TIDMFCH
RNS Number : 9380Z
Funding Circle Holdings PLC
24 September 2020
Funding Circle Holdings plc
Half Year 2020 Results
Embargoed until 7.00am, 24 September 2020
THIS ANNOUNCEMENT INCLUDES INSIDE INFORMATION AS DEFINED IN
ARTICLE 7 OF THE MARKET ABUSE REGULATION NO. 596/2014
Funding Circle Holdings plc ("Funding Circle"), today announces
results for the six months ended 30 June 2020.
Samir Desai CBE, CEO and Founder, said: "We started Funding
Circle after the financial crisis to help small businesses access
funding, and we are proud that since becoming accredited to SME
government guarantee programmes in the UK and US, we have approved
more than GBP2 billion of loans, and are the 5th largest CBILS
lender with c.20% market share of loans approved.
"In H1, we grew total income 24% to GBP101.2m and improved free
cash flow to negative GBP9.6m. AEBITDA was down, primarily due to
the impact of Covid-19 on the investments we held for sale. We
remain focused on profitable growth and are reinstating our target
of close to AEBITDA break-even for the business in the second half
of 2020."
"We believe that Covid-19 has led to an acceleration in the
adoption of online small business lending and small businesses are
increasingly drawn to the unique Funding Circle model, which
provides access to finance in a fast and affordable way with
excellent customer service. Our Instant Decision lending technology
launched this year is already transforming the SME borrowing
experience with average loan applications being completed in 6
minutes, and decisions in 9 seconds.
"Our advanced data driven credit assessment and the actions we
have taken are protecting investor returns - after applying our
central Covid-19 stress scenario, we expect all cohorts in the UK
to deliver positive annualised returns to investors."
Financial Summary:
-- Total Income of GBP101.2m (H1 2019: GBP81.7m) up 24% supported by investment income.
-- Adjusted EBITDA(1) of negative GBP84.1m (H1 2019: negative
GBP19.7m), primarily due to the impact of Covid-19 on the
investments we held for sale; includes negative GBP59.7m AEBITDA
from investment products.
-- Free cash flow improves to negative GBP9.6m (H1 2019: negative GBP28.1m).
-- Operating loss of GBP113.5m (H1 2019: negative GBP31.3m)
affected by investment AEBITDA(2) , an exceptional non-cash
write-down of GBP12.0m of US goodwill related to the US
restructure, and GBP4.9m related to the restructure of the
Developing Markets business, both of which were previously
announced.
-- Net assets of GBP216.9m (2019: GBP319.0m) including a mix of cash and investments.
-- Loss per share of 33.0 pence (H1 2019 loss: 8.9 pence).
Operating and Strategic Summary:
-- Leading SME loans platform:
o GBP3.7bn loans under management (2019: GBP3.5bn), representing
year-on-year growth of 5%.
o Originations of GBP1.1bn (H1 2019: GBP1.2bn), down 7%
year-on-year as a result of lower levels of originations in March
and April as the business adapted to the Covid-19 crisis and waited
for accreditation to SME government guarantee programmes in the UK
and US.
-- Successfully rolled out SME government guarantee programmes in UK and US :
o Accredited for the Coronavirus Business Interruption Loan
Scheme (CBILS) in the UK and the Paycheck Protection Program (PPP)
in the US in April.
o Since being accredited, Funding Circle has become the 5th
largest CBILS lender in the UK with a market share of c.20% of
loans approved. We have approved c.GBP1.2bn and originated
c.GBP815m(3) of CBILS loans, with June to August lending volumes up
more than 30% year-on-year.
o In the US, we were approved to offer PPP loans in April. Since
launching, we have approved c.$1bn and originated c.$500m(3) of PPP
loans.
o Additionally, we have closed more than GBP1.25bn in funding
agreements with multiple institutional investors, including banks,
asset managers and insurance companies to meet SME demand in both
the UK and US.
-- Launched Instant Decision lending technology:
o Instant Decision lending is already transforming the SME
borrowing experience and represents c.40% of CBILS
applications.
o 6 min average application time with decision in 9 seconds.
-- Effective management of loanbook during extreme period of stress:
o Following an initial spike, the number of borrowers missing
payments for the first time has fallen to below pre-Covid-19 levels
and more than 90% of UK borrowers are making payments.
-- Investor returns resilient after applying Covid-19 credit stress scenarios:
o All UK cohorts expected to deliver positive annualised
returns.
o All US cohorts (except 2019) expected to deliver positive
annualised returns.
Covid-19 and Our Response:
The actions taken at the start of Covid-19 to protect investor
returns and support businesses during the crisis are working. At
the start of lockdown, we saw an initial spike in the number of
borrowers who missed a payment for the first time. This has now
fallen to below pre-Covid-19 levels with more than 90% of UK
borrowers making payments. Investor returns have also remained
resilient during Covid-19 and we expect all cohorts in the UK to
deliver positive annualised returns and all cohorts in the US to
deliver positive annualised returns, except the 2019 vintage.
Early Covid-19 trends suggest a permanent change in the SME
borrowing market that we believe will benefit Funding Circle in the
medium to long term. Government support has demonstrated the
strategic importance of small businesses to economic growth. A
higher proportion of SMEs are now accessing finance as a result and
we believe this is likely to continue in the future. For those
small businesses looking for finance, t here has been a significant
acceleration in online adoption with searches related to business
finance terms increasing 2x immediately following the introduction
of a national lockdown in the UK. Finally, l ong term low interest
rates are likely to continue to attract strong demand from
institutional investors to fund SME loans.
Outlook:
The economic environment remains very uncertain. H2 expectations
are predicated on there being no further prolonged national
lockdowns across our geographies and includes the expectation of
ongoing government support for SMEs in the UK.
We are reinstating previous guidance of close to AEBITDA
break-even in H2.
We remain committed to delivering profitable growth and
generating long-term value for shareholders.
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 following the presentation.
Media Enquiries:
Funding Circle
David de Koning - Director of Investor Relations and
Communications (0203 927 3893)
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 retail
investors, banks, specialty finance companies asset management
companies, insurance companies, government-backed entities and
funds - have lent approximately GBP10 billion to 90,000 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.
Footnotes
(1) Adjusted EBITDA represents EBITDA (Earnings before Interest,
Tax, Depreciation and Amortisation) excluding share-based payments,
exceptional items and foreign exchange gains or losses.
(2) Investment AEBITDA refers to net investment income (being
investment income, investment expense and fair value adjustments)
as previously reported.
(3) UK and US originations up to 20(th) September.
(4) Investment AEBITDA refers to net investment income (being
investment income, investment expense and fair value adjustments)
as previously reported and operating AEBITDA represents AEBITDA
excluding investment AEBITDA.
Business Review
Overview
2020 started strongly for the business with originations at the
high end of expectations as we saw 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 for 12 months.
Originations were impacted significantly during March and April
as we waited for approval to SME government guarantee programmes in
the UK and the US. Originations rebounded strongly in May and June,
following accreditation to these programmes, and reached record
levels. Overall, loans under management were GBP3,722m as at 30
June, in line with the year end 2019. Overall originations declined
by 7% to GBP1,112m, driven by the lower levels of originations in
March and April.
Loans under Management Originations
(as at) (period ended)
-------------------- ------------------------------- ---------------------------
30 June 31 December Change 30 June 30 June Change
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
-------------------- -------- ------------ ------- -------- -------- -------
United Kingdom 2,566 2,583 (1%) 662 798 (17%)
United States 904 882 2% 410 311 32%
Developing Markets 252 266 (5%) 40 83 (52%)
-------------------- -------- ------------ ------- -------- -------- -------
Total 3,722 3,731 - 1,112 1,192 (7%)
-------------------- -------- ------------ ------- -------- -------- -------
For the six month period, this resulted in Group total income of
GBP101.2m (H1 2019: GBP81.7m) up 24%. Total income excludes the
volatility driven by the Fair Value movements on loans held on
balance sheet.
Adjusted EBITDA loss of GBP84.1m (H1 2019: loss GBP19.7m)
comprised of negative GBP24.4m of operating AEBITDA(4) and negative
GBP59.7m of investment AEBITDA(4) .
Following the non-cash fair value movement on the Group's
financial assets, the Group's loss before taxation was GBP115.1m
(H1 2019: GBP30.8m). Before exceptional costs of GBP16.9m in 2020
for the restructuring of the European business (GBP4.9m) and the US
goodwill write-off (GBP12.0m), the loss before tax was GBP98.2m (H1
2019: GBP30.8m).
At the end of 2019, the Group made certain organisational
changes with greater ownership of costs within geographies from
2020. Accordingly, the central costs of product development and
corporate costs from 2020 have been allocated to each of the
segments. The 2019 segmental reporting has been restated for
comparability.
Geographic highlights
United Kingdom
The UK continues to represent Funding Circle's largest and most
mature business unit. As at the end of H1, loans under management
remained flat on 31 December 2019, due to a combination of lower
originations and higher levels of repayments and prepayments, in
part reflecting the fact that borrowers may use the Government's
CBILS and Bounce Back loan scheme to help refinance their existing
loans. Originations totalled GBP662m, down 17% on H1 2019
reflecting the two month period where limited loans were
originated.
The Government introduced the Coronavirus Business Interruption
Loan Scheme (CBILS), an 80% government guarantee to UK small
businesses, in March. Following accreditation to CBILS, we saw high
demand from SMEs with June to August lending volumes up more than
30% year-on-year. As at 20 September, we had approved c.GBP1.2bn of
loans and originated c.GBP815m. Following accreditation to CBILS we
also paused all non-CBILS lending from retail and institutional
investors to concentrate on supporting the Government's SME
guarantee programme. CBILS loans have similar economics to our core
lending product, but slightly lower transaction fee and slightly
higher servicing fees.
Total income for the UK was GBP59.3m (H1 2019: GBP53.0m)
benefitting from six months of investment income from the new ABS
products which had only just launched in June 2019.
In March, we launched the first phase of our Instant Decision
lending platform in the UK. At the end of June, c.40% of CBILS
applications were serviced by new Instant Decision lending
technology and we are ahead of our target for the end of the year
for 50% of all loan applications to be automated. The average time
taken to complete an application has been 6 minutes with decision
time in 9 seconds.
United States
Similar to the UK, the US business had a strong beginning to the
year with January and February our highest months for originations
for 12 months.
The US Government introduced its Paycheck Protection Program
("PPP") through the Small Business Administration ("SBA") in April.
