
The thin market liquidity combined with receivership/administrator sales may
The Company's Borrowers retain a right of redemption but have been unable to also attract only opportunistic buyers seeking high returns and deep discounts
raise sufficient equity to refinance the current loans. in order to proceed with a perceived distressed sale with very limited The Investment Manager maintains an active dialogue with all the
indemnities or warranties being offered. administrators/receivers and keeps the Board informed of any issues arising.
Loans and the underlying security are monitored on an ongoing basis to
identify any further deterioration or distress.
In adverse market conditions with low transaction volumes and high costs of
debt, the appointed Receivers and Administrators may find it challenging to
secure sales.
The Investment Manager remains an active participant in the UK CRE financing
market and as such is continually monitoring property and finance market
conditions, meaning it is well placed to deal with any issues. Current
conditions mean that reconciling a timely exit with maximising shareholder
value is challenging.
Fall in collateral values, and accuracy of valuations Commercial property values are typically linked to a property's ability to This may impact the Company's ability to accurately determine collateral The current volatile market conditions may make the accuracy of valuations
generate cashflows and are benchmarked against comparable properties. values, and to appropriately consider the level of permanent impairment of any somewhat unreliable with significant but unknown bid offer spreads between
particular investment, within the target timeframe to realise that investment. buyer and seller aspirations. As things stand at the time of review, the
Economic and market volatility create material uncertainty in terms of
market for refinancing loans or the sale of underlying properties is
property valuations. uncertain.
The Board obtains external valuations as appropriate but also makes judgements
based on offers in hand, valuer and agency advice and outlook for each
specific property.
Given the market uncertainty and lack of transactional evidence, the
Company applies a probability weighted approach to the range of outcomes
based on differing realisation scenarios.
Portfolio Diversification The Company is in wind down with only three loans remaining. The Company no longer benefits from portfolio diversification, but carries the As part of the orderly realisation, the Investment Manager and the Board have
specific risks associated with the remaining loans. stepped up monitoring of the individual investments and the Board receives
frequent formal and informal reports from the Investment Manager.
The remaining loans are in receivership or administration and, as such, the
Company's income generation is and cashflow are unpredictable. The Board also continues to closely monitor the Company's costs, to ensure
optimum value is obtained during the realisation of the portfolio.
Furthermore, the Company's fixed costs will thereof comprise a greater
proportion of the Group's revenues which may impact the amount of funds However, with only three loans outstanding, the portfolio's concentration risk
available for distribution to shareholders. has increased significantly and will continue to increase as loans are repaid.
The Board will adopt a prudent approach to the repayment of capital to
shareholders to ensure that the Company remains viable and avoids becoming a
distressed seller through the final realisation process.
Liquidation process and timeliness of final capital distribution The Company's liquidation is expected to follow repayment of the final loan Liquidation of the Company may be delayed and it may continue to operate with The performance of all loans and timings of repayments is monitored closely.
and the discharge of all creditors and claims, timings of which is uncertain high fixed costs relative to the remaining income streams.
for the reasons set out above.
The Board and Investment Manager will continue to weigh the merits of
accelerated exits versus orderly repayment to maximise shareholder returns
where possible.
Potential claims and liabilities will be identified and addressed in advance
wherever possible.
The Company's principal risk factors are fully set out in the Company's 2018
Prospectus available on the Company's website (www.lbow.co.uk) and should be
reviewed by shareholders, together with the supplemental prospectus issued in
2019, albeit in the context that the Company has now adopted a new Investment
Policy and is in managed wind down which has changed the nature of many of the
principal risk factors, as described above.
Emerging risks are regularly considered to assess any potential impact on the
Company and to determine whether any actions are required. Emerging risks
include those related to regulatory/legislative change, the war in the Middle
East and macroeconomic and political change.
In summary, the above risks are mitigated and managed by the Board through
continual review, policy setting and updating of the Company's detailed risk
matrix to ensure that procedures are in place with the intention of minimising
the impact of the above-mentioned risks. The Board also relies on periodic
reports provided by the Investment Manager and Administrator regarding risks
that the Company faces. When required, experts will be employed to gather
information, including property surveyors, tax managers, legal managers or
environmental managers as appropriate.
By order of the Board
Jack Perry Fiona Le Poidevin
Chairman Director
8 May 2024 8 May 2024
Report of the Audit and Risk Committee
The Audit and Risk Committee, chaired by Mrs Le Poidevin, operates within
clearly defined terms of reference (which are available from the Company's
website) and includes all matters indicated by Disclosure and Transparency
Rule 7.1, the AIC Code and the UK Code. Its other members are Mr Beevor and Mr
Meader.
Only independent Directors can serve on the Audit and Risk Committee. Members
of the Audit and Risk Committee must be independent of the Company's external
auditor and Investment Manager. The Audit and Risk Committee will meet no less
than twice a year, and at such other times as the Audit and Risk Committee
Chair shall require.
The Committee members have considerable financial and business experience and
the Board has determined that the membership as a whole has sufficient recent
and relevant sector and financial experience to discharge its
responsibilities. The Board has taken note of the requirement that at least
one member of the Audit and Risk Committee should have recent and relevant
financial experience and is satisfied that the Audit and Risk Committee is
properly constituted in that respect, with all members being highly
experienced and, in particular, with one member having a background as a
chartered accountant.
The duties of the Audit and Risk Committee in discharging its responsibilities
include reviewing the Annual Report and Financial Statements and the Interim
Report, the system of internal controls, and the terms of appointment of the
Company's independent auditor together with their remuneration. It is also the
formal forum through which the auditor will report to the Board of Directors.
The objectivity of the auditor is reviewed by the Audit and Risk Committee
which will also review the terms under which the external auditor is appointed
to perform non-audit services and the fees paid to them or their affiliated
firms overseas.
Responsibilities
The main duties of the Audit and Risk Committee are:
• reviewing and monitoring the integrity of the Financial
Statements of the Company and any formal announcements relating to the
Company's financial performance, reviewing significant financial reporting
judgements contained in them;
• reporting to the Board on the appropriateness of the
Company's accounting policies and practices including critical judgement
areas;
• reviewing any draft impairment reviews of the Company's
investments prepared by the Investment Manager and making a recommendation to
the Board on any impairment in the value of the Company's investments;
• meeting regularly with the external auditor to review their
proposed audit plan and the subsequent audit report and assess the
effectiveness of the audit process and the levels of fees paid in respect of
both audit and non-audit work;
• making recommendations to the Board in relation to the
appointment, re-appointment or removal of the external auditor and approving
their remuneration and the terms of their engagement;
• monitoring and reviewing annually the auditor's
independence, objectivity, expertise, resources, qualification and non-audit
work;
• considering annually whether there is a need for the Company
to have its own internal audit function;
• monitoring the internal financial control and risk
management systems on which the Company is reliant;
• reviewing and considering the UK Code, the AIC Code and the
FRC Guidance on Audit and Risk Committees; and
• reviewing the risks facing the Company and monitoring the risk
matrix.
The Audit and Risk Committee is required to report its findings formally to
the Board, identifying any matters on which it considers that action or
improvement is needed, and make recommendations on the steps to be taken.
The external auditor is invited to attend the Audit and Risk Committee
meetings as the Directors deem appropriate and the Audit and Risk Committee
has the opportunity to meet the external auditor without representatives of
the Investment Manager or the Administrator being present at least once per
year.
Financial Reporting
The primary role of the Audit and Risk Committee in relation to the financial
reporting is to review with the Administrator, Investment Manager and the
auditor the appropriateness of the Annual Report and Financial Statements,
concentrating on, amongst other matters:
• the quality and acceptability of accounting policies and
practices;
• the clarity of the disclosures and compliance with financial
reporting standards and relevant financial and governance reporting
requirements;
• material areas in which significant judgements have been
applied or where there has been discussion with the external auditor including
the going concern status and viability statement;
• whether the Annual Report and Financial Statements, taken as
a whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's performance, business model
and strategy; and
• any correspondence from regulators in relation to the
Company's financial reporting.
To aid its review, the Audit and Risk Committee considers reports from the
Administrator and Investment Manager and also reports from the auditor on the
outcome of their annual audit. The Audit and Risk Committee supports the
external auditor and recognises the necessary professional scepticism their
role requires.
Meetings
During the year ended 31 January 2024, the Audit and Risk Committee met
formally on four occasions. The matters discussed at those meetings included:
• review of the terms of reference of the Audit and Risk
Committee for approval by the Board;
• review of the accounting policies and format of the
Financial Statements;
• detailed review of the Annual Report and Financial
Statements, Interim Report and recommendation for approval by the Board
including the basis other than that of a going concern and the viability
statement;
• detailed review and updating of the Company's risk matrix;
• review and approval of the audit plan and final Audit and
Risk Committee report of the auditor;
• discussion and approval of the fee for the external audit;
• assessment of the independence of the external auditor;
• assessment of the effectiveness of the external audit
process as described below; and
• review of the Company's key risks and internal controls.
Primary Area of Judgement
The Audit and Risk Committee determined that the key risk of misstatement of
the Company's Financial Statements relates to the valuation and recoverability
of the loans, in the context of the judgements necessary to evaluate any
related impairment of the loans and associated credit loss.
The Company's loans are the key value driver for the Company's NAV and
interest income. Judgements over the level of any impairment and
recoverability of loan principal and interest could significantly affect the
NAV.
The Company's remaining loans are past due and, in each case, the underlying
assets are subject to either receivership or administration process at the
behest of the Company. The Committee reviews the Investment Manager's
monitoring of the subject properties and performance of its appointed asset
managers, receivers, administrators and sales agents to ensure all reasonable
steps are being taken in the orderly realisation of the assets.
The Committee also receives updates from the Investment Manager regarding the
trading performance of each property. As a result, the Committee seeks to
determine the level of impairment to the loans.
The Audit and Risk Committee notes that critical judgements have been made in
relation to the assessment of the estimation of the loss given default to
each of the remaining three loans.
The incorrect treatment of any arrangement, exit and prepayment fees and the
impact of loan impairments in the effective interest rate calculations may
significantly affect the level of income recorded in the year thus affecting
the level of distributable income.
The Audit and Risk Committee focused their work on disclosures required in the
Annual Report following requirements under the AIC Code, consideration of
emerging risks, environmental, social and governance matters and on subsequent
event disclosures.
The Audit and Risk Committee also focused on IFRS 9 and in particular the
assessment of the credit risk changes and loss given default in relation to
the loan portfolio. The Audit and Risk Committee has reviewed detailed
impairment analysis and current loan performance reports prepared by the
Investment Manager together with the consideration of the current collateral
values underpinning the loan portfolio.
The Audit and Risk Committee also reviewed the income recognition and the
treatment of arrangement and exit fees which were based on effective interest
rate calculations prepared by the Investment Manager and the Administrator.
The internal credit rating of each loan as at 31 January 2024 was reviewed.
All three loans, Affinity, RoyaleLife and Southport were identified as Stage 3
and have an impairment provision of £32.48 million. All loans were discussed
at the Audit and Risk Committee meeting to review the Annual Report, with the
Investment Manager, the Administrator and Auditor. In line with requirements
of IFRS as set out in the accounting policies, interest accruing and unpaid on
Stage 3 loans recognised as Income net of ECL allowance in the Statement of
Comprehensive Income.
