TIDMSQN
RNS Number : 7501S
SQN Asset Finance Income Fund Ltd
05 October 2017
5 October 2017
FOR IMMEDIATE RELEASE
THE BOARD OF DIRECTORS OF SQN Asset Finance Income Fund Limited
ANNOUNCES THE ANNUAL REPORT AND AUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEARED 30 JUNE 2017
GROUP HIGHLIGHTS FOR THE YEARED 30 JUNE 2017
The investment objective of SQN Asset Finance Income Fund
Limited is to provide its Shareholders with regular, sustainable
dividends and to generate capital appreciation through investment,
directly or indirectly, in business-essential, revenue-producing
(or cost saving) equipment and other physical assets. The Groups
base currency is Sterling.
-- Earnings/(loss) per share for the year ended 30 June 2017
8.58p per Ordinary Share
(0.02)p per 2016 C Share
-- Share price premium to NAV as at 30 June 2017
4.89% Ordinary Share
3.76% 2016 C Share
-- Market capitalisation of Ordinary Shares and 2016 C Shares as at 30 June 2017
GBP557 million
-- Average weighted yield of invested portfolio as at 30 June 2017
>9.5%
-- Dividend yield for the twelve months based on the share price as at 30 June 2017
6.94% Ordinary Share
0.49% 2016 C Share
-- Weighted average remaining term of invested portfolio (in months)
82.54
FINANCIAL HIGHLIGHTS, PERFORMANCE SUMMARY AND DIVID HISTORY
Financial Highlights
On 25 October 2016, the 2015 C Shares were converted into
Ordinary Shares using a conversion ratio of 0.9929 Ordinary Shares
for every one 2015 C Share held.
On 12 December 2016, 180,000,000 new 2016 C Shares were issued
at a price of GBP1.00 each, raising net proceeds of GBP176,889,776.
The 2016 C Share issue was fully subscribed.
Performance Summary
Sterling in millions, 30 June 2017 30 June
except per share data 2016
and number of shares
in issue
Number of Shares in
Issue
- Ordinary Shares 357,707,507 178,985,507
- 2016 C Shares 180,000,000 -
- 2015 C Shares - 180,000,000
Total Net Asset Value
("NAV")
- Ordinary Shares GBP356.40 GBP178.00
- 2016 C Shares GBP176.51 -
- 2015 C Shares - GBP176.83
NAV per share
- Ordinary Shares 99.63p 99.45p
- 2016 C Shares 98.06p -
- 2015 C Shares - 98.24p
Share Price(1)
- Ordinary Shares 104.50p 107.00p
- 2016 C Shares 101.75p -
- 2015 C Shares - 104.50p
Market Capitalisation(1)
- Ordinary Shares GBP373.80 GBP191.51
- 2016 C Shares GBP183.15 -
- 2015 C Shares - GBP188.10
Investments GBP373.93 GBP278.38
Cash and cash equivalents GBP154.57 GBP87.82
Weighted average yield
(in excess of)(2) 9.50% 9.50%
Weighted average remaining 82.54 months 82.69 months
term(2)
Earnings/loss per share
- Ordinary Shares 8.58p 6.64p
- 2016 C Shares (0.02)p -
- 2015 C Shares - 0.66p
Dividend paid per share
- Ordinary Shares 7.25p 7.12p
- 2016 C Shares 0.20p -
- 2015 C Shares 1.43p 0.7p
Comprehensive income GBP25.74 GBP13.08
before dividends
(1) Source: London Stock Exchange
(2) In regard to the investment portfolio
Ongoing Charges
Ongoing charges reflect those expenses which are likely to recur
in the foreseeable future and which relate to the operation of the
Company, excluding the costs of acquisition or disposal of
investments, finance charges, gains or losses arising on
investments and Ordinary Shares.
Ongoing charges are a measure, expressed as a percentage of NAV,
based on actual costs incurred in the year as being the best
estimate of future costs excluding any non-recurring fees divided
by the average NAV of the Company during the year, in accordance
with the Association of Investment Companies (the "AIC")
methodology. The ongoing charge for the year ended 30 June 2017 was
1.18% (30 June 2016: 1.31%).
Dividend History
Please refer to note 14 for details on dividends paid during the
year.
COMPANY OVERVIEW
The investment objective and policy of SQN Asset Finance Income
Fund Limited (the "Company" and together with its subsidiaries, the
"Group") is set out below.
Company: SQN Asset Finance Income Fund Limited
Incorporated in Guernsey on 28 May 2014.
Registered Guernsey Closed-ended Collective Investment
Scheme.
Admitted to the Premium Segment of the UK Listing Authority's
Official List and to trading on the Main Market of the London Stock
Exchange on 14 July 2014 for Ordinary Shares, 9 November 2015 for
the first issuance of C Shares (the "2015 C Shares") and 12
December 2016 for the second issuance of C Shares (the "2016 C
Shares").
Registration number 58519.
Investment Managers:
SQN Capital Management, LLC (the "US Investment Manager")
Incorporated in the United States of America on 7 December
2007.
A Registered Investment Adviser with the United States
Securities and Exchange Commission.
File number 4466472.
SQN Capital Management (UK) Limited (the "UK Investment
Manager")
Incorporated in England & Wales on 12 May 2014.
A wholly owned subsidiary of the US Investment Manager
Registration number 09033846.
(together the "Investment Managers")
INVESTMENT OBJECTIVE
The investment objective of the Company is to provide its
shareholders with regular, sustainable dividends and to generate
capital appreciation through investment, directly or indirectly, in
business-essential, revenue producing (or cost-saving) equipment
and other physical assets.
INVESTMENT POLICY
The Company will seek to invest in business-essential, revenue
producing (or cost-saving) equipment and other assets with high in
place value and long economic life relative to the investment
term.
The Company provides asset financing primarily by way of
equipment leases, loans, hire-purchase agreements, construction
finance, and residual participations. It is intended that each
investment made by the Company will generate returns either through
cash flow over the investment term or through the residual value of
the equipment or other assets at the end of the investment term.
When available, the Company targets investments in the specialist
segment of the leasing market where assets provide cash flow during
the base term of the leases as well as offering the potential for
additional proceeds through lease extensions or sales at the end of
the lease. The Company generally does not intend to invest in the
large single asset segment of the leasing market, such as wide-body
commercial aircraft leasing, which is heavily reliant on residual
value to meet its return targets, or the high volume, low margin
segment of the leasing market, such as photocopier and automobile
leasing, although it may do so, from time to time, if appropriate
opportunities are identified in these segments.
The Company may invest in assets in any industry. The Company,
however, generally expects to be invested in such industries where
the Investment Managers see the potential to make the most
attractive risk adjusted returns which currently include, but are
not limited to, Agriculture, Energy, Environmental, Manufacturing,
Material Handling, Medical, Modular Accommodation, Technology and
Transportation.
The Investment Managers will target transaction sizes below
GBP20 million but, generally, the average transaction size is
expected to be GBP3 million to GBP6 million, although it may
fluctuate based on the market opportunities and portfolio
composition that the Investment Managers believe will best achieve
the Company's investment objectives. Whilst there is no minimum
lease term, it is typical for the initial lease terms to be 3 to 10
years depending on the asset. Where appropriate, however, the term
of the lease may vary significantly from this range reflecting the
opportunities available and the needs of the lessee.
It is intended that the Company will primarily acquire assets
directly and function as the lessor under equipment lease
contracts. In such situations, the Company will own all rights,
title, and interest in and to the assets and will lease them to the
end-user. In other situations, the Company may own assets and enter
into hire-purchase agreements where the Company will own the assets
until all payments are made under the agreement and a pre-agreed
nominal purchase price is paid to the Company.
The assets held by the Company will generally be leased to a
third party and will be subject to either a direct finance (cash
flow) lease or an operating lease. The Company intends to balance
the portfolio between direct finance leases, to provide regular
cash flow, and operating leases, to provide capital appreciation
opportunities. Many, but not all, investments will be structured to
provide return of capital and interest during the lease term with
an opportunity for additional realisation from the residual value
after the initial lease term. In certain jurisdictions, direct
finance leases will be structured as loans and provide the same
advantages to the Company.
The Investment Managers will generally seek to acquire
investments and/or enter into lease arrangements that require the
lessee or other counterparty to bear all tax, maintenance,
insurance, and other costs related to the lease or the operation of
the underlying asset(s). Generally, as a result, the Company will
not be required to undertake maintenance on assets but reserves the
right to do so on an exceptional basis.
Whilst the Company will typically seek direct ownership of the
assets under lease, the Company may also obtain exposure to such
investments through holding securities that have exposure to an
underlying asset or assets that meet the Company's investment
criteria where it is more advantageous for the Company to do so or
a direct investment is not possible. This includes, but is not
limited to, holding or entering into debt securities, loan
agreements, equity securities, participation agreements, hybrid
instruments, or other securities, whilst maintaining the desired
economic exposure and level of security.
The Company may invest in residual interests in assets or
equipment. When the Company invests in residual interests, it or
its subsidiaries will acquire the rights and/or title to equipment,
assets, income or proceeds in respect of the period after the end
of the initial lease term or other underlying contract term. Cash
flow from the residual interests generally will not commence until
all of the obligations under the initial term are satisfied. Once
those obligations are satisfied, rights and/or title to the
underlying equipment, assets, income or proceeds will be
transferred to the Company or its subsidiaries. Furthermore, the
Company may elect to sell all or part of the lease receivables to a
third party investor or bank and retain its exposure to the asset
by retaining ownership of the residual value (in addition to any
proportion of the lease receivables retained). Therefore, in
relation to certain investments, the Company may be reliant on the
residual value to obtain its return on that investment. It is not
expected that residual interests would represent more than 35 per
cent of the portfolio at the time of investment.
Investments will primarily be made in the United Kingdom, the
United States and Europe which is expected to represent at least 75
per cent of the portfolio. The Company may also invest in assets
and equipment located or subject to law in Canada and Australia and
other countries, regions, or jurisdictions where the Investment
Managers believe they can adequately secure the Company's interest
in assets and equipment whilst achieving an appropriate
risk-adjusted return consistent with the rest of the portfolio.
For further details on the Investment Objective and Policy refer
to the Prospectus which can be viewed on the website,
www.sqnassetfinance.com.
CHAIRMAN'S STATEMENT
At the date of these accounts, your Company was approaching
three full years of operations and the conclusion of another year
of consistent monthly dividends paid at an annual rate of 7.25
pence per Ordinary Share.
Over that time, we have undertaken four equity raisings, each of
which have been oversubscribed and we thank our shareholders, both
original and new, for their support.
Following the October 2016 conversion of the C Share equity
raised in 2015, the Company undertook a further C share offering in
December 2016, the 2016 C Share, raising the issued capital to
GBP540 million in November 2016, which now represents a solid
foundation for the Group to operate and grow in the future.
That new equity is currently being deployed. However, for much
of 2017, the market experienced a slowdown in activity linked, in
part, to the uncertainty surrounding the United Kingdom's exit from
the European Union which caused businesses to delay making
decisions on capital equipment acquisition, expansion, and
renovation. Rather than assuaging those concerns, the surprise
General Election, and its subsequent result, threw the market into
a prolonged state of hesitation which has still not fully subsided.
Consequently, the pace of deployment of the net proceeds of the
2016 C Share issue has been slower than anticipated. We continue to
invest judiciously and will not deploy capital in haste, but
maintain our robust underwriting approach. We are, fortunately, now
seeing some pick-up in deal flow after the holiday season.
As at the end of September 2017, the Group has allocated
approximately GBP53 million, of the 2016 C Share capital, between
drawn and committed investments and an additional GBP12 million of
transactions have been approved, together with a pipeline of GBP96
million.
One of the Group's principal objectives is to produce income
from a diversified portfolio of investments secured by
business-essential assets and equipment and, by this important
measure, the Company has continued to meet this core investment
objective.
In the twelve months leading up to 30 June 2017, the Group, in
total, completed approximately GBP113 million of new investments,
(excluding any capitalised interest and restructuring amounts as
shown in the accounts), which contributed to the generation of just
under GBP26 million of Comprehensive Income. Across all share
classes, the Company has paid out over GBP24 million in
dividends.
Ongoing charges continued to decline - from 1.31% at 30 June
2016 to 1.18% as at 30 June 2017 - and the weighted average yield
on the portfolio remains over 9.5%, despite continued downward
pressure on rates across the market. This pressure on rates has
been created by the slowdown in the market previously mentioned
which in turn has led to more competition for projects and keener
pricing.
The larger size of the portfolio has also led to an increase in
diversification with investments now spread over 17 different asset
classes and 18 industries, ranging from manufacturing equipment in
the glassware industry to IT equipment in the medical industry.
The portfolio remains geographically diverse with the majority
(63.2%) of assets in the United Kingdom with investments also
spread over the United States (18.4%), France (7.5%), the
Netherlands (6.2%), Ireland (3.6%), Brazil (<1%) and Australia
(<1%).
All non-UK investments continue to be hedged back into
Sterling.
Anaerobic digestion plants, which are considered assets in the
agricultural industry, now account for 19.8% of net assets and is
the single largest asset class in the portfolio. These long-lived
assets are typically subject to leases of 10 to 15 years at rates
between 9.5% and 10.5%. The intention has always been to season
these assets in the expectation that the lessees will
opportunistically refinance them in the wider market at lower
rates, reducing the Group's exposure while increasing the overall
return. Several of these investments have now reached the phase in
which they can be refinanced. The Investment Managers' Report
provides a more detailed overview of these asset holdings.
The average investment size is approximately GBP7.7 million with
a weighted average term of 83 months which fits squarely in the
underbanked segment of the market where the Investment Managers
believe attractive, above market yields can be achieved,
representing an attractive risk adjusted return
The portfolio continues to consist primarily of finance leases
and secured asset financings with more than 95% of expected revenue
from fixed term contracts where early repayment will generally be
accompanied by an additional charge providing for a yield uplift.
While the current pipeline is almost exclusively full payout
structures, there are a number of potential investments being
reviewed that have end-of-lease optionality that may be accretive
to the portfolio.
Both the Ordinary Shares and the 2016 C Shares traded at healthy
premiums to NAV during much of our financial year, at one point
reaching a combined market capitalisation of over GBP600 million.
ln April 2017, however, we announced that Suniva, a U.S. solar
manufacturer to which we had provided financing, had filed for
bankruptcy protection due to a flooding of foreign imports into the
U.S. market. After very close and ongoing consultation with the
Investment Managers, the Board made the decision not to impair the
investment which currently represents 6.8% of the Ordinary Share
assets (this investment is not in the 2016 C Share class). This was
based on the Investment Managers' high degree of confidence that
the investment, along with any interest due, will be fully
recoverable. The uncertainty surrounding the outcome of this
investment caused an erosion of the share premium seeing a decline
in both the 2016 C Share and Ordinary Share prices. The case
recently received a favourable response from the U.S. International
Trade Commission's confirmation that the U.S. solar industry has
been adversely affected by the importation of heavily subsidised
foreign imports. The Commission will now make a recommendation of a
remedy to the White House to address the damages. This now paves
the way for a number of scenarios in which we expect our position
to be recovered in full along with any interest due and costs
expended. See the Investment Managers' Report for more on this.
In light of the uncertainty over this position and seeking to
balance the interests of all shareholders, the Company is proposing
to hold a general meeting and class meetings following the
Company's AGM, in which a proposal will be put to shareholders to
extend the conversion date for the 2016 C Shares until there is a
clear outcome from this case.
It is to be expected that the nature of the assets in which we
invest combined with the rates of return that we target on our
investments will, from time to time, see challenges arise. We
believe that with the business essential nature of the assets on
which our investments are secured, and the experience of the
Investment Managers over many years in proactively managing such
challenges, we will be able to optimise the outcome for
Shareholders when these challenges do occur to maintain an
attractive risk-adjusted return.
In addition to Suniva, there are some other assets where the
Investment Managers have taken proactive action to ensure their
ongoing viability. This is a core part of the Investment Managers'
role, where they have the knowledge and a long track record of
success in these situations.
In addition to the Investment Managers continuing to manage the
portfolio closely with increasing resources, which the size of the
Group demands, they remain in a good position to source deals which
fit the criteria we have set out in our Investment Policy. Their
regular and in-depth dialogue with investors and the transparency
that results is vital to maintain confidence in the asset class;
the Board welcomes that dialogue and promotes it actively. In this
same vein, the Investment Managers' Report, included in these
accounts, provides a detailed description of each investment in the
portfolio at the year end.
Since the year end, to strengthen the Board, an additional
Director, Paul Meader, has joined us and brings a wealth of
investment experience with him.
The Board will also continue our visits to different assets
within the portfolio and I, as Chairman, welcome opportunities to
meet with investors, as I have done this year, to explain in more
detail how the Board operates, its Corporate Governance processes
and our oversight of the management of the assets in your Company.
I am also happy to coordinate investor visits with the Investment
Managers, should investors wish to see some of the investments
directly.
At our forthcoming AGM, the Company will propose the
Continuation Resolution provided for in our IPO prospectus and on
which shareholders will be asked to vote. The Board trusts that
shareholders will recognise what has been achieved since the
Company launched three years ago, the quality of the investment
portfolio that has been established, and the consistent income
stream that the Group provides investors. As such, we hope that
shareholders will join the directors in voting in favour of the
Continuation Resolution to allow the Investment Managers to
continue to pursue the Investment Objective and grow the Group
under our stewardship for the benefit of all shareholders.
Finally, may I thank all shareholders for your continuing
support and commitment to the Group.
Peter Niven
Chairman
4 October 2017
STRATEGIC REPORT
The Investment Objective and Policy, the Chairman's Statement
and the Investment Managers' Report form part of the Strategic
Report. A review of the Company's activities is provided in the
Company Overview, the Chairman's Statement and the Investment
Managers' Report. These include a review of the business of the
Group and its core activities, the principal risks and
uncertainties it faces, dividend policy and results for the
year.
Structure
The Company is a non-cellular company limited by shares,
incorporated in Guernsey on 28 May 2014. The Company is regulated
in Guernsey by the Guernsey Financial Services Commission as a
Registered Closed-ended Collective Investment Scheme.
The Company is a member of the AIC and is classified within the
Specialist: Leasing sector.
Share Capital
The Company's issued share capital as at 30 June 2017 consisted
of 357,707,507 Ordinary Shares and 180,000,000 2016 C Shares of no
par value. The share capital of the Company is represented by an
unlimited number of shares of no par value. All shares hold equal
voting rights with no restrictions and no shares carry special
rights with regard to the control of the Company. There are no
special rights attached to the shares in the event that the Company
is wound up.
On 25 October 2016, the 2015 C Shares were converted into
Ordinary Shares using a conversion ratio of 0.9929 Ordinary Shares
for every one 2015 C Share held.
On 12 December 2016, 180,000,000 new 2016 C Shares were issued
at a price of GBP1.00 each, raising net proceeds of GBP176,889,776.
The 2016 C Share issue was fully subscribed.
Subsidiaries
The Company's subsidiaries are detailed in note 1.
The Directors of the subsidiaries are the same as the
Company.
Diversification Strategy
The Group's portfolio is subject to diversification policies
limiting the maximum amount of capital that can be invested in a
single asset, in a single asset class, in assets held by a
corporation or group or held by companies in a specific industry
and as a percentage of NAV of the portfolio, measured at the time
of investment, as follows:
-- Maximum by asset: 15%
-- Maximum by asset class: 30%
-- Maximum by corporation or group: 15%
-- Maximum by industry: 30%
Principal Risks and Uncertainties
When considering the total return of the Group, the Board takes
account of the risk which has been taken to achieve that return.
The Board looks at numerous risk factors, an overview of which is
set out below:
Asset/Credit quality risk
The Group's success is subject to risks inherent in the
equipment leasing and finance business; in particular, the quality
of the assets it acquires and the risk of default by the Group's
lessees or other counterparties, including banking counterparties
in relation to cash balances, which may affect the Group's ability
to operate profitably. Key risks here are deemed to be asset
valuations and quality and the level of arrears and impairments.
Additionally, the risk of asset concentration, by geography,
industry sector and asset class. Further, to the extent relevant,
any decline in the residual value of the Group's underlying assets
at the end of a lease term, which will depend on factors outside
the Group's control, may erode the ability of the Group to make a
profit on those investments.
Geopolitical and economic risks
It is the intention of the Group to lease or make loans to
customers in several jurisdictions exposing the Group to potential
economic, social, legal and political risks. The Group therefore
also faces the risk of failing to survive a global financial
crisis, including any impact that Brexit may cause. These risks
additionally expose the Group to interest rate changes and foreign
exchange currency fluctuations. The adequacy and timeliness of
management's response to risks in the jurisdictions in which it
operates are of critical importance to the mitigation of these
risks. The Board considers management to include third parties,
such as the Investment Managers and BNP Paribas Securities Services
S.C.A., Guernsey Branch (the "Administrator") to whom the Board has
delegated responsibility for key operations and day to day
functions. Refer to note 17 for more detail on interest rate risk
and foreign exchange hedging.
Key personnel risk
The Group's performance is dependent on services provided by the
Investment Managers. The departure of key employees from the
Investment Managers may adversely affect the returns available to
the Group.
Performance Risk
The performance of the Group is largely determined by the
success of the Investment Managers in meeting or exceeding the
expectations of investors, in accordance with the objectives set
out in the prospectus. As such, if dividend return targets or
overall rate of return targets are not met, or the Group's cash
flows or liquidity are constrained, investor confidence and support
would be at risk.
Regulatory risk
Changes in law or regulation may adversely affect the Group's
ability to carry on its business or may increase the Group's
on-going charges.
Tax risk
Unfavourable changes in tax legislation could result in adverse
changes in the tax position of the Group or the imposition of
additional and possibly material tax liabilities on
shareholders.
Other risks
The Directors wish to draw the attention of shareholders to the
other risks as set out in the Company's Prospectus, which is
available on the Group's website: www.sqnassetfinance.com. Refer to
note 17 for details on the Group's risk mitigation strategies and
details of additional risks.
Going Concern
Going concern refers to the assumption that the Group has the
resources and desire to continue in operation for the foreseeable
future. After analysing the following, the Directors believe that
it is appropriate to adopt the going concern basis in preparing
these consolidated financial statements:
-- Working capital - As at 30 June 2017, there was a working
capital surplus. The Directors noted that as at 30 June 2017 the
Group had no borrowings and therefore has sufficient capital in
hand to cover all expenses (which mainly consist of Investment
Managers' fees, administration fees and professional fees) and to
meet all its obligations as they fall due.
-- Consideration of various areas of possible financial risk,
including comprehensive financial forecasts.
-- Closed-ended Company - The Company has been registered with
the Guernsey Financial Services Commission as a Registered
Closed-ended Collective Investment Scheme, as such shareholders
have no right to have their Ordinary Shares redeemed, and there
will therefore be no cash flows out of the Company in this respect.
Please see below for details on the continuation resolution.
Given the nature of the Group's business, the Directors have a
reasonable expectation that the Group has adequate financial
resources to continue for a period of at least twelve months from
the date of approval of the Consolidated Financial Statements.
Accordingly, the Consolidated Financial Statements have been
prepared on a going concern basis.
Viability Statement
The Directors have assessed the viability of the Company over a
three-year period. This statement explains how they have assessed
the prospects of the Company, over what period they have done so
and why they consider that period to be appropriate, taking into
account the Company's current position and principal risks. The
principal risks faced by the Group are described above. Based on
this assessment, the Directors have a reasonable expectation that
the Company will be able to continue in operation and meet its
liabilities as they fall due over a three-year period.
