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AICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
XXXXX (CONTINUED)
Company Number: 55917
ICG-Longbow Senior Secured UK Property Debt Investments Limited
Annual Report and Consolidated Financial Statements
For the year ended 31 January 2019
CONTENTS
Overview
01 FinancialHighlights
01 CorporateSummary
02 FinancialSummary
03 Chairman’sStatement
05 InvestmentAdviser’sReport
15 InvestmentPolicy
Governance
16 BoardofDirectors
18 ReportoftheDirectors
22 Directors’ResponsibilitiesStatement
24 CorporateGovernanceReport
32 ReportoftheAuditandOperationalRiskCommittee
35 IndependentAuditor’sReport
Financial Statements
42 ConsolidatedStatementofComprehensiveIncome
43 ConsolidatedStatementofFinancialPosition
44 ConsolidatedStatementofChangesInEquity
45 ConsolidatedStatementofCashFlows
46 NotestotheConsolidatedFinancialStatements
Other Information
64 GlossaryofCapitalisedDefinedTerms
66 DirectorsandGeneralInformation
AllcapitalisedtermsaredefinedintheGlossaryofCapitalisedDefinedTermsonpages64to65unlessseparatelydefined.
Cover picture: Spectrum Building, Bristol
01ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
Overview
Governance
Financial Statements
Other Inform
ation
FINANCIAL HIGHLIGHTS FOR THE YEAR ENDED 31 JANUARY 2019
Portfolio
£107,221,546
Invested in 9 loans as at 31 January
2019
£121,271,423
Invested in 10 loans as at 23 April
2019
Over 60%
of original portfolio transitioned or extended, with strong pipeline
to invest upcoming loan maturities
3.75 Year
weighted average maturity of new loans
£25 million
3 year revolving credit facility
secured
CORPORATE SUMMARY
INVESTMENT OBJECTIVETheinvestmentobjectiveoftheGroup,asapprovedbytheshareholdersoftheCompany,is“toconstructaportfolioofUKrealestatedebtrelatedinvestmentspredominantlycomprisingloanssecuredbyfirstrankingfixedchargesagainstcommercialpropertyinvestments,withtheaimofprovidingshareholderswithattractive,quarterlydividends,capitalpreservationand,overthelongerterm,adegreeofcapitalappreciation.”
STRUCTURETheCompanyisanon-cellularcompanylimitedbysharesincorporatedinGuernseyon29November2012undertheCompaniesLaw.TheCompany’sregistrationnumberis55917,andithasbeenregisteredwiththeGFSCasaregisteredclosed-endedcollectiveinvestmentscheme.TheCompany’sordinaryshareswereadmittedtothepremiumsegmentoftheFCA’sOfficialListandtotradingontheMainMarketoftheLondonStockExchangeaspartofitsIPOwhichcompletedon5February2013.TheissuedcapitalcomprisestheCompany’sordinarysharesdenominatedinPoundsSterling.TheCompanymakesinvestmentsinitsportfoliothroughICG-LongbowSeniorDebtS.A.,theCompany’swhollyownedsubsidiary.
INVESTMENT ADVISERTheInvestmentAdviser(IntermediateCapitalManagersLimited),whichtradesunderthenameofICG-Longbow,isauthorisedandregulatedbytheFCA.TheassetsoftheCompanyaremanagedbytheBoardafterreceivingadvicefromtheInvestmentAdviserunderthetermsofthenon-discretionaryInvestmentAdvisoryAgreement.
Performance
Total Income Per Share
6.30 pence
NAV Per Share
99.16 pence
Dividend per Share
6.00 pence
Shareholder Total Return since IPO
35.4%
02 ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
FINANCIAL SUMMARY
PERFORMANCEO NAVof£120.28millionasat31January2019(31January2018:£117.98million).
O Totaldividendspaidordeclaredfortheyearended31January2019of6.00pencepershare(31January2018:8.25pencepershare).Intheprioryear,totaldividendpaidincludedaspecialdividendof2.25pencepershare.
O Totalincomeexcludingprepaymentfeesof£7.64million(31January2018:£7.10million).
O Prepaymentfeesof£nil(31January2018:£0.97million).Allloanrepaymentsreceivedduringtheyearwereoutsidetheircontractedincomeprotectionperiods.
O Profitaftertaxof£5.26millionfortheyearended31January2019(31January2018:£5.90million),asaresultofnoprepaymentfeesearned.
O Earningspershareof4.36pence(31January2018:5.33pence).
DIVIDENDO Totaldividendspaidordeclaredfortheyearended31January2019of6.00pencepershare(31January2018:8.25pencepershare),madeupasfollows:
– Interimdividendof1.5pencepersharepaidinrespectofquarterended30April2018
– Interimdividendof1.5pencepersharepaidinrespectofquarterended31July2018
– Interimdividendof1.5pencepersharepaidinrespectofquarterended31October2018
– Interimdividendof1.5pencepersharepaidinrespectofquarterended31January2019
INVESTMENT PORTFOLIO O Asat31January2019,theGroup’sinvestmentportfoliocomprisednineloanswithanaggregateprincipalbalanceof£107.22million,representing89.14%oftheshareholders’equity(31January2018:tenloanswithaggregateprincipalbalanceof£111.15million,representing94.21%oftheshareholders’equity).
O Theweightedaveragecouponwas6.23%(31January2018:6.29%).
O TheportfolioweightedaverageLTVwas62.2%(31January2018:58.03%),reflectingchangestothecompositionoftheloanportfolio.TheweightedaverageICRwas208%(31January2018:218%).
O Theportfolioweightedaverageresidualtermwas0.96years,ofwhich,onaverage,0.42yearsremainsincomeprotected(31January2018:residualterm1.37years,incomeprotectedterm0.53years).
O Asaresultofnewinvestmentsmadeafterthefinancialyearend,theGroup’sinvestmentportfolioasatthedateoftheseaccountscomprisestenloanswithanaggregateprincipalbalanceof£121.27million.TheGrouphasmadea£3.5milliondrawdownonitsrevolvingcreditfacility.
O TheportfolioweightedaverageLTVasat23April2019is63.0%,theweightedaverageresidualloantermis1.13years,andtheweightedaverageloancouponis6.32%.
03ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
Overview
Governance
Financial Statements
Other Inform
ation
CHAIRMAN’S STATEMENT
JACK PERRY CHAIRMAN
INTRODUCTIONOnbehalfoftheBoard,itismypleasuretopresentthesixthAnnualReportfortheGroup,fortheyearended31January2019.
TheCompanycontinuestomakestrongprogressagainstitskeyobjectives.Followingshareholderapproval,theBoardadoptedtherevisedInvestmentPolicyinMarch2017tofacilitatethereinvestmentofthematuringloanportfolioandtogrowtheCompany.AsignificantproportionoftheinvestmentportfoliohasnowbeentransitionedandtheBoardisgreatlyencouragedbytheincreasinglyattractivepipelineofnewlendingopportunities.ThenewRevolvingCreditFacilityiscontributingtoeffectivedeploymentofcapitalinnewloansinanticipationofloanredemptions.Theexistinginvestmentportfoliohasperformedinlinewithexpectations,producingatotalincomeof£7.6millionforthefinancialyear(£8.1millionforyearto31January2018)deliveringearningspershare,aftercosts,of4.36pence(5.33pencein2018).Thereductioninearningspersharereflectsthelowerincomeduetothetimingoftheredeploymentofcapitalunderthenewinvestmentmandatefollowingtherepaymentofcertainoriginalloansandtheexceptionalprepaymentfeesreceivedin2018notbeingrepeated.
Themomentuminthefinancialyearto31January2019hasbeencontinuedduringthefirstquarterofthisyear.Inadditiontonewloanscompleted,theInvestmentAdviserhasagreedtermsonthreenewloansandextendedthetermsonoriginalhighcouponloanswithanaggregatecommittedbalanceinexcessof£45million,which,ifcompleted,willincreasetheweightedaverageinvestmentcouponandloanduration.
Asaconsequenceofthepositivetransitionoftheinvestments,supportedbytheconfidenceinthepipeline,theBoardexpectstoprogresstowardsprovidingafullycovereddividendlaterintheyear.Accordingly,andasdiscussedfurtherbelow,theannualdividendhasbeenmaintainedat6pencepershare.
PORTFOLIOOverthepastyeartheGroupsuccessfullycontinuedtheprocessofrepositioningitsinvestmentportfolioasandwhenloansarerepaid.TheCompanyissuednewsharecapitalduringtheyear,howeverthevolumeofnewissuancewasaffectedbymarketsentimentintheperiod.Further,theGrouprecentlysecureda£25millionrevolvingcreditfacilitywithOakNorthBankplcwhichhasenabledtheInvestmentAdvisertoproactivelyseeknewinvestmentopportunitiesaheadofloanmaturitiessoastoreducetheimpactofcashdragontheGroup’sperformance.
At31January2019,theportfoliocomprisednineloansofwhichthree,includingtheincreaseandextensiontotheMeadowloan,wereunderthenewinvestmentpolicy,withonefurtherloancompletedsinceyearend.Overall,sinceitsIPOtheCompanyhasseenover£65millionofinvestmentsredeem,andhascompletedover£80millionofnewinvestmentcommitments.
Theweightedaveragematurityoftheloanscompletedunderthenewpolicy,atover3.75years,andIRRreturns,atover8.2%,comparefavourablytotheoverallbookandwillsupportincomegenerationinthelongerterm.
AsdiscussedintheInvestmentAdviser’sReportwhichfollows,anincreasinglyfavourablepipelineofinvestmentopportunitiesisnowbeingassembledtoreplacetheolder,maturingloanswhichwillrepaythrough2019.Theloanmaturityprofileoftheportfolioshouldextendaccordingly.
Duringtheyear,inlightofthevolatilepoliticalenvironmentanduncertaintyaroundBrexit,theGroupmaintaineditsdisciplinedinvestmentprocessandexercisedagreaterdegreeofcautioninconsideringnewinvestmentsfortheportfolio.TheBoardwouldhighlightthat,subjecttotheapprovalofthechangeofuseinrespectoftheMeadowproperty,theportfoliohasanegligibleexposuretothehighlychallengingretailpropertysector.AsaresultoftheGroup’sprudentriskmanagementpracticesandinvestmentselection,allloanscontinuetoperforminlinewiththeirrespectivebusinessplansandareincompliancewithfinancialcovenants.
SHARE PLACEMENT & WORKING CAPITAL FACILITYTheCompanyraisednewcapitalintheyearunderitsshareplacementprogramme.Howevermarketcircumstancesatthetimewerenotfavourableandonly4.26millionnewshareswereissued.TheBoardremainskeentogrowtheCompanyfurtherwhenthetimeisripe,andhascontinuedtomonitormarketconditionswithaviewtoraisingfurthercapital.
InOctober2018theCompanyenteredintothethreeyearrevolvingcreditfacilitywithOakNorthBankplc.TheBoardispleasedbytheflexibilitythisfacilitybringstotheCompanyintransitioningtheloanbookandgrowingtheinvestmentportfolio.Giventheaddedcertaintyofliquidity,theInvestmentAdviserhasaccordinglynowbeenabletocompleteonenewinvestment,aheadofanticipatedloanrepaymentsinApril,andexpectstoutilisethefacilityfurthertoconvertthepipelineopportunitiesreferredtoabove.
“Continuedportfolioanddividendstabilitylaysthefoundationforfuturegrowth”
04 ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
CHAIRMAN’S STATEMENT(CONTINUED)
SHARE PLACEMENT & WORKING CAPITAL FACILITY (CONTINUED)TheOakNorthfacilityalsoprovidestheopportunitytoraiseequityonceloancapitalhasbeendeployed,whichisamuchmoreattractivepropositionforpotentialshareholders,borrowersandtheBoardthanraisingcapitalinadvanceofdeployment.TheBoardwillconsiderwhethertoseektofurtherextendtheplacementprogrammeattheCompany’sAnnualGeneralMeeting.
DIVIDENDOverthepastyeartheCompanyhasbeensupplementingearningsgeneratedfromtheportfoliowiththereleaseofpriorperiodprofitsinordertomaintainitsdividendwhilelegacy,loweryielding,loansrun-off.TheCompany’sretainedprofitshavenowbeenfullyutilised.Thelastoftheloweryieldingloans,madeundertheoldinvestmentpolicy,matureinApril2019andareexpectedtobereplacedbyhigherreturninginvestments,whichwillalsoservetoincreasemateriallytheweightedaverageloandurationandweightedaveragecouponoftheportfolio.
TheBoardconsidersthatitisinshareholders’intereststomaintainitsdividendwhilethistransitionprocessiscompleted,andhasthereforedeclaredadividendof1.50pencepershareinrespectofthequarterended31January2019maintainingthetotaldividendfortheyearat6.0pencepershareofwhich0.54penceisbeingpaidfromcapital.
Giventhepositiveoutlookhighlightedabove,theBoardintendstomaintaintheCompany’sdividend,utilisingcapital
asrequireduntiltheselegacyloanshavebeenreplaced.TheBoardremainsconfidentofreturningtoacovereddividendoverthenextthreequarters.
GOVERNANCE AND MANAGEMENTTheBoardcontinuestocommitsignificanttimeandefforttoitsgovernanceresponsibilities.TostrengthenoversightoftheperformanceoftheongoinginvestmentportfoliotheBoardestablishedanInvestmentRiskCommitteeintheprioryear.ThisCommitteehasworkedeffectivelythroughoutthisyear.TheBoardasawholecontinuestoassessandchallengenewpipelineinvestmentsfortheGroup.AfullaccountofthedischargeoftheBoard’sgovernanceresponsibilitiesisprovidedintheCorporateGovernanceReport.
OUTLOOKFollowingyearend,theGroupcompletedanew£15millioncommitmentanddrewdownafurther£1.5milliononthecommittedAffinityloan.InallcasestheInvestmentAdviserhassought–andcontinuestoseek–tostresstesttheBrexitresiliencyofnewopportunities,whichincertaincasesledtoadelayincompletionofthesenewloansbutresultedinanimprovedriskpositionfortheGroup.
Followingthesecompletions,theweightedaverageunexpiredloantermofthecommittedportfolioincreasesto1.13yearsandtheaverageLTVoftheportfoliorisesto63.0%.TheGroup’swiderpipelineremainshighlyencouragingwithtermsnowagreedonthreenewtransactionsandthe
InvestmentAdviserhas,fromlateFebruaryonwards,seenastrongpickupinnewenquiries.
CertainoftheGroup’sshort-datedandlower-returningloanswillreachmaturity,withanexpectationofrepaymentinthefirsthalfoftheyearofuptoapproximately£46million.Thedepthofthecurrentpipelinewillallowforthesubstantialtransitioningoftheportfoliotowardslonger-datedandhigherreturningloansinlinewiththestatedinvestmentobjectives.Asat31January2019,over60%oftheportfoliohadbeenextendedortransitionedtothenewinvestmentpolicyandbasedoncurrentexpectedmaturitiesandredeployments,thisshouldrisetoover80%byJuly2019.
TheBoardcontinuestoprogressapotentialinvestmentinanICG-Longbowprivatefundopportunityasdetailedinourlastfactsheet.ThelikelytimingforsuchaninvestmentwillbebalancedagainstthepipelineofnewdirectlendingdealsandtheGroup’savailablefundstoensuretheoptimumoutcomeforshareholdersfromarisk,returnandloandiversificationperspective.
JACK PERRYChairman
23April2019
Bliss Hotel, Southport
05ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
Overview
Governance
Financial Statements
Other Inform
ation
INVESTMENT ADVISER’SREPORT
INVESTMENT OBJECTIVETheinvestmentobjectiveoftheGroup,asapprovedbytheshareholdersoftheCompany,is“toconstructaportfolioofUKrealestatedebtrelatedinvestmentspredominantlycomprisingloanssecuredbyfirstrankingfixedchargesagainstcommercialpropertyinvestments,withtheaimofprovidingshareholderswithattractive,quarterlydividends,capitalpreservationand,overthelongerterm,adegreeofcapitalappreciation.”
Fund facts
Fundlaunch: 5February2013 Fundtype: Closedendedinvestmentcompany
InvestmentAdviser: ICG-Longbow Domicile: Guernsey
Basecurrency: GBP Listing: LondonStockExchange
Issuedshares: 121.3million ISINcode: GG00B8C23S81
Managementfee: 1.0% LSEcode: LBOW
Website: www.lbow.co.uk
Share price & NAV at 31 January 2019 Key portfolio statistics at 31 January 2019
Shareprice(pencepershare): 98.80 Numberofinvestments: 9
NAV(pencepershare): 99.16 Percentagecapitalinvested(2): 90.3%
Discount: (0.36%) Weightedavg.investmentcoupon: 6.23%
Approveddividend(pencepershare)(1): 1.5 Weightedavg.LTV: 62.2%
Dividendpaymentdate(1): 12April2019 Weightedavg.ICR: 208%
(1) For the Quarter ended 31 January 2019.(2) Loans advanced at amortised cost/Total equity attributable to the owners of the Company.
SHARE PRICE TOTAL RETURN V NAV TOTAL RETURN (FROM IPO TO 31 JANUARY 2019)(1)
Shareholder Total ReturnNAV Total Return
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Jan-
13
May
-13
Sep-
13
Jan-
14
May
-14
Sep-
14
Jan-
15
May
-15
Sep-
15
Jan-
16
May
-16
Sep-
16
Jan-
17
May
-17
Sep-
17
Jan-
18
May
-18
Sep-
18
Jan-
19
(1) Reduction in NAV in April 2017 due to declaration of 2.25 pence per share special dividend.
06 ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
INVESTMENT ADVISER’SREPORT(CONTINUED)
SUMMARYAt31January2019theinvestmentportfoliocomprisednineloans,followingtherepaymentintheperiodoftheIRAFandHulbertloans,andreinvestmentofproceedsintothe£16.20millionAffinityloancommitment.Afurther£1.50millionwasadvancedtotheborroweroftheMeadowloan.
Theweightedaverageloantovalueratioincreasedto62.2%(31January2018:58.0%),reflectingtherepaymentoftherelativelylowlyleveragedIRAFandHulbertloans.Eachindividualloanremainswellsecured,withtheportfolioICRat208%,substantiallyinlinewith31January2018(218%).
Followingtheyearend,theGroupenteredintoa£15.00millioncommitmentsecuredbyahotelandleisurecomplexinSouthport,Merseyside,ofwhich£12.50millionwasdrawnatclosing.TheloancarriesaninitialLTVratioof59.5%,andmaturesinApril2023.ItisinlinewiththeGroup’sinvestmentparametersandprovidesanattractiveriskadjustedreturn.Additionally,afurther£1.50millionadvancewasmadeontheGroup’sAffinityloan,insupportoftheborrower’songoingrefurbishmentworks.
Thisresultedinanaggregateof£121,271,423beingadvancedasat31March2019andthecashbalancereducedto£3,286,723.
ThesechangestaketheportfolioweightedaverageLTVto63.0%,theweightedaverageresidualloantermto1.13years,andtheweightedaverageloancouponto6.32%.
GROUP PERFORMANCE TheGroup’sperformancewassteadyin2018,withthe£11.94millionIRAFrepaymentimmediatelyreinvestedintotheAffinityloan,minimisingcashdrag.InOctober2018the£6.57millionHulbertloanrepaid,withtheproceedsreinvestedinthe£1.50millionadvancetoMeadow,notedabove,and,inFebruary2019(post-yearend),inthe£15.00millionSouthportloancommitment.TheSouthportloanwasfundedfromcashresourcesanda£3.50milliondrawdownontheOakNorthBankPlcfacility.Alsopostyearend,inMarch2019,afurther£1.50mwasdrawnunderthecommittedAffinityloan.
TheportfoliocontinuestoperforminlinewithexpectationsandincompliancewithalloftheGroup’sinvestmentparameters.
PORTFOLIO
Portfolio statistics 31 January 2019 31 January 2018
Numberofloaninvestments 9 10
Aggregateprincipaladvanced £107,221,546 £111,153,477
WeightedaverageLTV 62.2% 58.0%
WeightedaverageICR 208% 218%
Weightedaverageinterestcoupon 6.23% 6.29%pa
Weightedaverageunexpiredloanterm 0.96years 1.37years
Weightedaverageunexpiredinterestincomeprotection 0.42years 0.53years
Cashheld £12,370,129 £6,486,150
07ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
Overview
Governance
Financial Statements
Other Inform
ation
INVESTMENT ADVISER’SREPORT(CONTINUED)
INVE
STM
ENT
PO
RTF
OLI
O A
S AT
31
JAN
UA
RY
2019
Pro
ject
Reg
ion
Sect
orTe
rm s
tart
Une
xpte
rm (yrs
)
Day
1
bala
nce
(£m
)
Day
1
LTV (%
)
Day
1
ICR (%
)
Pri
ncip
al
Bal
ance
ou
tsta
ndin
g(£
m)(2
)
Curr
ent
LTV
(%)
Curr
ent
ICR (%
)
Mea
dow
Lond
onR
etai
l(1)
Sep-
131.
0018
.07
65.0
150
21.5
070
.3(3
)10
0
Nor
thla
nds
Lond
onM
ixed
use
Nov
-13
0.07
7.20
61.7
192
8.50
53.5
158
Hal
cyon
N
atio
nal
Indu
stri
al/d
istr
ibut
ion
Dec
-13
0.85
8.60
64.8
116
6.42
65.2
115
Car
rara
Yo
rks/
Hum
bers
ide
Reg
iona
loffi
ceD
ec-1
30.
851.
3065
.011
31.
3065
.011
3
Ram
ada
Nor
thE
ast
Oth
er(h
otel
)Ap
r-14
0.24
7.98
64.4
180
7.98
66.0
162
Com
mer
cial
Reg
iona
lSpa
ceN
orth
Wes
tIn
dust
rial
/dis
trib
utio
nM
ar-1
60.
2022
.40
64.0
280
22.4
050
.935
5
BM
ON
atio
nal
Mix
edU
seJa
n-17
0.20
16.0
055
.440
415
.79
51.5
398
Qua
ttro
Sout
hEa
stM
ixed
Use
Oct
-17
1.95
9.00
83.7
100
9.00
83.7
100
Affin
itySo
uth
Wes
tO
ffice
Mar
-18
3.29
14.2
067
.310
014
.32
67.9
100
Tota
l/w
eigh
ted
aver
age
0.96
104.
7565
.020
710
7.22
62.2
208
(1)
Whi
lst t
he e
xist
ing
use
of th
e M
eado
ws
secu
red
prop
erty
is r
etai
l, th
e si
te is
sub
ject
to a
pla
nnin
g ap
plic
atio
n fo
r re
side
ntia
l red
evel
opm
ent.
(2)
Amou
nts
may
var
y du
e to
rou
ndin
g.(3
) Th
ecurren
tLTV
refl
ectsth
ehigh
ervalua
tiontaking
intoaccou
ntth
ean
ticipated
increaseinvalue
onreceivingpe
rmission
forthechan
geofu
se.
Seni
or L
oans
Cas
h
90%
10%Ass
et T
ype
Ret
ail
Indu
stri
al/D
istr
ibut
ion
Mix
ed U
se
Oth
er (H
otel
)
Offi
ce
7%
27%
15%
20%
Sect
or D
istr
ibut
ion
by L
oan
Am
ount
31%
28%
21%
8%
8%
21%
Lond
on
Sout
h Ea
st
Nor
th E
ast
Nor
th W
est
Nat
iona
l
Reg
iona
l Dis
trib
utio
n by
Loa
n A
mou
nt
York
s/H
umbe
rsid
e
13%
Sout
h W
est
1%
08 ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
INVESTMENT ADVISER’SREPORT(CONTINUED)
ECONOMY AND FINANCIAL MARKET UPDATEAnnualGDPgrowthfor2018was1.4%,reflectingtheninthconsecutiveyearofgrowth,withmonthlyfiguresforJanuaryandFebruary2019alsobeingstrongandaheadofconsensusexpectations.Lookingforward,theOBRisforecastingcontinuedgrowthforeachofthenextfiveyears.TheOBRdoesexpectgrowthtotemperin2019(to1.2%),howeverthepublicfinancesareinthestrongestpositionsincethefinancialcrisisandappearwellplacedtoweatheranysoftening.
TheUKemploymentsuccessstorycontinues.Thelabourmarketisessentiallyatfullcapacity,with473,000morepeopleinworkinJanuary2019comparedtotheprioryear,andtheemploymentrateof76.1%atanall-timehigh.Lastyearwereportedthattheunemploymentrateof4.3%wasthejointlowestsince1975;ithassincefallenfurther,to3.9%.Unfilledvacanciesarereportedat863,000,furtherhighlightingpositivelabourdemand.
Duringtheyearthestrengthofthelabourmarkettranslatedintorealwagegrowth,withaveragenominalwagesgrowingbycirca3.3%year-on-year,thefastestratesince2008,comparedwithCPIinflationat1.9%attheendofFebruary.Inflationhadbeenonadownwardtrendduringtheyear,withtheJanuary2018ratebeing3.0%,howeverthelatestCPIfiguresdidshowamodestincreasefromtheJanuary2019level,withimportcostsperhapspointingtoafurthermoderateriseininflationinthecomingmonths.
Notwithstandingthestrengthofthelabourmarketandoutlookforprices,theBankofEngland’sdecisionmakingoninterestratesislikelytobeheavilyweightedtowardstheoutcomeofBrexitnegotiations.Fiveyearswaprateshavetrendedmodestlydownwardsoverthesecondhalfoftheyear(fromahighofcirca1.45%inOctober2018tobelow1.00%inMarch2019),perhapsreflectingaviewoftheBankofEnglandbeinginwait-and-seemodefortheforeseeablefuture.
BREXITAnextensionto31October2019oftheArticle50deadlinetoavoidadisruptive“nodeal”BrexithasrecentlybeenagreedbetweentheUKandEuropeanUnion.ItappearsthatthevastmajorityofbothParliamentandtheGovernmentarestronglyagainstleavingwithoutadeal;theEUalsowishestoavoidanodealscenario.Intensivepoliticaldebatewillcontinuealthoughtheendgameisstillasmurkyasever.
OngoingBrexituncertaintyisaffectingbusinessandconsumerconfidenceandfurtherdelaywillnotbehelpful.
Intheeventofa“no-deal”Brexit,weforeseeaperiodofvolatilityinthepropertymarketasitreactstotheincreaseduncertaintywhichwillprovideopportunity.CapitalEconomics–whoseprojectionsprovedrobustintheimmediateaftermathoftheunexpectedreferendumresult–isprojectinga5.4%fallinUKcommercialpropertyvaluesina‘managed’nodealandan8.8%fallinadisorderlyexitscenario.WebelievetheGroup’sportfolioissufficientlyrobusttowithstandanysuchshock,andmoreoveranyvolatilitymaycreateexcellentopportunitiesfornewinvestmentintheeventthat,forexample,open-endedpropertyfundsareforcedtodiveststocktomeetredemptions,asintheimmediateaftermathofthereferendum.
Inwhatwemaycalla‘normalised’Brexitscenario,andaswedetailbelow,consensusopinioninthepropertymarketshasforsometimebeenthattheoutlookforreturnswillbedrivenbyincomeinthecomingyears,giventheextendedmarketcycleandongoingstructuralweaknessinretail.Inourviewthiscontinuestoreinforcethecasefordebtratherthanequityinvesting.
OCCUPATIONAL DEMAND/SUPPLY Theoccupationalmarkets(outsideofretail)remainbroadlypositive,drivenbystrongemploymentdataandjobcreation.Intheofficemarkets,CentralLondontakeupin2018wasslightlyaheadoftheprioryear,whilstintheregions,thestrongestperformerswereGlasgowandManchester,easilysurpassing2017takeup.Glasgowinparticularsawtakeup64%abovethe10-yearaverage,accordingtoCBRE.BristolandBirminghamreportedlyremainstrong,albeitarebothhamperedbylackofavailablesupply.TakeupintheSouthEast,at3.5millionsq.ft.,wasthehighestsince2007.
Industrialandlogisticstakeupcontinuestobepositive.AccordingtoCBRE,2018logisticstakeupof31.5millionsq.ft.wascomfortablyabovethe10yearaverageof21.4millionsq.ft.andanewannualrecord.Rentalvaluegrowthwasalsopositive,at5.2%inthe12monthstoDecember2018.
Thisrepresentsamarkedcontrastwiththeretailmarket,whereCBREreportaverageprimerentsonUKhighstreetsfalling4.4%in2018,withdoubledigitdeclinesinScotland,WalesandtheNorthWest.Itshouldbehighlightedtheaboveexcludessecondaryandnon-corelocations,andeventhenmaybeunderstatingthetrueextentofthedecline–bywayofexampleinMarch2019Nextplcreportedthatinleaserenewalsconcludedfor28storesduringtheyear,itachievedaveragelike-for-likerentalreductionsof29%.Thefallingrentsarereflectiveofthehighvolumeofstoreclosuresduringtheyear(manythroughthecontroversialCVAprocess)andlesscompetitionforspace.
PROPERTY INVESTMENT MARKETIntheinvestmentmarket,LambertSmithHampton’sregularinvestmenttransactionbulletinshowedthat2018wasastrongyearforvolumes,with£16.6billionoftransactionsinQ4takingtheannualtotalto£61.8billion,modestlyaheadof2017andthesecondhighestforadecade.Thisisevenmoreimpressivewhenconsideredinthelightofaslumpinretailinvestmentvolumes28%belowthe10-yearaverage.
Industrialinvestmentwasatarecordhighwith£8.4billiontransacted,andofficevolumeswere29%abovethe10-yearaverage,ledbyCentralLondon(£16.9billion)whereBrexitdoesnotappeartohavedeterredoverseaspurchasers,particularlyfromtheFarEast,frommakingsizeablecommitments(albeitsomemaybetakingadvantageofthefavourableexchangerate).
Towardstheendof2018andinparticularinearly2019,thedatashowthatvolumeshavesoftened,withtotalinvestmentinJanuaryandFebruary2019onlyhalftheleveloftheprioryear.ThishasbeenreflectedinourownexperienceasinvestorsborrowingfinancetookamorecautiousapproachtodecisionmakingamidstwhatatthetimeappearedtobethepeakoftheBrexitturmoil.Wehaveseenamaterialincreaseinactivityfromlate-Februaryonwardand,asandwhenmoreclarityemergesonBrexit,weexpectthistrendtocontinueastheweightofmoneyallocatedtoUKpropertyremainsstrong.
All-propertycapitalvaluesroseby2.1%during2018,ameaningfulslowdownfromthe5.2%growthreportedintheprioryear,andlargelydrivenbya6%fallinretailvalues.Totalreturnsfellto7.5%,from10%ayearearlier.Lookingforward,IPFconsensusforecastsshowtotalreturnsaveragingcirca3%during2019and2020,beforerisingto4.9%in2021.Ineachcasetheoutlookforreturnsisexpectedtobedrivenbyincome,albeitrentalvaluegrowthisexpectedtobesubdued,particularlygiventheongoingstructuralweaknessinretail.
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FINANCE MARKETSAccordingtothelatestCassBusinessSchoolLendingSurvey,thevalueoftotaloutstandingCREloansdippedonlymarginally(2.5%)throughthefirsthalfof2018suggestingthebeginningofalevellingoutofloanbooksafterafewyearsofdecline–theBankofEnglandreportedhistoricyearlyfallsof6.8%,7.2%and7.6%between2017and2015.CasshighlightthatthisputscurrentoutstandingUKpropertydebtat£163billion,some36%lowerthanthe2008peakof£255billion.