The Audit and Risk Committee has reviewed the judgements and estimations in
determining the fair value of prepayment options embedded within the contracts
for loans advanced. The key factors considered in the valuation of prepayment
options include the exercise price, the interest rate of the host loan
contract, differential to current market interest rates, the risk-free rate of
interest, contractual terms of the prepayment option, and the expected term of
the option. In response to these factors, it has been evaluated that the
probability of exercise by the borrower is low and the timing of exercise is
indeterminable. As a result, the Audit and Risk Committee has concluded that
it is appropriate no value is attributed to embedded prepayment options.
Risk Management
The Company's risk assessment process and the way in which significant
business risks are managed is a key area of focus for the Audit and Risk
Committee. The work of the Audit and Risk Committee is driven primarily by the
Company's assessment of its principal risks and uncertainties as set out in
the Corporate Governance Report, and it receives reports from the Investment
Manager and Administrator on the Company's risk evaluation process and reviews
changes to significant risks identified. Furthermore, the Investment Manager
monitors the risks associated with the investments and the compliance of the
investment portfolio with the investment restrictions of the Company.
Internal Audit
The Audit and Risk Committee continues to review the need for an internal
audit function and has decided that the systems and procedures employed by the
Administrator and the Investment Manager, including their own internal
controls and procedures, provide sufficient assurance that an appropriate
level of risk management and internal control, which safeguards shareholders'
investment and the Company's assets, is maintained. Furthermore, the visit to
the Investment Manager's London office on 8 February 2024 gave the Committee
assurance around the Investment Manager's internal controls and included a
discussion with the Investment Manager's head of internal audit. An internal
audit function specific to the Company is therefore considered unnecessary.
External Audit
Deloitte LLP has been the Company's external auditor since the Company's
inception. This is the eleventh audit period and therefore the Company is
obliged to consider tendering for a new audit firm. As the Company is in a
managed realisation, the Audit and Risk Committee has determined that Deloitte
LLP should remain as auditor until the Company has wound up.
The external auditor is required to rotate the audit partner every five years.
The current Deloitte LLP lead audit partner, Mr David Becker, started his
tenure in 2020 (in respect of the year ended 31 January 2020) and his current
rotation will end with the audit of the 2024 Annual Report and Financial
Statements. The Audit and Risk Committee has considered the re-appointment of
the auditor and decided not to put the provision of the external audit out to
tender, given the limited life of the Company.
The objectivity of the auditor is reviewed by the Audit and Risk Committee
which also reviews the terms under which the external auditor may be appointed
to perform non-audit services. The Audit and Risk Committee reviews the scope
and results of the audit, its cost effectiveness and the independence and
objectivity of the auditor, with particular regard to any non-audit work that
the auditor may undertake. In order to safeguard auditor independence and
objectivity, the Audit and Risk Committee ensures that any other advisory
and/or consulting services provided by the external auditor do not conflict
with its statutory audit responsibilities. Advisory and/or consulting services
will generally only cover reviews of Interim Reports and capital raising work.
Any non-audit services conducted by the auditor outside of these areas will
require the consent of the Audit and Risk Committee before being initiated.
The external auditor may not undertake any work for the Company in respect of
the following matters - preparation of the Financial Statements, provision of
investment advice, taking management decisions or advocacy work in adversarial
situations.
The Committee reviews the scope and results of the audit, its cost
effectiveness and the independence and objectivity of the auditor, with
particular regard to the level of non-audit fees.
The Committee regularly monitors non-audit services being provided by the
external auditor to ensure there is no impairment to their independence or
objectivity.
Notwithstanding such services, the Audit and Risk Committee considers Deloitte
LLP to be independent of the Company and that the provision of such non-audit
services is not a threat to the objectivity and independence of the conduct of
the audit as appropriate safeguards are in place.
To fulfil its responsibility regarding the independence of the auditor, the
Audit and Risk Committee will consider:
• discussions with or reports from the auditor describing its
arrangements to identify, report and manage any conflicts of interest; and
• the extent of non-audit services provided by the auditor and
arrangements for ensuring the independence, objectivity, robustness and
perceptiveness of the auditor and their handling of key accounting and audit
judgements.
To assess the effectiveness of the auditor, the Audit and Risk Committee will
review:
• the auditor's fulfilment of the agreed audit plan and
variations from it;
• discussions or reports highlighting the major issues that
arose during the course of the audit;
• feedback from other service providers evaluating the
performance of the audit team;
• arrangements for ensuring independence and objectivity;
• the robustness of the auditor in handling key accounting and
audit judgements; and
• a summary of the FRC's Audit Quality Review report for
Deloitte and discuss the findings with the audit partner to determine if any
of the indicators in that report had particular relevance to this year's audit
of the Company. Specifically, the Audit and Risk Committee discuss the extent
of the auditor's challenge of key estimates and assumptions in key areas of
judgement, including asset valuations and impairment testing and the quality
of the firm's audit of revenue.
The Audit and Risk Committee is satisfied with Deloitte LLP's effectiveness
and independence as auditor having considered the degree of diligence and
professional scepticism demonstrated by them. Having carried out the review
described above and having satisfied itself that the auditor remains
independent and effective, the Audit and Risk Committee has recommended to the
Board that Deloitte LLP be reappointed as auditor for the year ending 31
January 2025.
The Board's recommendation to shareholders on the re-appointment of Deloitte
LLP as external auditor will be put to shareholders at the Annual General
Meeting.
The Chair of the Audit and Risk Committee will be available at the Annual
General Meeting to answer any questions about the work of the Committee.
On behalf of the Audit and Risk Committee
Fiona Le Poidevin
Chair of the Audit and Risk Committee
8 May 2024
Statement of Comprehensive Income
For the year ended 31 January 2024
1 February 2023 to 1 February 2022 to
Notes 31 January 2024 31 January 2023
£ £
Income
Income from loans 2 e) 4,896,000 7,136,574
Other fee income from loans 2 f) 5,168 133,051
Income from cash and cash equivalents 53,518 2,864
Total income 4,954,686 7,272,489
Expenses
Investment Management fees 13 551,167 761,047
Directors' remuneration 12 160,000 160,000
Audit fees for the Company 14 63,013 42,353
ECL provision on financial assets 5 28,507,897 3,940,181
Other expenses 15 548,860 409,085
Total expenses 29,830,937 5,312,666
(Loss)/profit for the year before tax (24,876,251) 1,959,823
Taxation charge 4 - -
(Loss)/profit for the year after tax (24,876,251) 1,959,823
Total comprehensive (loss)/income for the year (24,876,251) 1,959,823
Basic and diluted (Loss)/Earnings per Share (pence) 9 (20.51) 1.62
All items within the above statement have been derived from discontinuing
activities on the basis of the orderly realisation of the Company's assets.
The Company had no recognised gains or losses for either period other than
those included in the results above.
The accompanying notes from 1 to 16 form an integral part of these Financial
Statements.
Statement of Financial Position
As at 31 January 2024
Notes 31 January 2024 31 January 2023
£ £
Assets
Current Assets
Loans advanced 5 33,639,051 68,963,675
Trade and other receivables 6 30,718 43,435
Cash and cash equivalents 7 2,945,829 9,209,494
Total current assets 36,615,598 78,216,604
Total assets 36,615,598 78,216,604
Liabilities
Current Liabilities
Trade and other payables 8 391,470 861,653
Total current liabilities 391,470 861,653
Total liabilities 391,470 861,653
Net assets 36,224,128 77,354,951
Equity
Share capital 10 64,650,361 80,298,419
Retained loss (28,426,233) (2,943,468)
Total equity attributable to the owners of the Company 36,224,128 77,354,951
Number of Ordinary Shares in issue at year end 10 121,302,779 121,302,779
Net Asset Value per Ordinary Share (pence) 9 29.86 63.77
The Financial Statements were approved by the Board of Directors on 8 May and
signed on their behalf by:
Jack Perry Fiona Le Poidevin
Chairman Director
8 May 2024 8 May 2024
The accompanying notes from 1 to 16 form an integral part of these Financial
Statements.
Statement of Changes in Equity
For the year ended 31 January 2024
Number Ordinary Share B Share Retained
Notes of shares capital capital (loss) / earnings Total
£ £ £ £
As at 1 February 2023 121,302,779 80,298,419 - (2,943,468) 77,354,951
Total comprehensive loss - - - (24,876,251) (24,876,251)
Dividends paid 10 - - - (606,514) (606,514)
B Shares issued February 2023 10 121,302,779 (6,671,653) 6,671,653 - -
B Shares redeemed & cancelled February 2023 10 (121,302,779) - (6,671,653) - (6,671,653)
B Shares issued August 2023 10 121,302,779 (8,976,405) 8,976,405 - -
B Shares redeemed & cancelled August 2023 10 (121,302,779) - (8,976,405) - (8,976,405)
As at 31 January 2024 121,302,779 64,650,361 - (28,426,233) 36,224,128
For the year ended 31 January 2023
Number Ordinary Share B Share Retained
Notes of shares capital capital (loss) / earnings Total
£ £ £ £
As at 1 February 2022 121,302,779 87,576,589 - 191,426 87,768,015
Total comprehensive income - - - 1,959,823 1,959,823
Dividends paid 10 - - - (5,094,717) (5,094,717)
B Shares issued May 2022 10 121,302,779 (7,278,170) 7,278,170 - -
B Shares redeemed & cancelled May 2022 10 (121,302,779) - (7,278,170) - (7,278,170)
As at 31 January 2023 121,302,779 80,298,419 - (2,943,468) 77,354,951
The accompanying notes from 1 to 16 form an integral part of these Financial
Statements.
Statement of Cash Flows
For the year ended 31 January 2024
1 February 2023 to 1 February 2022 to
Notes 31 January 2024 31 January 2023
£ £
Cash flows generated from operating activities
(Loss)/profit for the year (24,876,251) 1,959,823
Adjustments for non-cash items and working capital movements:
Movement in other receivables 6 12,718 459,050
Movement in other payables and accrued expenses 8 (296,009) 68,430
Loan amortisation 25,889,373 1,193,484
729,831 3,680,787
Loans advanced less arrangement fees (308,400) (487,610)
Arrangement fees received - 64,740
Loans repaid 5 9,569,476 13,523,240
Net loans repaid less arrangement fees 9,261,076 13,100,370
Net cash generated from operating activities 9,990,907 16,781,157
Cash flows used in financing activities
Dividends paid 10 (606,514) (5,094,717)
Return of Capital paid 10 (15,648,058) (7,278,170)
Net cash (used in) financing activities (16,254,572) (12,372,887)
Net (decrease)/increase in cash and cash equivalents (6,263,665) 4,408,270
Cash and cash equivalents at the start of the year 9,209,494 4,801,224
Cash and cash equivalents at the end of the year 2,945,829 9,209,494
The accompanying notes from 1 to 16 form an integral part of these Financial
Statements.
1. General information
ICG-Longbow Senior Secured UK Property Debt Investments Limited is a
non-cellular company limited by shares and was incorporated in Guernsey under
the Companies Law on 29 November 2012 with registered number 55917 as a
closed-ended investment company. The registered office address is Floor 2, PO
Box 286, Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 4LY.
