UK MORTGAGES LIMITED
INTERIM REPORT AND UNAUDITED CONDENSED
INTERIM FINANCIAL STATEMENTS
For the period from 1 July 2016 to 31 December
2016
SUMMARY INFORMATION
The Company
The Company was incorporated with limited liability in Guernsey, as
a closed-ended investment company on 10 June
2015. The Company’s shares were admitted to trading on the
Specialist Fund Segment of the London Stock Exchange on
7 July 2015.
The Company and affiliate structure has been designed by the
Board of Directors, the Portfolio Manager, the Corporate Broker and
legal advisors to ensure the most efficient structure for
regulatory and tax purposes.
The Company established an Acquiring Entity, UK Mortgages
Corporate Funding Designated Activity Company (“DAC”) for the
purpose of acquiring and securitising mortgages via Special Purpose
Vehicles (“SPVs”). The Acquiring Entity, the Issuer SPV and the
Warehouse SPVs (collectively, “the Group”) are treated on a
consolidated basis for the purpose of the Interim Condensed
Financial Statements.
Investment Objective
The Company’s investment objective is to provide Shareholders with
access to stable income returns through the application of
relatively conservative levels of leverage to portfolios of UK
mortgages.
The Company expects that income will constitute the vast
majority of the return to Shareholders and that the return to
Shareholders will have relatively low volatility and demonstrate a
low level of correlation with broader markets.
Shareholders’ Information
Northern Trust International Fund Administration Services
(Guernsey) Limited (the “Administrator”) is responsible for
calculating the Net Asset Value (“NAV”) per share of the Company.
The NAV per Ordinary Share is calculated as at the last business
day of every month by the Administrator and is announced through a
Regulatory Information Service on, or within 2 weeks following, the
last business day of the following month.
Financial Highlights
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31.12.2016 |
30.06.2016 |
31.12.2015 |
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Total Net
Assets |
|
|
£229,246,078 |
£237,363,265 |
£244,545,062 |
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|
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Net Asset
Value per ordinary share |
|
91.70p |
94.95p |
97.82p |
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|
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|
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|
|
Share price |
|
|
|
95.25p |
96.75p |
101.00p |
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|
|
|
|
|
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Premium to
Net Asset Value |
|
3.87% |
1.90% |
3.25% |
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|
|
|
|
|
Total
dividends paid during the period |
3.00p |
1.50p |
0.00p |
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|
|
|
|
|
|
Total
dividends declared in relation to the period |
3.00p |
3.00p |
0.00p |
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|
|
|
|
|
|
Ongoing
total expense ratio |
|
1.06% |
1.20% |
0.95% |
CHAIRMAN’S STATEMENT
for the period from 1 July 2016 to
31 December 2016
Review
I am pleased to present my report for the Company for the period
from 1 July 2016 to 31 December 2016, a period of significant
activity during which UKML progressed towards full deployment of
the capital raised at its IPO.
Following the successful launch of its inaugural securitisation,
Malt Hill No.1 Plc, in May, work continued on the Company’s second
transaction, which was announced in July. This work had in
fact been ongoing for over six months, but had been substantially
delayed by the late withdrawal from the transaction of the proposed
loan financing counterparty, and their subsequent replacement by
the Royal Bank of Scotland. The transaction consists of an
arrangement with The Mortgage Lender (“TML”) to purchase up to
£250m of newly-originated owner-occupied mortgages, thereby
offering natural diversification to the first transaction (which
comprised Buy-to-Let loans), over an expected 12 to 14-month
period, having agreed a product set and borrower credit profile
with TML.
TML launched its product offering through the mortgage broker
market immediately following the announcement and has since been
receiving and processing loan applications, making offers where
applications meet the agreed criteria and subsequently proceeding
to completion as required. With some seasonal variation, the pace
of applications, offers and completions are proceeding generally in
line with expectations, and, as of the end of the period, the
portfolio contained fifty-two completed loans with a further
pipeline of £37.5m. The transaction is expected to utilise approx.
£72m of the Company’s capital, with an initially estimated IRR over
the life of the pool of 9.49%, based on the Portfolio Manager’s
assessment of the expected cash flows and available financing rates
having allowed for low revenue generation initially as the loans
are originated. The deal also offers the potential for the Company
to utilise further capital and acquire up to £1bn of mortgages over
a five-year period, which provides a significant incentive for TML
to deliver a mortgage pool in line with the first-year
target. With securitisation spreads having contracted since
the deal was announced it is also possible that the eventual yield
may be higher than the initial estimate.
In November 2016, the Portfolio
Manager undertook an extensive investor roadshow, which included a
webinar and both group and individual investor meetings. The
roadshow was designed to update investors on the Company’s
investment progress and asset performance ahead of the Continuation
Vote at the Company’s AGM in December, as the Company was yet to
achieve its target of fully committing its capital to mortgage
portfolios. Following this update, the vote was passed with
no votes against.
Along with the result of the AGM, the Board announced that
negotiations regarding the purchase and financing of an existing
pool of mortgages that would deploy the Company’s remaining
available capital were at an advanced stage. Terms for this,
the Company’s third transaction, were subsequently agreed and
signed just prior to the end of December
2016. Following this, the finalisation of various
pre-acquisition diligence, documentation and financing arrangements
allowed the transaction to be completed in mid-February 2017. The transaction
comprises the purchase of approximately £590.5m UK predominantly
Buy-to-Let Mortgages (“BTL”), originated primarily between 2004 and
2008 by Capital Home Loans (“CHL”), then the UK specialist BTL
mortgage lending arm of Permanent TSB. CHL will continue to service
the mortgages, resulting in a seamless transaction for the mortgage
borrowers. The pool comprises 4,896 loans with an average
balance of £120,610, and a weighted average indexed
loan-to-value of 69.65%. Given the age of the loans,
which on a weighted average basis have almost 10 years of
payment history encompassing the financial crisis, performance is
very strong with just 0.92% of the loans more than one
month in arrears. The transaction has deployed the Company’s
remaining investable capital.
As a result of the completion of this transaction, the second
Continuation Vote announced in November
2016, that was due to be triggered should substantially all
of the cash held at that time not have been deployed within six
months of the AGM, will no longer be required.
While the pace of investment has been slower than anticipated,
it is again worth reiterating the point made in previous reports;
that the nature and structure of the mortgage market meant that
there could be no guarantee that the Company would be able to gain
exposure to appropriate mortgage portfolios as quickly as desired.
Buying mortgage portfolios can be a lengthy process, requiring
extensive and detailed work on the part of the Portfolio Manager to
complete due diligence and arrive at an appropriate structure. In
addition, specific factors have slowed progress in 2016, including
poor market conditions at the start of the year and uncertainty
around the Brexit vote, which directly contributed to the
withdrawal of the initial financing counterparty to the TML
transaction. In addition, much time and effort has been
expended on reviewing potential transactions that were eventually
rejected as unsuitable. However, the attraction of deriving returns
from such a historically stable and uncorrelated asset class as UK
residential mortgages remains clear. The challenge continues to be
delivering those returns through a conventional investment company
structure.
Dividend Distributions
When the Company was launched in July 2015, the Board
anticipated paying at least a 1.5p quarterly dividend from April
2016. This remains our policy, although the slow pace of
investment has meant that the dividend remains uncovered to a
greater extent than originally envisaged. This is partially
due to the timeframe required for the TML portfolio to become fully
originated and also because until the completion of the third
transaction in February 2017
approximately half of the Company’s capital was yet to be
invested. Paying an uncovered dividend is not a decision that
the Board takes lightly, but it is based on regular appraisals of
the Portfolio Manager’s cash flow models, which continue to
indicate that the high IRRs relative to the dividend target that
the mortgage pools offer should enable excess income to be produced
over and above the dividend in future financial years. Furthermore,
any subsequent investments that the Company makes are likely to be
funded as new capital is raised, which will minimise any future
cash drag.
Outlook
Ongoing political uncertainty, whether in the UK with the imminent
triggering of Article 50 followed by up to two years of
negotiations over the UK’s exit terms from the EU, the multiple
radical measures likely to be proposed in the US following
President Trump’s election, or the upcoming elections in Europe,
particularly in France and the Netherlands, where shock results in
favour of populist candidates are a distinct possibility, means
that despite a generally positive economic undertone markets remain
vulnerable to shocks. However, we believe the fundamental
performance of the Company’s portfolio of mortgages will be largely
uncorrelated to these events and will continue to perform in line
with expectations.
The Portfolio Manager is expected to complete its second
securitisation, to refinance the CHL portfolio later in 2017, with
exact timing dependent on market conditions. Similarly, a
securitisation of the TML transaction is also anticipated once the
portfolio is fully originated. Meanwhile, now that the
initial transactions have been completed, the Portfolio Manager is
seeing more potential deal flow and we will further advise
investors should these opportunities become likely to proceed to
future transactions.
Finally, I’d like to conclude by thanking the portfolio
management team for their hard work during this period and our
shareholders for their continued support.
Christopher Waldron
Chairman
21 March 2017
PORTFOLIO MANAGER’S REPORT
for the period from 1 July 2016 to
31 December 2016
Market Commentary
The summer and autumn of 2016 saw dramatic changes across the
entire financial and political landscape in the UK, Europe and the
US. The UK’s EU referendum result in late June set the tone
for a second half of surprises, initiating a period of tension and
political sparring between the re-formed and reshuffled UK
government under Theresa May. The government appeared
determined not to show its cards too early, and various UK Remain
supporters and political opposition, plus a host of European
politicians were equally determined to stand firm against any
potential UK proposals for favourable exit treatment. Populist
movements gained ground, with Mario Renzi effectively being ousted
in Italy in what became a highly personal vote of no confidence for
his policy implementation referendum, plus the shock election of
Donald Trump as the new US President in November.
The UK’s situation in particular, led initially to concerns
about the economic damage Brexit might herald and in August the
Bank of England reacted with a raft of economic policy easing
measures including an expected 25bp base rate cut, but coupled with
further QE measures including the reintroduction of a QE bond
buying programme and the inclusion of corporate bond purchases for
the first time. The programme also included a newly initiated
four-year Term Funding Scheme (“TFS”) providing secured funds at
the new base rate, designed to help banks to pass on the rate cut
to borrowers. This certainly seemed to be the case as mortgage and
other consumer borrowing rates were tightened but it also led to
something of a repeat of the effect seen in 2012 following the
introduction of the Funding for Lending Scheme, when banks
substantially withdrew from issuance in wholesale funding markets
in favour of cheap central bank subsidies.
The short and medium term effects of this were to tighten
issuance spreads across all wholesale funding markets as the
expectation of reduced issuance from the banking sector was borne
out. In RMBS markets however, some of the slack was taken up by
independent non-bank issuers, but the cost of funding continued to
tighten nonetheless and this trend extended into 2017, with spreads
now trading at record post-crisis tight levels. This may prompt
some of the bank issuers back to the market.