WhilsttheUK’soverallloanbookisshowingsignsofstabilisation,thenatureofthelenderssupplyingdebtcapitaltothemarketcontinuestochange.AreviewoftheyearendaccountsoftheUKclearingbanksshowstheyaregenerallystillreducingtheirexposuretothesector.During2018,LloydsBankingGroupreportedareductioninitsUKcommercialrealestateloanbookbycirca£0.1billion(0.6%);RoyalBankofScotlandbycirca£2.17billion(8.5%);andSantanderbycirca£1.86billion(22%),asregulatoryconstraintsandcreditappetitecontinuetoaffectbusinessvolumes.
Meanwhilealternativelenderscontinuetothrive.AccordingtotheCassSurvey‘OtherLenders’,whichincludesalternativenon-banklenderssuchastheGroup,sawloanoriginationsincreaseby21%inH12018,thelatestdataforwhichfiguresareavailable.
Interestingly,accordingtotheCasssurvey,respondentsput‘PropertyFundamentals’aheadof‘Brexit’asthekeycurrentlendingrisk.Thisdoubtlessreflectsthewidelyreportedstructuralchallengesintheretailsectorandtheextendedpropertycycle,butreinforcesourviewthatthelendingmarketremainssanguineaboutbusinessprospectsspecificallyrelatedtoBrexit.
PORTFOLIO PROFILE AND ACTIVITYTheGroup’sinvestmentportfoliowasgenerallystableduringtheyear,withtworepayments–the£11.94millionIRAFloanandthe£6.57millionHulbertloan–andonenewinvestment,anew£16.20millioncommitmentsecuredbyaBristolofficebuilding(theAffinityloan).A£1.50millionincreasetotheMeadowloanwasadvancedinDecember2018.TheGroupalsoagreedloanextensionswiththeborrowersoftheHalcyon,CarraraandNorthlandsloans,allowingshareholderstobenefitfromthesemodestlyleveragedandperformingassetsforanextendedperiod.
OverthereportingperiodtheGroup’sinvestmentshavecontinuedtoperforminlinewithbusinessplanswithunderlyingperformancegenerallystableorimproving.Allfinancialcovenantsareincompliance.Theweightedaverage
LTVatyearendwas62.2%(31January2018:58.0%),astheGroupcontinuestotransitionitsloanportfolioundertherevisedinvestmentpolicy.TheweightedaverageICRontheportfolioremainsrobustat208%,broadlyinlinewiththe218%reportedat31January2018.
InFebruary2019,followingyearend,theGroupadvancedanew£15.00millionloancommitmenttoBlissHotelsgroup,securedbyahotelandleisurecomplexinSouthport,Merseyside.
Followingthepost-yearendevents,theweightedaverageLTVoftheGroup’sinvestmentsis63.0%,theweightedaverageICRis202%andweightedaveragecouponhasincreasedto6.32%.Theaverageunexpiredloantermhasincreasedto1.13years,astheinvestmentportfoliocontinuestotransition.
TheInvestmentAdviserbelievestheGroup’sloanportfoliocontinuestobesatisfactorilysecured,givenitsseniorpositionwithaweightedaverageexposureof62.2%LTVatyearend.Riskremainswell-diversifiedatportfoliolevelbysectorandregion.Exposuresarepredominantlyagainstmulti-propertyormulti-tenantedsecurity,andwhereappropriateinterestissupportedbyfullyfundedcashreserves.
PORTFOLIO OUTLOOKAstheGroup’sshorter-dated,lower-returningloansreachmaturity,withanexpectationofrepaymentinthefirsthalfofthefinancialyear,thereisnowastrongopportunitytocementthetransitionoftheportfoliotowardsnewer,longer-datedandhigher-returningloansinlinewiththestatedinvestmentobjectives.
Inpreparationfortherapidreinvestmentofanyrepaidproceeds,theInvestmentAdviserhasagreedtermsonthreenewandrenewaltransactionswithanaggregatecommittedbalanceinexcessof£45million,which,ifcompleted,willsignificantlyincreasetheweightedaverageinvestmentcouponandloanduration,andprogresstheCompanytowardsafullycovereddividend.
TheUKretailmarketremainschallenged,andalthoughsuchdifficultiesalwayspresentopportunities,extremeselectivityandcautioniswarranted.ItshouldbenotedthattheGroup’sexposuretoretailislowat20%(theMeadowloan)andsecuredbyasiteundergoingplanningapprovalforalargeresidentialdevelopment.Exposuretotrueretailislimitedtolocalconvenienceshoppingparades(withintwooftheloanssecuredbymixed-useportfolios),asub-marketwhichislessexposedtothegeneraltravailsofthesector.
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LOAN PORTFOLIOAssetoutabove,asat31January2019,theGroup’sportfoliocomprisednineloanswithanaggregateprincipalbalanceoutstandingof£107.22million.
Asummaryofeachoftheindividualloansasat31January2019issetoutbelow:
Meadow
Originallyan£18.07millionseniorloanfacilityusedtoassistfinancinganestablishedandwellsupportedinternationalrealestatefundintheacquisitionofahighlyprominentretailparkinNorthLondon.TheborrowerisanSPVownedbyMeadowRealEstateFundIILPandismanagedbyMeadowPartners,aninternationalrealestateinvestorandassetmanager.
Theestateisnowvacant,saveforsometemporaryoccupancyofpartofthesite,anddebtservicecontinuestobemetfromapre-fundedreserveaccount(toppedupquarterly)whichprovidesinterestcoverthroughtoloanmaturity.Theloanremainscompliantwithallcovenantsandissatisfactorilysecured.
Duringtheyear,a£1.50millionincreasewasadvancedtotheborrower,withtheloanextendedforafurtherperioduptoJanuary2020.Theincreasesupportedtheacquisitionofanadjoiningsitewhichwasdeemedtoholdmarriagevaluewiththemainschemebyenhancingaccessroutes.
Aspreviouslyreported,thesponsorisintheadvancedstagesofreachingadeterminationonitsresidentialproposalsforthesite.WhilstBarnetCouncilinitiallyrejectedtheapplication,theLondonMayorcalledintheproposalon5November2018forhisowndetermination.Adecisionispending.
Property profile Debt profile
Numberofproperties 1 Dayonedebt £18,070,000
Propertyvalue(£) £30,600,000* Debtoutstanding £21,500,000
Propertyvalue(£/sq.ft.) £329.45 Originalterm 4.3years
Propertyareasq.ft. 92,882 Maturity January2020
Numberoftenants n/a CurrentLTV 70.3%
Weightedleaselength n/a CurrentICR 100%
Loanexposurepersq.ft. £231.48
*Thepropertyvalueof£30.6mreflectsthecurrentvalueofthepropertyincludingthepotentialupliftinvaluewhichmaybeachievedshouldplanningpermissionbeobtained.
Northlands
Originallya£7.20millionseniorloanfacilityusedtorefinanceexistingseniordebtsecuredonamixeduseportfolioofhighstreetretail(46%),officeandtenantedresidentialunitslocatedpredominantlyinLondonandtheSouthEast.TheborrowerisNorthlandsHoldingsandgroupaffiliatesonacross-collateralisedbasis.
Thesecurityportfolioishighlydiverseacrossitspropertyandtenantbase,principallybeinglettoconvenienceretailandresidentialoccupiers.Followingcertainchangestotheunderlyingpropertysecuritypoolandadditionaladvances,theloanbalanceisnow£8.50million,reflecting53.5%LTV.
ThesponsorandCompanyhaveagreedtermsforafullrefinancingofthefacility,onattractiverisk-adjustedterms,insupportofthenextphaseofthesponsor’sbusinessplan.Postyearend,ashorttermextensionofthecurrentloanmaturityhasbeenagreedwhilsttherefinancingprogresses.
Property profile Debt profile
Numberofproperties 15 Dayonedebt £7,200,000
Propertyvalue(£) £15,877,950 Debtoutstanding £8,500,000
Propertyvalue(£/sq.ft.) £131.91 Originalterm 5.0years
Propertyareasq.ft. 121,285 Maturity February2019(extendedtoNovember2019)Numberoftenants 119
Weightedleaselength 2.17years CurrentLTV 53.5%
CurrentICR 158%
Loanexposurepersq.ft. £70.08
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Halcyon
Originallya£8.60millionseniorloanfacilityutilisedtorefinanceaportfoliooffreeholdgroundrents.
Duringtheyeartheloanwaspartiallyrepaidby£2.17mfollowingthereleaseofthreefreeholdassetswhichwassanctionedonthebasisthattheoverallcreditriskdynamicontheportfoliodidnotchange.
Withtheloanbeingsecuredbyaportfolioofdefensivefreeholdgroundrentinvestments,thesecuritypositionisconsideredstrongdespiteanICRbelowtheaverageoftheGroup’sinvestments.
Arepaymentofthefacilityisexpectedinadvanceofthescheduledloanmaturity.
Property profile Debt profile
Numberofproperties 18 Dayonedebt £8,600,000
Propertyvalue(£) £9,856,000 Debtoutstanding £6,423,280
Propertyvalue(£/sq.ft.) £37.40 Originalterm 5.0years
Propertyareasq.ft. 263,545 Maturity December2019
Numberoftenants 4 CurrentLTV 65.2%
Weightedleaselength 83.76years CurrentICR 115%
Loanexposurepersq.ft. £24.37
Carrara
A£1.30millionseniorloanfacilitywasusedtorefinanceanindividualgroundrentinvestment.
TheCarrarasecuritycomprisesasinglevirtualfreeholdgroundrentinvestmentlocatedinLeedswithanunexpiredleasetermof82years,subjecttoagroundrentof25%ofmarketrent.ThepropertyisamodernofficebuildingonanestablishedbusinessparkaccessedfromtheM1motorway.GiventheGroup’sseniorpositioninthecapitalstructureagainstthesuperiorfreeholdinterestintheasset,thesecuritypositionremainsverystrong.
Arepaymentofthefacilityisexpectedinadvanceofthescheduledloanmaturity.
Property profile Debt profile
Numberofproperties 1 Dayonedebt £1,300,000
Propertyvalue(£) £2,000,000 Debtoutstanding £1,300,000
Propertyvalue(£/sq.ft.) £81.73 Originalterm 5.0years
Propertyareasq.ft. 24,470 Maturity December2019
Numberoftenants 1 CurrentLTV 65.0%
Weightedleaselength 81.94years CurrentICR 113%
Loanexposurepersq.ft. £53.13
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Ramada
A£7.98millionloantoQuayHotelsLimited,whichhadanoriginalmaturitydateofApril2019.
TheinvestmentissecuredbyafirstandonlychargeovertheRamadaEncorehotelinGateshead,amodern200bedroomhotelwhichwasconstructedin2012.Thesecuredproperty,whichisoperatedbyWyndhamHotelsGroup,issituatedinahighlyvisiblelocationinGatesheadQuays,adjacenttotheBalticCentreforContemporaryArtandwithinashortwalkoftheSageGatesheadconcertvenueandtheMillenniumfootbridgewhichlinksGatesheadandNewcastlequaysideareas.
TheLTVpositionoftheloan,at66%,andICR(162%)remainrobust.
Ashorttermextensionoftheloanisunderdiscussionwiththeborrower.Thiswillallowshareholderstoenjoyincomeontheloanforanextendedperiod.
Property profile Debt profile
Numberofproperties 1 Dayonedebt £7,982,500
Propertyvalue(£) £12,100,000 Debtoutstanding £7,982,500
Propertyvalue(£/bedroom) £60,500 Originalterm 5.0years
Bedrooms 200 Maturity April2019
CurrentLTV 66.0%
CurrentICR 162%
Loanexposureperbedroom £39,912.50
Commercial Regional Space
A£22.40millionloantoCommercialRegionalSpaceLimitedandaffiliatesmadeon16March2016,andsecuredbyfirstchargesagainsttwomulti-letindustrialestateslocatedinLancashirecomprising1.25millionsq.ft.ofaccommodationandprovidingahighlydiversifiedincomestreamfromlettingstoover160tenants.
Performancecontinuestoremainrobustduringtheyear,withincomestableandtheloanbeingconsideredverywellsecured.
Postyearend,ashorttermextensionoftheloanwasagreed,atanimprovedinterestrate,whilstarefinancingisprogressed.Thereafterweanticipaterepaymentoftheloaninthecomingsixmonths.
Property profile Debt profile
Numberofproperties 2 Dayonedebt £22,400,000
Propertyvalue(£) £44,000,000 Debtoutstanding £22,400,000
Propertyvalue(£/sq.ft.) £36.81 Originalterm 3years
Propertyareasq.ft. 1,195,197 Maturity July2019
Numberoftenants 166 CurrentLTV 50.9%
Weightedleaselength 1.50years CurrentICR 355%
Loanexposurepersq.ft. £18.74
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BMO
TheGroupadvancedanew£16.00millionloantoclientsofBMORealEstatePartners,withaninitialLTVratioof55.4%andamaturitydateinApril2019.Theloanwasoriginallysecuredbyfirstchargesagainstaportfolioof17propertieslocatedacrosstheUK,principallyinthehighstreetretailandindustrialsectors,andprovidesadiversifiedincomestream.
Arepaymentofthefacilityisexpectedinthecomingquarter.Howeverashortextensionisbeingagreedtoallowrefinancingtobefinalised.
Property profile Debt profile
Numberofproperties 15 Dayonedebt £16,000,000
Propertyvalue(£) £30,690,000 Debtoutstanding £15,793,727
Propertyvalue(£/sq.ft.) £96.50 Originalterm 2years
Propertyareasq.ft. 318,036 Maturity April2019
Numberoftenants 52 CurrentLTV 51.5%
Weightedleaselength 9.62years CurrentICR 398%
Loanexposurepersq.ft. £49.66
Quattro
On17October2017,theGroupadvancedanew£9.00millionloantoaprivatepropertycompany,securedbythreemixeduseassetsinandaroundtheLondonBoroughofKingston.TheGroupinitiallyfinanceda£6.00millionparticipationintheloansubsequently,acquiringtheminority£3.00millionpositionfromICGfollowinganequityissuanceunderthe2017PlacingProgramme.
TheloancarriesaninitialLTVratioof83.7%,atthetopendoftheGroup’sinvestmentparameters,howeveritofferssignificantincomeandvaluegrowthopportunities.
Theloanisstructuredwithaprofitparticipationcomponent,allowingtheGrouptobenefitfromanyfuturevaluegrowthintheportfoliowhilstretainingthesecurityofaseniorfirstmortgageposition.Therehasbeennovaluegrowthtodateandaccordinglynovalueiscurrentlyascribedtotheprofitparticipation.
Property profile Debt profile
Numberofproperties 3 Dayonedebt £9,000,000
Propertyvalue(£) £10,750,000 Debtoutstanding £9,000,000
Propertyvalue(£/sq.ft.) £282.61 Originalterm 3.2years
Propertyareasq.ft. 38,038 Maturity January2021
Numberoftenants 7 CurrentLTV 83.7%
Weightedleaselength 12.23years CurrentICR 100%
Loanexposurepersq.ft. £236.61
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LOAN PORTFOLIO (CONTINUED)
Affinity
On28February2018,anew£16.20millioncommitmentwasmade,ofwhich£14.20millionwasadvanced,torefinanceamulti-letofficepropertyinBristol,andtoprovidea£2.00millioncapitalexpenditurefacilitytofundarefurbishmentprogramme.Theloanissecuredbyafivestoreyofficeblockcomprising114,364sq.ft.lettotentenantswithacontractedrentof£1.24millionperannumandaninitialweightedunexpiredleasetermatloanclosingof4.9years.
Theloancontinuestoperforminlinewiththebusinessplanwithsomekeyleaserenewalssecuredduringtheperiod.
Property profile Debt profile
Numberofproperties 1 Dayonedebt £14,200,000
Propertyvalue(£) £21,100,000 Debtoutstanding £14,322,039
Propertyvalue(£/sq.ft.) £184.50 Originalterm 4.2years
Propertyareasq.ft. 114,364 Maturity May2022
Numberoftenants 21 CurrentLTV 67.9%
Weightedleaselength 4.02years CurrentICR 100%
Loanexposurepersq.ft. £125.23
Followingyearend,thefollowingloanwasaddedtotheportfolio:
Southport Hotel
A£15millionloancommitment,ofwhich£12.50millionhasbeendrawn,securedbyahotelandleisurecomplexinSouthport,Merseyside.Theinitialloantovalueratiois59.5%.
Thehotelhasademonstrabletradinghistorywithabusinessplanfocusedoninvestinginimprovingtheasset,renovatingthebedroomsandthereafterdrivingroomrates.
Property profile Debt profile
Numberofproperties 1 Dayonedebt £12,500,000
Propertyvalue(£) £21,000,000 Debtoutstanding £12,500,000
Propertyvalue(£/bedroom) £157,895 Originalterm 4years
Propertyvalue(£/sq.ft.) £462.25 Maturity April2023
Bedrooms 133 CurrentLTV 59.5%
Propertyareasq.ft. 45,430 CurrentICR 143%
LoanExposureperbedroom £93,984.96
ICG-LONGBOW 23April2019
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INVESTMENT POLICY
INVESTMENT OBJECTIVETheinvestmentobjectiveoftheGroup,asapprovedbytheshareholdersoftheCompany,is“toconstructaportfolioofUKrealestatedebtrelatedinvestmentspredominantlycomprisingloanssecuredbyfirstrankingfixedchargesagainstcommercialpropertyinvestments,withtheaimofprovidingshareholderswithattractive,quarterlydividends,capitalpreservationand,overthelongerterm,adegreeofcapitalappreciation.”
INVESTMENT POLICYTheGroup’sinvestmentpolicyistoinvestin:
O directrealestatedebtinvestmentsviaadiversifiedloanportfoliocomprisedoffirstrankingloanssecuredonUKCommercialProperty,withanaggregateLTVofnomorethan75%(basedontheinitialvaluationsatthetimeofloanoriginationoracquisitiononcefullyinvested);and
O ICGPrivateFundsacquiredinprimaryorsecondarytransactions,includingfromtheInvestmentAdviseroritsassociates.
INVESTMENT RESTRICTIONSA.Thefollowingrestrictionsapplytoloaninvestmentswithin
theportfolio.
TheGroupwill,subjectassetoutbelow,onlyinvestinloansthat:
O areoriginatedbytheInvestmentAdviseroritsassociates;
O aredenominatedinPoundsSterling;
O benefitfromafirstrankingfixedchargeovertherelevantproperties,includinginrespectofanyreceivableincome;
O benefitfromloancovenantsstructuredtoensurethatamaterialdecreaseintheincomeorvaluefromtheunderlyingpropertywilltriggeraneventofdefaultorcash-flowlock-up;
O haveatermofnogreaterthantenyearsfromthedateofinvestment;
O haveanLTVnohigherthan85%atthetimeoforiginationoracquisitionprovidedhoweverthattheaggregatevalueoftheloanswithanLTVofgreaterthan80%shallbenogreaterthan20%oftheGroup’sgrossassetvalue;and
O arebilateral(otherthanwheresyndicatedwithotherfundsmanagedbytheInvestmentAdviseroritsassociates).
Atthetimeanyinvestmentismade:
O themaximumpercentageoftheGroup’sgrossassetsallocatedtoasingleloanshallbe10%,providedthatthelimitmaybeincreasedto15%inrespectofloansbenefitingfromInvestmentGradeTenantsand20%inrespectofloansbenefitingfromadiversifiedtenantprofile;
O themaximumpercentageoftheGroup’sgrossassetsallocatedtoasingleborrower(togetherwithitsparents,subsidiariesand/oraffiliates)shallbe20%;
O themaximumexposureofthegrossrentsreceivableonallloaninvestmentstoasingleunderlyingtenantshallbe10%,exceptinthecaseoftheUKGovernment,whenthemaximumexposureshallbe25%;
O themaximumexposuretoamainstreampropertysectororthemixedpropertysectorshallbe50%oftheGroup’sgrossassets;
O themaximumexposuretoanalternativepropertysectorshallbe25%oftheGroup’sgrossassets;
O themaximumexposuretopropertywhichisnotamainstreampropertysector,analternativepropertysectororthemixedpropertysectorshallbe5%oftheGroup’sgrossassets;
O themaximumexposuretopropertywithinasingleUKeconomicregionshallbe30%oftheGroup’sgrossassets,providedthatthemaximumexposuretoGreaterLondonpropertyshallbe60%oftheGroup’sgrossassets;and
O thevalueoftheGroup’ssecuritywhichisnotfreeholdtenureorlong-leaseholdtenurewithanunexpiredtermofmorethan50yearsshallnotbegreaterthan5%ofthetotalvalueoftheGroup’ssecurity.
TheGroupwillnotinvestinsubordinatedloansandmezzanineloans,bridgeloans,developmentloansorloan-on-loanfinancings.
B.Thefollowingrestrictionsapplytotheportfolio’sindirectrealestateexposure.
TheGroupmayonlyinvestinICGPrivateFundswhereatthedateofmakinganinvestmentorcommitment:
O therelevantICGPrivateFund’sinvestmentparameters,investmentpolicyand/orinvestmentobjective,asthecasemaybe,requirethatatleast90%ofthatICGPrivateFund’scapitalisinvestedinPoundsSterlingdenominatedloanssecuredbycommercialrealestateandatleast60%inloanssecuredbyfirstrankingsecurityoverCommercialProperty;
O themaximumpercentageoftheGroup’sgrossassetscommittedtoasingleICGPrivateFundshallbe20%,wheregrossassetsarecalculatedontheassumptionthattheGroup’scommitmenttosuchfundisfullyutilised;and
O themaximumpercentageoftheGroup’sgrossassetscommittedtoallICGPrivateFundsshallbe30%,wheregrossassetsarecalculatedontheassumptionthattheGroup’scommitmenttosuchfundsisfullyutilised.
GEARINGTheGroupmayutiliseborrowingsfromtimetotimeinordertofinanceitsworkingcapitalrequirementsprovidedthatsuchborrowingswillnotexceedanamountequalto20%oftheGroup’sNetAssetValueimmediatelyfollowingthedrawdownoftheborrowings.
CASH MANAGEMENT POLICYCashheldbytheGrouppendinginvestmentordistributionwillbeheldineithercashorcashequivalents.TheGroupmayinvestinquotedbondandotherdebtinstrumentswithafinalmaturityoflessthan365daysaswellasmoneymarketfundsforthepurposesofcashmanagementprovidedanysuchinstrumenthasaminimumcreditrating.TheGroupwillnotapplygearingtothesetemporaryinvestments.
TheGroupwillnotinvestinotherlistedorunlistedclosed-endedfunds.
AnymaterialchangetotheGroup’spublishedinvestmentpolicywillbemadeonlywiththepriorapprovalofshareholdersbyordinaryresolution.
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BOARDOFDIRECTORS
APPOINTMENT: AppointedtotheBoardandasaChairmaninNovember2012
EXPERIENCE:Jackpursuesacareerasaportfolionon-executivedirector.Inadditiontoanumberofcurrentpublicandcharitableappointments,heischairmanofEuropeanAssetsTrustPLCandanon-executivedirectorofWitanInvestmentTrustplc.HewasChiefExecutiveOfficerofScottishEnterpriseandpriortothiswasamanagingpartnerandregionalindustryleaderforErnst&YoungLLP.JackwasalsochairmanofCBIScotland.HehasservedontheBoardsofFTSE250andotherpublicandprivatecompaniesandisamemberoftheInstituteofCharteredAccountantsofScotland.
COMMITTEE MEMBERSHIP: NominationCommittee,ManagementEngagementCommitteeJACK PERRY CBE
Chairman and Non-Executive Independent Director
APPOINTMENT: AppointedtotheBoardinNovember2012
EXPERIENCE:StuartisanIndependentConsultantwithvariousrolesadvisingclientsinrealestatefundmanagement,investment,developmentandassetmanagement.HeisBoardMemberofMetropolitanThamesValleyHousingandnon-executivedirectorofEmpiricStudentPropertyplc.From2004to2013hewasanon-executivedirectoratUniteGroupPlc.From2002to2011hewasManagingDirectorofGrosvenorFundManagementLimitedandamemberoftheBoardofGrosvenorGroupLimited,theinternationalpropertygroup.PriortojoiningGrosvenor,hewasManagingDirectoratLegalandGeneralPropertyLimited,havingpreviouslyheldanumberofrolesatNorwichUnion(nowAviva).StuartisaCharteredSurveyorwithover30years’experienceinrealestatebothintheUKandoverseas.
COMMITTEE MEMBERSHIP: AuditandOperationalRiskCommittee,InvestmentRiskCommittee,NominationCommittee
STUART BEEVOR
Non-Executive Independent Director
APPOINTMENT: AppointedtotheBoardinNovember2012
EXPERIENCE:PatrickqualifiedasaCharteredAccountantwithKPMGGuernseyin1991andisalsoamemberoftheCharteredInstituteforSecuritiesandInvestment.HehasworkedinthefundindustryinGuernseysincejoiningRothschildAssetManagement(CI)Limitedin1992beforemovingtobecomeManagingDirectoratButterfieldFundServices(Guernsey)Limited(subsequentlyButterfieldFulcrumGroup(Guernsey)Limited),acompanyprovidingthirdpartyfundadministrationservices,whereheworkedfromApril2002untilJune2009.Heisanon-executivedirectorofanumberofinvestmentfundsandmanagementcompanies,includingGLIFinanceLimited,RiverstoneEnergyLimited,JZCapitalPartnersLimitedandNextEnergySolarFundLimited.MrFirthisaresidentofGuernsey.
COMMITTEE MEMBERSHIP: AuditandOperationalRiskCommittee,NominationCommittee,ManagementEngagementCommittee,InvestmentRiskCommittee
PATRICK FIRTH
Non-Executive Independent Director
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BOARDOFDIRECTORS(CONTINUED)
APPOINTMENT: AppointedtotheBoardinNovember2012
EXPERIENCE:Markhasover40years’experienceinthefundandfiduciarysectorandmuchofhisinvolvementinthefundandprivateassetsectorshasinvolvedrealestateandprivateequityinvestments.Heholdsanumberofboardappointmentsonlistedandprivatefundsandpropertyadvisoryboardsincludingnon-executiveboardappointmentofthefollowinglistedcompanies:MacauPropertyOpportunitiesFundLimited,StirlingMortimerNo.8FundUKLandLimitedandStirlingMortimerNo.9FundUKLand2Limited.HehasbeenactivelyinvolvedinrealestateinvestmentintheUKandinternationally.Healsohasexperienceofanumberofprivateandlisteddebtstructures.MarkisanAssociateoftheInstituteofFinancialServices(TrusteeDiploma).
HeactedasaconsultanttotheAdministratorfollowingthesaleofthecompanyinNovember2017.Thepurposeoftheconsultancywastoprovidecorporateknowledgeprimarilyforthethreemonthsfollowingsaleto31January2018.Noremunerationhasbeenpaidandheholdsnoexecutiverolesorfunctions.TherehasbeennoinvolvementwiththeAdministratorunderthisarrangementconcerningtheGroup’sactivities.TheconsultancyisnotactiveandwillexpireinOctober2019.
COMMITTEE MEMBERSHIP: InvestmentRiskCommittee,NominationCommittee
MARK HUNTLEY
Non-Executive Director
APPOINTMENT: AppointedtotheBoardinNovember2012
EXPERIENCE:Paulisanindependentdirectorofinvestmentcompanies,insurersandinvestmentfunds.Untiltheautumnof2012hewasHeadofPortfolioManagementforCollinsStewartbasedinGuernsey,priortowhichhewasChiefExecutiveofCorazonCapital.Hehasover30years’experienceinfinancialmarketsinLondon,DublinandGuernsey,holdingseniorpositionsinportfoliomanagementandtrading.PriortojoiningCorazonhewasManagingDirectorofRothschild’sSwissprivate-bankingsubsidiaryinGuernsey.Heisanon-executivedirectorofthefollowinglistedcompanies:GuaranteedInvestmentProducts1PCCLimited,VoltaFinanceLimited,SchroderOrientalIncomeFundLimited,SQNAssetFinanceIncomeFundLimitedandJPMorganGlobalConvertiblesIncomeFundLimited.PaulisaCharteredFellowoftheCharteredInstituteofSecurities&Investments,apastCommissioneroftheGuernseyFinancialServicesCommissionandpastChairmanoftheGuernseyInternationalBusinessAssociation.HeisagraduateofHertfordCollege,Oxford.
COMMITTEE MEMBERSHIP: AuditandOperationalRiskCommittee,InvestmentRiskCommittee,NominationCommittee,ManagementEngagementCommittee
PAUL MEADER
Non-Executive Independent Director
18 ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
REPORT OFTHEDIRECTORS
TheDirectorsherebysubmittheAnnualReportandConsolidatedFinancialStatementsfortheGroupfortheyearended31January2019.ThisReportoftheDirectorsshouldbereadtogetherwiththeCorporateGovernanceReportonpages24to31.
GENERAL INFORMATIONTheCompanyisanon-cellularcompanylimitedbysharesincorporatedon29November2012undertheCompaniesLaw.TheCompany’sregistrationnumberis55917,andithasbeenregisteredwiththeGFSCasaregisteredclosed-endedcollectiveinvestmentscheme.TheCompany’sordinaryshareswereadmittedtothepremiumsegmentoftheFCA’sOfficialListandtotradingontheMainMarketoftheLondonStockExchangeon5February2013.
PRINCIPAL ACTIVITIESTheprincipalactivityoftheGroupistoinvestinseniorsecureddebtinvestments.TheinvestmentobjectiveoftheGroupistoconstructaportfolioofUKrealestatedebtrelatedinvestmentspredominantlycomprisingloanssecuredbyfirstranking
fixedchargesagainstcommercialpropertyinvestments,withtheaimofprovidingshareholderswithattractive,quarterlydividends,capitalpreservationand,overthelongerterm,adegreeofcapitalappreciation.
BUSINESS REVIEWAreviewoftheGroup’sbusinessanditslikelyfuturedevelopmentisprovidedintheChairman’sStatementonpages3to4andintheInvestmentAdviser’sReportonpages5to14.
LISTING REQUIREMENTSSincebeingadmittedon5February2013totheOfficialListmaintainedbytheFCA,theCompanyhascompliedwiththeapplicableListingRules.
RESULTS AND DIVIDENDSTheresultsfortheyeararesetoutintheFinancialStatementsonpages42to63.
Duringtheyear,andsincetheyearend,theDirectorsdeclaredthefollowingdividends:
Dividend Quarter Ended Date of Declaration Payment Date
Amount per Ordinary
Share (pence)
Interimdividend 31January2018 13March2018 20April2018 1.5
Interimdividend 30April2018 28June2018 27July2018 1.5
Interimdividend 31July2018 2October2018 2November2018 1.5
Interimdividend 31October2018 7December2018 18January2019 1.5
Interimdividend 31January2019 8March2019 12April2019 1.5
SHARE CAPITALAtincorporationon29November2012,theCompanyissuedonefoundingordinaryshareofnoparvalue.On5February2013theCompanyissuedafurther104,619,249ordinarysharesofnoparvalueat£1perordinaryshareinanIPO.On24April2014,theCompanyissued3.6millionnewordinarysharesat102pencepershare,apremiumof2pencepershareaboveIPOissueprice.On26October2017,theCompanyissued8.82millionnewordinarysharesat102pencepershare,apremiumof2pencepershareaboveIPOissueprice.On27March2018,theCompanyissued4.26millionnewordinarysharespursuanttotheremainingauthoritytoallotafurther31.2millionsharesunderthe2017PlacingProgramme.
TheCompanyhasoneclassofordinaryshares.Theissuednominalvalueoftheordinarysharesrepresents100%ofthetotalissuednominalvalueofallsharecapital.UndertheCompany’sArticlesofIncorporation,onashowofhands,each
shareholderpresentinpersonorbyproxyhastherighttoonevoteatAnnualGeneralMeetings.Onapoll,eachshareholderisentitledtoonevoteforeveryshareheld.On1March2017,theproposedresolutionthatCompanyhavethepowertoallotuptoanadditional40,000,000shareswasdulypassedwithoutamendment.