The Company's shares were admitted to the Premium Segment of the Official List
and to trading on the Main Market of the London Stock Exchange on 5 February
2013.
In line with the revised Investment Objective and Policy approved by
shareholders in the Extraordinary General Meeting in January 2021, the Company
is now undertaking an orderly realisation of its investments. As sufficient
funds become available the Board intends to return capital to shareholders,
taking account of the Company's working capital requirements and funding
commitments.
ICG Alternative Investment Limited is the external discretionary investment
manager.
2. Accounting policies
a) Basis of preparation
The Financial Statements for the year ended 31 January 2024 have been prepared
in accordance with UK adopted international accounting standards and the
Companies (Guernsey) Law, 2008.
The same accounting policies and methods of computation have been followed in
the preparation of these Financial Statements as in the Annual Report and
Financial Statements for the year ended 31 January 2023.
At the date of approval of these Financial Statements, the Company has
reviewed the following new and revised IFRS standards and interpretations that
have been issued and are now effective:
The adoption of these standards and interpretations has had no impact on the
Financial Statements of the Company.
Effective for periods commencing
IFRS 17 Insurance Contracts (Amendments to address concerns and implementation 01 January 2023
challenges that were identified after IFRS 17 was published)
IAS 1 Presentation of Financial Statements (Amendments regarding the disclosure of 01 January 2023
accounting policies)
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (Amendments 01 January 2023
regarding the definition of accounting estimates)
IAS 12 Income Taxes (Amendments regarding deferred tax on leases and decommissioning 01 January 2023
obligations
The following new and revised IFRS standards and interpretations that have
been issued and are not yet effective. The Company intends to adopt these new
and amended standards and interpretations, if applicable, when they become
effective.
Effective for periods commencing
IFRS 7 Financial Instruments: Disclosures (Amendments regarding supplier finance 01 January 2024
arrangements)
IFRS 16 Leases (Amendments to clarify how a seller-lessee subsequently measures sale 01 January 2024
and leaseback transactions)
IAS 1 Presentation of Financial Statements (Amendments regarding the classification 01 January 2024
of liabilities)
IAS 1 Presentation of Financial Statements (Amendments regarding the classification 01 January 2024
of debt with covenants)
IAS 7 Statement of Cash Flows (Amend-ments regarding supplier finance arrange-ments) 01 January 2024
b) Going concern
The Directors, at the time of approving the Financial Statements, are required
to consider whether they have a reasonable expectation that the Company has
adequate resources to continue in operational existence for the foreseeable
future and whether there is any threat to the going concern status of the
Company. At the EGM of the Company on 14 January 2021, following a
recommendation from the Board published in a circular on 16 December 2020,
shareholders voted by the requisite majority in favour of a change to the
Company's Objectives and Investment Policy which would lead to an orderly
realisation of the Company's assets and a return of capital to shareholders.
It is intended that, following the appointment of receivers or administrators
in respect of the last remaining loans, the investments will be realised as
and when the underlying property assets, or loans upon which they are secured,
can be sold in an orderly manner. The Company may take actions with the
consequence of accelerating or delaying realisation in order to optimise
shareholders' returns in the context of the Company's size.
Whilst the Directors are satisfied that the Company has adequate resources to
continue in operation throughout the realisation period and to meet all
liabilities as they fall due, given the Company is now in a managed wind down,
the Directors consider it appropriate to adopt a basis other than going
concern in preparing the financial statements.
In the absence of a ready secondary market in real estate loans by which to
assess market value of the loans, the basis of valuation for investments is
amortised cost net of impairment, recognising the realisable value of each
property in the orderly wind down of the Company. In accordance with the
Company's IFRS 9 Policy the staging of each loan has been reviewed and all
loans are now considered to be at Stage 3. Consequently, valuations reflect
the ECL assuming a twelve month realisation period, as detailed in Note 5. No
material adjustments have arisen solely as a result of ceasing to apply the
going concern basis.
c) Functional and presentation currency
The Financial Statements are presented in Pounds Sterling, which is the
functional currency as well as the presentation currency as all the Company's
investments and most transactions are denominated in Pounds Sterling.
d) Foreign currencies
Transactions in foreign currencies are translated at the foreign exchange rate
ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies at the reporting date are translated at the
foreign exchange rate ruling at that date. Foreign exchange differences
arising on translation are recognised in the Statement of Comprehensive
Income.
e) Interest income
In accordance with IFRS 9 interest income is recognised when it is probable
that the economic benefits will flow to the Company and the amount of revenue
can be measured reliably. Interest income is accrued on a time basis, by
reference to the principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts estimated future cash
receipts through the expected life of the financial asset to that asset's net
carrying amount on initial recognition. Arrangement and exit fees which are
considered to be an integral part of the contract are included in the
effective interest rate calculation.
For financial assets in stage 3, interest is recognised on a net basis after
allowance for ECL. For financial assets in Stage 2, where the Company
considers that the quantum or timeliness of the economic benefit cannot be
measured reliably, in accordance with IFRS, interest will be recognised on a
gross basis and an ECL provision will be raised.
Interest on cash and cash equivalents is recognised on an accruals basis.
f) Other fee income
Other fee income includes prepayment and other fees due under the contractual
terms of the debt instruments. Such fees and related cash receipts are not
considered to form an integral part of the effective interest rate and are
accounted for on an accruals basis.
g) Operating expenses
Operating expenses are the Company's costs incurred in connection with the
ongoing management of the Company's investments and administrative costs.
Operating expenses are accounted for on an accruals basis.
h) 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 £1,600
which is included within other expenses. The Company is required to apply
annually to obtain exempt status for the purposes of Guernsey Taxation.
i) Dividends
Dividends payable are recognised as distributions in the financial statements
when the Company's obligation to make payment has been established. Dividends
paid during the year are disclosed in the Statement of Changes In Equity. Any
dividends that are declared post year end are disclosed in note 16.
j) Segmental reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision-maker. The chief operating
decision-maker, who is responsible for allocating resources and assessing
performance of the operating segments, has been identified as the Board of
Directors, as a whole. The key measure of performance used by the Board to
assess the Company's performance and to allocate resources is the total return
on the Company's Net Asset Value, as calculated under IFRS, and therefore no
reconciliation is required between the measure of profit or loss used by the
Board and that contained in the Financial Statements.
For management purposes, the Company is organised into one main operating
segment, being the provision of a portfolio of UK commercial property backed
senior debt investments.
The majority of the Company's income is derived from loans secured on
commercial and residential property in the United Kingdom.
Due to the Company's nature, it has no employees.
k) Financial instruments
Financial assets and financial liabilities are recognised in the Company's
Statement of Financial Position when the Company becomes a party to the
contractual provisions of the instrument. Financial assets and financial
liabilities are only offset and the net amount reported in the Statement of
Financial Position and Statement of Comprehensive Income when there is a
currently enforceable legal right to offset the recognised amounts and the
Company intends to settle on a net basis or realise the asset and liability
simultaneously.
Financial Assets
All financial assets are recognised and de-recognised on a trade date where
the purchase or sale of a financial asset is under a contract whose terms
require delivery of the financial asset within the timeframe established by
the market concerned, and are initially measured at fair value, plus
transaction costs, except for those financial assets classified as at fair
value through profit or loss, which are initially measured at fair value.
Financial assets are classified into the following specified categories:
financial assets at fair value through profit or loss, financial assets at
fair value through Other Comprehensive Income or financial assets at amortised
cost.
The classification depends on the nature and purpose of the financial assets
and is determined at the time of initial recognition.
The Company's financial assets currently comprise loans, trade and other
receivables and cash and cash equivalents.
i) Loans and receivables
These assets are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. They comprise loans and
trade and other receivables.
They are initially recognised at fair value plus transaction costs that are
directly attributable to the acquisition, and subsequently carried at total
claim value less allowance for Expected Credit Loss (ECL). The effect of
discounting on trade and other receivables is not considered to be material.
ii) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits and other
short-term highly liquid investments with an original maturity of three months
or less that are readily convertible to a known amount of cash and are subject
to an insignificant risk of changes in value.
iii) Effective interest rate method
The effective interest rate method is a method of calculating the amortised
cost of a debt instrument and of allocating interest income over the relevant
period. The effective interest rate is the rate that exactly discounts
estimated future cash receipts (including all fees paid or received that form
an integral part of the effective interest rate, transaction costs and other
premiums or discounts) through the expected life of the debt instrument, or,
where appropriate, a shorter period, to the net carrying amount on initial
recognition.
iv) Impairment of financial assets
The Company recognises a loss allowance for ECL on trade receivables and loan
receivables. The amount of ECL is updated at each reporting date to reflect
changes in credit risk since initial recognition of the respective financial
instrument. The Company always recognises a 12-month ECL for trade receivables
and loan receivables that fall under stage 1 assets. For stage 2 assets, the
Company recognises a lifetime ECL when there has been a significant increase
in credit risk since initial recognition. In respect of the Stage 3,
non-performing loans, lifetime expected credit losses are also recognised, and
interest is calculated on the net carrying amount and subject to further
provision for impairment in the event that it is unlikely to be received.
The ECL on Stage 1 and Stage 2 loans are estimated using a provision matrix
based on the Investment Manager's historical credit loss experience, adjusted
for factors that are specific to the debtors, general economic conditions and
an assessment of both the current as well as the forecast direction of
conditions at the reporting date, including time value of money where
appropriate. The Company has adopted a simplified model for trade receivables
where lifetime ECL is estimated and does not materially differ from the
12-month ECL.
The ECL for Stage 3 loans is assessed based on the expected net realisable
value of the underlying properties, taking inputs from various external
sources including property valuations, agency advice, comparable evidence and
offers received. Where specific valuation evidence is not available or
unclear, a risk probability weighted approach will be applied to a range of
outcomes.
v) Significant increase in credit risk
In assessing whether the credit risk on a financial instrument has increased
significantly since initial recognition, the Company compares the risk of a
default occurring on the financial instrument at the reporting date with the
risk of a default occurring on the financial instrument at the date of initial
recognition. In making this assessment, the Company considers both
quantitative and qualitative information that is reasonable and supportable,
including historical experience and forward-looking information that is
available without undue cost or effort. Forward-looking information considered
includes the future prospects of the industries in which the Company's debtors
operate, obtained from
economic expert reports, financial analysts, governmental bodies, relevant
think‑tanks and other similar organisations, as well as consideration of
various external sources of actual and forecast economic information that
relate to the Company's core operations.
In particular, the following information is taken into account when assessing
whether credit risk has increased significantly since initial recognition:
• an actual or expected significant deterioration in the financial
instrument's external (if available) or internal credit rating;
• significant deterioration in external market indicators of credit risk for
a particular financial instrument,
e.g. a significant increase in the credit spread, the credit default swap
prices for the debtor, or the length of time or the extent to which the fair
value of a financial asset has been less than its amortised cost;
• existing or forecast adverse changes in business, financial or economic
conditions that are expected to cause a significant decrease in the debtor's
ability to meet its debt obligations;
• any actual or expected significant deterioration in the operating results
of the debtor;
• significant increases in credit risk on other financial instruments of the
same debtor; or
• an actual or expected significant adverse change in the regulatory,
economic, or technological environment of the debtor that results in a
significant decrease in the debtor's ability to meet its debt obligations.
