TIDMFCH
RNS Number : 4130T
Funding Circle Holdings PLC
25 March 2021
Funding Circle Holdings plc
Full Year 2020 Results
Embargoed until 7.00am, 25 March 2021
Funding Circle Holdings plc ("Funding Circle"), today announces
results for the year ended 31 December 2020.
Samir Desai CBE, CEO and Founder, said:
"We are seeing an acceleration in the shift towards online in
small business lending as a result of Covid and this has opened up
an enlarged opportunity for Funding Circle.
We exceeded previous guidance and delivered GBP20 million of
AEBITDA profit in the second half of 2020. This is a milestone for
the business and we expect to continue to be AEBITDA profitable
going forward.
Our machine learning and technology platform is transforming the
small business borrowing experience with instant decisions for 50%
of applications. A verage loan applications are completed in 6
minutes and decisions follow in just 9 seconds, providing borrowers
with an unmatched experience. In the next 12 months we will use
this technology to launch new products to help solve more small
business funding problems.
It has been a difficult year for many people and I'd like to
thank all of our team who have worked exceptionally hard to help
small businesses. Whilst we remain mindful of the uncertain
economic environment, we are well positioned to help tens of
thousands of small businesses in 2021."
Performance highlights
H1 2020 H2 2020 2020 2019 % change
GBPm GBPm GBPm GBPm year-on-year
Loans under Management
(LuM) 3,722 4,214 4,214 3,731 13%
-------- -------- -------- ------- --------------
Originations 1,112 1,630 2,742 2,350 17%
-------- -------- -------- ------- --------------
Fee income ("Operating
income") 64.8 90.9 155.7 156.9 (1)%
-------- -------- -------- ------- --------------
Net investment income(1) 36.4 29.9 66.3 20.4 225%
-------- -------- -------- ------- --------------
Total income 101.2 120.8 222.0 177.3 25%
-------- -------- -------- ------- --------------
Fair value (losses)/gains (96.1) (22.2) (118.3) (9.9) 1095%
-------- -------- -------- ------- --------------
Net income 5.1 98.6 103.7 167.4 (38)%
-------- -------- -------- ------- --------------
AEBITDA(2) (84.1) 20.3 (63.8) (27.5) 132%
-------- -------- -------- ------- --------------
Operating profit (loss) (113.5) 7.2 (106.3) (84.7) 26%
-------- -------- -------- ------- --------------
Profit (Loss) before
taxation (115.1) 7.0 (108.1) (84.2) 28%
-------- -------- -------- ------- --------------
Financial summary
Full Year 2020
-- Total Income GBP222.0 million (2019: GBP177.3 million) up 25% year-on-year.
-- Record loans under management of GBP4.21 billion (2019:
GBP3.73 billion) up 13% and record originations of GBP2.74 billion
(2019: GBP2.35 billion) up 17% year-on-year.
-- AEBITDA of negative GBP63.8 million (2019: negative GBP27.5
million); includes H1 2020 AEBITDA loss of GBP84.1 million, and H2
2020 AEBITDA profit of GBP20.3 million.
-- UK business AEBITDA profit of GBP6.5 million.
-- Operating expenses (before exceptional items) cut 12% to
GBP191.3 million (2019: GBP217.8 million) following cost management
initiatives.
-- Operating loss of GBP106.3 million (2019: GBP84.7 million).
This predominantly reflects the previously announced impact of
Covid-19 on the loans we held for sale, a non-cash impairment of
GBP12.0 million of US goodwill and GBP1.5 million related to the US
restructure, and GBP5.2 million related to the restructure of the
Developing Markets business.
H2 2020
-- Total income reached GBP120.8 million, up 26% year-on year.
-- Record loans under management of GBP4.21 billion up 13% and
record originations of GBP1.63 billion, up 41% year-on-year.
-- AEBITDA of GBP20.3 million (H2 2019: negative GBP7.8 million)
as a result of strong trading, cost reduction actions and Fair
Value in line with expectations.
-- Operating profit of GBP7.2 million.
-- UK business AEBITDA profit of GBP28.6 million and operating profit of GBP21.3 million.
-- Net assets of GBP217.6 million, a small increase since June 2020 (GBP216.9 million).
Operating and Strategic Summary:
-- We continue to be one of the largest providers of SME loans:
o Following accreditation to the Coronavirus Business
Interruption Loans Scheme (CBILS) in the UK and Paycheck Protection
Program (PPP) in the US, we saw strong borrower and investor demand
leading to record loans under management and record originations in
2020.
o In the UK, Funding Circle was the 3rd largest(3) CBILS loans
provider and represented c.27% share of the number of CBILS loans
approved since we began participating in the scheme.
o 100,000 small businesses have now accessed more than GBP11.5
billion of funding through the Funding Circle platform since
2010.
o Net promoter scores between 80-90 for borrowers in the UK and
US.
-- Our machine learning and technology platform is revolutionising SME lending:
o Funding Circle leverages machine learning risk models, built
over the last 10 years, to provide instant decisions for small
businesses.
o Instant Decision Lending launched in Q4 2019 is transforming
the SME borrowing experience.
o At the end of 2020, 50% of loan decisions were automated, up
from 40% in Q2 2020. Our long term target is c.80% of loan
decisions automated.
o In the UK, our 8(th) generation risk models are three times
better at predicting risk than traditional credit bureau scores and
Instant Decision technology uses the same risk models as
non-instant decision loans with no adverse change in the credit
performance.
o As a result of the improved borrower experience, this
technology increases conversion by up to 25% and has lower
processing costs and greater scalability. H2 2020 UK originations
were up 91% year-on year, without adding additional headcount.
-- This technology provides us with opportunities to launch new solutions to help SMEs:
o Over the next 12 months we will leverage our technology to
beta launch new funding solutions to help small business owners
solve more problems:
-- A new Application Programming Interface (API) embedding
Funding Circle natively into partners' websites and platforms to
extend distribution.
-- A new payment finance product enabling small business owners
to pay invoices and spread the costs over 3 months.
-- A new card for Funding Circle borrowers to enable them to
better manage their business spending habits.
-- We have shown effective management of the loanbook during an extreme period of stress:
o At the start of national lockdowns, we implemented a range of
tools to support businesses, including increasing our support
capacity to our Collections and Recoveries team and providing
flexibility by offering payment plans to borrowers.
o Following an initial spike in April and May 2020, the flow of
borrowers missing payments for the first time has fallen to below
pre-Covid-19 levels, and remained low and stable despite further
recent lockdowns.
o 93% of UK and US businesses are now making full payments on
their loans.
-- Loan performance demonstrates quality and resilience of portfolio:
o All UK and US cohorts expected to deliver positive annualised
returns with small improvement from June 2020.
-- Covid has changed the SME lending landscape - and we are well
placed to capture this enlarged opportunity:
o Since the start of the pandemic, Governments have stepped in
to support SMEs, demonstrating their strategic importance to the
economic recovery and future growth. SMEs have been able to access
more than $700bn through PPP in the US, whilst in the UK SMEs have
accessed GBP70bn borrowed through CBILS and the Bounce Back Loan
Scheme (BBLS).
o Covid has led to a rapid acceleration in the shift towards
online in small business lending . There has been a 5x increase in
search terms for online business loans since the start of
Covid.
o There has been strong demand from investors despite the
economic downturn. More than GBP2.5 billion of investor capital has
been raised since the beginning of Covid to lend to UK and US SMEs
on the Funding Circle platform.
o Whilst government support has been significant over the past
12 months, many SMEs expect to continue to have ongoing financing
needs. 40% have said they expect to require finance in the next 12
months, primarily for growth or investment.
-- Clear priorities for 2021:
o UK: We will operate our core loan product alongside the new
Government programme, the Recovery Loan Scheme (RLS), which will
replace CBILS, as well as launching new products using our
technology platform.
o US: Once PPP ends, we will expand our core loan product, as
well as originating government guarantee loans through the Small
Business Administration (SBA) programme on behalf of banks and
continuing to operate our referral model for other borrower
needs.
Launch of Funding Circle's Economic Impact Report:
-- Alongside today's results, Funding Circle, in partnership
with Oxford Economics, today publishes its 2020 Economic Impact
Report. Key findings from the report include:
o Globally, in 2020, lending through Funding Circle helped
generate GBP10bn in GDP while creating and sustaining 135,000
jobs.
o SMEs used CBILS loans to invest in and adapt their business to
the pandemic's challenges.
o Across 2020 as a whole, searches for online business loans
were 5.3 times higher than 2019, accelerating an existing
trend.
o Almost six out of ten SMEs who took a Funding Circle loan were
first-time users of the platform; 86% of these say they will come
back to the platform first in future.
o The majority-73%-of Funding Circle's customers expect to
require further finance and 40% have said they expect to require
finance in the next 12 months, primarily for growth or investment.
The proportion of SMEs happy to use finance to meet their growth
aspirations is at its highest level since 2018.
o The full report can be found here:
https://www.fundingcircle.com/uk/impact
Outlook:
Covid-19 has changed the SME lending landscape. Over the past 12
months we have seen an acceleration in the adoption of online
borrowing. Through the use of our machine learning and technology
platform, which is transforming the small business borrowing
experience, we are well-placed to capture this enlarged opportunity
going forward.
Full year outlook:
-- LuM and originations over the full year will depend on how
quickly the economy recovers in the UK and US.
-- Trading has been strong since the start of 2021. As we
transition to operating our core loan product alongside government
guarantee programmes in the UK and US from Q2 2021 onwards, we
expect some initial reduction in lending.
-- We expect to be AEBITDA profitable for the full year, with
profitability skewed towards H1 2021.
Board changes:
Cath Keers, Bob Steel and Ed Wray will not be standing for
re-election as Directors at the Company's AGM on 19 May 2021.
Matthew King, who currently chairs the Funding Circle Ltd Board (UK
trading subsidiary), will join the Board as a Non-Executive
Director on 19 May and Helen Beck will join as a Non-Executive
Director and Chair of the Remuneration Committee on 1 June 2021.
Geeta Gopalan will take on the role of Senior Independent Director
from 19 May 2021. Matthew King is Chair of Savannah Resources plc.
There is no further information to be disclosed regarding either
Matthew or Helen under paragraph 9.6.13(R) of the Listing
Rules.
Analyst presentation:
A presentation for analysts will be held today via webcast at
9:30am. Please contact IR@fundingcircle.com if you wish to
attend.
An on-demand replay will also be available on the Funding Circle
website (corporate.fundingcircle.com) following the
presentation.
Investor relations and media relations:
Investor Relations
David de Koning - Director of Investor Relations and
Communications (0203 927 3893)
Media relations
Natasha Jones - Head of UK Communications (020 3667 2245)
Headland Consultancy: Mike Smith / Stephen Malthouse (020 3805
4822)
About Funding Circle:
Funding Circle (LSE: FCH) is a small and medium enterprise
("SME") loans platform. Since launching in 2010, investors and
lenders across Funding Circle's geographies - including banks,
asset management companies, insurance companies, government-backed
entities, retail investors and funds - have lent more than GBP11.5
billion to 100,000 businesses globally.
Forward looking statements and other important information:
This document contains forward looking statements, which are
statements that are not historical facts and that reflect Funding
Circle's beliefs and expectations with respect to future events and
financial and operational performance. These forward looking
statements involve known and unknown risks, uncertainties,
assumptions, estimates and other factors, which may be beyond the
control of Funding Circle and which may cause actual results or
performance to differ materially from those expressed or implied
from such forward-looking statements. Nothing contained within this
document is or should be relied upon as a warranty, promise or
representation, express or implied, as to the future performance of
Funding Circle or its business. Any historical information
contained in this statistical information is not indicative of
future performance.
The information contained in this document is provided as of the
dates shown. Nothing in this document should be construed as legal,
tax, investment, financial, or accounting advice, or solicitation
for or an offer to invest in Funding Circle.
--
(1) We have redefined net investment income, first described in
the 2019 financial results, to be investment income less investment
expense. Investment AEBITDA is net investment income less fair
value (losses)/gains.
(2) ("AEBITDA") Adjusted EBITDA represents operating
profit/(loss) before depreciation and amortisation, share based
payment charges, associated social security costs, foreign exchange
gains / (losses), and exceptional items. A reconciliation between
AEBITDA and operating profit/(loss) is shown in the Business
Review.
(3) Funding Circle CBILS approvals as at 12 Feb 2021.
Business Review
At Funding Circle we deliver an excellent customer experience
for small businesses powered by our machine learning and
technology.
A great customer experience is built on exceptional fundamentals
and seamless technology. Since our launch, we have built a
technology platform that is revolutionising SME lending. A decade
of research and development has created an inflection point for
Funding Circle. 8th Generation machine learning risk models using
Open Banking data and 10 years of proprietary data underpin our
Instant Decision Lending platform. This enables SME owners to
receive a decision in minutes, from the start of an application to
receipt of approval.
Today, as the leading global platform for small business loans
we have helped more than 100,000 small businesses to access more
than GBP11.5 billion. Our investment in technology has resulted in
strong customer satisfaction scores and high repeat rates, helping
us to grow alongside our small businesses.
We believe that as we get bigger and help more small businesses
access the finance they need to grow, we will create a stronger
platform that drives significant competitive advantage. This
creates a virtuous circle that will enable us to continue to help
thousands of small businesses around the world and drive market
share.
2020 overview
2020 was a year of two halves as shown in the originations table
below. The year started strongly with originations at the high end
of expectations with strong demand for SME loans in the UK,
following Brexit and the General Election in 2019, and in the US
where originations in January and February were the highest levels
seen for 12 months.