In broader mortgage and housing markets, signals have been very
mixed, with conflicting data from source to source and from month
to month but, for the main part, the market has continued to show
growth over the period. Whilst regional data is available less
frequently, subjective evidence from wider sources suggests that
even though much of the London market has been suffering something
of a slowdown in response to Brexit uncertainty, other parts of the
country that had lagged behind are beginning to catch up.
In early 2017, the political focus has shifted away from the UK
somewhat towards the imminent elections in Europe, with real
concerns about further shock populist victories. In the US,
President Trump continues to push forward with his many signalled
radical policies, which continue to attract news headlines and
prompt potential volatility. However, the UK will come sharply back
into focus once the government finally triggers Article 50 as
promised before the end of March.
Portfolio Review
Having closed the Company’s inaugural securitisation, Malt Hill
No.1 plc, in May, securing the senior funding for the next three
years, the Company was able to announce its second transaction with
a new market entrant, The Mortgage Lender (“TML”), in early
July. As described in more detail in previous reports, this
transaction had been in the making for about six months but had
taken longer to complete than would normally be the case, due to
the newness of TML as an originator and a delay caused by a late
change in the warehouse provider.
TML opened their doors for business immediately and began to
take applications. These were followed shortly afterwards with the
first offers being made (as well as the first declinations) and, as
would be expected with a lag of about 2-3 months, the first
completions. Applications, offers and completions have
continued to grow broadly in line with initial expectations, and at
the time of writing the pipeline totalled approximately £85m.
We expect to move into the first securitisation phase for these
loans towards the end of 2017.
Work continued throughout the summer to secure a third
transaction, and a number of portfolios and opportunities were
considered but rejected for either quality or incompatibility
reasons. Two opportunities stood out however and both of
these were pursued. With broader markets evolving quickly
following the Brexit vote, it was difficult to gauge which might
come first and the opportunities swapped places as frontrunner
several times. This was particularly difficult to manage,
especially in the light of the impending continuation vote at the
Company’s upcoming AGM. The Portfolio Manager engaged with
investors prior to this via a webinar and a roadshow of investor
meetings, but was unable to announce a transaction prior to the
vote, which was passed with no votes against. Shortly afterwards,
we were able to announce that commercial terms had been agreed and
following extensive work throughout December a term-sheet was
signed at the end of the year for a portfolio of existing loans
which would deploy the remainder of the Company’s investable
capital. In February, the transaction was completed, after the
finalisation of various pre-acquisition diligence, documentation
and financing arrangements.
The pool comprises 4,896 loans with a value of approx. £590m
predominantly Buy-to-Let Mortgages (“BTL"), an average balance of
£120,610, and a weighted average indexed loan-to-value of
69.65%.
The loans were originated primarily between 2004 and 2008 by
Capital Home Loans (“CHL”), then the UK specialist BTL mortgage
lending arm of Permanent TSB. CHL was sold to an affiliate of
Cerberus Capital Management, L.P. (“Cerberus”) in July 2015. The pool was purchased from another
Cerberus affiliate. Following the transaction CHL will continue to
service the mortgages, resulting in a seamless transaction for the
mortgage borrowers. Given the age of the loans, which on a
weighted average basis have almost 10 years of payment history
encompassing the financial crisis, performance is very strong with
just 0.92% of the loans more than one month in arrears.
The purchase has been financed with aid of a funding facility
from Bank of America Merrill Lynch for up to 18 months, although
work began immediately on the intended securitisation to provide
longer term financing.
Portfolio Performance Review
The table below shows the major contributors to the performance of
the NAV since launch. In particular, the longer time taken for the
portfolio to become fully invested and the increase in the dividend
to 6p per annum in the second year of operation have been the major
drivers of NAV performance, along with the 1.1p mark-to-market
movement in swap valuation.
NAV to end Dec-2016 |
Start NAV |
98.0 |
Net Interest |
2.4 |
Dividend |
-4.5 |
Costs (Servicing,
Operating, Warehouse) |
-3.2 |
Swap MTM |
-1.1 |
Fund NAV |
91.6 |
As highlighted in previous reports, the first portfolio consists
of mostly fixed rate mortgages, of which a majority should revert
to floating rate loans after two years and is financed by Senior
AAA rated Notes that pay a floating rate coupon. To deal with this
short term mismatch between the coupon rate of the assets and
liabilities, an interest rate swap is in place that converts the
underlying fixed rate income into floating rate income. This swap
valuation is the present value of the expected receipts and
payments to maturity and the profit or loss from this valuation
feeds directly into the NAV calculation. The mortgage portfolio is
valued in accordance with industry standard at amortised cost less
any impairment provisions as required. In practice, whilst the
value of the mortgage pool is very stable as there have been no
impairments to date, the value of the swap is subject to mark to
market volatility and will vary due to changes in the absolute
level and relative shape of the UK government yield curve. This
volatile component of the NAV is expected to diminish over time as
the payment profile of the fixed rate mortgages revert to floating
rate.
Coventry Portfolio Outlook (Malt Hill No. 1 Plc)
The portfolio continues to exhibit strong performance, in line with
expectations at the time of purchase. At the time of writing, just
one of the loans is currently marked as in arrears, being on a
payment holiday, all other loans have been paid on time and there
are no arrears, bearing out the strong credit quality of the
borrowers in the pool and the conservative lending guidelines on
the loans. There has been a minor pick-up in prepayments, however,
as expected with this type of loan, overall prepayments remain
relatively low during the initial fixed rate period. The
first resets from this are expected to begin in the spring of 2017
and given the regulatory changes to interest coverage ratios and
stress rates for BTL loans introduced at the beginning of 2017, the
number of loans which refinance out of the pool may be lower than
originally expected, as this portfolio was originated before the
rule changes were announced, which would be positive for
maintaining leverage within pool.
TML Portfolio Outlook (Cornhill No 2 Limited)
Mortgage applications and completions received so far are broadly
in line with initial expectations. This portfolio is expected to be
securitised after reaching the initial commitment of £250m of
origination, subject to market conditions.
CHL Portfolio Outlook
The portfolio acquisition was agreed just before the 31 December
period end and it is not shown in these financial statements as the
transaction settled on 21 February
2017. It is expected to be securitised as soon as
practically possible subject to market conditions.
Market Outlook
Following the CHL acquisition, the remaining investable capital for
the Company has now been deployed. The immediate challenge
will be to complete the securitisation and then to build upon this
with potential further transactions, with the initial aim of paying
dividends from income and capital gain and over the medium term
rebuilding the capital previously used to pay dividends.
The market backdrop and technicals remain strong over the short
term with the mortgage lending market resilient and robust primary
funding markets. We remain positive but cautious on the outlook and
we continue to discuss further opportunities, including both
secondary portfolios and primary origination flow opportunities and
have a varied pipeline of potential investments for 2017.
TwentyFour Asset Management LLP
21 March 2017
PORTFOLIO OF INVESTMENTS
As at 31 December 2016
|
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|
Value at amortised cost |
|
|
|
|
31.12.2016 |
|
30.06.2016 |
|
|
|
|
£ |
|
£ |
Cornhill
Mortgages No. 2 Limited |
|
|
11,560,981 |
|
- |
Malt Hill No.1
Plc |
|
|
|
296,150,665 |
|
303,585,700 |
|
|
|
|
|
|
|
|
|
|
|
307,711,646 |
|
303,585,700 |
Portfolio Summary as at 31 December 2016 |
Outstanding Balance of
the Mortgage Portfolio |
290,959,909 |
Number of Mortgage
Accounts |
1,643 |
Average Mortgage
Size |
177,091 |
Weighted Average
Current LTV |
64.66% |
Weighted Average
Interest Rate |
3.36% |
Weighted Average
Remaining Term (months) |
231.64 |
Weighted Average
Seasoning (months) |
17.49 |
BOARD MEMBERS
Biographical details of the Directors are as follows:
Christopher Waldron (Chairman) -
Independent Non-Executive Director – Guernsey resident
Mr Waldron is the Chairman of Ranger Direct Lending Fund Plc and
a director of a number of listed companies, including DW Catalyst
Fund Limited, Crystal Amber Fund Limited and JZ Capital Partners
Limited. He has over 30 years' experience as an investment manager,
specialising in fixed income, hedging strategies and alternative
investment mandates and until 2013 was Chief Executive of the
Edmond de Rothschild Group in the Channel Islands. Prior to joining
the Edmond de Rothschild Group in 1999, Mr Waldron held investment
management positions with Bank of Bermuda, the Jardine Matheson
Group and Fortis. Mr Waldron is also a member of the States of
Guernsey’s Policy and Resources Investment and Bond Sub-Committee
and a Fellow of the Chartered Institute of Securities and
Investment.
Richard Burrows - Senior Independent Non-Executive Director –
UK resident
Mr Burrows works as Head of Treasury for Bank of China, London
Branch following a role as Senior Regulatory Policy Adviser to Bank
of China UK Ltd. He previously worked as a Capital and Liquidity
Risk Consultant at Grant Thornton and before that at the
Co-operative Bank plc, taking the role of Chief of Staff to the CEO
appointed to lead the process of recapitalisation. Before
Co-operative Bank plc Mr Burrows worked in the Technical Specialist
Prudential Risk Division – Liquidity and ALM of the Financial
Services Authority and led the on-site review of BIPRU firms’
Supervisory Liquidity Review Process and subsequent panel
submission to agree Individual Liquidity Guidance. In 2009 – 2010,
before joining the Financial Services Authority Mr Burrows worked
at Northern Rock plc as Assistant Director, Marketing and Liquidity
Risk as the firm prepared for and completed its formal split of the
balance sheet into core banking and non-core assets. From 1994 to
2008, Mr Burrows was Director, Head of Funding at Citi Alternative
Investments and was responsible for efficient funding via debt
issuance from Euro and US domestic programmes and hedging of all
market risk via derivatives.
Paul Le Page (Audit Committee Chairman) - Independent
Non-Executive Director–
Guernsey resident
Mr Le Page is a director of Man Fund Management Guernsey Limited,
Man Group Japan Limited and FRM Investment Management Limited which
are subsidiaries of Man Group Plc. He is responsible for managing
hedge fund portfolios, and is a director of a number of FRM and GLG
funds. Mr Le Page is currently the Audit Committee Chairman for
Bluefield Solar Income Fund Limited and was formerly the Audit
Committee Chairman for Cazenove Absolute Equity Limited and Thames
River Multi Hedge PCC Limited. He has extensive knowledge of, and
experience in, the fund management and the hedge fund industry.
Prior to joining FRM, he was an Associate Director at Collins
Stewart Asset Management from January
1999 to July 2005, where he
was responsible for managing the firm’s hedge fund portfolios and
reviewing fund managers. He joined Collins Stewart in January 1999 where he completed his MBA in
July 1999. He originally qualified as
a Chartered Electrical Engineer after a 12-year career in
industrial research and development, latterly as the Research and
Development Director for Dynex Technologies (Guernsey) Limited,
having graduated from University College London in Electrical and
Electronic Engineering in 1987.