In making this statement, the Directors have considered and
challenged the reports of the Investment Managers and have
conducted a robust assessment of the viability of the Company over
a three-year period, taking account of the Company's current
position and the potential impact of the principal risks. In making
their assessment, the Directors have taken into consideration the
Group's NAV, dividend cover and cash flows. These factors were
subjected to stress tests which involved sensitivity analysis of
the key assumptions underlying the forecast. Where appropriate,
this analysis was carried out to evaluate the potential impact of
the Group's principal risks occurring, severe changes to
macro-economic conditions, increased defaults and counterparty
risks.
The Directors have determined that a three-year period is an
appropriate time over which to provide its viability statement and
this takes account of the average weighted life of the portfolio,
the probability of the refinancing and early redemption of a number
of construction loans within the portfolio. The three-year period
is consistent with the outlook period used in economic and other
medium term forecasts prepared for the Directors by the Investment
Manager and is the outlook period generally used by the Board in
considering the Company's strategies. The review also considers the
market opportunities for the investment of capital, the anticipated
portfolio redemptions and the ability to raise third party
funds
This statement is made on the assumption that continuation votes
will be passed throughout the period under assessment (see Life of
the Company section).
Key Related Party Transactions
The contracts with the US Investment Manager (and related
entities) and the UK Investment Manager are the key related party
transactions currently in place. Other than fees payable in the
ordinary course of business, there have been no material
transactions with these related parties which have affected the
financial position or performance of the Group in the year. Further
details on related party transactions can be found in note 18.
Financial Review
At 30 June 2017, the Net Assets of the Group amounted to
GBP532,903,565 (30 June 2016: GBP354,829,918).
Borrowing
The Group does not currently utilise borrowings on a portfolio
basis for investment purposes. The Group, however, may, from time
to time, utilise borrowings for share buybacks and short-term
liquidity purposes, but such borrowings will not, in any event,
exceed 15% of the Group's NAV at the time of investment. This does
not prevent the Group from purchasing the equity or subordinated
participation in a special purpose entity set up to own an asset or
a pool of assets or equipment, which itself may be geared.
Hedging
The Investment Managers seek to hedge the expected foreign
currency income on the Group's portfolio and anticipate that they
may hedge the principal amount of investments and, where
appropriate, expected income against foreign currency fluctuation
risks. Accordingly, the Group may use derivative instruments to
hedge against foreign currency risks, although there can be no
certainty as to the efficacy of any such hedging. Hedging
arrangements, however, will be implemented only when suitable
hedging contracts, such as currency swap agreements, futures
contracts, options and forward currency exchange and other
derivative contracts, are available in a timely manner and on terms
acceptable to the Group. The Group may otherwise employ the use of
derivatives for efficient portfolio management purposes but
derivatives will not be employed for investment purposes. The Group
does not apply hedge accounting.
Performance Measurement and Key Performance Indicators
In order to measure the success of the Group in meeting its
objectives and to evaluate the performance of the Investment
Managers, the Directors take into account the following performance
indicators:
-- Returns and NAV - The Board reviews and compares at monthly
meetings the performance of the portfolio as well as the NAV,
income, dividend and share price of the Company.
-- Discount/premium to NAV - at monthly meetings the Board
monitors the level of the Group's discount or premium to NAV. The
Group publishes the NAV per share on a monthly basis through the
official newswire of the London Stock Exchange.
-- Formal monthly and quarterly reports from the Investment
Managers, which provide information to assess other key performance
criteria, including:
-- asset quality, arrears and impairments;
-- geographic and currency breakdowns;
-- sector concentration and asset classes;
-- liquidity and cash flows; and
-- ongoing charges.
INVESTMENT MANAGERS' REPORT
The Group had another strong year of performance despite the
high-profile case involving Suniva, which has now advanced to the
remedy stage following the United States International Trade
Commission's favourable vote on 22 September 2017.
Highlights for the year included:
- More than GBP113 million of capital deployed (excluding any
capitalised interest and restructuring amounts as shown in the
accounts) at rates above 9.00%.
- Consistent monthly dividends paid at 7.25 pence per Ordinary
Share even with income suspended on the Suniva investment.
- Year on year income growth of nearly 100% outpacing the
increased capital base of roughly 50% demonstrating the full income
potential once deployed and justifying the lead times required to
adequately invest proceeds.
- Shares reaching a high of 117p in May 2017 before retreating.
- The 2015 C Share achieving the 7.25 pence per share dividend
level and converting to Ordinary Shares in October 2016.
- Another successful oversubscribed C Share issue in November 2016.
- Four transactions repaid early, representing approximately
GBP10 million invested, all at yields at or above the originally
anticipated rates including a 27.01% IRR on a GBP4 million
investment in heavy hose manufacturing and turning equipment which
originally had a projected yield of 9.50%.
The positive performance of the Group has been overshadowed by
the events surrounding an investment made in solar manufacturing
equipment for US-based Suniva, even though the Group continues to
generate sufficient monthly income to cover the dividend as capital
continues to be deployed into a wide diversity of attractive
opportunities.
The Suniva investment was underwritten in accordance with the
Investment Managers' high quality standard of care. The
underwriting involved a thorough analysis of the equipment,
including alternative uses as well as those in the secondary
market. The assets were equipment known to the Investment Managers
as the Investment Managers have had a successful track record of
investing in this asset class for a number of years over multiple
cycles. The due diligence process was highly focused on cash flow,
sales pipeline, and margins. Taking into account the specific
industry, all projections were stressed beyond any historic
precedents, and, as is consistent with the Investment Managers'
usual approach, additional credit enhancements were structured into
the transaction in the form of $10 million of subordinated capital
against the Group's approximate $30 million investment. The Group
also arranged co-investment from a division of the Canadian
government and required a corporate guarantee from the Hong Kong
Stock Exchange listed parent company which at the time had a US$950
million market capitalisation.
Under normal circumstances, which have already been demonstrated
with other assets in the portfolio, if the debtor was unable to
make payments, the equipment could be taken back and either
re-positioned with another company or sold into the secondary
market. With the amount of subordinated equity in the Suniva
transaction, there should have been sufficient value in the
equipment to cover the Group's exposure and, if there were any
shortfall, the corporate guarantee would be there to cover it with
all accrued interest and penalties.
The events that led to Suniva's default involved a coordinated
effort to circumvent or directly violate existing trade laws both
in the United States and in accordance with the World Trade
Organization. When an investment is underwritten, it can only be
underwritten in the context that all market participants will
operate within the established legal framework. This unlawful
activity distorted the market which resulted in devastating harm to
Suniva, the US solar manufacturing industry as a whole and the
value of the equipment that secures the Group's investment. All
this in a very short time period.
Given that the Group's collateral value was affected by unlawful
behaviour, the appropriate reaction was to petition the government
for redress. While this is not the normal course of action that the
Group would have to pursue to protect or recover its investment,
there is a specific section of the U.S. Trade Act of 1974 which
provides for recourse in the exact circumstances that had
occurred.
On 22 September 2017, the United States International Trade
Commission found, by a vote of 4 to 0, in support of the petition
for redress and is now focused on preparing a recommendation of a
remedy to be submitted to the White House on 13 November 2017. The
White House then will have 60 days to act on the recommendation or
suggest its own remedy.
Suniva represents 6.8% of the Ordinary Share portfolio (or 4.6%
of the total value of the combined portfolio), not including the
additional $4 million loan advanced, also from the Ordinary Share
pool. At 30 June 2017, the remaining 95.4% of the portfolio was
made up of 27.4% in cash (predominantly in the C Share pool) with
the remainder, outlined below, in a well-diversified pool of assets
and equipment-secured investments (ordered by acquisition cost with
particular detail provided for the larger investments).
Note: Where the Principal Balance Outstanding is greater than
the original Investment amount, this reflects accrued interest
being capitalised.
Investments made by the group during the year
Description Investment Amount Industry
------------------------- ------------------ -----------------------
Waste Processing GBP6,100,369 Environment
AD GBP23,720,440 Agriculture
Wind Turbines GBP494,537 Energy
Wind Turbines GBP409,564 Energy
AD GBP94,648 Agriculture
AD GBP5,357,300 Agriculture
Wholesale Portfolios GBP6,841,974 Wholesale Portfolios
AD GBP243,058 Agriculture
Waste Processing GBP4,500,000 Environment
AD GBP8,077,634 Agriculture
VAT Receivable GBP1,911,987 Government
VAT Receivable GBP891,987 Government
AD GBP825,597 Agriculture
AD GBP185,700 Agriculture
Diversified Portfolios GBP6,227,904 Diversified Portfolios
Wholesale Portfolios GBP8,596,900 Wholesale Portfolios
AD GBP1,509,937 Agriculture
Aviation GBP6,159,610 Transportation
Vessels GBP12,367,301 Transportation
Vessels GBP6,465,218 Transportation
Marine equipment GBP1,010,000 Marine
AD GBP467,785 Agriculture
AD GBP1,493,386 Agriculture
Vessels GBP1,928,532 Transportation
Wind Turbines GBP1,183,222 Energy
Manufacturing GBP211,393 Solar
Infrastructure Equipment GBP5,937,190 Infrastructure
------------------------- ------------------ -----------------------
Total GBP113,213,173
------------------------- ------------------ -----------------------
Top Ten Investments
1. Glass Manufacturing Plant
The largest single investment that the Group has made was
GBP27.2 million through a sale and lease back of 10 furnace
production lines and ancillary equipment for one of the largest
plate and cup manufacturers in the world with over 3,000 separate
products and specialty contracts with some of the world's most
recognised brands. The 84 month fully amortising financing was
provided in conjunction with an acquisition and recapitalisation of
the company. Headquartered in France where the equipment is
located, the company was formed in 1825 and has operations in 160
countries.
Principal balance outstanding as at 30 June 2017:
GBP24,277,527
Share Class: Ordinary
2. Anaerobic Digestion Plants ("AD Plants")
The Group's largest exposure to a single asset class is in AD
Plants, where it has invested approximately GBP95.0 million which,
with accrued interest, represents 19.75% of the Group's NAV in
leases and project financing transactions. An AD Plant is a closed
system that processes organic material to produce methane which can
be used as a fuel source or fed into a combined heat and power unit
to create electricity and heat. The AD Plants that have been
financed, run on a combination of agricultural and food waste as
the primary feedstocks. The majority of the cash flow generated
from operations is derived from long-term, non-cancellable
government subsidies related to the production of electricity or
the volume of gas delivered to the grid. Each investment is backed
by a full Engineering Procurement Construction ("EPC") contract and
a performance warranty to ensure a minimum level of production. The
average term of the Group's investments in AD Plants is 12 years at
rates of approximately 10%.
A number of these investments are jointly funded with the Green
Investment Bank ("GIB") through their management agreement with
Foresight Group.
The second, third, and ninth largest investments made by the
Group are in AD Plants.
The Group invested GBP23.8 million in a 5 MW waste to energy
project in Imperial Park, Middlesbrough, UK. The fully operational
plant which is subject to a 12 year full payout lease is designed
to process 120,000 tons of agriculture and food waste a year and
sell electricity, heat and fertiliser to local businesses.
Principal balance outstanding as at 30 June 2017:
GBP27,293,545
Share Class: Ordinary
The Group invested GBP23.7 million in a second, nearly
identical, 5 MW waste to energy project in Hartlepool in the North
East of the UK which is scheduled to be fully operational in the
first quarter of 2018. This plant will be capable of treating up to
110,000 tons of commercially-sourced food waste per year. The
initial term of this investment is 14 years with a potential 3 year
extension that, when exercised, will enhance the Group's return on
investment.
Principal balance outstanding as at 30 June 2017:
GBP26,013,068
Share Class: Ordinary
3. Solar Manufacturing Equipment
The Group's investment in Suniva was GBP21.4 million making it
the fourth largest investment. In order to secure and take control
of the equipment, and ensure that the petition being filed with the
United States International Trade Commission was properly
prosecuted, the Group agreed to provide up to an additional $4.0
million in the form of a super-senior secured loan and in exchange
for, among other considerations, warrants representing a majority
equity ownership in the company.
Principal balance outstanding as at 30 June 2017:
GBP24,272,873
Share Class: Ordinary
4. Paper Mill
The Group invested GBP20.4 million through a sale and leaseback
of a paper mill in Scotland operated by a well-known speciality
paper company that was consolidating operations from multiple
international plants into the Scottish facility. The equipment
being financed includes industrial reel wrappers, speciality and
colour paper manufacturing machines, bespoke currency paper
production equipment, and business stationary and watermarking
tools. The fully amortising lease term is 84 months with the
company that was originally founded in 1761 and was a constituent
of the FTSE 100 on the London Stock Exchange until it was taken
private in 2000.
Principal balance outstanding as at 30 June 2017:
GBP16,789168
Share Class: Ordinary
5. Combined Heat and Power Units
The Group provided GBP17.0 million for the construction and
lease financing of two (non-renewable) 11 MW natural gas-based
energy generation plants. The equipment includes four Rolls-Royce
5.5 MW combined heat and power units at two sites on the Isle of
Wight at one of the U.K.'s largest tomato farms. The equipment is
used to produce heat and carbon dioxide which aids the growth of
tomatoes in the farm's glasshouses. The Group advanced 62.5%
against the value of the equipment and took full title subject to a
13 year full payout lease.
Principal balance outstanding as at 30 June 2017:
GBP17,947,737
Share Class: Ordinary
6. IT and Telecommunications Equipment
The Group provided financing of GBP14.5 million secured by a
portfolio of Integrated Set Top Cable and Internet Boxes (and all
related receivables) on lease or under service agreements with
1,400 different customers representing approximately 2,200 hotels
and 230,000 hotel rooms internationally. The investment is further
secured by an investment grade insurance policy for all principal
and interest. The 60 month fully amortising, Euro-denominated
investment is hedged back to Sterling as were all non-Sterling
investments as at 30 June 2017.
Principal balance outstanding as at 30 June 2017:
GBP9,397,067
Share Class: Ordinary
7. Marine Vessels
The eighth largest investment is in two marine vessels. The
Group initially provided financing of GBP14.1 million, secured by
two Supramax bulk carriers and the strong balance sheet of related
companies providing additional support. After two years of a four
year term with steady performance and amortisation, the borrower
sought additional financing at a lower advance rate for the
acquisition of a fleet of 6 container feeder vessels through two 48
month transactions totalling GBP18.8 million
These combined with a third investment in helicopters (see
below) make up the largest single group exposure amounting to
GBP39.9 million. The counterparty is a privately-held international
business group that controls 30 subsidiaries active in 35 countries
across six continents. It is focused on six core sectors: aviation,
energy, finance, hospitality, real estate, and shipping.
Principal balance outstanding as at 30 June 2017:
GBP12,522,231
Share Class: Ordinary
Principal balance outstanding as at 30 June 2017:
GBP18,270,809
Share Class: C
8. AD Plants
The Group has invested GBP13.5 million in a 4 MW AD Plant
located in Donegal, Ireland being our 50% co-investment with Invest
Northern Ireland ("INI"), the Regional business development agency.
The plant takes chicken waste from INI as well as the Republic and
their 14 hexagon gas road tanker trailers and two Volvo tractor
units transport gas to five sites in Belfast utilising combined
heat and power units and site transformers for grid connection. The
equipment is subject to a 15 year fully amortising lease with
quarterly payments. At 30 June 2017, the plant was operating but
had not yet been commissioned, which is expected in due course.
Principal balance outstanding as at 30 June 2017:
GBP14,939,091
Share Class: Ordinary
9. Marine Vessels
Rounding out the top ten largest investments, the Group has
provided GBP13.3 million of financing for four Jumbo Class
Multipurpose Vessels built between 2007 and 2009 with a Dutch
operator. Charter rates on vessels in this segment remained under
significant pressure for the duration of the year and resulted in a
pattern of consistent payment delinquencies. After having evaluated
the situation, the Investment Managers and the Board came to the
conclusion that the vessels should be sold at market prices to pay
off the outstanding balances and close the investment. It is
anticipated that the sale will take up to six months and that
proceeds will cover all outstanding principal and interest. During
the sale process, the debtor is continuing to make interest
payments.
Principal balance outstanding as at 30 June 2017:
GBP12,915,750
Share Class: Ordinary
10. Diversified Portfolio
The Group has made two investments that are classified as
Diversified Portfolios. These investments are backed by diversified
portfolios of equipment lease and asset financing transactions
within larger portfolios held by insurance companies. The
investments of GBP13.3 million and GBP11.6 million are further
collateralised by the broader portfolios of investment-grade
securities. The equipment assets in these portfolios include
traditional transportation assets, manufacturing equipment,
construction cranes, IT equipment, medical equipment, furniture,
fixtures and equipment, earth moving equipment, machine tools, and
a wood pellet mill. The investments are structured as secured notes
with 11 year full payout terms. The notes individually have been
rated BBB which is considered investment grade.
Principal balance outstanding as at 30 June 2017:
GBP13,081,249
Share Class: Ordinary
Principal balance outstanding as at 30 June 2017:
GBP11,381,106
Share Class: Ordinary
Other Investments
Additional AD Plants
The Group invested GBP13.1 million in a 2.5 MW gas to grid AD
Plant in Peterhead, Scotland in co-operation with Scotia Gas
Networks ("SGN"). The plant converts merchant waste, grass silage,
and crops into bio-methane which is sold to Total Gas and injected
into the national gas grid through SGN's grid connection. The
construction and commissioning had encountered some delays and
missed milestones. The plant is operating though not yet at the
warrantied level. The project will require approximately GBP2
million more in order to reach commissioning. The Group has agreed
to provide this financing in exchange for increased equity warrants
in the project to 44%. The Group expects to recover this additional
investment under the warranties and EPC contract. The plant is
estimated to be fully operational in the first quarter of 2018 at
which time the approximately 14 year lease term will commence.
Principal balance outstanding as at 30 June 2017:
GBP15,275,160
Share Class: Ordinary
The Group is a co-investor in a 2 MW AD Plant in Nottinghamshire
which was voted AD Plant of the year by Anaerobic Digestion and
Bio-Resources Association. The Group's investment of GBP6.7 million
is in a 15 year full payout lease.
Principal balance outstanding as at 30 June 2017:
GBP7,157,165
Share Class: Ordinary
The Group has investments in two additional AD Plants that are
still in the construction phase but nearing completion. The
investments of GBP1.6 million and GBP1.5 million are both
co-investments alongside the Green Investment Bank in farm-based
500 KW AD Plants in Northern Ireland. Each is subject to a 15 year
lease with the expectation that they will be refinanced before the
end of the term.
Principal balance outstanding as at 30 June 2017:
GBP1,552,148
Share Class: Ordinary
Principal balance outstanding as at 30 June 2017:
GBP1,613,714
Share Class: Ordinary
Within the year, the Group successfully refinanced one
co-investment in an AD Plant through the programme with the Green
Investment Bank in Northern Ireland. The Group's GBP1.8 million
investment in the farm-based 500 KW AD Plant was refinanced
generating an IRR of 11.72% against an originally projected yield
of 9.25%.
Subsequent to year-end, a second AD Plant investment of GBP1.7
million was refinanced and resulted in a similar premium over the
originally anticipated yield.
The Group has made four additional investments in 500 KW
farm-based AD Plants in Northern Ireland on similar terms as the
above. Those investments range from GBP1.6 million to GBP2.1
million, and all four plants are currently operating. One of the
plants is already commissioned, two are currently being
commissioned, and the fourth is expected to begin commissioning by
the end of 2017.
Principal balance outstanding as at 30 June 2017:
GBP7,818,813
Share Class: Ordinary
VAT Receivables
On certain transactions the funding amount will include VAT.
When this occurs, the amount advanced accrues interest at the same
rate as the rest of the transaction even though the counterparty
risk on this element is governmental. At 30 June 2017, the Group
had an outstanding VAT receivable of GBP1.2 million accruing
interest at 12%.
Modular Building
The Group provided financing in the amount of GBP10.2 million
secured by mobile, modular buildings used in the hospitality
industry to serve as hotel rooms at different events throughout
Europe. The investment was made in coordination with the operator's
plan to transition its business toward semi-permanent arrangements
like remote worker accommodations and away from short-term rentals.
The transition was intended to be completed over a period of two
years. Management was changed in April 2016 and the Group was asked
to allow interest-only payments from September 2016 to July 2017.
The Group applied the security deposit to cover those payments and
reduced the outstanding exposure to GBP8.2 million. Given the
long-lived nature of the assets, a restructured solution is being
worked out that better matches the current cash flow while
amortising the debt.
Principal balance outstanding as at 30 June 2017:
GBP7,616,723
Share Class: Ordinary
Wholesale Lending Arrangements
Wholesale lending arrangements are an effective way for the
Group to make asset-secured investments through lenders that
specialise in those specific asset classes or segments, with
additional credit enhancements that would not be available if the
Group invested directly.
The Group made an investment of GBP8.6 million through a firm
that specialises in providing financing to SMEs throughout the
United Kingdom. The financing is secured by all the assets of the
borrowers including their business-essential equipment. The
structure of the Group's investment is that it lends against a
portfolio of loans at a 90% advance rate. Under the terms of the
agreement, any loan that is more than 30 days delinquent is either
bought out or replaced with a performing loan from an unencumbered
pool of loans held directly by the lender. All activity within the
portfolio is reviewed monthly by a third-party auditor who provides
reports to the Investment Managers. This facility has a one year
rolling term.
Principal balance outstanding as at 30 June 2017:
GBP8,596,900
Share Class: C
The Group provided GBP6.8 million of financing under a program
with the lessor of domestic central heating/hot water system
boilers. The Group's advance rate is between 92.5% and 94.0% of a
seasoned portfolio but has an assignment of 100% of the underlying
leases and service agreements. The investment is further secured by
floating and fixed charges over all of the assets of the
lessors.
Principal balance outstanding as at 30 June 2017:
GBP6,658,737
Share Class: Ordinary
Medical Equipment
The Group invested GBP8.5 million secured by medical equipment
for a new hospital in Green Valley, Arizona in the United States.
The initial investment was divided between two equipment-secured
notes; one with a term of 4 years and the other with a term of 5
years. The investment was further collateralised by a lien on
unencumbered property owned by the hospital. The hospital
encountered delays in securing crucial insurance reimbursements
and, as a consequence, was unable to attract specialist doctors
whose services were a meaningful component of the projected income
of the hospital. As a result, the hospital filed for U.S.
bankruptcy protection in order to reorganise while the insurance
issues were resolved and specialist doctors are on-boarded. Given
the crucial nature of the equipment financed by the Group and its
long economic life, the Group and the hospital were able to reach
an agreement within the bankruptcy court that keeps the equipment
in place and protects the principal of the investment. The
investment has been restructured into two notes with terms of 10
and 15 years which are secured by all of the assets originally
financed under the notes and the equipment that was purchased
directly by the hospital. The interest rate on the notes was
reduced to 2.5% but the principal balance was increased by $1.0
million and a third note will be issued for additional accruing
interest at 7.5% which is subordinate to other debts of the
hospital.
Principal balance outstanding as at 30 June 2017:
GBP8,320,872
Share Class: Ordinary
Semiconductor Manufacturing and Testing Equipment
The Group participated in the financing of a semiconductor
manufacturing plant and equipment for a publicly-traded French
company that produces and markets Silicon on Insulator wafers
("SOI") mainly for the electronics industry. The wafers are used in
the fabrication of integrated circuits which run faster and consume
less power than integrated circuits etched on traditional silicon
material. SOI is used in a growing number of microelectronic
applications including in servers, game consoles, desktop, and
personal computers. The investment of GBP7.2 million is structured
as a 3 year full payout lease. At the same time the lease was
funded, an additional amount of GBP1.6 million was paid in VAT
where this VAT portion was repaid within 5 months at the same
interest rate as the balance of the investment.