With the emergence of the pandemic and associated impact on
economic activity, originations were impacted significantly during
March and April as we waited for approval for the SME government
guarantee programmes in the UK and the US. Total originations
rebounded strongly from May onwards, following accreditation to
these programmes, and reached record levels. Overall, loans under
management were GBP4,214 million as at 31 December 2020, a 13%
increase on 2019. Total originations increased by 17% to GBP2,742
million.
Loans under Management (as
at 31 December)
=================== ==============================
2020 2019 Change
GBPm GBPm
United Kingdom 3,271 2,583 27%
United States 759 882 (14%)
Developing Markets 184 266 (31%)
=================== ======== ========= =========
Total 4,214 3,731 13%
=================== ======== ========= =========
Originations (year ended Originations (half year
31 December) ended)
=================== ============================ =========================
2020 2019 Change H1 2020 H2 2020
GBPm GBPm GBPm GBPm
United Kingdom 2,111 1,556 36% 662 1,449
United States 581 619 (6%) 410 171
Developing Markets 50 175 (71%) 40 10
=================== ======== ======== ======== ================ =======
Total 2,742 2,350 17% 1,112 1,630
=================== ======== ======== ======== ================ =======
2021 priorities
We are well-positioned to take advantage of the structural
changes that are currently reshaping the SME lending market. We are
seeing a significant acceleration in the move towards online
lending among small businesses and our ten years of online
experience means we can capture this enlarged opportunity going
forward.
Our priorities to achieve this are clear.
Lending on our core loans product and the new Recovery Loan
Scheme in the UK, and SBA loans on behalf of banks in the US, as
well as continuing to operate our referral model for other borrower
needs, will commence during Q2.
Alongside this, we will look to take advantage of the
opportunities that our technology provides us with to do more to
help SMEs. Over the next 12 months we will leverage our technology
to launch new funding solutions in the UK to help small business
owners solve more problems. This includes an API to help embed
Funding Circle into partners' websites and platforms; a payment
finance product to help them manage their cash flow challenges: and
a new card for Funding Circle borrowers to enable them to better
manage their business spending habits.
Geographic highlights
United Kingdom
Following the impact of Covid-19 in March 2020, the Government
introduced the Coronavirus Business Interruption Loan Scheme
("CBILS"), which provides an 80% government guarantee to investors.
Funding Circle received accreditation to this scheme in late April
2020 and started lending in May 2020. Under the scheme's rules,
retail investors are not permitted to invest in CBILS loans.
As we started to operate under the scheme, we paused all
non-CBILS lending. From May 2020, and through the rest of the year,
the UK secured a number of funding agreements with institutional
investors such that we were able to meet the high demand from SME
borrowers.
As at 31 December, we had originated c.GBP1,700 million of CBILS
loans. In addition to the CBILS accreditation, we also received
accreditation to originate loans under the Government's Bounce Back
Loan Scheme in July 2020 but this was only made available to
existing Funding Circle borrowers and represented c.GBP27 million
of loans.
In 2020, loans under management rose by 27% to GBP3,271 million
whilst originations grew by 36% to GBP2,111 million. The UK
delivered total income growth of 37% to GBP153 million in 2020,
benefitting from a full year of investment income from the ABS
products, first launched in June 2019, alongside increased
transaction fees driven by the high demand for CBILS loans.
Despite the fair value loss in H1 2020 AEBITDA for the UK
business for full year 2020 was positive at GBP6.5 million. AEBITDA
profit in H2 2020 was GBP28.6 million compared to an AEBITDA loss
in H1 2020 of GBP22.1 million. The UK business was also operating
profitable in H2 2020.
HM Treasury announced in November 2020 that CBILS will be
extended to March 2021, with applications made prior to 31 March
2021 being processed in April and May 2021. In March 2021, HM
Treasury announced that CBILS and BBLS would end on 31(st) March
2021 and be replaced by a new 80% SME guarantee loan scheme called
the Recovery Loan Scheme.
United States
The US business had a strong beginning to the year with January
and February being our highest months for originations for 12
months. In April 2020, the US Government introduced its Paycheck
Protection Program ("PPP") through the Small Business
Administration ("SBA") programme. Under this scheme, the SBA will
forgive the loans if the funds are used to pay eligible expenses
such as payroll costs of employees. The US business was approved by
the SBA to originate PPP loans during April 2020.
Following approval, the US business originated $474 million from
May 2020 through to August 2020 when the scheme paused awaiting the
next round of stimulus packages from the Government. The US
initially funded these loans under two models; the core model and a
referral model whereby it refers borrowers that meet their
eligibility criteria to other institutions. PPP loans are 100%
guaranteed and the average transaction fee was 3.15%.
By July 2020, the US business was granted access to the use of
the Federal Reserve's PPP liquidity facility. This allows for
lending to be undertaken with funds coming directly from this
facility. The US originated GBP24 million of loans through this
facility during 2020. When loans are forgiven by the SBA, the debt
associated with them from the facility is also extinguished.
As anticipated, borrower demand was suppressed from August to
December due to uncertainty over whether there would be further PPP
lending. We relaunched our core lending product in December and
continued to offer our referral model during the second half of the
year. Overall for the year, loans under management decreased by 14%
to GBP759 million with overall originations down 6% at GBP581
million.
The US Government approved a new round of stimulus measures in
December 2020 and, following the relaunch of the PPP programme in
January 2021, the US business funded loans directly from the
Federal Reserve's PPP liquidity facility. Once PPP finishes, we
will continue to grow our core lending product, originate
government guaranteed loans through the SBA programme on behalf of
banks and continue to operate our referral model for other borrower
needs.
Total income for the US was GBP63 million (2019: GBP52 million)
up 20% year on year, again benefitting significantly from a full
six months of investment income from the new investment products.
AEBITDA was negative GBP62.4 million (2019: negative GBP22.0
million) largely driven by the significant fair value adjustment in
H1 2020 of GBP61.3 million and the slowdown in trading in the final
quarter of the year whilst waiting for government stimulus to
restart. In H2 2020, the fair value adjustment was GBP13.2
million.
In July 2020, the Group announced the reorganisation of the US
business centralising the US technology team in the UK and moving
sales and marketing to Denver to accelerate its path to
profitability, with a net reduction of 85 roles. This resulted in
GBP1.5 million in relation to reorganisation costs including
right-of-use asset impairment and GBP12.0 million in relation to
the impairment of goodwill associated with the US business which
were recognised as exceptional items in the year.
Developing Markets
In March 2020, the Group announced the decision to restructure
the Developing Markets business to a referral only model where
loans would be referred to lenders rather than originating loans
for institutional and retail investors. As part of the restructure,
we centralised operations in London. The restructure was completed
successfully and the business was AEBITDA breakeven in H2 2020. Due
to the impact of Covid-19, the Group decided not to scale up the
new model and headcount numbers in London, which resulted in a
limited number of loans originated. Costs associated with the
reorganisation of GBP5.2 million were recognised within exceptional
items in the year.
Finance review
Overview
Group total income was GBP222.0 million (2019: GBP177.3
million), up 25%. Net income for the year was GBP103.7 million
(2019: GBP167.4 million). Net income is total income less fair
value movements on SME loans held for sale.
AEBITDA loss was GBP63.8 million (2019: loss GBP27.5 million).
H1 AEBITDA loss was GBP84.1 million, which comprised of negative
GBP24.4 million operating AEBITDA(4) and negative GBP59.7 million
investment AEBITDA(4) , driven by a large fair value adjustment on
SME loans held for sale. This compared to a strong AEBITDA profit
in H2 2020 of GBP20.3 million, which comprised of GBP12.6 million
operating AEBITDA and GBP7.7 million investment AEBITDA.
The Group's operating loss was GBP106.3 million for the full
year (2019: GBP84.7 million loss). H1 2020 operating loss was
GBP113.5 million, compared with an operating profit in H2 2020 of
GBP7.2 million. Before exceptional items of GBP18.7 million in 2020
for the restructuring of the European business (GBP5.2 million),
restructuring cost in the US business (GBP1.5 million) and US
goodwill impairment (GBP12.0 million), the operating loss was
GBP87.6 million (2019: GBP50.4 million loss).
Profit and loss
31 December 2020 31 December 2019
--------------------------- ------------------------------------ ------------------------------------
Before Before
exceptional Exceptional exceptional Exceptional
items items Total items items Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ------------ ------------- ------- ------------ ------------- -------
Transaction fees 122.5 - 122.5 121.2 - 121.2
Servicing fees 30.2 - 30.2 30.4 - 30.4
Other fees 3.0 - 3.0 5.3 - 5.3
--------------------------- ------------ ------------- ------- ------------ ------------- -------
Fee income ("operating
income") 155.7 - 155.7 156.9 - 156.9
Investment income 89.0 - 89.0 28.3 - 28.3
Investment expense (22.7) - (22.7) (7.9) - (7.9)
--------------------------- ------------ ------------- ------- ------------ ------------- -------
Total income 222.0 - 222.0 177.3 - 177.3
Fair value (losses)/gains (118.3) - (118.3) (9.9) - (9.9)
--------------------------- ------------ ------------- ------- ------------ ------------- -------
Net income 103.7 - 103.7 167.4 - 167.4
--------------------------- ------------ ------------- ------- ------------ ------------- -------
People costs (81.3) (4.0) (85.3) (90.3) - (90.3)
Marketing costs (46.8) - (46.8) (66.5) - (66.5)
Depreciation, amortisation
and impairment (17.2) (13.7) (30.9) (14.9) (34.3) (49.2)
Loan repurchase charge (6.2) - (6.2) (6.5) - (6.5)
Other costs (39.8) (1.0) (40.8) (39.6) - (39.6)
--------------------------- ------------ ------------- ------- ------------ ------------- -------
Operating expenses (191.3) (18.7) (210.0) (217.8) (34.3) (252.1)
--------------------------- ------------ ------------- ------- ------------ ------------- -------
Operating loss (87.6) (18.7) (106.3) (50.4) (34.3) (84.7)
Total income
The Group delivered total income of GBP222.0 million (2019:
GBP177.3 million) up 25%. Total income represents operating income
and investment income, less investment expense.
Operating income includes transaction fees, servicing fees, and
other fees and was GBP155.7 million (2019: GBP156.9 million).
-- Transaction fees , representing fees earned on originations,
grew 1% to GBP122.5 million. This was driven by higher originations
in the UK, offset by lower yields on CBILS loans which are fixed at
4.75%, together with the lower originations in the US, where the
majority were generated through the marketplace (referral) model
driving average yields in the US to 3.7% for the year (2019:
5.4%).
-- Servicing fees , representing income for servicing loans
under management, remained flat at GBP30.2 million. With a large
proportion of the UK originations occurring in the second half of
2020, the impact on the UK's servicing fees will be more pronounced
in 2021. Servicing yield was 0.8% compared with 0.9% in 2019 as
servicing fees are not earned when Funding Circle is servicing its
own loans in warehouses and securitisation vehicles that are on
balance sheet.
-- Other fees arise principally from a fee premium we received
from certain institutional investors in the year in respect of
buying back certain defaulted loans under a historic loan purchase
commitment.
Net investment income represents the investment income, less
investment expense, on loans invested within Funding Circle's
investment vehicles and was GBP66.3 million (2019: GBP20.4
million). This is significantly higher than 2019 as these
programmes commenced in June 2019.
Net income , defined as total income after fair value
adjustments, was GBP103.7 million (2019: GBP167.4 million). The
Group considers a large proportion of this fair value loss of
GBP118.3 million was attributable to the impact that Covid-19
economic stress had on SME borrowers. The fair value adjustment in
H1 2020 was GBP96.1 million, compared with H2 2020 of GBP22.2
million.
Operating expenses
Cost management initiatives led to a 12% decrease from H1 2020
to H2 2020. Overall operating expenses for the full year were
GBP210.0 million (2019: GBP252.1 million). 2020 operating expenses
included certain exceptional items driven by goodwill impairment
and restructuring costs of the Developing Markets and the US
business. Excluding these items, operating expenses were down
GBP26.5 million to GBP191.3 million (2019: GBP217.8 million)
principally driven by salary related savings following the
restructurings and reduced marketing spend.
People costs (including contractors) which represent the Group's
largest ongoing operating cost decreased during the year by 9% to
GBP94.7 million, before the capitalisation of development spend.
This was driven by a decrease in average headcount of 14% and
includes total exceptional costs related to the reorganisation of
the US and Developing Market businesses of GBP4.0 million. The
share-based payment charge for the year, included in people costs,
was lower at GBP5.6 million (2019: GBP8.0 million) driven by
credits from leavers as part of the US and Developing Markets
restructuring of which GBP1.0 million is recognised in exceptional
items.
31 December 31 December
2020 2019 Change
GBPm GBPm %
--------------- ------------- ----------
People costs 94.7 104.6 (9%)
Less capitalised development
spend ("CDS") (9.4) (14.3) (34%)
People costs net of CDS 85.3 90.3 (6%)
Average headcount (incl. contractors) 1,002 1,165 (14%)
Year-end headcount (incl.
contractors) 863 1,139 (24%)
-------------------------------------- --------------- ------------- ----------
Marketing costs decreased in the year from GBP66.5 million in
2019 to GBP46.8 million in 2020 as the Group managed discretionary
marketing spend tightly. Marketing spend overall was 30% of
operating income during the year (2019: 42%).