ShareholdersareentitledtoalldividendspaidbytheCompanyand,onawindingup,providingtheCompanyhassatisfiedallofitsliabilities,theshareholdersareentitledtoallofthesurplusassetsoftheCompany.Theordinaryshareshavenorighttofixedincome.
19ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
REPORT OFTHEDIRECTORS(CONTINUED)
SHAREHOLDINGS OF THE DIRECTORSTheDirectorswithbeneficialinterestsinthesharesoftheCompanyasat31January2019and2018aredetailedbelow:
Director
Ordinary Shares of £1 each held
31 January 2019
% holding at 31 January
2019
Ordinary Shares of £1 each held
31 January 2018
% holding at 31 January
2018
JackPerry 50,000 0.04 50,000 0.04
StuartBeevor 30,000 0.02 20,000 0.02
PaulMeader 25,000 0.02 25,000 0.02
PatrickFirth 10,000 0.01 10,000 0.01
MarkHuntley 10,000 0.01 10,000 0.01
Directors’beneficialinterestsinthesharesoftheCompanyasat22March2019,beingthemostcurrentinformationavailable,areunchangedfromthosedisclosedabove.
DIRECTORS’ AUTHORITY TO BUY BACK SHARES TheDirectorsbelievethatthemosteffectivemeansofminimisinganydiscounttoNetAssetValuewhichmayariseontheCompany’sshareprice,istodeliverstrong,consistentperformancefromtheGroup’sinvestmentportfolioinbothabsoluteandrelativeterms.However,theBoardrecognisesthatwidermarketconditionsandotherconsiderationswillaffecttheratingofthesharesintheshorttermandtheBoardmayseektolimitthelevelandvolatilityofanydiscounttoNetAssetValueatwhichthesharesmaytrade.ThemeansbywhichthismightbedonecouldincludetheCompanyrepurchasingshares.Therefore,subjecttotherequirementsoftheListingRules,theCompaniesLaw,theArticlesandotherapplicablelegislation,theCompanymaypurchasesharesinthemarketinordertoaddressanyimbalancebetweenthesupplyofanddemandforsharesortoenhancetheNetAssetValueofshares.
IndecidingwhethertomakeanysuchpurchasestheDirectorswillhaveregardtowhattheybelievetobeinthebestinterestsofshareholdersandinaccordancewiththeapplicableGuernseylegalrequirementswhichrequiretheDirectorstobesatisfiedonreasonablegroundsthattheCompanywill,immediatelyafteranysuchrepurchase,satisfyasolvencytestprescribedbytheCompaniesLawandanyotherrequirementsinitsMemorandumandArticlesofIncorporation.ThemakingandtimingofanybuybackswillbeattheabsolutediscretionoftheBoardandnotattheoptionoftheshareholders.AnysuchrepurchaseswouldonlybemadethroughthemarketforcashatadiscounttoNetAssetValue.
AnnuallytheCompanypassesaresolutiongrantingtheDirectorsgeneralauthoritytopurchaseinthemarketupto14.99%ofthesharesinissueimmediatelyfollowingAdmissionatapricenotexceedingthehigherof(i)5%abovetheaveragemid-marketvaluesofsharesforthefivebusinessdaysbeforethepurchaseismadeor(ii)thehigherofthelastindependenttradeorthehighestcurrentindependentbidforshares.TheDirectorsintendtoseekrenewalofthisauthorityfromtheshareholdersattheAnnualGeneralMeeting.
Pursuanttothisauthority,andsubjecttotheCompaniesLawandthediscretionoftheDirectors,theCompanymaypurchasesharesinthemarketonanon-goingbasiswithaviewtoaddressinganyimbalancebetweenthesupplyofanddemandforshares.
SharespurchasedbytheCompanymaybecancelledorheldastreasuryshares.TheCompanymayborrowand/orrealiseinvestmentsinordertofinancesuchsharepurchases.
TheCompanydidnotpurchaseanysharesfortreasuryorcancellationduringtheyearortodate.
DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCETheGroupmaintainsinsuranceinrespectofdirectors’andofficers’liabilityinrelationtotheiractsonbehalfoftheGroup.Insuranceisinplace,havingbeenrenewedon30December2018.
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REPORT OFTHEDIRECTORS(CONTINUED)
SUBSTANTIAL SHAREHOLDINGSAsat31January2019,theCompanyhadbeennotified,inaccordancewithChapter5oftheDisclosureandTransparencyRules,ofthefollowingsubstantialvotingrightsasshareholdersoftheCompany.
Shareholder Shareholding % holding
CloseBrothersAssetManagement 21,243,517 17.51
BrooksMacdonald 11,356,118 9.36
TDCPensionskasse 10,653,156 8.78
PremierAssetManagement 10,300,000 8.49
IntermediateCapitalGroup 10,000,000 8.24
Canopius 9,806,107 8.08
KleinwortHambros 6,259,802 5.16
Inaddition,theCompanyalsoprovidesthesameinformationasat22March2019,beingthemostcurrentinformationavailable.
Shareholder Shareholding % holding
CloseBrothersAssetManagement 21,102,083 17.40
Canopius 11,006,107 9.07
TDCPensionskasse 10,653,156 8.78
PremierAssetManagement 10,300,000 8.49
IntermediateCapitalGroup 10,000,000 8.24
BrooksMacdonald 9,791,465 8.07
KleinwortHambros 6,172,312 5.09
TheDirectorsconfirmthattherearenosecuritiesinissuethatcarryspecialrightswithregardtothecontroloftheCompany.
INDEPENDENT EXTERNAL AUDITORDeloitteLLPhasbeentheCompany’sexternalauditorsincetheCompany’sincorporation.TheAuditandOperationalRiskCommitteereviewstheappointmentoftheexternalauditor,itseffectivenessanditsrelationshipwiththeCompany,whichincludesmonitoringtheuseoftheexternalauditorfornon-auditservicesandthebalanceofauditandnon-auditfeespaid,asincludedinNote15.Followingareviewoftheindependenceandeffectivenessoftheexternalauditor,aresolutionwillbeproposedatthe2019AnnualGeneralMeetingtore-appointDeloitteLLP.EachDirectorbelievesthatthereisnorelevantinformationofwhichtheexternalauditorisunaware.Eachhadtakenallstepsnecessary,asaDirector,tobeawareofanyrelevantauditinformationandtoestablishthatDeloitteLLPismadeawareofanypertinentinformation.ThisconfirmationisgivenandshouldbeinterpretedinaccordancewiththeprovisionsofSection249oftheCompaniesLaw.FurtherinformationontheworkoftheexternalauditorissetoutintheReportoftheAuditandOperationalRiskCommitteeonpages32to34.
ARTICLES OF INCORPORATIONTheCompany’sArticlesofIncorporationmayonlybeamendedbyspecialresolutionoftheshareholders.
NMPI STATUS ThereisnochangetotheCompany’sstatusinrespectofNMPIandtheCompanyremainsontheAIClistofexemptedsecurities.
TheCompanycontinuestomakeallreasonableeffortstoconductitsaffairsinsuchamannersothatitssharescanberecommendedbyUKfinancialadviserstoordinaryretailinvestorsinaccordancewiththeFCA’srulesrelatingtonon-mainstreaminvestmentproducts.
AIFMDTheCompanyisaninternallymanagednon-EUdomiciledalternativeinvestmentfund.AnyofferofsharestoprospectiveinvestorswithinselectedmemberstatesoftheEuropeanEconomicArea(includingtheUK)willbemadeinaccordancewiththeapplicablenationalprivateplacementregime,andtheCompanywillnotifyitsintentiontomarkettothecompetentauthorityineachoftheselectedmemberstatesforthepurposesofcompliancewithAIFMD.
AEOI RULESUnderAEOIRulestheCompanycontinuestocomplywithbothFATCAandCRSrequirementstotheextentrelevanttotheCompany.
CHANGE OF CONTROLTherearenoagreementsthattheCompanyconsiderssignificantandtowhichtheCompanyispartythatwouldtakeeffect,alterorterminateuponchangeofcontroloftheCompanyfollowingatakeoverbid.
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REPORT OFTHEDIRECTORS(CONTINUED)
GOING CONCERNTheDirectors,atthetimeofapprovingtheFinancialStatements,haveareasonableexpectationthattheGrouphasadequateresourcestocontinueinoperationalexistencefortheforeseeablefutureanddonotconsidertheretobeanythreattothegoingconcernstatusoftheGroup.TheGroupwassubstantiallyinvestedat31January2019,withloansadvancedatamortisedcostrepresenting90.25%ofthetotalequityattributabletotheownersoftheCompany.TheBoardexpectsthattheloanportfoliowillgeneratesufficientcashflowstopayon-goingexpensesandgeneratereturnstoshareholdersforaperiodofatleasttwelvemonthsfromthedateofapprovaloftheConsolidatedFinancialStatements.TheDirectorshaveconsideredthecashposition,maturityprofileandperformancesofcurrentinvestmentsmadebytheGroup,anditsabilitytoreinvestmaturingloansandhaveconcludedthatitisappropriatetoadoptthegoingconcernbasisofaccountinginpreparingtheFinancialStatements.
Thefirstcontinuationvotewasheldon1March2017andpassedbytheshareholders.Follow-oncontinuationresolutionsshallbeheldeveryfiveyearsatwhichtheDirectorsshallproposeanordinaryresolutionthattheCompanycontinuesitsbusinessasaclosed-endedcollectiveinvestmentscheme.Thefirstfollow-oncontinuationresolutionwillberequiredonorbeforetheAnnualGeneralMeetingoftheCompanytobeheldin2022.
VIABILITY STATEMENTAsrequiredbytheAICCode,theDirectorshaveassessedtheprospectsoftheGroupoveraperiodlongerthan12monthsrequiredbythegoingconcernprovision.TheBoardhasconductedthisreviewforaperiodcoveringtheperiodto31January2022,whichisdeemedappropriategiven:
(i) thematurityprofileoftheGroup’scurrentloanportfoliofromApril2019toJanuary2023;
(ii) theCompany’sintentiontoreplaceexistingloansatmaturitywithnewloansof3-5yeartenureastheyexpire;
(iii) theexpectationthattheweightedaverageloantermwillincreaseto2-3years;and
(iv) thedateofthenextscheduledcontinuationvotebeing2022.
TheGroup’scapitalhasremainedsubstantiallyinvestedandcanbereinvestedunderthenewinvestmentpolicyutilisingtheCompany’srevolvingcreditfacility(“RCF”)inadvanceofexpectedloanrepayments.Basedonpastperformancethereturnsgeneratedfromeachinvestmentshouldbestableandpredictableinthemediumterm.
TheInvestmentAdviserhaspreparedandtheBoardhasreviewedtheGroup’srevenue,cashflowandworkingcapitalprojectionsoverthenextthreeyears,andconsideredtheimpactofsomeoftheprincipalrisksoftheGroupasdescribedonpages29to31.TheInvestmentAdviserandtheBoardevaluatedtheresilienceoftheGrouptotheoccurrenceoftheserisksinsevereyetplausiblescenarios.Thisevaluationhasappliedthroughthefollowingkeyscenariostotheportfolioofloansprevailingat31January2019andknownsubsequentchanges:
O eachloanrepaysattheexpirydate.UtilisingtheCompany’srevolvingcreditfacility,capitalisinvestedinadvanceofloanmaturitywithinthetargetinvestmentpolicyandreflectingthe
InvestmentAdviser’stransactionpipeline.LoanrepaymentsareusedtoreduceborrowingundertheRCFafterthreemonths(the“BaseCase”);
O theUKeconomyentersaperiodofsevererecessioncausinga20%reductionininterestcollectionasaresultofacombinationoftenantdefaultsandfallingrentswhichinturncauseasharpcorrectiontopropertyvaluessimilartothatwhichwasexperiencedin2008.DuringthisperiodtheRCFremainsavailable,butisnotextended,andunderperformingassetsarenotrealisedbeforematurity(the“StressCase”).
ItwasassumedthattherewouldbenochangesrelatingtotheGroupstructure,whichincludeschangesintaxlegislationapplicabletotheGrouporCompanyandchangestofundlegislation,andforthepurposeoftheprojectionsthatnonewcapitalwasraised.
TheInvestmentAdviserandtheBoardhavefurtherconsideredtheimpactofBrexitontheperformanceoftheloanportfolio,andtheGroup’sabilitytoredeploycapital.GiventhestrengthofthecurrentpipelineandinvestmentpropertytransactionvolumestheBoardwassatisfiedthatBrexitdidnotposeagreaterrisktothebusinessthanthestressscenario.
Havingconductedarobustanalysisoftheabovescenariosandstressesappliedtoeach,theDirectorsremainsatisfiedthattheGroupcanmeetitsliabilitiesastheyfalldueandremainsviableovertheperiodunderconsideration(toJanuary2022).
FINANCIAL RISK MANAGEMENT POLICIES AND OBJECTIVESFinancialRiskManagementPoliciesandObjectivesaredisclosedinNote11onpages58to62.
PRINCIPAL RISKS AND UNCERTAINTIESPrincipalRisksandUncertaintiesarediscussedintheCorporateGovernanceReportonpages29to31.
SUBSEQUENT EVENTSSignificantsubsequenteventshavebeendisclosedinNote17totheFinancialStatementsonpage63.
ANNUAL GENERAL MEETINGTheAGMoftheCompanywillbeheldat2pmBSTon2July2019atFloor2,TrafalgarCourt,LesBanques,StPeterPort,GY14LY.DetailsoftheresolutionstobeproposedattheAGM,togetherwithexplanations,willappearintheNoticeofMeetingtobedistributedtoshareholderstogetherwiththisAnnualReport.
MembersoftheBoardwillbeinattendanceattheAGMandwillbeavailabletoanswershareholderquestions.
ByorderoftheBoard
JACK PERRYChairman
23April2019
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DIRECTORS’ RESPONSIBILITIESSTATEMENT
TheDirectorsareresponsibleforpreparingtheAnnualReportandFinancialStatementsinaccordancewithapplicablelawandregulations.
TheCompaniesLawrequirestheDirectorstoprepareFinancialStatementsforeachfinancialyear.UnderthatlawtheDirectorsarerequiredtopreparetheConsolidatedFinancialStatementsinaccordancewithIFRSasadoptedbytheEuropeanUnion.UndertheCompaniesLaw,theDirectorsmustnotapprovetheFinancialStatementsunlesstheyaresatisfiedthattheygiveatrueandfairviewofthestateofaffairsoftheGroupandoftheprofitorlossoftheGroupforthatperiod.InpreparingtheseFinancialStatements,theDirectorsarerequiredto:
O selectsuitableaccountingpoliciesinaccordancewithIAS8:AccountingPolicies,ChangesinAccountingEstimatesandErrorsandthenapplythemconsistently;
O makejudgementsandestimatesthatarereasonableandprudent;
O presentinformation,includingaccountingpolicies,inamannerthatprovidesrelevant,reliable,comparableandunderstandableinformation;
O provideadditionaldisclosureswhencompliancewiththespecificrequirementsinIFRSareinsufficienttoenableuserstounderstandtheimpactofparticulartransactions,othereventsandconditionsontheGroup’sfinancialpositionandfinancialperformance;
O statethattheGrouphascompliedwithIFRS,subjecttoanymaterialdeparturesdisclosedandexplainedintheFinancialStatements;and
O preparetheFinancialStatementsonagoingconcernbasisunlessitisinappropriatetopresumethattheGroupwillcontinueinbusiness.
TheDirectorsconfirmthattheyhavecompliedwiththeaboverequirementsinpreparingtheFinancialStatements.
TheDirectorsareresponsibleforkeepingproperaccountingrecords,whichdisclosewithreasonableaccuracyatanytime,thefinancialpositionoftheGroupandenablethemtoensurethattheFinancialStatementscomplywithCompaniesLaw.TheyarealsoresponsibleforsafeguardingtheassetsoftheCompanyandhencefortakingreasonablestepsforthepreventionanddetectionoffraud,errorandnon-compliancewithlawandregulations.
TheDirectorsareresponsibleforthemaintenanceandintegrityofthecorporateandfinancialinformationincludedonthewebsite(www.lbow.co.uk).
LegislationinGuernseygoverningthepreparationanddisseminationoftheFinancialStatementsmaydifferfromlegislationinotherjurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT UNDER THE DISCLOSURE AND TRANSPARENCY RULESEachoftheDirectors,whosenamesaresetoutonpages16and17,confirmstothebestoftheirknowledgeandbeliefthat:
O theFinancialStatements,preparedinaccordancewithIFRS,giveatrueandfairviewoftheassets,liabilities,financialpositionandprofitorlossoftheCompanyandtheundertakingsincludedintheconsolidationtakenasawhole;
O theAnnualReportincludesafairreviewofthedevelopmentandperformanceofthebusinessandthepositionoftheCompanyanditssubsidiary,togetherwithadescriptionoftheprincipalrisksanduncertaintiesfaced;and
O theAnnualReportandConsolidatedFinancialStatementsincludeinformationrequiredbytheFCAandensuringthattheCompanycomplieswiththeprovisionsoftheListingRules,DisclosureGuidelinesandTransparencyRulesoftheFCA.Withregardtocorporategovernance,theCompanyisrequiredtodisclosehowithasappliedtheprinciplesandcompliedwiththeprovisionsoftheCorporateGovernanceCodeapplicabletotheCompany.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT UNDER THE CORPORATE GOVERNANCE CODETheDirectorsareresponsibleforpreparingtheAnnualReportandFinancialStatementsinaccordancewithapplicablelawandregulations.HavingtakenadvicefromtheAuditandOperationalRiskCommittee,theDirectorsconsidertheAnnualReportandFinancialStatements,takenasawhole,asfair,balancedandunderstandableandthatitprovidestheinformationnecessaryforshareholderstoassesstheGroup’sperformance,businessmodelandstrategy.
ByorderoftheBoard
JACK PERRY PATRICK FIRTHChairman Director
23April2019 23April2019
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24 ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
CORPORATE GOVERNANCE REPORT
AsaUKpremiumlistedCompany,ICG-LongbowSeniorSecuredUKPropertyDebtInvestmentLimited’sgovernancepoliciesandproceduresarebasedontheprinciplesoftheCorporateGovernanceCodeasrequiredundertheListingRules.TheCorporateGovernanceCodeisavailableontheFinancialReportingCouncil’swebsite,www.frc.org.uk.
TheCompanybecameamemberoftheAICeffective27February2013andhasthereforeputinplacearrangementstocomplywiththeAICCodeand,inaccordancewiththeAICCode,voluntarilycomplieswiththeCorporateGovernanceCode.TheDirectorsrecognisetheimportanceofsoundcorporategovernance,particularlytherequirementsoftheAICCode.TheAICCodeandtheAICGuideareavailableontheAIC’swebsite,www.theaic.co.uk.Wearesupportiveofthecontinuedenhancementofgovernancestandardsthathaverecentlybeenpublishedforaccountingperiodsbeginningonorafter1January2019.
TheCompanyissubjecttotheGFSCCode,whichappliestoallcompaniesregisteredascollectiveinvestmentschemesinGuernsey.TheGFSChasalsoconfirmedthatcompaniesthatreportagainsttheCorporateGovernanceCodeorAICCodearedeemedtomeettheGFSCCode.
TheBoardmonitorsdevelopmentsincorporategovernancetoensuretheBoardremainsalignedwithbestpracticeespeciallywithrespecttotheincreasedfocusondiversity.TheBoardacknowledgestheimportanceofdiversity,includinggender,fortheeffectivefunctioningoftheBoardandcommitstosupportingdiversityintheboardroom.ItistheBoard’songoingaspirationtohaveawelldiversifiedrepresentation.TheBoardalsovaluesdiversityofbusinessskillsandexperiencebecauseDirectorswithdiverseskillssets,capabilitiesandexperiencegainedfromdifferentgeographicalbackgroundsenhancetheBoardbybringingawiderangeofperspectivestotheCompany.
TheAICCode,asexplainedbytheAICGuide,addressesalltheprinciplessetoutintheCorporateGovernanceCode,aswellassettingoutadditionalprinciplesandrecommendationsonissuesthatareofspecificrelevancetoinvestmentcompaniessuchastheCompany.TheBoardconsidersthatreportingagainsttheprinciplesandrecommendationsoftheAICCode,byreferencetotheAICGuide,providesbetterinformationtoshareholders.
Throughouttheyearended31January2019,theCompanyhascompliedwiththerecommendationsoftheAICCodeandtherelevantprovisionsofSection1oftheCorporateGovernanceCode,exceptassetoutbelow.
TheCorporateGovernanceCodeincludesprovisionsrelatingto:
O theroleofthechiefexecutive;
O executivedirectors’remuneration;and
O theneedforaninternalauditfunction.
ForthereasonssetoutintheAICGuide,andasexplainedintheCorporateGovernanceCode,theBoardconsidersthattheaboveprovisionsarenotcurrentlyrelevanttothepositionoftheCompany,beinganinternallymanagedinvestmentcompany,whichdelegatesmostday-to-dayfunctionstothirdparties.
AsaninvestmentcompanytheCompanyhasnoemployees,allDirectorsarenon-executiveandindependentoftheInvestmentAdviserandthereforetheDirectorsconsidertheCompanyhasnorequirementforaChiefExecutiveorSeniorIndependent
DirectorandtheBoardissatisfiedthatanyrelevantissuescanbeproperlyconsideredbytheBoard.TheabsenceofaninternalauditfunctionisdiscussedintheReportoftheAuditandOperationalRiskCommitteeonpage33.
Asaninvestmentcompany,theGroup’sactivitieshavenodirectimpactontheenvironment.HowevertheBoardbelievesthatitisintheshareholders’interesttoconsiderenvironmental,socialandgovernancefactorswhenselectingandretaininginvestments.TheInvestmentAdviserisasignatorytotheUNPrinciplesforResponsibleInvestmentandtheseprinciplesareappliedinallinvestmentdecisions.TheInvestmentAdviserhascontinuedtodevelopitsESGpoliciesandprocedures,whichincludedcompletingtheGlobalRealEstateSustainabilityBenchmarksurveyofrealestatedebtinvestorsforthesecondtime,withsatisfactoryresultsagainstitspeergroup.
Moreover,duringtheyeartheparentoftheInvestmentAdviserhasbeennamedasaconstituentoftheFTSE4Goodindex.FTSERussell(thetradingnameofFTSEInternationalLimitedandFrankRussellCompany)confirmsthatIntermediateCapitalGrouphasbeenindependentlyassessedaccordingtotheFTSE4Goodcriteria,andhassatisfiedtherequirementstobecomeaconstituentoftheFTSE4GoodIndexSeries.CreatedbytheglobalindexproviderFTSERussell,theFTSE4GoodIndexSeriesisdesignedtomeasuretheperformanceofcompaniesdemonstratingstrongEnvironmental,SocialandGovernance(ESG)practices.TheFTSE4Goodindicesareusedbyawidevarietyofmarketparticipantstocreateandassessresponsibleinvestmentfundsandotherproducts.
THE BOARDTheCompanyisledandcontrolledbyaBoardofDirectors,whichiscollectivelyresponsibleforthelong-termsuccessoftheCompany.ItdoessobyactingintheinterestsoftheCompany,creatingandpreservingvalueandhasasitsforemostprincipleactingintheinterestsofshareholders.TheCompanybelievesthatthecompositionoftheBoardisafundamentaldriverofitssuccessastheBoardmustprovidestrongandeffectiveleadershipoftheCompany.ThecurrentBoardwasselected,astheirbiographiesillustrate,tobringabreadthofknowledge,skillsandbusinessexperiencetotheCompany.TheDirectorsdetailsarelistedonpages16and17whichsetouttheirrangeofinvestment,financialandbusinessskillsandexperiencerepresented.
TheChairmanoftheBoardmustbeindependentandisappointedinaccordancewiththeCompany’sArticlesofIncorporation.MrPerryisconsideredtobeindependentbecausehe:
O hasnocurrentorhistoricalemploymentwiththeInvestmentAdviser;
O hasnocurrentdirectorshipsinanyotherinvestmentfundsmanagedbytheInvestmentAdviser;and
O isnotanexecutiveofaself-managedcompanyoranex-employeewhohaslefttheexecutiveteamofaself-managedcompanywithinthelastfiveyears.
TheBoardmeetsatleastfourtimesayearand,inaddition,thereisregularcontactbetweentheBoard,theInvestmentAdviserandtheAdministrator.Further,theBoardrequirestobesuppliedinatimelymannerwithinformationbytheInvestmentAdviser,theCompanySecretaryandotheradvisersinaformandofaqualityappropriatetoenableittodischargeitsduties.
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CORPORATE GOVERNANCE REPORT(CONTINUED)
BOARD TENURE AND RE-ELECTIONAllDirectorswereappointedinNovember2012thereforenomemberoftheBoardhasservedforlongerthansevenyearstodate.AssuchnoissuehasarisentobeconsideredbytheBoardwithrespecttolongtenure.InaccordancewiththeAICCode,whenandifanyDirectorshallhavebeeninoffice(oronre-electionwouldattheendofthattermofoffice)formorethannineyearstheCompanywillconsiderfurtherwhetherthereisariskthatsuchaDirectormightreasonablybedeemedtohavelostindependencethroughsuchlongservice.Followingtherecentpublicationofthe2019AICCode,theBoardrecognisesthatDirectorsservingnineyearsormoremayappeartohavetheirindependenceimpaired.However,theBoardmaynonethelessconsiderDirectorstoremainindependentandwillprovideaclearexplanationwithfutureAnnualReportandFinancialStatementsastotheirreasoning.
TheNominationCommitteeshalltaketheleadinanydiscussionsrelatingtotheappointmentorre-appointmentofDirectors,andgiveconsiderationtoBoardrotationinadvanceofthenineyeartenurelimit.
ADirectorwhoretiresatanAnnualGeneralMeetingmay,ifwillingtocontinuetoact,beelectedorre-electedatthatmeeting.If,atageneralmeetingatwhichaDirectorretires,theCompanyneitherre-electsthatDirectornorappointsanotherpersontotheBoardintheplaceofthatDirector,theretiringDirectorshall,ifwillingtoact,bedeemedtohavebeenre-appointedunlessatsuchmeetingitisexpresslyresolvednottofillthevacatedofficeoraresolutionforthere-appointmentoftheDirectorisputtothemeetingandlost.
Directorsareappointedunderlettersofappointment,copiesofwhichareavailableattheregisteredofficeoftheCompany.TheBoardconsidersitscompositionandsuccessionplanningonanon-goingbasis.TheCompany’sArticlesofIncorporationspecifythatnotgreaterthanonethirdbynumberoftheDirectorswillbesubjecttoannualre-electionateachsubsequentAnnualGeneralMeetingoftheCompanyandthateachoftheDirectorsshouldsubmitthemselvesforre-electionatleasteverythreeyears.MrFirthandMrMeaderwillretireasDirectorsofthe
CompanyinaccordancewiththepolicyadoptedbytheBoardandwillbeputforwardforre-electionattheforthcomingAGM.MrHuntleywasconsideredbytheBoardasindependentbutasheremainedaconsultanttotheAdministratorunderanagreementwhichisdescribedonpage17whichexpiresinOctober2019hewillstandforre-election.
AnyDirectorwhoiselectedorre-electedatthatmeetingistreatedascontinuinginofficethroughout.Ifheisnotelectedorre-elected,heshallretainofficeuntiltheendofthemeetingor(ifearlier)whenaresolutionispassedtoappointsomeoneinhisplaceorwhenaresolutiontoelectorre-electtheDirectorisputtothemeetingandlost.
TheBoardhasanagreedsuccessionplanfortheorderlyretirementofexistingDirectorsandtoprovidefortheregularrefreshmentofskillsandtalent.TheBoardwelcomesthe2019AICCodeandisconfidentthatitssuccessionplanrespectsboththeletterandthespiritoftheCoderegardingBoardcomposition,diversity-particularlywithrespecttogender-andhoweffectivelymembersworktogethertoachievetheCompany’sobjectives.
RegularretirementsofDirectorswilltakeplacestartingfromtheAGMin2020ensuringthattheCompanycomplieswiththe2019AICCode.
DIRECTORS’ REMUNERATIONThelevelofremunerationoftheNon-executiveDirectorsreflectsthetimecommitmentandresponsibilitiesoftheirroles.TheChairmanisentitledtoannualremunerationof£50,000(31January2018:£50,000).TheChairmanoftheAuditandOperationalRiskCommitteeisentitledtoannualremunerationof£40,000(31January2018:£40,000)andtheChairmanoftheInvestmentRiskCommitteeisentitledtoannualremunerationof£37,500effectivefrom1May2018(31January2018:£35,000).TheotherindependentDirectorsareentitledtoannualremunerationof£35,000(31January2018:£35,000).NochangetoDirectors’remunerationisproposedfortheyearto31January2020.
Duringtheyearended31January2019andtheyearended31January2018,theDirectors’remunerationwasasfollows:
Director
1 February 2018 to31 January 2019
£
1 February 2017 to31 January 2018
£
JackPerry 50,000 50,833
PatrickFirth 40,000 41,875
PaulMeader 36,875 36,875
StuartBeevor 35,000 36,875
MarkHuntley 35,000 36,875
TheCompanyDirectors’feesfortheyearamountedto£196,875(31January2018:£203,333)withoutstandingfeesof£49,375duetotheDirectorsat31January2019(31January2018:£48,750)(seeNote8).Duringtheprioryear,theCompanypaideachDirectoranadditional,one-offfeeof£5,000fortheextraservicestheyperformedinconnectionwiththe2017PlacingProgramme.
AlloftheDirectorsarenon-executiveandareeachconsideredindependentforthepurposesofChapter15oftheListingRules.
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DUTIES AND RESPONSIBILITIESTheBoardhasoverallresponsibilityformaximisingtheCompany’ssuccessbydirectingandsupervisingtheaffairsofthebusinessandmeetingtheappropriateinterestsofshareholdersandrelevantstakeholders,whileenhancingthevalueoftheCompanyandalsoensuringtheprotectionofinvestors.TheBoardhasadoptedaScheduleofMatterswhichsetsouttheparticulardutiesoftheBoard.Suchreservedpowersincludethefollowing:
O strategicmatters;
O riskassessmentandmanagementincludingreporting,compliance,governance,monitoringandcontrolandfinancialreporting;
O statutoryobligationsandpublicdisclosure;
O declaringCompanydividends;
O managingtheCompany’sadvisers;and
O othermattershavingamaterialeffectontheCompany.
TheDirectorshaveaccesstotheadviceandservicesoftheAdministrator,whoisresponsibletotheBoardforensuringthatBoardproceduresarefollowedandthatitcomplieswithCompaniesLawandapplicablerulesandregulationsoftheGFSCandtheLondonStockExchange.Wherenecessary,incarryingouttheirduties,theDirectorsmayseekindependent
professionaladviceandservicesattheexpenseoftheCompany.TheCompanymaintainsappropriateDirectors’andOfficers’liabilityinsuranceinrespectoflegalactionagainstitsDirectorsonanon-goingbasis.
TheBoard’sresponsibilitiesfortheAnnualReportaresetoutintheDirectors’ResponsibilityStatementonpage22.TheBoardisalsoresponsibleforissuingappropriateInterimReportsandotherprice-sensitivepublicreports.
OneofthekeycriteriatheCompanyuseswhenselectingnon-executiveDirectorsistheirconfirmationpriortotheirappointmentthattheywillbeabletoallocatesufficienttimetotheCompanytodischargetheirresponsibilitiesinatimelyandeffectivemanner.