This scheme has similar characteristics to the UK furlough scheme,
where 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 on 14
April.
Since then, the US business has approved over $1bn of PPP loans
and originated c.$500m. The US funds 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 across
the two models was c.2.5%.
Loans under management increased by 2% to GBP904m with overall
originations up 32% at GBP410m, however the referral fees are lower
than under the funding model.
Total income for the US was GBP38.0m (H1 2019: GBP22.0m), again
benefitting significantly from a full six months of investment
income from the new investment products.
Developing Markets
In March, 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. Due to the impact of Covid-19,
the company decided not to scale up the new model and headcount
numbers in London, which resulted in a limited number of loans
originated in Germany in H1, and in the Netherlands we are not
currently originating loans.
Statement of Comprehensive Income
Six months to 30 June Six months to 30
2020 June 2019
Before
exceptional Exceptional Total Total
items items GBPm GBPm
GBPm GBPm
Transaction fees 47.8 - 47.8 62.5
Servicing fees 13.8 - 13.8 15.2
Other fees 3.2 - 3.2 2.7
--------------------------- ------------ ------------- ------- ----------------
Fee income 64.8 - 64.8 80.4
Investment income 49.8 - 49.8 2.2
Investment expense (13.4) - (13.4) (0.9)
--------------------------- ------------ ------------- ------- ----------------
Total income 101.2 - 101.2 81.7
Fair value (losses)/gains (96.1) - (96.1) (0.3)
Net income 5.1 - 5.1 81.4
--------------------------- ------------ ------------- ------- ----------------
Operating expenses
People costs (44.5) (3.8) (48.3) (45.5)
Marketing costs (22.4) - (22.4) (35.2)
Depreciation, amortisation
and impairment (8.2) (12.4) (20.6) (7.1)
Loan repurchase charge (5.5) - (5.5) (4.2)
Other costs (21.1) (0.7) (21.8) (20.7)
--------------------------- ------------ ------------- ------- ----------------
(101.7) (16.9) (118.6) (112.7)
--------------------------- ------------ ------------- ------- ----------------
Operating loss (96.6) (16.9) (113.5) (31.3)
--------------------------- ------------ ------------- ------- ----------------
Total income
For the six month period, the Group delivered total income of
GBP101.2m (H1 2019: GBP81.7m) up 24%.
Fee income defined as transaction, servicing and other fees,
declined 19% reflecting lower levels of origination in March and
April prior to Funding Circle being accredited to join CBILS in the
UK and approved to originate PPP loans in the US, and lower yields
as a result of accessing these schemes. In the UK, yields were
marginally lower than in the prior period on the CBILS loans; and
in the US, yields across the funded and referred PPP loans were
c.2.5%.
Investment income represents the interest income on loans
invested within Funding Circle's investment vehicles. This is
significantly higher than the six month period to 30 June 2019 as
these programmes had only recently commenced by June 2019.
Net income, defined as total income after fair value loss, was
GBP5.1m (H1 2019: GBP81.4m). The Group considers the large majority
of this fair value movement is attributable to Covid-19. The fair
value movement in the six months to 30 June 2019 was minimal as the
Group had only just begun its ABS programmes which brought loans
onto its balance sheet.
Operating expenses
Total operating expenses
Operating loss of GBP113.5m (H1 2019: GBP31.3m) was affected by
investment AEBITDA, an exceptional non-cash write-down of GBP12.0m
for US goodwill and GBP4.9m for the previously announced
restructuring of the Developing Markets business. Excluding these
costs, total expenses were GBP101.7m, 10% down on prior year
principally driven by reducing discretional marketing spend
following the Covid-19 outbreak. Operating expenses are expected to
fall a further c.15% in H2.
People costs (including contractors) which represent the Group's
largest ongoing operating cost increased during the period by
GBP2.4m largely reflecting the restructuring costs of GBP3.8m for
the Developing Markets business.
Excluding these items, people costs were down GBP1.4m driven by
inflationary pay rises in March being more than offset by headcount
control, recruitment freezes and redeployment of staff.
Following the headcount reduction in the Developing Markets
through the period, headcount is now 19% lower than June 2019 and
at its lowest level since June 2018.
Six months to Six months Change
30 June 2020 to %
GBPm 30 June 2019
GBPm
People costs 53.7 51.3 5%
Less capitalised development
spend (CDS) (5.4) (5.8) (7%)
People costs net of CDS 48.3 45.5 6%
Average headcount (incl. contractors) 1,076 1,140 (6%)
Period end headcount (incl.
contractors) 1,004 1,227 (18%)
-------------------------------------- ------------- ------------- ------
Marketing costs were reduced from GBP35.2m to GBP22.4m. This was
particularly in the online, direct, brand and TV channels where
reductions totalled GBP11.2m as discretionary spend was scaled
back.
Depreciation, amortisation and impairment costs of GBP20.6m (H1
2019: GBP7.1m) include an impairment of GBP0.4m for the Developing
Markets premises and an impairment of GBP12.0m for US goodwill.
Excluding these, the charge is principally in relation to the
amortisation of the Group's technology platform and the deprecation
of leasehold improvements and office equipment.
Loan repurchase charges relate to the buyback of certain
defaulted loans from certain institutional investors under a loan
purchase commitment in return for a fee premium. The charge
increased during the period as a result of Covid-19. Under IFRS 9
this commitment is accounted for under the expected credit loss
model.
Other costs principally include cost of sales, data and
technology costs and property costs. These remained relatively flat
on 2019.
Segmental reporting
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:
30 June 2020 30 June 2019
========================== ================================= ============================================ =======
United United Developing Total United United Developing Total
Kingdom States Markets Kingdom States Markets
==========================
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
========================== ========= ======== ============ ======= ========== ========= ============ =======
Total income 59.3 38.0 3.9 101.2 53.0 22.2 6.5 81.7
Fair value (losses)/gains (34.8) (61.3) - (96.1) - (0.3) - (0.3)
-------------------------- --------- -------- ------------ ------- ---------- --------- ------------ -------
Net income 24.5 (23.3) 3.9 5.1 53.0 21.9 6.5 81.4
Segment profit 30 June 2020 30 June 2019
------------------------------------------ --------------------------------------------
United United Developing Total United United Developing Total
Kingdom States Markets Kingdom States Markets
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- --------- -------- ------------ ------- ---------- --------- ------------ -------
Segment adjusted EBITDA (10.5) (48.4) (6.7) (65.6) 14.0 (6.7) (6.1) 1.2
Product development (7.5) (4.0) (0.8) (12.3) (8.3) (4.4) (1.6) (14.3)
Corporate costs (4.1) (1.7) (0.4) (6.2) (4.2) (1.9) (0.5) (6.6)
========================== ========= ======== ============ ======= ========== ========= ============ =======
Adjusted EBITDA (22.1) (54.1) (7.9) (84.1) 1.5 (13.0) (8.2) (19.7)
Depreciation and
amortisation (4.1) (3.4) (0.7) (8.2) (4.0) (2.3) (0.8) (7.1)
Share-based payments
and social security
costs (3.0) (1.2) (0.1) (4.3) (2.5) (1.8) (0.2) (4.5)
Exceptional items - (12.0) (4.9) (16.9) - - - -
Operating loss (29.2) (70.7) (13.6) (113.5) (5.0) (17.1) (9.2) (31.3)
========================== ========= ======== ============ ======= ========== ========= ============ =======
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 access 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 GBP759m, Funding Circle's exposure is limited to its
investment of GBP110m (31 December 2019: GBP145m).
The investments are valued by discounting future cash flows and
the Group may crystallise more than GBP110m in cash in future
periods as the discounting unwinds.
The tables below breaks down the Group's balance sheet into its
constituent parts:
As at 30 As at 31
June December
2020 2019
---------------
Operating Warehouse Securitisation Other Total
business SPVs SPVs investments Total
GBPm GBPm GBPm GBPm GBPm GBPm
================ =============== ===================== ========================= ============= ======== ========
Investment
in SME loans 1.8 321.8 419.4 15.6 758.6 723.5
Cash 74.3 22.9 34.0 - 131.2 164.5
Other assets - - 13.3 - 13.3 8.4
Borrowing/bonds (0.3) (279.1) (438.0) - (717.4) (614.5)
================ =============== ===================== ========================= ============= ======== ========
Cash &
Investments 75.8 65.6 28.7 15.6 185.7 281.9
================ =============== ===================== ========================= ============= ======== ========
Other assets 102.0 - - - 102.0 99.1
Other
liabilities (70.8) - - - (70.8) (62.0)
================ =============== ===================== ========================= ============= ======== ========
Equity 107.0 65.6 28.7 15.6 216.9 319.0
================ =============== ===================== ========================= ============= ======== ========
Funding Circle investment exposure
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 in different ways. The table below provides a
further breakdown of Funding Circle's investment in these
vehicles:
Investment type Principal invested Balance sheet valuation
At 30 June 2020 At 30 June 2020
GBPm GBPm
1. Securitisation
SPVs (vertical) 18 18
2. Other investments 16 16
3. Warehouse SPVs 80 66
4. Securitisation
SPVs (horizontal) 45 10
--------------------- -------------------- -----------------------
Total 159 110
--------------------- -------------------- -----------------------
1) Vertical securitisation retention: Funding Circle is required
by regulation to retain a 5% equal participation in all classes of
bonds issued (vertical). Covid-19 has had minimal impact on these
investments.
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. Covid-19
has had minimal impact on these investments.
3) Warehouses: In warehouses we deploy our equity and bank debt
to aggregate loans temporarily prior to securitisation. The debt is
senior which means the equity is more exposed to changes in
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. In the six
month period, the warehouses generated investment AEBITDA of
negative GBP20m comprising GBP15m investment Income minus GBP35m
fair value adjustments.
4) Horizontal securitisation: 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
June 2020, we held horizontals in 3 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 these
horizontal tranches in H1 2020. In the six month period, the
horizontal securitisation generated investment AEBITDA of negative
GBP40m comprising GBP21m investment Income minus GBP61m fair value
adjustments.