Helen Green - Independent Non-Executive Director - Guernsey
resident
Mrs Green is a chartered accountant and has been employed by
Saffery Champness, a top 20 ?rm of chartered accountants, since
1984. She quali?ed as a chartered accountant in 1987 and became a
partner in the London office in 1997. Since 2000 she has been based
in the Guernsey office where she is client liaison director
responsible for trust and company administration. Mrs Green serves
as a Non-Executive Director on the boards of a number of companies
in various jurisdictions, including Aberdeen Emerging Markets
Investment Company Limited, Landore Resources Limited, John Laing
Infrastructure Fund Limited, City Natural Resources High Yield
Trust plc and Acorn Income Fund Limited, of which she is
Chairman.
STATEMENT OF PRINCIPAL RISKS AND UNCERTAINTIES
Principal Risks and Uncertainties
In respect to the Company’s system of Internal Controls and
reviewing its effectiveness, the Directors:
- are satisfied that they have reviewed the principal risks
facing the Company, including those that would threaten its
business model, future performance, solvency or liquidity; and
- have reviewed the effectiveness of the risk management and
Internal Control systems including material financial, operational
and compliance controls (including those relating to the financial
reporting process) and no significant failings or weaknesses were
identified.
When considering the total return of the Group, the Board takes
account of the risk which has been taken in order to achieve that
return. The Board considers the following principal risks to be
relevant for the next six month period ending June 30 2017:
1. The risk of failing to securitise purchased mortgage
portfolios. If there is any significant delay in the ability to
securitise a portfolio, the interest rates payable by the Warehouse
SPV to third party providers of loan finance are likely to increase
over time leading to falls in the value and/or yield of the
instruments held by the Acquiring Entity, the value of which will
impact the yield of the Group. In addition the underlying
portfolios will need to be re-financed periodically in order to
maintain optimal levels of leverage. Failure to re-securitise at a
suitable rate and/or reinvest the proceeds of subsequent
securitisations may also adversely impact the yield of the Group.
The risk has been mitigated by the Portfolio being engaged with the
UK RMBS market and service providers. This enables the Company to
optimise the timing of its securitisation transactions.
2. The risk of the default of the counterparty with which
the Warehouse or Issuer SPVs transacts the derivative trades for
hedging purposes, or to gain, increase or decrease exposure to
mortgages. Default by any hedging counterparty in the performance
of its obligations could subject the investments to unwanted credit
and market risks. The risk is mitigated by the Portfolio Manager
employing due diligence in its choice of swap counterparty and
engaging with robust and financially sound counterparties, with
continuous monitoring of the counterparty through credit analysis
and ratings monitoring over the lifetime of the trade.
3. The risk of the Company being unable to pay target
dividends to investors due to a shortfall in income received on the
portfolio. The risk is mitigated by the Portfolio Manager
monitoring the Group’s cash flow and income position, in
conjunction with the Company’s Administrator, and reporting to the
Board on a quarterly basis. The Company can also pay dividends from
capital if necessary.
4. The risk of the Group being unable to invest or
reinvest proceeds of capital repaid from mortgage loans to purchase
additional mortgage portfolios in a timely manner. The risk is
mitigated by the Board monitoring the portfolio pipeline in regular
communication with the Portfolio Manager, and in quarterly and ad
hoc board meetings.
5. The risk of investor dissatisfaction leading to a
weaker share price, causing the Company to trade at a discount to
its underlying asset value.
Going Concern
Under the 2014 UK Corporate Governance Code (effective for periods
beginning on or after 1 October 2014), the Directors are
required to satisfy themselves that it is reasonable to assume that
the Group is a going concern and to identify any material
uncertainties to the Group’s ability to continue as a going concern
for at least 12 months from the date of approving the financial
statements.
Having reviewed the Group’s current portfolio and pipeline of
investment transactions the Board of Directors believe that it is
appropriate to adopt a going concern basis in preparing the
Unaudited Condensed Consolidated Interim Financial Statements given
the Group’s holdings of cash and cash equivalents and the income
deriving from those investments, meaning the Group has adequate
financial resources to meet its liabilities as they fall due for
the foreseeable future being no less than 12 months from the
statement of financial position date.
Related Parties
Other than fees payable in the ordinary course of business, there
have been no material transactions with related parties, which have
affected the financial position or performance of the Group in the
financial period. Please refer to note 10 for further details.
RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
• these
Unaudited Condensed Consolidated Interim Financial Statements have
been prepared in accordance with International Accounting Standard
34, "Interim Financial Reporting" and give a true and fair view of
the assets, liabilities, financial position and profit or loss of
the Group as required by the UK Listing Authority’s Disclosure and
Transparency Rule (“DTR”) 4.2.4R.
• the interim
report meets the requirements of an interim management report and
includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules,
being an indication of important events that have occurred during
the period from 1 July 2016 to
31 December 2016 and their impact on
the Unaudited Condensed Consolidated Interim Financial Statements;
and a description of the principal risks and uncertainties for the
remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules,
being related party transactions that have taken place during the
period from 1 July 2016 to
31 December 2016 and that have
materially affected the financial position or performance of the
Company during that period.
By order of the Board,
Signed on behalf of the Board of Directors on 21 March 2017 by:
Christopher Waldron
Chairman
Paul Le Page
Director
Independent review report to UK
Mortgages Limited
Our conclusion
We have reviewed the accompanying unaudited condensed
consolidated interim financial information of UK Mortgages Limited
and its subsidiaries (the ‘Group’) as at 31
December 2016. Based on our review, nothing has come to our
attention that causes us to believe that the accompanying unaudited
condensed consolidated interim financial information is not
prepared, in all material respects, in accordance with
International Accounting Standard 34, ‘Interim Financial
Reporting’, and the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom’s Financial Conduct Authority.
What we have reviewed
The accompanying unaudited condensed consolidated interim financial
information comprises:
- the Unaudited Condensed Consolidated Statement of Financial
Position as at 31 December 2016;
- the Unaudited Condensed Consolidated Statement of Comprehensive
Income for the six-month period then ended;
- the Unaudited Condensed Consolidated Statement of Changes in
Equity for the six-month period then ended;
- the Unaudited Condensed Consolidated Statement of Cash Flows
for the six-month period then ended; and
- the Notes to the Unaudited Condensed Consolidated Interim
Financial Statements, comprising a summary of significant
accounting policies and other explanatory information.
The unaudited condensed consolidated interim financial
information has been prepared in accordance with International
Accounting Standard 34, ‘Interim Financial Reporting’, and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom’s Financial Conduct Authority.
Our responsibilities and those of the directors
The Directors are responsible for the preparation and presentation
of this unaudited condensed consolidated interim financial
information in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom’s Financial
Conduct Authority.
Our responsibility is to express a conclusion on this unaudited
condensed consolidated interim financial information based on our
review. This report, including the conclusion, has been prepared
for and only for the Group for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom’s Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
Scope of review
We conducted our review in accordance with International Standard
on Review Engagements 2410, 'Review of interim financial
information performed by the independent auditor of the entity'
issued by the International Auditing and Assurance Standards Board.
A review of interim financial information consists of making
inquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Interim
Report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the unaudited condensed consolidated interim financial
statements.
PricewaterhouseCoopers CI LLP
Chartered Accountants
Guernsey, Channel Islands
21 March 2017
(a) The maintenance and integrity of the Group’s
website is the responsibility of the directors; the work carried
out by the auditors does not involve consideration of these matters
and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the Interim Report and Unaudited
Condensed Consolidated Interim Financial Statements since they were
initially presented on the website.
(b) Legislation in Guernsey governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME
for the period from 1 July 2016 to
31 December 2016
|
|
|
|
|
|
For
the period from 01.07.2016 to 31.12.2016 |
|
For
the period from 10.06.2015 to 31.12.2015 |
|
|
|
|
|
|
(Unaudited) |
|
(Unaudited) |
|
|
|
Note |
|
|
£ |
|
£ |
Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on
mortgage loans |
|
|
|
|
|
4,602,222 |
|
1,576,557 |
Interest
income on cash and cash equivalents |
|
|
|
|
10,009 |
|
219,234 |
Net interest expense
on financial liabilities at fair value through profit and loss |
|
|
|
|
|
(1,149,012) |
|
- |
Unrealised gain/(loss)
on financial liabilities at fair value through profit and loss |
|
|
|
|
|
1,249,700 |
|
(689,335) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income |
|
|
|
|
|
4,712,919 |
|
1,106,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on
loan notes |
|
|
15 |
|
|
2,384,147 |
|
- |
Portfolio management
fees |
|
|
10 |
|
|
881,648 |
|
897,278 |
Commitment facility
fees |
|
|
11 |
|
|
654,658 |
|
- |
Amortisation of loan
note issue costs |
|
|
|
|
|
487,117 |
|
- |
Mortgage loans
servicing fees |
|
|
|
|
|
385,253 |
|
103,317 |
General expenses |
|
|
11 |
|
|
97,918 |
|
34,489 |
Administration &
secretarial fees |
|
|
11 |
|
|
89,241 |
|
42,664 |
Audit fees |
|
|
|
|
|
78,126 |
|
32,865 |
Legal &
professional fees |
|
|
|
|
|
72,603 |
|
90,809 |
Directors' fees |
|
|
10 |
|
|
53,750 |
|
40,063 |
AIFM fees |
|
|
11 |
|
|
48,582 |
|
50,474 |
Depositary fees |
|
|
11 |
|
|
40,858 |
|
37,200 |
Custody fees |
|
|
11 |
|
|
31,058 |
|
11,684 |
Corporate broker
fees |
|
|
11 |
|
|
25,147 |
|
24,054 |
Interest expense on
borrowings |
|
|
|
|
|
- |
|
196,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses |
|
|
|
|
|
5,330,106 |
|
1,561,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
loss for the period |
|
|
|
|
|
(617,187) |
|
(454,938) |
|
|
|
|
|
|
|
|
|
Loss per ordinary
share - |
|
|
|
|
|
(0.002) |
|
(0.002) |
basic &
diluted |
|
|
3 |
|
|
|
All items in the above statement derive from continuing
operations.