TheBoardformallymetfourtimesduringtheyearandthead-hocBoardmeetingswerecalledinrelationtospecificeventsortoissueapprovals,oftenatshortnoticeanddidnotnecessarilyrequirefullattendance.EachBoardmemberreceivesacomprehensiveBoardpackatleastfivedayspriortoeachmeetingwhichincorporatesaformalagendatogetherwithsupportingpapersforitemstobediscussedatthemeeting.DirectorsareencouragedwhentheyareunabletoattendameetingtogivetheChairmantheirviewsandcommentsonmatterstobediscussed,inadvance.Inadditiontotheirmeetingcommitments,theNon-executiveDirectorsalsoliaisewiththeInvestmentAdvisertomanagementwheneverrequiredandthereisregularcontactoutsidetheBoardmeetingschedule.
Attendanceisfurthersetoutbelow:
Director
Scheduled Board
Meetings
Ad-hoc Board
Meetings
Audit andOperational
Risk Committee
Meetings
Investment Risk
CommitteeMeetings
NominationCommittee
Meeting
ManagementEngagement
CommitteeMeeting
Tenure as at 31 January 2019
StuartBeevor 4of4 1of4 3of3 4of4 1of1 n/a 6yearsand2months
PatrickFirth 4of4 3of4 3of3 n/a 1of1 1of1 6yearsand2months
MarkHuntley 4of4 4of4 n/a 4of4 1of1 n/a 6yearsand2months
PaulMeader 4of4 2of4 3of3 4of4 1of1 1of1 6yearsand2months
JackPerry 4of4 2of4 n/a n/a 1of1 1of1 6yearsand2months
AquorumiscomprisedofanytwoormoremembersoftheBoardfromtimetotime,toperformadministrativeandotherroutinefunctionsonbehalfoftheBoard,subjecttosuchlimitationsastheBoardmayexpresslyimposeonthiscommitteefromtimetotime.
COMMITTEES OF THE BOARDTheBoardbelievesthatitanditscommitteeshaveanappropriatecompositionandblendofbackgrounds,skillsandexperiencetodischargetheirdutieseffectively.TheBoardisoftheviewthatnooneindividualorsmallgroupdominatesdecision-making.TheBoardkeepsitsmembership,andthatofitscommittees,underreviewtoensurethatanacceptablebalanceismaintained,andthatthecollectiveskillsandexperienceofitsmemberscontinuetoberefreshed.ItissatisfiedthatallDirectorshavesufficienttimetodevotetotheirrolesandthatunduerelianceisnotplacedonanyindividual.
EachcommitteeoftheBoardhaswrittentermsofreference,approvedbytheBoard,summarisingitsobjectives,remit
andpowers,whichareavailableontheCompany’swebsite(www.lbow.co.uk)andarereviewedonanannualbasis.EachCommitteehasaccesstosuchexternaladviceasitmayconsiderappropriate.
Allcommitteemembersareprovidedwithanappropriateinductiononjoiningtheirrespectivecommittees,aswellason-goingaccesstotraining.MinutesofallmeetingsofthecommitteesaremadeavailabletoallDirectorsandfeedbackfromeachofthecommitteesisprovidedtotheBoardbytherespectivecommitteeChairmenatthenextBoardmeeting.TheChairmanofeachcommitteeattendstheAGMtoansweranyquestionsontheircommittee’sactivities.
TheBoardanditscommitteesaresuppliedwithregular,comprehensiveandtimelyinformationinaformandofaqualitythatenablesthemtodischargetheirdutieseffectively.AllDirectorsareabletomakefurtherenquiriesofmanagementwhenevernecessary,andhaveaccesstotheservicesoftheCompanySecretary.
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AUDIT AND OPERATIONAL RISK COMMITTEETheAuditandOperationalRiskCommitteeischairedbyMrFirthandalsocomprisesMrBeevorandMrMeader,allofwhomheldofficethroughouttheyear.OtherDirectorshaveastandinginvitationtoattendmeetings.However,theirattendanceatthesemeetingsisasanobserveronly.TheChairmanoftheAuditandOperationalRiskCommittee,theInvestmentAdviserandtheexternalauditor,DeloitteLLP,havehelddiscussionsregardingtheauditapproachandidentifiedrisks.TheexternalauditorsattendAuditandOperationalRiskCommitteemeetingsandaprivatemeetingisroutinelyheldwiththeexternalauditorstoaffordthemtheopportunityofdiscussionswithoutthepresenceoftheInvestmentAdviserorAdministrator.TheAuditandOperationalRiskCommitteeactivitiesarecontainedintheReportoftheAuditandOperationalRiskCommitteeonpages32to34.
INVESTMENT RISK COMMITTEETheInvestmentRiskCommitteewasestablishedon21September2017andischairedbyMrMeaderandalsocomprisesMrBeevor,MrHuntleyandMrMortimer,allofwhomheldofficethroughouttheyear.MrChristieretiredfromtheInvestmentRiskCommitteeon7March2019andMrFirthwasappointedtotheInvestmentRiskCommitteeon7March2019.MrChristieisarepresentativeofLuxcoandMrMortimerisarepresentativeoftheInvestmentAdviser.ThenewrepresentativeofLuxcoiscurrentlyunderconsideration.TheInvestmentRiskCommitteewillmeetnotlessthantwiceayearpursuanttoitstermsofreferencewhichareavailableontheCompany’swebsite.
Pursuanttoitstermsofreference,theInvestmentRiskCommittee’sremitistomonitortherisksassociatedwiththeinvestmentsandtomonitorthecomplianceoftheinvestmentportfoliowiththeinvestmentrestrictionsoftheGroup.TheInvestmentRiskCommitteereviews;theperformanceandinvestmentrisksassociatedwiththeindividualinvestments,theeffectivenessoftheInvestmentAdviser’sinvestmentunderwritingandinvestmentstructuring/documentationprocessesanditscompliancewiththem,andtheeffectivenessoftheInvestmentAdviser’sinvestmentmanagementandriskreportingprocesses,challengingwhereappropriate.
MANAGEMENT ENGAGEMENT COMMITTEETheManagementEngagementCommitteeischairedbyMrPerryandalsocomprisesMrFirthandMrMeader,allofwhomheldofficethroughouttheyear.TheManagementEngagementCommitteewillmeetnotlessthanonceayearpursuanttoitstermsofreferencewhichareavailableontheCompany’swebsite.
TheManagementEngagementCommittee’smainfunctionistoreviewandmakerecommendationsinrelationtotheCompany’sserviceproviders.TheManagementEngagementCommitteewillreviewinparticularanyproposedamendmenttotheInvestmentAdvisoryAgreementandwillkeepunderreviewtheperformanceoftheInvestmentAdviser(includingeffectiveandactivemonitoringandsupervisionoftheactivitiesoftheInvestmentAdviser)initsroleasInvestmentAdvisertotheCompanyaswellastheperformanceofanyotherserviceproviderstotheCompany.TheAuditandOperationalRiskCommitteealsoreportontheirrelationshipwiththeexternalauditor.
Board Performance Evaluation InaccordancewithPrinciple7oftheAICCodewhichrequiresaformalandrigorousannualevaluationofitsperformance,the
Boardformallyreviewsitsperformanceannuallythroughaninternalprocess.
TheassessmentcoverstheeffectivenessandperformanceoftheBoardasawhole,anevaluationofindividualDirectorsandtheeffectivenessoftheBoardCommittees.InternalevaluationoftheBoard,theAuditandOperationalRiskCommittee,theNominationCommittee,theManagementEngagementCommitteeandindividualDirectorstooktheformofself-appraisalquestionnairesanddiscussiontodetermineeffectivenessandperformanceaswellastheDirectors’continuedindependence.DuringtheyeartheBoardcarriedoutaninternalevaluationoftheperformancesoftheBoardandtheBoardCommittees.TheresponseswereconsolidatedandanonymisedandcommonthemesidentifiedinorderfortheBoardtodeterminekeyactionsandnextstepsforimprovingBoardandCommitteeeffectivenessandperformance.
TheBoardbelievesthatannualevaluationsarehelpfulandprovideavaluableopportunityforcontinuousimprovement.TheevaluationconcludedthattheBoardisperformingsatisfactorilyandisacquittingitsresponsibilitieswellintheareasreviewedwhichincorporated:investmentmatters,Boardcompositionandindependence,relationshipsandcommunication,shareholdervalue,knowledgeandskills,BoardprocessesandtheperformanceoftheChairman.TheBoardbelievesthatthecurrentmixofskills,experience,knowledgeandageoftheDirectorsisappropriatetotherequirementsoftheCompany.
NewDirectorswillreceiveaninductiononjoiningtheBoard.DirectorsregularlymeetwiththeseniormanagementemployedbytheInvestmentAdviserbothformallyandinformallytoensurethattheBoardremainsregularlyupdatedonallissues.AllmembersoftheBoardaremembersofprofessionalbodiesandserveonotherBoards,whichensurestheyarekeptabreastofthelatesttechnicaldevelopmentsintheirareasofexpertise.TheBoardarrangesforpresentationsfromtheInvestmentAdviser,theCompany’sbrokersandotheradvisersonmattersrelevanttotheCompany’sbusiness.TheBoardassessesthetrainingneedsofDirectorsonanannualbasis.
NOMINATION COMMITTEETheNominationCommitteeischairedbyMrPerryandalsocomprisesMrBeevor,MrFirth,MrHuntleyandMrMeader,allofwhomheldofficethroughouttheyear.TheNominationCommitteemeetsatleastonceayearpursuanttoitstermsofreferenceandmeton23April2018.TheNominationCommittee’sremitistoreviewregularlythestructure,sizeandcompositionoftheBoard;togivefullconsiderationtosuccessionplanningforDirectors;tokeepunderreviewtheleadershipneedsoftheCompanyandberesponsibleforidentifyingandnominating,fortheapprovaloftheBoard,candidatestofillBoardvacanciesasandwhentheyarise.
TheNominationCommitteerecognisesthecontinuingimportanceofplanningforthefutureandensuringthatsuccessionplansareinplace.InconsideringappointmentstotheBoard,theNominationCommitteetakesintoaccounttheongoingrequirementsoftheCompanyandevaluatesthebalanceofskills,experience,independence,andknowledgeofeachcandidate.AppointmentsarethereforemadeonpersonalmeritandagainstobjectivecriteriawiththeaimofbringingnewskillsanddifferentperspectivestotheBoardwhilsttakingintoaccounttheexistingbalanceofknowledge,experienceanddiversity.
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NOMINATION COMMITTEE (CONTINUED)InthecaseofcandidatesforNon-executiveDirectorships,careistakentoascertainthattheyhavesufficienttimetofulfiltheirBoardand,whererelevant,committeeresponsibilities.TheBoardbelievesthatthetermsofreferenceoftheNominationCommitteeensurethatitoperatesinarigorousandtransparentmanner.TheBoardbelievesthat,asawhole,itcomprisesanappropriatebalanceofskills,experienceandknowledge.TheBoardalsobelievesthatdiversityofexperienceandapproach,includinggenderdiversity,amongstBoardmembersisofgreatimportanceanditistheCompany’spolicytogivecarefulconsiderationtoissuesofBoardbalanceanddiversitywhenmakingnewappointments.
TheNominationsCommitteehasreviewedthecomposition,structureanddiversityoftheBoard,successionplanning,theindependenceoftheDirectorsandwhethereachoftheDirectorshassufficienttimeavailabletodischargetheirdutieseffectively.TheCommitteeandtheBoardconfirmthattheybelievethattheBoardhasanappropriatemixofskillsandbackgroundsandwasselectedwiththatinmind,thatamajorityofDirectorsshouldbeconsideredasIndependentinaccordancewiththeprovisionsoftheAICCodeandthatallDirectorshavethetimeavailabletodischargetheirdutieseffectively.Inthisregard,theCommitteereviewedinmoredetailthecommitmentsofMrFirth,MrMeaderandMrHuntley.
MrFirthisadirectorandChairmanoftheAuditandOperationalRiskCommittee.Heisalsoafull-timenon-executivedirectorofanumberofcompanies,fourofwhicharelistedinvestmentcompanies.MrFirthhasalsoannouncedthathewillshortlyberetiringfromtheboardofoneofthosecompanies,JZCapitalPartnersLimited.TheCommitteenotedthatMrFirthhasattendedallBoardandmaincommitteemeetings,and3outof4ad-hocBoardmeetings(thequorumforwhichistwomembers),duringtheyearandthathehasalwaysdemonstratedthetimecommitmenttodischargefullyandeffectivelyhisdutiesasaDirector.
MrMeaderisalsoafulltimenon-executivedirectorandisadirectoroffivelistedinvestmentcompanies,oneofwhichheischairman.TheCommitteenotedthatMrMeaderhasalwaysdemonstratedthetimecommitmenttodischargehisdutiesfullyandeffectivelyandheattendedallscheduledBoardmeetings,allcommitteemeetingsand2ofthe4ad-hocBoardmeetings.
MrHuntleyisalsoafulltimenon-executivedirectorandisadirectorofthreelistedinvestmentcompanies.TheCommitteenotedthatMrHuntleyhasalwaysdemonstratedthetimecommitmenttodischargehisdutiesfullyandeffectivelyandheattendedallscheduledBoardmeetings,allcommitteemeetingsandallad-hocBoardmeetings.
Accordingly,theBoardrecommendsthatshareholdersvoteinfavourofthere-electionofallDirectorsattheforthcomingAGM.
INTERNAL CONTROL AND FINANCIAL REPORTINGTheDirectorsacknowledgethattheyareresponsibleforestablishingandmaintainingtheGroupandCompany’ssystemofinternalcontrolsandreviewingitseffectiveness.Internalcontrolsystemsaredesignedtomanageratherthaneliminatethefailuretoachievebusinessobjectivesandcanonlyprovidereasonablebutnotabsoluteassuranceagainstmaterialmisstatementsorloss.TheDirectorscanconfirmtheyhavecarriedoutarobustassessmentoftheprincipalrisksfacingtheCompany,includingthosethatwouldthreatenitsbusinessmodel,futureperformance,solvencyorliquidity.Thekeyprocedureswhichhavebeenestablishedtoprovideinternalcontrolare:
O theBoardhasdelegatedthedaytodayoperationsoftheGroupandCompanytotheAdministratorandInvestmentAdviser,however,itremainsaccountableforallfunctionsitdelegates;
O theBoardclearlydefinesthedutiesandresponsibilitiesoftheCompany’sagentsandadvisersandappointmentsaremadebytheBoardafterdueandcarefulconsideration.TheBoardmonitorstheon-goingperformanceofsuchagentsandadvisersandwillcontinuetodosothroughtheManagementEngagementCommittee;
O theBoardmonitorstheactionsoftheInvestmentAdviseratregularBoardmeetingsandisalsogivenfrequentupdatesondevelopmentsarisingfromtheoperationsandstrategicdirectionoftheunderlyingborrowers;and
O theAdministratorprovidesadministrationandcompanysecretarialservicestotheCompany.TheAdministratormaintainsasystemofinternalcontrolonwhichitreportstotheBoard.
TheBoardhasreviewedtheneedforaninternalauditfunctionandhasdecidedthatthesystemsandproceduresemployedbytheAdministratorandInvestmentAdviser,includingtheirowninternalcontrolsandprocedures,providesufficientassurancethatanappropriatelevelofriskmanagementandinternalcontrol,whichsafeguardsshareholders’investmentandtheGroup’sassets,ismaintained.AninternalauditfunctionspecifictotheCompanyisthereforeconsideredunnecessary,asexplainedonpage33.
Internalcontrolsoverfinancialreportingaredesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalreportingpurposes.TheAdministratorandInvestmentAdviserbothoperateriskcontrolledframeworksonacontinualongoingbasiswithinaregulatedenvironment.TheAdministratorundertakesanISAE3402:AssuranceReportsonControlsataServiceOrganisationauditannuallywhichisprovidedtotheBoardwhenfinalised.TheAdministratoralsoformallyreportstotheBoardquarterlythroughacompliancereport.TheInvestmentAdviserformallyreportstotheBoardquarterlyincludingupdateswithinICG-LongbowandalsoengageswiththeBoardonanad-hocbasisasrequired.NoweaknessesorfailingwithintheAdministratororInvestmentAdviserhavebeenidentified.
Thesystemsofcontrolreferredtoabovearedesignedtoensureeffectivenessandefficientoperation,internalcontrolandcompliancewithlawsandregulations.Inestablishingthesystemsofinternalcontrol,regardispaidtothematerialityofrelevantrisks,thelikelihoodofcostsbeingincurredandcostsofcontrol.Itfollows,therefore,thatthesystemsofinternalcontrolcanonlyprovidereasonablebutnotabsoluteassuranceagainsttheriskofmaterialmisstatementorloss.
TheCompanyhasdelegatedtheprovisionofservicestoexternalserviceproviderswhoseworkisoverseenbytheManagementEngagementCommitteeatitsregularscheduledmeetings.EachyearadetailedreviewofperformancepursuanttotheirtermsofengagementisundertakenbytheManagementEngagementCommittee.Anon-sitereviewoftheInvestmentAdviserandanassessmentoftheLuxembourgAdministratorwereundertakeninNovember2018andinFebruary2019respectively.TheconclusionsofthesereviewswerehighlysatisfactoryprovidingassurancetotheBoard.Inaddition,theCompanymaintainsawebsitewhichcontainscomprehensiveinformation,includingregulatoryannouncements,sharepriceinformation,financialreports,investmentobjectivesandstrategy,investorcontactsandinformationontheBoard.
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INVESTMENT ADVISORY AGREEMENTTheCompanyhasenteredintoanagreementwiththeInvestmentAdviser.ThissetsouttheInvestmentAdviser’skeyresponsibilities,whichincludeidentifyingandrecommendingsuitableinvestmentsfortheCompanytoenterintoandnegotiatingonbehalfoftheCompanythetermsonwhichsuchinvestmentswillbemade.TheInvestmentAdviserisalsoresponsibletotheBoardforallissuesrelatingtothemaintenanceandmonitoringofexistinginvestments.
InaccordancewithListingRule15.6.2(2)RandhavingformallyappraisedtheperformanceandresourcesoftheInvestmentAdviser,intheopinionoftheDirectorsthecontinuingappointmentoftheInvestmentAdviseronthetermsagreedisintheinterestsoftheshareholdersasawhole.
RELATIONS WITH SHAREHOLDERSTheBoardwelcomesshareholders’viewsandplacesgreatimportanceoncommunicationwithitsshareholders.TheCompany’sAGMprovidesaforumforshareholderstomeetanddiscussissueswiththeDirectorsoftheCompany.TheChairmanandotherMembersoftheBoardhavemade,andwillcontinuetomakethemselvesavailabletomeetshareholdersatothertimes.
TheCompanyreportsformallytoshareholdersinanumberofways:regulatorynewsreleasesthroughtheLondonStockExchange’sRegulatoryNewsServicewherebyannouncementsareissuedinresponsetoeventsorroutinereportingobligations;anInterimReportispublishedinSeptembereachyear,outliningperformanceto31July,whichismadeavailableontheCompany’swebsite;theAnnualReportispublishedinAprileachyear,fortheyearended31January,whichismadeavailableontheCompany’swebsite.Inaddition,theCompany’swebsite(http://www.lbow.co.uk)containscomprehensiveinformation,includingcompanynotifications,shareinformation,financialreports,investmentobjectivesandpolicy,investorcontactsandinformationontheBoardandcorporategovernance.TheBoardreceivescomprehensiveshareholderreportsfromtheCompany’sRegistraratallquarterlyBoardmeetingsandregularlymonitorstheviewsofshareholdersandtheshareholderprofileoftheCompany.Overtheyear,theInvestmentManager’sinvestorrelationsteamandseniormanagementheldseveralroadshowsandover20meetingswithinvestorsandequityresearchanalysts.
WHISTLEBLOWING TheBoardhasconsideredtheAICCoderecommendationsinrespectofarrangementsbywhichstaffoftheInvestmentAdviserorAdministratormay,inconfidence,raiseconcernswithintheirrespectiveorganisationsaboutpossibleimproprietiesinmattersoffinancialreportingorothermatters.
Ithasconcludedthatadequatearrangementsareinplacefortheproportionateandindependentinvestigationofsuchmattersand,wherenecessary,forappropriatefollow-upactiontobetakenwithintheirorganisation.
PRINCIPAL RISKS AND UNCERTAINTIESDuringtheyeartheBoardhasoverseenthecontinuedenhancementoftheGroup’sriskmanagementframeworkandriskculture.TheCommitteeundertookarobustassessmentoftheGroup’sprincipalrisksandassociatedriskappetite,takingintoaccountchangesinthebusinessandtheexternalenvironment.
TheBoardcanconfirmthattheyhaveundertakenarobustassessmentofprincipalrisksfacingtheCompany.Theseriskshavebeenrankedconsideringthemagnitudeofpotentialimpact,probabilityandtakingintoaccounttheeffectivenessofexistingcontrols.TherisksrepresentasnapshotoftheCompany’scurrentriskprofile.ThisisnotanexhaustivelistofallriskstheCompanyfaces.Asthemacroenvironmentchangesandcountryandindustrycircumstancesevolve,newrisksmayariseorexistingrisksmayrecedeortherankingsoftheserisksmaychange.
TheBoardthoroughlyconsiderstheprocessforidentifying,evaluatingandmanaginganysignificantrisksfacedbytheCompanyonanon-goingbasisandtheserisksarereportedanddiscussedatBoardmeetings.Itensuresthateffectivecontrolsareinplacetomitigatetheserisksandthatasatisfactorycomplianceregimeexiststoensureallapplicablelocalandinternationallawsandregulationsareupheld.
TheBoardiscommittedtoupholdingandmaintainingourzerotolerancetowardsthecriminalfacilitationoftaxevasion.
Foreachmaterialrisk,thelikelihoodandpotentialimpactareidentified.TheCompany’sfinancialinstrumentrisksarediscussedinNote11totheFinancialStatements.
TheDirectorshaveidentifiedthefollowingasthekeyrisksfacedbytheCompany:
Description Potential Impact Mitigation
Realestateloannon-performance
RealestateloansmadebytheGroupmay,afterfunding,becomenon-performingforawidevarietyofreasons,includingnon-paymentofprincipalorinterest,aswellascovenantviolationsbytheborrowerinrespectoftheunderlyingloandocuments.Non-paymentofinterestcouldaffecttheCompany’sabilitytopaythetargetdividendinfull,whilstnon-paymentofprincipalcouldleadtotheCompanyinitiatinganenforcementprocessovertheassetssecuringtherelevantloan,wheretherecoveriesundersuchprocessmaybesmallerthanthevalueoftheCompany’sinvestmentintheloan.
TheGroup’scurrentinvestmentparametersrequireanequitybufferofatleast15%(and25%byaverage)ofthepropertysecurity’svaluetoshieldagainstanyreductionincapitalvalues.Allloansincludecovenantswhichgivethelendertheopportunitytointerveneandtakeprotectiveactionatanearlystageifthevalueoftheunderlyingpropertyortheincomeprofilereducesmaterially.Inordertoidentifyanysuchdeterioration,loansaremonitoredonaquarterlybasisforsignsofunderperformanceordistress.
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Description Potential Impact Mitigation
Propertyvaluations
Valuationsofpropertyandproperty-relatedassetsareinherentlysubjectiveduetotheindividualnatureofeachproperty.Asaresult,valuationsaresubjecttouncertaintyand,indeterminingmarketvalue,valuersarerequiredtomakecertainassumptionsandsuchassumptionsmayprovetobeinaccurate.Thisisparticularlysoinperiodsofvolatilityorwhentherearelimitedrealestatetransactionaldataagainstwhichpropertyvaluationcanbebenchmarked.Ifvaluationsprovetobeinaccurate,theassetssecuringtheCompany’sloanmaybeworthlessthantheCompanyanticipated.Thismaymeantherelevantloanbecomesnon-performing,withthepossibilityofalossorimpairmentfortheCompany.
Allinvestmentsaremonitoredonaquarterlybasisforearlywarningsignsofunderperformanceordistress.ThematurityoftheloansandtheInvestmentAdviser’sdirectpropertymarketexperience,includingitsongoinginteractionswiththemarketinrespectofotherfundsitmanages,shouldalsohelpittoidentifyanypotentialinaccuraciesintheindependentthirdpartyvaluations,oradversetrendsinthemarketasawhole.
Marketconditions TheperformanceoftheGroupanditsunderlyinginvestmentsmaybeaffectedbyothereconomicconditionssuchaschangestoequityriskpremiums,corporatefailurerates,changesinlawsorregulations,nationalandinternationalpoliticalcircumstances,andgeneralmacroeconomicvariablesetc.Theserisksareparticularlyacutegiventhepotentialvolatilityofthecapitalandcreditmarkets,andtheInvestmentAdvisermaybeunabletopredictwhether,ortowhatextentorforhowlong,suchconditionsmayoccurandaffecttheoperationoftheGroup.
WhilstmarketconditionsmayhaveasignificantimpactonthesharepriceoftheCompany,theimpactonitsinvestmentsandunderlyingperformancewillbelessseveretotheextentitdoesnotimpacttheconfidenceofpropertyinvestorsortheoccupationalmarkets.TheGroup’sinvestmentstrategy,basedondiverseunderlyingincomeandthoroughcashflow–basedunderwriting,andpropertyduediligencewillmitigatetheriskofpropertiesand/orlocationsbecomingundesirableduetoothermarketconditionsduringthetermoftheinvestments.ThegeneraleconomicbackdropismonitoredbytheInvestmentAdviser.
Risks relating to Group structure:
Description Potential Impact Mitigation
Changeintaxandregulatorylegislationandensuringthecorporatestructureisfitforpurpose
AchangeintaxlegislationapplicabletotheGrouporCompany,resultinginincreasedtaxliabilitiesfortheGrouporCompanyandaconsequentialreductioninyieldorcapitaltoinvestors.TheGroupmayalsobeimpactedbytheOECD’sBEPSlegislation.BEPSreferstothetaxplanningstrategiesofmultinationalcorporationsthatexploitmismatchesinnationaltaxrulestoshiftartificialprofitstoloworno-taxlocations,resultinginlittleornooverallcorporatetaxbeingpaid.WhiletheInvestmentAdviserdoesnotbelievetheCompanyisanintendedtargetoftheOECD’sBEPSmeasures,beingneitheramultinationalcompanynorinvolvedinartificialarrangements,itiscurrentlyunclearwhattheimplicationswillbefortheGrouportherealestatesector.ItispossiblethattheimplementationoftheBEPSactionsintheUKorotherjurisdictionsthroughwhichtheGroupinvestsmayhavenegativeimplicationsfortheGroup,includingthepotentialforareductioninthetaxdeductibilityofdebtinterest.TheriskofsuchchangestotaxandregulatorylegislationisheightenedastheUKwithdrawsfromEurope.
ThecorporatestructureoftheCompanyisregularlyreviewedand,whereappropriate,externaltaxadvicesought.ICG-LongbowandtheBoardcontinuetomonitordevelopmentsinUK,GuernseyandEuropeantaxandregulatorylegislation.WithrespecttoBEPSandBrexit,theGroupcontinuestomonitorthesituationbutdoesnotcurrentlyexpecteithertoimpactitsoperatingstructureorinvestmentperformance.
TheInvestmentAdviserisinconstantcontactwithadvisersandindustrybodiestobeabletomonitorthepotentialimpactofchangesinregulationandlegislation.
31ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
CORPORATE GOVERNANCE REPORT(CONTINUED)
TheCompany’sprincipalriskfactorsarefullydiscussedintheCompany’s2018Prospectus,availableontheCompany’swebsite(www.lbow.co.uk)andshouldbereviewedbyshareholders.
EmergingrisksareregularlyconsideredtoassessanypotentialimpactontheGroupandtodeterminewhetheranyactionsarerequired.Emergingrisksincludethoserelatedtoregulatory/legislativechangeandmacroeconomicandpoliticalchange,whichinthecurrentyearhaveincludedtheongoingdevelopmentsinrespectoftheUK’sdecisiontoleavetheEuropeanUnion.
Insummary,theaboverisksaremitigatedandmanagedbytheBoardthroughcontinualreview,policysettingandupdatingoftheCompany’sriskmatrixateachquarterlymeetingtoensurethatproceduresareinplacewiththeintentionofminimisingtheimpactoftheabovementionedrisks.TheBoardrelies
onperiodicreportsprovidedbytheInvestmentAdviserandAdministratorregardingrisksthattheGroupfaces.Whenrequired,expertswillbeemployedtogatherinformation,includingpropertysurveyors,taxadvisers,legaladvisers,andenvironmentaladvisers.
ByorderoftheBoard
JACK PERRY PATRICK FIRTHChairman Director
23April2019 23April2019
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REPORTOFTHEAUDIT AND OPERATIONAL RISK COMMITTEE
TheAuditandOperationalRiskCommittee,chairedbyMrFirth,operateswithinclearlydefinedtermsofreference(whichareavailablefromtheCompany’swebsite)andincludesallmattersindicatedbyDisclosureandTransparencyRule7.1,theAICCodeandtheUKCode.ItsothermembersareMrBeevorandMrMeader.OnlyindependentDirectorscanserveontheAuditandOperationalRiskCommittee.MembersoftheAuditandOperationalRiskCommitteemustbeindependentoftheCompany’sexternalauditorandInvestmentAdviser.TheAuditandOperationalRiskCommitteewillmeetnolessthantwiceayear,andatsuchothertimesastheAuditandOperationalRiskCommitteeChairmanshallrequire.
TheCommitteemembershaveconsiderablefinancialandbusinessexperienceandtheBoardhasdeterminedthatthemembershipasawholehassufficientrecentandrelevantsectorandfinancialexperiencetodischargeitsresponsibilities.TheBoardhastakennoteoftherequirementthatatleastonememberoftheAuditandOperationalRiskCommitteeshouldhaverecentandrelevantfinancialexperienceandissatisfiedthattheAuditandOperationalRiskCommitteeisproperlyconstitutedinthatrespect,withallmembersbeinghighlyexperiencedand,inparticular,withonememberhavingabackgroundasacharteredaccountant.
ThedutiesoftheAuditandOperationalRiskCommitteeindischargingitsresponsibilitiesincludereviewingtheAnnualReportandConsolidatedFinancialStatementsandtheInterimReport,thesystemofinternalcontrols,andthetermsofappointmentoftheCompany’sindependentauditortogetherwiththeirremuneration.ItisalsotheformalforumthroughwhichtheauditorwillreporttotheBoardofDirectors.TheobjectivityoftheauditorisreviewedbytheAuditandOperationalRiskCommitteewhichwillalsoreviewthetermsunderwhichtheexternalauditorisappointedtoperformnon-auditservicesandthefeespaidtothemortheiraffiliatedfirmsoverseas.
RESPONSIBILITIESThemaindutiesoftheAuditandOperationalRiskCommitteeare:
O reviewingandmonitoringtheintegrityoftheFinancialStatementsoftheGroupandanyformalannouncementsrelatingtotheGroup’sfinancialperformance,reviewingsignificantfinancialreportingjudgementscontainedinthem;
O reportingtotheBoardontheappropriatenessofouraccountingpoliciesandpracticesincludingcriticaljudgementareas;
O reviewinganydraftimpairmentreviewsoftheGroup’sinvestmentspreparedbytheInvestmentAdviser,andmakingarecommendationtotheBoardonanyimpairmentinthevalueoftheGroup’sinvestments;
O meetingregularlywiththeexternalauditortoreviewtheirproposedauditplanandthesubsequentauditreportandassesstheeffectivenessoftheauditprocessandthelevelsoffeespaidinrespectofbothauditandnon-auditwork;
O makingrecommendationstotheBoardinrelationtotheappointment,re-appointmentorremovaloftheexternalauditorandapprovingtheirremunerationandthetermsoftheirengagement;
O monitoringandreviewingannuallytheauditor’sindependence,objectivity,expertise,resources,qualificationandnon-auditwork;
O consideringannuallywhetherthereisaneedfortheCompanyanditsGrouptohaveitsowninternalauditfunction;
O monitoringtheinternalfinancialcontrolandriskmanagementsystemsonwhichtheCompanyanditsGroupisreliant;
O reviewingandconsideringtheUKCode,theAICCode,theFRCGuidanceonAuditandOperationalRiskCommittees;and
O reviewingtherisksfacingtheGroupandmonitoringtheriskmatrix.