Depreciation amortisation and impairment costs of GBP30.9
million (2019: GBP49.2 million) largely represent the amortisation
of the cost of the Group's capitalised technology development and
impairment of goodwill.
A charge of GBP12.0 million was recorded in H1 2020 in respect
of the goodwill of the US business (2019: GBP29.0 million in
respect of the Developing Markets goodwill and GBP5.3 million with
respect to other non-financial assets).
An exceptional impairment charge of GBP1.7 million was also
recognised in relation to the impairment of right-of-use property
related assets driven by the reorganisation of the US and
Developing Markets businesses.
Loan repurchase charges relate to certain historical
circumstances when in new markets, predominantly Germany and the
Netherlands, Funding Circle entered into arrangements to buyback
certain defaulted loans from certain financial institutions under a
loan purchase commitment. In return the business has received a fee
premium (reflected in Other fees). Under IFRS 9 this commitment is
accounted for under the expected credit loss model.
Other costs principally includes cost of sales, data and
technology costs and property costs and remained broadly flat year
on year.
Operating loss was GBP113.5 million in H1 2020. In H2 2020, we
made an operating profit of GBP7.2 million. This led to an overall
operating loss for the full year of GBP106.3 million (2019: loss
GBP84.7 million) due to the non-cash fair value adjustment on
investments primarily as a result of the impact of Covid-19 and
exceptional items related to the reorganisation of the US and
Developing Markets businesses. Excluding exceptional items,
operating loss was GBP87.6 million (2019: GBP50.4 million).
--
(4) Investment AEBITDA is defined as investment income,
investment expense and fair value adjustments, and operating
AEBITDA represents AEBITDA excluding investment AEBITDA.
Segmental reporting
During the year ended 31 December 2020, organisational changes
led to greater ownership of costs being managed within geographies.
As a result, the way the operating segment performance is reported
to and reviewed by the Global Leadership Team was modified to
allocate product development, corporate costs, depreciation and
amortisation, share-based payments and exceptional items across the
geographical segments.
The comparatives for the year ended 31 December 2019 have been
restated to reflect the revised segmental presentation. The Group
also reviews the results of the Group using Adjusted EBITDA as an
alternative performance measure. The table below sets out a
reconciliation between these measures and the statutory operating
loss:
Net income/(loss) 31 December 2020 31 December 2019 (Restated)
----------------------------------------------- -----------------------------------------------
United United Developing United United Developing
Kingdom States Markets Total Kingdom States Markets Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ---------- ---------- ------------- -------- ------------ ---------- ------------ -------
Total income 152.9 63.0 6.1 222.0 111.6 52.4 13.3 177.3
Fair value
(losses)/gains (43.8) (74.5) - (118.3) (3.1) (6.8) - (9.9)
Net income/(loss) 109.1 (11.5) 6.1 103.7 108.5 45.6 13.3 167.4
Segment profit 31 December 2020 31 December 2019 (Restated)
------------------------------------------------- -------------------------------------------------
United United Developing United United Developing
Kingdom States Markets Total Kingdom States Markets Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------- ---------- ------------- ---------- ---------- ---------- ------------- ----------
Segment
adjusted
EBITDA 30.2 (52.8) (6.3) (28.9) 34.0 (10.3) (12.5) 11.2
Product
development (14.7) (6.5) (1.1) (22.3) (15.1) (8.3) (3.0) (26.4)
Corporate
costs (9.0) (3.1) (0.5) (12.6) (7.9) (3.4) (1.0) (12.3)
Adjusted
EBITDA 6.5 (62.4) (7.9) (63.8) 11.0 (22.0) (16.5) (27.5)
Depreciation
and
amortisation (9.4) (6.5) (1.3) (17.2) (8.0) (5.2) (1.7) (14.9)
Share-based
payments and
social
security
costs (5.0) (1.2) (0.4) (6.6) (5.0) (2.7) (0.3) (8.0)
Exceptional
items - (13.5) (5.2) (18.7) - - (34.3) (34.3)
Operating loss (7.9) (83.6) (14.8) (106.3) (2.0) (29.9) (52.8) (84.7)
Balance sheet and investments
As previously reported, in 2019 the Group launched new funding
products whereby it aggregates loans in warehouses for sale as ABS
bonds to widen the universe of investors that can access investment
in Funding Circle loans.
The SME loans are held in bankruptcy remote warehouses and
securitisation vehicles. The value of the investments are regularly
assessed and have been impacted due to the stress of Covid-19 on
SMEs.
Whilst total loans consolidated on balance sheet for accounting
purposes is c.GBP560 million, Funding Circle's exposure is limited
to its investment of GBP118 million (2019: GBP145 million). The
investments are valued by discounting future cash flows and the
Group may crystallise higher amounts in future periods as the
discounting unwinds. The tables below breaks down the Group's
balance sheet into its constituent parts:
2020 2019
Operating PPP Loans Warehouse Securitisation Other
business SPVs SPVs investments Total Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
=================== =========== =========== =========== ================ ============== ========= =========
Investment
in SME loans 0.7 24.3 221.8 279.8 32.2 558.8 723.5
Cash 64.4 - 18.9 20.0 - 103.3 164.5
Other assets - - - 11.1 - 11.1 8.4
Borrowing/bonds - (24.3) (171.2) (294.3) - (489.8) (614.5)
=================== =========== =========== =========== ================ ============== ========= =========
Cash & Investments 65.1 - 69.5 16.6 32.2 183.4 281.9
=================== =========== =========== =========== ================ ============== ========= =========
Other assets 109.0 - - - - 109.0 99.1
Other liabilities (74.8) - - - - (74.8) (62.0)
=================== =========== =========== =========== ================ ============== ========= =========
Equity 99.3 - 69.5 16.6 32.2 217.6 319.0
=================== =========== =========== =========== ================ ============== ========= =========
Funding Circle has various investment vehicles it uses to invest
in SME loans. Given the different risk dynamics, each vehicle is
affected by Covid-19 economic stress in different ways.
The Group had warehoused loans in the US and UK during 2019 and
securitised them in August 2019 and November 2019 respectively. In
January 2020, the US undertook a second securitisation. When
lockdowns began in March 2020, the Group had one UK warehouse at
100% of capacity and two US warehouses at a combined 30% capacity.
Our invested capital increased following the 2019 year-end, prior
to the reassessment of the investment portfolio fair value in light
of Covid-19. The fair value of each of these investments was
assessed for the interim results in June 2020, with the resultant
value determined to be GBP110 million collectively as shown
below.
The Group values its investments using discounted cash flows
that take into account projected cash flows from the underlying SME
loans, which include principal repayment and prepayment rates and
expected levels of default. Since the 30 June 2020, there has not
been a significant deterioration in the expected level of defaults
when these investments were revalued at 31 December 2020.
The table below provides a further breakdown of Funding Circle's
investment in these vehicles:
At 31 December At 30 June At 31 December
2019 2020 2020
Investment type GBPm GBPm GBPm
------------------------------------- ---------------- ------------ -----------------
1. Securitisation SPVs (vertical) 13 18 12
2. Other Investments 13 16 32
3. Warehouse SPVs 94 66 70
4. Securitisation SPVs (horizontal) 25 10 4
------------------------------------- ---------------- ------------ -----------------
Total 145 110 118
------------------------------------- ---------------- ------------ -----------------
1) Securitisation SPVs (vertical): Funding Circle is required by
regulation to retain a 5% equal participation in all classes of
bonds issued (vertical). The vertical investments are held at
amortised cost.
2) Other Investments: There are a small amount of Other
Investments, comprising seed investments in Private Funds and
participation in investments in the UK CBILS programme. The
increase since 2019 is principally driven by CBILS investments.
3) Warehouse SPVs: In warehouses we deploy our equity and third
party bank debt to aggregate loans temporarily prior to
securitisation. The debt is senior which means the equity is more
exposed to changes in the valuation of loans. When Covid-19 hit,
the Group had one UK warehouse at 100% of capacity and two US
warehouses at a combined 30% capacity. The intention was to
securitise the SME loans in the warehouses but this was not
feasible due to Covid-19.
4) Securitisation SPVs (horizontal): Once loans are securitised,
we temporarily hold the residual horizontal tranches with the
intention to sell once seasoned. These tranches have the potential
to earn greatest returns, but they also absorb losses first. As at
December 2020, we held horizontals in three securitisations which
were securitised in H2 2019 (UK and US) and H1 2020 (US). The
timing of the pandemic meant that it was not feasible to dispose of
all these horizontal tranches in 2020. Since June 2020, the Group
sold a tranche of the UK vehicle for c.GBP4 million.
Cash flow
As at 31 December 2020, the Group held cash and cash equivalents
of GBP103.3 million, down from GBP164.5 million at the end of 2019.
Of the balance, GBP38.9 million (2019: GBP14.2 million) was held
within the warehouse and securitisation vehicles. Included within
the GBP61.2 million decrease, GBP20.9 million has been due to the
co-investing in CBILS loans and GBP57.9 million invested into the
ABS vehicles principally in the first quarter of the year prior to
Covid-19.
As at 31 December 2020, the Group was due net GBP27 million of
fees which were subsequently received in February 2021.
Free cash flow , which is an alternative performance measure,
represents the net cash flows from operating activities less the
cost of purchasing intangible assets, property, plant and
equipment, lease payments and interest received. It excludes the
warehouse and securitisation financing and funding cash flows.
Free cash flow has principally improved due to operating cash
flows from transaction fee income and investment income while
controlling marketing and people costs year on year.
The table below shows how the Group's cash has been
utilised:
2020 2019
==================================================
GBPm GBPm
================================================== ======== ========
Adjusted EBITDA (63.8) (27.5)
Fair value adjustments 118.3 9.9
Purchase of tangible and intangible assets (10.3) (17.2)
Payment of lease liabilities (7.8) (7.1)
Working capital / other (21.0) (7.5)
-------------------------------------------------- -------- --------
Free cash flow 15.4 (49.4)
Net investment in associates 2.3 (13.9)
Net investment in trusts (20.9) -
Net investment in warehouses (234.0) (79.3)
Net investment in securitisations 176.1 (27.7)
Other 0.2 3.9
Effect of foreign exchange (0.3) (2.1)
================================================== ======== ========
Movement in the year (61.2) (168.5)
Cash and cash equivalents at the beginning of the
year 164.5 333.0
================================================== ======== ========
Cash and cash equivalents at the end of the year 103.3 164.5
================================================== ======== ========
Statement of Directors' Responsibilities
The Funding Circle Report and Accounts for year end 31 December
2020 contains a responsibility statement in the following form:
Each of the Directors, whose names and functions are listed in
the Report of the Directors confirm that, to the best of their
knowledge:
-- the Group and Company financial statements, which have been
prepared in accordance with international accounting standards in
conformity with the requirements of the Companies Act 2006 and
international financial reporting standards adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the European Union,
give a true and fair view of the assets, liabilities, financial
position and loss of the Group and profit of the Company; and
-- the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Group and Company, together with a description of the principal
risks and uncertainties that it faces.
In the case of each of the Directors in office as at the date of
the approval of the Annual Report and Accounts:
-- so far as the Director is aware, there is no relevant audit
information of which the Company's auditors are unaware; and
-- the Director has taken all the steps that he/she ought to
have taken as a Director in order to make himself/herself aware of
any relevant information and to establish that the Company's
auditors are aware of that information.
By order of the Board
Samir Desai, Chief Executive Officer
Oliver White, Chief Financial Officer
25 March 2021
Consolidated statement of comprehensive income
for the year ended 31 December 2020
31 December 31 December 31 December 31 December
2020 2020 2019 2019
Before Exceptional Before Exceptional
exceptional items(1) exceptional items(1)
items items
Note GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
Transaction fees 122.5 - 122.5 121.2 - 121.2
Servicing fees 30.2 - 30.2 30.4 - 30.4
Other fees 3.0 - 3.0 5.3 - 5.3
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
Fee income 155.7 - 155.7 156.9 - 156.9
Investment income 89.0 - 89.0 28.3 - 28.3
Investment expense (22.7) - (22.7) (7.9) - (7.9)
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
Total income 222.0 - 222.0 177.3 - 177.3
Fair value
(losses)/gains (118.3) - (118.3) (9.9) - (9.9)
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
Net income 2 103.7 - 103.7 167.4 - 167.4
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
People costs 3,5 (81.3) (4.0) (85.3) (90.3) - (90.3)
Marketing costs 3 (46.8) - (46.8) (66.5) - (66.5)
Depreciation,
amortisation
and impairment 3 (17.2) (13.7) (30.9) (14.9) (34.3) (49.2)
Loan repurchase
charge 3 (6.2) - (6.2) (6.5) - (6.5)
Other costs 3 (39.8) (1.0) (40.8) (39.6) - (39.6)
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
Operating expenses 3 (191.3) (18.7) (210.0) (217.8) (34.3) (252.1)
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
Operating loss (87.6) (18.7) (106.3) (50.4) (34.3) (84.7)
Finance income 0.4 - 0.4 1.8 - 1.8
Finance costs (1.4) - (1.4) (1.2) - (1.2)
Share of net loss of
associates (0.8) - (0.8) (0.1) - (0.1)
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
Loss before taxation (89.4) (18.7) (108.1) (49.9) (34.3) (84.2)
Income tax (0.2) - (0.2) (0.5) - (0.5)
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
Loss for the year (89.6) (18.7) (108.3) (50.4) (34.3) (84.7)
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
Other comprehensive
income/(loss)
Items that may be
reclassified
subsequently to
profit and
loss:
Exchange differences
on
translation of
foreign operations 1.7 - 1.7 (7.7) - (7.7)
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
Total comprehensive
loss
for the year (87.9) (18.7) (106.6) (58.1) (34.3) (92.4)
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
Total comprehensive
loss
attributable to:
Owners of the Parent (87.9) (18.7) (106.6) (58.1) (34.3) (92.4)
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
Loss per share
Basic and diluted
loss per
share 6 (25.8)p (5.4)p (31.2)p (14.5)p (9.9)p (24.4)p
--------------------- ---- ------------ ------------- ------------- ------------- ----------------- -----------
(1) Exceptional items are detailed within note 4. During the
year ended 31 December 2020 the presentation of exceptional items
on the face of the consolidated statement of comprehensive income
was amended to illustrate them in columnar fashion to aid users of
the accounts understanding of the impact of such items. The
comparative year ended 31 December 2019 was re-presented
accordingly for comparability.