Despite the foregoing, the Company assumes that the credit risk on a financial
instrument has not increased significantly since initial recognition if the
financial instrument is determined to have low credit risk at the reporting
date. A financial instrument is determined to have low credit risk if:
(1) The financial instrument has a low risk of default;
(2) The debtor has a strong capacity to meet its contractual cash flow
obligations in the near term; and
(3) Adverse changes in economic and business conditions have not, or will not
in the foreseeable future, reduce the ability of the borrower to fulfil its
contractual cash flow obligations. Where the ability to meet cashflow
obligations, including payment of interest, are impacted the risk associated
with the financial instrument may be considered to have increased.
The Company considers a financial asset to have low credit risk when the asset
has external credit rating of 'investment grade' in accordance with the
globally understood definition or if an external rating is not available, the
asset has an internal rating of 'performing'. Performing means that the
counterparty has a strong financial position and there are no past due
amounts.
The Company regularly monitors the effectiveness of the criteria used to
identify whether there has been a significant increase in credit risk and
revises them as appropriate to ensure that the criteria are capable of
identifying significant increase in credit risk before the amount becomes past
due.
vi) Definition of default
The Company considers the following as constituting an event of default for
internal credit risk management purposes as historical experience indicates
that financial assets that meet any of the following criteria may not be fully
recoverable:
• when there is a breach of financial covenants by the debtor which has not
be waived or where the lender's rights have not been reserved pending action
by the borrower;
• information developed internally or obtained from external sources
indicates that the debtor is unlikely to pay its creditors, including the
Company, in full (without taking into account any collateral held by the
Company); or
• when the Company have appointed administrators or receivers to the debtor.
There is a rebuttable presumption that where loans are past due or interest is
unpaid for more than 30 days, this leads to a significant increase in credit
risk or that if unpaid for more than 90 days this leads to an event of
default. However, the Company may elect to waive the default or give a period
of forbearance and reserve its rights in respect of the default to enhance
returns and hence may rebut the presumption that there is a significant
increase in credit risk or an event of default.
vii) Credit-impaired financial assets
A financial asset is credit‑impaired when one or more events that have a
detrimental impact on the estimated future cash flows of that financial asset
have occurred. Evidence that a financial asset is credit‑impaired includes
observable data about the following events:
(a) significant financial difficulty of the issuer or the borrower;
(b) a breach of contract, such as a default or past due event (see (vi)
above);
(c) the lenders to the borrower, for economic or contractual reasons relating
to the borrower's financial difficulty having granted to the borrower
concessions that the lenders would not otherwise consider;
(d) it is becoming probable that the borrower will enter bankruptcy or other
financial reorganisation; or
(e) the disappearance of an active market for that financial asset because of
financial difficulties.
viii) Write-off policy
The Company writes off a financial asset when there is information indicating
that the debtor is in severe financial difficulty and there is no realistic
prospect of recovery, e.g. when the debtor has been placed under liquidation
or has entered into bankruptcy proceedings, or in the case of loan
receivables, when the amounts are over two years past due, whichever occurs
sooner. Financial assets written off may still be subject to enforcement
activities under the Company's recovery procedures, taking into account legal
advice where appropriate. Any recoveries made are recognised in profit or
loss.
ix) Measurement and recognition of ECL
The measurement of ECL is a function of the probability of default, loss given
default (i.e. the magnitude of the loss if there is a default) and the
exposure at default. The assessment of the probability of default and loss
given default is based on historical data adjusted by forward‑looking
information as described above. As for the exposure at default, for financial
assets, this is represented by the asset's gross carrying amount at the
reporting date.
For financial assets, the ECL is estimated as the difference between all
contractual cash flows that are due to the Company in accordance with the
contract and all the cash flows that the Company expects to receive,
discounted at the original effective interest rate.
If the Company has measured the loss allowance for a financial instrument at
an amount equal to lifetime ECL in the previous reporting period but
determines at the current reporting date that the conditions for lifetime ECL
are no longer met, the Company measures the loss allowance at an amount equal
to 12‑month ECL at the current reporting date, except for assets for which a
simplified approach was used.
The Company's measurement of ECL reflects an unbiased and probability-weighted
amount that is determined by evaluating the range of possible outcomes as well
as incorporating the time value of money. The Company has also considered
reasonable and supportable information from past events, current conditions
and reasonable and supportable forecasts for future economic conditions when
measuring ECL.
· Stage 1 covers financial assets that have not deteriorated
significantly in credit risk since initial recognition;
· Stage 2 covers financial assets that have significantly
deteriorated in credit quality since initial recognition; and
· Stage 3 covers financial assets that have objective evidence of
impairment at the reporting date.
Twelve-month ECL are recognised in stage 1, while lifetime ECL are recognised
in stages 2 and 3. The Company's remaining loan book are all past due and as
a result 12 month and lifetime ECL will be the same.
x) Modification of cash flows
Having performed adequate due diligence procedures, the Company may negotiate
or otherwise modify the contractual cash flows of loans to customers, usually
as a result of loan extensions. When this happens, the Company assesses
whether or not the new terms are substantially different to the original
terms.
If the terms are not substantially different, the renegotiation or
modification does not result in derecognition, and the Company recalculates
the gross carrying amount based on the revised cash flows of the financial
asset and recognises a modification gain or loss in profit or loss. The new
gross carrying amount is recalculated by discounting the modified cash flows
at the original effective interest rate.
If terms are substantially different the original asset is derecognised and a
new financial asset is recognised. It is assumed that the terms are
substantially different if the discounted present value of the cash flows
under the new terms, including any fees paid net of any fees received and
discounted using the original effective rate is at least 10 per cent different
from the discounted present value of the remaining cash flows of the original
financial asset. If the modification is not substantial, the difference
between: (1) the carrying amount of the liability before the modification; and
(2) the present value of the
cash flows after modification is recognised in profit or loss as the
modification gain or loss within other gains and losses as explained in
paragraph above.
xi) Derecognition of financial assets
The Company derecognises a financial asset only when the contractual rights to
the cash flows from the asset expire, or when it transfers the financial asset
and substantially all the risks and rewards of ownership of the asset to
another entity. If the Company neither transfers nor retains substantially all
the risks and rewards of ownership and continues to control the transferred
asset, the Company recognises its retained interest in the asset and an
associated liability for amounts it may have to pay. If the Company retains
substantially all the risks and rewards of ownership of a transferred
financial asset, the Company continues to recognise the financial asset and
also recognises a collateralised borrowing for the proceeds received.
On derecognition of a financial asset measured at amortised cost, the
difference between the asset's carrying amount and the sum of the
consideration received and receivable, is recognised in profit or loss.
Financial liabilities
The classification of financial liabilities at initial recognition depends on
the purpose for which the financial liability was issued and its
characteristics.
All financial liabilities are initially recognised at fair value net of
transaction costs incurred. All purchases of financial liabilities are
recorded on a trade date, being the date on which the Company becomes party to
the contractual requirements of the financial liability. Unless otherwise
indicated the carrying amounts of the Company's financial liabilities
approximate to their fair values.
The Company's financial liabilities consist of only financial liabilities
measured at amortised cost.
i) Financial liabilities measured at amortised cost
These include trade payables and other short-term monetary liabilities, which
are initially recognised at fair value and subsequently carried at amortised
cost using the effective interest rate method.
ii) Derecognition of financial liabilities
The Company derecognises financial liabilities when, and only when, the
Company's obligations are discharged, cancelled or have expired. The
difference between the carrying amount of the financial liability derecognised
and the consideration paid and payable is recognised in profit or loss.
i) Equity instruments
An equity instrument is any contract that evidences a residual interest in the
assets of an entity after deducting all of its liabilities. Equity instruments
issued by the Company are recognised as the proceeds received, net of direct
issue costs.
3. Critical accounting judgements and key sources of estimation uncertainty
in applying the Company's accounting policies
The preparation of the Financial Statements under IFRS requires management to
make judgements, estimates and assumptions that affect the application of
policies and reported amounts of assets and liabilities, income and expenses.
The estimates and associated assumptions are based on historical experience
and other factors that are believed to be reasonable under the circumstances,
the results of which form the basis of making judgements about carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an on-going basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period or in the period
of the revision and future periods if the revision affects both current and
future periods.
Critical accounting judgements
In assessing the ECL, the Board have made critical judgements in relation to
the staging of the loans and assessments which impact the loss given
default. In assessing whether the loans have incurred a significant increase
in credit risk the Investment Manager, on behalf of the Board, assesses the
credit risk attaching to each of the loans, and the value of the properties on
which they are secured. The Company has adopted the Investment Manager's
internal credit rating methodology and has used its loss experience to
benchmark investment performance and potential impairment for Stage 1, Stage 2
and Stage 3 loans under IFRS 9 considering both probability of default and
loss given default. The judgement applied in allocating each investment to
Stage 1, 2 or 3 is key in deciding whether losses are considered for the next
12 months or over the residual life of the loan. It is noted that the
Company's remaining loans are all now past due, and that receivers or
administrators have been appointed over the Company's security.
The Investment Manager and the Board will also take into consideration the
likely repayment term of loans that have become past due and the actions to be
taken, by the appointed receiver or administrator to repay such loans.
Consequently a loan which is past due, but otherwise performing, may continue
to be assessed as Stage 1 where there is an active repayment plan in place, or
supporting evidence that the loan can be repaid in full and the Company has
given a period of forbearance whilst reserving its rights to, or charging,
default interest.
The Investment Manager and the Board will also take into account prevailing
economic and market conditions, investor sentiment and outlook over the
expected term of the investments to realisation or repayment. In this regard
the sustained rise in UK interest rates over the past eighteen months, and
interest rate outlook implied by the five year swap rate, has dramatically
reduced liquidity in property and finance markets as well as affecting asset
prices in many property sectors. As a result, the number of UK commercial
property transactions in the first half of 2023 was over 50% lower than the
same period in the prior year, and 37% below the 10-year average. The UK
economy fell into a technical recession at the end of 2023, and whilst
headline inflation is now falling core pressures remain, with rate cuts not
now expected until H2 2024. Geopolitical concerns are high with the
continuing war in Ukraine, escalating hostilities in the Gaza and the Middle
East, and further uncertainties caused by an upcoming general elections in the
UK and US.
Against the backdrop of interest rate rises and liquidity issues as discussed
in the Investment Manager's Report, the Investment Manager and Board agree
that all remaining investments have a heightened credit risk. At the
reporting date all three loans are subject to enforcement action and, in the
absence of an active and liquid property market, are considered as Stage 3
assets with a material risk of credit loss.
Key sources of estimation uncertainty
The measurement of both the initial and ongoing ECL allowance for loan
receivables measured at amortised cost is an area that has required the use of
significant assumptions about credit behaviour such as likelihood of borrowers
continuing to support their properties through interest payments and equity
injections, or defaulting and the resulting losses.
In assessing the probability of default for loans at Stage 1 and Stage 2, the
Board has taken note of the experience and loss history of the Investment
Manager which may not be indicative of future losses. The default
probabilities are based on a number of factors including rental income trends,
interest cover and LTV headroom and sectoral trends which the Investment
Manager believes to be a good predictor of the probability of default, in
accordance with recent market studies of European commercial real estate
loans.