Cash flow
As at 30 June 2020, the Group held cash and cash equivalents of
GBP131.2m (31 December 2019: GBP164.5m). The table below shows how
the Group's overall cash has been utilised:
6 months 6 months
ended ended
30 June 2020 30 June
GBPm 2019
GBPm
-------------------------------------------- -------------- ---------
Net cash outflow from operating activities (0.6) (18.1)
Purchase of tangible and intangible
assets (5.9) (8.1)
Interest received 0.4 0.9
Payment of lease liabilities (3.5) (2.8)
-------------------------------------------- -------------- ---------
Free cash flow (9.6) (28.1)
Net cash outflow associated with
investor products (26.1) (35.6)
Net cash inflow from other financing
activities 0.1 0.5
Effect of foreign exchange 2.3 0.2
-------------------------------------------- -------------- ---------
Movement in the year (33.3) (63.0)
Cash and cash equivalents at the
beginning of the period 164.5 333.0
-------------------------------------------- -------------- ---------
Cash and cash equivalents at the
end of the period 131.2 270.0
-------------------------------------------- -------------- ---------
Subsequent events
In July 2020, the Group announced that it is restructuring the
US business to accelerate its path to profitability. This included
centralising the US technology team in the UK, moving the sales and
marketing teams to the Denver office and workforce reductions in
aggregate resulting in a net reduction of c.85 roles. The
anticipated cash cost of this restructuring is c.GBP2m.
Going Concern
In considering the preparation of the interim report and
financial statements on a going concern basis, the Directors
considered and reviewed stress scenarios in relation to the impact
and duration of Covid-19 and related restrictions. Covid-19
resulted in the Group adapting its business model to originate
through UK and US SME government guarantee programmes( CBILS and
PPP), and temporarily suspending lending under
non-government-guaranteed programmes. In addition, forbearance
measures were implemented to assist in easing the pressure on many
of Funding Circle's existing borrowers with the aim of assisting
them in remaining viable in the medium to long term while
protecting investor returns.
The Group has prepared cash flow projections to 31 December 2021
which include stress scenarios including the timing of when the
Group would expect to resume non-government guaranteed lending and
the extent to which origination growth would increase. At 30 June
2020, the Group had net assets of GBP217m.
Under our central stress scenario, defaults accelerate to a peak
of three and a half times pre-Covid-19 levels in the second half of
2020 before reducing in 2021 and resulting in cumulative net losses
of two times pre-Covid-19 levels. At all times through the forecast
period, the Group retains sufficient financial resources.
Additionally, the Group has financial covenants in relation to
servicing agreements and the warehouse vehicles consisting of
minimum cash and tangible net worth levels and tangible net worth
to debt ratios. At all times through the forecast period, the Group
remains within the required levels.
Following these forecasts, including the consideration of
downside stress scenarios, the Directors are satisfied that the
Group has sufficient financial resources such that it is
appropriate to prepare the interim financial statements on a going
concern basis.
Principal risks and uncertainties
The Group's principal risks and uncertainties were disclosed in
the 2019 annual report and accounts after review and approval by
the Board. In light of the onset of Covid-19 from March 2020,
whilst the Group considers the overall principal risks and
uncertainties remain the same in nature, a number of these risks
have significantly heightened.
Principal risk General Impact Covid-19 Specific Impact
---------------------------- --------------------------------------- ---------------------------------
Strategic risk Economic environment - Financial The economic slowdown
- defined as the risk that is associated with due to Covid-19 creates
failure to build macroeconomic or political uncertainty in terms
a sustainable, diversified factors that may affect Funding of the credit risk associated
and profitable business Circle's financial and/or with unsecured lending
that can successfully credit performance. to small businesses.
adapt to environment
changes due to the The current government
inefficient use backed lending programmes
of Funding Circle's are temporary in nature,
available resources. and may rapidly evolve.
These factors may hamper
our ability and the
timing for Funding Circle
to resume platform lending
of unsecured loans.
We are closely monitoring
the external environment
and continue to evolve
our business model,
credit strategy and
product offerings.
---------------------------- --------------------------------------- ---------------------------------
Funding and liquidity Funding risk - The risk that Given the low demand
risk - defined as borrower loan demand cannot for unsecured lending
the risks associated be met when and where they in the Covid-19 environment,
with platform funding fall due or can only be met Funding Circle placed
(matching borrower at an uneconomic price. This a temporary suspension
demand and investor risk varies with the economic on non-government backed
cash supply), capital attractiveness of Funding lending.
commitments and Circle loans as an investment,
corporate liquidity the level of diversification We currently have a
through normal and of funding sources and the strong pipeline for
stress scenarios. level of resilience of these institutional funding
funding sources through economic of government-backed
cycles. loans and sufficient
liquidity to match borrower
Liquidity risk - The risk demand. However, the
that Funding Circle liabilities timing and ability to
cannot be met when and where resume unsecured lending
they fall due or can only to pre-Covid levels
at an uneconomic price. is uncertain.
---------------------------- --------------------------------------- ---------------------------------
Credit risk - defined Borrower acquisition - Credit There is an increased
as the risk of financial performance and returns of credit risk of borrowers
loss to an investor new loans can deviate from not meeting their repayment
should any borrower expectations due to several obligations due to the
fail to fulfil their factors: changes in credit impact of lockdowns
contractual repayment quality of incoming applications, and continuing economic
obligations. Credit calibration of risk models slowdown. This can lead
risk management or strategy parameters and to an increase in credit
is the sum of activities control gaps in processing defaults and a decrease
necessary to deliver loan applications. in investor net returns.
a risk profile at Portfolio risk management
portfolio level - Credit performance and returns Investor net returns
in line with Funding of existing portfolio can are also contingent
Circle management's deviate from expectations on the continuous effectiveness
expectations, in due to several factors: deterioration of collections & recoveries
terms of net loss of credit environment, increased activities during the
rate, risk-adjusted competition driving higher crisis.
rate of return and prepayment rates, effectiveness
its volatility through of portfolio monitoring and To mitigate these risks,
economic cycles. collections and recoveries. we have paused unsecured
lending for now. Given
the government guarantees,
credit risk significantly
reduces under the government
backed lending programs,
which have formed the
majority of our lending
in 2020.
We have also increased
staffing and adapted
our collections capabilities
and tools to help borrowers
in difficulty.
---------------------------- --------------------------------------- ---------------------------------
Principal risk General Impact Covid-19 Specific Impact
------------------------------------------- ------------------------------
Regulatory, reputation Regulatory risk - The risk There is increased regulatory
and conduct risk that Funding Circle's ability scrutiny in the UK as
- defined as engaging to effectively manage its a result of the economic
in activities that regulatory relationships is uncertainty and the
detract from Funding compromised or diminished, perceived increased
Circle's goal of that the Group's governance risks to viability of
being a trusted and controls framework is firms.
and reputable company not satisfactory given business
with products, services growth or that there is business Conduct risk has also
and processes designed interruption by reason of increased due to the
for customer success non-compliance with regulation challenges of oversight
and delivered in or the introduction of business-impacting and monitoring of employees
a way that will regulation. and controls in a remote
not cause customer environment.
detriment or regulatory
censure. The volume of collections
activity also poses
an increased regulatory
risk regarding the adequate
management of borrowers
in difficulty.
Proactive engagement
with the regulator continues
Enhanced first line
controls and ongoing
compliance monitoring
and testing is in place
to manage conduct risk.
-------------------------
Reputation risk - Operational There is heightened
or performance failures could reputational risk from
lead to negative publicity pursuing collections
that could adversely affect from borrowers, who
our brand, business, results, have missed payments
operations, financial condition
or prospects. Forbearance measures
have been offered to
help borrowers in difficulty
in an empathetic way.
Quality monitoring has
also been enhanced in
our collections and
recoveries department.
-------------------------
Principal risk General Impact Covid-19 Specific Impact
--------------------------- --------------------------------------- ----------------------------------
Operational risk Process risk - Failure to Funding Circle implemented
Operational risk operate in accordance with new processes to support
is the risk of loss British Business Bank (BBB) the government backed
resulting from inadequate guidelines may invalidate lending schemes. There
or failed internal CBILS guarantee. This may is a potential for operational
processes, people result in Funding Circle repurchasing errors that may result
and systems or from loans from investors. in repurchasing loans
external events. from investors, and
this could have an impact
on Funding Circle's
financials.
We have implemented
robust controls, as
well as independent
quality checks to ensure
that all loans originated
under the government
scheme are fully compliant
with eligibility requirements.
Government programs
monitoring and oversight
is in place to ensure
ongoing program compliance.
---------------------------
Information security - Failure There is heightened
to protect the confidential risk driven from staff
information of Funding Circle's working from remote
borrowers, investors and IT locations and using
systems may lead to financial electronic communication
loss, reputational damage channels that may be
and regulatory censure. susceptible to cyberattacks.
We are continuing to
evolve our workplace
and information security
policies in the Covid-19
environment, with enhanced
monitoring.
---------------------------
Financial crime - Risk of There is heightened
regulatory breach, financial risk due to the rapid
loss or reputational damage pace of change needed
arising from a failure to to adapt to government
adequately manage or prevent backed lending and to
money laundering, terrorist remote working.
financing, bribery and corruption,
or to comply with sanctions We have focused on maintaining
regulations. robust controls through
this period of changes,
with enhanced detections
to mitigate such risks.
Technology risk - Failure There is increased reliance
of the technology platform on technology with remote
could have a material adverse working. Rapidly launching
impact on Funding Circle's and adjusting systems
business, results of operations, to accommodate government-backed
financial condition or prospects. loans also heightened
this risk.
We have dedicated technical
resources to monitor
and rapidly fix potential
outages, operating within
clear disaster and recovery
contingency plans.
Client money risk - Failure New trust structures
of Funding Circle to adequately set up in the UK for
protect and segregate client CBILS and BBLS loans
money may lead to financial have required additional
loss, reputational damage controls to be implemented.
and regulatory censure. Client money flows through
these schemes is protected
and segregated under
the same standards and
best practices applied
across the platform,
including performing
internal and external
reconciliations daily.
In addition, given the
temporary pause of retail
investment, we have
observed an increase
in retail money balances.
Retail money continues
to be segregated from
institutional and Funding
Circle money and additional
monitoring controls
have been put in place
to mitigate client money
risks.
--------------------------- --------------------------------------- ----------------------------------
Statement of Directors' Responsibilities
The Directors confirm that this condensed consolidated interim
financial information has been prepared in accordance with IAS 34
("Interim Financial Reporting") as adopted by the European Union
and gives a true and fair view of the assets, liabilities,
financial position and loss as required by DTR 4.2.4 and that the
interim management report includes a fair review of the information
required by DTR 4.2.7 and DTR 4.2.8, namely:
-- an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed consolidated interim financial information and a
description of the principal risks and uncertainties for the
remaining six months of the financial year; and
-- material related party transactions in the first six months
of the financial year and any material changes in the related party
transactions described in the last Annual Report.