All amounts relate to continuing activities.
Consolidated balance sheet
as at 31 December 2020
31 December 31 December
2020 2019
Note GBPm GBPm
-------------------------------------------- ---- ----------- -----------
Non-current assets
Goodwill 7 - 11.3
Intangible assets 8 24.4 23.6
Property, plant and equipment 9 28.7 39.0
Investment in associates 11.0 13.2
Investment in trusts 13 21.2 -
Investment in SME loans (other) 13 0.7 1.7
-------------------------------------------- ---- ----------- -----------
86.0 88.8
-------------------------------------------- ---- ----------- -----------
Current assets
Investment in SME loans (warehouse) 13 221.8 342.0
Investment in SME loans (securitised) 13 279.8 366.6
Investment in SME loans (other) 13 24.3 -
Trade and other receivables 10 67.0 33.6
Cash and cash equivalents 14 103.3 164.5
-------------------------------------------- ---- ----------- -----------
696.2 906.7
-------------------------------------------- ---- ----------- -----------
Total assets 782.2 995.5
-------------------------------------------- ---- ----------- -----------
Current liabilities
Trade and other payables 11 34.1 19.7
Bank borrowings 13 195.5 265.8
Bonds 13 294.3 348.7
Short-term provisions and other liabilities 12 8.7 3.1
Lease liabilities 9 7.3 8.5
-------------------------------------------- ---- ----------- -----------
539.9 645.8
Non-current liabilities
Long-term provisions and other liabilities 12 1.2 0.9
Lease liabilities 9 23.5 29.8
-------------------------------------------- ---- ----------- -----------
Total liabilities 564.6 676.5
-------------------------------------------- ---- ----------- -----------
Equity
Share capital 0.3 0.3
Share premium account 292.6 292.3
Foreign exchange reserve 9.7 8.0
Share options reserve 13.6 11.9
(Accumulated losses)/ retained earnings (98.6) 6.5
-------------------------------------------- ---- ----------- -----------
Total equity 217.6 319.0
-------------------------------------------- ---- ----------- -----------
Total equity and liabilities 782.2 995.5
-------------------------------------------- ---- ----------- -----------
Consolidated statement of changes in equity
for the year ended 31 December 2020
Share Share Foreign Share Retained Total
Capital premium exchange options earnings Equity
account reserve reserve / (accumulated
losses)
Note GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ----- -------- -------- --------- -------- --------------- -------
Balance at 1 January 2019 0.3 291.8 15.7 6.0 87.2 401.0
Loss for the year - - - - (84.7) (84.7)
Other comprehensive loss
Exchange differences on
translation of foreign operations - - (7.7) - - (7.7)
Transactions with owners
Transfer of share option
costs - - - (4.0) 4.0 -
Issue of share capital - 0.5 - - - 0.5
Employee share schemes -
value of employee services - - - 9.9 - 9.9
------------------------------------------ -------- -------- --------- -------- --------------- -------
Balance at 31 December 2019 0.3 292.3 8.0 11.9 6.5 319.0
Loss for the year - - - - (108.3) (108.3)
Other comprehensive income
Exchange differences on
translation of foreign operations - - 1.7 - - 1.7
Transactions with owners
Transfer of share option
costs - - - (3.2) 3.2 -
Issue of share capital - 0.3 - - - 0.3
Employee share schemes -
value of employee services - - - 4.9 - 4.9
------------------------------------------ -------- -------- --------- -------- --------------- -------
Balance at 31 December 2020 0.3 292.6 9.7 13.6 (98.6) 217.6
------------------------------------------ -------- -------- --------- -------- --------------- -------
Consolidated statement of cash flows
for the year ended 31 December 2020
31 December 31 December
2020 2019
Note GBPm GBPm
----------------------------------------------- ---- ----------- -----------
Net cash inflow/(outflow) from operating
activities 14 33.1 (27.0)
----------------------------------------------- ---- ----------- -----------
Investing activities
Purchase of intangible assets 8 (9.5) (14.5)
Purchase of property, plant and equipment 9 (0.8) (2.7)
Cash receipts from SME loans (curing) - 4.7
Purchase of SME loans (other) 13 (25.0) (1.5)
Purchase of SME loans (warehouse phase) 13 (286.9) (381.2)
Purchase of SME loans (securitised) 13 - (414.5)
Cash receipts from SME loans (warehouse phase) 13 146.9 32.5
Cash receipts from SME loans (securitised) 13 211.7 37.4
Proceeds from sale of investment bonds 13 4.0 -
Investment in trusts 13 (20.9) -
Redemption / (investment) in associates 1.9 (13.9)
Dividends from associates 0.4 0.1
Interest received 0.4 1.8
----------------------------------------------- ---- ----------- -----------
Net cash inflow/(outflow) from investing
activities 22.2 (751.8)
----------------------------------------------- ---- ----------- -----------
Financing activities
Proceeds from bank borrowings 13 230.1 462.1
Repayment of bank borrowings 13 (299.1) (192.7)
Proceeds from issuance of bonds 13 186.5 379.5
Payment of bond liabilities 13 (226.1) (30.1)
Proceeds from the exercise of share options 0.2 0.7
Payment of lease liabilities (7.8) (7.1)
----------------------------------------------- ---- ----------- -----------
Net cash (outflow)/inflow from financing
activities (116.2) 612.4
----------------------------------------------- ---- ----------- -----------
Net decrease in cash and cash equivalents (60.9) (166.4)
Cash and cash equivalents at the beginning
of the year 164.5 333.0
Effect of foreign exchange rate changes (0.3) (2.1)
----------------------------------------------- ---- ----------- -----------
Cash and cash equivalents at the end of the
year 14 103.3 164.5
----------------------------------------------- ---- ----------- -----------
The impact of exceptional items on the consolidated statement of
cash flows is detailed in note 4.
Notes
for the year ended 31 December 2020
1. Basis of preparation
General information
The results for the year ended 31 December 2020 have been
extracted from the audited financial statements of Funding Circle
Holdings plc. The financial statements have been prepared in
accordance with International Financial Reporting Standards (IFRSs)
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in
the European Union and International Accounting Standards in
conformity with the requirements of the Companies Act 2006. The
financial statements have been prepared on a going concern
basis.
The financial information in this statement does not constitute
statutory accounts within the meaning of s434 of the Companies Act
2006. The statutory accounts for the year ended 31 December 2020,
on which the auditors have given an unqualified audit report, have
not yet been filed with the Registrar of Companies.
Except as described below in Note 15, the principal accounting
policies applied in the preparation of the consolidated financial
statements are consistent with those of the annual financial
statements for the year ended 31 December 2019, as described in
those financial statements.
The preparation of financial statements in conformity with IFRS
requires the use of estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Although these estimates are
based on management's best knowledge of the amount, event or
actions, actual results ultimately may differ from those
estimates.
Going concern
The financial statements are prepared on a going concern basis
as the Directors are satisfied that the Group has the resources to
continue in business for the foreseeable future (which has been
taken as at least 12 months from the date of approval of the
financial statements).
The Group made a total comprehensive loss of GBP106.6 million
during the year ended 31 December 2020 (2019: loss of GBP92.4
million).
As at 31 December 2020, the Group had net assets of GBP217.6
million (2019: GBP319.0 million). This includes GBP103.3 million
cash and cash equivalents (2019: GBP164.5 million) of which GBP38.9
million (2019: GBP14.2 million) was held within the warehouse and
securitisation vehicles. In February 2021 the Group received net
GBP27.0 million in cash relation to fees owed to the Group at 31
December 2020. Additionally, within the net assets the Group holds
GBP118.3 million of invested capital, some of which is capable of
being monetised if liquidity needs arise.
The Group has prepared detailed cash flow forecasts for the next
15 months and has updated the going concern assessment to factor in
the potential impact of Covid-19 and related economic stress.
The base case scenario assumes:
-- non-government scheme lending and the new government
guarantee scheme in the UK resume in Q2 2021.
-- there is no further extension to the PPP government programme in the US beyond March 2021.
-- costs and headcount remain relatively flat with marketing at c.30% of operating income.
Management prepared a severe but plausible downside scenario in
which:
-- there is a further deterioration in the global economy and
there is a dislocation period of two months between current
government schemes ending and non-government schemes/new schemes
commencing; and
-- a downside loss scenario is applied to Funding Circle's
on-balance sheet investment in SME loans resulting in higher fair
value losses and lower cash flows to the warehouse and horizontal
tranches of investments it owns.
In this downside scenario, sufficient cash is forecast to be
available to meet liabilities as they fall due without the
requirement to take significant mitigating actions, restructuring
or monetising investments.
The Group does not currently rely on committed or uncommitted
borrowing facilities with the exception of borrowings, which are
held in bankruptcy remote SPVs, to fund warehouse SME loan
purchases, and does not have undrawn committed borrowing facilities
available to the wider Group. Management has reviewed financial
covenants that the Group must adhere to in relation to its
servicing agreements. These are with institutional investors and
debt facilities associated with borrowings used to fund SME loan
originations in warehouses, for which there are unrestricted cash,
tangible net worth and debt to tangible net worth ratios. In the
downside scenario, the risk of covenant breach is considered
remote.
The Directors have made enquiries of management and considered
budgets and cash flow forecasts for the Group and have, at the time
of approving these financial statements, a reasonable expectation
that the Company and the Group have adequate resources to continue
in operational existence for the foreseeable future.
2. Segmental information
IFRS 8 Operating Segments requires the Group to determine its
operating segments based on information which is provided
internally. Based on the internal reporting information and
management structures within the Group, it has been determined that
there are three geographic operating segments previously supported
by two centralised cost segments. Reporting on this basis is
reviewed by the Global Leadership Team ("GLT"), which is the chief
operating decision maker ("CODM"). The GLT function is made up of
the Executive Directors and other senior management and is
responsible for the strategic decision making of the Group.
The five reportable segments previously consisted of the three
geographic segments: the United Kingdom, the United States and
Developing Markets, plus the two centralised cost segments: global
product development and corporate costs. The Developing Markets
segment includes the Group's less mature businesses in Germany and
the Netherlands.
The GLT measures the performance of each segment by reference to
a non-GAAP measure, Adjusted EBITDA, which is defined as
profit/loss before finance income and costs, taxation, depreciation
and amortisation ("EBITDA") and additionally excludes share-based
payment charges and associated social security costs, foreign
exchange and exceptional items (see note 5). Together with
operating profit/loss, Adjusted EBITDA is a key measure of Group
performance as it allows better interpretation of the underlying
performance of the business.
During the year ended 31 December 2020 organisational changes
led to greater ownership of costs being managed within geographies.
As a result the way the operating segment performance is reported
to and reviewed by the GLT was modified to allocate product
development, corporate costs, depreciation and amortisation,
share-based payment charges and exceptional items across the three
geographical segments. The comparatives for the year ended 31
December 2019 have been restated to reflect the revised segmental
presentation.