TheAuditandOperationalRiskCommitteeisrequiredtoreportformallyitsfindingstotheBoard,identifyinganymattersonwhichitconsidersthatactionorimprovementisneeded,andmakerecommendationsonthestepstobetaken.
TheexternalauditorisinvitedtoattendtheAuditandOperationalRiskCommitteemeetingsastheDirectorsdeemappropriateandatwhichtheyhavetheopportunitytomeetwiththeAuditandOperationalRiskCommitteewithoutrepresentativesoftheInvestmentAdviserortheAdministratorbeingpresentatleastonceperyear.
FINANCIAL REPORTINGTheprimaryroleoftheAuditandOperationalRiskCommitteeinrelationtothefinancialreportingistoreviewwiththeAdministrator,InvestmentAdviserandtheauditortheappropriatenessoftheInterimReportandAnnualReportandConsolidatedFinancialStatements,concentratingon,amongstothermatters:
O thequalityandacceptabilityofaccountingpoliciesandpractices;
O theclarityofthedisclosuresandcompliancewithfinancialreportingstandardsandrelevantfinancialandgovernancereportingrequirements;
O materialareasinwhichsignificantjudgementshavebeenappliedortherehasbeendiscussionwiththeexternalauditorincludinggoingconcernandviabilitystatement;
O whethertheAnnualReportandConsolidatedFinancialStatements,takenasawhole,isfair,balancedandunderstandableandprovidestheinformationnecessaryforshareholderstoassesstheGroup’sperformance,businessmodelandstrategy;and
O anycorrespondencefromregulatorsinrelationtotheGroup’sfinancialreporting.
Toaiditsreview,theAuditandOperationalRiskCommitteeconsidersreportsfromtheAdministratorandInvestmentAdviserandalsoreportsfromtheauditorontheoutcomeoftheirannualaudit.TheAuditandOperationalRiskCommitteesupportsDeloitteLLPindisplayingthenecessaryprofessionalscepticismtheirrolerequires.
33ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
REPORTOFTHEAUDIT AND OPERATIONAL RISK COMMITTEE(CONTINUED)MEETINGSDuringtheyearended31January2019,theAuditandOperationalRiskCommitteemetformallyon3occasions.Themattersdiscussedatthosemeetingsinclude:
O reviewofthetermsofreferenceoftheAuditandOperationalRiskCommitteeforapprovalbytheBoard;
O reviewoftheaccountingpoliciesandformatoftheFinancialStatements;
O detailedreviewoftheAnnualReportandFinancialStatements,InterimReportandrecommendationforapprovalbytheBoardincludingthegoingconcernbasisandtheviabilitystatement;
O reviewoftheGroup’sriskmatrix;
O reviewandapprovaloftheauditplanandfinalAuditandOperationalRiskCommitteereportoftheauditor;
O discussionandapprovalofthefeefortheexternalaudit;
O assessmentoftheindependenceoftheexternalauditor;
O assessmentoftheeffectivenessoftheexternalauditprocessasdescribedbelow;and
O reviewoftheGroup’skeyrisksandinternalcontrols.
PRIMARY AREA OF JUDGEMENTTheAuditandOperationalRiskCommitteedeterminedthatthekeyriskofmisstatementoftheGroup’sFinancialStatementsrelatestotherecoverabilityoftheloans,inthecontextofthejudgementsnecessarytoevaluateanyrelatedimpairmentoftheloans.
TheGroup’sloansarethekeyvaluedriverfortheGroup’sNAVandinterestincome.JudgementsoverthelevelofanyimpairmentandrecoverabilityofloaninterestcouldsignificantlyaffecttheNAV.
TheBoardreviewsthecomplianceofallloanswithtermsandcovenantsateachBoardmeeting.TheBoardalsoreceivesupdatesfromtheInvestmentAdviserregardingthetradingperformanceforeachborrower,theborrower’sperformanceundertheloansandonthegeneralUKpropertymarket.Asaresult,theBoardisabletodeterminethelevel,ifany,ofanyimpairmenttotheloans.
Theincorrecttreatmentofanyarrangement,exitandprepaymentfeesandtheimpactofloanimpairmentsintheeffectiveinterestratecalculationsmaysignificantlyaffectthelevelofincomerecordedintheyearthusaffectingthelevelofdistributableincome.
TheAuditandOperationalRiskCommitteehasfocussedtheirworkontheadoptionofIFRS9andinparticulartotheassessmentofthecreditriskchanges,probabilityofdefaultandlossgivendefaultinrelationtotheloanportfolio.TheAuditandOperationalRiskCommitteehasrevieweddetailedimpairmentanalysisandcurrentloanperformancereportspreparedbytheInvestmentAdvisertogetherwiththeconsiderationofthecurrentcollateralvaluesunderpinningtheloanportfolio.TheAuditandOperationalRiskCommitteenotesthatcriticaljudgementshavebeenmadeinrelationtotheassessmentofthestagingoftheloanstogetherwiththeestimationoftheprobabilityofdefaultandalsothelossgivendefault.ParticularconsiderationwasgiventotheMeadowloanwhichhasexperiencedasignificantcreditriskincreasegiventhefallinLTVandreductioninICRasthepropertybecomesvacantinreadinessforthechangeinuse.Further,itshouldbe
notedthatthecurrentvaluationincludesanupliftinrelationtotheexpectedvalueofthegrantingofplanningpermission.Shouldthispermissionnotbegranted,thejudgementsaroundthevaluationwouldneedtoberevisited.TheAuditandOperationalRiskCommitteebelievesthatwhilstthereisanon-goingriskthatthecapitalvalueinvestedintheloanportfoliomaynotberecoverableortheremaybedelaysinrecoveringthecapital,itissatisfiedwiththevalueofthesecurityheldprovidessufficientheadroomabovetheloanprincipaltosupporttheassertionthatnoimpairmentlossisrequiredtoberecordedat31January2019.
TheAuditandOperationalRiskCommitteealsoconsideredthepotentialforimpairmentoftheportfoliointhelongerterm,inaccordancewithIFRS9,basedonanagreedcreditratingmethodologywhichisbenchmarkedagainsttheGroup’spreviousexperienceinmanagingseniordebtandwholeloanportfolios.
TheAuditandOperationalRiskCommitteealsoreviewedtheincomerecognitionandthetreatmentofarrangementandexitfeeswhichwerebasedoneffectiveinterestratecalculationspreparedbytheInvestmentAdviserandtheAdministrator.Themainassumptionsofthecalculationswerethatnoneoftheloanswereimpairedandthateachloanwouldberepaidattheendoftheagreedloanterm.ThesewerediscussedattheAuditandOperationalRiskCommitteemeetingtoreviewtheAnnualReport,withtheInvestmentAdviser,theAdministratorandAuditor.TheAuditandOperationalRiskCommitteeissatisfiedthattheGroupinterestincomehasbeenrecognisedinlinewiththerequirementsofIFRS.
TheAuditandOperationalRiskCommitteehasreviewedthejudgementsandestimationsindeterminingthefairvalueofprepaymentoptionsembeddedwithinthecontractsforloansadvanced.Thekeyfactorsconsideredinthevaluationofprepaymentoptionsincludetheexerciseprice,theinterestrateofthehostloancontract,differentialtocurrentmarketinterestrates,theriskfreerateofinterest,contractualtermsoftheprepaymentoption,andtheexpectedtermoftheoption.Inresponsetothesefactorsithasbeenevaluatedthattheprobabilityofexercisebytheborrowerislowandthetimingofexerciseisindeterminable.Asaresult,theAuditandOperationalRiskCommitteehasconcludedthatitisappropriatenovalueisattributedtoembeddedprepaymentoptions.
RISK MANAGEMENTTheCompany’sriskassessmentprocessandthewayinwhichsignificantbusinessrisksaremanagedisakeyareaoffocusfortheAuditandOperationalRiskCommittee.TheworkoftheAuditandOperationalRiskCommitteeisdrivenprimarilybytheGroup’sassessmentofitsprincipalrisksanduncertaintiesassetoutonpages29to31oftheCorporateGovernanceReport,anditreceivesreportsfromtheInvestmentAdviserandAdministratorontheGroup’sriskevaluationprocessandreviewschangestosignificantrisksidentified.Furthermore,theInvestmentRiskCommitteemonitorstherisksassociatedwiththeinvestmentsandthecomplianceoftheinvestmentportfoliowiththeinvestmentrestrictionsoftheGroup.
INTERNAL AUDITTheAuditandOperationalRiskCommitteecontinuestoreviewtheneedforaninternalauditfunctionandhasdecidedthatthesystemsandproceduresemployedbytheAdministratorandtheInvestmentAdviser,includingtheirowninternalcontrolsandprocedures,providesufficientassurancethatanappropriatelevelofriskmanagementandinternalcontrol,whichsafeguardsshareholders’investmentandtheGroup’sassets,ismaintained.AninternalauditfunctionspecifictotheCompanyisthereforeconsideredunnecessary.
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REPORTOFTHEAUDIT AND OPERATIONAL RISK COMMITTEE(CONTINUED)EXTERNAL AUDITDeloitteLLPhasbeentheCompany’sexternalauditorsincetheCompany’sinception.Thisisthesixthauditperiod.
Theexternalauditorisrequiredtorotatetheauditpartnereveryfiveyears.ThecurrentDeloitteLLPleadauditpartner,MrsNicolaPaul,startedhertenurein2014(inrespectoftheyearended31January2015)andhercurrentrotationwillendwiththeauditofthe2019AnnualReportandFinancialStatements.TheAuditandOperationalRiskCommitteeshallgiveadvancenoticeofanyretenderingplanswithintheAnnualReport.TheAuditandOperationalRiskCommitteehasconsideredthere-appointmentoftheauditoranddecidednottoputtheprovisionoftheexternalauditouttotenderatthistime.
TheobjectivityoftheauditorisreviewedbytheAuditandOperationalRiskCommitteewhichalsoreviewsthetermsunderwhichtheexternalauditormaybeappointedtoperformnon-auditservices.TheAuditandOperationalRiskCommitteereviewsthescopeandresultsoftheaudit,itscosteffectivenessandtheindependenceandobjectivityoftheauditor,withparticularregardtoanynon-auditworkthattheauditormayundertake.Inordertosafeguardauditorindependenceandobjectivity,theAuditandOperationalRiskCommitteeensuresthatanyotheradvisoryand/orconsultingservicesprovidedbytheexternalauditordonotconflictwithitsstatutoryauditresponsibilities.Advisoryand/orconsultingserviceswillgenerallyonlycoverreviewsofInterimReports,taxcomplianceandcapitalraisingwork.Anynon-auditservicesconductedbytheauditoroutsideoftheseareaswillrequiretheconsentoftheAuditandOperationalRiskCommitteebeforebeinginitiated.
TheexternalauditormaynotundertakeanyworkfortheGroupinrespectofthefollowingmatters–preparationoftheFinancialStatements,provisionofinvestmentadvice,takingmanagementdecisionsoradvocacyworkinadversarialsituations.
TheCommitteereviewsthescopeandresultsoftheaudit,itscosteffectivenessandtheindependenceandobjectivityoftheauditor,withparticularregardtothelevelofnon-auditfees.
TheCommitteeregularlymonitorsnonauditservicesbeingprovidedbyDeloittetoensurethereisnoimpairmenttotheirindependenceorobjectivity.
Notwithstandingsuchservices,theAuditandOperationalRiskCommitteeconsidersDeloitteLLPtobeindependentoftheCompanyandthattheprovisionofsuchnon-auditservicesisnotathreattotheobjectivityandindependenceoftheconductoftheauditasappropriatesafeguardsareinplace.
Tofulfilitsresponsibilityregardingtheindependenceoftheauditor,theAuditandOperationalRiskCommitteewillconsider:
O discussionswithorreportsfromtheauditordescribingitsarrangementstoidentify,reportandmanageanyconflictsofinterest;and
O theextentofnon-auditservicesprovidedbytheauditorandarrangementsforensuringtheindependenceandobjectivityandrobustnessandperceptivenessoftheauditorandtheirhandlingofkeyaccountingandauditjudgements.
Toassesstheeffectivenessoftheauditor,theAuditandOperationalRiskCommitteewillreview:
O theauditor’sfulfilmentoftheagreedauditplanandvariationsfromit;
O discussionsorreportshighlightingthemajorissuesthataroseduringthecourseoftheaudit;
O feedbackfromotherserviceprovidersevaluatingtheperformanceoftheauditteam;
O arrangementsforensuringindependenceandobjectivity;and
O therobustnessoftheauditorinhandlingkeyaccountingandauditjudgements.
TheAuditandOperationalRiskCommitteeissatisfiedwithDeloitteLLP’seffectivenessandindependenceasauditorhavingconsideredthedegreeofdiligenceandprofessionalscepticismdemonstratedbythem.Havingcarriedoutthereviewdescribedaboveandhavingsatisfieditselfthattheauditorremainsindependentandeffective,theAuditandOperationalRiskCommitteehasrecommendedtotheBoardthatDeloitteLLPbereappointedasauditorfortheyearending31January2020.
TheAuditandOperationalRiskCommitteehasprovidedtheBoardwithitsrecommendationtotheshareholdersonthere-appointmentofDeloitteLLPasexternalauditorwhichwillbeputtoshareholdersattheAnnualGeneralMeeting.
TheChairmanoftheAuditandOperationalRiskCommitteewillbeavailableattheAnnualGeneralMeetingtoansweranyquestionsabouttheworkoftheCommittee.
OnbehalfoftheAuditandOperationalRiskCommittee
PATRICK FIRTHChairman of the Audit and Operational Risk Committee
23April2019
35ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
INDEPENDENTAUDITOR’S REPORTtotheMembersofICG-LongbowSeniorSecuredUKPropertyDebtInvestmentsLimited
REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS
OPINIONIn our opinion the consolidated financial statements of ICG Longbow Senior Secured UK Property Debt Investments Limited:
O give a true and fair view of the state of the Group’s affairs as at 31 January 2019 and of the Group’s profit for the year then ended;
O have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and
O have been prepared in accordance with the requirements of the Companies (Guernsey) Law, 2008.
Wehaveauditedthefinancialstatementswhichcomprise:
O theConsolidatedStatementofComprehensiveIncome;
O theConsolidatedStatementofFinancialPosition;
O theConsolidatedStatementofChangesinEquity;
O theConsolidatedStatementofCashFlows;and
O therelatednotes1to17.
ThefinancialreportingframeworkthathasbeenappliedintheirpreparationisapplicablelawandIFRSsasadoptedbytheEuropeanUnion.
BASIS FOR OPINIONWeconductedourauditinaccordancewithInternationalStandardsonAuditing(UK)(ISAs(UK))andapplicablelaw.Ourresponsibilitiesunderthosestandardsarefurtherdescribedintheauditor’sresponsibilitiesfortheauditofthefinancialstatementssectionofourreport.
WeareindependentoftheGroupinaccordancewiththeethicalrequirementsthatarerelevanttoourauditofthefinancialstatementsintheUK,includingtheFinancialReportingCouncil’s(FRC’s)EthicalStandardasappliedtolistedentities,andwehavefulfilledourotherethicalresponsibilitiesinaccordancewiththeserequirements.
Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouropinion.
SUMMARY OF OUR AUDIT APPROACH
Key audit matters Thekeyauditmattersthatweidentifiedinthecurrentyearwere:
• theassessmentofanyimpairmentinvalueofloansadvanced;and
• revenuerecognition.
Withinthisreport,anynewkeyauditmattersareidentifiedwith andanykeyauditmatterswhicharethesameastheprioryearidentifiedwith
Materiality ThematerialityweusedfortheGroupfinancialstatementswas£2.4millionwhichwasdeterminedas2%oftheNetAssetValue.
Wealsoappliedalowermaterialitythresholdof£0.38millionbasedon5%ofInvestmentIncome.
Scoping Auditworktorespondtotherisksofmaterialmisstatementwasperformeddirectlybytheauditengagementteam.
Significant changes in our approach
Therehavebeennosignificantchangesinourapproachfromtheprioryear.
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INDEPENDENTAUDITOR’S REPORT(CONTINUED)
CONCLUSIONS RELATING TO GOING CONCERN, PRINCIPAL RISKS AND VIABILITY STATEMENTGoing concernWehavereviewedtheDirectors’statementinnote2(b)tothefinancialstatementsaboutwhethertheyconsidereditappropriatetoadoptthegoingconcernbasisofaccountinginpreparingthemandtheiridentificationofanymaterialuncertaintiestotheGroup’sabilitytocontinuetodosooveraperiodofatleasttwelvemonthsfromthedateofapprovalofthefinancialstatements.
Weconsideredaspartofourriskassessmentthenatureofthegroup,itsbusinessmodelandrelatedrisksincludingwhererelevanttheimpactofBrexit,therequirementsoftheapplicablefinancialreportingframeworkandthesystemofinternalcontrol.Weevaluatedthedirectors’assessmentofthegroup’sabilitytocontinueasagoingconcern,includingchallengingtheunderlyingdataandkeyassumptionsusedtomaketheassessment,andevaluatedthedirectors’plansforfutureactionsinrelationtotheirgoingconcernassessment.
WearerequiredtostatewhetherwehaveanythingmaterialtoaddordrawattentiontoinrelationtothatstatementrequiredbyListingRule9.8.6R(3)andreportifthestatementismateriallyinconsistentwithourknowledgeobtainedintheaudit.
We confirm that we have nothing material to report, add or draw attention to in respect of these matters.
Principal risks and viability statementBasedsolelyonreadingthedirectors’statementsandconsideringwhethertheywereconsistentwiththeknowledgeweobtainedinthecourseoftheaudit,includingtheknowledgeobtainedintheevaluationofthedirectors’assessmentoftheGroup’sabilitytocontinueasagoingconcern,wearerequiredtostatewhetherwehaveanythingmaterialtoaddordrawattentiontoinrelationto:
O thedisclosuresonpages29-31thatdescribetheprincipalrisksandexplainhowtheyarebeingmanagedormitigated;
O theDirectors’confirmationonpage29thattheyhavecarriedoutarobustassessmentoftheprincipalrisksfacingtheGroup,includingthosethatwouldthreatenitsbusinessmodel,futureperformance,solvencyorliquidity;or
O theDirectors’explanationonpage21astohowtheyhaveassessedtheprospectsoftheGroup,overwhatperiodtheyhavedonesoandwhytheyconsiderthatperiodtobeappropriate,andtheirstatementastowhethertheyhaveareasonableexpectationthattheGroupwillbeabletocontinueinoperationandmeetitsliabilitiesastheyfalldueovertheperiodoftheirassessment,includinganyrelateddisclosuresdrawingattentiontoanynecessaryqualificationsorassumptions.
Wearealsorequiredtoreportwhetherthedirectors’statementrelatingtotheprospectsoftheGrouprequiredbyListingRule9.8.6R(3)ismateriallyinconsistentwithourknowledgeobtainedintheaudit.
We confirm that we have nothing material to report, add or draw attention to in respect of these matters.
37ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
INDEPENDENTAUDITOR’S REPORT(CONTINUED)
KEY AUDIT MATTERSKeyauditmattersarethosemattersthat,inourprofessionaljudgement,wereofmostsignificanceinourauditofthefinancialstatementsofthecurrentperiodandincludethemostsignificantassessedrisksofmaterialmisstatement(whetherornotduetofraud)thatweidentified.Thesemattersincludedthosewhichhadthegreatesteffecton:theoverallauditstrategy,theallocationofresourcesintheaudit;anddirectingtheeffortsoftheengagementteam.
Thesematterswereaddressedinthecontextofourauditofthefinancialstatementsasawhole,andinformingouropinionthereon,andwedonotprovideaseparateopiniononthesematters.
The assessment of any impairment in value of loans advanced
Key audit matter description
Asat31January2019,loansmeasuring£108.56million(31January2018:£112.33million)arecarriedatamortisedcostlessanyprovisionforimpairmentasdisclosedinNote2k)vandNote5oftheConsolidatedFinancialStatements.
AsdescribedintheReportOfTheAuditandOperationalRiskCommittee,theGroup’sloansarethekeyvaluedriverfortheGroupNetAssetValueandinterestincome.
Judgementsoverthelevelofanyimpairmentcouldsignificantlyaffectthesekeyperformanceindicators.ImpairmentisconsideredtobethemostcriticalaccountingjudgmentandestimatemadeinapplyingtheGroup’saccountingpoliciesasdescribedinNote3.Thespecificareasofjudgementinclude:
O Thedeterminationoftheappropriateassumptionsunderlyingtheimpairmentanalysis;
O Theimpactofloan-specificmattersandmacroeconomicfactorsthatmightindicatesignificantincreaseincreditriskorobjectiveevidenceofimpairmentonanindividualloanorontheentireloanportfolio;and
O Thedeterminationofkeyinputsoftheexpectedcreditlossesmodelsuchasprobabilityofdefaultandlossgivendefault.
How the scope of our audit responded to the key audit matter
Ourproceduresincluded:
O reviewingtheloanduediligence(includingthirdpartypropertyvaluations)inrespectofeachloaninexistenceatbalancesheetdate;
O challengingthejudgments(includingqualitativeandquantitativecriteria)takenbymanagementrelatedtothecategorisationofloanassetsintovariouscreditstagesrequiredunderIFRS9.Weconsideredthisinthecontextofmanagement’sdefinitionofsignificantincreaseincreditrisk(‘SICR’)andDefault.Toachievethis,weperformedareviewofthe‘LoanMonitoringReport’toassessevidenceofchangesincreditriskarisingfromfactorssuchas:
– movementinloantovalueandinterestcoverratiossincedateofinitialrecognition(i.e.deteriorationinassetsecurity);
– covenantbreaches;
– delinquencyincontractualpaymentsincludingunexpectedmodificationstocontractualcashflows;or
– othersignsoffinancialstress.
O evaluatingthereasonablenessofestimatesappliedtodeterminetheprobabilityofdefault(PD),lossgivendefault(LGD)andexposureatdefault(EAD),includinghowforwardlookinginformationwasconsideredinthisregard;
O workingwithourcreditspecialiststochallengetheECLmodelitselfandtheECLestablishedforeachloan;
O reviewingeachloantoassesswhethertheloanhasorislikelygoingtobreachitscovenantsorhasdefaultedonanycouponpayments,andconsideringotherinformationavailableontheborrowertoassesstheability(orotherwise)tomeetfuturepaymentcommitments;and
O assessingthedesignandimplementationofrelevantcontrolsrelatingtotheloanimpairmentreviewprocess.
Key observations
Havingcarriedouttheproceduresaboveandbasedontheevidenceobtained,wedeterminedthattheimpairmentassumptionswerereasonableandtheresultingestimateofexpectedcreditlossesandimpairmentisinaccordancewithinternationalfinancialreportingstandards.
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INDEPENDENTAUDITOR’S REPORT(CONTINUED)
Revenue recognition
Key audit matter description
Incomefromloansadvancedtotalled£7.20mfortheyearended31January2019(2018:£7.04m),withfurtherotherincomeof£0.44m(31January2018:£1.04million)receivedasaresultofearlyprincipalrepayments(seenote5).PartoftheGroup’sinvestmentobjectiveasdisclosedintheInvestmentAdviser’sReportincludesanaimtoprovideshareholderswithattractivequarterlydividends.Incorrecttreatmentofanyarrangementfees,exitfees,prepaymentfeesandtheimpactofloanimpairmentsintheeffectiveinterestratecalculationsmaysignificantlyaffectthelevelofincomerecordedintheperiod,thusaffectingthelevelofdistributableincome.
Inaddition,theexistenceofprepaymentfeesarisingfromearlyprincipalrepaymentsduringtheperiodwillaffecttheincomerecognisedandmaynotberecordedinaccordancewiththeeffectiveinterestraterequirementssetoutinIFRS9.
TheaccountingpoliciesrelatedtothiskeyauditmattercanbefoundinNote2e)andNote3.
How the scope of our audit responded to the key audit matter
Ourproceduresincluded:
O assessingandchallengingmanagement’sjudgementsinrespectoftheestimatedcontractualcashflows(includingarrangementandexitfees)throughexaminationoftheamortisationschedulespreparedforeachloantogetherwiththeimpairmentanalysis;
O recalculatinginterestincomeaccruingundertheeffectiveinterestratemethod,takingintoaccounttheimpactofanyprepaymentsandothermodificationsincontractualcashflows,totheloanbalancesandinterestincomerecognised;
O evaluatingtheimpactofanyimpairmentsontherecognitionofincomerecordedintheperiod;
O evaluatingtheimpactofanyprepaymentsorexitfeesfromearlyrepaymentsontheincomerecordedintheperiod;
O tracingscheduledcouponpaymentstobankstatements;and
O assessingthedesignandimplementationofrelevantcontrolsrelatingtorecognitionofinvestmentincome.
Key observations
Havingcarriedouttheprocedures,wefoundoutthatinterestincomeandloanrelatedfeesareappropriatelyaccountedforinthefinancialstatementsandnomaterialmisstatementswereidentifiedbyourtesting.
39ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
INDEPENDENTAUDITOR’S REPORT(CONTINUED)
OUR APPLICATION OF MATERIALITYWedefinematerialityasthemagnitudeofmisstatementinthefinancialstatementsthatmakesitprobablethattheeconomicdecisionsofareasonablyknowledgeablepersonwouldbechangedorinfluenced.Weusematerialitybothinplanningthescopeofourauditworkandinevaluatingtheresultsofourwork.
Basedonourprofessionaljudgement,wedeterminedmaterialityforthefinancialstatementsasawholeasfollows:
Group materiality £2.4million(2018:£2.36million)
Basis for determining materiality
WedeterminedmaterialityfortheGrouptobe£2.4million(31January2018:£2.36million),whichisapproximately2%(31January2018:2%)ofNetAssetValue.
Wehaveappliedalowermaterialitythresholdof£382,000(31January2018:£351,000)basedon5%ofnetincome(31January2018:5%)inrespectofloaninterestincome.
Rationale for the benchmark applied
WebelieveNetAssetValueisthemostappropriatebenchmarkasitisconsideredoneoftheprincipalconsiderationsformembersoftheGroupinassessingfinancialperformance.
Alowerthresholdhasbeenusedforloaninterestincomeassuchtransactionsareimportanttoinvestorsandprovidetherevenuetosupportdistributionstoshareholders.
Net Asset Value £120.28m
Group materiality £2.4m
Audit Committee reporting threshold
£0.12m
Net Asset Value
Group materiality
FollowingdiscussionwiththeAuditCommittee,wereassessedourreportingthresholdfromtheprioryearandagreedthatwewouldreporttotheCommitteeallauditdifferencesinexcessof£120,000(2018:£47,000)fortheGroup,aswellasdifferencesbelowthatthresholdthatinourview,warrantedreportingonqualitativegrounds.WealsoreporttotheAuditCommitteeondisclosuremattersthatweidentifiedwhenassessingtheoverallpresentationofthefinancialstatements.
AN OVERVIEW OF THE SCOPE OF OUR AUDITTheconsolidatedfinancialstatementsoftheGroupincorporatesthefinancialstatementsoftheparentcompanyanditssubsidiaryasdefinedintheopinionparagraphabove.MaterialtransactionsofthesubsidiaryandparentcompanywereincludedwithinthescopeofourauditoftheconsolidatedfinancialstatementsconductedusingtheGroupmaterialitysetoutabove.
OurauditwasscopedbyobtaininganunderstandingoftheGroupanditsenvironment,includinginternalcontrol,andassessingtherisksofmaterialmisstatement.Auditworktorespondtotherisksofmaterialmisstatementwasperformeddirectlybytheauditengagementteamforboththeparententityanditswhollyownedsubsidiary,ICG-LongbowSeniorDebtS.A.,whichholdstheportfolioofloaninvestmentsoftheGroup.
ICG-LongbowSeniorSecuredUKPropertyDebtInvestmentsLimitedusesserviceorganisationstomanagebook-keepingandsupportinthepreparationofthefinancialstatements.Assuch,wehaveassessedthedesignandimplementationofrelevantcontrolsestablishedbytheserviceorganisations.
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INDEPENDENTAUDITOR’S REPORT(CONTINUED)
OTHER INFORMATION
TheDirectorsareresponsiblefortheotherinformation.Theotherinformationcomprisestheinformationincludedintheannualreport,otherthanthefinancialstatementsandourauditor’sreportthereon.
Ouropiniononthefinancialstatementsdoesnotcovertheotherinformationandwedonotexpressanyformofassuranceconclusionthereon.
Inconnectionwithourauditofthefinancialstatements,ourresponsibilityistoreadtheotherinformationand,indoingso,considerwhethertheotherinformationismateriallyinconsistentwiththefinancialstatementsorourknowledgeobtainedintheauditorotherwiseappearstobemateriallymisstated.
Ifweidentifysuchmaterialinconsistenciesorapparentmaterialmisstatements,wearerequiredtodeterminewhetherthereisamaterialmisstatementinthefinancialstatementsoramaterialmisstatementoftheotherinformation.If,basedontheworkwehaveperformed,weconcludethatthereisamaterialmisstatementofthisotherinformation,wearerequiredtoreportthatfact.
Inthiscontext,mattersthatwearespecificallyrequiredtoreporttoyouasuncorrectedmaterialmisstatementsoftheotherinformationincludewhereweconcludethat:
O Fair, balanced and understandable–thestatementgivenbythedirectorsthattheyconsidertheannualreportandfinancialstatementstakenasawholeisfair,balancedandunderstandableandprovidestheinformationnecessaryforshareholderstoassesstheGroup’spositionandperformance,businessmodelandstrategy,ismateriallyinconsistentwithourknowledgeobtainedintheaudit;or
O Audit committee reporting–thesectiondescribingtheworkoftheauditcommitteedoesnotappropriatelyaddressmatterscommunicatedbyustotheauditcommittee;or
O Directors’ statement of compliance with the UK Corporate Governance Code–thepartsofthedirectors’statementrequiredundertheListingRulesrelatingtothecompany’scompliancewiththeUKCorporateGovernanceCodecontainingprovisionsspecifiedforreviewbytheauditorinaccordancewithListingRule9.8.10R(2)donotproperlydiscloseadeparturefromarelevantprovisionoftheUKCorporateGovernanceCode.
We have nothing to report in respect of these matters.
RESPONSIBILITIES OF DIRECTORSAsexplainedmorefullyintheDirectors’responsibilitiesstatement,theDirectorsareresponsibleforthepreparationofthefinancialstatementsandforbeingsatisfiedthattheygiveatrueandfairview,andforsuchinternalcontrolastheDirectorsdetermineisnecessarytoenablethepreparationoffinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.
Inpreparingthefinancialstatements,thedirectorsareresponsibleforassessingtheGroup’sabilitytocontinueasagoingconcern,disclosingasapplicable,mattersrelatedtogoingconcernandusingthegoingconcernbasisofaccountingunlessthedirectorseitherintendtoliquidatetheGrouportoceaseoperations,orhavenorealisticalternativebuttodoso.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTSOurobjectivesaretoobtainreasonableassuranceaboutwhetherthefinancialstatementsasawholearefreefrommaterialmisstatement,whetherduetofraudorerror,andtoissueanauditor’sreportthatincludesouropinion.Reasonableassuranceisahighlevelofassurance,butisnotaguaranteethatanauditconductedinaccordancewithISAs(UK)willalwaysdetectamaterialmisstatementwhenitexists.Misstatementscanarisefromfraudorerrorandareconsideredmaterialif,individuallyorintheaggregate,theycouldreasonablybeexpectedtoinfluencetheeconomicdecisionsofuserstakenonthebasisofthesefinancialstatements.