The Directors are responsible for the maintenance and integrity
of the Company's website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
The Directors of Funding Circle Holdings plc are listed in the
Company's Report and Accounts for the year to 31 December 2019. A
list of current Directors is maintained on the Funding Circle
Holdings plc website: www.corporate.fundingcircle.com.
By order of the Board
Samir Desai, Chief Executive Officer
Oliver White, Chief Financial Officer
24 September 2020
Condensed consolidated statement of comprehensive income
For the six months to 30 June 2020 (unaudited)
Unaudited Unaudited
6 months 6 months
to to
Before 30 June 30 June
exceptional Exceptional 2020 2019
items items (1) Total Total
Note GBPm GBPm GBPm GBPm
Transaction fees 47.8 - 47.8 62.5
Servicing fees 13.8 - 13.8 15.2
Other fees 3.2 - 3.2 2.7
--------------------------------- ---------------- -------------- ------------ ---------- ----------
Fee income 64.8 - 64.8 80.4
Investment income 49.8 - 49.8 2.2
Investment expense (13.4) - (13.4) (0.9)
--------------------------------- ---------------- -------------- ------------ ---------- ----------
Total income 101.2 - 101.2 81.7
Fair value (losses)/gains (96.1) - (96.1) (0.3)
Net income 5.1 - 5.1 81.4
People costs (44.5) (3.8) (48.3) (45.5)
Marketing costs (22.4) - (22.4) (35.2)
Depreciation, amortisation
and impairment (8.2) (12.4) (20.6) (7.1)
Loan repurchase charge (5.5) - (5.5) (4.2)
Other costs (21.1) (0.7) (21.8) (20.7)
--------------------------------- ---------------- -------------- ------------ ---------- ----------
Operating expenses 5 (101.7) (16.9) (118.6) (112.7)
Operating loss (96.6) (16.9) (113.5) (31.3)
Finance income 0.3 - 0.3 1.0
Finance costs (0.8) - (0.8) (0.5)
Share of net loss of associates (1.1) - (1.1) -
--------------------------------- ---------------- -------------- ------------ ---------- ----------
Loss before taxation (98.2) (16.9) (115.1) (30.8)
Income tax 7 (0.1) - (0.1) (0.2)
--------------------------------- ---------------- -------------- ------------ ---------- ----------
Loss for the period (98.3) (16.9) (115.2) (31.0)
--------------------------------- ---------------- -------------- ------------ ---------- ----------
Other comprehensive income
Items that may be reclassified
subsequently to profit
and loss:
Exchange differences on
translation of foreign
operations 8.7 - 8.7 1.0
--------------------------------- ---------------- --------------
Total comprehensive loss
for the period (89.6) (16.9) (106.5) (30.0)
============== ============ ========== ==========
Total comprehensive loss
attributable to:
Owners of the parent (89.6) (16.9) (106.5) (30.0)
============== ============ ========== ==========
Loss per share
Basic and diluted loss
per share 8 (28.2)p (4.8)p (33.0)p (8.9)p
============== ============ ========== ==========
(1) Exceptional items are detailed within note 6.
Condensed consolidated balance sheet
As at 30 June 2020 (unaudited)
Unaudited
30 June 31 December
2020 2019
Note GBPm GBPm
Non-current assets
Goodwill 9 - 11.3
Intangible assets 10 26.1 23.6
Property, plant and equipment 11 36.1 39.0
Investments in associates 12 11.7 13.2
Investment in trusts 3.9 -
Investment in SME loans (other) 13 1.8 1.7
---------- --------------
79.6 88.8
Current assets
Investment in SME loans (curing) 13 - -
Investment in SME loans (warehouse) 13 321.8 342.0
Investment in SME loans (securitised) 13 419.4 366.6
Trade and other receivables 54.0 33.6
Cash and cash equivalents 131.2 164.5
---------- --------------
926.4 906.7
---------- --------------
Total assets 1,006.0 995.5
========== ==============
Current liabilities
Trade and other payables 25.2 19.7
Bank borrowings 14 279.4 265.8
Bonds 438.0 348.7
Lease liabilities 11 7.5 8.5
Short-term provisions 15 9.4 3.1
---------- --------------
759.5 645.8
Non-current liabilities
Long-term provisions 15 0.9 0.9
Lease liabilities 11 28.7 29.8
---------- --------------
Total liabilities 789.1 676.5
========== ==============
Equity
Share capital 0.4 0.3
Share premium account 292.5 292.3
Foreign exchange reserve 16.7 8.0
Share options reserve 14.7 11.9
(Accumulated losses)/retained earnings (107.4) 6.5
---------- --------------
Total equity 216.9 319.0
========== ==============
Total equity and liabilities 1,006.0 995.5
========== ==============
These condensed interim financial statements were approved by
the Board on 24 September 2020. They were signed on behalf of the
Board by:
O White
Director
Condensed consolidated statement of changes in equity
For the six months to 30 June 2020 (unaudited)
Share Foreign Share
Share premium exchange options Retained earnings /
Note capital account reserve reserve (accumulated losses) Total equity
GBPm GBPm GBPm GBPm GBPm GBPm
Balance as at
1 January 2020 0.3 292.3 8.0 11.9 6.5 319.0
Loss for the period - - - - (115.2) (115.2)
Other
comprehensive
income:
Exchange differences
on translation of
foreign operations - - 8.7 - - 8.7
Transactions
with owners
Issue of share capital 0.1 0.2 - - - 0.3
Transfer of share
option costs - - - (1.3) 1.3 -
Employee share schemes
- value of employee
services - - - 4.1 - 4.1
------------- ------------ ------------ ------------ --------------------- -------------
Unaudited balance at
30 June 2020 0.4 292.5 16.7 14.7 (107.4) 216.9
============= ============ ============ ============ ===================== =============
Balance as at
1 January 2019 0.3 291.8 15.7 6.0 87.2 401.0
Loss for the period - - - - (31.0) (31.0)
Other comprehensive income:
Exchange differences
on translation of
foreign operations - - 1.0 - - 1.0
Transactions with owners
Issue of share capital 0.1 0.4 - - - 0.5
Transfer of share
option costs - - - (1.5) 1.5 -
Employee share schemes
- value of employee
services - - - 5.6 - 5.6
------------- ------------ ------------ ------------ --------------------- -------------
Unaudited balance at
30 June 2019 0.4 292.2 16.7 10.1 57.7 377.1
============= ============ ============ ============ ===================== =============
Condensed consolidated statement of cash flows
For the six months to 30 June 2020 (unaudited)
Note Unaudited Unaudited
6 months 6 months
to to
30 June 2020 30 June 2019
GBPm GBPm
Net cash outflow from operating activities 17 (0.6) (18.1)
Investing activities
Purchase of intangible assets (5.5) (5.9)
Purchase of property, plant and equipment (0.4) (2.2)
Cash receipts from SME loans (curing) - 2.0
Purchase of SME loans (other) - (1.7)
Purchase of SME loans (warehouse phase) (289.6) (179.7)
Cash receipts from SME loans (warehouse
phase) 63.5 3.9
Cash receipts from SME loans (securitised) 108.0 -
Investment in trusts (3.9) -
Redemption/(Investment) in private
funds 0.3 (5.6)
Dividends received from private funds 0.3 -
Finance income received 0.4 0.9
Net cash outflow from investing activities (126.9) (188.3)
-------------- --------------
Financing activities
Proceeds from bank borrowings 206.5 145.5
Repayment of bank borrowings (200.6) -
Proceeds from issuance of bonds 190.1 -
Payment of bond liabilities (100.7) -
Proceeds from the exercise of share
options 0.1 0.5
Payment of lease liabilities (3.5) (2.8)
Net cash inflow from financing activities 91.9 143.2
-------------- --------------
Net decrease in cash and cash equivalents (35.6) (63.2)
Cash and cash equivalents at the beginning
of the period 164.5 333.0
Effect of foreign exchange rate changes 2.3 0.2
Cash and cash equivalents at the end
of the period 131.2 270.0
============== ==============
Notes to the condensed interim financial statements
For the six months to 30 June 2020 (unaudited)
1. Basis of preparation
General information
Funding Circle Holdings plc ('the Company') is a public limited
company which is listed on the London Stock Exchange and is
domiciled and incorporated in the United Kingdom under the
Companies Act 2006. The Company's registered office is 71 Queen
Victoria Street, London, EC4V 4AY.
These condensed interim financial statements have been prepared
as at, and for the six months to, 30 June 2020. The comparative
financial information presented has been prepared as at, and for
the six months to 30 June 2019 and as at 31 December 2019.
The interim financial information presented as at, and for the
six months to, 30 June 2020 comprise the Company and its
subsidiaries (together referred to as the "Group"). The
consolidated financial statements of the Group as at, and for the
year to, 31 December 2019 are available on request from the
Company's registered office and via the Company's website.
Going concern
The Group made a total comprehensive loss of GBP106.5 million
during the six months to 30 June 2020 (30 June 2019: loss of
GBP30.0 million). The cash and cash equivalent balance of the Group
as at 30 June 2020 was GBP131.2 million (31 December 2019: GBP164.5
million).
The condensed interim 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 12 months from the date of approval
of the condensed interim financial statements).
After receiving accreditation for CBILS lending, the UK business
has seen strong performance in originations and is well positioned
to facilitate further lending depending on the duration and extent
of ongoing government guarantee programmes, or with a view to
resuming the facilitation of non-government guarantee lending if
the government schemes end. As discussed in note 22, the Group has
announced a reorganisation of the US business centralising
technology roles within the UK and sales and marketing in
Denver.
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 and economic uncertainty caused by
Covid-19.
The base case scenario assumes:
- The expectation of ongoing Government support for SMEs in the
UK, or the resumption of non-government lending if government
support schemes end;
- There is no extension to the PPP government scheme in the
US;
- Non-government scheme lending on the platform resumes from
January 2021;
- Lending in the US steadily increases; and
- Costs and headcount remain relatively flat with marketing at
c.30% of income.