The notes form an integral part of these Unaudited Condensed
Consolidated Interim Financial Statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
as at 31 December 2016
|
|
|
31.12.2016 |
|
30.06.2016 |
|
|
|
(Unaudited) |
|
(Audited) |
Assets |
Note |
|
£ |
|
£ |
Non-current
assets |
|
|
|
|
|
Mortgage loans |
5 |
|
306,061,483 |
|
302,251,423 |
Reserve fund |
6 |
|
4,739,400 |
|
4,739,400 |
Total non-current
assets |
|
|
310,800,883 |
|
306,990,823 |
|
|
|
|
|
|
Current
assets |
|
|
|
|
|
Mortgage loans |
5 |
|
1,650,163 |
|
1,334,277 |
Trade and other
receivables |
7 |
|
2,486,605 |
|
4,792,524 |
Cash and cash
equivalents |
8 |
|
171,863,352 |
|
194,218,249 |
Total current
assets |
|
|
176,000,120 |
|
200,345,050 |
|
|
|
|
|
|
Total
assets |
|
|
486,801,003 |
|
507,335,873 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Non-current
liabilities |
|
|
|
|
|
Loan notes |
15 |
|
252,702,008 |
|
261,784,493 |
Total non-current
liabilities |
|
|
252,702,008 |
|
261,784,493 |
|
|
|
|
|
|
Current
liabilities |
|
|
|
|
|
Financial liabilities
at fair value through profit and loss |
|
|
2,828,275 |
|
4,077,975 |
Trade and other
payables |
9 |
|
2,024,642 |
|
4,110,140 |
Total current
liabilities |
|
|
4,852,917 |
|
8,188,115 |
Total
liabilities |
|
|
257,554,925 |
|
269,972,608 |
|
|
|
|
|
|
Net assets |
|
|
229,246,078 |
|
237,363,265 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
Share capital
account |
|
|
245,000,000 |
|
245,000,000 |
Other reserves |
|
|
(15,753,922) |
|
(7,636,735) |
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity |
|
|
229,246,078 |
|
237,363,265 |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares in
issue |
|
|
250,000,000 |
|
250,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value per
ordinary share |
4 |
|
0.9170 |
|
0.9495 |
|
|
|
|
|
|
The Unaudited Condensed Consolidated Interim Financial
Statements were approved and authorised for issue by the Board of
Directors on 21 March 2017 and signed
on its behalf by:
Christopher Waldron
Chairman
Paul Le Page
Director
The notes form an integral part of these Unaudited Condensed
Consolidated Interim Financial Statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
EQUITY
for the period from 1 July 2016 to
31 December 2016
|
|
|
Share
capital |
|
Other |
|
Total |
|
|
|
account |
|
reserves |
|
equity |
|
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
|
|
£ |
|
£ |
|
£ |
Balance
at 1 July 2016 |
|
245,000,000 |
|
(7,636,735) |
|
237,363,265 |
|
|
|
|
|
|
|
|
Dividend
paid |
|
- |
|
(7,500,000) |
|
(7,500,000) |
Total
comprehensive loss for the period |
|
- |
|
(617,187) |
|
(617,187) |
|
|
|
|
|
|
|
|
Balance
at 31 December 2016 |
|
245,000,000 |
|
(15,753,922) |
|
229,246,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
capital |
|
Other |
|
Total |
|
|
|
account |
|
reserves |
|
equity |
|
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
|
|
£ |
|
£ |
|
£ |
Balance
at 10 June 2015 |
|
- |
|
- |
|
- |
|
|
|
|
|
|
|
|
Issue of
shares |
|
250,000,000 |
|
- |
|
250,000,000 |
Share
issue costs |
|
(5,000,000) |
|
- |
|
(5,000,000) |
Total
comprehensive loss for the period |
|
- |
|
(454,938) |
|
(454,938) |
|
|
|
|
|
|
|
|
Balance
at 31 December 2015 |
|
245,000,000 |
|
(454,938) |
|
244,545,062 |
|
|
|
|
|
|
|
|
The notes form an integral part of these Unaudited Condensed
Consolidated Interim Financial Statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS
for the period from 1 July 2016 to
31 December 2016
|
|
|
For
the period from 01.07.2016 to 31.12.2016 |
|
For
the period from 10.06.2015 to 31.12.2015 |
|
|
|
(Unaudited) |
|
(Unaudited) |
|
|
Note |
£ |
|
£ |
|
|
|
|
|
|
Cash flows from
operating activities |
|
|
|
|
|
Total comprehensive
loss for the period |
|
|
(617,187) |
|
(454,938) |
|
|
|
|
|
|
Adjustments for: |
|
|
|
|
|
Amortisation
adjustment under effective interest rate method |
|
5 |
436,019 |
|
186,514 |
Decrease/(increase) in trade and other receivables |
|
2,305,919 |
|
(891,968) |
Unrealised (gain)/loss
on financial liabilities at fair value through profit and loss |
|
|
(1,249,700) |
|
689,335 |
Increase in margin
account |
|
|
- |
|
(3,000,000) |
(Decrease)/increase in
trade and other payables |
|
|
(2,085,498) |
|
1,634,219 |
Amortised borrowing
charges released |
|
5 |
19,825 |
|
13,971 |
Purchase of mortgage
loans |
|
5 |
(11,563,225) |
|
(316,395,593) |
Mortgage loans
repaid |
|
5 |
6,981,435 |
|
2,109,320 |
|
|
|
|
|
|
Net cash outflow from
operating activities |
|
|
(5,772,412) |
|
(316,109,140) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issue of
ordinary shares |
|
|
- |
|
246,153,156 |
Share issue costs |
|
|
- |
|
(1,098,538) |
Proceeds from
borrowings |
|
|
- |
|
94,762,500 |
Increase in issue fees
amortised |
|
|
326,825 |
|
- |
Repayments of loan
notes |
|
|
(9,409,310) |
|
- |
Dividend paid |
|
|
(7,500,000) |
|
- |
|
|
|
|
|
|
Net cash
(outflow)/inflow from financing activities |
|
|
(16,582,485) |
|
339,817,118 |
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/increase in cash and cash equivalents |
|
(22,354,897) |
|
23,707,978 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents at beginning of period |
|
194,218,249 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period |
|
|
171,863,352 |
|
23,707,978 |
|
|
|
|
|
|
The notes form an integral part of these Unaudited Condensed
Consolidated Interim Financial Statements.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
for the period from 1 July 2016 to
31 December 2016
1. General Information
The Company was incorporated with limited liability in Guernsey, as
a closed-ended investment company on 10 June
2015. The Company’s Shares were listed with the UK Listing
Authority and admitted to trading on the Specialist Fund Segment of
the London Stock Exchange on 7 July
2015.
The Unaudited Condensed Consolidated Interim Financial
Statements comprise the financial statements of UK Mortgages
Limited, UK Mortgages Corporate Funding Designated Activity
Company, Malt Hill No.1 Plc (UK based company), and Cornhill
Mortgages No.1 Limited (UK based company currently in liquidation)
and Cornhill Mortgages No.2 Limited (UK based company) as at
31 December 2016, together referred
to as the “Group”.
The Group’s investment objective is to provide Shareholders with
access to stable income returns through the application of
relatively conservative levels of leverage to portfolios of UK
mortgages.
The Group expects that income will constitute the vast majority
of the return to Shareholders and that the return to Shareholders
will have relatively low volatility and demonstrate a low level of
correlation with broader markets.
The Portfolio Manager to the Company and Portfolio Adviser to
the UK Mortgages Corporate Funding Designated Activity Company is
TwentyFour Asset Management LLP.
2. Accounting Policies
a) Statement of compliance
The Unaudited Condensed Consolidated Interim Financial Statements
for the period from 1 July 2016 to 31 December 2016 have been prepared on a going
concern basis in accordance with IAS 34 “Interim Financial
Reporting”, the Listing Rules of the London Stock Exchange and
applicable legal and regulatory requirements.
The Unaudited Condensed Consolidated Interim Financial
Statements should be read in conjunction with the Annual
Consolidated Financial Statements for the period ended
30 June 2016 which were prepared in accordance with
International Financial Reporting Standards (“IFRS”) and which
received an unqualified audit report.
b) Changes in accounting policy
In the current financial period, there have been no changes to the
accounting policies from those applied in the most recent audited
annual financial statements.
c) Critical judgements and estimates
In the current financial period, there have been no changes to the
significant critical accounting judgements, estimates and
assumptions from those applied in the most recent audited annual
financial statements.
3. Loss per Ordinary Share - basic &
diluted
The loss per Ordinary Share of £0.002 (31
December 2015: £0.002) - basic and diluted has been
calculated based on the weighted average number of Ordinary Shares
of 250,000,000 (31 December 2015: 217,073,171) and a net loss
of £617,187 (31 December 2015:
£454,938).
4. Net Asset Value per Ordinary Share
The Net Asset Value of each share of £0.9170 (30 June 2016: £0.9495) is determined by dividing
the net assets of the Company £229,246,078 (30 June 2016: £237,363,265) by the number of
shares in issue at 31 December 2016
of 250,000,000 (30 June 2016:
250,000,000).
5. Mortgage loans
|
|
|
|
|
|
|
For
the period from 01.07.2016 to 31.12.2016 |
|
For
the period from 10.06.2015 to 30.06.2016 |
|
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
|
|
|
|
|
|
|
£ |
|
£ |
Mortgage
loans at start of the period |
|
303,585,700 |
|
- |
Mortgage
loans purchased |
|
|
|
11,563,225 |
|
316,395,593 |
Amortisation adjustment under effective interest rate method |
|
(436,019) |
|
(669,501) |
Mortgage
loans repaid |
|
|
|
|
(6,981,435) |
|
(12,411,333) |
Borrowings
charges amortised |
|
- |
|
297,374 |
Amortised borrowing
charges released |
|
|
|
|
|
|
(19,825) |
|
(26,433) |
|
|
|
|
|
|
|
|
|
|
Mortgage
loans at end of the period |
|
307,711,646 |
|
303,585,700 |
|
|
|
|
|
|
|
|
|
|
Amounts
falling due after more than one year |
306,061,483 |
|
302,251,423 |
Amounts
falling due within one year |
|
1,650,163 |
|
1,334,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307,711,646 |
|
303,585,700 |
|
|
|
|
|
|
|
|
|
|
Mortgage loans at 31 December 2016
comprise of one securitised mortgage portfolio legally held in Malt
Hill No.1 Plc and one mortgage portfolio held with Cornhill
Mortgages No. 2 Limited. Please refer to the Portfolio of
Investments for breakdown of both portfolios.
Note 12 sets out the liquidity and credit risk profile of the
mortgage loans.
6. Reserve fund
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
|
|
|
|
31.12.2016 |
|
30.06.2016 |
|
|
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
|
|
|
|
|
|
|
|
£ |
|
£ |
|
Reserve fund |
|
|
|
|
|
|
4,739,400 |
|
4,739,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,739,400 |
|
4,739,400 |
|
|
|
|
|
|
|
|
|
|
|
|
The reserve fund is held with Citibank N.A. London Branch within
the securitisation structure. The Group is required to maintain
this reserve and it is not readily available to the Group and may
only be used in accordance with the Issue and Programme
Documentation.
7. Trade and other
receivables
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
|
|
|
31.12.2016 |
|
30.06.2016 |
|
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
|
|
|
|
|
|
|
£ |
|
£ |
Collateral
due from BNP Paribas |
|
- |
|
3,000,000 |
Interest
receivable on mortgage loans |
|
821,469 |
|
834,356 |
Capitalised expenses |
|
|
|
|
1,319,489 |
|
621,517 |
Other
receivables and prepayments |
|
345,180 |
|
332,123 |
Interest
receivable on cash and cash equivalents |
467 |
|
4,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,486,605 |
|
4,792,524 |
|
|
|
|
|
|
|
|
|
|
Capitalised expenses are the set up costs of Cornhill Mortgages
No. 2 Limited, which are being amortised over 3 years.
8. Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash
equivalents comprise the following balances with original maturity
of less than 90 days.
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
|
|
|
31.12.2016 |
|
30.06.2016 |
|
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
|
|
|
|
|
|
|
£ |
|
£ |
Cash at bank |
|
|
|
|
|
|
169,938,915 |
|
182,970,882 |
Short-term
deposits |
|
|
|
|
1,924,437 |
|
11,247,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,863,352 |
|
194,218,249 |
|
|
|
|
|
|
|
|
|
|
The short-term deposits are investments into a BlackRock-managed
institutional money-market fund – “Institutional Cash Series Plc -
Institutional Sterling Liquidity Fund”.
9. Trade and other payables
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
|
|
|
31.12.2016 |
|
30.06.2016 |
|
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
|
|
|
|
|
|
|
£ |
|
£ |
Portfolio
management fees payable |
|
881,648 |
|
1,348,312 |
Interest
expense on loan notes payable |
|
429,012 |
|
390,507 |
Loan notes
issue costs payable |
|
280,914 |
|
1,975,461 |
Audit fees
payable |
|
|
|
|
|
133,126 |
|
85,000 |
Mortgage
loans servicing fees payable |
|
|
|
70,942 |
|
55,441 |
Legal
& professional fees payable |
|
53,112 |
|
74,508 |
General
expenses payable |
|
|
|
52,744 |
|
29,304 |
Administration & secretarial fees payable |
|
42,427 |
|
27,389 |
Directors'
fees payable |
|
|
|
|
26,875 |
|
20,568 |
AIFM fees
payable |
|
|
|
|
|
24,914 |
|
25,804 |
Commitment
facility fees payable |
|
13,564 |
|
- |
Depositary
fees payable |
|
|
|
|
11,514 |
|
51,362 |
Custody
fees payable |
|
|
|
|
3,850 |
|
26,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,024,642 |
|
4,110,140 |
|
|
|
|
|
|
|
|
|
|
10. Related Parties
a) Directors’ Remuneration & Expenses
The Directors of the Company are remunerated for their services at
such a rate as the Directors determine. The aggregate fees of the
Directors will not exceed £200,000.
The annual Directors’ fees comprise £30,000 payable to Mr
Waldron, the Chairman, £27,500 to Mr Le Page as Chairman of the
Audit Committee, and £25,000 each to Mrs Green and Mr Burrows.
During the period ended 31 December
2016, Directors’ fees of £53,750 (31
December 2015: £40,063) were charged to the Company, of
which £26,875 remained payable at the end of the period
(30 June 2016: £20,568).
b) Shares held by related parties
As at 31 December 2016, Directors of
the Company held the following shares in the Company
beneficially:-
Directors' and Other Interests |
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
|
|
31.12.2016 |
Christopher Waldron |
|
|
5,000 |
Richard
Burrows |
|
|
5,000 |
Paul Le
Page |
|
|
|
20,000 |
Helen
Green |
|
|
|
- |
As at 31 December 2016, the
Portfolio Manager held Nil shares (30 June
2016: Nil) and partners and employees of the Portfolio
Manager held 8,040,076 shares (30 June
2016: 8,040,076), which is 3.22% of the issued share capital
(30 June 2016: 3.22%).
c) Portfolio Manager
The portfolio management fee is payable to the Portfolio Manager
quarterly on the last business day of the quarter at a rate of
0.75% per annum of the lower of NAV, which is calculated monthly on
each valuation day, or market capitalisation of each class of
shares. For the period beginning six months after admission and
ending when at least 75% of the net proceeds have been
contractually exposed to mortgage portfolios, the amount of the net
proceeds which have not been contractually exposed to mortgage
portfolios will be deducted from the NAV and the market
capitalisation for the purposes of calculating the fee payable to
the Portfolio Manager.
The Company has also agreed to pay a marketing fee equal to
12.5% of the Placing commission calculated and payable to Numis
Securities Limited (“Numis”) in respect of the issue and each
Placing whether under the Placing Programme or otherwise, to the
Portfolio Manager in respect of its marketing activities.
Total portfolio management fees for the period amounted to
£881,648 (31 December 2015: £897,278)
of which £881,648 (30 June 2016:
£1,348,312) remained payable at the period end. The Portfolio
Management Agreement dated 23 June
2015 remains in force until determined by the Company or the
Portfolio Manager giving the other party not less than twelve
months' notice in writing. Under certain circumstances, the Company
or the Portfolio Manager are entitled to immediately terminate the
agreement in writing.
11. Material Agreements
a) Alternative Investment Fund Manager
The Company’s Alternative Investment Fund Manager (the “AIFM”) is
Maitland Institutional Services Limited. In consideration for the
services provided by the AIFM under the AIFM Agreement the AIFM is
entitled to receive from the Company a minimum fee of £20,000 per
annum and fees payable quarterly in arrears at a rate of 0.07% of
the NAV of the Company below £50 million, 0.05% on Net Assets
between £50 million and £100 million and 0.03% on Net Assets in
excess of £100 million. During the period ended 31 December 2016, AIFM fees of £48,582
(31 December 2015: £50,474) were
charged to the Company, of which £24,914 (30 June 2016:
£25,804) remained payable at the end of the period.
b) Administrator and Secretary
Administration fees are payable to Northern Trust International
Fund Administration Services (Guernsey) Limited monthly in arrears
at a rate of 0.06% of the NAV of the Company below £100 million,
0.05% on net assets between £100 million and £200 million and 0.04%
on net assets in excess of £200 million as at the last business day
of the month subject to a minimum £75,000 per annum. These NAV
based fees commenced from 19 November
2015 being the date the Company acquired its initial
investment.
In addition, an annual fee of £45,000 will be charged for
corporate governance and company secretarial services and
accounting services. Total administration and secretarial fees for
the period amounted to £89,241 (31 December
2015: £42,664) of which £42,427 (30
June 2016: £27,389) remained payable at the period end.
c) Depositary and Custodian
Depositary fees are payable to Northern Trust (Guernsey) Limited,
monthly in arrears, at a rate of 0.03% of the NAV of the Company as
at the last business day of the month subject to a minimum £40,000
per annum. Total depositary fees and charges for the period
amounted to £40,858 (31 December
2015: £37,200) of which £11,514 (30
June 2016: £51,362) remained payable at the period end.
The Depositary will charge an additional fee of £20,000 for
performing due diligence on each service provider/administrator
employed.
The Depositary is also entitled to a custody fee at a rate of
0.03% of the NAV of the Company as at the last business day of the
month subject to a minimum of £8,500 per annum. These NAV based
fees commenced on 19 November 2015
being the date Company acquired its initial investment. Total
custody fees for the period amounted to £31,058 (31 December 2015: £11,684) of which £3,850
(30 June 2016: £26,484) remained
payable at the period end.
d) Commitment facility fee
The commitment facility fee is an undrawn fee on the loan facility
between Cornhill No 2 Limited and the Royal Bank of Scotland plc.
This is charged at 90bps on the initial warehouse size of £150m.
The drawn costs are 180bps over 1 month LIBOR initially,
changing to 280bps over 1 month LIBOR from 1
January 2017.
e) IPO Sponsor’s and Placing Agreement
In connection with the Company’s IPO, the Company engaged the
services of Numis to act as corporate broker, co-ordinators,
placement agents, arrangers and sponsors in connection with the
issue of the Ordinary Shares (“the Issue”) and the application for
Admission.
The Company agreed to pay Numis:
- a corporate finance fee of £200,000, and
- a Placing commission equal to 2% of the gross proceeds of the
Issue less (i) an amount equal to reasonably and properly incurred
costs payable by the Company in respect of the Issue, Placing
Programme and the Trading Applications and agreed in advance with
Numis and (ii) an amount equal to the marketing fee payable to the
Portfolio Manager. Total Issue fees amounted to £5,000,000 of which
£Nil (30 June 2016: £54,618) is due
and payable at the period end. The Sponsor and Placing agreement is
governed by the laws of England. The Company also agreed to pay
Numis an annual retainer fee of £50,000 of which nil remained
payable at the period end. The charge for the period was £25,147
(30 June 2016: £48,907).
12. Financial Risk Management
The Group’s objective in managing risk is the creation and
protection of shareholder value. Risk is inherent in the Group’s
activities, but it is managed through an ongoing process of
identification, measurement and monitoring.
The Group’s financial instruments include financial assets or
liabilities at fair value through profit and loss, loans and
receivables, and cash and cash equivalents. The main risks arising
from the Group’s financial instruments are market risk, liquidity
risk, and credit risk. The techniques and instruments utilised for
the purposes of portfolio management are those which are reasonably
believed by the Board to be economically appropriate to the
efficient management of the Group.
On 8 July 2016, the Group agreed
an arrangement with The Mortgage Lender to purchase up to £250m of
newly-originated owner-occupied mortgages over an expected 12 to 14
month period. The Company has the option to purchase up to £1bn of
mortgages over a 5 year period.
Market risk
Market risk embodies the potential for both losses and gains and
includes interest rate risk, price risk and currency risk. The
Group’s strategy on the management of market risk is driven by the
Group’s investment objective. The Group’s investment objective is
to provide investors with access to stable income returns through
the application of relatively conservative levels of leverage to
portfolios of UK mortgage loans.
In July 2016, the Group agreed
upon a second transaction, which was with The Mortgage Lender, to
purchase up to £250m of newly-originated mortgages over an expected
12 to 14 month period. Once purchased by the Warehouse SPV, the
Group intends to securitise this second mortgage portfolio.
1.1 Interest rate risk: Interest rate risk is the risk that the
value of financial instruments will fluctuate due to changes in
market interest rates. The current underlying mortgage portfolios
are payable on fixed rates, meaning the current exposure to
interest rate fluctuations on the portfolios are limited. However,
floating rate interest is payable on loan notes. In order to hedge
this differential, interest rate swaps were transacted by the
Warehouse SPVs with a market counterparty to pay the fixed rate and
receive the floating rate payments. On 2 June 2016, the
interest rate swap transacted by Cornhill No. 1 plc was novated to
the Issuer SPV on securitisation of the mortgage
portfolio.