Net income/(loss) 31 December 2020 31 December 2019 (restated)
-------------------------------------- ------------------------------------
United United Developing United United Developing
Kingdom States Markets Total Kingdom States Markets Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- -------- ------- ---------- ------- -------- ------- ---------- -----
Total income 152.9 63.0 6.1 222.0 111.6 52.4 13.3 177.3
Fair value (losses)/gains (43.8) (74.5) - (118.3) (3.1) (6.8) - (9.9)
-------------------------- -------- ------- ---------- ------- -------- ------- ---------- -----
Net income/(loss) 109.1 (11.5) 6.1 103.7 108.5 45.6 13.3 167.4
Segment profit 31 December 2020 31 December 2019 (restated)
-------------------------------------- -------------------------------------
United United Developing United United Developing
Kingdom States Markets Total Kingdom States Markets Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- -------- ------- ---------- ------- -------- ------- ---------- ------
Segment adjusted
EBITDA 30.2 (52.8) (6.3) (28.9) 34.0 (10.3) (12.5) 11.2
Product development (14.7) (6.5) (1.1) (22.3) (15.1) (8.3) (3.0) (26.4)
Corporate costs (9.0) (3.1) (0.5) (12.6) (7.9) (3.4) (1.0) (12.3)
--------------------- -------- ------- ---------- ------- -------- ------- ---------- ------
Adjusted EBITDA 6.5 (62.4) (7.9) (63.8) 11.0 (22.0) (16.5) (27.5)
Depreciation
and amortisation (9.4) (6.5) (1.3) (17.2) (8.0) (5.2) (1.7) (14.9)
Share-based payments
and social security
costs (5.0) (1.2) (0.4) (6.6) (5.0) (2.7) (0.3) (8.0)
Exceptional items
(note 4) - (13.5) (5.2) (18.7) - - (34.3) (34.3)
--------------------- -------- ------- ---------- ------- -------- ------- ---------- ------
Operating loss (7.9) (83.6) (14.8) (106.3) (2.0) (29.9) (52.8) (84.7)
Net income by type
In addition to the segmental reporting of performance under IFRS
8, the table below sets out net income by its type:
31 December 31 December
2020 2019
GBPm GBPm
-------------------------- ----------- -----------
Transaction fees 122.5 121.2
Servicing fees 30.2 30.4
Other fees 3.0 5.3
-------------------------- ----------- -----------
Fee income 155.7 156.9
Investment income 89.0 28.3
Investment expense (22.7) (7.9)
-------------------------- ----------- -----------
Total income 222.0 177.3
Fair value (losses)/gains (118.3) (9.9)
-------------------------- ----------- -----------
Net income 103.7 167.4
-------------------------- ----------- -----------
3. Operating expenses
31 December 2020 31 December 2019
---------------------------- -------------------------------- --------------------------------
Before Exceptional Total Before Exceptional Total
exceptional items exceptional items
items items
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ------------ ----------- ----- ------------ ----------- -----
Depreciation 9.0 - 9.0 7.8 - 7.8
Amortisation 8.2 - 8.2 7.1 - 7.1
Rental income and other
recharges (1.1) - (1.1) - - -
Operating lease rentals:
- Other assets - - - 0.1 - 0.1
- Land and buildings 0.1 - 0.1 0.1 - 0.1
Employment costs (including
contractors) 81.3 4.0 85.3 90.3 - 90.3
Marketing costs (excluding
employment costs) 46.8 - 46.8 66.5 - 66.5
Data and technology 10.9 - 10.9 9.4 - 9.4
Loan repurchase charge 6.2 - 6.2 6.5 - 6.5
Impairment of goodwill - 12.0 12.0 - 29.0 29.0
Impairment of intangible
and tangible assets - 1.7 1.7 - 5.3 5.3
Other expenses 29.9 1.0 30.9 30.0 - 30.0
---------------------------- ------------ ----------- ----- ------------ ----------- -----
Total operating expenses 191.3 18.7 210.0 217.8 34.3 252.1
---------------------------- ------------ ----------- ----- ------------ ----------- -----
4. Exceptional items
31 December 31 December
2020 2019
GBPm GBPm
----------------------------------------------------- ----------- -----------
Restructuring costs 6.0 -
Share-based payment credit relating to restructuring (1.0) -
Impairment of goodwill 12.0 29.0
Impairment of intangible and tangible assets 1.7 5.3
----------------------------------------------------- ----------- -----------
Total 18.7 34.3
----------------------------------------------------- ----------- -----------
Exceptional items are the items of income or expense that the
Group considers are material, one-off in nature and of such
significance that they merit separate presentation in order to aid
the reader's understanding of the Group's financial
performance.
As announced in March 2020, the Group restructured the German
and Dutch (Developing Markets) businesses to focus on referring
loans it originates to local lenders. This restructuring has
resulted in one-off costs totalling GBP4.6 million comprising
redundancy costs GBP4.0 million, a related share-based payment
credit of (GBP0.4) million and other costs of GBP1.0 million. An
additional impairment on right-of-use assets was incurred of GBP0.6
million. Cash payments associated with these items totalled GBP3.8
million to 31 December 2020.
As announced in July 2020, the Group reorganised the US
business, centralising the US technology team in the UK, and moving
sales and marketing to Denver, resulting in a net reduction of c.85
roles. This restructuring has resulted in one-off costs totalling
GBP0.4 million, comprising redundancy costs of GBP1.0 million and
associated share-based payment credits of (GBP0.6) million. An
additional impairment on right-of-use assets was recognised of
GBP1.1 million. Cash payments associated with these items totalled
GBP1.1 million to 31 December 2020.
Following a change in the Group's income and cost forecasts, the
Group has taken a non-cash goodwill impairment of GBP12.0 million
in relation to the US business.
In 2019, as part of the annual goodwill impairment assessment
the Group took a non-cash goodwill impairment of GBP29.0 million.
Additionally the Group assessed the tangible and intangible fixed
assets of the German and Dutch businesses and took a non-cash
impairment of GBP0.7 million and GBP4.6 million respectively.
5. Employees
The average monthly number of employees (including Directors)
during the year was:
2020 2019
Number Number
------------------- ------- -------
UK 601 599
US 240 292
Developing Markets 70 164
------------------- ------- -------
911 1,055
------------------- ------- -------
In addition to the employees above, the average monthly number
of contractors during the year was 91 (2019: 110).
Employment costs (including Directors' emoluments) during the
year were:
31 December 31 December 31 December
2020 2020 2019
Before Exceptional Total Total
exceptional items
items
GBPm GBPm GBPm GBPm
------------------------------------ ------------ ------------- ------------- -----------
Wages and salaries 70.8 4.0 74.8 80.1
Social security costs 6.9 1.0 7.9 7.8
Pension costs 1.2 - 1.2 1.0
Share-based payments 6.6 (1.0) 5.6 8.0
------------------------------------ ------------ ------------- ------------- -----------
85.5 4.0 89.5 96.9
Contractor costs 5.2 - 5.2 7.7
Less: capitalised development costs (9.4) - (9.4) (14.3)
------------------------------------ ------------ ------------- ------------- -----------
Employment costs net of capitalised
development costs 81.3 4.0 85.3 90.3
------------------------------------ ------------ ------------- ------------- -----------
6. Loss per share
Basic loss per share amounts are calculated by dividing the loss
for the year attributable to ordinary equity holders of the Company
by the weighted average number of ordinary shares outstanding
during the year.
There is no difference in the weighted average number of shares
used in the calculation of basic and diluted loss per share as the
effect of all potentially dilutive shares outstanding was
anti-dilutive.
The following table reflects the income and share data used in
the basic and diluted loss per share computations:
31 December 31 December
2020 2019
GBPm GBPm
---------------------------------------------------- ----------- -----------
Loss for the year (108.3) (84.7)
---------------------------------------------------- ----------- -----------
Weighted average number of ordinary shares in
issue (million) 347.0 347.6
Basic and diluted loss per share (31.2)p (24.4)p
---------------------------------------------------- ----------- -----------
Loss for the year before exceptional items (89.6) (50.4)
---------------------------------------------------- ----------- -----------
Weighted average number of ordinary shares in
issue (million) 347.0 347.6
Basic and diluted loss per share before exceptional
items (25.8)p (14.5)p
---------------------------------------------------- ----------- -----------
7. Goodwill
Total
GBPm
--------------------------- ------
Cost and carrying amount
At 1 January 2019 42.3
Exchange differences (2.0)
Impairment charge (note 4) (29.0)
--------------------------- ------
At 31 December 2019 11.3
--------------------------- ------
At 1 January 2020 11.3
Exchange differences 0.7
Impairment charge (note 4) (12.0)
--------------------------- ------
At 31 December 2020 -
--------------------------- ------
Goodwill is reviewed annually for impairment, or more frequently
when there are indications that impairment may have occurred.
Following the impact of Covid-19 and a change in the Group's income
and cost forecasts, the Group undertook an interim goodwill
impairment review for all CGUs at 30 June 2020.
Goodwill acquired in a business combination is allocated, at
acquisition, to the CGUs that are expected to benefit from that
business combination. At the previous balance sheet date, the Group
had one CGU to which goodwill was attached, being Funding Circle
USA ("FCUSA") and its subsidiaries.
31 December 31 December
2020 2019
GBPm GBPm
------ ----------- -----------
FCUSA - 11.3
FCCE - -
------ ----------- -----------
Total - 11.3
------ ----------- -----------
The impairment test involved comparing the carrying value of the
non-financial assets held for use to their recoverable amount. The
recoverable amount represents the higher of the CGU's fair value
less costs to sell and its value in use. The recoverable amount was
determined using fair value less cost to sell calculations
utilising discounted cash flows.
Further details of the impairment assessment are detailed within
note 16. The review identified impairment to the goodwill in FCUSA
as the fair value less cost to sell calculated was below the
carrying amount. The cumulative amount of impairment losses in
relation to goodwill recognised in the year was GBP12.0 million (31
December 2019: GBP29.0 million in FCCE).
8. Intangible assets
Capitalised
development Computer Other
costs software intangibles Total
GBPm GBPm GBPm GBPm
--------------------------- ------------ --------- ------------ ------
Cost
At 1 January 2019 34.2 0.8 1.3 36.3
Exchange differences (0.5) - (0.2) (0.7)
Additions 14.3 0.2 - 14.5
Reclassification - - - -
Disposals (0.7) - - (0.7)
--------------------------- ------------ --------- ------------ ------
At 31 December 2019 47.3 1.0 1.1 49.4
--------------------------- ------------ --------- ------------ ------
At 1 January 2020 47.3 1.0 1.1 49.4
Exchange differences (0.5) - - (0.5)
Additions 9.4 0.1 - 9.5
Disposals (10.7) (0.3) - (11.0)
--------------------------- ------------ --------- ------------ ------
At 31 December 2020 45.5 0.8 1.1 47.4
--------------------------- ------------ --------- ------------ ------
Accumulated amortisation
At 1 January 2019 13.4 0.3 1.1 14.8
Exchange differences (0.1) - (0.1) (0.2)
Reclassification (0.3) 0.3 - -
Charge for the year 6.9 0.2 - 7.1
Impairment 4.6 - - 4.6
Disposals (0.5) - - (0.5)
--------------------------- ------------ --------- ------------ ------
At 31 December 2019 24.0 0.8 1.0 25.8
--------------------------- ------------ --------- ------------ ------
At 1 January 2020 24.0 0.8 1.0 25.8
Charge for the year 8.0 0.2 - 8.2
Disposals (10.7) (0.3) - (11.0)
--------------------------- ------------ --------- ------------ ------
At 31 December 2020 21.3 0.7 1.0 23.0
--------------------------- ------------ --------- ------------ ------
Carrying amount
At 31 December 2020 24.2 0.1 0.1 24.4
--------------------------- ------------ --------- ------------ ------
At 31 December 2019 23.3 0.2 0.1 23.6
--------------------------- ------------ --------- ------------ ------
9. Property, plant and equipment, right-of-use assets and lease
liabilities
The Group has right-of-use assets which comprise property leases
held by the Group. Information about leases for which the Group is
a lessee is presented below.
Analysis of property, plant and equipment between owned and
leased assets
31 December 31 December
2020 2019
GBPm GBPm
-------------------------------------- ----------- -----------
Property, plant and equipment (owned) 3.9 5.1
Right-of-use assets 24.8 33.9
-------------------------------------- ----------- -----------
28.7 39.0
-------------------------------------- ----------- -----------
Reconciliation of amount recognised in the balance sheet
Leasehold Computer Furniture Right-of-use
improvements equipment and fixtures assets (property) Total
GBPm GBPm GBPm GBPm GBPm
------------------------- ------------- ---------- ------------- ------------------ -----
Cost
At 1 January 2019 5.3 4.0 2.2 33.8 45.3
Reclassification (0.2) - - 0.2 -
Disposals (0.5) - (0.4) (5.3) (6.2)
Additions 1.4 0.9 1.2 21.1 24.6
Exchange differences (0.2) (0.1) - (0.4) (0.7)
------------------------- ------------- ---------- ------------- ------------------ -----
At 31 December 2019 5.8 4.8 3.0 49.4 63.0
------------------------- ------------- ---------- ------------- ------------------ -----
At 1 January 2020 5.8 4.8 3.0 49.4 63.0
Disposals (0.1) (1.6) (0.2) (2.2) (4.1)
Additions 0.4 0.4 - - 0.8
Exchange differences - - - (0.4) (0.4)
------------------------- ------------- ---------- ------------- ------------------ -----
At 31 December 2020 6.1 3.6 2.8 46.8 59.3
------------------------- ------------- ---------- ------------- ------------------ -----
Accumulated depreciation
At 1 January 2019 1.7 3.0 1.5 13.9 20.1
Disposals (0.3) - (0.4) (3.7) (4.4)
Charge for the year 1.0 0.9 0.4 5.5 7.8
Impairment 0.6 0.1 - - 0.7
Exchange differences - - - (0.2) (0.2)
------------------------- ------------- ---------- ------------- ------------------ -----
At 31 December 2019 3.0 4.0 1.5 15.5 24.0
------------------------- ------------- ---------- ------------- ------------------ -----
At 1 January 2020 3.0 4.0 1.5 15.5 24.0
Disposals (0.1) (1.6) (0.2) (2.2) (4.1)
Charge for the year 0.8 0.8 0.4 7.0 9.0
Impairment (exceptional) - - - 1.7 1.7
Exchange differences - - - - -
------------------------- ------------- ---------- ------------- ------------------ -----
At 31 December 2020 3.7 3.2 1.7 22.0 30.6
------------------------- ------------- ---------- ------------- ------------------ -----
Carrying amount
At 31 December 2020 2.4 0.4 1.1 24.8 28.7
------------------------- ------------- ---------- ------------- ------------------ -----
At 31 December 2019 2.8 0.8 1.5 33.9 39.0
------------------------- ------------- ---------- ------------- ------------------ -----
During the year right-of-use assets were identified as part of
the FCCE and FCUS restructures which were considered to be
individual CGUs for which the recoverable amount was considered to
be the future potential sub-let value. The estimated discounted
cash flows from sub-let income were compared to the carrying value
of the asset and an impairment of GBP1.7 million was recognised.
See note 4 for related exceptional items.