Management prepared a stress scenario in which:
- CBILS in the UK is not extended beyond end of September
2020;
- UK and US non-government lending does not meaningfully resume
until January 2021; and
- A downside loss scenario is applied to F unding Circle 's
on-balance sheet investment in SME loans resulting in higher
initial fair value losses and lower cash flows to the subordinate
tranches of investments it owns.
Even in the stress scenario, sufficient cash is forecast to be
generated to meet liabilities as they fall due without the
requirement to take significant mitigating actions or restructuring
beyond that already announced. The Group does not currently rely on
committed or uncommitted borrowing facilities with the exception of
borrowings used to fund warehouse SME loan purchases, and does not
have undrawn committed borrowing facilities available to the wider
Group.
Management have reviewed financial covenants 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, which
require minimum levels of unrestricted cash in the Group and
maintaining maximum debt to tangible net worth ratios. Even in
stressed scenarios there is not considered to be a material risk of
a covenant breach despite a narrowing of headroom in the near
term.
The Directors have made inquiries of management and considered
budgets and cash flow forecasts for the Group and have, at the time
of approving these interim financial statements, a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future.
Basis of preparation
These condensed interim financial statements, which have been
reviewed and not audited, have been prepared in accordance with the
Disclosure and Transparency Rules of the Financial Conduct
Authority and with IAS 34, "Interim Financial Reporting" as adopted
by the EU. They do not include all of the information required for
full annual financial statements, and should be read in conjunction
with the consolidated financial statements of the Group as at and
for the year to 31 December 2019 which have been prepared in
accordance with International Financial Reporting Standards (IFRSs)
as adopted for use in the EU, including International Accounting
Standards (IAS) and interpretations issued by the International
Financial Reporting Standard Interpretations Committee
(IFRS-IC).
The financial information included in these condensed interim
financial statements does not constitute statutory accounts within
the meaning of Section 434 of the Companies Act 2006 (the 'Act').
The statutory accounts for the year to 31 December 2019 have been
reported on by the Company's auditors and were delivered to the
Registrar of Companies following the Company's Annual General
Meeting. The auditor's report was (i) unqualified, (ii) did not
include a reference to any matters to which the auditor drew
attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 of the Act.
Significant changes in the current reporting period
The financial position and performance of the Group was affected
by the following events and transactions during the six months to
30 June 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 fell considerably in the
latter half of March 2020. SME government guarantee programmes
introduced by the UK and US governments, and Funding Circle's
subsequent accreditation 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 in order
to protect the best interests of both Funding Circle's borrowers
and investors.
ii) The UK Government's Coronavirus Business Interruption Loan Scheme ("CBILS") funding
During the period, due to the Covid-19 crisis, Funding Circle
became an accredited lender under CBILS. Funding Circle is required
to co-invest in loans originated through this scheme. The loans are
beneficially owned by investors under trust structures in which
Funding Circle retains a de minimis stake.
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 fair value through profit and loss 'FVTPL'.
iii) Paycheck protection programme ("PPP") loan funding
During the period, 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. It has no
ongoing retention in the PPP loans.
iv) Asset-backed securities ("ABS")
The Group continued its bond programmes which commenced in the
prior year in the UK and US, continuing to invest 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 and warehouse vehicle
in the US was utilised in the period to 30 June 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 period to 30 June 2020 a further GBP221.9 million of SME loans
have been sold to SPVs (30 June 2019: GBPnil).
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
temporarily holds 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
June 2020, Funding Circle held horizontals in 3 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
these horizontal tranches in H1 2020.
2. Changes in significant accounting policies
The accounting policies, methods of computation and presentation
adopted in the preparation of the condensed interim financial
statements are consistent with those followed in the preparation of
the consolidated financial statements for the year to 31 December
2019. The Group has not early adopted any other standard,
interpretation or amendment that has been issued but is not yet
effective.
A number of new or amended standards became applicable for the
current reporting period, however, the Group did not have to change
its accounting policies or make retrospective adjustments as a
result of adoption.
Summary of new accounting policies
Investment in trusts
The Group holds a de minimis beneficial ownership in trusts set
up to fund CBILS loans with the remaining 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 investors and therefore 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 entity's and
structures and uses this control to obtain a variable return. As
the Group's de minimis 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.
3. Critical accounting estimates and judgments
The preparation of the condensed interim 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.
There were no critical judgements in the current period. The
significant estimates and judgements 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.
Key sources of estimation uncertainty
The following are the key sources of estimation uncertainty that
the Directors have made in the process of applying the Group's
accounting policies and have the most significant effect on the
amounts recognised in the financial statements.
a) Loan repurchase provision (note 15)
In certain circumstances, in the less mature 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. 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 on
loan defaults. It is estimated that in both the European markets
defaults will accelerate to a peak in H2 2020 and then de-stress
gradually afterwards, with Germany expected to fair more favourably
than Netherlands as a result of government stimulus programme. The
most significant estimation is with default rates on performing
loans. For the period ended 30 June 2020 the weighted average
lifetime default rate is estimated at 24.1% under stress
assumptions (31 December 2019: 12.9% without Covid-19 stress). If
the weighted average default rate estimate were to change by +/-25%
the provision would change by GBP2.2 million for the period ended
30 June 2020 (31 December 2019: GBP1.5 million). It is considered
that the range of reasonably possible outcomes in annual default
rates used might be +/-25% and as a result it is possible that the
provision in future could materially diverge from management's
estimate.
b) Fair value of financial instruments (note 16)
At 30 June 2020, the carrying value of the Group's financial
instrument assets held at fair value was GBP779.5 million (31
December 2019: GBP754.8 million) and the carrying value of
financial liabilities carried at fair value was GBP5.3 million (31
December 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. In light of Covid-19, a range of stress scenarios
were used incorporating different default and recovery
stresses.
For the UK Portfolio the Group applied different stress levels
to different segments of the portfolio depending on the borrower
behaviour observed to date. 1) borrowers that weathered the
lockdown without missing payments or needing plans are performing
better than pre-crisis average in the short term, with moderate
stress possible in the medium term due to a weak economy, 2)
borrowers late and not on a plan are expected to incur standard
high default rates for such populations, 3) borrowers that took
payment plans or holidays are expected to exhibit a credit
performance in-between the two segments above. The resultant impact
on the portfolios is a peak in defaults in H2 2020 with a tail
normalising over 2021 into 2022.
Similarly in the US the loss scenario involved splitting the
loan book by borrower segment based on their observed behaviour
since the start of the crisis. This also produces an expectation of
a peak in defaults in H2 2020 with a tail normalising over 2021
into 2022. Overall, it is estimated that a similar level of stress
will occur in the US and UK over the coming years.
A sensitivity to the default rates and discount rate are
illustrated below.
Description Fair value Unobservable Inputs Relationship of unobservable
(GBPm) input inputs to fair value
Investment 321.8 Lifetime cumulative US 18.6 A change in the lifetime
in SME loans default rate and 21.7%(1) cumulative default rate
- (warehouse) as % of original UK 15.7% would have the following
impact:
US: +/- 200 bps would
decrease/increase fair
value by GBP2.4 million.
UK: +/- 160 bps would
decrease/increase fair
value by GBP3.3 million.
------------------ -------------------- --------------- -----------------------------
Investment 419.4 Lifetime cumulative US 23.4 A change in the lifetime
in SME loans default rate and 26.2%(1) cumulative default rate
- (securitised) as % of original UK 17.4% would have the following
impact:
US: +/- 250 bps would
decrease/increase fair
value by GBP9.0 million.
UK: +/- 170 bps would
decrease/increase fair
value by GBP2.3 million.
------------------ -------------------- --------------- -----------------------------
A change in the lifetime
Lifetime cumulative cumulative default rate
default rate by +/- 170 bps would
of associated increase/decrease fair
Bonds (Unrated) (5.3) assets. 17.4% value by GBP0.4 million.
------------------ -------------------- --------------- -----------------------------
(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.
For the illustration of sensitivity a 10% change in cumulative
lifetime loss rates has been applied above. However given ongoing
uncertainty in relation to the impact of Covid-19 in the future,
the reasonably possible range of outcomes could be wider than those
illustrated. In Particular a more severe impact from Covid-19 in
future than that estimated by management could result in the fair
value of the assets materially diverging from management's
estimate, while a less severe impact from Covid-19 in future would
be estimated to produce a more limited range of reasonably possible
outcomes.
Description Fair value Unobservable input Inputs Relationship of unobservable
(GBPm) inputs to fair value
Investment 321.8 Risk-adjusted US 7.9% A change in the discount
in SME loans discount rate UK 7.7% rate by +/-100 bps would
- (warehouse) decrease/increase fair
value by GBP4.7 million
------------------ ------------------- --------- -----------------------------
Investment 419.4 Risk-adjusted US 7.9% A change in the discount
in SME loans discount rate UK 7.7% rate by +/-100 bps would
- (securitised) decrease/increase fair
value by GBP5.7 million
------------------ ------------------- --------- -----------------------------
A change in the discount
rate by +/-100 bps would
Risk-adjusted decrease/increase fair
Bonds (Unrated) (5.3) discount rate 27.1% value by GBP0.2 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.
c) Estimated impairment of non-financial assets (notes 9 and
10)
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 Limited ("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, an event indicating the
possibility of impairment was identified and the Group has
undertaken an interim impairment review of non-financial assets in
CGUs.
The impairment test involved comparing the carrying value of the
net assets held for use to their recoverable amount for each CGU.
The recoverable amount represents the higher of the entity'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 FCUK was not sensitive
to estimation uncertainty, nor was FCCE as the non-financial assets
were impaired in the previous assessment 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 GBP12.0m. 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, however a lower
estimated recoverable amount could lead to impairment of intangible
assets within the CGU which are held at a carrying value of
GBP11.3m and property, plant and equipment totalling GBP1.7m
(excluding right of use assets).
The Group prepared a five-year forecast for the FCUS CGU for
which the majority of the sensitivity 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:
- income growth at a compound growth rate of 23.9%. A 500bps
reduction in projected 5(th) year income growth rate with no cost
reduction would decrease the recoverable amount by GBP13.2
million.
- cost growth at a compound rate of 12.5%. A 500bps increase in
projected 5(th) year cost growth rate with no income increase would
decrease the recoverable amount by GBP11.2 million.
- pre-tax discount rate of 15%. A 1% increase in discount rate
would decrease the recoverable amount by GBP3.6 million.
- income beyond the five-year period extrapolated using an
estimated growth rate of 1.5%. A reduction in the growth rate to
1.0% would reduce the recoverable amount by GBP1.1 million.