The below tables show exposure to interest rate risk:
|
|
|
|
|
|
Non
interest |
|
Total
as at |
|
|
Floating rate |
|
Fixed
rate |
|
bearing |
|
31.12.2016 |
|
|
£ |
|
£ |
|
£ |
|
£ |
Assets |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Mortgage loans |
|
- |
|
307,711,646 |
|
- |
|
307,711,646 |
Reserve fund |
|
4,739,400 |
|
- |
|
- |
|
4,739,400 |
Trade and other
receivables |
|
821,936 |
|
- |
|
1,664,669 |
|
2,486,605 |
Cash and cash
equivalents |
|
171,863,352 |
|
- |
|
- |
|
171,863,352 |
Total
assets |
|
177,424,688 |
|
307,711,646 |
|
1,664,669 |
|
486,801,003 |
Liabilities |
|
|
|
|
|
|
|
|
Financial liabilities
at fair value through profit and loss |
|
(2,828,275) |
|
- |
|
- |
|
(2,828,275) |
Trade and other
payables |
|
- |
|
- |
|
(2,024,642) |
|
(2,024,642) |
Loan notes |
|
(252,702,008) |
|
- |
|
- |
|
(252,702,008) |
Total
liabilities |
|
(255,530,283) |
|
- |
|
(2,024,642) |
|
(257,554,925) |
Total interest
sensitivity gap |
|
(78,105,595) |
|
307,711,646 |
|
(359,973) |
|
229,246,078 |
|
|
|
|
|
|
Non
interest |
|
Total
as at |
|
|
Floating rate |
|
Fixed
rate |
|
bearing |
|
30.06.2016 |
|
|
£ |
|
£ |
|
£ |
|
£ |
Assets |
|
(Audited) |
|
(Audited) |
|
(Audited) |
|
(Audited) |
Mortgage loans |
|
- |
|
303,585,700 |
|
- |
|
303,585,700 |
Reserve fund |
|
4,739,400 |
|
- |
|
- |
|
4,739,400 |
Trade and other
receivables |
|
838,884 |
|
- |
|
3,953,640 |
|
4,792,524 |
Cash and cash
equivalents |
|
194,218,249 |
|
- |
|
- |
|
194,218,249 |
Total
assets |
|
199,796,533 |
|
303,585,700 |
|
3,953,640 |
|
507,335,873 |
Liabilities |
|
|
|
|
|
|
|
|
Financial liabilities
at fair value through profit and loss |
|
(4,077,975) |
|
- |
|
- |
|
(4,077,975) |
Trade and other
payables |
|
- |
|
- |
|
(4,110,140) |
|
(4,110,140) |
Loan notes |
|
(261,784,493) |
|
- |
|
- |
|
(261,784,493) |
Total
liabilities |
|
(265,862,468) |
|
- |
|
(4,110,140) |
|
(269,972,608) |
Total interest
sensitivity gap |
|
(66,065,935) |
|
303,585,700 |
|
(156,500) |
|
237,363,265 |
If interest rates were to change by 50 basis points, with all
other variables remaining constant, the effect on the net profit
and equity would have been as shown in the table below. The
movement has been calculated on the notional amount of the swaps of
£301,920,272 which is not shown in the table above. These
percentages have been determined based on potential volatility and
are deemed reasonable by the Directors.
|
|
|
|
|
|
|
|
31.12.2016 |
|
|
|
|
|
|
|
|
£ |
Increase of 50 basis
points |
|
|
|
|
|
|
|
1,119,073 |
Decrease of 50 basis
points |
|
|
|
|
|
|
|
(1,119,073) |
|
|
|
|
|
|
|
|
30.06.2016 |
|
|
|
|
|
|
|
|
£ |
Increase of 50 basis
points |
|
|
|
|
|
|
|
1,175,104 |
Decrease of 50 basis
points |
|
|
|
|
|
|
|
(1,175,104) |
1.2 Price risk: An active market does not exist in the
underlying instruments based on the illiquidity of the mortgage
loans, and for this reason the mortgage portfolios are accounted
for on an amortised cost basis by an independent third party
valuation provider. Any such valuation may therefore differ from
the actual realisable market value of the relevant mortgage
portfolio.
The interest rate swap hedge trade is valued on a fair value
mark-to-market basis by the swap counterparty, using the observable
information on swap rates. The difference in fair value of the
interest rate swap and amortised cost valuation of the mortgage
loans could lead to volatility in the Group’s NAV.
1.3 Currency risk: As at 31 December
2016, the Group had no material exposure to foreign exchange
fluctuations or changes in foreign currency interest rates.
Consequently there is no material movement in assets and
liabilities arising from foreign exchange fluctuations.
Liquidity Risk
Liquidity risk is the risk that the Group will not have sufficient
resources available to meet its liabilities as and when they fall
due. The company makes its investments by purchasing Profit
Participating Notes issued by the Acquiring Entity. The
Acquiring Entity is bound by EU securities law and will be unable
to fully liquidate, sell, hedge or otherwise mitigate its credit
risk under or associated with the Retention Notes issued by the
Warehouse SPV or Issuer SPV until such time as the securities of
the relevant Issuer SPV have been redeemed in full (whether at
final maturity or early redemption). This places limitations on the
Group’s ability to redeem the Profit Participating Notes issued by
the Acquiring Entity. It is not expected that any party will make a
secondary market in relation to the Retention Notes, and that there
will usually be a limited market for the Retention Notes. Any
partial sales of Retention notes would need to be negotiated on a
private counterparty to counterparty basis and could result in a
liquidity discount being applied. There may be additional
restrictions on divestment in the terms and conditions of the
underlying investments. The illiquidity of the Retention Notes may
therefore adversely affect the value of the Profit Participating
Notes in the event of a forced sale which would, in turn, adversely
affect the Group’s business, business prospects, financial
condition, returns to Shareholders including dividends, NAV and/or
the market price of the shares.
During the warehousing phase the Group’s mortgage loans advanced
are illiquid and may be difficult or impossible to realise for cash
at short notice. At the period end, the TML mortgage portfolio was
in the warehousing phase.
The Group manages its liquidity risk through short term and long
term cash flow forecasts to ensure it is able to meet its
obligations. In addition, the Group is permitted to borrow up
to 10% of NAV for short term liquidity purposes, including
financing share repurchases or redemptions, making investments or
satisfying working capital requirements. This can be either through
a loan facility or other types of collateralised borrowing
instruments including stock lending or repurchase transactions.
|
|
|
|
|
|
|
Less
than |
|
More
than |
|
Total
as at |
|
|
|
|
|
|
|
one
year |
|
one year |
|
31.12.2016 |
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
Assets |
|
|
|
|
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Mortgage loans |
|
|
|
|
|
|
1,650,163 |
|
306,061,483 |
|
307,711,646 |
Reserve fund |
|
|
|
|
|
|
- |
|
4,739,400 |
|
4,739,400 |
Trade and
other receivables |
|
|
|
|
2,486,605 |
|
- |
|
2,486,605 |
Cash and
cash equivalents |
|
|
|
171,863,352 |
|
- |
|
171,863,352 |
Total
assets |
|
|
|
|
|
|
176,000,120 |
|
310,800,883 |
|
486,801,003 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities at fair value through profit and loss |
2,828,275 |
|
- |
|
2,828,275 |
Trade and
other payables |
|
|
|
|
|
2,024,642 |
|
- |
|
2,024,642 |
Loan notes |
|
|
|
|
|
|
- |
|
252,702,008 |
|
252,702,008 |
Total
liabilities |
|
|
|
|
|
|
4,852,917 |
|
252,702,008 |
|
257,554,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than |
|
More
than |
|
Total
as at |
|
|
|
|
|
|
|
one
year |
|
one year |
|
30.06.2016 |
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
Assets |
|
|
|
|
|
|
(Audited) |
|
(Audited) |
|
(Audited) |
Mortgage loans |
|
|
|
|
|
|
1,334,277 |
|
302,251,423 |
|
303,585,700 |
Reserve fund |
|
|
|
|
|
|
- |
|
4,739,400 |
|
4,739,400 |
Trade and
other receivables |
|
|
|
|
4,792,524 |
|
- |
|
4,792,524 |
Cash and
cash equivalents |
|
|
|
194,218,249 |
|
- |
|
194,218,249 |
Total
assets |
|
|
|
|
|
|
200,345,050 |
|
306,990,823 |
|
507,335,873 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities at fair value through profit and loss |
4,077,975 |
|
- |
|
4,077,975 |
Trade and
other payables |
|
|
|
|
4,110,140 |
|
- |
|
4,110,140 |
Loan notes |
|
|
|
|
|
|
- |
|
261,784,493 |
|
261,784,493 |
Total
liabilities |
|
|
|
|
|
|
8,188,115 |
|
261,784,493 |
|
269,972,608 |
Credit risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or commitment that
it has entered into with the Group.
The Group’s primary fundamental credit risk exposure is to
borrowers of the underlying mortgages, with the risk of borrowers
defaulting on interest and principal payments. The Portfolio
Manager manages the reduction of borrower credit risk with
extensive due diligence on portfolios conducted by internal and
external analysts and stress testing.
The Group also has credit risk to the counterparty with which
the Warehouse or Issuer SPV transacts the derivative trades for
hedging purposes, or to gain, increase or decrease exposure to
mortgages. Default by any hedging counterparty in the performance
of its obligations could subject the investments to unwanted credit
risks. The Portfolio Manager manages the reduction of credit risk
exposure to the derivative counterparty through ongoing credit
analysis of the counterparty in addition to implementing clauses
into derivative transactions whereby collateral is required to be
posted upon a downgrade of the counterparty’s credit rating. The
current credit rating of the counterparty is A+.
The Group’s exposure to the credit risk of cash and deposit
holders defaulting is managed through the use of investments into
money market funds, to diversify cash holdings away from single
custodians. Money market fund vehicles are chosen after extensive
due diligence focusing on manager performance, controls and track
record. Currently the cash is held with Northern Trust London
(credit rating A+ per Standards and Poor). The money market fund is
held in a BlackRock-managed institutional money-market fund –
“Institutional Cash Series Plc - Institutional Sterling Liquidity
Fund” and their current rating is AAAm from Standards and Poor. The
reserve fund is held with Citibank N.A. London Branch (credit
rating A+ per Standards and Poor).