Principal balance outstanding as at 30 June 2017:
GBP2,675,563
Share Class: Ordinary
Helicopters
Referencing the above two investments made in marine vessels for
a single group, the Group has also provided 70% deposit financing
for the acquisition of seven newly built helicopters for a separate
company in the same organisation. The GBP6.2 million extended is
subject to a 24 month term loan with quarterly interest-only
payments and a balloon payment at maturity. The loan is guaranteed
by the borrower's immediate parent company with a net worth of more
than $46 million and available credit facilities of over $100
million.
Principal balance outstanding as at 30 June 2017:
GBP6,188,018
Share Class: C
Waste Processing Equipment
The Group has invested GBP6.1 million in the construction and
lease of waste water processing equipment that includes a 1 MW AD
Plant located in the Republic of Ireland. The lessee provides a
full life cycle service to clients operating in the municipal and
private sectors including collection, transportation and
disposal/reuse of their sludges which are in turn processed into a
fully certified alternative to expensive chemical fertilisers. The
initial term of this investment is 12 years with a potential 3 year
extension that, when exercised, will enhance the Group's return on
investment. As at 30 June 2017, construction was ahead of
schedule.
Principal balance outstanding as at 30 June 2017:
GBP6,537,899
Share Class: C
Infrastructure Painting and Coating Equipment
The Group provided financing in the amount of GBP5.9 million
secured by all the assets and equipment of the fourth largest
industrial painting and coating contracting company in the United
States. Ninety percent of the borrower's business is from large,
often high profile, government projects. Shortly after the Group's
investment was made, the borrower signed a contract with the US
military, the profit margin of which, on its own, is sufficient to
amortise the 60 month term debt. This investment, with a company
that provides chemical stripping, concrete coating, fireproofing,
high-pressure water jetting, lead abatement, metalizing, and
sandblasting services, is US Dollar denominated and fully hedged
back to Sterling. The primary equipment being financed is suspended
platforms. The investment is further secured by personal guarantees
of the owners and liens on real estate.
Principal balance outstanding as at 30 June 2017:
GBP4,988,664
Share Class: Ordinary
Combined Heat and Power Unit
In addition to the two combined heat and power units financed on
the Isle of Wight, the Group provided GBP5.90 million to finance a
third non-renewable unit for the U.K.'s largest tomato grower used
in their glasshouses in Teesside, Middleborough. The 6.6 MW natural
gas based energy generation plant includes two Jenbacher combine
heat and power units subject to a 13.25 year fully amortising
lease.
Principal balance outstanding as at 30 June 2017:
GBP6,358,339
Share Class: Ordinary
Remote Operated Vehicles ("ROVs")
The Group made an investment of approximately GBP5 million in
two ROVs that were originally subject to a lease with a company
engaged in oil field services in the North Sea for a term of 60
months at a fixed rate. In the first quarter of 2015, the original
end-user went into administration, and, as a result, the Investment
Managers decided to take possession of the assets and re-lease them
directly to the company on whose vessel the launch and recovery
systems servicing the ROVs were mounted. The new operating lease
was for a term of 36 months with a variable rate based on
utilisation. The lease is performing as budgeted.
Principal balance outstanding as at 30 June 2017:
GBP4,279,780
Share Class: Ordinary
The Group made a second, smaller, unrelated investment of GBP1.1
million in ROVs with another operator. Cash flow to the operator
was affected as oil prices remained low in the segment in which it
is operating. As a result, the Group granted a period of
interest-only payments to the lessee which has now ended. The lease
has been restructured maintaining the same yield and the same term
but with a lower monthly payment and a bullet payment at the
maturity date in 2021.
Principal balance outstanding as at 30 June 2017: GBP914,772
Share Class: Ordinary
Waste Processing Equipment
The Group entered into a lease of a new automated waste material
recovery system for a successful waste collection company located
in the Midlands. The lessee was formed in 1986 and for the last ten
years has been focusing on modernising the plant, increasing
efficiency, and creating a zero-carbon footprint. The lessee has
historically been engaged solely in waste collection and has had to
pay to dispose of the waste. With the addition of the waste
recovery system, the lessee is able to sort the waste and sell
portions for recycling and greatly reduce the cost of disposal. The
total investment amount was GBP4.50 million and will be repaid over
a lease term of 60 months.
Principal balance outstanding as at 30 June 2017:
GBP4,663,578
Share Class: C
Automotive Manufacturing Equipment
The Group invested in a total of five leases, each with a term
of 48 months, for an automobile parts manufacturer and its
aluminium subsidiary. The equipment on lease was machine tools used
to make parts for new Jaguars and Land Rovers. The total investment
amount was GBP4.8 million. Subsequent to year-end and, as part of a
sale of the lessee, three of the leases were paid off early and the
two remaining were novated to the buyer.
Principal balance outstanding as at 30 June 2017:
GBP2,851,997
Share Class: Ordinary
Helicopters
The Group invested GBP3.6 million in the senior portion of a
portfolio of helicopters on lease to three separate lessees who in
turn sub-lease the fully serviced helicopters to end-users that
include military, government, medical, and corporate clients.
During the year, one of the lessees filed for bankruptcy in the
United States and the Group restructured the leases, extending the
term and lowering the payments on four helicopters. Two
helicopters, with a different lessee, came to the end of their
respective leases and are now subject to purchase agreements over a
term of 48 months at the expected values. Two additional
helicopters have come off lease with one sold to a bank
participating in the financing while the medical helicopter is
being offered for sale in the market. The helicopter sold to the
bank was sold below the projected value which was absorbed by the
equity in the portfolio.
Principal balance outstanding as at 30 June 2017:
GBP3,925,920
Share Class: Ordinary
Telephone Towers
The Group invested GBP3.5 million for the construction and lease
of a portfolio of telecommunication towers located in Brazil for a
company based in Florida in the United States. The investment was
secured by an investment grade insurance policy with a reputable
reinsurance syndicate that includes Hanover Re, PartnerRe, QatarRe,
and Lloyd's of London. The initial investment term was 14 months
but the CEO of the company unexpectedly passed away which left the
company in the control of a highly competent engineer who was also
a partner. The company asked for an extension of the term while
they reacted to the loss. The Group granted this extension and is
now working with the remaining partner to sell the portfolio of
towers as had originally been planned.
Principal balance outstanding as at 30 June 2017:
GBP3,550,296
Share Class: Ordinary
Wind Turbines
The Group entered into separate leases for three 250 kW wind
turbines in a single, cross-collateralised transaction, in the
amount of GBP2.4 million. Each of the leases is for a term of 10
years against 20 year power purchase agreements and Northern
Ireland Renewable Obligation Certificates.
Principal balance outstanding as at 30 June 2017:
GBP1,914,555
Share Class: Ordinary
As part of the same vendor programme in Northern Ireland, the
Group entered into a second transaction for the lease of three
additional 250 kW wind turbines in the amount of GBP3.3 million.
These three leases are cross-collateralised amongst themselves for
a term of 10 years with the same structure as the first set of wind
turbines.
Principal balance outstanding as at 30 June 2017:
GBP3,045,272
Share Class: Ordinary
The Group also entered into a sale and lease back in the amount
of GBP1.4 million for a 500 kW wind turbine and a 50 metre tower.
The equipment is located 100 miles north of London in a business
park owned by the principals of the lessee. The lease term is 10
years which is coterminous with a power purchase agreement with a
major Dow Chemical company subsidiary.
Principal balance outstanding as at 30 June 2017:
GBP1,182,467
Share Class: Ordinary
The Group provided GBP1.3 million in lease financing for 250 kW
and 225 kW wind turbines located on a dairy farm in Northern
Ireland. The lease term is 12 years with a power purchase agreement
in place and qualified for 20 years of Northern Ireland Renewable
Obligation Certificates.
Principal balance outstanding as at 30 June 2017:
GBP1,480,385
Share Class: Ordinary
The Group entered into a 10 year lease in the amount of GBP1.2
million for two 225 kW wind turbines located in South Wales. The
lessee is a specialist in developing community scale wind turbines
between 300 kW and 800 kW in rural, commercial, and brownfield
sites. The project is supported by 20 years of Feed-in-Tariffs.
Principal balance outstanding as at 30 June 2017: GBP851,410
Share Class: Ordinary
Each of the investments made by the Group in wind turbines had a
construction phase during which the lessee made interest-only
payments at a higher rate than the long-term lease rate.
Construction was completed in each case without incident and all of
the investments are performing satisfactorily.
Marine Vessel
In May 2016, the Group entered into a sale and lease back for a
brand new, state of the art crew transport vessel in the amount of
GBP1.9 million which represented 80% of the vessel's cost. As part
of the transaction, a three month rental reserve was deposited by
the lessee with the Group. Despite the high demand for this vessel
from offshore wind farm developers, the new vessel was
under-utilised. By November 2016, the three month rental reserve
was exhausted and the lessee voluntarily surrendered the vessel to
the Group. Under the remarketing agreement with the manufacturer, a
new lessee that was already operating a sister vessel was quickly
identified. A new lease was entered into in early 2017 for a term
of 6 months. At the end of the initial term, the lessee extended
for a further 6 month term with a fixed purchase option. The vessel
has been fully utilised since being repositioned and has been
repainted and officially made part of the new lessee's fleet.
Principal balance outstanding as at 30 June 2017:
GBP1,938,821
Share Class: Ordinary
Ground Support Equipment
The Group made two investments totalling GBP1.4 million in four
aircraft de-icers subject to 60 month full pay out leases. Two of
the de-icers are in service at Heathrow Airport and the other two
at Gatwick Airport.
Principal balance outstanding as at 30 June 2017: GBP463,080
Share Class: Ordinary
Reel Drive System (Marine Support Equipment)
The Group entered into a transaction to refinance a 400 ton reel
drive system along with a spares container and a control van. The
value of the equipment was in excess of GBP2.5 million and had
approximately GBP228,000 of outstanding debt encumbering it. The
Group provided GBP1.0 million against the equipment and paid off
the existing encumbrance. The proceeds were then used to complete
the construction of a new 85-ton reel drive system which also
became part of the Group's collateral package. The equipment is
used offshore for both undersea pipeline and power cable
construction (laying) and maintenance. The hire purchase contract
is for a term of 60 months.
Principal balance outstanding as at 30 June 2017: GBP784,972
Share Class: Ordinary
IT & Software
The Group provided GBP908,039 of financing for IT systems and
software used by a major hospital group in Australia. This fully
amortising 60 month investment is Sterling-denominated and made
through the borrowers UK parent company.
Principal balance outstanding as at 30 June 2017: GBP405,239
Share Class: Ordinary
Plastics Reprocessing Equipment
The Group entered into a 5 year lease for one infrared rotary
drum and two twin screw compounder extruders used by a specialty
engineering and plastics company. The GBP515,000 of equipment is
used to reprocess polymer based products into forms reused by a
number of industries. The company won the 2014 Plastics Industry
Award for the UK's Best Supplier Partnership. Subsequent to year
end, the company was sold. The lease will be novated to the new
company which is expected to be achieved by end of October
2017.
Principal balance outstanding as at 30 June 2017: GBP416,803
Share Class: Ordinary
Plant Hire Equipment
The Group purchased the receivables associated with a 5 year
lease of dump trucks, excavators, bulldozers, and other heavy earth
moving machinery. An unrelated leasing company holds the
subordinated residual interest in the GBP439,000 investment.
Principal balance outstanding as at 30 June 2017: GBP324,007
Share Class: Ordinary
Asset Finance and Equipment Leasing Industry Relative
Performance
The asset finance and equipment leasing industry has a very low
net charge-off rate relative to other forms of lending. This is not
to say that defaults do not occur at similar rates to other lending
businesses and, by some comparisons, at higher rates. This industry
is unique, however, in its high recovery rates which is what drives
the low net charge-offs. In any diversified portfolio of meaningful
size, there will always be assets that require attention and
potential restructuring. Within the Group's portfolio there have
already been a number of successful recoveries such as the
repositioned ROVs, the new lease for the crew transportation
vessel, and the buyout of the small AD plant in Northern Ireland
which the Group invested GBP98,000 of a GBP2.2 million commitment
before exercising its rights under the security agreement to exit
the transactions with a payout of GBP153,000.
As demonstrated by the Suniva investment, resolutions take time
but as long as there is adequate diversification, a
well-constructed portfolio can provide the necessary cash flow
coverage to maintain dividends while the Investment Managers focus
on bringing the assets that require attention back on line. This
is, in part, the driver behind the high yields being achieved by
the Group.
Outlook
Looking forward, it is expected that the balance of available
cash from the 2016 C Share will be fully deployed over the coming
months in well-collateralised transactions maintaining the weighted
average yield in the portfolio above 9% despite the rate pressure
in the market from general increased lending competition.
A resolution is anticipated in the Suniva transaction early in
the first quarter of 2018, if not sooner, at which time, the Board
will examine whether it is appropriate to merge the 2016 C Shares
with the Ordinary Shares. As the Chairman's Statement has
indicated, an extension of time for the 2016 C Share issue will be
put before shareholders.
The natural run-off of the portfolio along with a number of
re-financings and early buyouts will provide a good source of
capital to reinvest and keep the Group active in the market for new
originations.
It is likely that political uncertainty surrounding Brexit will
continue to restrain businesses from making capital investment
decisions but the target market is large enough relative to the
fund size, even at over GBP500 million, for the Group to remain
selective in its investments without compromising credit
quality.
The fundamentals of the market have not changed nor has the
Group's approach to investing or asset selection. The fund is
designed to weather all cycles and continue to produce consistent
income. It is with these objectives that the Group will be managed
into 2018 and beyond.
SQN Capital Management, LLC SQN Capital Management (UK) Limited
4 October 2017 4 October 2017
DIRECTORS' REPORT
The Directors present the Annual Report and Consolidated
Financial Statements of the Group for the year ended 30 June
2017.
Board of Directors
The Directors of the Company who served during the year
were:
Peter Niven (Chairman)
John Falla
Carol Goodwin
Christopher Spencer
Paul Meader was appointed as a Director of the Company on 18
August 2017.
Directors' Interests
The Directors held a minor interest in the Company's share
capital during the year ended 30 June 2017 as follows:
Director Number of Ordinary Number of 2016
Shares C Shares
Peter Niven 59,858 5,000
John Falla 19,637 4,961
Carol Goodwin 44,893 5,000
Christopher Spencer 19,929 4,982
There have been no changes in the interests of the Directors
since the year end.
Notifications of Shareholdings
As at 30 June 2017, the Company had been notified in accordance
with Chapter 5 of the Disclosure Guidance and Transparency Rules
(which covers the acquisition and disposal of major shareholdings
and voting rights), of the following shareholders that had an
interest of greater than 5% in the Company's issued share
capital.
Number of Percentage
Shares of total voting
rights (%)
Investec Wealth & Investment
Limited 42,976,308 11. 01%
Old Mutual 42,900,218 11.99%
Schroders plc 36,051,235 10.04%
Between 1 July 2017 and 2 October 2017, no additional
notifications were received.
Environmental and Social Issues
The Company is a closed-ended investment company which has no
employees and therefore its own direct environmental impact is
minimal. The Board notes that the companies in which the Group
invests will have a social and environmental impact over which it
has no control. The Board, the members of which are all based in
Guernsey, holds all its meetings in Guernsey and, whilst the
Investment Managers do travel to those meetings, the Group's
greenhouse gas emissions and environmental footprint are believed
to be small. However, many of the companies and projects in which
the Group invests have a very positive environmental footprint. The
numerous anaerobic digestion plants the Group finances use waste of
many types to produce sustainable fertilisers and electricity or
gas which are provided to the respective National Grids.
Additionally, our investment in wind turbines and solar panels
likewise provide alternative energy sources to fossil and/or
nuclear fuels. In these ways, the Board is pleased that the Group
plays a positive part in the environmental arena.
Life of the Company
The Company has an indefinite life. The Directors shall propose
one or more ordinary resolutions at the Annual General Meeting (the
"AGM") to be held in 2017 and at every third AGM thereafter that
the Company continues as a closed-ended investment company (the
"Continuation Resolution"). In the event that a Continuation
Resolution is not passed, the Directors shall formulate proposals
to be put to shareholders as soon as is practicable but, in any
event, by no later than six months after the Continuation
Resolution is not passed, to reorganise, unitise or reconstruct the
Company or for the Company to be wound up with the aim of enabling
shareholders to realise their holdings in the Company.
Dividends
The Company targets a total annual dividend of 7.25 pence per
Ordinary Share. The dividend target is a target only and there can
be no guarantee that this will be achieved. Dividends are declared
and paid monthly for Ordinary Shares.
Prior to conversion to Ordinary Shares on 25 October 2016,
dividends were declared and paid monthly for the 2015 C Shares (the
last 2015 C Share dividend was declared and paid for August
2016).
A dividend for the 2016 C Shares was declared and paid for the
period from admission to 31 March 2017.
Refer to note 14 for details on dividends that the Company has
declared and paid to its shareholders during the year and note 19
for details on dividends declared and paid after the year end.
Ordinary Share Buybacks
On 24 November 2016 the Directors were granted authority to
repurchase 53,620,355 Ordinary Shares (being equal to 14.99% of the
number of Ordinary Shares in issue) for cancellation or to be held
as treasury shares. This authority, which has not been used, will
expire at the forthcoming AGM. The Directors intend to seek annual
renewal of this authority from the shareholders. Pursuant to this
authority, and subject to the Companies (Guernsey) Law, 2008, as
amended ("Companies Law") and the discretion of the Directors, the
Company may purchase Ordinary Shares in the market if they believe
it to be in shareholders' interests; in particular, as a means of
correcting any imbalance between the supply and demand for the
Ordinary Shares.
Indemnities
To the extent permitted by Guernsey Law, the Company's Articles
provide an indemnity for the Directors against any liability except
such (if any) as they shall incur by or through their own breach of
trust, breach of duty or negligence.
During the year, the Group has maintained insurance cover for
its Directors and Officers under a Directors' and Officers'
liability insurance policy.
2017 AGM
The AGM will be held in Guernsey on 20 November 2017. The notice
for the AGM sets out the ordinary and special resolutions to be
proposed at the meeting. Separate resolutions are proposed for each
substantive issue.
The Articles of the Company state that fourteen clear days'
notice of the AGM of the Company is required. It is, however, the
intention of the Board that the Notice of AGM is issued to
shareholders so as to provide at least twenty business days' notice
of the meeting. The Directors welcome communication with all
shareholders and can be contacted in writing at the Company's
registered office.
Voting on all resolutions at the 2017 AGM will be on a poll. The
proxy votes cast, including details of votes withheld are disclosed
to those in attendance at the meeting and the results are published
on the Company's website and announced via the Regulatory
Information Service.
Directors' Statement of Responsibilities
The Directors are responsible for preparing Consolidated
Financial Statements for each financial year which give a true and
fair view, in accordance with applicable Guernsey law and
International Financial Reporting Standards as adopted by the
European Union ("IFRS"), of the state of affairs of the Group and
of the profit or loss for the year. In preparing those Consolidated
Financial Statements, the Directors are required to:
-- Select suitable accounting policies and apply them consistently;
-- Make judgements and estimates that are reasonable and prudent;
-- State whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the Financial Statements; and
-- Prepare the Consolidated Financial Statements on the going
concern basis unless it is inappropriate to presume that the Group
will continue in business.
The Directors are responsible for keeping proper accounting
records, which disclose with reasonable accuracy at any time the
financial position of the Group and to enable them to ensure that
the Financial Statements comply with the Companies Law. The
Directors are also responsible for safeguarding the assets of the
Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors confirm to the best of their knowledge that:
-- The Consolidated Financial Statements which have been
prepared in conformity with IFRS and give a true and fair view of
the assets, liabilities, financial position and profit of the
Group, and the undertakings included in the Financial Statements
taken as a whole as required by the United Kingdom Listing
Authority Disclosure Guidance and Transparency Rules ("DTR")
4.1.12R and are in compliance with the requirements set out in the
Companies Law;
-- the Consolidated Financial Statements include a fair review
of the information required by DTR 4.1.8R and DTR 4.1.11R, which
provide an indication of important events and a description of
principal risks and uncertainties during the year;
-- there is no information relevant to the preparation of their
report of which the Group's external auditor, Baker Tilly CI Audit
Limited (the "Auditor") is unaware and he or she has taken all
steps a Director might reasonably be expected to have taken to be
aware of relevant audit information and to establish that the
Auditor is aware of that information; and
-- the Annual Report and Consolidated Financial Statements,
taken as a whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the Group's
performance, business model and strategy.
The maintenance and integrity of the Company's website is the
responsibility of the Directors; the work carried out by the
Auditor does not involve consideration of these matters and,
accordingly, the Auditor accepts no responsibility for any changes
that may have occurred to the Annual Report and Consolidated
Financial Statements since they were initially presented on the
website.
Legislation in Guernsey governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
By order of the Board
Peter Niven Christopher Spencer
Chairman Director
4 October 2017 4 October 2017
DIRECTORS' BIOGRAPHIES
Peter Niven (Non-Executive Chairman)
Peter Niven, is a resident of Guernsey. He has worked in the
financial services industry in the UK, offshore and internationally
for over 40 years, 30 of those with the Lloyds Banking Group from
which he retired in 2005 as the head of the Group's Offshore
Banking Division. Since then Peter has worked for the Guernsey
Government and the local financial services sector, through
Guernsey Finance, with the remit to develop and promote the island
on the world stage as a premier international finance centre. He
retired from that role in December 2012.
He now acts as a Non-Executive Director on a broad portfolio of
listed (LSE, AIM, TISE) and unlisted investment funds investing in
asset classes including property, hedge funds, emerging markets and
private equity and has wide experience of chairing Boards and Audit
and Management Committees. He is also a director of ABTA's Guernsey
captive insurance entity. Peter is a Fellow of the Institute of
Bankers, a Fellow of the Institute of Directors and a Chartered
Director.
John Martyn Falla (Non-Executive Director)
John Falla, a Guernsey resident, is a Chartered Accountant and
has a BSc Hons degree in Property Valuation and Management from The
City University, London. He is a Chartered Fellow of the Chartered
Institute for Securities and Investment having been awarded their
diploma. He is a Non-Executive Director and consultant to a number
of companies, most of which are listed on the London Stock
Exchange.
John trained with Ernst & Young in London before moving to
their Corporate Finance Department. On returning to Guernsey he
worked for an International Bank, before joining the Channel
Islands Stock Exchange as a member of the Market Authority. In 2000
John joined the Edmond de Rothschild Group in Guernsey and provided
corporate finance advice to clients including open and closed-ended
investment funds, and institutions with significant property
interests. John was a director of a number of Edmond de Rothschild
group operating and investment companies.
Carol Patricia Goodwin (Non-Executive Director)
Carol Goodwin, a resident of Guernsey, has extensive experience
in the finance industry and has held senior executive positions
with several European and North American banks, managing businesses
in London, Toronto, Montreal, Amsterdam, Nassau and Guernsey. Since
2002 Carol has devoted her time to Non-Executive Director roles.
She currently serves as a Non-Executive Director for a local bank
and a number of other financial services entities, including a
variety of listed and unlisted investment funds and property
companies. Carol has a strong background in corporate governance
and risk management.
Ms Goodwin is a Fellow of the Institute of Canadian Bankers
(FICB), a Trust and Estate Practitioner (TEP), a Chartered Director
(C.Dir.) and a Fellow of the Institute of Directors (FioD).