4. Segmental information
IFRS 8 Operating segments requires the Group to determine its
operating segments based on information which is used internally
for decision making. Based on the internal reporting information
and management structures within the Group, it has been determined
that there are three geographic operating segments 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 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-base
payment charges and associated social security costs, foreign
exchange, and exceptional items (see note 6). 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 period to 30 June 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
payments and exceptional items across the geographical segments.
The comparatives of 30 June 2019 have been restated to reflect the
revised segmental presentation.
Net income/(loss) 30 June 2020 30 June 2019 (restated)
========================== ================================= ============================================ =======
United United Developing Total United United Developing Total
Kingdom States Markets Kingdom States Markets
==========================
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
========================== ========= ======== ============ ======= ========== ========= ============ =======
Total income 59.3 38.0 3.9 101.2 53.0 22.2 6.5 81.7
Fair value (losses)/gains (34.8) (61.3) - (96.1) - (0.3) - (0.3)
-------------------------- --------- -------- ------------ ------- ---------- --------- ------------ -------
Net income/(loss) 24.5 (23.3) 3.9 5.1 53.0 21.9 6.5 81.4
Segment profit 30 June 2020 30 June 2019 (restated)
------------------------------------------ --------------------------------------------
United United Developing Total United United Developing Total
Kingdom States Markets Kingdom States Markets
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- --------- -------- ------------ ------- ---------- --------- ------------ -------
Segment adjusted EBITDA (10.5) (48.4) (6.7) (65.6) 14.0 (6.7) (6.1) 1.2
Product development (7.5) (4.0) (0.8) (12.3) (8.3) (4.4) (1.6) (14.3)
Corporate costs (4.1) (1.7) (0.4) (6.2) (4.2) (1.9) (0.5) (6.6)
========================== ========= ======== ============ ======= ========== ========= ============ =======
Adjusted EBITDA (22.1) (54.1) (7.9) (84.1) 1.5 (13.0) (8.2) (19.7)
Depreciation and
amortisation (4.1) (3.4) (0.7) (8.2) (4.0) (2.3) (0.8) (7.1)
Share-based payments
and social security
costs (3.0) (1.2) (0.1) (4.3) (2.5) (1.8) (0.2) (4.5)
Exceptional items - (12.0) (4.9) (16.9) - - - -
Operating loss (29.2) (70.7) (13.6) (113.5) (5.0) (17.1) (9.2) (31.3)
========================== ========= ======== ============ ======= ========== ========= ============ =======
5. Operating expenses
30 June 30 June 30 June 30 June
2020 2020 2020 2019
Before exceptional Exceptional Total Total
items items
GBPm GBPm GBPm GBPm
Depreciation, amortisation
and impairment 8.2 12.4 20.6 7.1
Rental income and other
recharges (0.4) - (0.4) (0.1)
Employment costs (including
contractors) 44.5 3.8 48.3 45.5
Marketing costs (excluding
employee costs) 22.4 - 22.4 35.2
Data and technology costs 5.7 - 5.7 4.9
Loan repurchase charge 5.5 - 5.5 4.2
Other expenses 15.8 0.7 16.5 15.9
-------- --------
Total operating expenses 101.7 16.9 118.6 112.7
------------------- ------------ -------- --------
6. Exceptional items
The Group reflects its underlying financial results in the
Before Exceptional Items column of the consolidated income
statement in order to provide a clear and consistent view of
trading performance.
As announced in March 2020, the Group is restructuring 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 totaling GBP4.9 million. These
comprised redundancy costs of GBP3.8 million, accelerated
depreciation on the right of use assets of GBP0.4 million and other
costs of GBP0.7 million. Cash payments associated with these items
totaled GBP2.4 million to 30 June 2020.
Following a change in the Group's income and cost forecasts, an
event indicating the possibility of impairment was identified and
the Group has undertaken an interim goodwill impairment review as a
result in which it was identified that goodwill in relation to
Funding Circle USA business was carried at a value higher than the
business unit's fair value less cost to sell driven by a reduction
in the future discounted cash flows of the Business Unit. As a
result, an impairment was recognised of GBP12.0 million. There was
no cash movement in relation to the impairment.
7. Taxation
The Group calculates the period income tax expense using the tax
rate that would be applicable to the expected total annual
earnings. The estimated average annual tax rate used for the six
months to 30 June 2020 (excluding the tax charge on Research and
Development Expenditure Credits (RDEC)) is nil%, compared to nil%
for the six months to 30 June 2019. The major components of income
tax expense in the condensed consolidated statement of
comprehensive income are:
30 June 30 June
2020 2019
GBPm GBPm
Current tax
UK corporation taxation 0.1 0.2
Total current tax 0.1 0.2
Total tax charge 0.1 0.2
-------- --------
The Group continues to be in a loss making position, however,
credits receivable in respect of RDEC are subject to UK corporation
tax. The above tax charge represents the amount of tax deducted
from the gross RDEC credit receivable for 2020.
The Group has unrelieved tax losses that are available for
offset against future taxable profits. The Group has not recognised
a deferred tax asset in respect of these losses as there is not
sufficient evidence of suitable profits being generated to utilise
these losses.
8. Losses per share
30 June 30 June
2020 2019
GBPm GBPm
Loss for the period (115.2) (31.0)
Weighted average number of ordinary
shares in issue (million) 348.8 346.7
Basic and diluted loss per share (33.0)p (8.9)p
-------- --------
Loss for the year before exceptional (98.3) n/a
items
Weighted average number of ordinary 348.8 n/a
shares in issue (million)
-------- --------
Basic and diluted loss per share before (28.2)p n/a
exceptional items
-------- --------
9. Goodwill
GBPm
Cost and carrying amount
At 1 January 2020 11.3
Exchange differences 0.7
Impairment charge (12.0)
-------
At 30 June 2020 -
-------
The annual goodwill impairment assessment was performed at 31
December 2019. Following the impact of Covid-19 and a change in the
Group's income and cost forecasts, an event indicating the
possibility of impairment was identified and the Group has
undertaken an interim goodwill impairment review for all CGUs as a
result.
Goodwill acquired in a business combination is allocated, at
acquisition, to the cash-generating units ("CGUs") that are
expected to benefit from that business combination. At the balance
sheet date, the Group had one CGU to which remaining goodwill is
attached, being Funding Circle USA ("FCUSA") and its
subsidiaries.
30 June 31 December
2020 2019
GBPm GBPm
FCUSA - 11.3
FCCE - -
--------- ------------
Total - 11.3
--------- ------------
The impairment test involved comparing the carrying value of the
net assets held for use to their recoverable amount. The
recoverable amount represents the higher of the entity'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 3. 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 period was GBP12.0 million
(31 December 2019: GBP29.0 million).
10. Intangible assets
Capitalised development Computer Other intangibles Total
costs software
GBPm GBPm GBPm GBPm
Net book value
At 31 December
2019 23.3 0.2 0.1 23.6
At 30 June 2020 25.7 0.3 0.1 26.1
------------------------ ---------- ------------------ ------
11. Property, plant and equipment, right-of-use assets and lease
liabilities
Analysis of property, plant and equipment between owned and
leased assets
30 June 31 December
2020 2019
GBPm GBPm
Property, plant and equipment (owned) 4.9 5.1
Right-of-use assets 31.2 33.9
-------- ------------
36.1 39.0
-------- ------------
Lease liabilities - maturity analysis
30 June 31 December
2020 2019
GBPm GBPm
No later than one year 7.5 8.5
Later than one year and no later than five
years 24.5 24.5
Later than five years 4.2 5.3
-------- ------------
Total 36.2 38.3
-------- ------------
Lease liabilities
30 June 31 December
2020 2019
GBPm GBPm
Current 7.5 8.5
Non-current 28.7 29.8
-------- ------------
Total 36.2 38.3
-------- ------------
12. Interest in associates
During the six month period to June 2020, Funding Circle UK SME
Direct Lending Fund I received additional committed capital from
external investors of GBP30.0 million. This increased the committed
capital in the fund to GBP65.0 million of which the Group provided
GBP5.0 million, reducing its holding from 14.3% to 7.7%. In April
2020, the Group injected a further GBP0.4 million into the fund.
This increased the committed capital in the fund to GBP65.4 million
of which the Group provided a total of GBP5.4 million, increasing
its holding to 8.3%.
The Group holds 23.6% of Funding Circle European SME Direct
Lending Fund I and 8.3% of Funding Circle UK SME Direct Lending
Fund I at 30 June 2020.
The Group's share of losses from associates in the period was
GBP1.1 million (30 June 2019: GBPnil).
13. Investments in SME loans
30 June 31 December
2020 2019
GBPm GBPm
Non-current
Investment in loans (other) - amortised
cost 1.8 1.7
Current
Investment in loans (curing) - FVTPL - -
Investment in loans (warehouse) - FVTPL 321.8 342.0
Investment in SME loans (securitised)
- FVTPL 419.4 366.6
-------- ------------
743.0 710.3
-------- ------------
14. Borrowings
During 2020, the Group maintained revolving credit facility
agreements of up to GBP220 million and $180 million for the Group's
UK and US ABS programmes respectively, including a new facility in
the US of up to $175 million in the period. The facilities are
drawn down in order to fund the purchase of SME loans for the
warehouses.
Due to the impact of Covid-19 and the refocus towards CBILS and
PPP loan originations, the warehouses have ceased reinvestment of
proceeds from SME loans and commenced paying down the outstanding
facility balances. As at 30 June 2020, the amounts drawn in the UK
and US totalled GBP192.4 million (2019: GBP71.5 million) and $107.1
million (2019: $95.8 million) respectively. Interest is payable on
the borrowings in the UK at 1.50% plus 1 month LIBOR and in the US
at 2.5% plus the 3 month commercial paper rate on the initial
facility and at 3 month USD LIBOR + 2% on the new facility
respectively.
Additionally in the US the Group has drawn $0.3m (2019: $nil) on
the PPP Liquidity Facility available from the Federal Reserve Bank
at a fixed interest rate of 0.35%.