In line with the Company's investment strategy at the time, most loans
benefited from significant LTV headroom at origination, with business plans
designed to deliver further value increases over time. This combined with
tight covenants generally enabled the Investment Manager to manage risk over
the term of the loans. However, following the change in Investment Strategy to
one of orderly wind down and the reduction of the portfolio to just three
remaining assets, the Investment Manager and the Board have placed greater
emphasis on the source and delivery of repayment of each loan when assessing
valuation and the risk of capital loss.
As discussed above, a material reduction in transactional evidence and higher
funding costs have led to fall in property values generally, but with those
sectors subject to structural change (e.g. offices), and interest rates (e.g.
residential housing for sale) being particularly impacted. As a result all
remining loans have evidence of heightened credit risk with the equity buffer
having been eroded by falls in property values, and as such have been assessed
as Stage 3 loans.
The Board's valuation of Stage 3 assets (those loans considered to have a
material risk of credit loss), is first informed by third party property
valuations and supporting comparative transactional evidence, including
marketing processes being undertaken. The Investment Manager and the Board
will then overlay property level cashflows, expected sales costs and other
factors considered necessary to achieve exits within the target timeframes for
returning capital to shareholders.
All of the Company's Stage 3 assets are subject to enforcement action in the
form of administration or receivership at the reporting date. As a result, the
Company has considered the likelihood of achieving sales at the most recent
third-party valuation or at discounts to reflect the current lack of liquidity
in the relevant property sector and the Company's target timeframes and the
probability of such outcomes. These probabilities and discounts are further
informed by prospective purchasers' offers or expressions of interest where
properties have been marketed.
In arriving at the investment valuations, the Investment Manager has overlayed
the expected costs of sale and exit timeframes to determine a weighted average
valuation of each loan under the expected interest rate method and, thereby,
the expected credit loss for each loan that may result.
Revenue recognition is considered a significant accounting judgement and
estimate that the Directors make in the process of applying the Company's
accounting policies. In respect of the Company's Stage 3 loans, interest
income will be recognised through in the Statement of Comprehensive Income net
of ECL allowance. In view of the trading conditions of the Southport hotel and
liquidity challenges facing the RoyaleLife loan, the Directors consider it
unlikely that interest payments will be received in the near term. The
Affinity property remains well occupied and able to meet its interest
liabilities in full from rents receivable, however the receiver will likely
reserve some cash for working capital purposes in order to prepare the
property for sale with a full due diligence pack. Interest on the Affinity
Loan will therefore also be recognised on a net basis after ECL allowance,
whilst any cash withheld by the receiver will form part of the final
settlement.
4.
Taxation
No tax was chargeable for the current year ended 31 January 2024. (31 January
2023: £Nil)
5. Loans advanced
(i) Loans advanced
1 February 2023 to 31 January 2024 1 February 2022 to 31 January 2023
£ £
Loans gross carrying value: 66,116,828 72,903,856
Less: Expected Credit Losses (32,477,777) (3,940,181)
33,639,051 68,963,675
31 January 2024 31 January 2024 31 January 2023 31 January 2023
Principal advanced Carrying value before ECL allowance Principal advanced At amortised cost before ECL allowance
£ £ £ £
Northlands((1)) - - 9,561,076 9,829,286
Affinity 17,125,789 18,033,451 17,299,963 17,774,436
Southport((2)) 15,500,000 16,511,470 15,200,000 15,988,651
RoyaleLife 25,382,017 31,571,907 25,382,017 29,311,483
58,007,806 66,116,828 67,443,056 72,903,856
(1) Repaid in full during the year
(2) There was a £300,000 increase to the Southport loan principal
during the year.
(ii) Valuation considerations
As noted above, the Company is now in the process of an orderly wind down. It
had been the intention of the Investment Manager and Directors to hold loans
through to their repayment date, and seek a borrower led repayment in order to
maximise value for the shareholders. Economic and property market conditions
have not enabled this, with commercial property transactions in some sectors
at their lowest levels for 15 years.
The carrying value amounts of the loans in the Financial Statements have been
adjusted for expected credit losses. For further information regarding the
status of each loan and the associated risks see the Investment Manager's
Report.
As loans have fallen past due and enforcement actions have been taken, the
Directors have also reassessed the likelihood and timing of receipt of any
exit fees associated with the loans in the context of the current underlying
property value and weak market conditions.
Each property on which investments are secured was subject to an independent,
third-party valuation at the time the investment was entered into and updated
valuations have been obtained over the term of the loans as deemed
appropriate, based on the performance of the subject properties and prevailing
macro and micro market conditions. All investments are made on a hold to
maturity basis. Each investment is being closely monitored including a review
of the performance of the underlying property security.
Third party property valuations are typically based on the specific
particulars of the property (rent, Weighted Average Unexpired Lease Term
(WAULT), vacancy, condition and location) and assume a normal marketing period
and sales process. Valuers benchmark against comparative evidence from
recent transactions in similar properties in similar locations.
All the remaining Investments are considered to be Stage 3 assets and were, at
year end, subject to enforcement action. Accordingly, the carrying value
of each loan has been reviewed and further provisions for expected credit loss
raised. The carrying value of each Stage 3 investment has been calculated to
reflect the net present value of the expected net proceeds from, and timing
of, exit under a range of scenarios reflecting the latest property valuation,
the cost of disposal (including enforcement action taken), and potential
discount to valuation that a willing buyer may offer in the current market for
a purchase out of administration/receivership in an accelerated process with
limited vendor warranties and indemnities.
(iii) IFRS 9 - Impairment of Financial
Assets
As discussed above, during 2023 the UK commercial property market has
experienced a period of historically low transaction volumes, as buyers adjust
their pricing in order to generate target returns in a higher interest rate
environment with uncertain occupational demand in many sectors. Conversely,
unless forced, sellers are inclined to hold properties where they can in the
expectation of improved liquidity as the economic outlook stabilises and
medium-term interest rates fall. In this context, valuation and, therefore,
the ECL for each investment has been recalculated based on the underlying
property performance and property valuations together with any sales/marketing
experience to date and is discussed further below.
The internal credit rating of each loan as at 31 January 2024 has been
reviewed. Southport was identified as a Stage 3 asset at 31 January 2023, and
the loan has remained a Stage 3 asset, with an ECL provision of £8,597,121
(31 January 2023: £2,288,651). The RoyaleLife and Affinity loans, that were
identified as Stage 2 assets at 31 January 2023, when third party property
valuations exceeded the debt outstanding, however, both are now identified as
Stage 3 assets, with aggregate ECL provisions of £23,880,311 (31 January
2023: £1,651,530).
As at 31 January 2024
Stage 1 Stage 2 Stage 3 Total
Principal advanced - - 58,007,806 58,007,806
Gross carrying value - - 66,116,828 66,116,828
Less ECL allowance - - (32,477,777) (32,477,777)
- - 33,639,051 33,639,051
As at 31 July 2023 (Unaudited)
Stage 1 Stage 2 Stage 3 Total (Unaudited)
Principal advanced 85,389 - 57,881,980 57,967,369
Gross carrying value 517,935 - 65,414,598 65,932,533
Less ECL allowance - - (21,320,189) (21,320,189)
517,935 - 44,094,409 44,612,344
As at 31 January 2023
Stage 1 Stage 2 Stage 3 Total
Principal advanced 9,561,076 42,681,981 15,200,000 67,443,056
Gross carrying value 9,829,286 47,085,919 15,988,651 72,903,856
Less ECL allowance - (1,651,530) (2,288,651) (3,940,181)
9,829,286 45,434,389 13,700,000 68,963,675
The Northlands loan, identified as stage 1 as at 31 January 2023, was repaid
in stages through the year and then in full in December 2023, through a
combination of property sales, and a refinance of the residual assets .
The Southport hotel was identified as a Stage 3 asset at 31 January 2023. This
followed the appointment of an administrator who marketed the hotel for sale
and was proceeding with a conditional offer at £14.50 million reflected in
the ECL at the time. The prospective purchaser was unable to satisfy a
condition of its offer, linked to planning consents, and withdrew from the
process. The Hotel, which continues to trade positively, is now subject to
an offer at £9.25 million, slightly below valuation and agency guidance. In
assessing the ECL as at 31 January 2024, the Investment Manager and the Board
have considered a range of potential outcomes based on the current offer,
valuation and market advice and adopted a probability weighted approach,
discounting the resultant cashflows to the balance sheet date.
Following failed attempts by the borrower of the Affinity loan to complete a
refinance of the Company's loan, or to repay via a sale, the Affinity loan was
identified as a stage 3 asset at the time of the Company's interim report
given the risk of loss that was emerging. Subsequently, the Investment
Manager, on behalf of the Company, appointed a receiver over the property in
September 2023, in order to take control of the exit process. Whilst the
property remains well occupied with new leases and regears being completed,
there are rolling lease events at the property over the coming twelve
months. Investor demand for regional offices is at a low due to
uncertainties surrounding occupational demand and capital expenditure
requirements in a post-Covid, remote working, environment. These
uncertainties combining with a higher interest rate environment have
materially impacted the valuation of the property which is down by
approximately 40% from over £20 million in April 2023, in line with the
wider market where there are very few if any bidders for regional office
assets. The receiver is preparing the property for market and intends to
launch a sales process shortly. The Investment Manager and the Board have
considered the agency and receiver advice to determine the likely net
realisable value of the property and timeframe in which it might be achieved.
As with the other the Stage 3 loans, a range of outcomes have been considered
and probabilities applied to each in determining the ECL of the loan as at 31
January 2024.
As previously reported, the companies holding the sites securing the
RoyaleLife loan were placed into administration during 2023 to protect the
assets from other creditor claims. Whilst the sites remain open and continue
to trade, it became apparent through the work of the administrator that the
business was unable to support itself and the Sponsor no longer had the means,
or was unwilling, to inject further capital for working capital purposes.
The Investment Manager appointed a new operator to take over the running of
the sites in order to protect their cashflows. Furthermore, given the
specific nature of the sites and planning consents in place, it was necessary
to protect the property security from other creditor claims and sites were
transferred into a new holding structure, along with part of the debt, at the
end of 2023. As part of this process, a shortform sales process was
undertaken by the administrator, and a new valuer appointed.
The Investment Manager continues to work with the replacement operator,
administrator and other advisors to maximise the potential outcome for
lenders, exploring in parallel a sale and relaunch of the parks under a new
brand. Given the latest valuation and the outcome of the administrator-led
sales process, the Board and Investment Manager consider there to be a
material risk of loss and the loan was categorised as Stage 3 at the time of
the Company's interim report. In determining the ECL as at 31 January 2024 the
Board and the Investment Manager have adopted the same probability weighted
approach and considered a range of outcomes linked to sale of the properties,
where negotiations continue with an institutional buyer, and to the relaunch
of the underlying business with an exit over time. The Company together with
its co-lenders retain the rights, under the original loan, to any recoveries
linked to the administration process and the bankruptcy proceedings against
the previous beneficial owner, albeit no value has been attached to such
claims.