Christopher Paul Spencer (Non-Executive Director)
Christopher Spencer, a resident of Guernsey, qualified as a
chartered accountant in London in 1975. Following two years in
Bermuda he moved to Guernsey. Christopher, who specialised in audit
and fiduciary work, was Managing Partner/Director of Pannell Kerr
Forster (Guernsey) Limited from 1990 until his retirement in May
2000. Christopher is a member of the AIC Offshore Committee, a past
President of the Guernsey Society of Chartered and Certified
Accountants and a past Chairman of the Guernsey Branch of the
Institute of Directors. Christopher sits on the Board of Directors
of JPEL Private Equity Limited and John Laing Infrastructure Fund
Limited, both of which is listed on the London Stock Exchange and
Summit Germany Ltd which is an AIM listed company.
Paul Meader (Non-Executive Director) - Appointed on 18 August
2017
Paul Meader, a resident of Guernsey, is an independent director
of investment companies, insurers and investment funds. He was
previously Head of Portfolio Management for Canaccord Genuity based
in Guernsey, prior to which he was Chief Executive of Corazon
Capital. He has over 30 years' experience in financial markets in
London, Dublin and Guernsey, holding senior positions in portfolio
management and trading. Prior to joining Corazon he was Managing
Director of Rothschild's Swiss private banking subsidiary in
Guernsey. Mr Meader is a Chartered Fellow of the Chartered
Institute of Securities & Investments and past Chairman of the
Guernsey International Business Association.
CORPORATE GOVERNANCE REPORT
Introduction
The Board is committed to high standards of corporate governance
and has put in place a framework for corporate governance which it
believes is appropriate for an investment company.
Compliance with Corporate Governance Codes
The Company is a member of the AIC. The UK Corporate Governance
Code (the "UK Code") acknowledges that the AIC Corporate Governance
Code ("AIC Code") can assist externally managed companies in
meeting their obligations under the UK Code in areas that are of
specific relevance to investment companies. The Guernsey Financial
Services Commission has also confirmed that companies that report
against the UK Code or AIC Code are deemed to meet the Guernsey
Code of Corporate Governance (the "Guernsey Code"). Copies of the
AIC Code and the AIC Guide can be found at www.theaic.co.uk. The UK
Code is available from the Financial Reporting Council website
(www.frc.co.uk).
Throughout the year ended 30 June 2017, the Company has complied
with the recommendations of the AIC Code and as such also meets the
requirements of the UK Code and by default the Guernsey Code,
except to the extent highlighted below:
-- the role of the chief executive;
-- executive Directors' remuneration;
-- Senior Independent Director; and
-- internal audit function.
For the reasons set out in the AIC Guide, and as explained in
the UK Code, the Board considers these provisions are not relevant
to the position of the Group, being an externally managed
investment company with subsidiaries. In particular, all of the
Group's day-to-day management and administrative functions are
outsourced to third parties. As a result, the Group has no
executive directors, direct employees or internal operations. The
Group has therefore not reported further in respect of these
provisions.
The Group complies with the corporate governance statement
requirements pursuant to the UK Financial Conduct Authority's
("FCA") DTR by virtue of the information included in the Corporate
Governance section of the Annual Report.
The Board believes that this Annual Report and Consolidated
Financial Statements presents a fair, balanced and understandable
assessment of the Group's position and prospects, and provides the
information necessary for shareholders to assess the Group's
performance, business model, strategy, principal risks and
uncertainties.
Directors
The following Directors were appointed on 28 May 2014:
Peter Niven (Non-Executive Chairman)
John Martyn Falla (Non-Executive Director)
Carol Patricia Goodwin (Non-Executive Director)
Christopher Paul Spencer (Non-Executive Director)
Paul Meader was appointed as a Non-Executive Director on 18
August 2017.
Directors' Duties and Responsibilities
The Directors have adopted a set of reserved powers, which
establish the key purpose of the Board and detail its major duties.
These duties cover the following areas of responsibility:
-- statutory obligations and public disclosure;
-- approval of key investment decisions;
-- strategic matters and financial reporting;
-- Board composition and accountability to shareholders;
-- risk assessment and management, including reporting,
compliance, monitoring, governance and control; and
-- other matters having material effects on the Group.
These reserved powers of the Board have been adopted by the
Directors to demonstrate clearly the importance with which the
Board takes its fiduciary responsibilities and as an ongoing means
of measuring and monitoring the effectiveness of its actions.
The Board meets at least four times each year and monitors the
Group's share price and NAV and regularly considers ways in which
future share price performance can be enhanced. The Board is
responsible for the safeguarding of the assets of the Group and
taking reasonable steps for the prevention and detection of fraud
and other irregularities. The Investment Managers together with the
Company Secretary also ensure that all Directors receive, in a
timely manner, all relevant management, regulatory and financial
information relating to the Group and its portfolio of investments.
Directors unable to attend a Board meeting are provided with the
Board papers and can discuss issues arising in the meeting with the
Chairman or another Non-Executive Director.
Individual Directors may, at the expense of the Group, seek
independent professional advice on any matters that concerns them
in the furtherance of their duties.
Board and Committees
The Board has established three committees, the Audit and Risk
Committee, the Management Engagement Committee, and the
Remuneration and Nomination Committee. Due to the size and nature
of the Company, all Directors have been appointed to all
Committees. The responsibilities of these Committees are described
below. Each Committee reports to and is subject to the oversight of
the Board. Terms of reference for each Committee have been approved
by the Board and are available in full on the Company's
website.
Board
Responsibilities:
-- Statutory obligations and public disclosure.
-- Approval of key investment decisions.
-- Strategic matters and financial reporting.
-- Board composition and accountability to shareholders.
-- Risk assessment and management, including reporting,
compliance, monitoring, governance and control.
-- Responsible for financial statements.
-- Other matters having material effects on the Group.
Audit and Risk Committee
Delegated Responsibilities:
-- Review the financial statements, including review of the
accounting policies and methods utilised.
-- Review the effectiveness and internal control policies and
procedures over financial reporting and identification, assessment
and reporting of risk.
-- Make recommendations to the Board in relation to appointment,
re-appointment and removal of external auditors and approving
remuneration and terms of engagement of external auditors.
-- To monitor risk management and internal control systems on an
ongoing basis, performing a review of their effectiveness, and
recommending actions to remedy any failings or weaknesses
identified.
Management Engagement Committee
Delegated Responsibilities:
-- Review on a regular basis the performance of the Investment
Managers and the Group's key advisers and major service suppliers
(other than the external auditor) to ensure that performance is
satisfactory and in accordance with the terms and conditions of the
respective appointments.
Remuneration and Nomination Committee
Delegated Responsibilities:
-- Review the structure, size and composition of the Board.
-- Give full consideration to succession planning
-- Identify suitable Board candidates to fill Board vacancies.
-- Make recommendations as to the appropriate level of Directors' remuneration.
-- Undertake performance evaluations of the Board and the Chairman.
Audit and Risk Committee
Mr Spencer is the Chairman of the Audit and Risk Committee. The
duties of the Audit and Risk Committee in discharging its
responsibilities are outlined above. The report on the role and
activities of this Committee and its relationship with the external
auditors is contained in the Audit and Risk Committee Report.
Management Engagement Committee
Mr Falla is the Chairman of the Management Engagement Committee.
The duties of the Management Engagement Committee in discharging
its responsibilities are outlined above.
The Management Engagement Committee carries out its review of
the Group's key advisers through consideration of a number of
objective and subjective criteria and through a review of the terms
and conditions of the advisers' appointments with the aim of
evaluating performance, identifying any weaknesses and ensuring
value for money for the Company's shareholders. The Management
Engagement Committee most recently reviewed the performance of the
Investment Managers and other key service providers to the Group on
23 May 2017. During this review, no material weaknesses were
identified. Overall the Management Engagement Committee confirmed
its satisfaction with the services and advice received.
Remuneration and Nomination Committee
Ms Goodwin is the Chairman of the Remuneration and Nomination
Committee. The duties of the Remuneration and Nomination Committee
in discharging its responsibilities are outlined above.
The Remuneration and Nomination Committee undertakes an
evaluation of the Board on an annual basis. The performance of each
Director is considered as part of a formal review by the
Remuneration and Nomination Committee. The Directors may also meet
without the Chairman of the Board present in order to review his
performance.
During the 2017 Board evaluation on 23 May 2017, all relevant
topics were fully discussed and it was agreed that Board meetings
were effective. It was concluded that the Board has a good range of
skills, diversity and competencies, with all Directors being
independent. The Committee confirmed that the Chairman and all
Directors had a good understanding of the investments and markets
in which the Company operates and felt well prepared and able to
participate fully at Board meetings.
During the first half of 2017, the Board, through the
Remuneration and Nomination Committee, undertook the process of
identifying an additional Non-Executive Director for appointment to
the Board. Given the current size of the Group and the increase in
Assets Under Management from GBP147,108,758 at the time of the
Initial Public Offering to GBP532,903,565 as at 30 June 2017, the
Board felt it was an appropriate time to bolster its resources and
increase the skills of the Board. A formal identification,
selection and appointment process was undertaken with the
assistance of an outside firm of specialised consultants.
Directors' Remuneration Report
The following report meets the relevant Listing Rules of the FCA
and the AIC Code and describes how the Board has applied the
principles relating to Directors' remuneration.
The fees paid to the Directors for the year ended 30 June 2017
are detailed in the table below:
Director Fees Extra Services Total
(2016 C
GBP Share) GBP
GBP
--------------- -------- --------------- --------
Peter Niven 60,000 7,500 67,500
--------------- -------- --------------- --------
Christopher
Spencer 50,000 7,500 57,500
--------------- -------- --------------- --------
John Falla 40,000 7,500 47,500
--------------- -------- --------------- --------
Carol Goodwin 40,000 7,500 47,500
--------------- -------- --------------- --------
Total 190,000 30,000 220,000
--------------- -------- --------------- --------
The Company's Articles limit the aggregation of fees payable to
the Directors to a total of GBP300,000 per annum. The increase in
aggregate fees from GBP200,000 to GBP300,000 was approved at the
AGM on 24 November 2016. Extra services are not included in the
definition of fees as per the Company's Articles. The extra
services fee was paid from the 2016 C Share issue costs.
Annual Report on Remuneration
Other than as shown above, no other remuneration or compensation
was paid or payable by the Company during the year to any of the
Directors.
Advisers to the Remuneration and Nomination Committee
The Board has not sought the advice or services by any outside
person, at this time, in respect of its consideration of the
Directors' remuneration, but as noted above, the Board did seek
outside assistance for the appointment of an additional
Non-Executive Director.
Board Independence, Composition and Diversity
The Chairman and all Directors are considered independent. The
Directors consider that there are no factors, as set out in
Principle 1 or 2 of the AIC Code, which compromise the Chairman's
or other Directors' independence and that they all contribute to
the affairs of the Company in an adequate manner. The Board reviews
the independence of all Directors annually. The Company Secretary,
BNP Paribas Securities Services S.C.A., Guernsey Branch, through
its representative, acts as Secretary to the Board and Committees
and in doing so it assists the Chairman in ensuring that all
Directors have full and timely access to all relevant
documentation, organises induction of new Directors, is responsible
for ensuring that the correct Board procedures are followed and
advises the Board on corporate governance matters.
The Board is chaired by Peter Niven who is responsible for its
leadership and for ensuring its effectiveness in all aspects of its
role. The Board currently consists of five Non-Executive Directors.
The biographical details of the Directors holding office at the
date of this report are listed above and demonstrate a breadth of
investment, accounting, banking and professional experience. The
appointment of a Senior Independent Director has been considered
but is not felt necessary as all Board members are independent
Non-Executive Directors, with different qualities and areas of
expertise on which they may lead where issues arise and to whom
concerns can be conveyed.
The Board values the importance of diversity, including gender,
to the effective functioning of the Board. The Board, however, does
not consider it appropriate or in the interest of the Company and
its shareholders to set prescriptive targets for gender or other
diversity on the Board. Any future appointments would be primarily
based on merit of skills, experience and knowledge of each
appointee.
Directors' Appointment and Policy on Payment of Loss of
Office
No Director has a service contract with the Company. Directors
have agreed letters of appointment with the Company, copies of
which are available for review by shareholders at the registered
office and will be available at the AGM. All Directors have served
since incorporation of the Company, with the exception of Paul
Meader, who was appointed on 18 August 2017. Any Director may
resign in writing to the Board at any time. Directors' appointments
will be reviewed during the annual Board evaluation. Directors are
not entitled to payment for loss of office.
The Articles of Incorporation require that all Directors submit
themselves for election by shareholders at the first opportunity
following their appointment. The Articles of the Company also
require that the Directors shall retire by rotation on a
three-yearly basis, commencing from the third AGM after inception.
The retiring Directors will then be eligible for reappointment. The
Directors have elected to stand for re-election on a yearly basis,
so will all retire at each AGM and be eligible for
reappointment.
Tenure of Non-Executive Directors
The Board has adopted a policy on tenure that is considered
appropriate for an investment company. The Board does not believe
that length of service, by itself, leads to a closer relationship
with the Investment Managers or necessarily affects a Director's
independence.
The Board's tenure and succession policy seeks to ensure that
the Board is well balanced and will be refreshed from time to time
by the appointment of new Directors with the skills and experience
necessary to replace those lost by Directors' retirements and meet
future requirements. Directors must be able to demonstrate their
commitment and fiduciary responsibility to the Company. The Board
seeks to encompass relevant past and current experience of various
areas relevant to the Company's business.
Conflict of Interests
The Directors have a duty to avoid situations where they have,
or could have, a direct or indirect interest that conflicts, or
possibly could conflict, with the Company's interests. Only
Directors who have no material interest in the matter being
considered will be able to participate in the Board approval
process. Directors are required to disclose all actual and
potential conflicts of interest to the Chairman in advance of any
proposed external appointment.
In deciding whether to approve an individual Director's
participation, the other Directors will act in a way they consider
to be in good faith in assessing the materiality of the conflict in
accordance with the Company's Articles of Incorporation.
The Board believes that its procedures regarding conflicts of
interest have operated effectively. The Board also confirms that
its procedure for the approval of conflicts of interest, if any,
has been followed by the Directors. None of the Directors had a
material interest in any contract which is significant to the
Group's business. Directors' holdings in the Company's shares can
be found within the Directors' Report.
Performance Evaluation
The performance of the Board and the Directors was reviewed by
the Remuneration and Nomination Committee in May 2017. The Chairman
of the Committee reviewed and discussed various areas, including
the process and style of meetings, strategy, investment matters,
shareholder value and governance. In addition, the Board reviewed
the performance of the Chairman in his role and evaluated their
personal contributions. It was concluded that Board meetings were
effective and all relevant topics were fully discussed, with the
Board having a good range of skills and competency. The Directors
confirm that they have devoted sufficient time, as considered
necessary, to the matters of the Company. It was agreed that all
Directors were independent and that the Chairman and all Directors
had a good understanding of the investments and markets in which
the company operates and felt well prepared and able to participate
fully at Board meetings.
Induction/Information and Professional Development
Directors are provided, on a regular basis, with key information
on the Company's policies, regulatory requirements and its internal
controls. Regulatory and legislative changes affecting Directors'
responsibilities are advised to the Board as they arise along with
changes to best practice from, amongst others, the Company
Secretary and the Auditor. Advisers to the Group also prepare
reports for the Board from time to time on relevant topics and
issues. In addition, Directors attend relevant seminars and events
to allow them to continually refresh their skills and knowledge and
keep up with changes within the investment management industry.
When a new Director is appointed to the Board, they are provided
with all relevant information regarding the Group and their duties
and responsibilities as a Director. In addition, a new Director
will also spend time with representatives of the Investment
Managers in order to learn more about their processes and
procedures.
Attendance at scheduled meetings of the Board and its committees
for the year ended 30 June 2017
Quarterly NAV Audit Remuneration Management Separate
Board & & & Nomination Engagement Investment
Dividend Risk Committee Committee Meetings
Meetings Committee
--------------- ---------- ---------- ----------- -------------- ------------ ------------
Number
of
meetings
during
the period 4 8 5 1 1 2
--------------- ---------- ---------- ----------- -------------- ------------ ------------
Peter Niven 4 7 5 1 1 2
--------------- ---------- ---------- ----------- -------------- ------------ ------------
John Falla 4 8 5 1 1 2
--------------- ---------- ---------- ----------- -------------- ------------ ------------
Carol Goodwin 4 8 5 1 1 1
--------------- ---------- ---------- ----------- -------------- ------------ ------------
Chris Spencer 4 8 5 1 1 2
--------------- ---------- ---------- ----------- -------------- ------------ ------------
In addition to these meetings, 4 ad-hoc meetings were held
during the year covering various Group matters.
Relationship with the Investment Managers, Company Secretary and
the Administrator
The Board has delegated various duties to external parties
including the management of the investment portfolio, the custodial
services (including the safeguarding of assets), the registration
services and the day-to-day company secretarial, administration and
accounting services. Each of these contracts was entered into after
full and proper consideration by the Board of the quality and cost
of services offered, including the control systems in operation in
so far as they relate to the affairs of the Group.
The Board receives and considers reports regularly from the
Investment Managers, with ad hoc reports and information supplied
to the Board as required. The Investment Managers take decisions as
to the purchase and sale of individual investments, within the
delegated authority established by the Board. The Board meet with
the Investment Managers on an ad-hoc basis to discuss and approve
investment decisions as necessary. The Investment Managers comply
with the risk limits as determined by the Board and have systems in
place to monitor cash flow and the liquidity risk of the Group. The
Investment Managers and the Administrator also ensure that all
Directors receive, in a timely manner, all relevant management,
regulatory and financial information. Representatives of the
Investment Managers and Administrator attend each Board meeting as
required, enabling the Directors to probe further on matters of
concern. The Directors have access to the advice and service of the
corporate Company Secretary through its appointed representative
who is responsible to the Board for ensuring that Board procedures
are followed and that applicable rules and regulations are complied
with. The Board, the Investment Managers and the Administrator
operate in a supportive, co-operative and open environment.
Shareholder Engagement
The Board believes that the maintenance of good relations with
shareholders is important for the long-term prospects of the
Company. It has, since admission, sought engagement with investors.
Where appropriate the Chairman, and other Directors are available
for discussion about governance and strategy with major
shareholders and the Chairman ensures communication of
shareholders' views to the Board. During the year, the Chairman has
engaged with shareholders when requested. The Board receives
feedback on the views of shareholders from its Corporate Broker and
the Investment Managers. Shareholders are welcome to contact the
Directors at any time via the Company Secretary.
The Board believes that the AGM provides an appropriate forum
for investors to communicate with the Board, and encourages
participation. There is an opportunity for individual shareholders
to question the Directors at the AGM. Details of proxy votes
received in respect of each resolution will be made available to
shareholders at the meeting and will be posted on the Company's
website following the meeting.
The Interim Report and Consolidated Financial Statements, Annual
Report and Consolidated Financial Statements and fact sheets are
available to provide shareholders with a clear understanding of the
Group's activities and its results. This information is
supplemented by the monthly calculation and publication on the
London Stock Exchange of the NAV of the Company's shares and the
dividend declared thereon. All documents issued by the Company can
be viewed on the website www.sqnassetfinance.com.
AIFMD
The Company is classed as an externally managed Alternative
Investment Fund under the Alternative Investment Fund Managers
Directive ("AIFMD"). The US Investment Manager is the authorised
Alternative Investment Fund Manager ("AIFM") for the purposes of
AIFMD. The AIFM is responsible for managing the Company's
investments and the risks it faces, subject to the overall scrutiny
of the Board. The US Manager is registered with the FCA as a "third
country AIFM". The requirements of AIFMD have been applied
accordingly.
AIFM Remuneration
The total fees paid to the Investment Managers by the Company
are disclosed in note 18. In accordance with Article 22 of the AIFM
Directive and Article 107 of the AIFM Regulations, the AIFM must
make certain disclosures in respect of the remuneration paid to its
staff. The AIFM has identified six staff as falling within the
scope of the disclosure requirements (the "Identified Staff").
These Identified Staff are senior management of the AIFM's
managerial functions and a Compliance Officer in the compliance
function. The annualised remuneration amount paid to all of the
Identified Staff of the AIFM in respect of their work with the AIFM
for the 12 month period to 30 June 2017 was GBP600,000.
AUDIT AND RISK COMMITTEE REPORT
The Audit and Risk Committee comprises all of the Directors. All
of the Audit Committee's members have recent and relevant financial
experience. The Chairman of the Audit Committee, Christopher
Spencer, is a chartered accountant and in addition serves as
chairman of the audit committee for some other listed investment
companies. The Board is satisfied that Mr Spencer has recent and
relevant financial experience, as required under the AIC Code. The
qualifications of the members of the Audit Committee are outlined
in Directors' Biographies.
Committee Meetings
The Audit and Risk Committee meets at least three times a year.
Only members of the Audit and Risk Committee have the right to
attend Audit and Risk Committee meetings. Representatives of the
Investment Managers and Administrator will be invited to attend
Audit and Risk Committee meetings on a regular basis and other
non-members may be invited to attend all or part of the meeting as
and when appropriate and necessary. The Auditor is also invited
whenever it is appropriate. The Audit and Risk Committee is also
able to meet separately with the Auditor without the Investment
Managers being present.
Main Activities
The Audit and Risk Committee assists the Board in carrying out
its overall responsibility in relation to financial reporting
requirements, risk management and the assessment of internal
financial and operating controls. It also manages the Group's
relationship with the Auditor. Meetings of the Committee generally
take place prior to a Company Board meeting. The Committee reports
to the Board as part of a separate agenda item, on the activity of
the Committee and matters of particular relevance to the Board in
the conduct of their work.
The day to day management and administrative functions are
outsourced to third parties and as a consequence there is no
requirement for an internal audit function. The Committee reviews
and monitors reports on the internal control and risk management
systems on which the Company is reliant.
Financial Reporting
The primary role of the Committee in relation to financial
reporting is to review in conjunction with the Investment Managers
and the Administrator, the appropriateness of the Interim Report
and Consolidated Financial Statements and the Annual Report and
Consolidated Financial Statements concentrating on, amongst other
matters:
-- the quality and acceptability of accounting policies and practices;
-- the clarity of the disclosures and compliance with financial
reporting standards and relevant financial and governance reporting
requirements;
-- material areas in which significant judgements have been
applied or there has been discussion with the Auditor;
-- in relation to the UK Corporate Governance Code and AIC Code,
whether the Annual Report and Financial Statements, taken as a
whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group's
performance, business model and strategy; and
-- any correspondence from regulators in relation to the quality
of the Group's financial reporting.
To aid its review, the Committee seeks the appropriate input
from the Investment Managers, Administrator and also reports from
the Auditor.
Significant Risks
In relation to the Annual Report and Consolidated Financial
Statements for the year ended 30 June 2017, the following
significant issues were considered by the Audit and Risk
Committee:
(i) Revenue Recognition
The risk that revenue (classified as 'income' in the
Consolidated Financial Statements and primarily comprising interest
income or finance charges receivable under loans, leases and hire
purchase agreements) may be materially misstated.
The Committee has reviewed and is satisfied that a robust
transaction reporting system is in place between the Investment
Managers and Administrator to ensure that transactions and the
revenue received are reflected correctly.
(ii) Investment Portfolio
The investment portfolio primarily comprises loans, hire
purchase contracts and finance leases. The carrying value of these
assets is key to the financial performance of the Group and drives
returns to shareholders. The valuation models rely on a number of
inputs, such as underlying assumptions and estimates, and inherent
within any such matter of judgement is the risk that the eventual
outcome will differ from that contained within these financial
statements.
The Committee reviews the regular reports from the Investment
Managers and Administrator regarding the valuation of the
investments and with the Board reviews the NAV of the Group,
together with the value of investments on a regular basis.
(iii) Compliance
The Company is required to comply with a number of rules and
regulations including London Listing Rules, Transparency Rules,
Corporate Governance Code and any other regulatory rules in
Guernsey. In addition the Company needs to ensure that it complies
with the investment strategy set out in its Prospectus, as amended
from time to time.