Lease liabilities
Amounts recognised on the balance sheet were as follows:
31 December 31 December
2020 2019
GBPm GBPm
------------ ----------- -----------
Current 7.3 8.5
Non-current 23.5 29.8
------------ ----------- -----------
Total 30.8 38.3
------------ ----------- -----------
Amounts recognised in the statement of comprehensive income were
as follows:
31 December 31 December
2020 2019
GBPm GBPm
------------------------------------------------------ ----------- -----------
Depreciation charge of right-of-use assets (property) 7.0 5.5
Interest expense (included in finance costs) 1.4 1.2
Expense relating to short-term leases and leases
of low-value assets 0.1 0.2
------------------------------------------------------ ----------- -----------
The total cash outflow for leases (excluding short-term and
low-value leases) in 2020 was GBP7.8 million (2019: GBP7.1
million).
As at 31 December 2020 the potential future undiscounted cash
outflows that have not been included in the lease liability due to
lack of reasonable certainty the lease extension options might be
exercised amounted to GBPnil (2019: GBPnil).
10. Trade and other receivables
31 December 31 December
2020 2019
GBPm GBPm
------------------------ ----------- -----------
Trade receivables 1.6 0.9
Other receivables(1) 15.5 17.3
Prepayments 3.6 4.2
Accrued income(2) 43.7 7.3
Rent and other deposits 2.6 3.9
------------------------ ----------- -----------
67.0 33.6
------------------------ ----------- -----------
1. Includes GBP7.5 million (2019: GBP7.5 million) in relation to
cash and liquidity reserves held in the UK securitisation vehicle
which will unwind to make payments to bond holders in future.
2. Includes GBP36.2 million (2019: GBPnil) in relation to
transaction fees receivable on CBILS originations. Accrued income
outstanding at the start of the year was subsequently
collected.
The maximum exposure to credit risk at the reporting date is the
carrying value of each class of receivables described earlier.
No trade receivables were overdue or impaired. Other receivables
includes amounts related to bought back loans some of which are
past due or impaired.
Included in rent and other deposits are GBP1.9 million of rental
deposits (2019: GBP3.3 million) in respect of the Group's property
leases which expire over the next five years.
The Directors consider that the carrying amount of trade and
other receivables approximates to their fair value.
11. Trade and other payables
31 December 31 December
2020 2019
GBPm GBPm
-------------------------------------- ----------- -----------
Trade payables 2.1 3.2
Other taxes and social security costs 3.7 3.1
Other creditors 5.6 1.7
Accruals 22.7 11.7
-------------------------------------- ----------- -----------
34.1 19.7
-------------------------------------- ----------- -----------
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value.
12. Provisions and other liabilities
Dilapidation Loan repurchase Restructuring(1) Other Total
GBPm GBPm GBPm GBPm GBPm
------------------------------- ------------ --------------- ---------------- ----- -----
At 1 January 2019 0.8 3.1 - 0.7 4.6
Reclassification - 0.5 - (0.5) -
Additional provision/liability 0.1 6.5 - 0.7 7.3
Amount utilised - (7.2) - (0.7) (7.9)
------------------------------- ------------ --------------- ---------------- ----- -----
At 31 December 2019 0.9 2.9 - 0.2 4.0
Exchange differences - 0.2 - (0.1) 0.1
Additional provision/liability - 6.2 6.0 3.2 15.4
Amount utilised - (4.1) (4.9) (0.6) (9.6)
------------------------------- ------------ --------------- ---------------- ----- -----
At 31 December 2020 0.9 5.2 1.1 2.7 9.9
------------------------------- ------------ --------------- ---------------- ----- -----
(1) Restructuring provision is in relation to reorganisation of
the USA, German and Dutch businesses, see note 4.
31 December 31 December
2020 2019
GBPm GBPm
------------ ----------- -----------
Current 8.7 3.1
Non-current 1.2 0.9
------------ ----------- -----------
9.9 4.0
------------ ----------- -----------
The dilapidation provision represents an estimated cost for
dismantling the customisation of offices and restoring the
leasehold premises to its original state at the end of the tenancy
period. The provision is expected to be utilised by 2025.
Loan repurchase liability
In certain historical circumstances, in new markets,
predominantly in Germany and the Netherlands, Funding Circle has
entered into arrangements with institutional investors to assume
the credit risk on the loan investments made by the institutional
investors. Under the terms of the agreements, the Group is required
either to make payments when the underlying borrower fails to meet
its obligation under the loan contract or buy the defaulted loan
from the investors at its carrying value. In return for these
commitments, the Group is entitled to the excess returns or
additional income which is recorded as other income.
Under IFRS 9, the Group is required to provide for these loan
repurchases under the expected credit loss ("ECL") model.
The liability related to each loan arranged is based on the ECLs
associated with the probability of default of that loan in the next
12 months unless there has been a significant increase in credit
risk of that loan since origination. The Group assumes there has
been a significant increase in credit risk if outstanding amounts
on the loan investment exceed 30 days, in line with the rebuttable
presumption per IFRS 9.
The Group defines a default, classified within non-performing,
as a loan investment with any outstanding amounts exceeding a
90-day due date, which reflects the point at which the loan is
considered to be credit-impaired. Under the loan repurchase
contracts, this was the point at which there is an obligation for
the Group to make a payment under the contract or buy back the
loan. However while the buyback agreement is contractually defined
as 90 days past-due, due to the impact of Covid-19, a consent
letter was signed with the institutional investors in April 2020 to
accommodate loans on forbearance plans whereby loans on such plans
will be repurchased at 180 days past-due. However, the definition
of default for the purposes of expected credit losses remains 90
days past-due and the buyback may lag the default definition
applied.
If the loan is bought back by the Group, at the point of buy
back, the financial asset associated with the purchase meets the
definition of purchased or originated credit impaired ("POCI");
this element of the reserve is therefore based on lifetime
ECLs.
The Group bands each loan investment using an internal risk
rating and assesses credit losses on a collective basis.
Performing: Underperforming: Non-performing:
12-month lifetime lifetime
ECL ECL ECL Total
GBPm GBPm GBPm GBPm
--------------------------------------- ----------- ---------------- --------------- -----
At 1 January 2019 2.1 0.8 0.2 3.1
Liability against new loans originated 2.8 - - 2.8
Liability against loans transferred
from performing (3.6) (0.1) 7.4 3.7
Amounts utilised - - (7.2) (7.2)
Loans repaid (0.5) - - (0.5)
Change in probability of default 1.3 0.1 (0.4) 1.0
--------------------------------------- ----------- ---------------- --------------- -----
At 31 December 2019 2.1 0.8 - 2.9
Liability against new loans originated - - - -
Exchange differences 0.1 0.1 - 0.2
Liability against loans transferred
from performing (0.3) 0.5 4.9 5.1
Amounts utilised - - (4.1) (4.1)
Loans repaid (0.8) - - (0.8)
Change in probability of default 1.1 0.1 0.7 1.9
--------------------------------------- ----------- ---------------- --------------- -----
At 31 December 2020 2.2 1.5 1.5 5.2
--------------------------------------- ----------- ---------------- --------------- -----
Gross assets
of external
parties
Basis for subject
Expected recognition to loan Loan
credit of repurchase repurchase
loss coverage loan repurchase liability liability
At 31 December 2019 % liability GBPm GBPm
------------------------------------- -------------- ---------------- ------------ -----------
12-month
Performing (due in 30 days or less) 5 ECL 40.6 2.1
Lifetime
Underperforming (31-90 days overdue) 81.3 ECL 0.9 0.8
Lifetime
Non-performing (90+ days overdue) 100 ECL - -
------------------------------------- -------------- ---------------- ------------ -----------
Total 41.5 2.9
------------------------------------- -------------- ---------------- ------------ -----------
Gross assets
of external
parties
Expected Basis for subject
credit recognition to loan Loan
loss of repurchase repurchase
coverage loan repurchase liability liability
At 31 December 2020 % liability GBPm GBPm
------------------------------------- --------- ---------------- ------------ -----------
12-month
Performing (due in 30 days or less) 10.8 ECL 20.3 2.2
Lifetime
Underperforming (31-90 days overdue) 71.5 ECL 2.1 1.5
Lifetime
Non-performing (90+ daysoverdue) 79.0 ECL 1.9 1.5
------------------------------------- --------- ---------------- ------------ -----------
Total 24.3 5.2
------------------------------------- --------- ---------------- ------------ -----------
The percentages applied above are based on the Group's past
experience of delinquencies and loss trends, as well as
forward-looking information in the form of macroeconomic scenarios
governed by an impairment committee, which considers macroeconomic
forecasts such as changes in interest rates, GDP and inflation.
Macroeconomic scenarios are probability weighted within the
model and include stress scenarios of: i) low losses, a high GDP,
market confidence and political stability; ii) normal losses based
on baseline economic conditions; iii) high losses with
manufacturing and political instability; iv) very high losses
reflecting Covid-19 stress scenarios with the peak of defaults
having occurred in H2 2020 and then de-stress gradually
afterwards.
The stress scenario used was a geography-weighted scenario
reflecting higher losses on the Netherlands book than that of the
German portion of the loan book. This reflects the impact of the
German government's stimulus programme, resulting in a blended
stress of defaults having peaked in H2 2020 and de-stressing
gradually afterwards.
The expected credit loss model includes actual defaults
determined by monthly cohort, adjusted for forecasted lifetime
cumulative default rates. It applies the latest default curve and
lifetime default rates tailored to each cohort based on the
expected lifetime default rate. When actual defaults trend higher
than the curve, the forecast default curve is shifted upwards to
align with actual performance. Estimated recoveries from defaults
are discounted back to their present value using the effective
interest rate. The items that the model is most sensitive to are
default rates. Management has applied an estimated weighted average
lifetime default rate across cohorts of 20.5% (31 December 2019:
12.9%). See note 16 for a sensitivity analysis on the impact of a
change in default rates. At 31 December 2020, there is only one
portfolio of loans.
The maximum exposure the Group might have to pay at the balance
sheet date if 100% of eligible loans were required to be bought
back would be GBP24.3 million (2019: GBP41.5 million). This would
be dependent on the timing of any eligible loans defaulting.
Repayments of eligible loans are no longer reinvested and therefore
the final loan is due to expire in December 2024, along with the
associated financial guarantees.
13. Financial risk management
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework.
The risk management policies are established to identify and
analyse the risks faced by the Group, to set appropriate risk
limits and controls and to monitor risks and ensure any limits are
adhered to. The Group's activities are reviewed regularly and
potential risks are considered.
Risk factors
The Group has exposure to the following risks from its use of
financial instruments:
-- credit risk;
-- liquidity risk; and
-- market risk (including foreign exchange risk, interest rate risk and other price risk).
Principal financial instruments
The principal financial instruments used by the Group, from
which financial instrument risk arises, are as follows:
-- investments;
-- trade and other receivables;
-- cash and cash equivalents;
-- trade and other payables;
-- bank borrowings;
-- bonds
-- lease liabilities; and
-- loan repurchase liability.
Categorisation of financial assets and financial liabilities
The tables show the carrying amounts of financial assets and
financial liabilities by category of financial instrument as at 31
December 2020:
Fair
value through
profit Amortised
and loss cost Total
Assets GBPm GBPm GBPm
-------------------------------------- -------------- --------- -----
Investment in SME loans (other) - 25.0 25.0
Investment in SME loans (warehouse) 221.8 - 221.8
Investment in SME loans (securitised) 279.8 - 279.8
Investment in trusts 21.2 - 21.2
Trade and other receivables 0.3 19.4 19.7
Cash and cash equivalents 24.8 78.5 103.3
-------------------------------------- -------------- --------- -----
547.9 122.9 670.8
-------------------------------------- -------------- --------- -----
Fair
value through
profit Amortised
and loss cost Total
Liabilities GBPm GBPm GBPm
-------------------------- -------------- --------- -------
Trade and other payables - (7.7) (7.7)
Loan repurchase liability - (5.2) (5.2)
Bank borrowings - (195.5) (195.5)
Bonds (7.8) (286.5) (294.3)
Lease liabilities - (30.8) (30.8)
-------------------------- -------------- --------- -------
(7.8) (525.7) (533.5)
-------------------------- -------------- --------- -------
The tables show the carrying amounts and fair values of
financial assets and financial liabilities by category of financial
instrument as at 31 December 2019:
Fair
value through
profit Amortised
and loss cost Total
Assets GBPm GBPm GBPm
-------------------------------------- -------------- --------- -----
Investment in SME loans (other) - 1.7 1.7
Investment in SME loans (curing) - - -
Investment in SME loans (warehouse) 342.0 - 342.0
Investment in SME loans (securitised) 366.6 - 366.6
Trade and other receivables 0.2 21.9 22.1
Cash and cash equivalents 46.0 118.5 164.5
-------------------------------------- -------------- --------- -----
754.8 142.1 896.9
-------------------------------------- -------------- --------- -----
Fair
value through
profit Amortised
and loss cost Total
Liabilities GBPm GBPm GBPm
-------------------------- -------------- --------- -------
Trade and other payables - (4.9) (4.9)
Loan repurchase liability - (2.9) (2.9)
Bank borrowings - (265.8) (265.8)
Bonds (20.0) (328.7) (348.7)
Lease liabilities - (38.3) (38.3)
-------------------------- -------------- --------- -------
(20.0) (640.6) (660.6)
-------------------------- -------------- --------- -------
Financial instruments measured at amortised cost
Financial instruments measured at amortised cost, rather than
fair value, include cash and cash equivalents, trade and other
receivables, investment in SME loans (other), bank borrowings,
lease liabilities, certain bonds, loan repurchase liability and
trade and other payables. Due to their short-term nature, the
carrying value of each of the above financial instruments
approximates to their fair value.