A reconciliation of the ECL allowance is presented as follows:
Expected Credit Loss Allowances
At 31 January 2023 Movement in ECL Allowance during year At 31 January 2024
£ £ £
Affinity (12,702) (6,684,609) (6,697,311)
Southport (2,288,651) (6,308,470) (8,597,121)
RoyaleLife (1,638,828) (15,544,517) (17,183,345)
(3,940,181) (28,537,596) (32,477,777)
Movement in ECL Allowance during year Other adjustments((1)) ECL allowance charged to SOCI
£ £
All loans (28,537,596) (29,699) (28,507,897)
(1) Other adjustments include Spectrum trapped cash adjustment
(iv) IFRS 9 Impairment - Stress Analysis
The carrying values of the remaining investments above contemplate sales in a
difficult market and have been adjusted for expected credit losses, making
allowance for the potential impact sales out of receivership/administration,
on the properties' underlying liquidity and attractiveness to buyers, as well
as the timeframe in which the Company is seeking to realise its investments.
The remaining loans are all subject to enforcement processes, which may be an
additional factor in the liquidity of and buyer pools for the subject
assets. Following the additional provision for ECL, all three of those loans
are held at 100% LTV. Two of the loans (Southport and RoyaleLife) are
secured against operating assets which brings additional complexity for buyers
when compared to, say, single tenant investment properties and, in the case of
RoyaleLife, operates in a new and emerging sector of retirement living.
The Investment Manager and the Board have considered the impact of a further
10%, 20% and 30% reduction in the underlying property values, broadly
reflecting a one, two and three stage credit deterioration as previously
presented, and recalculated its probability weighted valuations on this basis.
The negative impact of these further declines in property values on the
portfolio as a whole is set out below.
Stress test impact on Expected Credit Loss at 31 January 2024
31 January 2024 31 January 2023
One grade deterioration in credit rating £3,279,000 £3,286,000
Two grade deterioration in credit rating £6,558,000 £5,072,000
Three grade deterioration in credit rating £9,837,000 £5,412,000
All efforts continue to be made by the Investment Manager and the Board to
crystalise the value in the remaining investments in a reasonable time frame
in order to return capital to shareholders and proceed to the liquidation of
the Company. However, as discussed above, in the current market many
properties for sale are not receiving any bids, even where they are considered
distressed, and the limited number of buyers active in the market are seeking
out the maximum distress in order achieve best relative value and maximise
their potential returns. Accordingly, the timing of the final realisation of
the Company's remaining assets cannot be predicted with certainty. The Board
and Investment Manager have considered the impact of a delay in the
realisation of the remaining loans. A 3 month delay would, at 31 January
2024, reduce the net present value of the cashflows arising by 2.5%
(£780,000), whilst a 6 month delay would result in a 5% (£1,540,000)
reduction in the net present value of the cashflows arising.
The current performance of each loan is discussed in the Investment Manager's
report.
6. Trade and other receivables
31 January 2024 31 January 2023
£ £
Other receivables 30,718 43,435
The Company has management policies in place to ensure that all receivables
are received within the credit time frame. The Directors consider that the
carrying amount of all receivables approximates to their fair value.
7. Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Company and short-term
bank deposits held with maturities of twelve months or less. The carrying
amounts of these assets approximate their fair value.
The table below shows the Company's cash balances and the banks in which they
are held:
31 January 2024 31 January 2023
£ £
Lloyds Bank International Limited 590,594 581,954
Barclays Bank plc 590,594 581,983
Butterfield Bank (Guernsey) Limited 594,252 582,571
Royal Bank of Scotland International Limited 1,170,389 7,462,986
2,945,829 9,209,494
8. Trade and other payables
31 January 2024 31 January 2023
£ £
Investment Management fees (see Note 13) 236,597 517,343
Directors' remuneration (see Note 12) 31,250 31,250
Administration fees (see Note 13) 67,917 43,283
Audit fees (see note 14) 17,150 50,138
Other expenses 38,556 40,465
Trade creditors - 179,174
391,470 861,653
Trade creditors comprise amounts payable to borrowers. The Company has
management policies in place to ensure that all payables are paid within the
credit time frame. The Directors consider that the carrying amount of all
payables approximates to their fair value.
9. Earnings per share and Net Asset Value per share
Earnings per share
1 February 2023 to 1 February 2022 to
31 January 2024 31 January 2023
Loss/(profit) for the year (£) (24,876,251) 1,959,823
Weighted average number of Ordinary Shares in issue 121,302,779 121,302,779
Basic and diluted (Loss)/EPS (pence) (20.51) 1.62
The calculation of basic and diluted (loss)/earnings per share is based on the
(loss)/profit for the year and on the weighted average number of Ordinary
Shares in issue in for the year ended 31 January 2024.
There are no dilutive shares in issue at 31 January 2024 (31 January 2023:
none).
Net Asset Value per share
31 January 2024 31 January 2023
NAV (£) 36,224,128 77,354,951
Number of Ordinary Shares in issue 121,302,779 121,302,779
NAV per share (pence) 29.86 63.77
The calculation of NAV per share is based on Net Asset Value and the number of
Ordinary Shares in issue at the year end.
10. Share capital
The authorised share capital of the Company is represented by an unlimited
number of Ordinary Shares with or without a par value which, upon issue, the
Directors may designate as (a) Ordinary Shares; (b) B Shares; and (c) C
Shares, in each case of such classes and denominated in such currencies as the
Directors may determine.
31 January 2024 31 January 2023
Number of shares Number of shares
Authorised
Ordinary Shares of no par value Unlimited Unlimited
B Shares of no par value Unlimited Unlimited
Total No Total No
Ordinary Shares 121,302,779 121,302,779
B Shares
B Shares issued May 2022 - 121,302,779
B Shares redeemed and cancelled May 2022 - (121,302,779)
B Shares issued February 2023 121,302,779 -
B Shares redeemed and cancelled February 2023 (121,302,779) -
B Shares issued August 2023 121,302,779 -
B Shares redeemed and cancelled August 2023 (121,302,779) -
- -
£ £
Share capital brought forward 80,298,419 87,576,589
Repaid in the year (15,648,058) (7,278,170)
Share capital carried forward 64,650,361 80,298,419
Dividends
Dividends are recognised by the Company in the quarterly NAV calculation
following the declaration date. A summary of the dividends declared and/or
paid during the year ended 31 January 2024 and 31 January 2023 are set out
below:
Dividend per share Total dividend
1 February 2023 to 31 January 2024 Pence £
Interim dividend in respect of quarter ended 31 January 2023 0.50 606,514
0.50 606,514
Dividend per share Total dividend
1 February 2022 to 31 January 2023 Pence £
Interim dividend in respect of quarter ended 31 January 2022 1.10 1,334,331
Interim dividend in respect of quarter ended 30 April 2022 1.10 1,334,331
Interim dividend in respect of quarter ended 31 July 2022 1.00 1,213,028
Interim dividend in respect of quarter ended 31 October 2022 1.00 1,213,027
4.20 5,094,717
Following shareholder approval of proposed changes to the Company's Investment
Objectives and Investment Policy which allows an orderly realisation of the
Company's assets and return of capital to shareholders, the Board has made it
clear that payment of quarterly dividends would continue only whilst it
remained prudent to do so.
Due to the enforcement actions in place over all three remaining assets,
trading levels have been reduced and accordingly levels of operating cashflow
are projected to be significantly reduced.
The Company has a predictable cost base and the ability to hold back capital
from the imminent (contracted) and prospective future repayments to meet costs
and preserve working capital over the medium to long-term. However, it is no
longer considered appropriate to distribute a regular dividend.
Return of Capital
Return of Capital is recognised by the Company in the quarterly NAV
calculation following the declaration date.
The Directors announced two returns in the year and have returned a total
amount of 12.90 pence per Ordinary Share to shareholders, being £15,648,058
in total based on the current number of Ordinary Shares in issue. This return
of capital was effected by way of an issue of redeemable B Shares to existing
shareholders pro rata to their shareholding on the record date set out below
and the subsequent redemption of those B Shares.
Return of Capital per share Total Return of Capital
1 February 2023 to 31 January 2024 Pence £
Return of Capital February 2023 5.50 6,671,653
Return of Capital August 2023 7.40 8,976,405
12.90 15,648,058
1 February 2022 to 31 January 2023 Pence £
Return of Capital May 2022 6.00 7,278,170
6.00 7,278,170
Rights attaching to Shares
The Company has a single class of Ordinary Shares which are not entitled to a
fixed dividend. The company had two issues of redeemable B shares which were
redeemed throughout the year on a Return of Capital payment to shareholders of
the redeemable B shares.
At any General Meeting of the Company each Ordinary Shareholder is entitled to
have one vote for each share held. The Ordinary Shares also have the right to
receive all income attributable to those shares and participate in
distributions made and such income shall be divided pari passu among the
holders of Ordinary Shares in proportion to the number of Ordinary Shares held
by them.
The Company's Articles include a B Share mechanism for returning capital to
Shareholders and following Shareholder approval on 14 January 2021, the
Company has and will continue to utilise this mechanism in future. When the
Board determines to return capital to Shareholders, the Company will issue B
Shares, paid up out of
the Company's assets, to existing Shareholders pro rata to their holding of
Ordinary Shares at the time of such issue. The amount paid up on the B Shares
will be equal to the cash distribution to be made to Shareholders via the B
Share mechanism. The B Shares shall be redeemable at the option of the Company
following issue and the redemption proceeds (being equal to the amount paid up
on such B Shares) paid to the holders of such B Shares
on such terms and in such manner as the Directors may from time to time
determine. It is therefore expected that the B Shares will only ever be in
issue for a short period of time and will be redeemed for cash shortly after
their issue in order to make the return of capital to Shareholders.
It is intended that following each return of capital the Company will publish
a revised estimated Net Asset Value and Net Asset Value per Ordinary Share
based on the prevailing published amounts adjusted to take into account the
return of capital. The number of Ordinary Shares in issue will remain
unchanged.
11. Risk Management Policies and Procedures
The Company through its investment in senior loans is exposed to a variety of
financial risks, including market risk (including currency risk and interest
rate risk), credit risk and liquidity risk. The Company's overall risk
management procedures focus on the unpredictability of operational performance
of the borrowers and on property fundamentals and seek to minimise potential
adverse effects on the Company's financial performance.
The Directors are ultimately responsible for the overall risk management
approach within the Company. The Directors have established procedures for
monitoring and controlling risk. The Company 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:
Market risk
Market risk includes market price risk, currency risk and interest rate 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. This risk is considered by the Board to be as a
result of credit risk as it relates to the borrower defaulting on the loan.
The Company's overall market position is monitored by the Investment Manager
and is reviewed by the Directors on an ongoing basis.
Currency risk
The Company's currency risk exposure is considered to be immaterial as all
investments have been and will be made in Pounds Sterling.
Interest rate risk
Interest rate risk is the risk that the value of financial instruments and
related income from cash and cash equivalents will fluctuate due to changes in
market interest rates.
The majority of the Company's financial assets are loans advanced, which are
at a fixed rate of interest, and cash and cash equivalents.
The following table shows the portfolio profile of the material financial
assets as at 31 January 2024 and 31 January 2023:
31 January 2024 31 January 2023
£ £
Floating rate
Cash 2,945,829 9,209,494
Fixed rate
Loans advanced, net of ECL allowance 33,639,051 68,968,675
36,584,880 78,178,169
Credit risk
Credit risk is the risk that a counterparty will be unable to pay amounts in
full when due. The Company's main credit risk exposure are on the loans
advanced, where the Company invests in secured senior debt, and in respect of
monies held with banks.