The Board and the Committee regularly receive compliance reports
from the Investment Managers and the Administrator.
(iv) Fraud Risk
The risk of fraud due to management override of controls.
The Committee reviews the reports from the Investment Managers
and Administrator as to the system of checks in place to combat
fraud.
(v) Related Parties and Consolidation
The Company has a number of subsidiaries and affiliated
entities.
Consideration is given to financial reporting requirements -
primarily around consolidation (and control) and related party
disclosure.
The Administrator and Investment Manager have a number of
worksheets and documents to ensure that all subsidiaries and
affiliated entities are correctly reflected in the monthly
valuations and fed through to the financial statements. Related
party disclosure is reviewed by all parties.
Risk Management and Internal Controls
As stated earlier, the day to day management and administrative
functions are outsourced to third parties. The US Investment
Manager is also the AIFM and has responsibilities for risk
management, subject to the oversight of the Board. The Board in
turn delegates this to the Audit and Risk Committee. The Audit and
Risk Committee reports their work and findings to the Board for
approval.
The Company continues to review and develop a comprehensive risk
management framework, outsourced to the Investment Managers and the
Administrator, with a risk register that is reviewed and updated as
necessary by the Board and Audit and Risk Committee. The Audit and
Risk Committee considers the risks facing the Group and controls
and other measures in place to mitigate the impact of risks.
The work of the Audit Committee is primarily driven by the
Company's assessment of the principal risks and uncertainties as
set out in the Strategic Report and in note 17, the reports
received from the Investment Manager and the Company's risk
evaluation process.
Risk Framework and Systems of Internal Control
The Board recognises the importance of identifying, actively
monitoring and, where possible, mitigating the financial and
non-financial risks facing the business. Whilst responsibility for
risk management rests with the Board, the management of risk is
embedded as part of the everyday business and culture of the
Company and its principal advisers.
The Board has considered the need for an internal audit function
but because of the internal controls systems in place at the key
service providers, and the independent controls process performed
it has decided instead to place reliance on those control and
assurance processes.
Risk Identification
The Board and Audit and Risk Committee identify risks with input
from the Group's Investment Managers and Administrator. The Board
also receives detailed quarterly asset management reports
highlighting performance and potential risk issues on an
investment-by-investment basis.
Risk Assessment
Each identified risk is assessed in terms of probability of
occurrence, potential impact on financial performance and movements
in the relative significance of each risk from period to
period.
Action Plans to Mitigate Risk
Where new risks are identified or existing risks increase in
terms of likelihood or impact, the Audit and Risk Committee assists
the Group in developing, where possible, an action plan to mitigate
the risk and put in place enhanced monitoring and reporting.
Re-assessment and Reporting of Risk
Such risk mitigation plans are reassessed by the Audit and Risk
Committee with the relevant key service providers where applicable,
and reported to the Board on a quarterly basis. The direct
communication between the Group and its Investment Managers is
regarded as a key element in the effective management of risk (and
performance) at the underlying investment level.
External Audit
The effectiveness of the external audit process is dependent on
appropriate audit risk identification at the start of the audit
cycle. The Audit and Risk Committee received a detailed audit plan
from the Auditor identifying its assessment of the significant
audit risks. The significant risks were tracked through the year
and the Audit and Risk Committee challenged the work performed by
the Auditor to test management override of controls and in addition
the audit work undertaken in respect of valuations of unlisted
investments.
The Audit and Risk Committee assess the effectiveness of the
audit process in addressing these matters through the reporting
received from the Auditor in relation to the year end. In addition,
the Audit and Risk Committee seeks feedback from the Investment
Managers and the Administrator on the effectiveness of the audit
process. For the year ended 30 June 2017, the Audit and Risk
Committee was satisfied that there had been appropriate focus and
challenge on the significant and other key areas of audit risk and
assessed the quality of the audit process to be good.
Appointment and Independence
In its assessment of the independence of the Auditor, the Audit
and Risk Committee receives details of any relationships between
the Group and the Auditor that may have a bearing on their
independence and receives confirmation that they are independent of
the Group.
The Audit and Risk Committee considers the reappointment of the
Auditor, including the rotation of the audit engagement partner,
and assesses their independence on an annual basis. The Auditor is
required to consider rotation of the engagement partner responsible
for the audit every five years. The current audit engagement
partner, Ewan Spraggon, has overseen the audit of the Company for
three audit cycles. The Auditor has been the Group's external
auditor since incorporation.
The Audit and Risk Committee reviews the objectivity and
effectiveness of the audit process on an annual basis and considers
the audit tendering provisions of the revised UK Code in
determining whether the Company should put the audit engagement out
to tender. Having considered the quality and level of service
currently being provided by the Auditor, the Audit and Risk
Committee believes that it is in the best interests of the
shareholders to retain its services and has therefore provided the
Board with its recommendation that a resolution proposing the
reappointment of the Auditor should be put to the shareholders at
the 2017 AGM. The Auditor has indicated its willingness to continue
in office. There are no contractual obligations restricting the
Committee's choice of external auditor and the external auditor is
not indemnified by the Group.
Non-Audit Services
To safeguard the objectivity and independence of the Auditor
from becoming compromised, the Committee has a formal policy
governing the engagement of the Auditor to provide non-audit
services. The Auditor and the Directors have agreed that all
non-audit services require the pre-approval of the Audit and Risk
Committee prior to commencing any work. The Auditor will only be
appointed to provide non-audit services if it is in the best
interests of the Company. Fees for non-audit services will be
tabled annually so that the Audit and Risk Committee can consider
the impact on the Auditor's objectivity.
The Auditor is remunerated as follows for their services
rendered during the year ended 30 June 2017:
GBP
Audit of the Group's financial
statements 42,900
Interim review of the Group's
financial statements 8,792
-------
Total audit related services 51,692
-------
Agreed upon procedures for
2016 C Share issue* 17,500
Review of the 2015 C Share
conversion calculation 4,000
-------
Total non-audit services 21,500
-------
Fees for non-audit services provided during the year represent
42% of the fees for audit related services, and 29% of the total
fees paid to the auditors.
*Included in C Share Costs.
For and on behalf of the Audit and Risk Committee
Christopher Spencer
Chairman of the Audit and Risk Committee
4 October 2017
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF SQN ASSET FINANCE
INCOME FUND LIMITED
Opinion
We have audited the consolidated financial statements of SQN
Asset Finance Income Fund Limited (referred to as "the company" and
together with its subsidiaries as "the Group") for the year ended
30 June 2017 which comprise the Consolidated Statement of
Comprehensive Income, the Consolidated Statement of Financial
Position, the Consolidated Statement of Cash Flows, the
Consolidated Statement of Changes in Equity and the related notes
including a summary of significant accounting policies. The
financial reporting framework that has been applied in their
preparation is applicable Guernsey law and International Financial
Reporting Standards (IFRSs) as adopted by the European Union.
In our opinion the financial statements:
-- give a true and fair view of the state of the Group's affairs
as at 30 June 2017 and of its profit for the year then ended;
-- have been properly prepared in accordance with IFRSs as adopted by the European Union; and
-- have been prepared in accordance with the requirements of the
Companies (Guernsey) Law, 2008.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
Auditor's responsibilities for the audit of the financial
statements section of our report. We are independent of the Group
in accordance with the ethical requirements that are relevant to
our audit of the financial statements in Guernsey, including the
FRC's Ethical Standard as applied to listed public interest
entities, and we have fulfilled our other ethical responsibilities
in accordance with these requirements. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Audit commentary
A: What has changed in the current year approach?
The approach followed was consistent with the 2016 audit
strategy, enhanced in the following areas:
-- Heightened review of the investment portfolio in light of
restructured investments and potentially impaired investments. As
part of this we included elements of unpredictability in our sample
selection.
-- Heightened review of the monitoring process of the portfolio
in particular diversification limits and covenant monitoring.
B: An overview of the scope of our audit
Our audit approach is risk based and focusses on identification
of key business risks and those areas of operation that are
considered significant to the results for the year. It focuses on
the robustness and effectiveness of the company's control
environment established by management to ensure sound operational
and financial control and the mitigation of risk.
For purposes of the Group, management includes those 3(rd)
parties such as the investment managers and administrator to whom
the board has delegated responsibility for key operations and day
to day functions.
Where possible, we seek to validate and subsequently place
reliance on the controls that are in place, in order to increase
the efficiency of our audit work. Our audit comfort comes from
evaluating and validating how management monitor and control the
business and financial risks.
The Group includes the company and its 5 wholly owned
subsidiaries which are all established for the primary purpose of
acting as investment holding companies.
Our audit approach covered both pre and year end procedures
described as follows:
-- Pre-year end: In conjunction with the testing of the internal
controls, the pre-year end audit work included "walk through
testing" which was undertaken to help us understand the control
environment (including IT controls) established by management and
the entire investment process of the different investments included
in the portfolio of the Group (from deal sourcing, due diligence to
recognition in the financial statements). We obtained this
understanding from discussions/meetings with the administrator, the
investment manager(s) and the board as well as review of relevant
documentation provided.
As part of our discussions with management and the board around
the control environment and the overall business environment of the
Group, we considered a number of emerging and developing areas to
be significant for management and the board's attention on an
on-going basis. These included but were not limited to cyber risk,
development in the global tax area and short term market volatility
as a result of the Brexit vote.
-- Year end: Based on the understanding of the business, from
the pre year end testing, we undertook substantive testing on
significant balances, transactions and disclosures in line with our
risk assessment including the results of the work done at the pre
year end.
C: Our application of materiality
In accounting terms, a material error is one that, if it were
unadjusted, would cause a user of the financial statements to alter
his view of those statements or the results or the financial
position of the entity being reported on. Materiality, therefore,
is incapable of monetary definition, since it has both quantitative
and qualitative elements. Auditors examine accounts on a test
basis. The level of testing we have carried out is based on our
assessment of the risk that an item in the financial statements may
be materially misstated.
We assess risk both at the overall financial statement level and
at the individual item level. The nature and volume of audit work
we have conducted is directly related to our risk assessments. We
plan the audit to determine the extent of testing needed to reduce
to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements does not exceed
materiality for the financial statements as a whole.
In making our assessments and in particular cognisant of the
challenges of defining materiality, we considered a threshold of
GBP3,459,000 to be an indicator of materiality for the financial
statements as a whole.
This threshold was based on an average of the following figures:
0.5% of revenue, 5% of profit, 1% of gross assets and 100% of the
smallest disclosed balance. This is intended to avoid the
distorting effect of using only one financial statement figure as
the measure. We agreed with the Audit Committee to report to it all
corrected and uncorrected misstatements we identified through our
audit with a value in excess of GBP86,475, in addition to other
audit misstatements below that threshold that we believe warranted
reporting on qualitative grounds.
D: Key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team. These matters were addressed in the context of our
audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters. This is not a complete list of all risks identified in our
audit.
The key matters listed below are consistent with our 2016 audit
strategy.
(i) Revenue recognition
Revenue is classified as "finance income" in the financial
statements and primarily comprises of interest income including
from loans, leases and hire purchase agreements. The respective
Group Company enters into legal agreements with clients of varying
lengths (typically up to 10 years). The terms of the agreements are
summarised in a trade ticket which is reviewed by both the
investment manager and administrator including on a monthly basis
as part of the NAV reporting process.
The risk - As finance income is the Group's major source of
revenue and is a material item in the Statement of Comprehensive
Income, the recognition of finance income is considered to be a
significant risk.
Our response - Our audit procedures with respect to revenue
recognition included, but were not limited to: tests of control
over trade ticket terms; substantive analytical procedures and
tests of detail over balances to corroborate the value of income
and debtors during the period to the trade ticket and underlying
documentation; and testing of cash receipts or debtors records to
test the completeness of revenue.
(ii) Loans and receivables
The risk - The carrying value of the investment portfolio may be
misstated. Qualitative information about the credit quality of the
portfolio (such as on restructured and potentially impaired
investments) may not be appropriately considered and/or disclosed.
The investments primarily comprise of loans, hire purchase
contracts and finance leases.
Our response - In conjunction with the revenue testing described
above, we performed tests of control over trade ticket terms. We
also performed analytical procedures to ensure that the
amortisation schedule and carrying value were in line with relevant
IFRS requirements. We had discussions with the investment managers
around the portfolio quality as part of our audit procedures.
(iii) Compliance
The risk - The Group is required to comply with a number of
rules and regulations including Listing Rules, Transparency Rules,
Corporate Governance Code and any other regulatory rules in
Guernsey. In addition, the Group needs to ensure that it complies
with the investment strategy set out in its prospectus, as amended
from time to time.
Our response - Our audit procedures include a review for
compliance with key rules e.g. Listing Rules, Transparency Rules,
Corporate Governance Code and any other regulatory rules. We also
performed a review of Board Minutes to check for board oversight of
the compliance work carried out by the administrator and of
investment strategy compliance.
(iv) Related parties
The risk - The Company has a number of subsidiaries and
affiliated entities. In addition a number of shares have been
issued to existing shareholders/investors. Consideration needs to
be given to financial reporting requirements - primarily around
consolidation (and control) and related party disclosure - as
applicable.
Our response - Our audit procedures include use of an IFRS
disclosure checklist in addition to discussions with management on
key related party transactions and the substance of the
transactions for the purpose of the consolidated financial
statements including appropriate disclosure thereof.
(v) Management override of internal controls
The risk - ISA (UK and Ireland) 240 'The Auditor's
Responsibilities Relating to Fraud in an Audit of Financial
Statements' requires us to consider the risk of management override
of controls. There is a risk of fraud due to management override of
controls particularly as the group is controlled by a small number
of individuals with limited segregation of duties.
Our response - Our audit work included a specific review of all
significant management journals, with special focus on journals
around the year end.
Conclusions relating to principal risks, going concern and
viability statement
We have nothing to report in respect of the following
information in the annual report, in relation to which the ISAs
(UK) require us to report to you whether we have anything material
to add or draw attention to:
-- the directors' confirmation in the Annual Report that they
have carried out a robust assessment of the principal risks facing
the entity, including those that would threaten its business model,
future performance, solvency or liquidity;
-- the disclosures in the annual report that describe those
risks and explain how they are being managed or mitigated;
-- the directors' statement in the financial statements about
whether they considered it appropriate to adopt the going concern
basis of accounting in preparing them, and their identification of
any material uncertainties to the entity's ability to continue to
do so over a period of at least twelve months from the date of
approval of the financial statements; and
-- the director's explanation in the Annual Report as to how
they have assessed the prospects of the entity, over what period
they have done so and why they consider that period to be
appropriate, and their statement as to whether they have a
reasonable expectation that the entity will be able to continue in
operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
Other information and matters on which we are required to report
by exception
The other information comprises all of the information included
in the annual report other than the financial statements and our
auditor's report thereon. The directors are responsible for the
other information.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated
in our report, we do not express any form of assurance conclusion
thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a
material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of the other information, we are required to report that fact.
We have nothing to report in respect of the following:
Under the ISAs (UK and Ireland), we are required to report to
you if, in our opinion, information in the annual report is:
-- materially inconsistent with the information in the audited financial statements; or
-- apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the Group acquired in the
course of performing our audit; or
-- is otherwise misleading.
In particular, we are required to consider whether we have
identified any inconsistencies between our knowledge acquired
during the audit and the directors' statement that they consider
the annual report is fair, balanced and understandable and whether
the annual report appropriately discloses those matters that we
communicated to the audit committee which we consider should have
been disclosed.
We also consider whether the section describing the work of the
audit committee appropriately addresses matters communicated by us
to the audit committee.
Under the Companies (Guernsey) Law 2008 we are required to
report to you if, in our opinion:
-- the company has not kept proper accounting records; or
-- the financial statements are not in agreement with the accounting records and returns; or
-- we have not received all the information and explanations
which to the best of our knowledge and belief are necessary for the
purposes of our audit.
Under the Listing Rules we are required to review:
-- the Directors' Statement, in relation to going concern and longer term viability; and
-- the part of the Corporate Governance Statement relating to
the company's compliance with the provisions of the UK Corporate
Governance Code specified for our review.
In the light of the knowledge and understanding of the group and
its environment obtained in the course of the audit, we have not
identified material misstatements in:
-- the strategic report or the directors' report; or
-- the information about internal control and risk management
systems in relation to financial reporting processes and about
share capital structures, given in compliance with applicable
legislation.
Responsibilities of the directors
As explained more fully in the directors' responsibilities
statement, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Group's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or the parent
company or to cease operations, or have no realistic alternative
but to do so.
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditors report.
Use of this report
This report is made solely to the Company's members, as a body,
in accordance with Section 262 of the Companies (Guernsey) Law,
2008. Our audit work is undertaken so that we might state to the
Company's members those matters we are required to state to them in
an auditors' report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
Baker Tilly CI Audit Limited
Chartered Accountants
St. Sampsons, Guernsey
Date: 4 October 2017
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 June 2017
Notes Year ended Year ended
30 June 30 June
2017 2016
GBP GBP
Income
Finance income 31,429,726 17,709,536
Interest on cash and cash
equivalents 278,468 486,926
Other income 855,267 1,656,788
------------- ---------------
Total income 2.6 32,563,461 19,853,250
------------- ---------------
Net unrealised gain on revaluation
of investments 245,435 288,266
Net unrealised foreign exchange
(loss)/gain on investments (940,552) 16,626,443
Net unrealised foreign exchange
gain/(loss) on forward contracts 12,102,788 (10,263,615)
Net realised foreign exchange
gain on investments 6,298,649 1,829,076
Net realised foreign exchange
loss on forward contracts (18,157,629) (11,005,490)
-------------
Net realised and unrealised
loss (451,309) (2,525,320)
------------- ---------------
Expenses
Investment management fees 3a (4,355,085) (2,893,765)
Directors' fees and travel
expenses (194,668) (202,593)
Other operating expenses 3b,4 (1,380,560) (801,295)
Depreciation 7 (443,056) (351,768)
------------- ---------------
Total operating expenses (6,373,369) (4,249,421)
------------- ---------------
Total comprehensive income
for the year 25,738,783 13,078,509
-------------
Total comprehensive income/(loss)
for the year /period analysed
as follows:
Attributable to Ordinary
shareholders 25,762,796 11,892,845
Attributable to 2016 C shareholders (24,013) -
Attributable to 2015 C shareholders - 1,185,664
------------- ---------------
Total 25,738,783 13,078,509
------------- ---------------
Basic and diluted earnings
per Ordinary Share 5 8.58p 6.64p
Basic and diluted loss per
2016 C Share 5 (0.02)p -
Basic and diluted earnings
per 2015 C Share 5 - 0.66p
All results are derived from continuing operations.
The Group has no items of other comprehensive income, and
therefore the profit for the year is also the total comprehensive
income.
The accompanying notes form an integral part of these financial
statements.
CONSOLIDATED Statement of Financial Position
As at 30 June 2017
Notes 30 June 30 June
2017 2016
GBP GBP
Non-current assets
Property, plant and equipment 7 6,218,601 4,631,548
Residual value of finance
lease investments 2.4 1,265,303 1,041,623
Investments designated as
fair value through profit
or loss 8.2 4,598,099 4,373,701
Finance lease and hire-purchase
investments 9 103,549,225 62,389,028
Loans and other investments 8.1 258,294,814 205,944,354
373,926,042 278,380,254
Current assets
Cash and cash equivalents 2 154,568,616 87,815,244
Interest receivables 10 3,848,999 2,494,276
Other receivables and prepayments 10 3,809,092 1,974,907
Investment receivables 10 876,451 173,632
163,103,158 92,458,059
Total assets 537,029,200 370,838,313
------------ -------------
Current liabilities
Other payables and accrued
expenses 11 (1,174,026) (792,595)
Investment payables (74,946) (1,836)
Derivative financial liabilities 8.2,17 (2,876,663) (15,213,964)
------------ -------------
(4,125,635) (16,008,395)
Net assets 532,903,565 354,829,918
============ =============
Equity
Share capital 13 530,606,210 353,716,434
Retained earnings 2,297,355 1,113,484
------------ -------------
532,903,565 354,829,918
============ =============
NAV per Share
* Ordinary Shares 6 99.63p 99.45p
* 2016 C Shares 6 98.06p -
* 2015 C Shares 6 - 98.24p
These Consolidated Financial Statements were approved and
authorised for issue by the Board of Directors on 4 October 2017,
and signed on its behalf by:
Peter Niven Christopher Spencer
Director Director
The accompanying notes form an integral part of these financial
statements.
CONSOLIDATED Statement of Changes in Equity
For the year ended 30 June 2017
Net Assets Attributable
to Shareholders
Notes Share Retained
Capital Earnings Total
GBP GBP GBP
As at 1 July 2016 353,716,434 1,113,484 354,829,918
Total comprehensive
income for the year - 25,738,783 25,738,783
Transactions with shareholders
Issue of 2016 C Shares 13 180,000,000 - 180,000,000
2016 C Shares issue
costs 13 (3,110,224) - (3,110,224)
Dividends paid 14 - (24,554,912) (24,554,912)
Total transactions with
shareholders 176,889,776 (24,554,912) 152,334,864
------------ ------------- -------------
As at 30 June 2017 530,606,210 2,297,355 532,903,565
============ ============= =============
For the year ended 30 June 2016
Net Assets Attributable
to Shareholders
Share Retained
Notes Capital Earnings Total
GBP GBP GBP
As at 1 July 2015 176,808,446 2,046,797 178,855,243
Total comprehensive
income for the year - 13,078,509 13,078,509
Transactions with shareholders
Issue of 2015 C Shares 13 180,000,000 - 180,000,000
2015 C Shares issue
costs 13 (3,092,012) - (3,092,012)
Dividends paid 14 - (14,011,822) (14,011,822)
Total transactions with
shareholders 176,907,988 (14,011,822) 162,896,166
------------ ------------- -------------
As at 30 June 2016 353,716,434 1,113,484 354,829,918
============ ============= =============
The accompanying notes form an integral part of these financial
statements.
CONSOLIDATED Statement of Cash Flows
For the year ended 30 June 2017
Note Year ended Year ended
30 June 30 June
2017 2016
GBP GBP
Operating activities:
Total comprehensive income
for the year 25,738,783 13,078,509
Adjustments for:
Unrealised gain on investments (245,435) (288,266)
Unrealised foreign exchange
gain in the year (11,162,236) (6,362,828)
Depreciation 7 443,056 351,768
Realised foreign exchange gain
on investments (6,298,649) (1,829,076)
Increase in interest receivable (1,354,723) (949,488)
(Increase)/decrease in investment
receivables (702,819) 225,840
Increase in other receivables
and prepayments (1,834,185) (1,100,067)
Increase/(decrease) in investment
payables 73,110 (128,164)
Increase in other payables
and accrued expenses 11 381,431 355,192
Acquisition of investments 7,8,9 (131,535,563) (203,357,736)
Amortisation of investment
principal during the year 8,9 35,620,919 42,613,143
Disposals during the year 8 5,529,332 -
-------------- --------------
Net cash outflow from operating
activities (85,346,979) (157,391,173)
Cash flow from financing activities
Share issue (net proceeds) 13 176,889,776 176,907,988
Dividends paid 14 (24,554,912) (14,011,822)
-------------- --------------
Net cash flows provided by
financing activities 152,334,864 162,896,166
Net increase in cash and cash
equivalents 66,987,885 5,504,993
Cash and cash equivalents at
start of the year 87,815,244 75,654,965
Effect of exchange rate changes
on cash and cash equivalents (234,513) 6,655,286
-------------- --------------
Cash and cash equivalents at
end of the year 154,568,616 87,815,244
============== ==============
The accompanying notes form an integral part of these financial
statements.