AfurtherdescriptionofourresponsibilitiesfortheauditofthefinancialstatementsislocatedontheFRC’swebsiteat:www.frc.org.uk/auditorsresponsibilities.Thisdescriptionformspartofourauditor’sreport.
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INDEPENDENTAUDITOR’S REPORT(CONTINUED)
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTSMatters on which we are required to report by exception
Adequacy of explanations received and accounting recordsUndertheCompanies(Guernsey)Law,2008wearerequiredtoreporttoyouif,inouropinion:
O wehavenotreceivedalltheinformationandexplanationswerequireforouraudit;or
O properaccountingrecordshavenotbeenkeptbytheparentcompany;or
O thefinancialstatementsarenotinagreementwiththeaccountingrecords.
We have nothing to report in respect of these matters.
USE OF OUR REPORTThisreportismadesolelytothecompany’smembers,asabody,inaccordancewithSection262oftheCompanies(Guernsey)Law,2008.Ourauditworkhasbeenundertakensothatwemightstatetothecompany’smembersthosematterswearerequiredtostatetotheminanauditor’sreportand/orthosematterswehaveexpresslyagreedtoreporttothemoninourengagementletterandfornootherpurpose.Tothefullestextentpermittedbylaw,wedonotacceptorassumeresponsibilitytoanyoneotherthanthecompanyandthecompany’smembersasabody,forourauditwork,forthisreport,orfortheopinionswehaveformed.
NICOLA SARAH PAUL FCAfor and on behalf of Deloitte LLPRecognised AuditorSt Peter Port, Guernsey
23April2019
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CONSOLIDATEDSTATEMENTOFCOMPREHENSIVE INCOMEFortheyearended31January2019
Notes
1 February 2018 to 31 January 2019
£
1 February 2017 to31 January 2018
£
Income
Incomefromloans 2e) 7,196,384 7,035,459
Otherfeeincomefromloans 2f),5 439,207 1,042,285
Incomefromcashandcashequivalents 6,657 1,928
Total income 7,642,248 8,079,672
Expenses
Investmentadvisoryfees 13,14 1,211,925 1,141,405
Administrationfees 13,14 163,333 170,000
Directors’remuneration 13 196,875 203,333
Luxcooperatingexpenses 169,559 153,379
Brokerfees 52,501 52,775
AuditfeesfortheCompany 15 40,000 40,000
AuditfeesfortheSubsidiary 15 12,953 12,993
Regulatoryfees 22,679 21,765
Listingfees 10,325 10,161
Legalandprofessionalfees 413,221 372,840
Otherexpenses 87,827 104,194
Total expenses 2,381,198 2,282,845
Profit for the year before tax 5,261,050 5,796,827
Taxationcharge/(credit) 4 2,803 (98,541)
Profit for the year after tax 5,258,247 5,895,368
Total comprehensive income for the year 5,258,247 5,895,368
Basic and diluted Earnings per share (pence) 9 4.36 5.33
Allitemswithintheabovestatementhavebeenderivedfromcontinuingactivities.
TheaccompanyingnotesformanintegralpartoftheseConsolidatedFinancialStatements.
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CONSOLIDATEDSTATEMENTOF FINANCIAL POSITIONAsat31January2019
TheaccompanyingnotesformanintegralpartoftheseConsolidatedFinancialStatements.
Notes31 January 2019
£31 January 2018
£
Assets
Cashandcashequivalents 7 12,370,129 6,486,150
Tradeandotherreceivables 6 126,654 202,182
Loansadvancedatamortisedcost 5 108,561,477 112,331,666
Total assets 121,058,260 119,019,998
Liabilities
Otherpayablesandaccruedexpenses 8 773,871 1,037,809
Total liabilities 773,871 1,037,809
Net assets 120,284,389 117,982,189
Equity
Sharecapital 10 119,115,310 114,857,090
Retainedearnings 1,169,079 3,125,099
Total equity attributable to the owners of the Company 120,284,389 117,982,189
Number of ordinary shares in issue at year end 10 121,302,779 117,042,779
Net Asset Value per ordinary share (pence) 9 99.16 100.80
TheFinancialStatementswereapprovedbytheBoardofDirectorson23April2019andsignedontheirbehalfby:
JACK PERRY PATRICK FIRTHChairman Director
23April2019 23April2019
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CONSOLIDATEDSTATEMENTOFCHANGES IN EQUITYFortheyearended31January2019
TheaccompanyingnotesformanintegralpartoftheseConsolidatedFinancialStatements.
NotesNumber
of shares
Sharecapital
£
Retainedearnings
£Total
£
As at 1 February 2018 117,042,779 114,857,090 3,125,099 117,982,189
Shareissue 10 4,260,000 4,302,600 – 4,302,600
Shareissuecosts 10 – (44,380) – (44,380)
Profitfortheyear – – 5,258,247 5,258,247
Dividendspaid 10 – – (7,214,267) (7,214,267)
As at 31 January 2019 121,302,779 119,115,310 1,169,079 120,284,389
Fortheyearended31January2018
NotesNumber
of shares
Sharecapital
£
Retainedearnings
£Total
£
As at 1 February 2017 108,219,250 106,038,522 6,290,172 112,328,694
Shareissue 10 8,823,529 9,000,000 – 9,000,000
Shareissuecosts 10 – (181,432) – (181,432)
Profitfortheyear – – 5,895,368 5,895,368
Dividendspaid 10 – – (9,060,441) (9,060,441)
As at 31 January 2018 117,042,779 114,857,090 3,125,099 117,982,189
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CONSOLIDATEDSTATEMENTOF CASH FLOWSFortheyearended31January2019
TheaccompanyingnotesformanintegralpartoftheseConsolidatedFinancialStatements.
Notes
1 February 2018 to31 January 2019
£
1 February 2017 to31 January 2018
£
Cash flows generated from operating activities
Profitfortheyear 5,258,247 5,895,368
Adjustmentsfornon-cashitems:
Movementinotherreceivables 75,528 (177,162)
Movementinotherpayablesandaccruedexpenses (242,282) 241,027
Movementintaxpayable (21,656) (101,760)
Loanamortisation (750,171) (706,539)
4,319,666 5,150,934
Loansadvancedlessarrangementfees (16,592,089) (11,940,000)
Loansrepaid 21,112,449 10,258,135
Netloansadvancedlessarrangementfees 4,520,360 (1,681,865)
Net cash generated from operating activities 8,840,026 3,469,069
Cash flows used in financing activities
Proceedsfromissueofshares 10 4,302,600 9,000,000
Shareissuecostspaid 10 (44,380) (181,432)
Dividendspaid 10 (7,214,267) (9,060,441)
Net cash used in financing activities (2,956,047) (241,873)
Netmovementincashandcashequivalents 5,883,979 3,227,196
Cashandcashequivalentsatthestartoftheyear 6,486,150 3,258,954
Cash and cash equivalents at the end of the year 12,370,129 6,486,150
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NOTESTOTHECONSOLIDATED FINANCIAL STATEMENTSFortheyearended31January2019
1. GENERAL INFORMATIONICG-LongbowSeniorSecuredUKPropertyDebtInvestmentsLimitedisanon-cellularcompanylimitedbysharesandwasincorporatedinGuernseyundertheCompaniesLawon29November2012withregisterednumber55917asaclosed-endedinvestmentcompany.TheregisteredofficeandprincipalplaceofbusinessoftheCompanyisHeritageHall,POBox225,LeMarchantStreet,StPeterPort,Guernsey,GY14HY,ChannelIslands.
TheCompany’sshareswereadmittedtothePremiumSegmentoftheOfficialListandtotradingontheMainMarketoftheLondonStockExchangeon5February2013.
TheConsolidatedFinancialStatementscomprisetheFinancialStatementsoftheGroupasat31January2019.
TheinvestmentobjectiveoftheGroup,asapprovedbytheshareholdersoftheCompany,istoconstructaportfolioofUKrealestatedebtrelatedinvestmentspredominantlycomprisingloanssecuredbyfirstrankingfixedchargesagainstcommercialpropertyinvestments,withtheaimofprovidingshareholderswithattractive,quarterlydividends,capitalpreservationand,overthelongerterm,adegreeofcapitalappreciation.
TheInvestmentAdviser,whichtradesunderthenameofICG-Longbow,isauthorisedandregulatedbytheFCA.TheassetsoftheCompanyaremanagedbytheBoardundertheadviceoftheInvestmentAdviserunderthetermsoftheInvestmentAdvisoryAgreement.
2. ACCOUNTING POLICIESa) Basis of preparationTheFinancialStatementsfortheyearended31January2019havebeenpreparedinaccordancewithIFRSasadoptedintheEUandtheCompaniesLaw.
InthepreparationoftheseFinancialStatements,theCompanyfollowedthesameaccountingpoliciesandmethodsofcomputationascomparedwiththoseappliedinthepreviousyear,exceptfortheclassification,measurement,impairmentandgeneralhedgeaccountingprinciplesofIFRS9;consequentialamendmentstoIFRS7FinancialInstruments:Disclosuresthatwereappliedtothedisclosuresfor2019;andotherconsequentialamendmentstootherIFRSstandardsthatareeffectiveforannualperiodsbeginningonorafter1February2018.TheadoptionofthechangesinothermandatorilyeffectiveIFRSstandardsdidnotmateriallyimpacttheCompany.
AtthedateofapprovaloftheseFinancialStatements,theGrouphasnotappliedthefollowingnewandrevisedIFRSstandardsandinterpretationsthathavebeenissuedbutyetarenoteffective:
Effective for periods commencing
IFRS9 FinancialInstruments(Amendmentsregardingprepaymentfeatureswithnegativecompensationandmodificationsoffinancialliabilities)
1January2019
IFRS11 Jointarrangements(AmendmentsresultingfromAnnualImprovements2015-2017Cycle) 1January2019
IFRS16 Leases 1January2019
IFRS17 InsuranceContracts 1January2021
IAS1 PresentationofFinancialStatements(Amendmentsregardingthedefinitionofmaterial) 1January2020
IAS8 AccountingPolicies,ChangesinAccountingEstimatesandErrors(Amendmentsregardingthedefinitionofmaterial)
1January2020
IAS12 IncomeTaxes(AmendmentsresultingfromAnnualImprovements2015-2017Cycle) 1January2019
IFRIC23 UncertaintyoverIncomeTaxTreatments 1January2019
TheDirectorsdonotanticipatethattheadoptionofthesestandardsandinterpretationsinfutureperiodswillhaveasignificantimpactontheConsolidatedFinancialStatementsoftheGroup.
New and amended IFRS Standards that are effective and have been adopted in the current year
Impact of initial application of IFRS 9 Financial InstrumentsInthecurrentyear,theGrouphasappliedIFRS9FinancialInstruments(asrevisedinJuly2014)andtherelatedconsequentialamendmentstootherIFRSStandardsthatareeffectiveforanannualperiodthatbeginsonorafter1January2018andwasadoptedbytheGroupfortheyearended31January2019.ThetransitionprovisionsofIFRS9allowanentitynottorestatecomparatives.TheGrouphaselectednottorestatecomparativesinrespectoftheclassificationandmeasurementoffinancialinstruments.
Additionally,theGroupadoptedconsequentialamendmentstoIFRS7FinancialInstruments:Disclosuresthatwereappliedtothedisclosuresfortheyearending31January2019andtothecomparativeperiod.
IFRS9introducednewrequirementsfor:
1) Theclassificationandmeasurementoffinancialassetsandfinancialliabilities,
2) Impairmentoffinancialassets;and
3) Generalhedgeaccounting.
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2. ACCOUNTING POLICIES (CONTINUED)a) Basis of preparation (continued)DetailsofthesenewrequirementsaswellastheirimpactontheGroup’sConsolidatedFinancialStatementsaredescribedbelow.
TheGrouphasappliedIFRS9inaccordancewiththetransitionprovisionssetoutinIFRS9.
(a) Classification and measurement of financial assetsThedateofinitialapplication(i.e.thedateonwhichtheGrouphasassesseditsexistingfinancialassetsandfinancialliabilitiesintermsoftherequirementsofIFRS9)is1February2018.Accordingly,theGrouphasappliedtherequirementsofIFRS9toinstrumentsthatcontinuetoberecognisedasat1February2018andhasnotappliedtherequirementstoinstrumentsthathadalreadybeenderecognisedasat1February2018.Comparativeamountsinrelationtoinstrumentsthatcontinuetoberecognisedasat1February2018havenotbeenrestated.
AllrecognisedfinancialassetsthatarewithinthescopeofIFRS9arerequiredtobemeasuredsubsequentlyatamortisedcostorfairvalueonthebasisoftheentity’sbusinessmodelformanagingthefinancialassetsandthecontractualcashflowcharacteristicsofthefinancialassets.
TheDirectorsoftheCompanyreviewedandassessedtheGroup’sexistingfinancialassetsasat1February2018basedonthefactsandcircumstancesthatexistedatthatdateandconcludedthattheinitialapplicationofIFRS9hashadthefollowingimpactontheGroup’sfinancialassetsasregardstheirclassificationandmeasurement:
O Financialassetsclassifiedasheld-to-maturityandloansandreceivablesunderIAS39thatweremeasuredatamortisedcostcontinuetobemeasuredatamortisedcostunderIFRS9astheyareheldwithinabusinessmodeltocollectcontractualcashflowsandthesecashflowsconsistsolelyofpaymentsofprincipalandinterestontheprincipalamountoutstanding;and
O Changesinthewayinwhichallowanceforcreditlosses(impairment)aremeasured,asdescribedbelow.ThechangehadnomaterialimpacttotheGroup.
(b) Impairment of financial assetsInrelationtotheimpairmentoffinancialassets,IFRS9requiresanexpectedcreditlossmodelasopposedtoanincurredcreditlossmodelunderIAS39.TheexpectedcreditlossmodelrequirestheGrouptoaccountforECLandchangesinthoseECLateachreportingdatetoreflectchangesincreditrisksinceinitialrecognitionofthefinancialassets.Inotherwords,itisnolongernecessaryforacrediteventtohaveoccurredbeforecreditlossesarerecognised.
Inparticular,IFRS9requirestheGrouptomeasurethelossallowanceforafinancialinstrumentatanamountequaltothelifetimeECLifthecreditriskonthatfinancialinstrumenthasincreasedsignificantlysinceinitialrecognition,orifthefinancialinstrumentisapurchasedororiginatedcredit-impairedfinancialasset.
However,ifthecreditriskonafinancialinstrumenthasnotincreasedsignificantlysinceinitialrecognition(exceptforapurchasedororiginatedcredit-impairedfinancialasset),theGroupisrequiredtomeasurethelossallowanceforthatfinancialinstrumentatanamountequalto12-monthsECL.IFRS9alsorequiresasimplifiedapproachformeasuringthelossallowanceatanamountequaltolifetimeECLfortradereceivables,contractassetsandleasereceivablesincertaincircumstances.
(c) Classification and measurement of financial liabilitiesTheapplicationofIFRS9hashadnoimpactontheclassificationandmeasurementoftheGroup’sfinancialliabilities.
(d) General hedge accountingTheapplicationoftheIFRS9hedgeaccountingrequirementshashadnoimpactontheresultsandfinancialpositionoftheGroupforthecurrentand/orprioryears.
AssessmentTheadoptionofIFRS9hasnothadamaterialimpactontheGroup’sConsolidatedFinancialStatements.ThisisbasedonthefollowingsummaryofGroup’stransactionsandactivity:
O Cashandcashequivalents–initialrecognitionatfairvalueandsubsequentmeasurementatamortisedcostunderbothIAS39andIFRS9;
O Tradeandotherreceivables–initialrecognitionatfairvalueandsubsequentmeasurementcontinuestobeheldatamortisedcostunderbothIAS39andIFRS9.AsnotedinNote2a)andNote2d)theimpairmentprovisionshasnothadamaterialimpactontheGroup;and
O Otherpayablesandaccruedexpenses–initialrecognitionatfairvalueandsubsequentmeasurementcontinuestobeheldatamortisedcostunderbothIAS39andIFRS9.
O Loansadvancedatamortisedcost–initialrecognitionatamortisedcostandsubsequentmeasurementcontinuestobeheldatamortisedcostunderbothIAS39andIFRS9.Asnotedbelow,theimpairmentprovisionhasnothadamaterialimpactontheGroup.
TheGrouphasadoptedtheInvestmentAdviser’sinternalcreditratingmethodologyanduseditslossexperiencetobenchmarkinvestmentperformanceandpotentialimpairmentforbothStage1andStage2loansunderIFRS9consideringbothprobabilityofdefaultandECL.
BasedontheGroup’sinternalcreditratingmodelanditspriorexperiencetogetherwiththatoftheInvestmentAdviser,seniorloans(lessthan65%dayoneLTV),typicallyachievean“investmentgrade”equivalentcreditrating.WhilstloanswithaLTVover65%maybeconsideredsub-investmentgrade.Theriskoflossismitigatedbythequalityoftheunderlyingpropertyandthestrengthsofthefinancialcovenantswhichenablethelendertotakeearlypreventativemeasures.TodatetheGrouphasnotexperiencedanycreditlosses.TheGrouphasadoptedtheInvestmentAdviser’sinternalcreditratingmethodologyanduseditslossexperiencetobenchmarkinvestmentperformanceandpotentialimpairmentforbothStage1andStage2loansunderIFRS9consideringbothprobabilityofdefaultandECL.
InaccordancewiththeGroup’sIFRS9policythecredit-worthinessofeachinvestmenthasbeenreviewedusingICG-Longbow‘sinternalratingsmodels.
Afterthereviewprocess,theGroupdoesnotconsiderthattherearespecialcircumstances,whichwouldincreasethebaselineprobabilityofdefaultandaccordinglynoIFRS9ECLprovisionhasbeentakenagainstanyloan.
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NOTESTOTHECONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)b) Going concernTheDirectors,atthetimeofapprovingtheFinancialStatements,haveareasonableexpectationthattheGrouphasadequateresourcestocontinueinoperationalexistenceforaperiodofatleasttwelvemonthsfromthedateofapprovaloftheConsolidatedFinancialStatementsanddonotconsidertheretobeanythreattothegoingconcernstatusoftheGroup.
TheGroupisnowsubstantiallyinvestedwithloansadvancedatamortisedcostrepresenting90.25%ofthetotalequityattributabletotheownersoftheCompanyandexpectsthattheloanportfoliowillgenerateenoughcashflowstopayon-goingexpensesandreturnstoshareholders.TheDirectorshaveconsideredthecashpositionandperformancesofcurrentinvestmentsmadebytheGroupandhaveconcludedthatitisappropriatetoadoptthegoingconcernbasisofaccountinginpreparingtheFinancialStatements.
Thefirstcontinuationvotewasheldon1March2017andpassedbytheshareholders.Therequirementforsubsequentannualcontinuationvoteshasbeenamendedsothatanyfollow-oncontinuationresolutionsshallbeheldeveryfiveyearsandtheDirectorsshallproposeanordinaryresolutionthattheCompanycontinuesitsbusinessasaclosed-endedcollectiveinvestmentscheme.Thefirstfollow-oncontinuationresolutionwillberequiredonorbeforetheAnnualGeneralMeetingoftheCompanytobeheldin2022.
c) Basis of consolidation TheConsolidatedFinancialStatementsincorporatetheFinancialStatementsoftheCompanyandentitiescontrolledbytheCompany(itssubsidiaries)madeupto31Januaryeachyear.ControlisachievedwheretheCompanyhasthepowertogovernthefinancialandoperatingpoliciesofaninvesteeentitysoastoobtainbenefitsfromitsactivities.
TheresultsofsubsidiariesacquiredordisposedofduringtheyearareincludedintheConsolidatedStatementofComprehensiveIncomefromtheeffectivedateofacquisitionoruptotheeffectivedateofdisposal,asappropriate.
Wherenecessary,adjustmentsaremadetotheFinancialStatementsofsubsidiariestobringtheaccountingpoliciesusedintolinewiththoseusedbytheGroup.Allintra-grouptransactions,balances,incomeandexpensesareeliminatedonconsolidation.
TheGroupisnotconsideredan‘InvestmentEntity’asdefinedbyIFRS10ConsolidatedFinancialStatementsasitdoesnotmeetthecriteriasetouttherein,specificallyitdoesnotmeasureandevaluatetheperformanceofsubstantiallyallofitsinvestmentsonafairvaluebasis.
d) Functional and presentation currencyTheFinancialStatementsarepresentedinPoundsSterling,whichisthefunctionalcurrencyaswellasthepresentationcurrencyasalltheGroup’sinvestmentsandmosttransactionsaredenominatedinPoundsSterling.
e) Interest incomeInterestincomeisrecognisedwhenitisprobablethattheeconomicbenefitswillflowtotheGroupandtheamountofrevenuecanbemeasuredreliably.Interestincomeisaccruedonatimebasis,byreferencetotheprincipaloutstandingandattheeffectiveinterestrateapplicable,whichistheratethatexactlydiscountsestimatedfuturecashreceiptsthroughtheexpectedlifeofthefinancialassettothatasset’snetcarryingamountoninitialrecognition.Arrangementandexitfeeswhichareconsideredtobeanintegralpartofthecontractareincludedintheeffectiveinterestratecalculation.
Interestoncashandcashequivalentsisrecognisedonanaccrualsbasis.
f) Other fee incomeOtherfeeincomeincludesprepaymentandotherfeesdueunderthecontractualtermsofthedebtinstruments.Suchfeesandrelatedcashreceiptsarenotconsideredtoformanintegralpartoftheeffectiveinterestrateandareaccountedforonanaccrualsbasis.
g) Operating expensesOperatingexpensesaretheGroup’scostsincurredinconnectionwiththeon-goingmanagementoftheGroup’sinvestmentsandadministrativecosts.Operatingexpensesareaccountedforonanaccrualsbasis.
h) TaxationTheCompanyisexemptfromGuernseytaxationundertheIncomeTax(ExemptBodies)(Guernsey)Ordinance1989forwhichitpaysanannualfeeof£1,200whichisincludedwithinotherexpenses.TheCompanyisrequiredtoapplyannuallytoobtainexemptstatusforthepurposesofGuernseyTaxation.
TheGroupisliabletoLuxembourgtaxarisingontheresultsandcapitalisationofitsLuxembourgregisteredentitywhichisincludedintaxchargefortheyear(seeNote4).
i) DividendsDividendspaidduringtheyeararedisclosedintheConsolidatedStatementofChangesinEquity.DividendsdeclaredpostyearendaredisclosedinNote17.
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2. ACCOUNTING POLICIES (CONTINUED)j) Segmental reportingOperatingsegmentsarereportedinamannerconsistentwiththeinternalreportingprovidedtothechiefoperatingdecision-maker.Thechiefoperatingdecision-maker,whoisresponsibleforallocatingresourcesandassessingperformanceoftheoperatingsegments,hasbeenidentifiedastheBoardofDirectors,asawhole.ThekeymeasureofperformanceusedbytheBoardtoassesstheGroup’sperformanceandtoallocateresourcesisthetotalreturnontheGroup’sNetAssetValue,ascalculatedunderIFRS,andthereforenoreconciliationisrequiredbetweenthemeasureofprofitorlossusedbytheBoardandthatcontainedintheFinancialStatements.
Formanagementpurposes,theGroupisorganisedintoonemainoperatingsegment,beingtheprovisionofadiversifiedportfolioofUKcommercialpropertybackedseniordebtinvestments.
ThemajorityoftheGroup’sincomeisderivedfromloanssecuredoncommercialandresidentialpropertyintheUnitedKingdom.
DuetotheGroup’snatureithasnoemployees.
TheGroup’sresultsdonotvarysignificantlyduringreportingperiodsasaresultofseasonalactivity.
k) Financial instruments FinancialassetsandfinancialliabilitiesarerecognisedintheGroup’sConsolidatedStatementofFinancialPositionwhentheGroupbecomesapartytothecontractualprovisionsoftheinstrument.FinancialassetsandfinancialliabilitiesareonlyoffsetandthenetamountreportedintheConsolidatedStatementofFinancialPositionandConsolidatedStatementofComprehensiveIncomewhenthereisacurrentlyenforceablelegalrighttooffsettherecognisedamountsandtheGroupintendstosettleonanetbasisorrealisetheassetandliabilitysimultaneously.
Financial assetsAllfinancialassetsarerecognisedandde-recognisedonatradedatewherethepurchaseorsaleofafinancialassetisunderacontractwhosetermsrequiredeliveryofthefinancialassetwithinthetimeframeestablishedbythemarketconcerned,andareinitiallymeasuredatfairvalue,plustransactioncosts,exceptforthosefinancialassetsclassifiedasatfairvaluethroughprofitorloss,whichareinitiallymeasuredatfairvalue.
Financialassetsareclassifiedintothefollowingspecifiedcategories:financialassetsatfairvaluethroughprofitorloss,financialassetsatfairvaluethroughOCIorfinancialassetsatamortisedcost.Theclassificationdependsonthenatureandpurposeofthefinancialassetsandisdeterminedatthetimeofinitialrecognition.
TheGroup’sfinancialassetscurrentlycompriseloans,tradeandotherreceivablesandcashandcashequivalents.
i) Loans and receivablesTheseassetsarenon-derivativefinancialassetswithfixedordeterminablepaymentsthatarenotquotedinanactivemarket.Theycompriseloansandtradeandotherreceivables.
Theyareinitiallyrecognisedatfairvalueplustransactioncoststhataredirectlyattributabletotheacquisition,andsubsequentlycarriedatamortisedcostusingtheeffectiveinterestratemethod,lessallowanceforECL.Theeffectofdiscountingonthesetradeandotherreceivablesisnotconsideredtobematerial.
TheGrouphasloansandreceivableswithaprepaymentoptionembedded.Thekeyfactorsconsideredinthevaluationofprepaymentoptionsincludetheexerciseprice,theinterestrateofthehostloancontract,differentialtocurrentmarketinterestrates,theriskfreerateofinterest,contractualtermsoftheprepaymentoption,andtheexpectedtermoftheoption.Giventhelowprobabilityofexerciseandundeterminableexercisedate,thevalueattributedtotheseembeddedderivativesisconsideredtobe£nil(31January2018:£nil).
ii) Derecognition of financial assetsAfinancialasset(inwholeorinpart)isderecognisedeitherwhen:
O theGrouphastransferredsubstantiallyalltherisksandrewardsofownership;or
O ithasneithertransferrednorretainedsubstantiallyalltherisksandrewardsandwhenitnolongerhascontrolovertheassetsoraportionoftheasset;or
O thecontractualrighttoreceivecashflowhasexpired.
iii) Cash and cash equivalentsCashandcashequivalentscomprisecashonhandanddemanddepositsandothershort-termhighlyliquidinvestmentswithanoriginalmaturityofthreemonthsorlessthatarereadilyconvertibletoaknownamountofcashandaresubjecttoaninsignificantriskofchangesinvalue.
iv) Effective interest rate methodTheeffectiveinterestratemethodisamethodofcalculatingtheamortisedcostofadebtinstrumentandofallocatinginterestincomeovertherelevantperiod.Theeffectiveinterestrateistheratethatexactlydiscountsestimatedfuturecashreceipts(includingallfeespaidorreceivedthatformanintegralpartoftheeffectiveinterestrate,transactioncostsandotherpremiumsordiscounts)throughtheexpectedlifeofthedebtinstrument,or,whereappropriate,ashorterperiod,tothenetcarryingamountoninitialrecognition.
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2. ACCOUNTING POLICIES (CONTINUED)k) Financial instruments (continued)v) Impairment of financial assets
TheGrouprecognisesalossallowanceforECLontradereceivablesandloanreceivables.TheamountofECLisupdatedateachreportingdatetoreflectchangesincreditrisksinceinitialrecognitionoftherespectivefinancialinstrument.TheGroupalwaysrecognises12-monthECLfortradereceivablesandloanreceivablesthatfallunderstage1assets.
Forstage2assets,theGrouprecogniseslifetimeECLwhentherehasbeenasignificantincreaseincreditrisksinceinitialrecognition.TheECLonthesefinancialassetsareestimatedusingaprovisionmatrixbasedontheGroup’shistoricalcreditlossexperience,adjustedforfactorsthatarespecifictothedebtors,generaleconomicconditionsandanassessmentofboththecurrentaswellastheforecastdirectionofconditionsatthereportingdate,includingtimevalueofmoneywhereappropriate.
vi) Significant increase in credit riskInassessingwhetherthecreditriskonafinancialinstrumenthasincreasedsignificantlysinceinitialrecognition,theGroupcomparestheriskofadefaultoccurringonthefinancialinstrumentatthereportingdatewiththeriskofadefaultoccurringonthefinancialinstrumentatthedateofinitialrecognition.Inmakingthisassessment,theGroupconsidersbothquantitativeandqualitativeinformationthatisreasonableandsupportable,includinghistoricalexperienceandforward-lookinginformationthatisavailablewithoutunduecostoreffort.Forward-lookinginformationconsideredincludesthefutureprospectsoftheindustriesinwhichtheGroup’sdebtorsoperate,obtainedfromeconomicexpertreports,financialanalysts,governmentalbodies,relevantthink-tanksandothersimilarorganisations,aswellasconsiderationofvariousexternalsourcesofactualandforecasteconomicinformationthatrelatetotheGroup’scoreoperations.
Inparticular,thefollowinginformationistakenintoaccountwhenassessingwhethercreditriskhasincreasedsignificantlysinceinitialrecognition:
O anactualorexpectedsignificantdeteriorationinthefinancialinstrument’sexternal(ifavailable)orinternalcreditrating;
O significantdeteriorationinexternalmarketindicatorsofcreditriskforaparticularfinancialinstrument,e.g.asignificantincreaseinthecreditspread,thecreditdefaultswappricesforthedebtor,orthelengthoftimeortheextenttowhichthefairvalueofafinancialassethasbeenlessthanitsamortisedcost;
O existingorforecastadversechangesinbusiness,financialoreconomicconditionsthatareexpectedtocauseasignificantdecreaseinthedebtor’sabilitytomeetitsdebtobligations;
O anactualorexpectedsignificantdeteriorationintheoperatingresultsofthedebtor;
O significantincreasesincreditriskonotherfinancialinstrumentsofthesamedebtor;or
O anactualorexpectedsignificantadversechangeintheregulatory,economic,ortechnologicalenvironmentofthedebtorthatresultsinasignificantdecreaseinthedebtor’sabilitytomeetitsdebtobligations.
Despitetheforegoing,theGroupassumesthatthecreditriskonafinancialinstrumenthasnotincreasedsignificantlysinceinitialrecognitionifthefinancialinstrumentisdeterminedtohavelowcreditriskatthereportingdate.Afinancialinstrumentisdeterminedtohavelowcreditriskif:
(1)Thefinancialinstrumenthasalowriskofdefault;
(2)Thedebtorhasastrongcapacitytomeetitscontractualcashflowobligationsinthenearterm;and
(3)Adversechangesineconomicandbusinessconditionsinthelongertermmay,butwillnotnecessarily,reducetheabilityoftheborrowertofulfilitscontractualcashflowobligations.
TheGroupconsidersafinancialassettohavelowcreditriskwhentheassethasexternalcreditratingof‘investmentgrade’inaccordancewiththegloballyunderstooddefinitionorifanexternalratingisnotavailable,theassethasaninternalratingof‘performing’.Performingmeansthatthecounterpartyhasastrongfinancialpositionandtherearenopastdueamounts.