With respect to its loan portfolio the Company has adopted the Investment
Manager's internal credit rating methodology to assess and monitor the
creditworthiness of each loan and resultant credit risk, PD and LGD. The model
takes into account factors below such as:
· financial risk of the borrower - considers the financial position
of the borrower in general and considers LTV, ICR and amortisation
profile/debt maturity;
· property risk - where the property location, quality
(specification, condition) and letting risk are considered;
· income risk - the income risk category considers, tenant
diversity, tenant credit quality and lease length ratio, sector diversity and
geographical diversity; and
· borrower/structure risk - where factors such as history of the
borrower/sponsor, loan control (security package) and covenants are
considered.
The credit rating methodology is dynamic and recognises the interplay between
diversity and quality as a risk mitigant. The Company's current credit risk
grading framework comprises the following categories and portfolio weightings:
Grade Description Maximum credit risk exposure 2024 Maximum credit risk exposure 2023
AAA, AA+ Virtually no risk - -
AA to A Low risk - -
BBB Moderate risk - 9,595,622
BB Average risk - 17,182,749
B Acceptable risk - -
CCC+ Borderline Risk - -
CCC Special Mention - -
CC Substandard - 26,405,642
D Doubtful 60,493,105 15,734,452
D Loss - -
The classification of loans for the purpose of considering expected credit
loss are discussed in the company's accounting policies and in note 5 above,
these include a deterioration in credit rating from the date of initial
recognition and are not based solely on the absolute credit rating at a point
in time.
The Company has previously used the Investment Manager's loss experience to
benchmark investment performance and potential impairment for Stage 1 and
Stage 2 assets under IFRS 9 considering expected loss given default. In the
case of Stage 3 assets the Company considers the net realisable value of the
underlying property security in determining expected credit loss. The total
exposure to credit risk arises from default of the loan counterparty and the
carrying amounts of other financial assets best represent the maximum credit
risk exposure at the year-end date, including the principal advanced on loans,
interest outstanding on loans and cash and cash equivalents. As at 31 January
2024, the maximum credit risk exposure was £60,493,105 (31 January 2023:
£68,918,465).
The Investment Manager has adopted procedures to reduce credit risk exposure
through the inclusion of covenants in loans issued, along with conducting
credit analysis of the counterparties, their business and reputation, which is
monitored on an ongoing basis. The Investment Manager routinely analyses the
profile of the Company's underlying risk in terms of exposure to significant
tenants, reviewing market data and forecast economic trends to benchmark
borrower performance and to assist in identifying potential future stress
points.
Collateral held as security
Each loan is secured by a charge of commercial real estate property pledged by
the borrower. To diversify credit risk the Company maintains its cash and cash
equivalents across four (31 January 2023: four) different banking groups as
shown below. In order to cover operational expenses, a working capital balance
at Royal Bank of Scotland International Limited is maintained and monitored.
This is subject to the Company's credit risk monitoring policies.
The table below shows the Company's cash balances and the credit rating for
each counterparty:
Rating 31 January 2024 31 January 2023
£ £
Lloyds Bank International Limited A 590,594 581,954
Barclays Bank plc A 590,594 581,983
Butterfield Bank (Guernsey) Limited BBB+ 594,252 582,571
Royal Bank of Scotland International Limited A- 1,170,389 7,462,986
2,945,829 9,209,494
The carrying amount of these assets approximates their fair value.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
liabilities as they fall due. The Company's loans advanced are illiquid and
may be difficult or impossible to realise for cash at short notice.
The Company manages its liquidity risks through the regular preparation and
monitoring of cash flow forecasts to ensure that it can meet its obligations
as they fall due. The Company expects the meet it ongoing obligations though
existing cash reserves.
Liquidity risks arise in respect of other financial liabilities of the Company
due to counterparties. The Company's loan assets are all now past due and in
default and the financial liabilities all have maturity dates within one
year. An analysis of the maturity of financial assets classified as loans
advanced is shown in the table below:
Less than one year Between one and five years Total as at
31 January 2024
£ £ £
Affinity - principal 17,125,789 - 17,299,963
Affinity - interest and exit fees 326,231 - 527,335
Southport - principal 15,500,000 - 15,500,000
Southport - interest and exit fees 490.356 - 277,089
RoyaleLife - principal 25,382,017 - 25,382,017
RoyaleLife - interest and exit fees 4,261,464 - 4,322,659
63,085,857 - 63,309,063
Less than one year Between one and five years Total as at
31 January 2023
£ £ £
Northlands - principal 9,561,076 - 9,561,076
Northlands - interest and exit fees 316,874 - 316,874
Affinity - principal 17,299,963 - 17,299,963
Affinity - interest and exit fees 326,231 - 326,231
Southport - principal 15,200,000 - 15,200,000
Southport - interest and exit fees 534,452 - 534,452
RoyaleLife - principal 25,382,017 - 25,382,017
RoyaleLife - interest and exit fees 4,261,464 - 4,261,464
72,882,077 - 72,882,077
Capital management policies and procedures
The Company's capital management objectives are to ensure that the Company
will be able to continue to meet all of its liabilities as they fall due and
to maximise the income and capital return to equity shareholders.
In accordance with the Company's investment policy, the Company's principal
use of cash has been to fund investments in the form of loans sourced by the
Investment Manager, as well as on-going 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 externally imposed capital requirements. The Company's
capital at the year-end comprised equity share capital and reserves.
12. Related Party Transactions and Directors' Remuneration
Parties are considered to be related if one party has the ability to control
the other party or exercise significant influence over the party in making
financial or operational decisions.
In the opinion of the Directors, on the basis of shareholdings advised to
them, the Company has no immediate or ultimate controlling party.
Directors
The Directors' fees for the year amounted to £160,000 (31 January 2023:
£160,000) with outstanding fees of £31,250 due to the Directors at 31
January 2024 (31 January 2023: £31,250) (see Note 8).
13. Material Agreements
Investment Manager Agreement
Investment Management fees for the year amounted to £551,167 (31 January
2023: £761,047), of which £236,597 (31 January 2023: £517,343) was
outstanding at the year-end (see Note 8).
The Investment Manager was entitled to a management fee at a rate equivalent
to 1% per annum of the Net Asset Value paid quarterly in arrears based on the
average Net Asset Value as at the last business day of each month in each
relevant quarter. The Board has agreed an amendment to the Investment
Manager's fee structure to align more closely with market capitalisation of
the Company and ultimate value returned to shareholders and as a result of
extensive discussion between the Board and the Investment Manager, it has
been agreed that fee will reduce to 0.5% of Net Asset Value from 1%
previously. This halving of the investment management fee will result in
meaningful savings for shareholders over the remaining life of the Company and
will apply from today's date.
The Investment Manager's agreement became effective from 25 November 2020 and
shall continue thereafter unless terminated in accordance with the terms of
the agreement. The Investment Manager's appointment cannot be terminated by
the Company with less than 12 months' notice. The Company may terminate the
Investment Management Agreement with immediate effect if the Investment
Manager has committed any material, irremediable breach of the Investment
Management Agreement or has committed a material breach and fails to remedy
such breach within 30 days of receiving notice from the Company requiring it
to do so; or the Investment Manager is no longer authorised and regulated by
the FCA or is no longer permitted by the FCA to carry on any regulated
activity necessary to perform its duties under the Investment Management
Agreement.
The Investment Manager may terminate their appointment immediately if the
Company has committed any material, irremediable breach of the Investment
Management Agreement or has committed a material breach and fails to remedy
such breach within 30 days of receiving notice from the Company requiring it
to do so.
Administration Agreement
The Administrator has been appointed to provide day to day administration and
company secretarial services to the Company, as set out in the Administration
Agreement. Under the terms of the Administration Agreement, the Administrator
is entitled to a fixed fee of £90,000 per annum for services such as
administration, corporate secretarial services, corporate governance,
regulatory compliance and stock exchange continuing obligations provided to
the Company. The Administrator will also be entitled to an accounting fee
charged on a time spent basis with a minimum fee of £40,000 per annum.
Administration and accounting fees for the year amounted to £239,806 (31
January 2023: £155,832) of which £67,917 (31 January 2023: £43,283) was
outstanding at the year end.
Registrar Agreement
The Registrar has been appointed to provide registration services to the
Company and maintain the necessary books and records, as set out in the
Registrar Agreement.
Under the terms of the Registrar Agreement, the Registrar is entitled to an
annual fee from the Company equal to £1.78 per shareholder per annum or part
thereof, subject to a minimum of £7,500 per annum. Other Registrar activities
will be charged for in accordance with the Registrar's normal tariff as
published from time to time.
Depositary Agreement
The Depositary has been appointed from 25 November 2020 to provide depositary
services under the AIFMD to the Company, which include cash monitoring, asset
verification and oversight, as set out in the Depositary Agreement.
Under the terms of the Depositary Agreement, the Depositary is entitled to a
fixed fee from the Company of £25,000 per annum.
14. Auditor's Remuneration
Audit and non-audit fees payable to the auditors can be analysed as follows:
31 January 2024
31 January 2023
£ £
Audit fees for the Company 63,013 48,025
Total Audit fees 63,013 48,025
There were no non-audit fees paid during the year.
15. Other Expenses
31 January 2024 31 January 2023
£ £
Broker fees 50,000 25,550
Administration fees 239,806 155,832
Regulatory fees 17,872 21,415
Listing fees 13,230 15,239
Legal and professional fees 118,645 71,296
Other expenses 109,307 119,753
548,860 409,085
16. Subsequent events
There are no material subsequent events noted after the reporting date.
alternative performance measures
Performance Measure Definition Reason for Use
Weighted Average Loan Coupon The money weighted average rate of interest being charged on each investment To provide shareholders with a means to assess whether the interest payable on
at the relevant reporting date. the Company's loans reflects the risk of such loans; and whether this is in
line with the Company's investment parameters and shareholders' return
expectations.
Capital Distribution Per Share The total annual Return of Capital to shareholders divided by the number of To assist shareholders in assessing the performance of the Company in relation
Shares in issue (other than shares held in treasury). to its Investment Objectives.
Weighted Average Loan Maturity/ Portfolio Weighted Average Residual Term The money weighted average period from the relevant reporting date until the To provide transparency to the Company's investment outlook and likely level
Company's investments reach their contractual repayment date. of loan repayments, and to assist shareholders in identifying whether the
remaining duration of the loans reflects their own investment time frames.
Weighted Average Loan to Value Ratio/Portfolio Weighted Average LTV The money weighted average Loan to Value ratio at the relevant reporting date, To provide transparency to the Company's risk positioning and to demonstrate
calculated on the basis of the outstanding loan amount for each investment as compliance with the investment restrictions.
a percentage of the most recent Market Value of the properties securing each
investment.
Current LTV The current Loan to Value ratio for each individual loan at the relevant To provide transparency to the Company's risk positioning and to demonstrate
reporting date, calculated on the basis of the outstanding loan amount for compliance with the investment restrictions.
each investment as a percentage of the most recent Market Value of the
property securing the investment.