NOTES TO THE FINANCIAL STATEMENTS
1. General Information
The Company was incorporated on 28 May 2014 and registered in
Guernsey as a Closed-ended Collective Investment Scheme. The
Company's registered office is BNP Paribas House, St Julian's
Avenue, St Peter Port, Guernsey, GY1 1WA. The Company's Ordinary
Shares were admitted to the Official List of the UK Listing
Authority and to trading on the Main Market of the London Stock
Exchange on 14 July 2014.
In November 2015, the Group raised additional capital by the
issuance of the 2015 C Shares, which were listed on the Main Market
of the London Stock Exchange. Net proceeds of GBP176,907,988 were
raised through the issue of 180,000,000 2015 C Shares. On 25
October 2016, the 2015 C Shares were converted to Ordinary Shares
using a conversion ratio of 0.9929 Ordinary Shares for each 2015 C
Share. The conversion ratio was based on the NAV per 2015 C Share
as at 14 October 2016, which was the conversion date (the
"Conversion Date") (refer to note 13).
In December 2016, the Group raised additional capital by the
issuance of the 2016 C Shares. Net proceeds of GBP176,889,776 were
raised through the issue of 180,000,000 2016 C Shares. The 2016 C
Shares are listed separately on the Main Market of the London Stock
Exchange and were admitted on 12 December 2016 (refer to note
13).
The 2016 C Shares net proceeds and the investments made with the
net proceeds will be accounted for and managed as a separate pool
of assets in accordance with the Company's investment policy until
the conversion of 2016 C Shares to Ordinary Shares. The terms and
timing of the conversion of the 2016 C Shares to Ordinary Shares
will be announced at a later date. Expenses are split between
Ordinary Shares and 2016 C Shares in proportion to their respective
NAV.
The Company's subsidiaries, SQN Asset Finance (Guernsey)
Limited, SQN AFIF (AMBER) Limited, SQN AFIF (BRONZE) Limited, SQN
AFIF (Cobalt) Limited and SQN AFIF (Diamond) Limited (the
"Subsidiaries") are wholly owned Subsidiaries incorporated in
Guernsey and established for the primary purpose of acting as
investment holding companies (refer to note 2.1(e) for further
details). The Subsidiaries' registered office is BNP Paribas House,
St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA.
2. Accounting Policies
The principal accounting policies applied in the preparation of
these financial statements are set out below. These policies have
been consistently applied throughout all the years presented,
unless otherwise stated.
2.1 Basis of Preparation
(a) Statement of Compliance
The audited consolidated financial statements for the year ended
30 June 2017 have been prepared in accordance with IFRS as adopted
by the European Union ("EU"), which comprise standards and
interpretations approved by the International Accounting Standards
Board together with the interpretations of IFRS and the Standing
Interpretations Committee as approved by the International
Accounting Standards Committee. They give a true and fair view of
the Group's affairs and comply with The Company (Guernsey) Law
2008, as amended.
(b) Going Concern
Going concern refers to the assumption that the Company has the
resources to continue in operation for the foreseeable future,
being twelve months from the date of approval of the Consolidated
Financial Statements. After reviewing the Group's budget and cash
flow forecast for the next financial period, the Directors are
satisfied that, at the time of approving the Consolidated Financial
Statements, it is appropriate to adopt the going concern basis in
preparing the Consolidated Financial Statements.
(c) New Standards, Amendments and Interpretations Not Adopted in
these Consolidated Financial Statements
There were no new standards, amendments or interpretations
effective for the first time for the current reporting period that
had a material impact on the Group or Company.
Detailed below are new standards, amendments and interpretations
to existing standards that become effective in future accounting
periods which have not been adopted by the Group:
Effective for
periods beginning
IFRS on or after
--------------------------------- ------------------------
IFRS 15 - Revenue from Contracts 1 January 2018
with Customers
IFRS 9 - Financial Instruments 1 January 2018
IFRS 16 - Leases (subject to EU 1 January 2019
endorsement)
The Directors have not yet fully assessed the impact that these
new standards will have on the Consolidated Financial Statements of
the Group. The new standards will be applied to periods on or after
the effective date.
(d) Functional and Presentation Currency
Items included in the Consolidated Financial Statements of the
Group are measured using Sterling as the currency of the primary
economic environment in which the Group operates (the "Functional
Currency"). The Financial Statements are presented in Sterling,
which is the Group's presentation currency.
(e) Consolidation
Subsidiaries are all entities (including special purpose
entities) over which the Company has the power to govern the
financial and operating policies generally accompanying a
shareholding of more than one half of the voting rights. The
existence and effect of potential voting rights that are currently
exercisable or convertible are considered when assessing whether
the Company controls another entity. The principal place of
business of the Subsidiaries is Guernsey.
In accordance with IFRS 10 - Consolidated Financial Statements
("IFRS 10"), if the Company meets the definition of an investment
entity ("IE") it qualifies for a consolidation exemption. The
relevant provisions for an IE under IFRS 10 are set out below.
IFRS 10.27 - An IE is an entity that:
a. obtains funds from one or more investors for the purpose of
providing those investor(s) with investment management
services;
b. commits to its investor(s) that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income, or both; and
c. measures and evaluates the performance of substantially all
of its investments on a fair value basis.
IFRS 10.28 - An entity shall consider whether it has the
following characteristics of an IE:
a. it has more than one investment;
b. it has more than one investor;
c. it has investors that are not related parties of the entity; and
d. it has ownership interests in the form of equity or similar interests.
The Board considered all the above factors and noted that whilst
it might meet many of the IE criteria, as it does not measure and
evaluate the performance of substantially all of its investments on
a fair value basis, the Directors' have concluded that the Company
does not meet the definition of an IE and does not qualify for the
IFRS 10 consolidation exemption. The Subsidiaries have therefore
been consolidated into these Consolidated Financial Statements.
(f) Critical Accounting Judgements and Key Sources of Estimation
Uncertainty
The preparation of the Consolidated Financial Statements in
accordance with IFRS requires management to make judgements,
estimates and assumptions that affect the application of policies
and the reported amounts of assets and liabilities, income and
expenses. The estimates and associated assumptions are based on
various factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making
judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision affects
only that period, or in the period of the revision and future
periods, if the revision affects both current and future
periods.
In the normal course of business, the Board, under the advice of
the Investment Managers make certain assumptions about residual
values (note 2.4), useful life of equipment (note 2.5), and asset
impairment (note 2.3(c)).
2.2 Foreign Currency Translation
Transactions in currencies other than the Functional Currency
are recorded using the exchange rate prevailing at the transaction
date. Foreign exchange gains and losses resulting from the
settlement of such transactions and those from the translation at
year end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the Statement
of Comprehensive Income.
Translation differences on non-monetary items such as financial
assets at fair value through profit or loss are reported as part of
net gains or losses on financial assets through profit or loss the
Statement of Comprehensive Income.
2.3 Financial Assets
a) Classification and Measurement
Financial assets are classified into the following specified
categories: financial assets at fair value through profit or loss
("FVTPL") and loans and receivables. The classification depends on
the nature and purpose of the financial assets and is determined at
the time of initial recognition.
Financial assets designated at fair value through profit or loss
at inception
Financial assets designated at fair value through profit or loss
at inception are financial instruments that are managed and their
performance is evaluated on a fair value basis in accordance with
the Group's documented investment strategy.
The Group's policy requires the Investment Managers and the
Directors to evaluate the information about these financial assets
on a fair value basis together with other related financial
information. Financial assets at fair value through profit are
recognised at fair value and changes in fair value are recorded in
the Statement of Comprehensive Income.
Loans and receivables
Trade receivables, loans, and other receivables that have fixed
or determinable payments that are not quoted in an active market
are classified as loans and receivables. Loans and receivables are
measured at amortised cost using the effective interest method,
less any impairment.
Financial assets, other than those at FVTPL, are assessed for
indicators of impairment at the end of each reporting period.
Financial assets are considered to be impaired when the value of
the asset is less than the carrying value on the Group's Financial
Statements. When assessing impairment, the Investment Managers
consider the ability of the end-user to make all contracted
payments due to the Group, the delinquency status of each account,
and the value of the equipment or assets relative to all
outstanding obligations in the case of defaults. In assessing
residual values for the purpose of impairment, each account is
reviewed at least annually and third-party appraisals used when
necessary.
Income is recognised on an effective interest basis for debt
instruments other than those financial assets classified as at
FVTPL. Gains and losses are recognised in the Statement of
Comprehensive Income when loans and receivables are derecognised or
impaired, as well as through the amortisation process.
b) Recognition and De-Recognition
The Group initially recognises loans and receivables on the date
when they are originated. All other financial assets are initially
recognised on the trade date.
The Group derecognises a financial asset when the contractual
rights to the cash flows from the asset expire, or it transfers the
rights to receive the contractual cash flows in a transaction in
which substantially all the risk and rewards of ownership of the
financial asset are transferred, or it neither transfers nor
retains substantially all the risk and rewards of ownership and
does not retain control over the transferred asset. Any interest in
such derecognised financial assets that is created or retained by
the Group is recognised as a separate asset or liability.
Financial assets are offset and the net amount presented in the
Statement of Financial Position when, and only when, the Group has
a legal right to offset the amounts and intends either to settle
them on a net basis or to realise the asset.
The Group derecognises a financial liability when its
contractual obligations are discharged, cancelled or expired.
c) Fair Value Estimation
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
The fair value measurement is based on the presumption that the
transaction to sell the asset or transfer the liability is
conducted in either:
-- the principal market for the asset or liability; or
-- in the absence of a principal market, the most advantageous
market for the asset or liability.
The fair value of an asset or liability is measured using the
assumption that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
A fair value measurement of a non-financial asset takes into
account a market participant's ability to generate economic
benefits by using the asset in its highest and best use capacity or
by selling it to another market participant that would use the
asset in its highest and best use capacity.
The Board assesses at each reporting date whether a financial
asset or group of financial assets is impaired.
If there is objective evidence that an impairment of the
principal on loans and receivables carried at amortised cost has
been incurred, the amount of the loss is measured as the difference
between the asset's carrying amount and the present value of
estimated future cash flows discounted at the financial asset's
original effective interest rate. The carrying amount of the asset
is reduced and the amount of the loss is recognised in the
Statement of Comprehensive Income.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised, the previously
recognised impairment loss is reversed. Any subsequent reversal of
an impairment loss is recognised in the Statement of Comprehensive
Income to the extent that the carrying value of the asset does not
exceed its amortised cost at the reversal date.
2.4 Finance Lease and Hire-Purchase Investments
The Group, as lessor, categorises finance leases and hire
purchase investments as lease arrangements where the terms of the
lease transfer substantially all risks and rewards of ownership to
the lessee (in accordance with the requirements of IAS 17 -
Leases). Hire-purchase investments include a purchase option
exercisable by the lessee upon fulfilment of specified conditions.
Under such arrangements, at the commencement of the lease term, the
Group records finance lease and hire-purchase investments in the
Statement of Financial Position as a receivable, at an amount equal
to the net investment in the lease.
The net investment in the lease is equal to the gross investment
in the lease (minimum lease payments receivable by the Group under
finance lease and hire-purchase investments plus any unguaranteed
residual value accruing to the Group) discounted by the interest
rate implicit in the lease.
On subsequent measurement, the Group splits the minimum payments
received under the lease between finance income and reduction of
the lease receivable.
The Group applies the principles of IAS 39 - Financial
Instruments: Recognition and Measurement ("IAS 39"), to lease
receivables with respect to the derecognition and impairment
provisions.
Residual Value on Finance Leases
The unguaranteed residual value on finance leases is calculated
by estimating the fair market value of the leased assets less the
lease payments from the lessee.
Estimates of market value are based on a number of assumptions
including, but not limited to, the in-place value of the equipment
or assets to the end-user, the secondary market value of similar
assets and equipment, the replacement cost of the asset or
equipment including the cost of de-installation and re-delivery,
and the Investment Managers' own assumptions based on historical
experience.
2.5 Property, Plant and Equipment
Property, Plant and Equipment comprises operating leases of
marine assets, which the Group categorises as a lease arrangement
in which a significant portion of the risks and rewards of
ownership are retained by the lessor (in accordance with the
requirements of IAS 17- Leases).
Assets held for use under operating leases are measured at cost
less depreciation and are depreciated on a straight line basis over
the remaining useful life.
Estimates of the useful life of equipment are based on
manufacturers' recommendations, the age of similar products in the
market, the intended use and utilisation of the equipment, and the
Investment Managers' own assumptions based on historical
experience.
2.6 Income
Income is recognised to the extent that it is probable that
economic benefits will flow to the entity and can be reliably
measured.
Finance income from finance leases is recognised in the
Statement of Comprehensive Income based on a pattern reflecting a
constant periodic rate of return on the net investment outstanding
in respect of the finance lease.
Income on cash and cash equivalents relates to interest
receivable on cash and cash deposits with banks.
Other income relates to upfront commitment and facility fees
received by the Group in connection to the lease and loan
undertakings. The income is recognised in the Statement of
Comprehensive Income immediately when the loan or lease agreements
are approved and signed.
2.7 Interest Income and Expenses
Interest income and expenses are recognised in the Statement of
Comprehensive Income at the effective interest rate.
2.8 Issue Costs
Costs directly incurred on share issues are netted off against
the share issue proceeds.
2.9 Dividends Payable
The Group pays dividends to Shareholders subject to the solvency
test prescribed by Guernsey Law. Refer to note 14 for details of
dividend activity during the year.
2.10 Cash and Cash Equivalents
Cash and cash equivalents comprise cash at bank, and deposits
held at call with banks. Cash equivalents are short-term, highly
liquid investments that are readily convertible to known amounts of
cash and are subject to insignificant risk of changes in value.
2.11 Taxation
Profits arising in the Company are subject to tax at the
standard rate of 0%. The Subsidiaries are exempt from Guernsey
taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance,
1989 for which they each pay an annual fee of GBP1,200.
2.12 Derivative Financial Instruments
The Group makes use of derivative financial instruments to
manage its exposure to foreign exchange rate risk, including but
not restricted to the use of foreign exchange forward contracts. A
derivative with a positive fair value is recognised as a financial
asset and a derivative with a negative fair value is recognised as
a financial liability. Further details on derivative financial
instruments are disclosed in notes 8.2 and 17.
2.13 Equity Holdings
As at 30 June 2017, the Group had provided (or committed to
provide) asset finance facilities in the form of construction
finance and hire purchase investments to six anaerobic digestion
plants (30 June 2016: five anaerobic digestion plants).
In addition to these finance arrangements the Group acquired a
25.5% equity holding in each investee company. The terms of the
shareholder agreement included an option (the "Call Option"),
exercisable by the developer upon or following full repayment of
the asset finance/loan, to purchase the Group's shares at a price
that will produce a maximum 12% per annum return on capital to the
Group, taking account of both interest paid under the debt
facilities and (if applicable) any dividends, assuming each project
is fully delivered.
The equity holdings do not qualify for equity method accounting
under IAS 28 - Investments in Associate - as, although the Group
holds greater than 20% of the voting power in each of the
investees, the Board judge that the Group does not have significant
influence due to the following factors for each investment:
-- The equity holdings can be bought back at the developer's
discretion once conditions per the shareholder agreement are
satisfied.
-- The return is fixed at a maximum of 12% per annum across the
entire investment (loan and shares). If the investment performs
better than expected, the developer will exercise the option to
purchase the shares at the agreed price and therefore the Group has
no realistic chance of participating in residual value.
In accordance with IAS 39, the separate investment in the shares
is measured initially at cost and subsequently at fair value
through profit or loss, taking into account all information
available including possible future cash flows, progress of the
projects and the call option available to the developer.
The Board are in ongoing communications with the Investment
Managers and from discussions and review of relevant information
available, believe that the fair value of the Call Options
throughout the period and as at 30 June 2017 is GBPnil.
2.14 Comparatives
The comparatives in the Consolidated Statement of Comprehensive
Income, Consolidated Statement of Financial Position, Consolidated
Statement of Changes in Equity and Consolidated Statement of Cash
Flows are not entirely comparable to the current year as they did
not include the 2016 C Shares, which were launched in December
2016.
3. Material Agreements
a) Investment Management Agreement
The Company's investments are managed by the Investment
Managers. Under the terms of the Investment Management Agreement
dated 16 June 2014, the Company appointed the Investment Managers
to provide management services to the Company. The Investment
Managers are together entitled to a management fee which is
calculated and accrued monthly and payable monthly in arrears at
the following rate per annum of the Group's NAV:
On first GBP300 million of the NAV 1.00%
On GBP300 million - GBP500 million of the NAV 0.90%
Any amount greater than GBP500 million of the NAV 0.80%
In addition to the above fee, the Investment Managers are
entitled to receive an additional fee where either of them or their
affiliates provides structuring advice and/or services in
connection with the acquisition (but not the disposal) of any
investment. The fee will be equal to 1% of the transaction
amount.
The Investment Managers are not entitled to any incentive or
performance based fees.
Refer to note 18 for details on fees paid during the year to the
Investment Managers.
b) Administration and Custodian Agreement
The Company has engaged the services of the Administrator to
provide administration and custodian services. With effect from 1
July 2015, under the terms of the revised schedule 2 of the
Administration and Custody Agreement dated 16 June 2014, the
Administrator is entitled to receive an annual administration fee
based on the Group's gross issue proceeds on a tiered percentage
basis.
The Administrator receives an annual fee of GBP36,000 for
performing the function of Secretary to the Company plus fees for
ad-hoc Board meetings and an annual fee of GBP10,000 for provision
of compliance services.
The Administrator is due a fee of GBP10,000 for each share
launch and an annual fixed fee of GBP5,000 for each Guernsey
Subsidiary (for up to seven Guernsey subsidiaries).
c) Registrar Agreement
Capita Registrars (Guernsey) Limited has been appointed as
registrar of the Company pursuant to the registrar agreement dated
16 June 2014. The fee is charged at a rate of GBP1.60 per holder of
Ordinary Shares and 2016 C Shares appearing on the register,
subject to a minimum fee of GBP5,000 per annum, plus
disbursements.
d) Placing Agreements
The Company, the US Manager, the UK Manager, the Sub-Investment
Manager, the Directors and Winterflood Securities Limited
("Winterflood") entered into a Placing and Offer Agreement on 16
June 2014. In addition, there are engagement letters dated 14 July
2014 and 15 September 2015 between the Company and Winterflood. In
accordance with the Placing and Offer Agreement and the engagement
letters, Winterflood acts as sponsor, financial advisor and sole
book runner in connection with the issue and/or the placing
programme. For their services, Winterflood are entitled to an
annual brokerage and advisory fee of GBP45,000 and commission fees
of 1% and 0.5% of the gross value of any share issues and
repurchases respectively. Winterflood were also entitled to
commission fees of 1.5% on the gross proceeds of the 2015 C Shares
and the 2016 C Shares which were issued in November 2015 and
December 2016 respectively.
4. Other Operating Expenses
30 June 30 June
2017 2016
GBP GBP
Administration and secretarial
fees 429,730 333,186
Audit fees 51,692 48,440
Brokerage fees 45,530 46,087
Public relation fees 50,053 46,070
Registrar fees 44,929 42,661
Legal fees 17,508 15,674
Professional fees 178,853 108,917
Commission fees 237,204 -
Transaction fees 70,865 14,808
Other expenses 254,196 145,452
Total 1,380,560 801,295
========== ========
5. Basic and Diluted Earnings/(Loss) per Share
30 June 2017 Ordinary Shares 2016 C Share 2015 C Share
Total comprehensive
income/(loss)
for the year GBP25,762,796 GBP(24,013) -
Weighted average
number of shares
in issue during
the year 300,418,537 100,602,740 -
Basic and diluted
earnings/(loss)
per share 8.58p (0.02)p -
30 June 2016 Ordinary Shares 2016 C Share 2015 C Share
Total comprehensive
income for the
year GBP11,892,845 - GBP1,185,664
Weighted average
number of shares
in issue during
the year 178,985,507 - 180,000,000
Basic and diluted
earnings per
share 6.64p - 0.66p
6. NAV per Share
30 June 2017 Ordinary Shares 2016 C Shares 2015 C Shares
NAV GBP356,397,803 GBP176,505,762 -
Number of shares
in issue at
year end 357,707,507 180,000,000 -
NAV per share 99.63p 98.06p -
30 June 2016 Ordinary Shares 2016 C Shares 2015 C Shares
NAV GBP177,996,266 - GBP176,833,652
Number of shares
in issue at
year end 178,985,507 - 180,000,000
NAV per share 99.45p - 98.24
7. Property, Plant and Equipment
Property, Plant and Equipment comprises plant and machinery
originally subject to:
a) a hire purchase agreement which was re-leased to an
alternative third party under an operating lease. The asset has a
remaining useful life of 12.5 years (30 June 2016: 13.5 years).
b) a finance lease which was re-leased to an alternative third
party under an operating lease during the year ended 30 June 2017.
The asset has a remaining useful life of 14 years.
The carrying amount is detailed in the table below:
30 June 30 June
2017 2016
Cost GBP GBP
Opening balance 5,100,572 5,100,572
Additions during the 44,522 -
year
Reclassified investments(1) 1,985,587 -
Closing balance 7,130,681 5,100,572
---------- ----------
Accumulated depreciation
Opening balance (469,024) (117,256)
Depreciation during
the year (443,056) (351,768)
---------- ----------
Closing balance (912,080) 469,024
---------- ----------
Net book value 6,218,601 4,631,548
---------- ----------
(1) This item relates to an investment that has been
reclassified from the Finance Lease investments category (as
detailed in note 7(b) above). Please refer to note 9 for additional
information.
8. Financial Instruments
8.1 Loans and Other Investments
The following table summarises the changes in investments
measured at amortised cost using the effective interest method:
30 June 2017 Loans Construction Receivables Total
Finance
GBP GBP GBP GBP
Opening balance 92,965,222 103,530,815 9,448,317 205,944,354
Advances and purchases
during the year 43,474,375 75,989,773 - 119,464,148
Principal amortisation
during the year (11,145,150) (8,231,726) (4,173,990) (23,550,866)
Disposals (5,401,127) (128,205) - (5,529,332)
Reclassified investments(1) 21,139,325 (63,995,135) - (42,885,810)
Realised foreign
exchange gain on
investments 1,442,156 3,891,701 533,765 5,867,622
Unrealised foreign
exchange gain on
revaluation 990,329 (1,783,446) (252,185) (1,045,302)
Closing balance 143,465,130 109,273,777 5,555,907 258,294,814
--------------- -------------- -------------- ---------------
30 June 2016 Loans Construction Receivables Total
Finance
GBP GBP GBP GBP
Opening balance 47,664,651 22,131,934 2,845,605 72,642,190
Advances and purchases
during the year 66,985,094 98,071,965 8,638,201 173,695,260
Principal amortisation
during the year (33,854,841) (1,037,392) (3,015,862) (37,908,095)
Reclassified investments(2) - (20,290,025) - (20,290,025)
Realised foreign
exchange gain on
investments 1,689,357 22,324 108,137 1,819,818
Unrealised foreign
exchange gain on
revaluation 10,480,961 4,632,009 872,236 15,985,206
Closing balance 92,965,222 103,530,815 9,448,317 205,944,354
--------------- -------------- -------------- ---------------
(1) This item relates to advances in the Construction Finance
investments category that were reclassified as additions in the
Loans investment category in the sum of GBP21,139,325 as noted
above, and Finance Lease and Hire-Purchase investment categories in
the sum of GBP31,933,393 and GBP10,922,417 respectively, as
detailed in note 9.