15. Provisions
Dilapidation Loan Restructuring(1) Other Total
repurchase
GBPm GBPm GBPm GBPm GBPm
At 1 January 2019 0.8 3.1 - 0.7 4.6
Additional provision 0.1 4.2 - - 4.3
Amount utilised - (4.4) - (0.1) (4.5)
------------ ----------- ---------------- ------ ------
At 30 June 2019 0.9 2.9 - 0.6 4.4
Additional provision - 2.3 - 0.7 3.0
Reclassification - 0.5 - (0.5) -
Amount utilised - (2.8) - (0.6) (3.4)
------------ ----------- ---------------- ------ ------
At 31 December 2019 0.9 2.9 - 0.2 4.0
Additional provision - 5.5 4.5 0.9 10.9
Amount utilised - (2.0) (2.4) (0.2) (4.6)
------------ ----------- ---------------- ------ ------
At 30 June 2020 0.9 6.4 2.1 0.9 10.3
------------ ----------- ---------------- ------ ------
(1) Restructuring provision is in relation to reorganisation of
the German and Dutch businesses, see note 6.
Current and non-current
30 June 31 December
2020 2019
GBPm GBPm
Current provisions 9.4 3.1
Non-current provisions 0.9 0.9
-------- ------------
Total 10.3 4.0
-------- ------------
Loan repurchase provision
In certain circumstances, in the less mature markets, 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 provision 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 previously defined a default, classified within
non-performing, as a loan investment with any outstanding amounts
exceeding a 90-day due date. 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. As a result the 90 day
overdue definition of default applies to loans in the portfolio not
on forbearance, and 180 days overdue is applied for those on
forbearance plans.
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: Total
loan repurchase
provision
12-month Lifetime Lifetime
ECL ECL ECL
GBPm GBPm GBPm GBPm
At 1 January 2019 2.1 0.8 0.2 3.1
Provision against new loans
originated 2.8 - - 2.8
Provision 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
------------ ----------------- ---------------- -----------------
Provision against new loans - - - -
originated
Provision against loans transferred
from performing (0.3) 3.1 2.0 4.8
Amounts utilised - - (2.0) (2.0)
Loans repaid (0.4) - - (0.4)
Change in probability of default 1.1 - - 1.1
------------ ----------------- ---------------- -----------------
At 30 June 2020 2.5 3.9 - 6.4
------------ ----------------- ---------------- -----------------
Gross assets
of external
Expected parties subject
credit loss Basis for recognition to loan repurchase Loan repurchase
coverage of loan repurchase provisions provision
(%) provision (GBPm) (GBPm)
As at 31 December 2019
Performing (due in 30
days or less) 5 12 month ECL 40.6 2.1
Underperforming (31-90
days overdue) 81.3 Lifetime ECL 0.9 0.8
Non-performing (90+ 100 Lifetime ECL - -
days overdue)
-------------------- ----------------
Total 41.5 2.9
-------------------- ----------------
As at 30 June 2020
Performing (due in 30
days or less) 8.6 12 month ECL 28.5 2.5
Underperforming (31-90
days overdue) 69.9 Lifetime ECL 5.6 3.9
Non-performing (90+ 100 Lifetime ECL - -
days overdue & 180 days+
overdue in forbearance)
-------------------- ----------------
Total 34.1 6.4
-------------------- ----------------
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 an acceleration of
defaults to a peak 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 peaking 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. The items that the model is most
sensitive to are delinquencies and default rates. Management has
applied an estimated weighted average lifetime default rate across
cohorts of 24.1% (31 December 2019: 12.9%). See note 3 for a
sensitivity analysis on the impact of a change in default rates. At
30 June 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 GBP34.1 million (31 December 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.
16. Fair value measurement of financial instruments
Financial risks arising from financial instruments are analysed
into credit risk, liquidity risk, market risk (including currency
risk, interest rate risk and other price risk) and foreign exchange
risk. These condensed interim financial statements do not include
all financial risk management information and disclosures required
in the annual financial statements. Details of how these risks are
managed are discussed in the Funding Circle Holdings plc's
financial statements for the year to 31 December 2019.
There has not been a significant change in the Group's financial
risk management processes or policies since the year end.
The definitions, details of the inputs and the valuation
techniques in determining the fair values of the Group's financial
instruments are shown in the Funding Circle Holdings plc financial
statements for the year to 31 December 2019.
The Group's finance department performs the valuations of
financial assets and liabilities required for financial reporting
purposes, including Level 3 fair values.
There have been no changes in the valuation techniques for any
of the Group's financial instruments held at fair value in each of
the periods presented. 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 all relate to investment in
SME loans (curing). These are typically held for two to three days
before being transferred to independent investors at the principal
amount.
There were no transfers between Level 1, Level 2 and Level 3
fair value measurements (year to 31 December 2019: none).
The fair value of the following financial assets and liabilities
approximate their carrying amount:
-- Investments in loans (other) and (curing)
-- Trade and other receivables
-- Cash and cash equivalents
-- Trade and other payables
-- Bank borrowings; and
-- Lease liabilities
Categorisation of financial assets and financial liabilities
The table shows the carrying amounts of financial assets and
financial liabilities by category of financial instrument:
30 June 2020 31 December 2019
Assets at fair Amortised cost Total Assets at fair Amortised cost Total
value through value through
profit profit and loss
and loss
GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Investments in SME
loans (other) - 1.8 1.8 - 1.7 1.7
Investment in SME
loans (warehouse) 321.8 - 321.8 342.0 - 342.0
Investment in SME
loans
(securitised) 419.4 - 419.4 366.6 - 366.6
Investment in
trusts 3.9 - 3.9 - - -
Trade and other
receivables 0.5 20.8 21.3 0.2 21.9 22.1
Cash and cash
equivalents 33.9 97.3 131.2 46.0 118.5 164.5
------------------- --------------- -------- ------------------- --------------- --------
779.5 119.9 899.4 754.8 142.1 896.9
------------------- --------------- -------- ------------------- --------------- --------
Liabilities
Trade and other
payables - (4.8) (4.8) - (4.9) (4.9)
Bank borrowings - (279.4) (279.4) - (265.8) (265.8)
Bonds (5.3) (432.7) (438.0) (20.0) (328.7) (348.7)
Lease liabilities - (36.2) (36.2) - (38.3) (38.3)
(5.3) (753.1) (758.4) (20.0) (637.7) (657.7)
------------------- --------------- ------------------- ---------------
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), bonds, bank
borrowings, lease liabilities 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:
The fair value hierarchy has the following levels:
-- 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 asset or liabilities,
either directly or indirectly; and
-- level 3 inputs are unobservable inputs for the asset or liability.
Fair value measurement using
30 June 2020 31 December 2019
Quoted prices Significant Significant Quoted prices Significant Significant
in active observable unobservable in active observable unobservable
markets inputs inputs markets Inputs inputs
(level 1) (level 1)
(level 2) (level 3) (level 2) (level 3)
GBPm GBPm GBPm GBPm GBPm GBPm
Financial
assets
Trade and
other
receivables - 0.2 0.3 - 0.2 -
Investment in
SME loans
(warehouse) - - 321.8 - - 342.0
Investment in
SME loans
(securitised) - - 419.4 - - 366.6
Investment in - - 3.9 - - -
trusts
Cash and cash
equivalents 33.9 - - 46.0 - -
-------------- --------------- --------------- --------------- --------------- ---------------
33.9 0.2 745.4 46.0 0.2 708.6
-------------- --------------- --------------- --------------- --------------- ---------------
Financial
liabilities
Bonds - - (5.3) - - (20.0)
-------------- --------------- --------------- --------------- --------------- ---------------
- - (5.3) - - (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 GBP321.8 million at 30 June 2020 (31 December 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 GBP419.4 million at 30 June 2020 (31 December
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 GBP5.3
million at 30 June 2020 (31 December 2019: GBP20.0 million).
Investment in trusts represent the Group's investment in the
trusts used to fund CBILS loans 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
GBP3.9 million at 30 June 2020 (31 December 2019: GBPnil).
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 as part
of net income.
A reconciliation of the movement in level 3 financial
instruments is shown as follows:
Investment Bonds Investment in Trade and
in SME (unrated) trusts other
Investment in SME loans loans receivables
(warehouse) (Securitised)
GBPm GBPm GBPm GBPm GBPm
Balance as at 1 -
January 2019 - - - -
Additions 673.4 - (17.1) - -
Securitisations (292.2) 414.5 - - -
Repayments (32.5) (37.4) 0.7 - -
Net loss on the
change in fair
value of
financial
assets and
liabilities at
fair value
through
profit or loss
during the
period (0.5) (5.8) (3.6) - -
Foreign exchange
gain (6.2) (4.7) - - -
----------------------------------- -------------- -------------- -------------- --------------
Balance as at 31
December 2019 342.0 366.6 (20.0) - -
----------------------------------- -------------- -------------- -------------- --------------
Additions 289.6 - - 3.9 -
Securitisations (221.9) 221.9 - - -
Transfers (0.3) - - - 0.3
Repayments (63.5) (108.0) 2.4 - -
Net (loss)/gain
on the change
in fair value
of financial
assets and
liabilities at
fair value
through profit
or loss during
the period (35.7) (72.7) 12.3 - -
Foreign exchange
gain 11.6 11.6 - - -
----------------------------------- -------------- -------------- -------------- --------------
Balance as at 30
June 2020 321.8 419.4 (5.3) 3.9 0.3
----------------------------------- -------------- -------------- -------------- --------------
Financial risk factors
Credit risk
Credit risk is the risk of financial loss to the Group if a
customer or counterparty to a financial instrument fails to meet
its contractual obligations, and arises principally from the
Group's receivables from customers and cash and cash equivalents
held at banks. The Group's maximum exposure to credit risk by class
of financial asset is as follows:
30 June 31 December
2020 2019
GBPm GBPm
Non-current
Investment in SME loans (other) 1.8 1.7
Current
Investment in SME loans (warehouse) 321.8 342.0
Investment in SME loans (securitised) 419.4 366.6
Investment in trusts 3.8 -
Trade and other receivables
- Trade receivables 0.8 0.9
- Other receivables 17.5 17.3
- Rent and other deposits 2.9 3.9
Cash and cash equivalent 131.2 164.5
------------------------------------------- -------- ------------
Total gross credit risk exposure 899.2 896.9
Less bank borrowings and bond liabilities (717.4) (614.5)
------------------------------------------- -------- ------------
Total net credit risk exposure 181.8 282.4
------------------------------------------- -------- ------------
In addition the Group is subject to financial guarantees it has
issued to buy back loans detailed in the loan repayment provision
in note 15. The Group's maximum exposure to credit risk on this
financial guarantee were every eligible loan required to be bought
back would be GBP34.1 million (31 December 2019: GBP41.5 million).