There are no past due or impaired loans. The current indexed
loan to value ratio in order to give an indication of credit
quality is as follows:
|
|
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
|
|
|
|
|
31.12.2016 |
|
30.06.2016 |
Loan to
value |
|
|
|
|
|
|
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
|
|
|
0-49% |
|
|
|
|
|
|
|
|
24,451,295 |
|
23,144,367 |
50-75% |
|
|
|
|
|
|
|
|
222,694,021 |
|
224,149,399 |
75-100% |
|
|
|
|
|
|
|
|
55,197,663 |
|
49,944,688 |
Premium on
purchase less EIR adjustment |
|
|
5,368,667 |
|
6,347,246 |
|
|
|
|
|
|
|
|
|
307,711,646 |
|
303,585,700 |
13. Analysis of Financial Assets
and Liabilities by Measurement Basis
|
|
|
|
|
|
|
Financial Assets at |
|
Financial Assets |
|
|
|
|
|
|
|
|
|
fair
value through |
|
at
amortised |
|
|
|
|
|
|
|
|
|
profit and loss |
|
cost |
|
Total |
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
31
December 2016 |
|
|
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets as per Unaudited Condensed Consolidated
Statement of Financial Position |
|
|
|
|
|
|
Mortgage loans |
|
|
|
|
|
|
- |
|
307,711,646 |
|
307,711,646 |
Reserve fund |
|
|
|
|
|
|
- |
|
4,739,400 |
|
4,739,400 |
Cash and
cash equivalents |
|
|
|
- |
|
171,863,352 |
|
171,863,352 |
Trade and
other receivables |
|
|
|
- |
|
2,486,605 |
|
2,486,605 |
|
|
|
|
|
|
|
- |
|
486,801,003 |
|
486,801,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities at |
|
Financial |
|
|
|
|
|
|
|
|
|
fair
value through |
|
Liabilities at |
|
|
|
|
|
|
|
|
|
profit and loss |
|
amortised cost |
|
Total |
Financial Liabilities as per Unaudited Condensed
Consolidated Statement of Financial Position |
|
£ |
|
£ |
|
£ |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Financial
liabilities at fair value through profit and loss |
|
2,828,275 |
|
- |
|
2,828,275 |
Trade and
other payables |
|
|
|
|
- |
|
2,024,642 |
|
2,024,642 |
Loan notes |
|
|
|
|
|
|
- |
|
252,702,008 |
|
252,702,008 |
|
|
|
|
|
|
|
2,828,275 |
|
254,726,650 |
|
257,554,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets at |
|
Financial Assets |
|
|
|
|
|
|
|
|
|
fair
value through |
|
at
amortised |
|
|
|
|
|
|
|
|
|
profit and loss |
|
cost |
|
Total |
|
|
|
|
|
|
|
£ |
|
£ |
|
£ |
30 June
2016 |
|
|
|
|
|
(Audited) |
|
(Audited) |
|
(Audited) |
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets as per Audited Consolidated Statement of
Financial Position |
|
|
|
|
|
|
Mortgage loans |
|
|
|
|
|
|
- |
|
303,585,700 |
|
303,585,700 |
Reserve fund |
|
|
|
|
|
|
- |
|
4,739,400 |
|
4,739,400 |
Cash and
cash equivalents |
|
|
|
- |
|
194,218,249 |
|
194,218,249 |
Trade and
other receivables |
|
|
|
- |
|
4,792,524 |
|
4,792,524 |
|
|
|
|
|
|
|
- |
|
507,335,873 |
|
507,335,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities at |
|
Financial |
|
|
|
|
|
|
|
|
|
fair
value through |
|
Liabilities at |
|
|
|
|
|
|
|
|
|
profit and loss |
|
amortised cost |
|
Total |
Financial Liabilities as per Audited Consolidated
Statement of Financial Position |
|
£ |
|
£ |
|
£ |
|
(Audited) |
|
(Audited) |
|
(Audited) |
Financial
liabilities at fair value through profit and loss |
|
4,077,975 |
|
- |
|
4,077,975 |
Trade and
other payables |
|
|
|
|
- |
|
4,110,140 |
|
4,110,140 |
Loan notes |
|
|
|
|
|
|
- |
|
261,784,493 |
|
261,784,493 |
|
|
|
|
|
|
|
4,077,975 |
|
265,894,633 |
|
269,972,608 |
14. Fair Value Measurement
IFRS 13 requires the Group to classify fair value measurements
using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements. The fair value hierarchy
has the following levels:
(i) Quoted prices (unadjusted) in active markets for
identical assets or
liabilities
(level 1).
(ii) Inputs other than quoted prices included within level 1
that are observable for the asset or liability, either directly
(that is, as prices) or indirectly (that is, derived from prices
including interest rates, yield curves, volatilities, prepayment
speeds, credit risks and default rates) or other market
corroborated inputs (level 2).
(iii) Inputs for the asset or liability that are not based
on observable market data (that is, unobservable inputs) (level
3).
The following tables analyse within the fair value hierarchy the
Group’s financial assets and liabilities (by class) measured at
fair value for the period ended 31 December
2016 and the period ended 30 June
2016.
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
|
|
£ |
|
£ |
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
Liabilities |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Financial liabilities
at fair value through profit and loss |
|
- |
|
(2,828,275) |
|
- |
|
(2,828,275) |
Total liabilities
as at |
|
|
|
|
|
|
|
|
31 December
2016 |
|
- |
|
(2,828,275) |
|
- |
|
(2,828,275) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
|
|
£ |
|
£ |
|
£ |
|
£ |
|
|
|
|
|
|
|
|
|
Liabilities |
|
(Audited) |
|
(Audited) |
|
(Audited) |
|
(Audited) |
Financial liabilities
at fair value through profit and loss |
|
- |
|
(4,077,975) |
|
- |
|
(4,077,975) |
Total liabilities
as at |
|
|
|
|
|
|
|
|
30 June
2016 |
|
- |
|
(4,077,975) |
|
- |
|
(4,077,975) |
The following table analyses within the fair value hierarchy the
Group’s assets and liabilities not measured at fair value at
31 December 2016 but for which fair
value is disclosed.
|
|
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
|
|
|
|
31.12.2016 |
|
31.12.2016 |
|
31.12.2016 |
|
31.12.2016 |
|
|
|
|
£ |
|
£ |
|
£ |
|
£ |
Assets |
|
|
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
Mortgage loans |
|
|
|
- |
|
- |
|
303,830,413 |
|
303,830,413 |
Reserve fund |
|
|
|
- |
|
4,739,400 |
|
- |
|
4,739,400 |
Cash and
cash equivalents |
|
- |
|
171,863,352 |
|
- |
|
171,863,352 |
Trade and
other receivables |
|
- |
|
2,486,605 |
|
- |
|
2,486,605 |
Total |
|
|
|
- |
|
179,089,357 |
|
303,830,413 |
|
482,919,769 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
Trade and
other payables |
|
- |
|
2,024,642 |
|
- |
|
2,024,642 |
Loan notes |
|
|
|
- |
|
252,702,008 |
|
- |
|
252,702,008 |
Total |
|
|
|
- |
|
254,726,650 |
|
- |
|
254,726,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
|
|
|
|
30.06.2016 |
|
30.06.2016 |
|
30.06.2016 |
|
30.06.2016 |
|
|
|
|
£ |
|
£ |
|
£ |
|
£ |
Assets |
|
|
|
(Audited) |
|
(Audited) |
|
(Audited) |
|
(Audited) |
Mortgage loans |
|
|
|
- |
|
- |
|
303,314,760 |
|
303,314,760 |
Reserve fund |
|
|
|
- |
|
4,739,400 |
|
- |
|
4,739,400 |
Cash and
cash equivalents |
|
- |
|
194,218,249 |
|
- |
|
194,218,249 |
Trade and
other receivables |
|
- |
|
4,792,524 |
|
- |
|
4,792,524 |
Total |
|
|
|
- |
|
203,750,173 |
|
303,314,760 |
|
507,064,933 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
Trade and
other payables |
|
- |
|
4,110,140 |
|
- |
|
4,110,140 |
Loan notes |
|
|
|
- |
|
261,784,493 |
|
- |
|
261,784,493 |
Total |
|
|
|
- |
|
265,894,633 |
|
- |
|
265,894,633 |
The value of the mortgage loans is calculated through a shadow
securitisation structure based on existing deals with current and
transparent pricing.
The other assets and liabilities included in the above table are
carried at amortised cost; their carrying values are a reasonable
approximation of fair value. Cash and cash equivalents include cash
in hand and short-term deposits with original maturities of three
months or less.
15. Loan notes
The Malt Hill No.1 Plc mortgage portfolio acquisition is partially
financed by the issue of notes. The notes are repaid as the
underlying mortgage loans repay. The terms and conditions of the
notes provide that the note holders will receive interest and
principal only to the extent that sufficient funds are generated
from the underlying mortgage loans. The priority and amount of
claims on the portfolio proceeds are determined in accordance with
strict priority of payments. Note holders have no recourse to the
Company in any form.
The Malt Hill No.1 Plc completed the public sale of £263.3m of
AAA-rated bonds on 26 May 2016. The
AAA notes were issued with a coupon of 3 month LIBOR plus 1.35%
which is payable quarterly and are listed on the Irish Stock
Exchange. The issue fees on loan notes will be amortised over the
expected life of the loan notes, which is 3 years, being the call
date.
|
|
|
|
|
|
|
As
at |
|
As
at |
|
|
|
|
|
|
|
31.12.2016 |
|
30.06.2016 |
|
|
|
|
|
|
|
(Unaudited) |
|
(Audited) |
|
|
|
|
|
|
|
£ |
|
£ |
Loan notes
due 27 Aug 2053 |
|
|
253,890,690 |
|
263,300,000 |
Issue fees
amortised |
|
|
|
|
(1,188,682) |
|
(1,515,507) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252,702,008 |
|
261,784,493 |
|
|
|
|
|
|
|
|
|
|
Interest expense on loan notes for the period amounted to
£2,384,147.
16. Dividend Policy
The Company has declared the following interim dividends in
relation to the period to 31 December 2016:
Period to |
Dividend rate per Share (pence) |
|
Net
dividend payable (£) |
|
Record date |
|
Ex-dividend date |
|
Pay
date |
30 September 2016 |
1.5 |
|
3,750,000 |
|
21
October 2016 |
|
20
October 2016 |
|
31
October 2016 |
31 December 2016 |
1.5 |
|
3,750,000 |
|
20
January 2017 |
|
19
January 2017 |
|
31
January 2017 |
For the 2017 financial year and onwards, it is intended that
dividends on the Ordinary Shares will be payable quarterly, all in
the form of interim dividends (the Company does not intend to pay
any final dividends). It is intended that the first three interim
dividends of each financial year will be paid at a minimum of 1.5p
per Ordinary Share with the fourth interim dividend of each
financial year including an additional amount such that a
significant majority of the Company’s net income for that financial
year is distributed to Shareholders.
The Board reserves the right to retain within a revenue reserve
a proportion of the Company’s net income in any financial year,
such reserve then being available at the Board’s absolute
discretion for subsequent distribution to Shareholders. The Company
may offer Shareholders the opportunity to elect to receive
dividends in the form of further Ordinary Shares.
Under Guernsey law, companies can pay dividends in excess of
accounting profit provided they satisfy the solvency test
prescribed by The Companies (Guernsey) Law, 2008. The solvency test
considers whether a company is able to pay its debts when they fall
due, and whether the value of a company’s assets is greater than
its liabilities. The Board confirms that the Company passed the
solvency test for each dividend paid.
17. Ultimate Controlling Party
In the opinion of the Directors on the basis of shareholdings
advised to them, the Company has
no ultimate controlling party.
18. Subsequent Events
The second interim dividend for year ending 30 June 2017 of 1.5p per Ordinary Share was
declared on 11 January 2017 and paid
from the capital of the Company on 31
January 2017.
Cornhill Mortgage No.1 Limited is currently in liquidation as
the mortgage portfolio held has been securitised. At the date of
approval of the Unaudited Condensed Consolidated Interim Financial
Statements, this entity has not yet been fully liquidated.
