TIDMUKML
UK Mortgages Limited
ANNUAL REPORT AND AUDITED
CONSOLIDATED FINANCIAL STATEMENTS
For the year from 1 July 2017 to 30 June 2018
Legal Entity Identifier: 549300388LT7VTHCIT59
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
The Company has today, in accordance with DTR 6.3.5, released its Report and
Audited Consolidated Financial Statements for the year ended 30 June 2018. The
Report will shortly be available via the Company's Portfolio Manager's website
www.ukmortgageslimited.com and will shortly be available for inspection online
at www.morningstar.co.uk/uk/NSM
SUMMARY INFORMATION
The Company
UK Mortgages Limited ("UKML") was incorporated with limited liability in
Guernsey as a closed-ended investment company on 10 June 2015. UKML's shares
were admitted to trading on the Specialist Fund Segment of the London Stock
Exchange on 7 July 2015.
UKML and its 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.
UKML established a Dublin domiciled Acquiring Entity, UK Mortgages Corporate
Funding Designated Activity Company ("DAC") for the purpose of acquiring and
securitising mortgages via Special Purpose Vehicles ("SPVs"). UKML, the
Acquiring Entity, the Issuer SPVs and the Warehouse SPVs (collectively, the
"Company") are treated on a consolidated basis for the purpose of the Audited
Consolidated 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. In accordance with the Listing
Rules, the Company can only make a material change to its investment policy
with the approval of its Shareholders by Ordinary Resolution.
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
Maitland Institutional Services Limited ("Maitland") is responsible for
calculating the Net Asset Value ("NAV") per share of the Company. Maitland has
delegated this responsibility to Northern Trust International Fund
Administration Services (Guernsey) Limited (the "Administrator") however
Maitland still performs an oversight function. The unaudited 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
30.06.2018 30.06.2017
Total Net Assets at year end GBP233,990,428 GBP223,388,138
Net Asset Value per ordinary share at 85.69p 89.36p
year end
Share price at year end 87.25p 96.40p
Premium to Net Asset Value at year end 1.82% 7.88%
Net Asset Value Total Return (0.81%) (3.14%)
Dividends declared and paid in the year 6.00p 6.00p
Total dividends declared in relation to 4.50p 4.50p
the year
Ongoing Charges
- UKML 0.93% 1.07%
- DAC and subsidiaries 1.65% 1.11%
Total ongoing charges for the Company 2.58% 2.18%
CHAIRMAN'S STATEMENT
for the year ended 30 June 2018
I am pleased to present the results of the Company for the year from 1 July
2017 to 30 June 2018. This was a busy period which closed amid a flurry of
activity that saw the Portfolio Manager working on the terms of the new
Keystone forward flow transaction as well as completing our second Coventry
portfolio acquisition and subsequent Malt Hill No.2 securitisation in short
order. To fund these transactions, GBP20m was raised in June through the issue of
new shares in a placing that was significantly oversubscribed. This placing was
an important milestone for the Company, as it not only demonstrated the
continuing attraction of UKML's investment strategy, but in going beyond the
original capital raised at IPO, it marked the beginning of what is planned to
be a new phase of targeted financing for specific acquisitions, minimising any
future cash drag.
Whilst these recent transactions have commanded much attention, it is also
important to note that the performance of the rest of the portfolio remains
very satisfactory, with arrears well below the Portfolio Manager's projections.
In the case of Malt Hill No.1, the Company's first portfolio purchase, none of
the 1241 loans was in arrears at the end of June, a remarkable performance.
After the expected round of resetting and switching in 2017, prepayments in
Malt Hill No.1 have stabilised and projected returns are in line with our
original expectations as we approach May 2019, when the original 2016
securitisation can be refinanced.
The Company's second securitisation was Oat Hill No. 1, a portfolio of
well-seasoned loans from the 2004-2008 period, securitised in May 2017. This
portfolio is significantly larger than Malt Hill No.1 with over 4500 loans
outstanding, yet only 74 of these are one month or more in arrears. The
mortgages in Oat Hill No. 1 are floating rate loans and consequently the recent
base rate rise should improve returns to the Company.
A similar pattern of minimal arrears can be seen in Cornhill No.2, the mortgage
origination business of The Mortgage Lender ("TML"), although as has been noted
in previous reports, the growth of this business has been slower than
originally anticipated. Nevertheless, TML has now passed GBP150m in completed
loans with GBP35m in the pipeline, sufficient for the Portfolio Manager to begin
initial work on securitising this portfolio. Currently we hope to be in a
position to bring this to market in the first quarter of 2019.
Outlook
With the completion of the Malt Hill No.2 securitisation in June, the immediate
task has been to complete the Keystone transaction. This forward flow agreement
will see the Company funding Buy-to-Let ("BTL") loans to professional
landlords. The Portfolio Manager has finalised discussions with Keystone about
how its offering should best be structured. Moreover, given Keystone is an
existing originator and therefore able to switch over from its current funding
stream almost immediately, the pace of origination should be much more
predictable than with TML and target volumes should be able to be reached
quickly. This should then generate a return for the Company well in excess of
7%.