Investment in SME loans (warehouse) and investment in SME loans
(securitised) relate to the underlying pool of SME loans in both
the warehouse and securitisation vehicles. Whilst there is credit
risk from the loans defaulting, these SME loans and the associated
bank debt or third party bonds are held within bankruptcy remote
vehicles. If the SME loans were to all default, then the bank debt
or third party bonds would not receive their money back. Therefore
the overall exposure to the Group for these investments is the
Group's net investment in the SME loans which is after taking
account of the bank debt and third party bonds.
Trade receivables represent invoiced amount in respect of
servicing fees due from institutional investors. The risk of
financial loss is deemed minimal because the counterparties are
well established financial institutions.
Ongoing credit evaluation is performed on the financial
condition of other receivables and, where appropriate, a provision
for impairment is recorded in the financial statements.
Other receivables includes amounts receivable in respect of
credit impaired debts acquired by the Group. The carrying amount of
these loans are stated net of impairment charges, represents the
Group's maximum exposure to credit risk as no collateral or other
credit enhancements are held.
The credit risk on cash and cash equivalents is limited because
the counterparties are banks with high credit ratings assigned by
international credit rating agencies.
Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due. The Group's
approach to managing liquidity is to ensure, as far as possible,
that it will always have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the
Group's position.
The Group's liquidity position is monitored and reviewed on an
ongoing basis by the Directors. As the investments in loan
securities held within the ABS warehouses are planned to be
securitised within a short time horizon these are classified as
current assets.
Interest rate risk
a) Interest rate risk sensitivity analysis - non trading interest (fixed rate)
Interest on investments in SME loans is fixed until the maturity
of the investment.
b) Interest rate risk sensitivity analysis - non trading interest (floating rate)
Interest on cash and cash deposit balances are subject to
movements in Libor. The Directors monitors interest rate risk and
note that interest rates remain at historical low. The Directors
believe that any reasonable increase in the Libor rate would not
significantly impact the Group.
Interest on borrowings are subject to movements in Libor and the
3 month commercial paper rate, 1 month GBP LIBOR and 3 month USD
Libor. However, the Group has taken out interest rate caps to
mitigate the risk of interest rate rises.
17. Cash outflow from operations
30 June 30 June
2020 2019
GBPm GBPm
Loss before taxation (115.1) (30.8)
Adjustments for:
Depreciation of property, plant and equipment 4.6 3.5
Amortisation of intangible assets 3.6 3.6
Impairment of goodwill (exceptional item) 12.0 -
Impairment of tangible assets (exceptional item) 0.4 -
Interest receivable (0.3) (1.0)
Interest payable 0.8 0.5
Non-cash employee benefits expense - share based
payments and associated social security costs 4.3 4.4
Fair value adjustments 96.1 0.3
Movement in restructuring provision (exceptional 2.1 -
item)
Movement in other provisions 4.2 (0.2)
Share of losses of associates 1.1 -
Other non-cash movements (0.4) (0.2)
Changes in working capital:
Movement in trade and other receivables (18.8) (4.4)
Movement in trade and other payables 4.8 6.2
Net cash outflow from operating activities (0.6) (18.1)
-------- --------
Analysis of changes in liabilities from financing activities
1 January Cash flows Exchange Other 30 June
2019 movements non-cash 2019
movements
GBPm GBPm GBPm GBPm GBPm
Bank borrowings - (145.5) (1.3) - (146.8)
Lease liabilities (25.1) 2.8 (1.2) (0.5) (24.0)
---------------------------- ---------- ----------- ----------- ----------- --------
Liabilities from financing
activities (25.1) (142.7) (2.5) (0.5) (170.8)
1 January Cash flows Exchange Other 30 June
2020 movements non-cash 2020
movements
GBPm GBPm GBPm GBPm GBPm
Bank borrowings (265.8) (5.9) (7.7) - (279.4)
Bonds (348.7) (89.4) (11.8) 11.9 (438.0)
Lease liabilities (38.3) 3.5 (1.5) 0.1 (36.2)
---------------------------- ---------- ----------- ----------- ----------- --------
Liabilities from financing
activities (652.8) (91.8) (21.0) 12.0 (753.6)
18. Cash and cash equivalents
30 June 31 December
2020 2019
GBPm GBPm
Cash and cash equivalents 131.2 164.5
-------- ------------
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 the fair value.
Included within cash and cash equivalents above is a total of
GBP58.8 million (31 December 2019: GBP15.4 million) in cash which
is restricted in use. Of this: i) GBP1.1 million (31 December 2019:
GBP1.2 million) is held in the event of rental payment defaults;
ii) GBP34.0 million (31 December 2019: GBP14.2 million) is held in
the securitisation SPVs which has been collected for payment to
bond holders; iii) GBP22.9 million (31 December 2019: GBP nil) is
held in the warehouse entities and is for use to repay the loan
facilities; iv) GBP0.8m (31 December 2019: GBP nil) is held within
Funding Circle Focal Point Limited and is for use to meet
operational cash flows related to the trust structures facilitating
CBILS funding.
At 30 June 2020, cash equivalents relating to money market funds
totalled GBP33.9 million (31 December 2019: GBP46.0 million).
19. Related party transactions
The basis of remuneration of key management personnel remains
consistent with that disclosed in the 2019 Annual Report and
Accounts. There were no other related party transactions which had
a material impact on these condensed interim financial
statements.
20. Contingent liabilities
There are currently no contingent liabilities expected to have a
material adverse financial impact on the Group's consolidated and
condensed results or net assets.
21. Financial risk management
The Group's financial risks and risk management objectives and
policies are consistent with those disclosed in the consolidated
financial statements as at and for the year to 31 December
2019.
22. Subsequent events
In July 2020, the Group sold 95% of its investment of one of the
subordinated unrated tranches in the UK Securitisation vehicle,
SBOLT 2019-3, for GBP4.0 million. As the vehicle is consolidated,
the Group's holding is eliminated on consolidation. 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 in unrated tranches of the vehicle.
In July, the Group announced that it is reorganising the US
business centralising the US technology team in the UK, and moving
sales and marketing to Denver, resulting in net reduction of c.85
roles to accelerate its path to profitability. The anticipated cash
cost of this reorganisation is anticipated to be c.GBP2
million.
Glossary
Alternative performance measures
The Group uses a number of alternative performance measures
("APMs") within its financial reporting. These measures are not
defined under the requirements of IFRS and may not be comparable
with the APMs of other companies. The Group believes these APMs
provide stakeholders with additional useful information in
providing alternative interpretations of the underlying performance
of the business and how it is managed and are used by the Directors
and management for performance analysis and reporting. These APMs
should be viewed as supplemental to, but not as a substitute for,
measures presented in the financial statements which are prepared
in accordance with IFRS.
APM Closest equivalent Definition and adjustments to reconcile
IFRS measure to IFRS measure
-------------------------- -------------------- ----------------------------------------------
Income statement
------------------------------------------------------------------------------------------------
Adjusted EBITDA, while Profit/loss before finance income
EBITDA not defined under and costs, taxation, depreciation
IFRS, is a widely and amortisation ("EBITDA") and
accepted profit additionally excludes share-based
measure payment charges and associated social
security costs, foreign exchange
and exceptional items
-------------------------- -------------------- ----------------------------------------------
Segment adjusted EBITDA, while Adjusted EBITDA before product development
EBITDA not defined under and central costs.
IFRS, is a widely
accepted profit
measure.
-------------------------- -------------------- ----------------------------------------------
Exceptional None. Items which the Group excludes from
items adjusted EBITDA in order to present
a measure of the Group's performance.
Each item is considered to be significant
in nature or size and is treated
consistently between periods. Excluding
these items from profit metrics
provides the reader with additional
performance information on the business
across the business as it is consistent
with how information is reported
to the Board and GLT.
-------------------------- -------------------- ----------------------------------------------
Investment EBITDA, while Investment AEBITDA refers to net
AEBITDA not defined under investment income (being investment
IFRS, is a widely income, investment expense and fair
accepted profit value adjustments) as previously
measure reported.
-------------------------- -------------------- ----------------------------------------------
Operating EBITDA, while Operating AEBITDA represents AEBITDA
AEBITDA not defined under excluding investment AEBITDA
IFRS, is a widely
accepted profit
measure
-------------------------- -------------------- ----------------------------------------------
Adjusted Earnings per share. Profit/loss after tax attributable
earnings/ to owners of the Parent and before
loss per the impact of exceptional items,
share divided by the weighted average
number of ordinary shares in issue
during the year
-------------------------- -------------------- ----------------------------------------------
Adjusted Diluted earnings Profit/loss after tax attributable
diluted earnings/loss per share. to owners of the Parent and before
per share the impact of exceptional items,
divided by the weighted average
number of ordinary shares in issue
during the year adjusted for the
effects of any potentially dilutive
options.
-------------------------- -------------------- ----------------------------------------------
Cash flow
------------------------------------------------------------------------------------------------
Free cash Cash generated Net cash flows from operating activities
flow from operating including the cash cost of purchasing
activities. intangible assets, property, plant
and equipment, interest received,
IPO costs in operating activities
and the payment of lease liabilities,
i.e. the cash flows excluding the
investment and funding of SME loan
purchases and capital raising.
-------------------------- -------------------- ----------------------------------------------
Independent review report to Funding Circle Holdings plc
Report on the condensed consolidated interim financial
statements
Our conclusion
We have reviewed Funding Circle Holdings plc's condensed
consolidated interim financial statements (the "interim financial
statements") in the 2020 Half Year Results of Funding Circle
Holdings plc for the 6 month period ended 30 June 2020. Based on
our review, nothing has come to our attention that causes us to
believe that the interim financial statements are not prepared, in
all material respects, in accordance with International Accounting
Standard 34, 'Interim Financial Reporting', as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the condensed consolidated balance sheet as at 30 June 2020;
-- the condensed consolidated statement of comprehensive income for the period then ended;
-- the condensed consolidated statement of cash flows for the period then ended;
-- the condensed consolidated statement of changes in equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the 2020 Half Year
Results have been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting', as adopted
by the European Union and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
As disclosed in note 1 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The 2020 Half Year Results, including the interim financial
statements, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the 2020
Half Year Results in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the 2020 Half Year Results based on our
review. This report, including the conclusion, has been prepared
for and only for the company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the 2020 Half
Year Results and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
24 September 2020
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