(2) This item relates to advances in the Construction Finance
category that were reclassified as additions in the Finance Lease
and Hire-Purchase investment categories in the sum of GBP2,880,118
and GBP17,409,907 respectively, as detailed in note 9.
Construction Finance investments comprise initial drawings or
advances made under loan agreements, finance leases or
hire-purchase agreements during a period of procurement or
construction of underlying assets (the "Construction Period").
During the Construction Period, interest or similar service
payments on the advances may be paid or (more usually) rolled-up
and capitalised on expiry of the Construction Period, typically
when the assets have been commissioned and (if applicable)
commercial operations have commenced.
The amortisation period (in the case of a loan) or lease/hire
term (in the case of a finance lease or hire-purchase) commences at
the end of the Construction Period and the service payments or
lease/hire payments rentals are calculated by reference to the
total advances during the Construction Period plus interest accrued
(if not paid). In the case of a finance lease, the advances (and
accrued interest) are repayable in full if a default or insolvency
event occurs or if the Construction Period has not ended by a
specified long-stop date.
Receivables comprise the legal right to streams of contracted
payments arising under lease, hire, licence or similar agreements
made between an end-user, lessee or licensee and lessor, owner or
licensor of goods or other assets, in respect of which the right to
receive payment has been sold or assigned absolutely to the Group
by a third party, but legal title to the goods or other assets lies
with that third party.
8.2 Fair Value Investments
The Group's accounting policy on fair value measurements is
discussed in note 2.3(c).
The Group measures fair values using the following fair value
hierarchy that reflects the significance of the inputs used in
making the measurements:
Level 1: Inputs that reflect unadjusted price quotes in active
markets for identical assets or liabilities that the Group has the
ability to access at the measurement date;
Level 2: Inputs that reflect price quotes of similar assets and
liabilities in active markets, and price quotes of identical assets
and liabilities in markets that are considered to be less than
active as well as inputs other than price quotes that are
observable for the asset or liability either directly or
indirectly; and
Level 3: Inputs that are unobservable for the asset or liability
and reflect the Investment Managers' own assumptions based upon
experience of similar assets and/or on third party appraised
values. This category includes instruments that are valued based on
price quotes for which the inputs are unobservable or price quotes
for similar instruments for which significant unobservable
adjustments or assumptions are required to reflect differences
between the instruments.
The fair values of derivative instruments are calculated using
quoted prices. Foreign currency forward contracts are measured
using quoted forward exchange rates and yield curves derived from
quoted interest rates matching maturities of the contracts.
For financial assets not carried at amortised cost, the
Investment Managers determine fair value using valuation techniques
approved by the Directors.
The following table details the Company's fair value
hierarchy.
30 June 2017 Level Level Level Total
1 2 3 GBP
GBP GBP GBP
Financial assets
Designated at fair value
through profit
or loss (Lease Participation) - - 4,598,099 4,598,099
Finance lease residual
value - - 1,265,303 1,265,303
Equity holding(1) - - - -
------- ------------ ------------ ------------
Total financial assets - - 5,863,402 5,863,402
------- ------------ ------------ ------------
Financial liabilities
Derivative liabilities - (2,876,663) - (2,876,663)
------- ------------ ------------ ------------
Total financial liabilities - (2,876,663) - (2,876,663)
------- ------------ ------------ ------------
30 June 2016 Level Level Level Total
1 2 3 GBP
GBP GBP GBP
Financial assets
Designated at fair value
through profit
or loss (Lease Participation) - - 4,373,701 4,373,701
Finance lease residual
value - - 1,041,623 1,041,623
Equity holding(1) - - - -
------- ------------- ------------ -------------
Total financial assets - - 5,415,324 5,415,324
------- ------------- ------------ -------------
Financial liabilities
Derivative liabilities - (15,213,964) - (15,213,964)
------- ------------- ------------ -------------
Total financial liabilities - (15,213,964) - (15,213,964)
------- ------------- ------------ -------------
(1) Refer to note 2.13 for further details on the equity
holding.
The following table summarises the changes in the fair value of
the Group's Level 3 investments:
30 June 30 June
2017 2016
GBP GBP
Opening balance 5,415,324 4,387,648
Additions during the year 235,549 183,821
Principal amortisation during the
year (162,332) (94,916)
Realised foreign exchange gain on
investments 24,676 9,258
Unrealised foreign exchange gain
on revaluation 350,185 929,513
---------- ----------
Closing balance 5,863,402 5,415,324
---------- ----------
Transfers between levels are deemed to have occurred at the date
of the event or change in circumstances that caused the transfer.
There were no transfers of investments between the Levels during
the year.
The Lease Participation investments represent a single
participation investment in a portfolio of leases. The carrying
value of GBP4,598,099 (30 June 2016: GBP4,373,701) represents the
value attributable to the 'principal' element of the participation
interest, determined in accordance with the participation
agreement.
The participation agreement entitles the Group to receive
interest on the principal balance at the rate of 10.5%. Payment
amounts are not fixed and are dependent on the actual proceeds
received on the Lease Portfolio each month. Any shortfall in
interest payments is added to the principal balance and accrues
interest at the same rate. The Group does not have any rights to
any amounts received on the portfolio over and above the repayment
of their principal plus any interest accrued at the rates stated
above.
The Directors and the Investment Managers believe this is a
reasonable approximation of the fair value. The Group has therefore
not presented quantitative information on the valuation of the
Lease Participation investments.
Information about the Secondary Market for Level 3
Investments
The Investment Managers make assumptions about the residual
value of certain assets and equipment. As determined by the
Investment Managers, the residual value is a function of the
in-place value and/or the secondary market value of the equipment
or assets.
The in-place value is an assessment of the value of the
equipment or assets if the equipment or assets were to continue to
operate and provide value to the end-user. This takes into account
the marginal cost of keeping the asset in place as well as the cost
to the end-user of decommissioning, redelivering, and replacing the
equipment. In some cases, this amount (or a maximum value) is
negotiated in advance with the end-user.
The secondary market value is determined utilising the
Investment Managers' historical experience, quotes from dealers,
third party appraisals and recent sales. The secondary market value
also takes into account the geography of the equipment or assets,
the timeframe required to conduct a sale, and the associated costs
that are not passed on to the end-user.
Equity Holdings
The equity holdings as detailed in note 2.13 are valued by the
Board, taking into consideration a range of factors including the
NAV of the investee, (if available), the existence of the Call
Option exercisable on the holding and other relevant available
information, including the price of recent transactions of equity
holdings, (if any), and advice received from the Investment
Managers and such other factors as the Board, in their sole
discretion, deem relevant in considering a positive or negative
adjustment to the valuation.
The estimated fair values of the equity holdings may differ from
the values that would have been realised had a ready market existed
and the difference could be material.
The fair value of the equity holdings is reassessed on an
ongoing basis by the Board.
8.3 Valuation Process
The following table provides information about fair value
measurements using significant unobservable inputs:
30 June 2017
Description Fair Valuation Unobservable Inputs
Value Techniques
GBP
Lease participation 4,598,099 Principal Third party appraisal
balance
In place value
Finance lease 1,265,303 Market approach / secondary market
residual value value
Equity holding - Market approach Market value
30 June 2016
Description Fair Valuation Unobservable Inputs
Value Techniques
GBP
Lease participation 4,373,701 Principal Third party appraisal
balance
In place value
Finance lease 1,041,623 Market approach / secondary market
residual value value
Equity holding - Market approach Market value
9. Finance Lease and Hire-Purchase Investments
The Group's investments include a portfolio of leases of plant
and machinery leased under finance lease agreements that transfer
substantially all the risks and rewards incidental to ownership to
the lessee and in hire-purchase agreements that include a purchase
option exercisable by the lessee upon fulfilment of specified
conditions. Under these agreements, the lessee pays periodic rent
for the use of the assets for a fixed or minimum initial term of
typically 3 to 10 years. At the end of the fixed or minimum term,
the lessee can typically elect to:
-- return the asset to the Group;
-- in the case of hire-purchase, exercise an option to purchase
the assets, typically at a 'bargain' price;
-- extend the lease for a further minimum term or from year to
year on payment of a pre-agreed rent (which is typically
substantially lower than the rent paid during the initial term);
or
-- arrange a sale of the asset to a third party and (typically)
receive all or the majority of the proceeds of sale. Legal title to
the leased assets remains with the Group at all times prior to such
sale.
The following tables summarise the changes in finance lease and
hire-purchase investments:
30 June 2017 Finance Hire-Purchase Total
Lease
GBP GBP GBP
Opening balance 23,662,205 38,726,823 62,389,028
Additions during the year 1,372,288 10,419,056 11,791,344
Reclassified Construction
Finance investments(1) 31,933,393 10,922,417 42,855,810
Reclassified Property,
Plant and Equipment investment(2) (1,985,587) - (1,985,587)
Realised gain on investment 9,026 397,325 406,351
Principal amortisation
during the year (3,704,147) (8,203,574) (11,907,721)
Closing balance 51,287,178 52,262,047 103,549,225
-------------- -------------- --------------
30 June 2016 Finance Hire-Purchase Total
Lease
GBP GBP GBP
Opening balance 17,230,475 - 17,230,475
Additions during the year 6,886,027 22,592,633 29,478,660
Reclassified construction
finance investments 2,880,118 17,409,907 20,290,025
Principal amortisation
during the year (3,334,415) (1,275,717) (4,610,132)
Closing balance 23,662,205 38,726,823 62,389,028
------------ -------------- ------------
(1) This item relates to advances that previously appeared in
the Construction Finance investment category in note 8.1 and have
been reclassified as Finance Lease or Hire-Purchase Investments.
The item has been reclassified as construction was completed during
the year.
(2) This item relates to an investment that has been
reclassified to the Property, Plant and Equipment investments
category. Please refer to notes 7 and 17 for additional
information.
Assets leased to third parties under finance leases had an
unguaranteed residual value at the end of the year of GBP1,265,303
(30 June 2016: GBP1,041,623).
During the year ended 30 June 2017, a residual investment was
sold for GBP27,627. During the year ended 30 June 2016, a residual
investment was sold for GBP94,916.
The following table summarises the changes in finance lease
investments:
30 June 30 June
2017 2016
GBP GBP
Non-current receivables
Finance leases - net receivables 46,609,514 20,497,468
Unearned future finance
income(1) 23,630,478 6,742,928
----------- -----------
70,239,992 27,240,396
----------- -----------
Current receivables
Finance leases - net receivables 4,677,664 3,164,737
Unearned future finance income(1) 4,867,152 2,185,453
----------- -----------
9,544,816 5,350,190
----------- -----------
Gross investment in finance
leases 79,784,808 32,590,586
----------- -----------
Net receivables from finance
leases
No later than 1 year 4,677,660 3,164,738
Later than 1 year and no later
than 5 years 21,125,424 13,558,940
Later than 5 years 25,484,094 6,938,527
-----------
51,287,178 23,662,205
----------- -----------
Unearned future income
on finance leases(1) 28,497,630 8,928,381
Gross investment in finance
leases 79,784,808 32,590,586
----------- -----------
Reconciliation
No later than 1 year 9,544,812 5,350,191
Later than 1 year and
no later than 5 years 35,632,669 19,068,415
Later than 5 years 34,607,327 8,171,980
----------- -----------
Gross investment in finance
leases 79,784,808 32,590,586
----------- -----------
(1) Unearned future income on finance leases is not recognised
in the Consolidated Statement of Financial Position as it is a
future asset.
The following table summarises the changes in hire purchase
investments:
30 June 30 June
2017 2016
GBP GBP
Non-current receivables
Hire purchase - net receivables 48,502,878 36,138,508
Unearned future income(1) 24,680,726 17,943,256
----------- -----------
73,183,604 54,081,764
----------- -----------
Current receivables
Hire purchase - net receivables 3,759,169 2,588,315
Unearned future income(1) 4,839,825 3,645,603
8,598,994 6,233,918
----------- -----------
Gross investment in hire
purchase 81,782,598 60,315,682
Net receivables from hire
purchase
No later than 1 year 3,761,514 2,588,315
Later than 1 year and
no later than 5 years 20,607,502 14,961,767
Later than 5 years 27,893,031 21,176,741
----------- -----------
52,262,047 38,726,823
----------- -----------
Unearned future income
on hire purchase(1) 29,520,551 21,588,859
Gross investment in hire
purchase 81,782,598 60,315,682
----------- -----------
Reconciliation
No later than 1 year 8,601,338 6,233,918
Later than 1 year and
no later than 5 years 35,830,388 26,271,712
Later than 5 years 37,350,872 27,810,052
----------- -----------
Gross investment in hire
purchase 81,782,598 60,315,682
----------- -----------
(1) Unearned future income on hire purchase is not recognised in
the Consolidated Statement of Financial Position as it is a future
asset.
10. Receivables
Interest Receivables
Interest receivables represent accrued interest receivable on
leases and loans.
The Group has financial risk management policies in place to
ensure that all receivables are received within the credit time
frame. The Directors considers that the carrying amount of all
receivables approximates to their fair value.
Other Receivables and Prepayments
Other receivables and prepayments include UK VAT receivable and
prepaid transaction fees due for arranging the investments of the
Group.
Investment Receivables
Investment receivables represent amounts due from the lessee or
loan counterpart with regards to ongoing contractual obligations
that remain outstanding at the reporting date.
11. Other Payables and Accrued Expenses
30 June 30 June
2017 2016
GBP GBP
Investment management fees 416,426 312,856
Administration and secretarial
fees 73,466 56,104
Audit fees 42,900 39,889
Printing fees 14,944 4,972
Brokerage fees 7,375 18,625
Rental reserve 498,168 353,741
Other payables 120,747 6,408
1,174,026 792,595
========== ========
The Group has financial risk management policies in place to
ensure that all payables are paid within the credit time frame.
The Directors consider that the carrying amount of all payables
approximates to their fair value.
12. Commitments and Contingent Liabilities
As at 30 June 2017, the Group had committed to invest a further
GBP18,427,179 (30 June 2016: GBP39,584,941). These commitments are
classified as 'hard commitments' of GBP9,052,605 (30 June 2016:
GBP39,584,941) which represent investments for which the
documentation is finalised and 'soft commitments' of GBP9,374,574
(30 June 2016: GBPNil) which represent investments at varying
stages of documentation.
The Group has committed up to US$4 million as part of a
debtor-in-possession financing for a US solar manufacturing
company, in order to protect the Group's interest in the equipment
that secures its loan. As at 30 June 2017, US$1.6 million was drawn
as part of a senior priority loan facility.
The Group did not have any contingent liabilities as at 30 June
2017 and 30 June 2016.
13. Share Capital
The authorised share capital of the Company is represented by an
unlimited number of shares of no par value which may be designated
as Ordinary Shares, C Shares or otherwise as the Directors may from
time to time determine. All shares hold equal rights with no
restrictions and no shares carry special rights with regard to the
control of the Company. There are no special rights attached to the
shares in the event that the Company is wound up.
The C Share net proceeds and the investments made with the net
proceeds will be accounted for and managed as a separate pool of
assets in accordance with the Company's investment policy until the
conversion of C Shares to Ordinary Shares. Expenses are split
between Ordinary Shares and C Shares.
The Company's share capital is denominated in Sterling.
Number of Stated Number of
Shares Capital Shares Stated Capital
30 June 30 June 30 June 30 June
2017 2017 2016 2016
GBP GBP
Ordinary Shares 357,707,507 353,716,434 178,985,507 176,808,446
2016 C Shares(2) 180,000,000 176,889,776 - -
2015 C Shares(1) - - 180,000,000 176,907,988
------------ ------------ ------------ ---------------
Total 537,707,507 530,606,210 358,985,507 353,716,434
------------ ------------ ------------ ---------------
Share Movements (Net proceeds)
Issue
Number Gross Proceeds Costs Net Proceeds
GBP GBP GBP
As at 1 July 2016 358,985,507 360,000,000 (6,283,566) 353,716,434
Conversion of 2015
C Shares to Ordinary
Shares(1) (1,278,000) - - -
2016 C Shares issued
during the year(2) 180,000,000 180,000,000 (3,110,224) 176,889,776
As at 30 June 2017 537,707,507 540,000,000 (9,393,790) 530,606,210
-------------- --------------- -------------- -------------
(1) In November 2015, the Group raised additional capital by the
issuance of 2015 C Shares. Net proceeds of GBP176,907,988 were
raised through the issue of 180,000,000 2015 C Shares. The 2015 C
Shares issue costs were GBP3,092,012. On 25 October 2016, the 2015
C Shares were converted into Ordinary Shares using an Ordinary
Share conversion ratio of 0.9929 for each 2015 C Share. The
conversion ratio was based on the NAV per 2015 C Share as at 14
October 2016, which was the calculation date.
(2) On 12 December 2016, the Group raised additional capital by
the issuance of 2016 C Shares. Net proceeds of GBP176,889,776 were
raised through the issue of 180,000,000 2016 C Shares. The 2016 C
Shares issue costs were finalised in the year ended 30 June 2017 as
GBP3,110,224. The reported figure in the Interim Report and
Unaudited Condensed Consolidated Financial Statements for the six
months ended 31 December 2016 was overstated by GBP53,752 and this
additional amount has been reinvested into the Group during the
year ended 30 June 2017. The terms and timing of the conversion of
2016 C Shares to Ordinary Shares will be announced at a later date.
The un-invested proceeds were held in cash and on fixed deposit as
at 30 June 2017. Please refer to the Investment Manager's Report
for details on the investment portfolio, opportunities and
outlook.
14. Dividends
The Company is targeting a dividend of 7.25 pence per Ordinary
Share, which is expected to grow over time. The dividend target is
a target only and there can be no guarantee that this will be
achieved or that any dividends will be paid. Dividend payments to
Shareholders will be subject to the Company being able to satisfy
the solvency test immediately after payment of such dividend.
Monthly dividends have been paid to Ordinary Shareholders during
the period. Dividends on the 2015 C Shares were paid quarterly for
the period from issue to 31 January 2016 and 30 April 2016, and
then monthly from May 2016 until conversion. The first dividend on
the 2016 C Shares was paid from issue to 31 March 2017, with the
second dividend covering the quarter to 30 June 2017. Dividends
have been paid on a monthly basis from July 2017.
The Company has declared and paid the following dividends to its
shareholders during the year:
Period Announcement Payment Amount Amount
Date Date per Share
Ordinary Shares GBP
21 June 25 July
1 to 31 May 2016 2016 2016 0.6042p 1,081,430
21 July 22 August
1 to 30 June 2016 2016 2016 0.6042p 1,081,430
18 August 19 September
1 to 31 July 2016 2016 2016 0.6042p 1,081,430
1 to 31 August 21 September 24 October
2016 2016 2016 0.6042p 1,081,430
1 to 30 September 21 October 21 November
2016 2016 2016 0.6042p 2,161,269
1 to 31 October 15 November 19 December
2016 2016 2016 0.6042p 2,161,269
1 to 30 November 19 December 23 January
2016 2016 2017 0.6042p 2,161,269
1 to 31 December 23 January 20 February
2016 2017 2017 0.6042p 2,161,269
1 to 31 January 17 February 17 March
2017 2017 2017 0.6042p 2,161,269
1 to 28 February 21 March 20 April
2017 2017 2017 0.6042p 2,161,269
25 April
1 to 31 March 2017 2017 23 May 2017 0.6042p 2,161,269
21 June
1 to 30 April 2017 23 May 2017 2017 0.6042p 2,161,269
-----------
Total 21,615,872
-----------
2016 C Shares GBP
Inception to 31 25 April
March 2017 2017 23 May 2017 0.2000p 360,000
Total 360,000
--------
2015 C Shares GBP
21 June 25 July
1 to 31 May 2016 2016 2016 0.2000p 360,000
21 July 22 August
1 to 30 June 2016 2016 2016 0.3300p 594,000
18 August 19 September
1 to 31 July 2016 2016 2016 0.4167p 750,060
1 to 31 August 21 September 24 October
2016 2016 2016 0.4861p 874,980
Total 2,579,040
-----------
Grand Total 24,554,912
===========
The Ordinary Share dividends for May 2017 and June 2017 and 2016
C Share dividends for the period to 30 June 2017, had an
ex-dividend date after the year end and are detailed in note
19.
The Company declared and paid the following dividends to its
shareholders during the prior year:
Period Announcement Payment Amount Amount
Date Date per Share
Ordinary Shares GBP
19 June 20 July
1 to 31 May 2015 2015 2015 0.5200p 930,725
20 July 20 August
1 to 30 June 2015 2015 2015 0.5625p 1,006,797
21 August 18 September
1 to 31 July 2015 2015 2015 0.6042p 1,081,430
1 to 31 August 17 September 20 October
2015 2015 2015 0.6042p 1,081,430
1 to 30 September 21 October 27 November
2015 2015 2015 0.6042p 1,081,430
1 to 31 October 20 November 18 December
2015 2015 2015 0.6042p 1,081,430
1 to 30 November 21 December 19 January
2015 2015 2016 0.6042p 1,081,430
1 to 31 December 22 January 22 February
2015 2016 2016 0.6042p 1,081,430
1 to 31 January 22 February 21 March
2016 2016 2016 0.6042p 1,081,430
1 to 28 February 21 March 25 April
2016 2016 2016 0.6042p 1,081,430
21 April
1 to 31 March 2016 2016 23 May 2016 0.6042p 1,081,430
20 June
1 to 30 April 2016 23 May 2016 2016 0.6042p 1,081,430
-----------
Total 12,751,822
-----------
2015 C Shares GBP
9 November 2015
to 22 February 21 March
31 January 2016 2016 2016 0.3000p 540,000
1 February to 30 20 June
April 2016 23 May 2016 2016 0.4000p 720,000
Total 1,260,000
-----------
Grand Total 14,011,822
===========
15. Capital Management Policies and Procedures
The Board defines capital as financial resources available to
the Group.
The Group's total capital at 30 June 2017 was GBP532,903,565
(2016: GBP354,829,918) and comprised equity share capital and
reserves. The Group was ungeared at the year end.
The Group's capital management objectives are:
-- to ensure that the Group will be able to continue as a going concern; and
-- provide returns to shareholders.
In accordance with the Group's investment policy, the Group's
principal use of cash has been to fund investments sourced by the
Investment Managers, as well as initial expenses related to the
issue, ongoing operational expenses, currency hedging and payment
of dividends and other distributions to shareholders in accordance
with the Group's dividend policy.
The Board, with the assistance of the Investment Managers,
monitors and reviews the broad structure of the Group's capital on
an ongoing basis.
The Group has no externally imposed capital requirements.
16. Segmental Reporting
There are two reportable segments as at 30 June 2017: Ordinary
Shares and 2016 C Shares. For the year ended 30 June 2016 two
reportable segments were identified, Ordinary Shares and 2015 C
Shares. Each Share Class has its own portfolio, is listed
separately on the Main Market of the London Stock Exchange and the
Company's Directors review internal management reports for each
segment separately on a quarterly basis.
The Directors view the operations of the two reportable segments
as one operating segment, being investment business and both
segments have the same investment objectives. All significant
operating decisions are based upon analysis of the Group's
investments as one segment. The financial results from this segment
are equivalent to the financial results of the Group as a
whole.