On 21 Feb 2017 the Company
purchased a pool of approximately £590.5m UK predominantly
Buy-to-Let Mortgages.
These Unaudited Condensed Consolidated Interim Financial
Statements were approved for issuance by the Board on 21 March 2017. There were no subsequent events,
apart from those mentioned above until this date.
GLOSSARY OF TERMS
Acquiring Entity |
means UK Mortgages Corporate Funding
Designated Activity Company, a designated activity company
incorporated in Ireland qualifying within the meaning of section
110 of the Taxes Consolidation Act 1997 to acquire mortgage
portfolios for on-selling to Warehouse SPVs and issuing PPNs |
Administrator |
Northern Trust International Fund
Administration Services (Guernsey) Limited (a non-cellular company
limited by shares incorporated in the Island of Guernsey with
registered number 15532) |
AIC |
Association of Investment
Companies |
AIC Code |
the AIC Code of Corporate Governance
for companies incorporated in Guernsey |
AIC Guide |
the AIC Guide to Corporate
Governance |
AIFM or Maitland |
Maitland Institutional Services
Limited, the Company’s alternative investment fund manager for the
purposes of regulation 4 of the AIFM Regulations |
Amortised Cost
Accounting |
The process by which mortgages in
the Company’s portfolio are valued at cost less capital repayments
and any provisions required for impairment. |
Audit Committee |
an operating committee of the Board
of Directors charged with oversight of financial reporting and
disclosure |
Audited Consolidated Financial
Statements |
Audited Consolidated Financial
Statements of the Group |
BoAML |
the Bank of America Merrill
Lynch |
Board of Directors or Board or
Directors |
the Directors of the Company |
Class A Notes |
means the Class A Mortgage Backed
Floating Rate Notes issued by the Issuer and admitted to trading on
the Irish Stock Exchange |
Company |
UK Mortgages Limited |
Company's Articles or
Articles |
the articles of incorporation of the
Company |
Continuation Vote |
An ordinary resolution that gives
shareholders the ability to instruct the board to prepare a
proposal to restructure or wind up a company by means of a simple
majority vote. |
Corporate Broker |
Numis Securities Limited |
CRS |
The Common Reporting Standard, a
global standard for the automatic exchange of financial account
information developed by OECD |
Custodian and Depositary |
Northern Trust (Guernsey) Limited (a
non-cellular company limited by shares incorporated in the Island
of Guernsey with registered number 2651) |
Derivative Instruments |
means instruments used to gain
leveraged exposure to mortgage portfolios, including but not
limited to Credit Linked Notes and Credit Default Swaps |
DAC |
UK Mortgages Corporate Funding
Designated Activity Company an independently managed, Dublin based,
section 110 designated activity company that is responsible for the
warehousing and securitisation of mortgage portfolios under the
supervision of TFAM the investment adviser. DAC is wholly financed
by the Company via Profit Participating Notes and distributes
substantially all of its profits to the Company thereby qualifying
for a reduced rate of taxation, commonly known as a Eurobond
exemption. From a financial reporting perspective DAC is
consolidated with the Company as it provides its services
exclusively to the Company |
FFI |
Foreign Financial Institution |
FRC |
the Financial Reporting Council |
GFSC Code |
Code of Corporate Governance issued
by the Guernsey Financial Services Commission |
Government and Public
Securities |
means per the FCA
definition, the investment, specified in article 78 of the
Regulated Activities Order (Government and public securities),
which is in summary: a loan stock, bond government and public
security FCA PRA or other instrument creating or acknowledging
indebtedness, issued by or on behalf of:
(a) the government of the United Kingdom; or
(b) the Scottish Administration; or
(c) the Executive Committee of the Northern Ireland Assembly;
or
(d) the National Assembly of Wales; or
(e) the government of any country or territory outside the United
Kingdom; or
(f) a local authority in the United Kingdom or elsewhere; or
(g) a body the members of which comprise: (i) States including the
United Kingdom or another EEA State; or
(ii) bodies whose members comprise States including the United
Kingdom or another EEA State; but excluding: (A) the instruments
specified in article 77(2)(a) to (d) of the Regulated Activities
Order; (B) any instrument creating or acknowledging indebtedness in
respect of: (I) money received by the Director of Savings as
deposits or otherwise in connection with the business of the
National Savings Bank; or (II) money raised under the National
Loans Act 1968 under the auspices of the Director of Savings or
treated as so raised under section 11(3) o |
Group |
means the Company, Acquiring Entity,
Issuer SPV and Warehouse SPVs |
IFRS |
International Financial Reporting
Standards |
Investment Company |
a company whose main business is
holding securities for investment purposes |
Internal Control |
a process for assuring achievement
of an organisation's objectives in operational effectiveness and
efficiency, reliable financial reporting, and compliance with laws,
regulations and policies |
IPO, Initial Public
Offering |
means the initial public offering of
shares in the Company on the specialist fund segment of the London
Stock Exchange |
IPD |
Interest Payment Date |
IRR |
internal rate of return: the
annualised return generated by the expected interest
and principal cash-flows over the life of the investment |
IRS |
the US Internal Revenue Service |
Issue |
means together the Placing and the
Offer (or as the context requires both of them |
Issuer SPVs |
means special purpose vehicles
established for the specific purpose of securitisation and issuing
Retention Notes for purchase by the Acquiring Entity |
Junior Note |
These notes have the lowest priority
claim on capital and income from the securitisation SPV and offer
the highest potential returns in exchange for bearing the first
loss experienced by the SPV. |
Loan Financing Facility |
means a facility in terms of which
ongoing finance is provided by Bank of America Merrill Lynch
International Limited for a period of up to 2 years |
LSE |
London Stock Exchange plc (a company
registered in England and Wales with registered number
2075721) |
LTV |
means Loan to Value |
Mortgage Pool/ Mortgage
Portfolio |
The underlying mortgage loans that
produce the income for the securitised portfolios. |
NAV |
means net asset value |
OECD |
the Organisation for Economic
Co-operation and Development |
Offer |
means the offer for subscription of
Ordinary Shares at 1 pence each to the public in the United Kingdom
on the terms and conditions set out in Part 12 of the Prospectus
and the Application Form |
Official List |
in reference to DAC and
Issuer SPV refers to the official list of the Irish Stock Exchange
p.l.c
In reference to the Company refers to the official list of the
London Stock Exchange |
Ordinary Shares |
ordinary shares of 100p each in the
capital of the Company |
Placing |
means the conditional placing by the
Corporate Broker, as agent for the Company, of up to 250 million
ordinary shares at 1 pence each on the terms and conditions set out
or referred to in the placing documents, being the Prospectus, the
Presentation, the P Proof, the flyer, the press announcements, the
contract note, any other document prepared in connection with the
pre-marketing of the issue or the placing programme |
Portfolio Manager |
TwentyFour Asset Management LLP (a
limited liability partnership incorporated in England and Wales
with registered number OC335015) |
Profit Participating
Notes/PPN |
these are Eurobond notes issued by
DAC to the Company. The capital paid by the Company to DAC to buy
the notes is invested in mortgage pools and DAC in turn pays income
to the Company via coupon payments on the notes |
Rating Agency |
companies that assess the
creditworthiness of both debt securities and their issuers, for
these purposes Standard and Poor’s, Moody’s and Fitch |
Retention Notes |
means a Subordinated tranche of
securities which as part of the securitisation issuance structure
are issued for purchase by the Acquiring Entity |
RMBS |
Residential Mortgage-Backed
Security |
Section 110 |
Section 110 of the Irish Taxes
Consolidation Act 1997 (as amended). A Section 110 company is an
Irish resident special purpose vehicle (“SPV”) which holds and/or
manages “qualifying assets” and usually distributes substantially
all of its income net of a fixed annual tax payment. |
Securitisation Vehicle |
special purpose vehicle incorporated
in the UK established for the purpose of issuing notes
collateralised by underlying mortgage pool |
Senior Note |
Senior note holders receive first
priority with respect to income and capital distributions and
effectively provide long term leverage finance to the Junior note
holders. |
Servicer |
Means the entity that maintains the
relationship with the underlying mortgage borrower to answer
questions, collect payments and refinance existing loans if
required. |
Share Buyback |
the Company purchases it’s own
shares in the market |
Shareholders |
holders of Shares |
Specialist Fund Segment |
the Specialist Fund Segment of the
London Stock Exchange |
SPV |
means a special purpose vehicle |
TML |
The Mortgage Lender Limited. The
firm originates mortgages which are currently being warehoused by
Cornhill No 2 Limited. TML is authorised and regulated by the
Financial Conduct Authority (Financial Services Firm Reference
Number 707058). |
UK Code |
The UK Corporate Governance Code
(July 2016) |
Valuation Agent |
Kinson Advisors LLP |
Warehousing |
the process by which mortgages are
acquired in a portfolio prior to securitisation. The portfolio is
typically leveraged by borrowing from a warehouse credit facility.
Two warehouse SPVs; Cornhill Mortgages No. 1 Limited and Cornhill
Mortgages No. 2 Limited, have been established for the purpose of
warehousing the first and second transactions of the company
respectively. Cornhill No 1 Limited was closed when the
company completed its first securitisation. |
Warehouse SPV |
a special purpose vehicle,
incorporated in the UK, established for the purpose of warehousing
the first mortgage portfolio |
CORPORATE INFORMATION
Directors
Christopher Waldron - Chairman
Richard Burrows
Paul Le Page
Helen Green
|
Custodian, Principal Banker and Depositary
Northern Trust (Guernsey) Limited
PO Box 71
Trafalgar Court
Les Banques
St Peter Port
Guernsey, GY1 3DA |
Registered Office
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey, GY1 3QL
|
Secretary and Administrator
Northern Trust International Fund Administration
Services (Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey, GY1 3QL |
Alternative Investment Fund Manager
Maitland Institutional Services Limited
Springfield Lodge
Colchester Road
Chelmsford, CM2 5PW
Portfolio Manager
TwentyFour Asset Management LLP
8th Floor
The Monument Building
11 Monument Street
London, EC3R 8AF |
Corporate Broker
Numis Securities Limited
The London Stock Exchange Building
10 Paternoster Square
London, EC4M 7LT
Independent Auditors
PricewaterhouseCoopers CI LLP
PO Box 321
Royal Bank Place
1 Glategny Esplanade
St Peter Port
Guernsey, GY1 4ND |
UK Legal Advisers to the Company
Eversheds LLP
One Wood Street
London, EC2V 7WS |
Receiving Agent
Computershare Investor Services plc
The Pavilions
Bridgwater Road
Bristol, BS13 8AE |
Guernsey Legal Advisers to the Company
Carey Olsen
Carey House
Les Banques
St Peter Port
Guernsey, GY1 4BZ
|
Registrar
Computershare Investor Services
(Guernsey) Limited
1st Floor
Tudor House
Le Bordage
St Peter Port
Guernsey, GY1 1DB
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