Beyond this, the terms of the refinancing of Malt Hill No. 1 next year and the
securitisation of Cornhill No.2 will be important drivers of future returns.
Here, the portfolio management team's established recognition in the
securitisation market will be an asset. It's worth noting that Malt Hill No.2
was securitised within a month of agreeing the final portfolio purchase terms
and without the need for a warehouse facility, whereas for Malt Hill No. 1 the
process took almost six months, albeit difficult market conditions drove some
of that original timing. The Malt Hill No.2 deal was also executed at a highly
competitive level, with wide investor participation and sizeable
oversubscription, despite being completed in the midst of a heavy expected new
issue pipeline, which has latterly weighed on spreads in the RMBS market.
We are also in discussions to secure a revolving credit facility that would
allow greater flexibility in the financing of future acquisitions and hope to
give more details on this later this year.
Dividend and NAV
As I have stated in previous reports, the Board has approved the payment of
uncovered dividends only after extensive discussion with the Portfolio Manager,
having consulted shareholders and carefully considered the projected cash
flows. No topic takes up more of the Board's time and therefore it is pleasing
to see that meaningful progress has been made this year towards covering the
dividend. Increased cash flows from the new Coventry transaction are expected
to be immediately additive, once transaction costs have been absorbed and
further growth and increasing leverage at TML, together with the addition of
the Keystone forward flow agreement will all add to returns.
The detailed projections are regularly updated on UKML's website and we
produced this graphical representation of our estimated future dividend
coverage pattern in April which the Portfolio Manager shared with investors in
their webinar. The chart is based on a number of assumptions about our ability
to originate and securitise/re-securitise loans and only includes our current
portfolio and the pending Keystone transaction, so no benefit is assumed for
additional acquisitions. The positions of the red triangles in the chart below
are intended to provide a relatively simple visualisation of how we estimate
our transition to a fully covered dividend will be achieved. Where the
triangles are below the orange line our income will be below our dividend
target and vice versa.
Similar modelling is used to give an indication of how the NAV will change.
Over the year to June 2019 we estimate that in excess of GBP9m in income will be
generated from the current portfolio, but with costs in the region of GBP2m and
an anticipated dividend of GBP16.4m this implies a decline in NAV of
approximately 3p per share. However, this rate of decline will slow in the
first half of 2019. In this period, we expect to securitise the TML portfolio
and by mid-year, the terms of the Malt Hill No. 1 refinancing will be known.
A further milestone will be the refinancing of Oat Hill No.1 in the first half
of 2020. This portfolio was bought at a significant discount to par and over
the three years since its initial securitisation, it is expected that that the
portfolio value will have accrued towards par as the discount reduces.
All three events will release capital and contribute to a re-leveraging of
returns, which should improve the NAV outlook. At each milestone, we will
update our projections with the new cash flows to give shareholders as much
detail as possible on progress to rebuilding the NAV.
We also expect our loan origination business segment to produce more stable and
predictable cash-flows as capital will be raised and applied incrementally,
therefore avoiding cash drag, maintaining leverage and benefitting returns.
Thank you for your continuing support.
Christopher Waldron
Chairman
17 October 2018
PORTFOLIO MANAGER'S REPORT
for the year ended 30 June 2018
Market Commentary
Central bank policy changes, political uncertainty and technical drivers have
been and will continue to be the major influences on macro market behaviour
through 2017/2018 and beyond. The unwinding of QE and the pace of interest rate
normalisation remain key to global central bank activity. The US continued on
its path of raising rates in a targeted manner with three interest rate rises
in the period, broadly in line with expectations as the Fed also welcomed a new
chairman, and for the most part US Treasury yields rose steadily, particularly
from last autumn to early Summer this year. Meanwhile, the Trump presidency
continued its rollercoaster ride, lurching from controversy to scandal to
political friction to international incident whilst hardly pausing for breath.
That said, the tax reform package was finally passed in late 2017, and the
on-off-on-again summit with North Korea's Kim Jong Un led to a cessation of the
war of words on the face of it, even if doubts remain as to the actual
sincerity of the promised denuclearisation in the region. However, rising
tensions with China over trade tariffs and speculation over the possible
evolution of a full-blown trade war, once again show that Trump's bombastic
approach will ensure anything but a smooth ride.
In Europe, yields were more volatile, with fears of a European taper tantrum
gradually receding as QE reduction was well flagged, with dovish guidance of a
prolonged withdrawal and no prospect of interest rate hikes until at least the
summer of next year. Political volatility was high across the board with Angela
Merkel suffering in the German elections in late 2017 and still struggling to
keep her coalition government together into the summer of this year. Political
unrest in Spain following the Catalonian independence referendum ultimately
cost Prime Minister Rajoy his job, ousted by socialist Pedro Sanchez.