Financial instruments measured at fair value
IFRS 13 requires certain disclosures which require the
classification of financial assets and financial liabilities
measured at fair value using a fair value hierarchy that reflects
the significance of the inputs used in making the fair value
measurement.
Disclosure of fair value measurements by level is according to
the following fair value measurement hierarchy:
-- level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities that the entity can
access at the measurement date;
-- level 2 inputs are inputs other than quoted prices included
within level 1 that are observable for the assets or liabilities,
either directly or indirectly; and
-- level 3 inputs are unobservable inputs for the asset or liability.
The fair value of financial instruments that are not traded in
an active market (for example, investments in SME loans) is
determined by using valuation techniques. These valuation
techniques maximise the use of observable market data where it is
available and rely as little as possible on entity-specific
estimates. If all significant inputs required to fair value an
instrument are observable, the instrument is included in level 2.
The investments categorised as level 2 relate to derivative
financial instruments.
If one or more of the significant inputs is not based on
observable market data, the instrument is included in level 3.
Fair value measurement using
---------------------------------------------
Quoted
prices Significant Significant
in active observable unobservable
markets inputs inputs
(level (level (level
1) 2) 3) Total
31 December 2020 GBPm GBPm GBPm GBPm
-------------------------------------- ---------- ----------- ------------- -----
Financial assets
Trade and other receivables - 0.1 0.2 0.3
Investment in SME loans (warehouse) - - 221.8 221.8
Investment in SME loans (securitised) - - 279.8 279.8
Investment in trusts - - 21.2 21.2
Cash and cash equivalents 24.8 - - 24.8
-------------------------------------- ---------- ----------- ------------- -----
24.8 0.1 523.0 547.9
-------------------------------------- ---------- ----------- ------------- -----
Financial liabilities
Bonds - - (7.8) (7.8)
-------------------------------------- ---------- ----------- ------------- -----
- - (7.8) (7.8)
-------------------------------------- ---------- ----------- ------------- -----
Fair value measurement using
----------------------------------------------
Quoted
prices Significant Significant
in active observable unobservable
markets inputs inputs
(level (level (level
1) 2) 3) Total
31 December 2019 GBPm GBPm GBPm GBPm
-------------------------------------- ---------- ----------- ------------- ------
Financial assets
Trade and other receivables - 0.2 - 0.2
Investment in SME loans (warehouse) - - 342.0 342.0
Investment in SME loans (securitised) - - 366.6 366.6
Cash and cash equivalents 46.0 - - 46.0
-------------------------------------- ---------- ----------- ------------- ------
46.0 0.2 708.6 754.8
-------------------------------------- ---------- ----------- ------------- ------
Financial liabilities
Bonds - - (20.0) (20.0)
-------------------------------------- ---------- ----------- ------------- ------
- - (20.0) (20.0)
-------------------------------------- ---------- ----------- ------------- ------
The fair value of investment in SME loans (warehouse) has been
estimated by discounting future cash flows of the loans using
discount rates that reflect the changes in market interest rates
and observed market conditions at the reporting date. The estimated
fair value and carrying amount of the investment in SME loans
(warehouse) was GBP221.8 million at 31 December 2020 (2019:
GBP342.0 million).
The fair value of investment in SME loans (securitised)
represents loan assets in the securitisation vehicles and has been
estimated by discounting future cash flows of the loans using
discount rates that reflect the changes in market interest rates
and observed market conditions at the reporting date. The estimated
fair value and carrying amount of the investment in SME loans
(securitised) was GBP279.8 million at 31 December 2020 (2019:
GBP366.6 million).
Bonds represent the unrated tranches of bond liabilities
measured at fair value through profit and loss (the rated tranches
of bonds are measured at amortised cost). The fair value has been
estimated by discounting future cash flows in relation to the bonds
using discount rates that reflect the changes in market interest
rates and observed market conditions at the reporting date. The
estimated fair value and carrying amount of the bonds was GBP7.8
million at 31 December 2020 (2019: GBP20.0 million).
Investment in trusts represents the Group's investment in the
trusts used to fund CBILS loans for which the government-owned
British Business Bank will guarantee up to 80% of the balance in
the event of default and is measured at fair value through profit
and loss. The fair value has been estimated by discounting future
cash flows in relation to the trusts using discount rates that
reflect the changes in market interest rates and observed market
conditions at the reporting date. The estimated fair value and
carrying amount of the investment in trusts was GBP21.2 million at
31 December 2020 (2019: GBPnil).
The most relevant significant unobservable input relates to the
default rate estimate and discount rates applied to the fair value
calculation, details of which are set out in note 16 for those with
material estimation uncertainty.
Fair value movements on investment in SME loans (warehouse),
investment in SME loans (securitised), investments in trusts and
bonds (unrated) are recognised through the profit and loss account
in fair value (losses)/gains.
A reconciliation of the movement in level 3 financial
instruments is shown as follows:
Investment Investment Bonds Investment Trade and
in in (unrated) In trusts other receivables
SME loans SME loans
(warehouse) (securitised) GBPm GBPm GBPm
GBPm GBPm
------------------------------ ------------ -------------- ---------- ---------- ------------------
At 1 January 2019 - - - - -
Additions 673.4 - (17.1) - -
Securitisations (292.2) 414.5 - - -
Repayments (32.5) (37.4) 0.7 - -
Net gain/(loss) on the change
in fair value of financial
instruments at fair value
through profit and loss (0.5) (5.8) (3.6) - -
Foreign exchange loss (6.2) (4.7) - - -
------------------------------ ------------ -------------- ---------- ---------- ------------------
At 31 December 2019 342.0 366.6 (20.0) - -
------------------------------ ------------ -------------- ---------- ---------- ------------------
Additions 286.9 - - 20.9 -
Securitisations (214.2) 214.2 - - -
Transfers (0.2) - - - 0.2
Repayments (146.9) (211.7) 4.2 - -
Disposal - - (4.0) - -
Net gain/(loss) on the change
in fair value of financial
instruments at fair value
through profit and loss (43.4) (87.2) 12.0 0.3 -
Foreign exchange loss (2.4) (2.1) - - -
------------------------------ ------------ -------------- ---------- ---------- ------------------
At 31 December 2020 221.8 279.8 (7.8) 21.2 0.2
------------------------------ ------------ -------------- ---------- ---------- ------------------
14. Notes to the consolidated statement of cash flows
Cash inflow/(outflow) from operating activities
31 December 31 December
2020 2019
GBPm GBPm
---------------------------------------------------------- ----------- -----------
Loss before taxation (108.1) (84.2)
Adjustments for
Depreciation of property, plant and equipment 9.0 7.8
Amortisation of intangible assets 8.2 7.1
Impairment of goodwill (exceptional item) 12.0 29.0
Impairment of intangible and tangible assets (exceptional
item) 1.7 5.3
Share based payment restructuring credit (exceptional
item) (1.0) -
Interest receivable (0.4) (1.8)
Interest payable 1.4 1.2
Non-cash employee benefits expense - share-based
payments and associated social security costs 6.4 7.7
Fair value losses 118.3 9.9
Movement in restructuring provision 1.1 -
Movement in loan repurchase liability 2.3 (0.2)
Movement in other provisions 2.5 (0.4)
Share of losses of associates 0.8 0.1
Other non-cash movements 1.2 (0.1)
Changes in working capital
Movement in trade and other receivables (35.3) (9.1)
Movement in trade and other payables 13.0 0.7
---------------------------------------------------------- ----------- -----------
Net cash inflow/(outflow) from operating activities 33.1 (27.0)
---------------------------------------------------------- ----------- -----------
Cash and cash equivalents
31 December 31 December
2020 2019
GBPm GBPm
-------------------------- ----------- -----------
Cash and cash equivalents 103.3 164.5
-------------------------- ----------- -----------
The cash and cash equivalents balance is made up of cash, money
market funds and bank deposits. The carrying amount of these assets
is approximately equal to their fair value. Included within cash
and cash equivalents above is cash of GBP1.0 million (2019: GBP1.2
million) which is restricted in use in the event of rental payment
defaults and cash held in the securitisation and warehouse SPVs of
GBP38.9 million (2019: GBP14.2 million) which has been collected
for on payment to lenders and bond holders and is therefore
restricted in its use. A further GBP4.3 million (2019: GBPnil) of
cash is held which is restricted in use to repaying investors in
CBILS loans and paying CBILS related costs to the UK
government.
At 31 December 2020, money market funds totalled GBP24.8 million
(2019: GBP46.0 million).
15. Significant changes in the current reporting year
The financial position and performance of the Group were
affected by the following events and transactions during the year
ended 31 December 2020:
i) Covid-19
As a result of the global Covid-19 pandemic and the related
uncertainty and restrictions required in the geographies that
Funding Circle operates within, lending was proactively brought
down in the latter half of March 2020 and continued to be low into
April. SME government guarantee programmes were introduced by the
UK and US Governments, and Funding Circle's subsequent
accreditations, resulted in originations restarting with new
borrower products as detailed below and the temporary cessation of
non-government-guaranteed lending. The Group's exposure to ABS
products resulted in significant fair value losses as detailed
below. Additionally, forbearance measures were introduced to
support small business borrowers.
ii) The UK Government's Coronavirus Business Interruption Loan
Scheme ("CBILS") and Bounce Back Loan Scheme ("BBLS") funding
During the year, due to the Covid-19 crisis, Funding Circle
became an accredited lender under CBILS and BBLS. Funding Circle is
required by the BBB to co-invest in loans originated under CBILS.
The loans are beneficially owned by investors under trust
structures in which Funding Circle retains a small stake in CBILS
trusts.
The Group does not consolidate the trusts or the loans held
within the trusts, recognising its interest in the loans instead as
an investment in trust assets on the balance sheet. This investment
is held at FVTPL. The Group earns transaction and service fee
income from originating and servicing CBILS and service fee income
for servicing BBLS loans.
iii) The US Government's Paycheck Protection Programme ("PPP")
loan funding
During the year, due to the Covid-19 crisis, the US business was
approved to originate loans under the US Government's PPP scheme.
Funding Circle funded PPP loans via its lending platform by
partnering with financial institutions and institutional investors,
for which it earns a referral fee or origination fee. Additionally
Funding Circle was accredited to draw down on the US government's
Federal PPP lending facility. As a result the Group holds GBP24.3
million of PPP loans on balance sheet included within Investment in
SME loans (other) with corresponding draw down on the SBA facility
of GBP24.3 million included within Bank borrowings. These loans are
recognised initially at fair value and are subsequently held at
amortised cost as the business model under which the assets are
held is in order to collect contractual cash flows. Once a loan is
forgiven, the loan and related borrowing are extinguished.
iv) Asset-backed securities ("ABS")
The Group continued its bond programmes which commenced in the
prior year in the UK and US, investing in SME loans during the
"warehousing phase" of the programme using both its own cash and
amounts borrowed under credit facilities with lending institutions.
An additional credit facility was utilised and warehouse vehicle
created in the US in the year to 31 December 2020. The loans are
held within bankruptcy remote special purpose warehouse vehicles
which are consolidated on the Group's balance sheet. Once the
warehouse vehicle reaches sufficient scale, the SME loans are sold
into another bankruptcy remote special purpose vehicle ("SPV")
financed through the issuance of bonds to third party investors and
the amounts borrowed under the credit facility are repaid. During
the year to 31 December 2020 a further GBP214.2 million of SME
loans have been sold to SPVs (31 December 2019: GBP292.2
million).
The bonds are split into senior rated bonds (referred to as
"rated") and junior unrated bonds (referred to as "unrated") and
Funding Circle is required by regulation to retain a 5% equal
participation in all classes of bonds issued.
Additionally, once loans are securitised, Funding Circle has
temporarily held the residual horizontal tranches with the
intention to sell once seasoned. These tranches have the potential
to earn greatest returns, but they also absorb losses first. As at
31 December 2020, Funding Circle held horizontals in three
securitisations which were securitised in H2 2019 (UK and US) and
H1 2020 (US). The timing of the pandemic meant that it was not
feasible to dispose of all horizontal tranches in 2020.
In July 2020 the Group sold 95% of its investment in one of the
subordinated unrated tranches in the UK securitisation vehicle, for
GBP4.0 million. The sale price was considered to represent the fair
value of the bond at the time of sale. The sale did not result in
deconsolidation of the securitisation vehicle, as the variability
in cash flows continues to be concentrated in the Group's remaining
holding of unrated tranches of the vehicle. The portion of the
bonds sold were subsequently held by a third party and no longer
eliminated on consolidation resulting in the recognition of an
additional bond liability at FVTPL on the Group's balance
sheet.
Changes in accounting policy and disclosures
The Group has adopted the following new and amended IFRSs and
interpretations from 1 January 2020 on a full retrospective
basis.
Applicable for financial
years beginning
Standard/interpretation Content on/after
----------------------------------- ------------------------ ------------------------
Amendments to IAS 1 Presentation
of Financial Statements, and
IAS 8 Accounting Policies,
Changes in Accounting Estimates Definition of material 1 January 2020
and Errors, definition of material
----------------------------------- ------------------------ ------------------------
Amendments to IFRS 3 Business
Combinations, definition of Business combinations 1 January 2020
a business
----------------------------------- ------------------------ ------------------------
Revised Conceptual Framework
for Financial Reporting and
Sale or Contribution of Assets
Between an Investor and its Associates and joint 1 January 2020
Associate or Joint Venture ventures
- Amendments to IFRS 10 and
IAS 28
----------------------------------- ------------------------ ------------------------
Amendments to IFRS 7, IFRS Reliefs relating to
9 and IAS 39 - Interest rate interest rate benchmark 1 January 2020
benchmark reform - Phase 1 reforms
----------------------------------- ------------------------ ------------------------
The amendments and interpretations listed above did not
significantly affect the current year and are not expected to
significantly affect future years.