TheGroupregularlymonitorstheeffectivenessofthecriteriausedtoidentifywhethertherehasbeenasignificantincreaseincreditriskandrevisesthemasappropriatetoensurethatthecriteriaarecapableofidentifyingsignificantincreaseincreditriskbeforetheamountbecomespastdue.
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2. ACCOUNTING POLICIES (CONTINUED)k) Financial instruments (continued) vii) Definition of default
TheGroupconsidersthefollowingasconstitutinganeventofdefaultforinternalcreditriskmanagementpurposesashistoricalexperienceindicatesthatfinancialassetsthatmeeteitherofthefollowingcriteriaaregenerallynotrecoverable:
O whenthereisabreachoffinancialcovenantsbythedebtor;or
O informationdevelopedinternallyorobtainedfromexternalsourcesindicatesthatthedebtorisunlikelytopayitscreditors,includingtheGroup,infull(withouttakingintoaccountanycollateralheldbytheGroup).
viii) Credit-impaired financial assetsAfinancialassetiscredit-impairedwhenoneormoreeventsthathaveadetrimentalimpactontheestimatedfuturecashflowsofthatfinancialassethaveoccurred.Evidencethatafinancialassetiscredit-impairedincludesobservabledataaboutthefollowingevents:
(a)significantfinancialdifficultyoftheissuerortheborrower;
(b)abreachofcontract,suchasadefaultorpastdueevent(see(vii)above);
(c)thelendersoftheborrower,foreconomicorcontractualreasonsrelatingtotheborrower’sfinancialdifficultyhavinggrantedtotheborroweraconcessionsthatthelenderswouldnototherwiseconsider;
(d)itisbecomingprobablethattheborrowerwillenterbankruptcyorotherfinancialreorganisation;or
(e)thedisappearanceofanactivemarketforthatfinancialassetbecauseoffinancialdifficulties.
ix) Write-off policyTheGroupwritesoffafinancialassetwhenthereisinformationindicatingthatthedebtorisinseverefinancialdifficultyandthereisnorealisticprospectofrecovery,e.g.whenthedebtorhasbeenplacedunderliquidationorhasenteredintobankruptcyproceedings,orinthecaseofloanreceivables,whentheamountsareovertwoyearspastdue,whicheveroccurssooner.FinancialassetswrittenoffmaystillbesubjecttoenforcementactivitiesundertheGroup’srecoveryprocedures,takingintoaccountlegaladvicewhereappropriate.Anyrecoveriesmadearerecognisedinprofitorloss.
x) Measurement and recognition of ECLThemeasurementofECLisafunctionoftheprobabilityofdefault,lossgivendefault(i.e.themagnitudeofthelossifthereisadefault)andtheexposureatdefault.Theassessmentoftheprobabilityofdefaultandlossgivendefaultisbasedonhistoricaldataadjustedbyforward-lookinginformationasdescribedabove.Asfortheexposureatdefault,forfinancialassets,thisisrepresentedbytheasset’sgrosscarryingamountatthereportingdate.
Forfinancialassets,theexpectedcreditlossisestimatedasthedifferencebetweenallcontractualcashflowsthatareduetotheGroupinaccordancewiththecontractandallthecashflowsthattheGroupexpectstoreceive,discountedattheoriginaleffectiveinterestrate.
IftheGrouphasmeasuredthelossallowanceforafinancialinstrumentatanamountequaltolifetimeECLinthepreviousreportingperiod,butdeterminesatthecurrentreportingdatethattheconditionsforlifetimeECLarenolongermet,theGroupmeasuresthelossallowanceatanamountequalto12-monthECLatthecurrentreportingdate,exceptforassetsforwhichsimplifiedapproachwasused.
TheGroup’smeasurementofECLreflectsanunbiasedandprobability-weightedamountthatisdeterminedbyevaluatingtherangeofpossibleoutcomesaswellasincorporatingthetimevalueofmoney.TheGrouphasalsoconsideredreasonableandsupportableinformationfrompastevents,currentconditionsandreasonableandsupportableforecastsforfutureeconomicconditionswhenmeasuringECL.
xi) Modification of cash flowsHavingperformedadequateduediligenceprocedures,theGroupmaynegotiateorotherwisemodifythecontractualcashflowsofloanstocustomers,usuallyasaresultofloanextensions.Whenthishappens,theGroupassesseswhetherornotthenewtermsaresubstantiallydifferenttotheoriginalterms.
Ifthetermsarenotsubstantiallydifferent,therenegotiationormodificationdoesnotresultinderecognition,andtheGrouprecalculatesthegrosscarryingamountbasedontherevisedcashflowsofthefinancialassetandrecognisesamodificationgainorlossinprofitorloss.Thenewgrosscarryingamountisrecalculatedbydiscountingthemodifiedcashflowsattheoriginaleffectiveinterestrate.
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2. ACCOUNTING POLICIES (CONTINUED)k) Financial instruments (continued) xii) Derecognition of financial assets
TheGroupderecognisesafinancialassetonlywhenthecontractualrightstothecashflowsfromtheassetexpire,orwhenittransfersthefinancialassetandsubstantiallyalltherisksandrewardsofownershipoftheassettoanotherentity.IftheGroupneithertransfersnorretainssubstantiallyalltherisksandrewardsofownershipandcontinuestocontrolthetransferredasset,theGrouprecognisesitsretainedinterestintheassetandanassociatedliabilityforamountsitmayhavetopay.IftheGroupretainssubstantiallyalltherisksandrewardsofownershipofatransferredfinancialasset,theGroupcontinuestorecognisethefinancialassetandalsorecognisesacollateralisedborrowingfortheproceedsreceived.
Onderecognitionofafinancialassetmeasuredatamortisedcost,thedifferencebetweentheasset’scarryingamountandthesumoftheconsiderationreceivedandreceivableisrecognisedinprofitorloss.
O Stage1coversfinancialassetsthathavenotdeterioratedsignificantlyincreditrisksinceinitialrecognition;
O Stage2coversfinancialassetsthathavesignificantlydeterioratedincreditqualitysinceinitialrecognition;and
O Stage3coversfinancialassetsthathaveobjectiveevidenceofimpairmentatthereportingdate.
TwelvemonthECLarerecognisedinstage1,whilelifetimeECLarerecognisedinstages2and3.
Financial liabilitiesTheclassificationoffinancialliabilitiesatinitialrecognitiondependsonthepurposeforwhichthefinancialliabilitywasissuedanditscharacteristics.
Allfinancialliabilitiesareinitiallyrecognisedatfairvaluenetoftransactioncostsincurred.Allpurchasesoffinancialliabilitiesarerecordedonatradedate,beingthedateonwhichtheGroupbecomespartytothecontractualrequirementsofthefinancialliability.UnlessotherwiseindicatedthecarryingamountsoftheGroup’sfinancialliabilitiesapproximatetotheirfairvalues.
TheGroup’sfinancialliabilitiesconsistofonlyfinancialliabilitiesmeasuredatamortisedcost.
i) Financial liabilities measured at amortised costTheseincludetradepayablesandothershort-termmonetaryliabilities,whichareinitiallyrecognisedatfairvalueandsubsequentlycarriedatamortisedcostusingtheeffectiveinterestratemethod.
ii) Derecognition of financial liabilitiesTheGroupderecognisesfinancialliabilitieswhen,andonlywhen,theGroup’sobligationsaredischarged,cancelledorhaveexpired.Thedifferencebetweenthecarryingamountofthefinancialliabilityderecognisedandtheconsiderationpaidandpayableisrecognisedinprofitorloss.
l) Equity instrumentsAnequityinstrumentisanycontractthatevidencesaresidualinterestintheassetsofanentityafterdeductingallofitsliabilities.EquityinstrumentsissuedbytheCompanyarerecognisedastheproceedsreceived,netofdirectissuecosts.
3. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES IN APPLYING THE GROUP’S ACCOUNTING POLICIESThepreparationoftheFinancialStatementsunderIFRSrequiresmanagementtomakejudgements,estimatesandassumptionsthataffecttheapplicationofpoliciesandreportedamountsofassetsandliabilities,incomeandexpenses.Theestimatesandassociatedassumptionsarebasedonhistoricalexperienceandotherfactorsthatarebelievedtobereasonableunderthecircumstances,theresultsofwhichformthebasisofmakingjudgementsaboutcarryingvaluesofassetsandliabilitiesthatarenotreadilyapparentfromothersources.Actualresultsmaydifferfromtheseestimates.
Theestimatesandunderlyingassumptionsarereviewedonanon-goingbasis.Revisionstoaccountingestimatesarerecognisedintheperiodinwhichtheestimateisrevisediftherevisionaffectsonlythatperiodorintheperiodoftherevisionandfutureperiodsiftherevisionaffectsbothcurrentandfutureperiods.
Critical judgementsInassessingtheECL,theBoardhavemadecriticaljudgementsinrelationtothestagingoftheloansandassessmentswhichimpactthelossgivendefault.InassessingwhethertheloanshaveincurredasignificantincreaseincreditrisktheInvestmentAdviser,onbehalfoftheBoard,assessesthecreditriskattachingtoeachoftheloans.TheGrouphasadoptedtheInvestmentAdviser’sinternalcreditratingmethodologyandhasuseditslossexperiencetobenchmarkinvestmentperformanceandpotentialimpairmentforbothStage1andStage2loansunderIFRS9consideringbothprobabilityofdefaultandexpectedcreditlosses.ThejudgementappliedinallocatingeachinvestmenttoStage1,2or3iskeyindecidingwhetherlossesareconsideredforthenext12monthsoroverthelifeoftheloan.TheBoardhasestimatedthattwoloanshaveshownevidenceofsignificantcreditriskinrelationtoreductioninLTVandICR.InassessingtheultimateECLinrelationtotheseloans,theBoardhasmadeassumptionsregardingthecollateralvalue,headroomovertheprincipalloanamountsand,inthecaseoftheMeadowloan,theexpectationthatplanningpermissionwillbegranted.
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3. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES IN APPLYING THE GROUP’S ACCOUNTING POLICIES (CONTINUED)Critical accounting estimatesThemeasurementofboththeinitialandongoingexpectedcreditlossallowanceforloanreceivablesmeasuredatamortisedcostisanareathatrequirestheuseofsignificantassumptionsaboutcreditbehavioursuchaslikelihoodofborrowersdefaultingandtheresultinglosses.ThisisdescribedfurtherinNote2k).InassessingtheprobabilityofdefaulttheBoardhastakennoteoftheexperienceandlosshistoryoftheInvestmentAdviserwhichmaynotbeindicativeoffuturelosses.ThedefaultprobabilitiesarebasedonLTVheadroomwhichtheInvestmentAdviserbelievestobeagoodpredictoroftheprobabilityofdefault,inaccordancewithrecentmarketstudiesofEuropeancommercialrealestateloans.TheDirectorsconsiderthelossgivendefaulttobeclosetozeroastheloansarethesubjectofverydetailedduediligenceproceduresoninceptionand,inaddition,thereissignificantLTVheadroom.Asaresult,nolossallowancehasbeenrecognisedbasedon12-monthexpectedcreditlossesforthoseinstage1andorlifetimelossesforthoseinstage2,asanysuchimpairmentwouldbewhollyinsignificanttotheGroup.
RevenuerecognitionisconsideredasignificantaccountingjudgementandestimatethattheDirectorsmakeintheprocessofapplyingtheGroup’spolicies(seeNotes2e)and2f)).
FurthertheDirectorsmakeestimatesindeterminingthefairvalueofprepaymentoptionsembeddedwithinthecontractsforloansadvanced.Thekeyfactorsconsideredinthevaluationofprepaymentoptionsincludetheexerciseprice,theinterestrateofthehostloancontract,differentialtocurrentmarketinterestrates,theriskfreerateofinterest,contractualtermsoftheprepaymentoption,andtheexpectedtermoftheoption.
4.TAXATIONTheGroup’staxchargeof£2,803(31January2018:credit£98,541)consistsoftaxesandnon-deductibleVATleviedonLuxco.Thenetwealthtaxchargewasnilforthefinancialyearended31January2019(31January2018:£4,365).Thenetwealthtaxcharge,setatarateof0.5%(31January2018:0.5%),onLuxco’sglobalassets(networth),determinedasatthe1Januaryofeachcalendaryear.Thecorporateincometaxcharge,includingcorporateincometaxandmunicipalbusinesstax,amountedto£nilfor2019(31January2018:£nil)setbytheLuxembourgTaxAdministration.
1 February 2018 to 31 January 2019
£
1 February 2017 to 31 January 2018
£
Netwealthtax–currentyear – 4,365
Netwealthtax–prioryear – (27,470)
Fixedincometax–currentyear (285) –
Fixedincometax–prioryear – (75,316)
Municipalbusinesstax–currentyear – –
Municipalbusinesstax–prioryear – (875)
Non-deductibleVAT 3,088 755
2,803 (98,541)
5.LOANS ADVANCED(i) Loans advanced
31 January 2019
Principal advanced
£
31 January 2019At
amortised cost
£
31 January 2018
Principal advanced
£
31 January 2018At
amortised cost
£
IRAF – – 11,935,000 12,150,584
Meadow 21,500,000 21,941,471 20,000,000 20,413,021
Northlands 8,500,000 8,692,447 7,577,250 7,690,133
Hulbert – – 6,565,000 6,666,450
Halcyon 6,423,280 6,570,708 8,600,000 8,730,605
Carrara 1,300,000 1,331,708 1,300,000 1,319,743
Ramada 7,982,500 8,151,125 7,982,500 8,077,179
CommercialRegionalSpace 22,400,000 22,620,181 22,400,000 22,556,213
BMO 15,793,727 15,807,533 15,793,727 15,770,768
Quattro 9,000,000 9,007,986 9,000,000 8,956,970
Affinity 14,322,039 14,438,318 – –
107,221,546 108,561,477 111,153,477 112,331,666
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5.LOANS ADVANCED (CONTINUED)(ii) Valuation considerationsTheDirectorsconsiderthatthecarryingvalueamountsoftheloans,recordedatamortisedcostintheFinancialStatements,areapproximatelyequaltotheirfairvalue.Noelementoftheloansadvancedispastdueorimpaired.ForfurtherinformationandtheassociatedrisksseetheInvestmentAdviser’sReport,theStatementofPrincipalRisksandNote11.
Amortisedcostiscalculatedusingtheeffectiveinterestratemethodwhichtakesintoaccountallcontractualterms(includingarrangementandexitfees)thatareanintegralpartoftheloanagreement.Asthesefeesaretakenintoaccountwhendetermininginitialnetcarryingvalue,theirrecognitioninprofitorlossiseffectivelyspreadoverthelifeoftheloan.TheGroup’saccountingpolicyonthemeasurementoffinancialassetsisdiscussedfurtherinNote2k).
TheGroup’sinvestmentsareintheformofbilateralloans,andassuchareilliquidinvestmentswithnoreadilyavailablesecondarymarket.Whilstthetermsofeachloanincludesrepaymentandprepaymentfees,intheabsenceofaliquidsecondarymarket,theDirectorsdonotbelieveawillingbuyerwouldpayapremiumtotheparvalueoftheloanstorecognisesuchtermsandassuchtheamortisedcostisconsideredrepresentativeofthefairvalueoftheloans.
Eachpropertyonwhichinvestmentsaresecuredwassubjecttoanindependent,thirdpartyvaluationatthetimetheinvestmentwasenteredinto.Allinvestmentsaremadeonaholdtomaturitybasis.Eachinvestmentismonitoredonaquarterlybasis,inlinewiththeunderlyingpropertyrentalcycle,includingareviewoftheperformanceoftheunderlyingpropertysecurity.Nomarketorothereventshavebeenidentifiedthroughthisreviewprocesswhichwouldresultinafairvalueoftheinvestmentssignificantlydifferenttothecarryingvalue.
Whilsttheloansareperformingandthebalanceoutstandingineachcaseisatasubstantialdiscounttothevalueoftheunderlyingrealestateonwhichtheyaresecured,theDirectorsdonotconsideranyloantobesubjecttospecificimpairment,orfortheretobeariskofnotachievingfullrecovery.
(iii) IFRS 9 – Impairment of Financial AssetsInaccordancewiththeGroup’sAccountingPolicyforFinancialInstrumentsassetoutinNote2k)(v)above,theBoardisrequiredtoconsiderthefuturepotentialimpairmentoftheloanportfolio.Accordingly,theinternalcreditratingofeachloanasat31January2019hasbeenreviewed.Twoloansshowedadeteriorationintheirinternalcreditratingsince31January2018andhavebeenidentifiedasastage2assets;allotherloansshowednodeterioration,andwereconsideredasStage1assetswithnoECLoveratwelvemonthperiod.
As at 31 January 2019
Stage 1 Stage 2 Stage 3 Total
Principaladvanced 76,721,546 30,500,000 – 107,221,546
Grosscarryingvalue 77,612,020 30,949,457 – 108,561,477
LessECLallowance – – –
77,612,020 30,949,457 – 108,561,477
As at 31 January 2018
Stage 1 Stage 2 Stage 3 Total
Principaladvanced 76,721,546 30,500,000 – 107,221,546
Grosscarryingvalue 112,331,666 – – 112,331,666
LessECLallowance – – – –
112,331,666 – – 112,331,666
ThetwoStage2loanswereQuattroandMeadow.InthecaseofMeadowthedeteriorationincreditratingwasastheresultofahigherLTVarisingfromtheincreaseintheloanamount.Investmentperformancewasinlinewithbusinessplanandtherewerenocircumstanceswarrantingspecialconsideration.Basedontheinternalcreditratingtheprobabilityofdefaultwasconsideredtobenilovertheremainingtermoftheloan.
InthecaseoftheQuattroloanthedeteriorationincreditratingwastheresultofareductionininterestcoverastheinterestreservewasutilised.Therewerenospecialcircumstanceswarrantingfurtherconsiderationandtheprobablyofdefaultovertheremainingtermwasconsideredtobenil.
AreconciliationoftheECLallowancewasnotpresentedastheallowancerecognisedatyearendwas£nil.
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5.LOANS ADVANCED (CONTINUED)IFRS 9 Impairment – Sensitivity AnalysisAsdiscussedabove,andinNote2,theGroup’sECLisafunctionoftheprobabilityofdefault(“PD”)andlossgivendefault(“LGD”),wherePDisbenchmarkedagainstICG-Longbow’sinternalcreditratingmodelandLGDisbasedonICG-Longbow’strackrecordofover£3.0billionofseniorandwholeloanswhichwouldsatisfytheCompany’sinvestmentparameters.
TheCompanyhasperformedsensitivityanalysisonitsexpectedcreditlossbyconsideringtheimpactofaonegradedeteriorationinthecreditratingofeachloan(PD)andaonegradeincreaseinloss(LGD)asaconsequence.Aonegradedeteriorationincreditrating(e.g.BBBtoBB)isbroadlyequivalenttoa5%increaseinLTVratioor20%reductioninICR.
GiventhelowweightedaverageLTVandstrongICRoftheportfolioasawholetheone-gradestressapplieddoesnotresultinanincreasetotheexpectedcreditlosswhichremainsnil.Atwogradedecreaseincreditqualityofeachloanwouldresultinanexpectedcreditlossof£157,080(0.14%ofthetotalcapitaladvance).
Reasonable possible shift 31 January 2019
LTV +5%£nil
ICR -10%
LTV +10%£157,080
ICR -20%
(iv) Portfolio movements HavingconsideredbothStage1andStage2loans,theBoardconsiderthattheExpectedCreditLosswithintheportfoliois£nil,andnoprovisionforimpairmentisrequiredunderIFRS9.
On28February2018,theGroupreceivedrepaymentinfullofthe£11,935,000IRAFloan,togetherwithinterestandexitfeesofapproximately£238,700.
On2March2018,theGroupmadeanewloancommitmentof£16,200,000toanaffiliateofAffinityGlobalRealEstate.At31January2019,£14,322,039ofthetotalfacilityhadbeendrawndown.On11March2019,theGroupadvancedafurther£1,549,877totheborroweroftheAffinityloan,takingtotaldrawingsto£15,871,916.
On5March2018,theGroupadvancedafurther£922,750commitmentontheNorthlandsloanandextendedthecouponprotectionperiodofthetotalNorthlandsloanof£8,500,000.InDecember2018,a90dayextensiontothematuritydatewasagreedwiththeborroweroftheNorthlandsloan.
On28June2018,theGroupreceivedapartialrepaymentof£2,176,720fromtheHalcyonloanborrower,togetherwithinterestandexitfeesofapproximately£50,414.
On15October2018,theGroupreceivedrepaymentinfullofthe£6,565,000Hulbertloan,togetherwithinterestandexitfeesofapproximately£135,093.
On3December2018,theGroupadvancedafurther£1,500,000totheborroweroftheMeadowloan.Theincreaseisonsubstantiallythesametermsandconditionsastheexistingloan.
InDecember2018,theHalcyonandCarraraloanswerebothextendedbyaperiodof12months.
Otherfeeincomefromloanstotalled£439,207(31January2018:£1,042,285).
Followingtheyearend,on25February2019,theGrouparrangedanewloancommitmentof£15.0milliontoanaffiliateofBlissHotelsgroup,withaninitialadvanceof£12.5million.TheCompanymadeitsfirstdrawingof£3.5milliononitsworkingcapitalfacilityinordertofundthisinvestment.
On11April2019,theCompanyagreedathreemonthextensionofitsfacilitytotheborroweroftheCommercialRegionalSpaceloan,atahigherrateofinterest.
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6. TRADE AND OTHER RECEIVABLES
31 January 2019£
31 January 2018£
Otherreceivables 126,654 202,182
Therearenomaterialpastdueorimpairedreceivablebalancesoutstandingattheyearend.
TheGrouphasfinancialriskmanagementpoliciesinplacetoensurethatallreceivablesarereceivedwithinthecredittimeframe.TheBoardofDirectorsconsidersthatthecarryingamountofallreceivablesapproximatestotheirfairvalue.
7. CASH AND CASH EQUIVALENTSCashandcashequivalentscomprisescashheldbytheGroupandshort-termbankdepositsheldwithmaturitiesofthreemonthsorless.Thecarryingamountsoftheseassetsapproximatetheirfairvalue.Thisincludesrestrictedcashof£272,423(31January2018:£nil).
8.OTHER PAYABLES AND ACCRUED EXPENSES
31 January 2019£
31 January 2018£
Investmentadvisoryfees(seeNote13) 302,122 865,836
Taxespayable 1,679 23,335
Shareissuecostspayable – 10,000
Directors’remuneration(seeNote13) 49,375 48,750
Administrationfees(seeNote13) 14,167 30,833
Brokerfees 27,083 28,953
Auditfees 30,000 28,000
Otherexpenses 349,445 2,102
773,871 1,037,809
TheGrouphasfinancialriskmanagementpoliciesinplacetoensurethatallpayablesarepaidwithinthecredittimeframe.TheBoardofDirectorsconsidersthatthecarryingamountofallpayablesapproximatestotheirfairvalue.
9.EARNINGS PER SHARE AND NET ASSET VALUE PER SHAREEarnings per share
1 February 2018 to 31 January 2019
1 February 2017 to 31 January 2018
Profitfortheyear(£) 5,258,247 5,895,368
Weightedaveragenumberofordinarysharesinissue 120,660,861 110,564,133
BasicanddilutedEPS(pence) 4.36 5.33
AdjustedbasicanddilutedEPS(pence) 3.99 4.39
ThecalculationofbasicanddilutedEarningspershareisbasedontheprofitfortheyearandontheweightedaveragenumberofordinarysharesinfortheyearended31January2019.
ThecalculationofadjustedbasicanddilutedEarningspershareisbasedontheprofitfortheyear,adjustedforone-offotherfeeincomeduringtheyeartotalling£439,207(31January2018:£1,042,285).
Therearenodilutivesharesinissueat31January2019(31January2018:none).
Net Asset Value per share
31 January 2019 31 January 2018
NAV(£) 120,284,389 117,982,189
Numberofordinarysharesinissue 121,302,779 117,042,779
NAVpershare(pence) 99.16 100.80
ThecalculationofNAVpershareisbasedonNetAssetValueandthenumberofordinarysharesinissueattheyearend.
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10.SHARE CAPITALTheauthorisedsharecapitaloftheCompanyisrepresentedbyanunlimitednumberofordinaryshareswithorwithoutaparvaluewhich,uponissue,theDirectorsmaydesignateas(a)ordinaryshares;(b)Bshares;and(c)Cshares,ineachcaseofsuchclassesanddenominatedinsuchcurrenciesastheDirectorsmaydetermine.
31 January 2019£
31 January 2018£
Authorised
Ordinarysharesofnoparvalue Unlimited Unlimited
Issued and fully paid: Total No Total No
Ordinarysharesofnoparvalue
Sharesasatinception 1 1
Issuedon5February2013 104,619,249 104,619,249
Issuedon24April2014 3,600,000 3,600,000
Issuedon26October2017 8,823,529 8,823,529
Issuedon27March2018 4,260,000 –
121,302,779 117,042,779
£ £
Sharecapitalbroughtforward 114,857,090 106,038,522
Movementsfortheyear:
Ordinarysharesissuedon26October2017 4,302,600 9,000,000
Shareissuecosts (44,380) (181,432)
Share capital 119,115,310 114,857,090
Dividends DividendsarerecognisedbytheCompanyinthequarterlyNAVcalculationfollowingthedeclarationdate.Asummaryofthedividendsdeclaredand/orpaidduringtheyearended31January2019and31January2018aresetoutbelow:
1 February 2018 to 31 January 2019
Dividendper share
PenceTotal dividend
£
Interimdividendinrespectofquarterended31January2018 1.50 1,755,642
Interimdividendinrespectofquarterended30April2018 1.50 1,819,542
Interimdividendinrespectofquarterended31July2018 1.50 1,819,541
Interimdividendinrespectofquarterended31October2018 1.50 1,819,542
6.00 7,214,267
Dividends
1 February 2017 to 31 January 2018
Dividend per share
Pence
Total dividend
£
Interimdividendinrespectofquarterended31January2017 1.50 1,623,289
Specialdividendinrespectofquarterended31January2017 2.25 2,434,933
Interimdividendinrespectofquarterended30April2017 1.50 1,623,289
Interimdividendinrespectofquarterended31July2017 1.50 1,623,289
Interimdividendinrespectofquarterended31October2017 1.50 1,755,641
8.25 9,060,441
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10.SHARE CAPITAL (CONTINUED)Additional interim dividendOn8March2019,theDirectorsdeclaredaninterimdividendinrespectofthequarterended31January2019of£1,819,541equatingto1.5penceperordinarysharetoshareholdersontheregisterasatthecloseofbusinesson22March2019.
Rights attaching to SharesTheCompanyhasasingleclassofordinaryshareswhicharenotentitledtoafixeddividend.AtanyGeneralMeetingoftheCompanyeachordinaryshareholderisentitledtohaveonevoteforeachshareheld.Theordinarysharesalsohavetherighttoreceiveallincomeattributabletothosesharesandparticipateindistributionsmadeandsuchincomeshallbedividedparipassuamongtheholdersofordinarysharesinproportiontothenumberofordinarysharesheldbythem.
11. RISK MANAGEMENT POLICIES AND PROCEDURESTheGroupthroughitsinvestmentinseniorloansisexposedtoavarietyoffinancialrisks,includingmarketrisk(includingcurrencyriskandinterestraterisk),creditriskandliquidityrisk.TheGroup’soverallriskmanagementproceduresfocusontheunpredictabilityofoperationalperformanceoftheborrowersandonpropertyfundamentalsandseektominimisepotentialadverseeffectsontheGroup’sfinancialperformance.
TheBoardofDirectorsisultimatelyresponsiblefortheoverallriskmanagementapproachwithintheGroup.TheBoardofDirectorshasestablishedproceduresformonitoringandcontrollingrisk.TheGrouphasinvestmentguidelinesthatsetoutitsoverallbusinessstrategies,itstoleranceforriskanditsgeneralriskmanagementphilosophy.
Inaddition,theInvestmentAdvisermonitorsandmeasurestheoverallriskbearingcapacityinrelationtotheaggregateriskexposureacrossallrisktypesandactivities.Furtherdetailsregardingthesepoliciesaresetoutbelow:
Market riskMarketriskincludesmarketpricerisk,currencyriskandinterestraterisk.Ifaborrowerdefaultsonaloanandtherealestatemarketentersadownturnitcouldmateriallyandadverselyaffectthevalueofthecollateraloverwhichloansaresecured.ThisriskisconsideredbytheBoardtobeasaresultofcreditriskasitrelatestotheborrowerdefaultingontheloan.
Marketriskismoderatedthroughacarefulselectionofloanswithinspecifiedlimits.TheGroup’soverallmarketpositionismonitoredbytheInvestmentAdviserandisreviewedbytheBoardofDirectorsonanon-goingbasis.
Currency riskTheGroup’scurrencyriskexposureisconsideredtobeimmaterialasallinvestmentshavebeenandwillbemadeinPoundsSterling,withimmaterialexpensesincurredinEurobyLuxco.
Interest rate riskInterestrateriskistheriskthatthevalueoffinancialinstrumentsandrelatedincomefromcashandcashequivalentswillfluctuateduetochangesinmarketinterestrates.
ThemajorityoftheGroup’sfinancialassetsareloansadvanced,whichareatafixedrateofinterestandcashandcashequivalents.TheGroup’sinterestrateriskislimitedtointerestearnedoncashdeposits.
Thefollowingtableshowstheportfolioprofileofthematerialfinancialassetsat31January2019and31January2018:
31 January 2019£
31 January 2018£
Floating rate
Cash 12,370,129 6,486,150
Fixed rate
Loansadvancedatamortisedcost 108,561,477 112,331,666
120,931,606 118,817,816
Thetimingofinterestpaymentsontheloansadvancedissummarisedinthetableonpage61.
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11. RISK MANAGEMENT POLICIES AND PROCEDURES (CONTINUED)Credit riskCreditriskistheriskthatacounterpartywillbeunabletopayamountsinfullwhendue.TheGroup’smaincreditriskexposureisontheloansadvanced,wheretheGroupinvestsinsecuredseniordebt.
Inordertominimisecreditrisk,theGrouphasadoptedapolicyofonlydealingwithcreditworthycounterpartiesasameansofmitigatingtheriskoffinanciallossfromdefaults.TheGrouponlytransactswithentitiesthatareratedtheequivalentofinvestmentgradeandinvestmentsintheseinstruments,includingbillsofexchange,debenturesandredeemablenotes,wherethecounterpartieshaveminimumBBB-creditrating,areconsideredtohavelowcreditriskforthepurposeofimpairmentassessment.Thecreditratinginformationissuppliedbyindependentratingagencieswhereavailableand,ifnotavailable,theGroupusesotherpubliclyavailablefinancialinformationanditsowntradingrecordstorateitsmajorcustomers.TheGroup’sexposureandthecreditratingsofitscounterpartiesarecontinuouslymonitoredandtheaggregatevalueoftransactionsconcludedisspreadamongstapprovedcounterparties.
TheGrouphasadoptedtheCMBScreditratingmethodologytoassessthecreditworthinessofeachloanandresultantcreditrisk,PDandLGD.Themodeltakesintoaccountfactorsbelowsuchas:
O financialriskofthedebtor–considersthefinancialpositionofthedebtoringeneralandconsidersLTV,ICRandamortisationprofile/debtmaturity;
O propertyrisk–wherethepropertylocation,quality(specification,condition)andlettingriskareconsidered;
O incomerisk–theincomeriskcategoryconsiders,tenantdiversity,tenantcreditqualityandleaselengthratio,sectordiversityandgeographicaldiversity;and
O Borrower/structurerisk–wherefactorssuchashistoryoftheborrower/sponsor,loancontrol(securitypackage)andcovenantsareconsidered.