The tables below provide a breakdown of the condensed
Consolidated Statement of Comprehensive Income between the
reportable segments:
For the year ended Ordinary 2016 C Total
30 June 2017 Shares Shares
GBP GBP GBP
Total income 31,427,097 1,136,364 32,563,461
Net realised and unrealised
loss (391,652) (59,657) (451,309)
Total operating expenses (5,272,649) (1,100,720) (6,373,369)
Total comprehensive
income for the year 25,762,796 (24,013) 25,738,783
============ ============ ============
For the year ended Ordinary 2015 C Total
30 June 2016 Shares Shares
GBP GBP GBP
Total income 16,484,602 3,368,648 19,853,250
Net realised and unrealised
loss (1,752,234) (773,086) (2,525,320)
Total operating expenses (2,839,523) (1,409,898) (4,249,421)
Total comprehensive
income for the year 11,892,845 1,185,664 13,078,509
============ ============ ============
The tables below provide a breakdown of the condensed
Consolidated Statement of Financial Position between the reportable
segments:
30 June 2017 Ordinary 2016 C Total
Share Share
GBP GBP GBP
Non-current assets 336,488,805 37,437,237 373,926,042
Current assets 23,658,367 139,444,791 163,103,158
Total assets 360,147,172 176,882,028 537,029,200
------------ ------------ ------------
Current liabilities (3,749,369) (376,265) (4,125,635)
Net assets 356,397,803 176,505,762 532,903,565
============ ============ ============
Equity 356,397,803 176,505,762 532,903,565
============ ============ ============
30 June 2016 Ordinary 2015 C Total
Share Share
GBP GBP GBP
Non-current assets 175,573,063 102,807,191 278,380,254
Current assets 14,853,833 77,604,226 92,458,059
Total assets 190,426,896 180,411,417 370,838,313
------------- ------------ -------------
Current liabilities (12,430,630) (3,577,765) (16,008,395)
Net assets 177,996,266 176,833,652 354,829,918
============= ============ =============
Equity 177,996,266 176,833,652 354,829,918
============= ============ =============
17. Financial Risk Management
The Group's financial assets mainly comprise investments and
cash balances. Note 2 sets out the accounting policies, including
criteria for recognition and the basis for measurement, applied to
significant financial assets and liabilities. Note 2 also includes
the basis on which income and expenses arising from financial
assets and liabilities are recognised.
The Group finances its investment activities through the Group's
Ordinary Share and 2016 C Share capital and reserves.
Principal risks and uncertainties are detailed in the Strategic
Report, the Directors and the Investment Managers work together to
mitigate these risks by employing the following risk mitigation
strategies:
(a) Credit Management - sound credit management is a
prerequisite for an entity's stability and profitability. Prudent
management of credit risk can minimise both operational and credit
risks. The Board and the Investment Managers pre-emptively begin to
manage risk through the comprehensive underwriting process to
ensure that there is not more than an acceptable amount of risk
within the transaction. The risk is continually managed throughout
the term of the lease (or other finance agreement) until the
ultimate disposition of the asset(s). Stringent underwriting
procedures are applied to mitigate risk.
(b) Loss Prevention Management - when available, insurance is
required for assets that the Group owns or which have been charged
or pledged to the Group as security. Insurance is in place for the
full term that an asset is owned by (or charged to) the Group,
thereby reducing the risk of loss from physical damage or
theft.
(c) Due Diligence - the Investment Managers perform
comprehensive due diligence on all counter parties, individuals and
businesses relevant to the investment strategy of the Group.
(d) On-going Portfolio Management - ensures that if a problem
starts to arise it is identified giving the capability to address
it and put into action whatever remediation steps are necessary to
help mitigate a potentially larger risk down the line.
(e) Legal Review - the Investment Managers engage legal
professionals in order to ensure, on an on-going basis, that all
rights, title and interests, held as security for the Company's
investments are being protected and preserved.
(f) Records Management - this is a critical way by which risk is
managed and mitigated. The Investment Managers' internal systems
are utilised to ensure the Group is not exposed from a record
maintenance standpoint. The Investment Managers have a
comprehensive electronic documentation system that is subject to
their internal/external backup procedure, maintaining information
access and retrieval 24/7 with offsite redundant backup in case of
a disaster when recovery would need to be deployed.
Additional risks arising from the Group's activities listed in
order of severity and likelihood are:
(i) credit risk;
(ii) liquidity risk;
(iii) operational risk; and
(iv) market risk, including currency risk and interest rate risk.
The Alternative Investment Manager, in close cooperation with
the Directors and the Administrator, coordinates the Group's risk
management. The policies for managing each of these risks are
summarised below and have been applied throughout the year.
(i) Credit Risk
This is the risk of the failure of a lessee to make lease
payments, the failure of the issuer of a security or borrower to
pay interest or principal in a timely manner, or that the effect of
negative perceptions of the issuer's ability to make such payments
causing the value of the investment to decline. Counterparties with
debt securities rated below investment-grade (or unrated) are
especially susceptible to this risk. The Group looks to source
investments that can provide various credit and structural
enhancements to attempt to mitigate credit exposure to any single
counterparty or asset class.
There is a risk that the bank used by the Group to hold cash
balances could fail and that the Group's assets may not be
returned. Associated with this is the additional risk of fraud or
theft by employees of those third parties. The Board manages this
risk through the Investment Managers monitoring the financial
position of the bank used by the Group.
The credit rating of the custodian, which is the bank used by
the Group, is A-1 with Standard & Poor's.
Investments past due not impaired
During the year, 5 investments totalling GBP61,302,686 (2016: 1
investment of 119,588) were past due but not impaired. The
Directors, after taking advice from and consulting with the
Investment Managers, do not consider these investments to be
impaired due to the security held and consider the full carrying
amount to be recoverable.
Table 1a below details the investments that are past due but not
impaired:
Ref Industry Balance Comment
(GBP
000)
A1 Solar 24,685 An investee business to which
the Group has provided a secured
loan entered chapter 11 bankruptcy
in the USA. A petition has been
made under Section 201 of the
United States International Trade
Commission under the Trade Act
of 1974, Import Relief for Domestic
Industries. If the petition is
successful it is expected that
the Group would make a full recovery
of its principal plus all current
and future interest. Legal action
has also commenced to force payment
under the guarantee from the
parent company. As at 30 June
2017, the Group continues to
hold this investment at its carrying
amount (including additional
restructuring amounts) with no
income accruing. The Directors
believe that the full carrying
amount is recoverable so do not
consider this investment to be
impaired.
Ref Industry Balance Comment
(GBP
000)
A2 Medical 9,973 An investee business to which
the Group has provided a secured
loan entered chapter 11 bankruptcy
in the USA. The Investment Managers
are in negotiations with the
current owners of the investee
business and believe that the
Group is likely to receive full
recovery of the principal, although
further restructuring may become
necessary. As at 30 June 2017,
the Group continues to hold this
investment at its carrying amount
with no income accruing. The
Directors do not consider this
investment to be impaired.
Also included in table 1b below.
A3 Transportation 14,304 This finance investment (a secured
loan) was restructured resulting
in payment terms being amended.
As at 30 June 2017, the Group
continues to hold this investment
at its carrying amount. The Directors
do not consider this investment
to be impaired following the
restructuring of the finance
agreement.
Also included in table 1b below.
A4 IT & Telecom 4,157 This finance investment (a secured
loan) was restructured resulting
in payment terms being amended.
As at 30 June 2017, the Group
continues to hold this investment
at its carrying amount. The Directors
do not consider this investment
to be impaired following the
restructuring of the finance
agreement.
Also included in table 1b below.
A5 Hospitality 8,184 This finance investment (a finance
lease) was restructured resulting
in payment terms being amended.
As at 30 June 2017, the Group
continues to hold this investment
at its carrying amount with no
income accruing. The Directors
do not consider this investment
to be impaired following the
restructuring of the finance
agreement.
Also included in table 1b below.
--------
61,303
========
Restructurings during the year ended 30 June 2017
During the year, 8 investments totalling GBP59,671,296 (2016: 3
investments totalling 19,201,474) were restructured resulting in
repayment terms being amended. As at year end, the Group continues
to hold them at the carrying value in the financial statements. The
Directors, after taking advice from and consulting with the
Investment Managers, do not consider these investments to be
impaired subsequent to the restructuring of the finance
agreement.
Table 1b below details the investments that have been
restructured:
Ref Industry Balance Comment
(GBP
000)
B1 Medical 9,973 See description in ref: A2 in
(A2) table 1a above
B2 Transportation 14,304 See description in ref: A3 in
(A3) table 1a above
B3 IT & Telecom 4,157 See description in ref: A4 in
(A4) table 1a above
B4 Hospitality 8,184 See description in ref: A5 in
(A5) table 1a above
B5 Transportation 4,598 This finance investment (a lease
participation) was restructured
resulting in payment terms being
amended. As at 30 June 2017,
the Group continues to hold this
investment at its carrying amount.
The Directors do not consider
this investment to be impaired
following the restructuring of
the finance agreement.
B6 Agriculture 15,275 This finance investment (a finance
lease) was restructured resulting
in payment terms being amended.
As at 30 June 2017, the Group
continues to hold this investment
at its carrying amount. The Directors
do not consider this investment
to be impaired following the
restructuring of the finance
agreement.
B7 Energy 1,242 This finance investment (a finance
lease) was restructured resulting
in payment terms being amended.
As at 30 June 2017, the Group
continues to hold this investment
at its carrying amount. The Directors
do not consider this investment
to be impaired following the
restructuring of the finance
agreement.
B8 Transportation 1,939 This finance investment (a finance
lease) was terminated because
of default by the lessee and
the leased asset was recovered
and rehired under an operating
lease to a new lessee. As at
30 June 2017, the Group continues
to hold this investment at its
carrying amount.
--------
59,672
========
(ii) Liquidity Risk
This is the risk that the Group will encounter difficulty in
meeting obligations associated with financial liabilities or
funding commitments.
The Group's investments (excluding cash deposits) are
asset-backed loan or finance transactions with commercial entities.
The investments are substantially less liquid than traded
securities and will have a highly limited (if any) secondary
market. Some transactions may incorporate provisions that restrict
transfer or disposal of the investment.
The Group may be required to satisfy margin calls in respect of
foreign exchange forward if the current market rate varies from the
contract rate.
In accordance with the Group's policy, the Investment Managers
manage the Group's liquidity risk, and the Directors monitor
it.
(iii) Operational Risk
Operational risk is the risk of direct or indirect loss arising
from a wide variety of causes associated with the processes,
technology and infrastructure supporting the Group's activities
with financial instruments either internally within the Group or
externally at the Group's service providers, and from external
factors other than credit, market and liquidity risks such as those
arising from legal and regulatory requirements and generally
accepted standards of investment management behaviour.
The Group's objective is to manage operational risk so as to
balance limiting of financial losses and damage to its reputation
with achieving its investment objective. The Group manages this
risk by having regular Board meetings to ensure oversight of the
Investment Managers and the Administrator.
(iv) Market Risk
The fair value of future cash flows of a financial instrument
held by the Group may fluctuate. This market risk comprises
currency risk and interest rate risk. The Board reviews and agrees
policies for managing these risks.
Currency Risk
The functional and presentation currency of the Group is
Sterling and, therefore, the Group's principal exposure to foreign
currency risk comprises investments denominated in other
currencies, principally US Dollars and Euros. The Investment
Managers monitor the Group's exposure to foreign currencies and
reports to the Board on a regular basis. The Investment Managers
measure the risk to the Group of the foreign currency exposure by
considering the effect on the NAV and income of a movement in the
rates of exchange to which the Group's assets, liabilities, income
and expenses are exposed. The Investment Manager is mandated to
undertake a hedging strategy and to report its effectiveness and
costs to the Board on an on-going basis.
The table below details the carrying amounts of the Company's
financial assets and liabilities that have foreign currency
exposure:
30 June 2017 GBP USD EUR Total
GBP GBP GBP GBP
Investments 196,762,961 107,016,095 70,146,986 373,926,042
Cash and cash equivalents 149,657,485 3,659,716 1,251,415 154,568,616
Interest receivables 1,894,286 798,306 1,156,407 3,848,999
Investment receivables,
other receivables
and prepayments 2,140,205 1,689,046 856,292 4,685,543
Other payables
and accrued expenses (1,248,972) - - (1,248,972)
Derivative financial
liabilities (2,876,663) - (2,876,663)
Total net foreign
currency exposure 346,329,302 113,163,163 73,411,100 532,903,565
-------------- ------------ ----------- --------------
Percentage of total 64.98% 21.24% 13.78% 100.00%
-------------- ------------ ----------- --------------
30 June 2016 GBP USD EUR Total
GBP GBP GBP GBP
Investments 129,959,636 77,624,753 70,795,865 278,380,254
Cash and cash equivalents 82,140,948 492,118 5,182,178 87,815,244
Interest receivables 1,845,261 527,925 121,090 2,494,276
Investment receivables,
Other receivables
and prepayments 1,845,578 250,916 52,045 2,148,539
Other receivables
and accrued expenses (794,431) - - (794,431)
Derivative financial
liabilities (15,213,964) - - (15,213,964)
Total net foreign
currency exposure 199,783,028 78,895,712 76,151,178 354,829,918
------------- ----------- ----------- -------------
Percentage of total 56.31% 22.23% 21.46% 100.00%
------------- ----------- ----------- -------------
Currency sensitivity analysis
Should the value of Sterling against the Euro and the US Dollar
increase or decrease by 5% with all other variables held constant
and excluding the impact of currency hedging described below, the
impact on the net assets of the Company would be as follows:
Currency 30 June 2017 30 June 2016
GBP GBP GBP GBP
Increase Decrease Increase Decrease
of 5% of 5% of 5% of 5%
USD (5,658,158) 5,658,158 (3,944,786) 3,944,786
EUR (3,670,555) 3,670,555 (3,807,559) 3,807,559
The foreign currency risk assumed by the Group in making and
retaining investments denominated in foreign currencies is hedged
by placing contracts for the sale of the future foreign currency
payments anticipated to be received in connection with such
investments ("FX Receivables"). Due to the limited availability,
inflexibility and cost of placing a matched forward contract for
each foreign currency investment (which may have a tenor of five
years or longer), the FX Receivables in respect of two or more
underlying investments are aggregated and a single forward contract
placed with short-term maturity (typically between three and nine
months). On maturity, the forward sale contract is part-settled
from actual foreign currency receipts and a new forward contract is
placed for the then applicable aggregate FX Receivables, adjusted
for payments received, contract variations and new investments.
The Group may be required to deposit initial cash collateral
against fluctuations in the applicable exchange rates and/or to
meet margin calls if the current market rate varies from the
contract rate. The Investment Managers monitor the Group's currency
risk, and the Directors review it.
As at 30 June 2017, the Group had the following open forward
foreign exchange contracts:
Notional
Buy/Sell Fair Value Settlement
Currency Foreign Currency GBP / GBP Equivalent Date Month/Year
GBP/USD
GBP/USD 132,094,320 102,424,539 759,035 July 2017
September
GBP/USD 21,473,953 16,491,152 (749) 2017
GBP/EUR 61,870,687 50,921,828 (3,538,366) October2017
GBP/USD 6,113,025 4,826,707 132,856 October 2017
December
GBP/EUR 41,652,312 36,476,322 (229,439) 2017
(2,876,663)
------------------
As at 30 June 2016, the Group had the following open forward
foreign exchange contracts:
Notional
Buy/Sell Fair Value Settlement
Currency Foreign Currency GBP / GBP Equivalent Date Month/Year
GBP/EUR 28,937,566 24,067,026 (3,150,292) July 2016
GBP/EUR 226,613 188,524 (10,710) August 2016
September
GBP/USD 33,192,961 24,830,961 (1,458,927) 2016
September
GBP/EUR 6,773,233 5,643,146 (429,775) 2016
GBP/EUR 18,515,140 15,431,610 (896,184) October 2016
November
GBP/EUR 45,150,513 37,675,891 (2,862,012) 2016
December
GBP/USD 82,266,109 61,401,921 (6,406,064) 2016
------------------
(15,213,964)
------------------
Interest Rate Risk
The value of fixed income securities usually rises and falls in
response to changes in interest rates. Declining interest rates
generally increase the value of existing instruments, and rising
interest rates generally decrease the value of existing
instruments. Changes in value usually will not affect the amount of
interest income or final principal repayments, but will affect the
interim carrying value of the investment prior to maturity.
Interest rate risk is generally greater for investments with longer
maturities.
Certain income generating securities pay interest at variable or
floating rates. Variable rate securities reset at specified
intervals, while floating rate securities reset whenever there is a
change in a specified index rate. The market prices of these
securities may fluctuate significantly when interest rates
change.
The possible effects on fair value and cash flows that could
arise as a result of changes in interest rates are taken into
account when making investment decisions. The Board reviews on a
regular basis the values of the financial instruments.
18. Related Party Transactions
Parties are considered to be related if one party has the
ability to control the other party or exercise significant
influence over the other party in making financial or operational
decisions or the parties are under common control.
The Investment Managers
The Group is party to an Investment Management Agreement with
the Investment Managers under which the Investment Managers are
entitled to the payment of management fees based on the Group's
NAV. During the year, the management fees due to the Investment
Managers amounted to GBP4,355,085 (30 June 2016: GBP2,893,765). At
30 June 2017, GBP416,426 (30 June 2016: GBP312,856) of the
management fees was still payable to the Investment Managers.
Under the Investment Management Agreement, the Investment
Managers are also entitled to structuring fees, which are based on
the value of new investments (these are not paid by the Group).
During the year, structuring fees of GBP777,886 (30 June 2016:
GBP1,409,927) were received by the Investment Managers.
The Investment Managers also receive commitment fees, that are
paid by investees direct (these are not paid by the Group). During
the year, commitment fees of GBP700,123 (30 June 2016:
GBP1,362,119) were received by the Investment Managers.
The Investment Managers as Servicer, Manager,
Administrative/Collateral Agent, Security Trustee
In relation to certain investment transactions made during the
period, typically those involving parallel investors or lenders,
the US Manager or the UK Manager are appointed to act as servicer,
manager or administrative agent for general management and
servicing purposes, which may include collection and distribution
of service payments from underlying obligors, and/or as collateral
agent or security trustee to hold and enforce security. In such
cases, the Investment Managers receive no remuneration for the
performance of such duties other than the management fee provided
for in the Investment Management Agreement.
Luxembourg Investment Company 26 S.Ã r.l. (LuxCo)
LuxCo is a special purpose company wholly owned by the US
Investment Manager for the purpose of holding investments. LuxCo
holds for the benefit of the Company a loan and mortgage on two
commercial marine vessels under a comprehensive loan and security
agreement including a corporate guarantee.
SQN Helo, LLC
SQN Helo is a special purpose company owned by SQN Portfolio
Acquisition Company, LLC and SQN AIF IV, L.P., both being
investment funds managed by the US Investment Manager. SQN Helo was
established to purchase and hold legal ownership of a portfolio of
leases and related assets. The carrying value of the investment is
GBP4,598,099 and further details can be found in note 8.2.
SQN Asset Finance (Ireland) DAC
The Group holds the following bonds issued by SQN Asset Finance
(Ireland) DAC ("SQN Ireland"), an unconsolidated structured entity
in the Republic of Ireland:
30 June 30 June
2017 2016
EUR denominated
bonds EUR49,740,000 EUR42,670,000
USD denominated $23,452,200 -
bonds
GBP denominated GBP15,277,984 -
bonds
The UK Investment Manager acts as investment advisor to SQN
Ireland.
Share Interest
The table below details the Ordinary Shares and C Shares held by
Directors of the UK Investment Manager in the Company:
30 June 2017 30 June 2016
Director Number of Number of Number of Number of
Ordinary 2016 C Shares Ordinary 2015 C Shares
Shares Shares
Neil Roberts 149,645 59,256 100,000 50,000
Tim Spring 157,690 75,032 73,085 74,800
The table below details the Ordinary Shares and C Shares held by
the Directors in the Company:
30 June 2017 30 June 2016
Director Number of Number of Number of Number of
Ordinary 2016 C Shares Ordinary 2015 C Shares
Shares Shares
Peter Niven 59,858 5,000 40,000 20,000
John Falla 19,637 4,961 10,000 9,706
Carol Goodwin 44,893 5,000 30,000 15,000
Christopher
Spencer 19,929 4,982 10,000 10,000
19. Events After the Reporting Period
On 21 June 2017, the Company declared a dividend of 0.6042p per
Ordinary Share, for the month ended 31 May 2017. This dividend was
paid to shareholders on 19 July 2017.
On 21 July 2017, the Company declared a dividend of 0.6042p per
Ordinary Share, for the month ended 31 May 2017 and 0.3p per 2016 C
Share, for the three month period ended 30 June 2017. The dividends
were paid to shareholders on 18 August 2017.
On 18 August 2017, Paul Meader was appointed as a Non-Executive
Director.
On 21 August 2017, the Company declared a dividend of 0.6042p
per Ordinary Share and 0.1042p per 2016 C Share, for the month
ended 31 July 2017. The dividends were paid to shareholders on 19
September 2017.
On 21 September 2017, the Company declared a dividend of 0.6042p
per Ordinary Share and 0.15p per 2016 C Share, for the month ended
31 August 2017. The dividends will be paid to the shareholders on
19 October 2017.
As at the date of these accounts, the Group had extended
approximately $3.95 million under the additional facility provided
to Suniva. On 22 September 2017, the United States International
Trade Commission voted unanimously in favour of government
intervention to provide relief to the U.S. solar manufacturing
industry, in response to the petition filed by Suniva under the
terms of the facility.
20. Ultimate Controlling Party
In the opinion of the Directors, there is no single ultimate
controlling party.
COMPANY INFORMATION
Non-Executive Directors
Peter Niven Christopher Spencer
(Chairman of the Board) (Chairman of Audit and
Risk Committee)
John Falla Carol Goodwin
(Chairman of Management (Chairman of Remuneration
Engagement Committee) and Nomination Committee)
Paul Meader (from 18 August
2017)
Registered Office
BNP Paribas House, St Julian's Avenue, St Peter Port, Guernsey,
GY1 1WA
US Investment Manager
SQN Capital Management, LLC, 100 Wall Street, 28(th) Floor, New
York, New York, 10005, USA
UK Investment Manager
SQN Capital Management (UK) Limited, Melita House, 124 Bridge
Road, Chertsey, Surrey, KT16 8LA
Financial Adviser and Broker
Winterflood Securities Limited, The Atrium Building, Cannon
Bridge House, 25 Dowgate, Hill, London, EC4R 2GA
Auditor
Baker Tilly CI Audit Limited, Mont Crevelt House, Bulwer Avenue,
St Sampsons, Guernsey, GY2 4LH
Registrar
Capita Registrars (Guernsey) Limited, Mont Crevelt House, Bulwer
Avenue, St Sampsons, Guernsey, GY2 4LH
Principal Bankers
BNP Paribas Securities Services S.C.A., BNP Paribas House, St
Julian's Avenue, St Peter Port, Guernsey, GY1 1WA
Designated Administrator, Custodian and Secretary
BNP Paribas Securities Services S.C.A., Guernsey Branch, BNP
Paribas House, St Julian's Avenue, St. Peter Port, Guernsey, GY1
1WA
Receiving Agent
Capita Asset Services Corporate Actions, The Registry, 34
Beckenham Road, Beckenham, Kent BR3 4TU
Legal Advisers to the Group (English Law)
Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH
Legal Advisers to the Group (Guernsey Law)
Mourant Ozannes, PO Box 186, 1 Le Marchant Street, St Peter
Port, , Guernsey, GY1 4HP
Website www.sqnassetfinance.com
<END>
Enquiries:
BNP Paribas Securities Services S.C.A., Guernsey Branch 01481 750822
Company Secretary
Sarah Hendry
A copy of the Company's Annual Report and Audited Consolidated
Financial Statements will be posted to the shareholders of the
Company. Copies are also available from the Company Secretary, BNP
Paribas Securities Services S.C.A., Guernsey Branch at BNP Paribas
House, St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA, or on
the Company's website www.sqnassetfinance.com.
Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into, or forms part of, this
announcement.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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October 05, 2017 02:00 ET (06:00 GMT)
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