Certain new accounting standards and interpretations have been
published that are not mandatory for 31 December 2020 reporting
years, have not yet been endorsed pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union and have not been
early adopted by the Group as follows:
Applicable for financial
years beginning
Standard/interpretation Content on/after
-------------------------------- ------------------------ ------------------------
Amendments to IFRS 7, IFRS Reliefs relating to
9 and IAS 39 - Interest rate interest rate benchmark 1 January 2021
benchmark reform - Phase 2 reforms
-------------------------------- ------------------------ ------------------------
Amendments to IFRS 16 - Covid-19
related Rent concessions Leases 1 June 2020
-------------------------------- ------------------------ ------------------------
These standards are not expected to have a material impact on
the Group in the current or future reporting years and on
foreseeable future transactions.
Summary of new and amended accounting policies
Investment in trusts
The Group holds a small beneficial ownership in trusts set up to
fund CBILS loans with the remaining majority of the beneficial
ownership held by institutional investors. Whilst SME loans are
originated by a Group subsidiary, Funding Circle Focal Point
Lending Ltd, which retains legal title to the loans, it holds this
legal title of trust on behalf of the majority investors who
substantially retain the economic benefits the CBILS loans generate
and therefore the trusts and the assets held within, including the
SME loans, are not consolidated.
The Group assesses whether it controls the trust structure under
the criteria of IFRS 10. Control is determined to exist if the
Group has the power to direct the activities of entities and
structures and uses this control to obtain a variable return. As
the Group's holding is pari passu, the Group is not exposed to the
majority of the variability in the cash flows of the trust, and it
is not considered to control the trust structures, so they are not
consolidated by the Group.
Investments in trusts are classified at fair value through
profit and loss. They are initially recognised at fair value on the
balance sheet with the subsequent measurement at fair value with
all gains and losses being recognised in the consolidated statement
of comprehensive income.
The Group recognises transaction fee income on origination of
loans within the trust and service fee income on the assets within
the trust, eliminating its proportional ownership share of the
service fees. A scheme lender fee is charged in relation to the
origination of CBILS loans and investment income is recognised in
relation to returns on the investment.
16. Critical accounting judgements and key sources of estimation
uncertainty
The preparation of the consolidated financial statements
requires the Group to make estimates and judgements that affect the
application of policies and reported amounts. Critical judgements
represent key decisions made by management in the application of
the Group accounting policies. Where a significant risk of
materially different outcomes exists due to management assumptions
or sources of estimation uncertainty, this will represent a key
source of estimation uncertainty.
Estimates and judgements are continually evaluated and are based
on experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
Although these estimates are based on management's best knowledge
of the amount, event or actions, actual results ultimately may
differ from those estimates.
The significant judgements and estimates applied by the Group in
the financial statements have been applied on a consistent basis
with the financial statements for the year to 31 December 2019.
Critical judgements:
Consolidation and deconsolidation of special purpose vehicles
("SPVs")
As part of its asset-backed securitisation programmes, the Group
has established warehouse and securitisation SPVs. Judgement is
required in determining who is most exposed to the variability of
returns and who has the ability to affect those returns and
therefore who should consolidate these vehicles and subsequently
deconsolidate them. Where the Group has a significant interest in
the junior tranches of the securitisation vehicles or the
subordinated debt in the warehouses, the Group is deemed to be
exposed to the majority of the variability of the returns of those
vehicles and controls them, and therefore consolidates them. Where
this interest is reduced, the Group considers whether the vehicles
should be deconsolidated. During the year a tranche of unrated
bonds was sold, reducing the Group's holding in a UK SPV. However,
the Group retained a significant holding of the most subordinate
unrated tranches of the vehicle and was considered to be exposed to
the majority of the variability of the returns and the vehicle was
not deconsolidated.
Loans originated through the platform
The Group originates SME loans through its platform which are
funded primarily by, banks, asset managers, other institutional
investors, national entities, retail investors or by usage of its
own capital. Judgement is required to determine whether these loans
should be recognised on the Group's balance sheet. Where the Group,
its subsidiaries or SPVs which it consolidates have legal and
beneficial ownership to the title of those SME loans, they are
recognised on the Group's balance sheet. Where this is not the
case, the loans are not recognised at the point of origination.
Key sources of estimation uncertainty
The following are the key sources of estimation uncertainty that
the Directors have identified in the process of applying the
Group's accounting policies and have the most significant effect on
the amounts recognised in the financial statements.
Estimated impairment of non-financial assets (note 7, 8 and
9)
Non-financial assets (primarily goodwill, intangible assets and
property, plant and equipment) are held within the Group within
cash-generating units ("CGUs") which are expected to benefit from
the assets. The Group has three CGUs, being Funding Circle USA
("FCUSA") and its subsidiaries, Funding Circle Ltd ("FCUK") and its
subsidiaries and the German and Dutch businesses (Funding Circle
Continental Europe or "FCCE"). These assets are assessed annually
for impairment or when indicators of impairment are identified.
Following the impact of Covid-19 and a change in the Group's income
and cost forecasts, the Group undertook an impairment review of
non-financial assets in each applicable CGU.
The impairment test involved comparing the carrying value of the
non-financial assets held for use to their recoverable amount for
each CGU. The recoverable amount represents the higher of the CGU's
fair value net of selling costs and its value in use, which were
determined using discounted cash flow methodology. In undertaking
the impairment assessment it was noted that the recoverable amount
of FCUK was not sensitive to estimation uncertainty, nor was FCCE
as the non-financial assets were previously impaired for the year
ended 31 December 2019.
The review identified impairment to the goodwill in FCUSA as the
fair value less cost to sell calculated was below the carrying
amount and the goodwill was fully impaired by GBP12.0 million. IAS
36 allocates impairment losses first to goodwill followed by other
non-financial assets; however, it prohibits the reversal of
goodwill impairment. As a result the impairment assessment is not
sensitive to a higher estimation of the recoverable amount, but a
lower estimated recoverable amount could lead to impairment of
intangible assets within the CGU which are held at a carrying value
of GBP8.7 million and property, plant and equipment totalling
GBP11.2 million (excluding certain right-of-use assets identified
as separate CGUs).
The Group prepared a five-year forecast for the FCUSA CGU for
which the majority of the sensitivity to estimation uncertainty is
in the growth rate applied to the fifth year which is forecast out
into perpetuity. The cash flow projections are based on the
following key assumptions presented along with the sensitivity to a
reduction in the recoverable amount for each key assumption:
-- fifth-year income growth of 27.0%. A 480bps reduction in
projected fifth-year income growth rate with no cost reduction
would decrease the recoverable amount by GBP16.2 million to be
equal to the carrying value.
-- Fifth-year cost growth of 16.0%. A 520bps increase in
projected fifth-year cost growth rate with no income increase would
decrease the recoverable amount by GBP16.2 million to be equal to
the carrying value.
-- pre-tax discount rate of 13.0%. A 270 bps increase in
discount rate would decrease the recoverable amount by GBP16.2
million to be equal to the carrying value.
-- income beyond the five-year period extrapolated using an
estimated growth rate of 1.5%. A reduction in the growth rate to
0.0% would reduce the recoverable amount by GBP6.9 million.
During the prior year ended 31 December 2019, impairment was
identified in relation to the goodwill and tangible and intangible
assets of the German and Dutch businesses within the Developing
Markets segment. Based on the performance of the German and Dutch
businesses and changes to the medium-term outlook for the
non-financial assets included within the associated CGU it was
determined that the carrying value exceeded the recoverable amount.
Goodwill was previously fully impaired by GBP29.0 million, tangible
fixed assets by GBP0.7 million and intangible assets by GBP4.6
million. There was not considered to be a recoverable amount in
relation to these assets.
Fair value of financial instruments ( note 13)
At 31 December 2020, the carrying value of the Group's financial
instrument assets held at fair value was GBP547.9 million (31
December 2019: GBP754.8 million) and the carrying value of
financial liabilities carried at fair value was GBP7.8 million
(2019: GBP20.0 million).
In accordance with IFRS 13 Fair Value Measurement, the Group
categorises financial instruments carried on the consolidated
balance sheet at fair value using a three-level hierarchy.
Financial instruments categorised as level 1 are valued using
quoted market prices and therefore there is minimal estimation
applied in determining fair value. However, the fair value of
financial instruments categorised as level 2 and, in particular,
level 3 is determined using valuation estimation techniques
including discounted cash flow analysis and valuation models. The
most significant estimation is with respect to discount rates and
default rates.
Sensitivities to the default rates and discount rates are
illustrated below.
Fair value Unobservable Relationship of unobservable
Description GBPm input Inputs inputs to fair value
--------------------- ---------- ------------------- ------------- ----------------------------------------
Investment 221.8 Lifetime cumulative US: 18.1% A change in the lifetime cumulative
in SME default rate and 21.6%(1) default rate would have the
loans (warehouse) as % of original UK 15.4% following impact:
US: +/-300 bps would decrease/increase
fair value by GBP3.8 million.
UK: +/-330 bps would decrease/increase
fair value by GBP7.1 million.
--------------------- ---------- ------------------- ------------- ----------------------------------------
Investment 279.8 Lifetime cumulative US: 21.9% A change in the lifetime cumulative
in SME default rate and 24.0%(1) default rate would have the
loans (securitised) as % of original UK 16.8% following impact:
US SPV1(1) : +/-140 bps would
decrease/increase fair value
by GBP2.0 million.
US SPV2(1) : +/-200 bps would
decrease/increase fair value
by GBP4.0 million.
UK: +/- 300 bps would decrease/increase
fair value by GBP2.6 million.
--------------------- ---------- ------------------- ------------- ----------------------------------------
A change in the lifetime cumulative
Lifetime cumulative default rate by+/-300 bps
default rate would decrease/increase fair
of associated value by GBP2.3 million and
Bonds (unrated) (7.8) assets. 16.8% (GBP0.9) million respectively.
--------------------- ---------- ------------------- ------------- ----------------------------------------
(1) Two cumulative default rates are presented for the US
representing the portfolios in each of the two respective
warehouses and two respective securitisation vehicles. Separate
sensitivities to default rates for the US securitisation vehicles
represent the respective seasoning of the loans and the different
reasonably possible range of outcomes.
The above sensitivities represent management's estimate of the
reasonably possible range of outcomes and as a result the fair
value of the assets and liabilities measured at fair value could
materially diverge from management's estimate.
Fair value Unobservable Relationship of unobservable
Description GBPm input Inputs inputs to fair value
--------------------- ---------- ------------- --------- ------------------------------
Investment 221.8 Discount rate US: 7.8% A change in the discount rate
in SME UK: 7.8% by +/-100 bps would decrease/
loans (warehouse) increase fair value by GBP3.1
million.
--------------------- ---------- ------------- --------- ------------------------------
Investment 279.8 Discount rate US: 7.8% A change in the discount rate
in SME UK: 7.8% by +/-100 bps would decrease/
loans (securitised) increase fair value by GBP3.7
million.
--------------------- ---------- ------------- --------- ------------------------------
A change in the discount rate
by +/-100 bps would decrease/
increase fair value by GBP0.2
Bonds (unrated) (7.8) Discount rate 21.7% million.
--------------------- ---------- ------------- --------- ------------------------------
It is considered that the range of reasonably possible outcomes
in relation to the discount rate used could be +/-100 bps and as a
result the fair value of the assets could materially diverge from
management's estimate.
As the discount rate is risk adjusted, it should be noted that
the sensitivities to discount rate and to lifetime cumulative
default rate contain a level of overlap regarding credit risk. The
sensitivity in expected lifetime cumulative defaults should not
also be applied to the sensitivity of the credit risk element of
the risk-adjusted discount rate and the sensitivities are most
meaningful viewed independently of each other.
Loan repurchase liability ( note 12)
In certain historical circumstances, in new markets,
predominantly Germany and the Netherlands, Funding Circle has
entered into arrangements with institutional investors to assume
the credit risk on the loan investments made by the institutional
investors. The Group must estimate the expected credit loss ("ECL")
for these commitments at each reporting date.
In order to quantify the ECL, IFRS 9 is followed. Estimation is
required in assessing individual loans and when applying
statistical models for collective assessments, using historical
trends from past performance as well as forward-looking information
including macroeconomic forecasts such as changes in interest
rates, GDP and inflation in each market together with the impact of
loan defaults. It is estimated that in both the European markets
defaults will have already peaked in H2 2020 and will de-stress
gradually afterwards, with Germany expected to fair more favourably
than the Netherlands as a result of the government stimulus
programme. The most significant estimation is with default rates on
performing loans. For the year ended 31 December 2020 the weighted
average lifetime default rate is estimated at 20.5% under stress
assumptions (2019: 12.9% without Covid-19 stress). If the weighted
average default rate estimate were to change by +/-240 bps, the
liability would change by GBP1.2 million for
the year ended 31 December 2020 (2019: GBP1.5 million). It is
considered that the range of reasonably possible outcomes in annual
default rates used might be +/-240 bps and as a result it is
possible that the liability in future could materially diverge from
management's estimated value.
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