Thecreditriskmodelisdynamicandrecognisestheinterplaybetweendiversityandqualityasariskmitigant.TheGroup’scurrentcreditriskgradingframeworkcomprisesthefollowingcategories:
Grade Description Staging Basis for recognising ECL
AAA,AA+ Virtuallynorisk Stage1 12monthECL
AAtoA Lowrisk Stage1 12monthECL
BBB Moderaterisk Stage1 12monthECL
BB Averagerisk Stage1 12monthECL
B Acceptablerisk Stage1 12monthECL
CCC+ BorderlineRisk Stage2 LifetimeECL-notcreditimpaired
CCC SpecialMention Stage2 LifetimeECL-notcreditimpaired
CC Substandard Stage3 LifetimeECL-creditimpaired
D Doubtful Stage3 LifetimeECL-creditimpaired
D Loss N/A Amountiswrittenoff
TheGrouphasadoptedtheInvestmentAdviser’sinternalcreditratingmethodologyanduseditslossexperiencetobenchmarkinvestmentperformanceandpotentialimpairmentforbothStage1andStage2loansunderIFRS9consideringbothprobabilityofdefaultandexpectedcreditloss.Thetotalexposuretocreditriskarisesfromdefaultoftheloancounterpartyandthecarryingamountsofotherfinancialassetsbestrepresentthemaximumcreditriskexposureattheyearenddate,includingtheprincipaladvancedonloans,cashandcashequivalentsandinterestoutstandingonloans.Asat31January2019,themaximumcreditriskexposurewas£119,591,675(31January2018:£117,827,695).
TheInvestmentAdviserhasadoptedprocedurestoreducecreditriskexposurethroughtheinclusionofcovenantsinloansissued,alongwithconductingcreditanalysisofthecounterparties,theirbusinessandreputation,whichismonitoredonanon-goingbasis.TheInvestmentAdviserroutinelyanalysestheprofileoftheGroup’sunderlyingriskintermsofexposuretosignificanttenants,reviewingmarketdataandforecasteconomictrendstobenchmarkborrowerperformanceandtoassistinidentifyingpotentialfuturestresspoints.
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11. RISK MANAGEMENT POLICIES AND PROCEDURES (CONTINUED)Collateral held as security Eachloanissecuredbyachargeofcommercialrealestatepropertypledgedbytheborrower.ThecurrentvaluationsforthesepropertiesandLTVinformationforeachloan(andfortheportfolioasawhole)aredetailedintheloansummarypagesintheInvestmentManager’sreportonpages10to14.
TodiversifycreditrisktheCompanymaintainsitscashandcashequivalentsacrossfour(31January2018:four)differentbankinggroupsasshownbelow,whichhaveparentcompaniesratedBaaorhigherbyMISoranequivalent.Inordertocoveroperationalexpenses,aworkingcapitalbalanceatRoyalBankofScotlandInternationalLimitedismonitoredandmaintained.TodiversifycreditriskwithinLuxco,cashandcashequivalentsaremaintainedatappropriatelevelsofoperationalcapitalwithinterestpaymentsmadetotheCompanyonaregularbasis.ThisissubjecttotheGroup’screditriskmonitoringpolicies.
31 January 2019£
RoyalBankofScotlandGlobalBanking(Luxembourg)S.A. 2,144,187
LloydsBankInternationalLimited 3,386,029
BarclaysBankplc 3,385,247
ABNAMRO(Guernsey)Limited 3,385,217
RoyalBankofScotlandInternationalLimited 69,449
12,370,129
31 January 2018£
RoyalBankofScotlandGlobalBanking(Luxembourg)S.A. 1,723,531
LloydsBankInternationalLimited 1,554,210
BarclaysBankplc 1,554,219
ABNAMRO(Guernsey)Limited 1,554,190
RoyalBankofScotlandInternationalLimited 100,000
6,486,150
Thecarryingamountoftheseassetsapproximatestheirfairvalue.
AreconciliationoftheECLallowancewasnotpresentedastheallowancerecognisedatyearendwas£nil.
Liquidity riskLiquidityriskistheriskthattheGroupwillnotbeabletomeetitsliabilitiesastheyfalldue.TheGroup’sloansadvancedareilliquidandmaybedifficultorimpossibletorealiseforcashatshortnotice.
TheGroupmanagesitsliquidityrisksthroughcashflowforecaststoensurethatitcanmeetitsobligationsastheyfalldue.Inaddition,duringtheyear,theGroupenteredintoarevolvingcreditfacilitywithOakNorthBankPlc.ThefacilitywasundrawnattheyearendbutinfuturewillbeusedtomaintainandpreserveliquidityaswellasmakingnewloansandinvestmentandmeetingoperatingcostsoftheGroup.
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11. RISK MANAGEMENT POLICIES AND PROCEDURES (CONTINUED)LiquidityrisksariseinrespectofotherfinancialliabilitiesoftheGroupduetocounterparties.TheGroupexpectstomeetitson-goingobligationsfromcashflowsgeneratedbytheloanportfolio.Exceptfortheloansadvanced,theGroup’sfinancialassetsandfinancialliabilitiesallhavematuritydateswithinoneyear.Ananalysisofthematurityoffinancialassetsclassifiedasloansadvancedisshowninthetablebelow:
Less than one year
£
Between one and five years
£
Total as at31 January 2019
£
Meadow–principal 21,500,000 – 21,500,000
Meadow–interestandexitfees 2,095,514 – 2,095,514
Northlands–principal 8,500,000 – 8,500,000
Northlands–interestandexitfees 232,976 – 232,976
Halcyon–principal 6,423,280 – 6,423,280
Halcyon–interestandexitfees 527,589 – 527,589
Carrara–principal 1,300,000 – 1,300,000
Carrara–interestandexitfees 106,778 – 106,778
Ramada–principal 7,982,500 – 7,982,500
Ramada–interestandexitfees 343,357 – 343,357
CommercialRegionalSpace–principal 22,400,000 – 22,400,000
CommercialRegionalSpace–interestandexitfees 433,977 – 433,977
BMO–principal 15,793,727 – 15,793,727
BMO–interestandexitfees 126,761 – 126,761
CNM–principal – 9,000,000 9,000,000
CNM–interestandexitfees 720,000 810,000 1,530,000
Affinity–principal – 14,322,039 14,322,039Affinity–interestandexitfees 1,070,332 2,827,139 3,897,471
89,556,791 26,959,178 116,515,969
Less than one year
£
Between one and five years
£
Total as at31 January 2018
£
IRAF–principal 11,935,000 – 11,935,000
IRAF–interestandexitfees 964,283 – 964,283
Meadow–principal – 20,000,000 20,000,000
Meadow–interestandexitfees 1,494,448 1,904,110 3,398,558
Northlands–principal 7,577,250 – 7,577,250
Northlands–interestandexitfees 674,687 – 674,687
Hulbert–principal 6,565,000 – 6,565,000
Hulbert–interestandexitfees 580,148 – 580,148
Halcyon–principal 8,600,000 – 8,600,000
Halcyon–interestandexitfees 706,378 – 706,378
Carrara–principal 1,300,000 – 1,300,000
Carrara–interestandexitfees 106,778 – 106,778
Ramada–principal – 7,982,500 7,982,500
Ramada–interestandexitfees 638,600 343,357 981,957
CommercialRegionalSpace–principal – 22,400,000 22,400,000
CommercialRegionalSpace–interestandexitfees 987,840 433,977 1,421,817
BMO–principal – 15,793,727 15,793,727
BMO–interestandexitfees 500,228 124,035 624,263
Quattro–principal – 9,000,000 9,000,000Quattro–interestandexitfees 720,000 1,530,000 2,250,000
43,350,640 79,511,706 122,862,346
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11. RISK MANAGEMENT POLICIES AND PROCEDURES (CONTINUED)TheGroupcouldalsobeexposedtoprepaymentrisk,beingtheriskthattheprincipalmayberepaidearlierthananticipated,causingthereturnoncertaininvestmentstobelessthanexpected.TheGroup,wherepossible,seekstomitigatethisriskbyinclusionofincomeprotectionclausesthatprotecttheGroupagainstanyprepaymentriskontheloansadvancedforsomeoftheperiodoftheloan.Todate,allloansincludeincomeprotectionclausesintheeventofprepaymentoftheloansforthemajorityoftheloanterm.Asattheyearenddatetheresidualweightedaverageincomeprotectionperiodwasyears0.42(31January2018:0.53years).
TheGrouphasloansandreceivableswithaprepaymentoptionembedded.Giventhelowprobabilityofexerciseandindeterminableexercisedate,thevalueattributedtotheseembeddedderivativesisconsideredtobe£nil(31January2018:£nil).
Capital management policies and proceduresTheGroup’scapitalmanagementobjectivesaretoensurethattheGroupwillbeabletocontinueasagoingconcernandtomaximisetheincomeandcapitalreturntoequityshareholders.
InaccordancewiththeGroup’sinvestmentpolicy,theGroup’sprincipaluseofcashhasbeentofundinvestmentsintheformofloanssourcedbytheInvestmentAdviser,aswellason-goingoperationalexpensesandpaymentofdividendsandotherdistributionstoshareholdersinaccordancewiththeCompany’sdividendpolicy.
TheBoard,withtheassistanceoftheInvestmentAdviser,monitorsandreviewsthebroadstructureoftheCompany’scapitalonanon-goingbasis.
TheCompanyhasnoexternallyimposedcapitalrequirements.TheGroup’scapitalattheyearendcomprisedequitysharecapitalandreserves.
12. SUBSIDIARY AtthedateofthisAnnualReporttheCompanyhadonewhollyownedsubsidiary,ICG-LongbowSeniorDebtS.A.,registeredinLuxembourg.
13. RELATED PARTY TRANSACTIONS AND DIRECTORS’ REMUNERATION Partiesareconsideredtoberelatedifonepartyhastheabilitytocontroltheotherpartyorexercisesignificantinfluenceoverthepartyinmakingfinancialoroperationaldecisions.
IntheopinionoftheDirectors,onthebasisofshareholdingsadvisedtothem,theCompanyhasnoimmediateorultimatecontrollingparty.
Administrator and DirectorsDuringtheyear,theCompanyincurredadministrationfeesinrelationtoservicesprovidedbytheCompany’sAdministratorof£163,333(31January2018:£170,000)ofwhich£14,167(31January2018:£30,833)wasoutstandingattheyearend(seeNote8).MrHuntleyactedasaconsultanttotheAdministratorfollowingthesaleofthecompanyinNovember2017.Thepurposeoftheconsultancywastoprovidecorporateknowledgeprimarilyforthethreemonthsfollowingsaleto31January2018.Noremunerationhasbeenpaidandheholdnoexecutiverolesorfunctions.TherehasbeennoinvolvementwiththeAdministratorunderthisarrangementconcerningtheGroup’sactivities.TheconsultancyisnotactiveandwillexpireinOctober2019.DuringtheyearMrHuntleyreceivedaDirector’sfeeof£35,000(31January2018:£36,875)ofwhich£8,750(31January2018:£8,750)wasoutstandingattheyearend.
TheCompanyDirectors’feesfortheyearamountedto£196,875(31January2018:£203,333)withoutstandingfeesof£49,375duetotheDirectorsat31January2019(31January2018:£48,750)(seeNote8).
Investment AdviserInvestmentadvisoryfeesfortheyearamountedto£1,211,925(31January2018:£1,141,405),ofwhich£302,122(31January2018:£865,836)wasoutstandingattheyearend(seeNote8).
14. MATERIAL AGREEMENTSInvestment Advisory Agreement TheCompanyandtheInvestmentAdviserhaveenteredintotheInvestmentAdvisoryAgreement,pursuanttowhichtheInvestmentAdviserhasbeengivenresponsibilityforthenon-discretionarymanagementoftheCompany’s(andanyoftheCompany’ssubsidiaries)assets(includinguninvestedcash)inaccordancewiththeGroup’sinvestmentpolicies,restrictionsandguidelines.
UnderthetermsoftheInvestmentAdvisoryAgreement,theInvestmentAdviserisentitledtoamanagementfeeatarateequivalentto1%perannumoftheNetAssetValuepaidquarterlyinarrearsbasedontheaverageNetAssetValueasatthelastbusinessdayofeachmonthineachrelevantquarter.
TheInvestmentAdviser’sappointmentcannotbeterminatedbytheCompanywithlessthan12months’notice.TheCompanymayterminatetheInvestmentAdvisoryAgreementwithimmediateeffectiftheInvestmentAdviserhascommittedanymaterial,irremediablebreachoftheInvestmentAdvisoryAgreementorhascommittedamaterialbreachandfailstoremedysuchbreachwithin30daysofreceivingnoticefromtheCompanyrequiringittodoso;ortheInvestmentAdviserisnolongerauthorisedandregulatedbytheFCAorisnolongerpermittedbytheFCAtocarryonanyregulatedactivitynecessarytoperformitsdutiesundertheInvestmentAdvisoryAgreement.TheInvestmentAdvisermayterminatetheirappointmentimmediatelyiftheCompanyhascommittedanymaterial,irremediablebreachoftheInvestmentAdvisoryAgreementorhascommittedamaterialbreachandfailstoremedysuchbreachwithin30daysofreceivingnoticefromtheCompanyrequiringittodoso.AsdisclosedinNote1,theInvestmentAdviser,whichtradesunderthenameofICG-LongbowisauthorisedandregulatedbytheFCA.
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14. MATERIAL AGREEMENTS (CONTINUED)Administration AgreementTheAdministratorhasbeenappointedtoprovidedaytodayadministrationandcompanysecretarialservicestotheCompany,assetoutintheAdministrationAgreement.
UnderthetermsoftheAdministrationAgreement,theAdministratorisentitledtoafixedfeeof£90,000perannumforservicessuchasadministration,corporatesecretarialservices,corporategovernance,regulatorycomplianceandstockexchangecontinuingobligationsprovidedbothtotheCompanyandsomelimitedadministrationservicestoLuxcoinconjunctionwiththeLuxembourgAdministrator.TheAdministratorwillalsobeentitledtoanaccountingfeechargedonatimespentbasiswithaminimumfeeof£40,000perannum.Accountingfeesfortheyearamountedto£80,000(31January2018:£80,000)ofwhich£14,167(31January2018:£30,833)wasoutstandingattheyearend.
Registrar AgreementTheRegistrarhasbeenappointedtoprovideregistrationservicestotheCompanyandmaintainthenecessarybooksandrecords,assetoutintheRegistrarAgreement.
UnderthetermsoftheRegistrarAgreement,theRegistrarisentitledtoanannualfeefromtheCompanyequalto£1.78pershareholderperannumorpartthereof,subjecttoaminimumof£7,500perannum.OtherRegistraractivitieswillbechargedforinaccordancewiththeRegistrar’snormaltariffaspublishedfromtimetotime.
15. AUDITOR’S REMUNERATIONAuditandnon-auditfeespayabletotheauditorscanbeanalysedasfollows:
1 February 2018 to 31 January 2019
£
1 February 2017 to 31 January 2018
£
AuditfeesfortheCompany 40,000 40,000
AuditfeesfortheSubsidiary 12,953 12,993
Total Audit fees 52,953 52,993
Professionalservicesinrelationtothe2017Prospectus – 51,000
Professionalservicesinrelationtothe2018Prospectus 49,000 –
Professionalservicesinrelationtotheshareissue – 6,000
Total non-audit fees 49,000 57,000
16. REVOLVING CREDIT FACILITYOn1October2018,theGroupenteredintoarevolvingcreditfacilitywithOakNorthBankplc.Thisfacilityisforanamountequaltothelowerof£25millionand209%oftheNAVfromtimetotime.Theloanmatures36monthsfromthedateoftheagreement.InterestaccruesoneachloanatarateofLIBORplus3.95%perannum.Anarrangementfeeispayableonfirstdrawingthefacilityandontheterminationdate.
Thisfacilitywillbeusedtowardsmaintainingandpreservingliquidity,makingnewcustomerloans,investinginLongbowPrivateFundsandpaymentofthefees,costsandexpensesdue.Nodrawdownsweremadeunderthisfacilityduringtheyear.ThefirstdrawdownwasmadeinFebruary2019(seeNote17).
17. SUBSEQUENT EVENTS On25February2019,theGrouparrangedanewloancommitmentof£15.0milliontoanaffiliateofBlissHotelsgroup,withaninitialadvanceof£12.5million.TheCompanymadeitsfirstdrawingof£3.5milliononitsworkingcapitalfacilityinordertofundthisinvestment.
On11March2019,afurther£1.5millionwasdrawndownonthecommittedAffinityloan.
On8March2019,theCompanydeclaredadividendof1.5penceperordinaryshareinrespectofthequarterended31January2019,payableon12April2019.
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GLOSSARY OFCAPITALISED DEFINED TERMS
“Administrator”meansEsteraInternationalFundManagers(Guernsey)Limited;
“Administration Agreement”meanstheAdministrationAgreementdated23January2013betweentheCompanyandtheAdministrator;
“Admission”meanstheadmissionofthesharestothepremiumlistingsegmentoftheOfficialListandtotradingontheLondonStockExchange;
“AEOI”meansAutomaticExchangeofInformation;
“Affinity”meansAffinityGlobalRealEstate;
“AGM”or“Annual General Meeting”meansthegeneralmeetingoftheCompany;
“AIC”meanstheAssociationofInvestmentCompanies;
“AIC Code”meanstheAICCodeofCorporateGovernance;
“AIC Guide”meanstheAICCorporateGovernanceGuideforInvestmentCompanies;
“AIFMD”meanstheAlternativeInvestmentFundManagersDirective;
“Annual Report”or“Annual Report and Consolidated Financial Statements”meanstheannualpublicationoftheGroupprovidedtotheshareholderstodescribetheiroperationsandfinancialconditions,togetherwiththeirConsolidatedFinancialStatements;
“Article 50”meansArticle50oftheTreatyofLisbonwhichgivesanyEUmemberstatetherighttoquitunilaterallyandoutlinestheprocedurefordoingso;
“Articles of Incorporation”or“Articles”meansthearticlesofincorporationoftheCompany,asamendedfromtimetotime;
“Audit and Operational Risk Committee”meanstheAuditandOperationalRiskManagementCommittee,aformalcommitteeoftheBoardwithdefinedtermsofreference;
“BEPS”meansBaseerosionandprofitshifting;
“BMO”meansBMORealEstatePartners;
“Board”or“Directors”or“Board of Directors”meansthedirectorsoftheCompanyfromtimetotime;
“Brexit”meansthepotentialdepartureoftheUKfromtheEU;
“Carrara”meansCarraraGroundRents;
“CBI”meanstheConfederationofBritishIndustry;
“CMBS”meanscommercialmortgage-backedsecurity;
“Code”or“Corporate Governance Code”meanstheUKCorporateGovernanceCode2016aspublishedbytheFinancialReportingCouncil;
“Commercial Regional Space”meansCommercialRegionalSpaceLimited;
“Companies Law”meanstheCompanies(Guernsey)Law,2008,(asamended);
“Company”meansICG-LongbowSeniorSecuredUKPropertyDebtInvestmentsLimited;
“CPI”meansconsumerpriceindex;
“CRE”meanscommercialrealestate;
“CRS”meansCommonReportingStandard;
“CVA”meanscompanyvoluntaryarrangement;
“Disclosure Guidance and Transparency Rules”or“DTRs”meansthedisclosureguidancepublishedbytheFCAandthetransparencyrulesmadebytheFCAundersection73AofFSMA;
“ECL”meansexpectedcreditlosses;
“EGM”meanstheExtraordinaryGeneralMeetingoftheCompanyheldon1March2017;
“EPS”or“Earnings per share”meansEarningsperordinaryshareoftheCompanyandisexpressedinPoundsStirling;
“ESG”meansEnvironmental,SocialandGovernance;
“EU”meanstheEuropeanUnion;
“Euro”or“€”meansEuros,thecurrencyintroducedatthestartofthethirdstageofEuropeaneconomicandmonetaryunion;
“FATCA”meansForeignAccountTaxComplianceAct;
“FCA”meanstheUKFinancialConductAuthority(oritssuccessorbodies);
“Financial Statements”or“Consolidated Financial Statements”meanstheauditedconsolidatedfinancialstatementsoftheGroup,includingtheConsolidatedStatementofComprehensiveIncome,theConsolidatedStatementofFinancialPosition,theConsolidatedStatementofChangesinEquity,theConsolidatedStatementofCashFlows,andassociatednotes;
“FRC”meanstheFinancialReportingCouncil;
“FTSE”meanstheFinancialTimesStockExchange;
“FVTOCI”meansFairValuethroughStatementofOtherComprehensiveIncome;
“GDP”meansgrossdomesticproduct;
“GFSC”meanstheGuernseyFinancialServicesCommission;
“GIIN”meansGlobalIntermediaryIdentificationNumber;
“GLA”meanstheGreaterLondonAuthority;
“Group”meanstheCompany,ICGLongbowSeniorSecuredUKPropertyDebtInvestmentsLimitedtogetherwithitswhollyownedsubsidiary,ICGLongbowSeniorDebtS.A(Luxco);
“GFSC Code”meanstheGFSCFinanceSectorCodeofCorporateGovernance;
“Halcyon”meansHalcyonGroundRents;
“Hulbert”meansHulbertProperties;
“IAS”meansinternationalaccountingstandardsasissuedbytheBoardoftheInternationalAccountingStandardsCommittee;
“ICG”meansIntermediateCapitalGroupPLC;
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GLOSSARYOFCAPITALISED DEFINED TERMS (CONTINUED)
“ICG Private Funds”meansprivaterealestatedebtfundsmanagedoradvisedbytheInvestmentAdviseroritsassociates;
“ICR”meansinterestcoverageratio;
“IFRS”meanstheInternationalFinancialReportingStandards,beingtheprinciples-basedaccountingstandards,interpretationsandtheframeworkbythatnameissuedbytheInternationalAccountingStandardsBoard,asadoptedbytheEU;
“Interest Cover Ratio”or“ICR”meansthedebt/profitabilityratiousedtodeterminehoweasilyacompanycanpayinterestonoutstandingdebt;
“Interim Report”meanstheCompany’sinterimreportandunauditedinterimcondensedfinancialstatementsfortheperiodended31July;
“Investment Grade Tenant”meansatenantthatisratedAaatoBaa3byMISand/orAAAtoBBB-byS&P;
“Investment Adviser”or“ICG-Longbow”meansIntermediateCapitalManagersLimitedoritsassociates;
“Investment Advisory Agreement”meansInvestmentAdvisoryAgreementdated31January2013betweentheCompanyandtheInvestmentAdviser,asamendedandrestatedon27April2017;
“Investment Risk Committee”meanstheInvestmentRiskCommittee,aformalcommitteeoftheBoardwithdefinedtermsofreference;
“IPF”meanstheInternationalPropertyForum;
“IPO”meanstheCompany’sinitialpublicofferingofsharestothepublicwhichcompletedon5February2013;
“IRAF”meansIRAFPortfolio;
“ISAE 3402”meansInternationalStandardonAssuranceEngagements3402,“AssuranceReportsonControlsataServiceOrganisation”;
“ISIN”meansanInternationalSecuritiesIdentificationNumber;
“Listing Rules”meansthelistingrulesmadebytheFCAundersection73AFinancialServicesandMarketsAct2000;
“London Stock Exchange”or“LSE”meansLondonStockExchangeplc;
“LGD”meanslossgivendefault;
“LTV”meansLoantoValueratio;
“Luxco”or“Subsidiary”meanstheCompany’swhollyownedsubsidiary,ICG-LongbowSeniorDebtS.A.;
“Luxembourg Administrator”meansOcorianServices(Luxembourg)S.àr.lbeingtheadministratorofLuxco;
“Main Market”meansthemainsecuritiesmarketoftheLondonStockExchange;
“Management Engagement Committee”meansaformalcommitteeoftheBoardwithdefinedtermsofreference;
“Meadow”meansMeadowRealEstateFundII;
“Memorandum”meanstheCompany’smemorandum;
“MIS”meansMoody’sInvestorsServiceLtd,acreditratingagencyregisteredinaccordancewithRegulation(EC)No1060/2009witheffectfrom31October2011;
“NAV per share”meanstheNetAssetValueperordinarysharedividedbythenumberofSharesinissue(otherthansharesheldintreasury);
“Net Asset Value”or“NAV”meansthevalueoftheassetsoftheGrouplessitsliabilities,calculatedinaccordancewiththevaluationguidelineslaiddownbytheBoard,furtherdetailsofwhicharesetoutinthe2017Prospectus;
“Nomination Committee”meansaformalcommitteeoftheBoardwithdefinedtermsofreference;
“Northlands”meansNorthlandsPortfolio;
“NMPIs”meansNon-MainstreamPooledInvestments;
“OBR”meanstheOfficeofBudgetResponsibility;
“OECD”meansTheOrganisationforEconomicCo-operationandDevelopment;
“Official List”isthePremiumSegmentoftheFCA’sOfficialList;
“PD”meansprobabilityofdefault;
“Ramada”meansRamadaGateshead;
“RCF”meansRevolvingCreditFacility;
“Registrar”meansLinkAssetServices(Guernsey)Limited(formerlyCapitaRegistrars(Guernsey)Limited);
“Registrar Agreement”meanstheRegistrarAgreementdated31January2013betweentheCompanyandtheRegistrar;
“Schedule of Matters”meanstheScheduleofMattersReservedfortheBoard,adopted23January2013;
“S&P”meansStandard&Poor’sCreditMarketServicesEuropeLimited,acreditratingagencyregisteredinaccordancewithRegulation(EC)No1060/2009witheffectfrom31October2011;
“SPV”meansspecialpurposevehicle;
“Treaty of Lisbon”meansaninternationalagreementthatamendsthetwotreatieswhichfromtheconstitutionalbasisoftheEU;
“UK”or“United Kingdom”meanstheUnitedKingdomofGreatBritainandNorthernIreland;
“US”or“United States”meanstheUnitedStatesofAmerica,itterritoriesandpossessions;
“2017 Placing Programme”meanstheplacingprogrammeinconnectionwiththe2017ProspectuspublishedinApril2017;
“2017 Prospectus”meanstheprospectuspublishedinApril2017bytheCompanyinconnectionwiththe2017PlacingProgramme;and
“£”or“Pounds Sterling”meansBritishpoundsterlingand“pence”meansBritishpence.
66 ICG-Longbow Senior Secured UK Property Debt Investments LimitedAnnual Report And Consolidated Financial Statements
DIRECTORSAND GENERAL INFORMATION
Board of DirectorsJackPerry(Chairman)StuartBeevorPatrickFirthMarkHuntleyPaulMeader
Audit and Operational Risk CommitteePatrickFirth (Chairman) StuartBeevorPaulMeader
Investment Risk CommitteePaulMeader (Chairman) StuartBeevorJamesChristie(Retired7March2019)MarkHuntleyDavidMortimerPatrickFirth(Appointed7March2019)
Management Engagement CommitteeJackPerry (Chairman)PatrickFirthPaulMeader
Nomination CommitteeJackPerry (Chairman)StuartBeevorPatrickFirthMarkHuntleyPaulMeader
Investment AdviserIntermediateCapitalManagersLimitedJuxonHouse100StPaul’sChurchyardLondonUnitedKingdomEC4M8BU
Registered officeHeritageHallPOBox225LeMarchantStreetStPeterPortGuernseyGY14HY
Effective from 29 April 2019EsteraInternationalFundManagers(Guernsey)LimitedFloor2TrafalgarCourtLesBanquesStPeterPortGuernseyGY14LY
Independent AuditorDeloitteLLPPOBox137RegencyCourtGlategnyEsplanadeSt.PeterPortGuernseyGY13HW
Guernsey Administrator and Company SecretaryEsteraInternationalFundManagers(Guernsey)LimitedHeritageHallPOBox225LeMarchantStreetSt.PeterPortGuernseyGY14HY
Effective from 29 April 2019EsteraInternationalFundManagers(Guernsey)LimitedFloor2TrafalgarCourtLesBanquesStPeterPortGuernseyGY14LY
Luxembourg AdministratorOcorianServices(Luxembourg)S.àr.l6cRueGabrielLippmannMunsbachLuxembourgL-5365
RegistrarLinkAssetServices(Guernsey)LimitedMontCreveltHouseBulwerAvenueStSampsonGuernseyGY24LH
Corporate Broker and Financial AdviserCenkosSecuritiesplc6-8TokenhouseYardLondonUnitedKingdomEC2R7AS
IdentifiersGIIN: 6IG8VS.99999.SL.831ISIN: GG00B8C23S81Sedol: B8C23S8Ticker: LBOWWebsite: www.lbow.co.uk
English Solicitors to the CompanyGowlingsWLG(UK)LLP4MoreLondonRiversideLondonUnitedKingdomSE12AU
Guernsey Advocates to the CompanyCareyOlsenCareyHousePOBox98LesBanquesStPeterPortGuernseyGY14BZ
BankersABNAMRO(Guernsey)LimitedMartelloCourtAdmiralParkStPeterPortGuernseyGY13QJ
BarclaysBankplc6-8HighStreetStPeterPortGuernseyGY13BE
LloydsBankInternationalLimitedPOBox136SarniaHouseLeTruchotStPeterPortGuernseyGY14EN
TheRoyalBankofScotlandInternationalRoyalBankPlace1GlategnyEsplanadeStPeterPortGuernseyGY14BQ
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CAUTIONARYSTATEMENT
TheChairman’sStatementandInvestmentAdviser’sReporthavebeenpreparedsolelytoprovideadditionalinformationforshareholderstoassesstheCompany’sstrategiesandthepotentialforthosestrategiestosucceed.Theseshouldnotbereliedonbyanyotherpartyorforanyotherpurpose.
TheChairman’sStatementandInvestmentAdviser’sReportmayincludestatementsthatare,ormaybedeemedtobe,“forward-lookingstatements”.Theseforward-lookingstatementscanbeidentifiedbytheuseofforward-lookingterminology,includingtheterms“believes”,“estimates”,“anticipates”,“expects”,“intends”,“may”,“will”or“should”or,ineachcase,theirnegativeorothervariationsorcomparableterminology.
Theseforward-lookingstatementsincludeallmattersthatarenothistoricalfacts.Theyappearinanumberofplacesthroughoutthisdocumentandincludestatementsregardingtheintentions,beliefsorcurrentexpectationsoftheDirectorsandtheInvestmentAdviser,concerning,amongstotherthings,theinvestmentobjectivesandinvestmentpolicy,financingstrategies,investmentperformance,resultsofoperations,financialcondition,liquidity,prospects,anddistributionpolicyoftheCompanyandthemarketsinwhichitinvests.
Bytheirnature,forward-lookingstatementsinvolverisksanduncertaintiesbecausetheyrelatetoeventsanddependoncircumstancesthatmayormaynotoccurinthefuture.Forward-lookingstatementsarenotguaranteesoffutureperformance.
TheCompany’sactualinvestmentperformance,resultsofoperations,financialcondition,liquidity,distributionpolicyandthedevelopmentofitsfinancingstrategiesmaydiffermateriallyfromtheimpressioncreatedbytheforward-lookingstatementscontainedinthisdocument.
Subjecttotheirlegalandregulatoryobligations,theDirectorsandtheInvestmentAdviserexpresslydisclaimanyobligationstoupdateorreviseanyforward-lookingstatementcontainedhereintoreflectanychangeinexpectationswithregardtheretooranychangeinevents,conditionsorcircumstancesonwhichanystatementisbased.
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FORYOURNOTES
ICG-Longbow Senior Secured UK Property Debt Investments LimitedHeritageHall,POBox225,LeMarchantStreet,StPeterPort,Guernsey,GY14HY,ChannelIslands.
T+44(0)1481742742F+44(0)1481730617
Furtherinformationavailableonline:www.lbow.co.uk