Total Income per Share The total income of the Company as disclosed in the Statement of Comprehensive To provide transparency to the Company's investment returns.
Income divided by the number of Ordinary Shares in issuance at the relevant
reporting date.
NAV per Share The net asset value of the Company divided by the number of Ordinary Shares in To assist shareholders in assessing the performance of the Company over a
issuance at the relevant reporting date. period in relation to its Investment Objectives.
Dividend per Share The total dividends per Ordinary Share declared and/or paid during the To assist shareholders in assessing the performance of the Company in relation
relevant reporting period. to its Investment Objectives.
Shareholder Total Return since IPO Share price movements combined with dividends paid on the assumption that To assist shareholders in assessing the total return earned over the life of
dividends have been reinvested. the Company.
Share Price Premium / Discount The percentage difference between the NAV per share and the quoted price of To assist shareholders in identifying and monitoring the performance of the
each Ordinary Share as at the relevant reporting date. Company.
Percentage Capital Invested The aggregate value of the investments at amortised cost divided by total To assist shareholders in identifying and monitoring the performance of the
shareholder equity. Where the figure exceeds 100%, the investments will be Company and the level of gearing.
partially funded by the Company's debt facility.
glossary of capitalised defined terms
"Administrator" means Ocorian Administration (Guernsey) Limited;
"Administration Agreement" means the Administration Agreement dated 23 January
2013 between the Company and the Administrator;
"Admission" means the admission of the shares to the premium listing segment
of the Official List and to trading on the London Stock Exchange;
"AEOI" means Automatic Exchange of Information;
"Affinity" means Impact Spectrum Limited;
"AGM" or "Annual General Meeting" means the general meeting of the Company;
"AIC" means the Association of Investment Companies;
"AIC Code" means the AIC Code of Corporate Governance;
"AIFMD" means the Alternative Investment Fund Managers Directive;
"Annual Report" or "Annual Report and Financial Statements" means the annual
publication of the Company provided to the shareholders to describe their
operations and financial conditions, together with their Financial Statements;
"Articles of Incorporation" or "Articles" means the articles of incorporation
of the Company, as amended from time to time;
"Board" or "Directors" or "Board of Directors" means the directors of the
Company from time to time;
"B shares" means a redeemable Ordinary Share of no par value in the capital of
the Company issued and designated as a B Share of such class, and denominated
in such currency, as may be determined by the Directors at the time of
issue. Issued for the purpose of returning capital in accordance with
Article 8;
"Capital Distribution Per Share" means the total annual Return of Capital to
shareholders divided by the number of Shares in issue (other than shares held
in treasury);
"Code" or "Corporate Governance Code" means the UK Corporate Governance Code
2019 as published by the Financial Reporting Council;
"Companies Law" means the Companies (Guernsey) Law, 2008, (as amended);
"Company" means ICG-Longbow Senior Secured UK Property Debt Investments
Limited;
"CRS" means Common Reporting Standard;
"ECL" means expected credit losses;
"EPS" or "Earnings per share" means Earnings per Ordinary Share of the Company
and is expressed in Pounds Sterling;
"ESG" means Environmental, Social and Governance;
"EU" means the European Union;
"Euro" or "€" means Euro;
"FATCA" means Foreign Account Tax Compliance Act;
"FCA" means the UK Financial Conduct Authority (or its successor bodies);
"Financial Statements" means the audited financial statements of the Company,
including the Statement of Comprehensive Income, the Statement of Financial
Position, the Statement of Changes in Equity, the Statement of Cash Flows,
and associated notes;
"FRC" means the Financial Reporting Council;
"FTSE" means the Financial Times Stock Exchange;
"GDP" means gross domestic product;
"GFSC" means the Guernsey Financial Services Commission;
"GIIN" means Global Intermediary Identification Number;
"GFSC Code" means the GFSC Finance Sector Code of Corporate Governance;
"IAS" means international accounting standards as issued by the Board of the
International Accounting Standards Committee;
"ICG" means Intermediate Capital Group PLC;
"ICR" means interest coverage ratio;
"IFRS" means the UK adopted international accounting standards;
"Interest Cover Ratio" or "ICR" means the debt/profitability ratio used to
determine how easily a company can pay interest on outstanding debt;
"Interim Report" means the Company's interim report and unaudited interim
condensed financial statements for the period ended 31 July;
"Investment Manager" or "ICG-Longbow" means ICG Alternative Investment Limited
or its associates;
"Investment Manager Agreement" means Investment Management Agreement dated 25
November 2020 between the Company and the Investment Manager;
"IPO" means the Company's initial public offering of shares to the public
which completed on 5 February 2013;
"ISAE 3402" means International Standard on Assurance Engagements 3402,
"Assurance Reports on Controls at a Service Organisation";
"ISIN" means an International Securities Identification Number;
"LGD" means loss given default;
"Listing Rules" means the listing rules made by the FCA under section 73A
Financial Services and Markets Act 2000;
"London Stock Exchange" or "LSE" means London Stock Exchange plc;
"LTV" means Loan to Value ratio;
"Main Market" means the main securities market of the London Stock Exchange;
"Management Engagement Committee" means a formal committee of the Board with
defined terms of reference;
"Memorandum" means the Company's memorandum;
"NAV per share" means the Net Asset Value per Ordinary Share divided by the
number of Shares in issue (other than shares held in treasury);
"Net Asset Value" or "NAV" means the value of the assets of the Company less
its liabilities, calculated in accordance with the valuation guidelines laid
down by the Board, further details of which are set out in the 2017
Prospectus;
"Northlands" means London & Guildford Properties Limited, London &
Weybridge Properties Limited, Lamborfore Limited, Northlands Holdings Limited,
Peeble Stone Limited, Auldana Limited, Felixstow Limited, Richmond Lodge
Construction Limited, Piperton Finance Limited and Alton & Farnham
Properties Limited;
"Official List" is the Premium Segment of the FCA's Official List;
"PD" means probability of default;
"Registrar" means Link Asset Services (Guernsey) Limited (formerly Capita
Registrars (Guernsey) Limited);
"Registrar Agreement" means the Registrar Agreement dated 31 January 2013
between the Company and the Registrar;
"RoyaleLife" means collectively, Time GB Properties LendCo Limited, Royal
Parks Limited, Ambassador Royale Parks Parent Limited and Ambassador Royale
Parks Intermediate Limited ;
"Schedule of Matters" means the Schedule of Matters Reserved for the Board,
adopted 23 January 2013, amended 25 September 2020;
"SOCI" means the Statement of Comprehensive Income;
"Southport" means Waterfront Southport Properties Limited and Waterfront
Hotels (Southport) Limited - now in administration;
"Sq ft" means square feet;
"UK" or "United Kingdom" means the United Kingdom of Great Britain and
Northern Ireland;
"£" or "Pounds Sterling" means British pound sterling and "pence" means
British pence.
directors and general information
Board of Directors Independent Auditor English Solicitors to the Company
Jack Perry Deloitte LLP Gowling WLG (UK) LLP
(Chair)
Stuart Beevor PO Box 137 4 More London Riverside
Paul Meader Regency Court London
Fiona Le Poidevin Glategny Esplanade United Kingdom
St. Peter Port SE1 2AU
Audit and Risk Committee Guernsey
Fiona Le Poidevin (Chair) GY1 3HW Guernsey Advocates to the Company
Stuart Beevor Carey Olsen
Paul Meader Guernsey Administrator and Company Secretary Carey House
Ocorian Administration (Guernsey) Limited PO Box 98
Management Engagement Committee P.O. Box 286 Les Banques
Jack Perry Floor 2 St Peter Port
(Chair)
Trafalgar Court Guernsey
Paul Meader
Les Banques GY1 4BZ
Fiona Le Poidevin
St Peter Port
Stuart Beevor
Guernsey Bankers
GY1 4LY Butterfield Bank (Guernsey) Limited
Nomination Committee
PO Box 25
Jack Perry (Chair)
Depositary Regency Court
Stuart Beevor
Ocorian Depositary (UK) Limited Glategny Esplanade
Paul Meader
5th Floor St Peter Port
Fiona Le Poidevin
20 Fenchurch Street Guernsey
London GY1 3AP
Remuneration Committee
England
Paul Meader (Chair)
EC3M 3BY Barclays Bank plc
Jack Perry
6-8 High Street
Stuart Beevor
Registrar St Peter Port
Fiona Le Poidevin
Link Asset Services (Guernsey) Limited Guernsey
Mont Crevelt House GY1 3BE
Investment Manager
Bulwer Avenue
ICG Alternative Investment Limited
St Sampson Lloyds Bank International Limited
Procession House
Guernsey PO Box 136
55 Ludgate Hill
GY2 4LH Sarnia House
London
Le Truchot
United Kingdom
Corporate Broker and Financial Adviser St Peter Port
EC4M 7JW
Cavendish Securities plc Guernsey
6-8 Tokenhouse Yard GY1 4EN
Registered office
London
P.O. Box 286
United Kingdom The Royal Bank of Scotland International
Floor 2
EC2R 7AS Royal Bank Place
Trafalgar Court
1 Glategny Esplanade
Les Banques
St Peter Port
St Peter Port
Identifiers Guernsey
Guernsey
GIIN: 6IG8VS.99999.SL.831 GY1 4BQ
GY1 4LY
ISIN: GG00B8C23S81
Sedol: B8C23S8
Ticker: LBOW
Website: www.lbow.co.uk (http://www.lbow.co.uk)
cautionary statement
The Chairman's Statement and Investment Manager's Report have been prepared
solely to provide additional information for shareholders to assess the
Company's strategies and the potential for those strategies to succeed. These
should not be relied on by any other party or for any other purpose.
The Chairman's Statement and Investment Manager's Report may include
statements that are, or may be deemed to be, "forward-looking statements".
These forward-looking statements can be identified by the use of
forward-looking terminology, including the terms "believes", "estimates",
"anticipates", "expects", "intends", "may", "will" or "should" or, in each
case, their negative or other variations or comparable terminology.
These forward-looking statements include all matters that are not historical
facts. They appear in a number of places throughout this document and include
statements regarding the intentions, beliefs or current expectations of the
Directors and the Investment Manager, concerning, amongst other things, the
investment objectives and investment policy, financing strategies, investment
performance, results of operations, financial condition, liquidity, prospects,
and distribution policy of the Company and the markets in which it invests.
By their nature, forward-looking statements involve risks and uncertainties
because they relate to events and depend on circumstances that may or may not
occur in the future. Forward-looking statements are not guarantees of future
performance.
The Company's actual investment performance, results of operations, financial
condition, liquidity, distribution policy and the development of its financing
strategies may differ materially from the impression created by the
forward-looking statements contained in this document.
Subject to their legal and regulatory obligations, the Directors and the
Investment Manager expressly disclaim any obligations to update or revise any
forward-looking statement contained herein to reflect any change in
expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based.
ICG-Longbow Senior Secured UK Property Debt Investments Limited
P.O. Box 286
Floor 2, Trafalgar Court
Les Banques, St Peter Port, Guernsey
GY1 4LY, Channel Islands.
T +44 (0) 1481 742742
F +44 (0) 1481 742698
Further information available online:
www.lbow.co.uk (http://www.lbow.co.uk)
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