Furthermore in Italy, the two main, but opposing, populist parties, Five Star
and the League struggled to form a coalition with presidential opposition to
ministerial positions driving up the tension. Once this was finally resolved,
attention has moved to whether the government can now deliver a workable
budget.
In the UK, the ever fluctuating Brexit debate drove political sentiment with a
pro-Remain revolt forcing the government to accept that a parliamentary vote
will be required to agree the final terms of the UK/EU separation - an event
likely to cause significant consternation and uncertainty, given the huge
divide not just within the government but across parliament as a whole. This
was exemplified by the fallout from the so-called "Chequers agreement" which
ultimately led to the high-profile resignations of David Davis and Boris
Johnson along with two Tory party vice-chairs in protest over the plan.
Meanwhile Brexit hardliners, such as Jacob Rees-Mogg continue to undermine Mrs
May's plans whilst the European camp show few signs of conciliation, and the
Labour party have broadly stayed out of the front-line argument, instead
distracted by bickering over claims of anti-Semitism in the party and in
particular its leadership.
Meanwhile, UK interest rate policy began to normalise although not without
hiccups. The eventual reversal in late 2017 of the Brexit-induced emergency
25bp rate cut over a year previously (along with confirmation that the end of
the Term Funding Scheme ("TFS") would take place on schedule in early 2018),
was followed by rhetoric that further rate increases would follow in mid-2018,
reinforced by comments from Governor Carney in early 2018. However, the
governor backtracked just a couple of months later and ultimately the rise
didn't come through until August.
This political and Brexit-driven uncertainty continues to feed through to the
broader UK mortgage and housing markets, where house price inflation at a
national level exhibits some volatility but generally continues to limp slowly
higher. However regionally, London in particular continues to decline relative
to areas such as the Midlands and the North which have out-performed.
Estate agents and surveyors continue to report lower levels of activity with a
lack of new instructions for sales of particular note, albeit a moderate
increase has been detected towards the end of the period ahead of the
traditionally quieter summer period.
Meanwhile, mortgage markets were dominated by re-mortgaging. This has been
driven mostly by borrowers refinancing existing loans, either because they have
reached the end of their current fixed rate period, but also in response to the
spectre of rising interest rates with an emerging trend towards 5 year loans
(rather than 2 year or 3 year loans which have hitherto been more popular)
becoming noticeable, to lock in current lower rates, or in the case of BTL
markets to benefit from the lower stress test threshold afforded to loans with
longer fixed rate periods. In the owner-occupied sector many homeowners are
also choosing to re-mortgage in order to finance home improvements rather than
choosing to move property. This has been partially driven by the ongoing
uncertainty in housing markets due to the unknown outcome of the Brexit
negotiations, but also as an ongoing reaction to the increased level of stamp
duty, especially for higher value properties, prompting many home owners to
'extend and improve rather than move'.
This has been partially offset by an increase in the number of first-time
buyers, particularly prompted by the stamp duty incentives introduced in the
November budget (albeit less so in London where the high cost barrier to entry
still eludes many capped by loan-to-income lending ratios). It has also perhaps
prompted something of a compression in house prices with the lower end of the
market buoyed by first-time buyer interest but the upper end, particularly in
the South, depressed by higher taxes and uncertainty.
In the BTL market, the 2-year anniversary of the increase in stamp-duty for
second properties also prompted a surge in re-mortgage activity as many of
those hastily arranged purchases from 2016 were re-financed. However,
uncertainty remains here also as new rules for professional landlords come into
effect, pushing up the cost of borrowing, and the full effect of the tax relief
tapering still being phased in. However, most lenders continue to report
strong business interest, although again re-mortgaging has dominated. Fears of
a wholesale sell-off by landlords in the face of new regulations appears to
have been unfounded, at least in the near-term, but for those who do convert to
limited company status the market currently appears to be robust, with many
increased costs being passed on to tenants in higher rents.
On the rate side, the two base rate rises both seem to have been fully passed
on to loan rates, if not savings rates, by the vast majority of lenders -
particularly those in the prime/high street space. If anything, one or two may
have even taken the opportunity to partially rebuild their margins following
intense competition during 2016/2017. In addition, the end of the extraordinary
funding measures provided by the BoE in the form of the TFS and Funding for
Lending Scheme ("FLS") has also prompted banks to be less competitive. The
specialist lenders and challenger banks, with more margin to play with, have
been less reactive but for the most part rates have crept up.
Overall, despite the sluggishness, the housing and mortgage markets remain
somewhat insulated from many other parts of the economy and the macro events
affecting stock and bond markets, as most activity is domestic, and as such
remain an effective uncorrelated haven from broader fixed income.
Meanwhile, securitisation and funding markets have generally been positive.
European ABS supply posted a new post-crisis record in 2017, albeit marginally,
and 2018 has seen a record first half. Despite this, for the most part demand
was also heavy as supply often came in spurts, and therefore spread performance
was strong throughout the period, especially with two UK base rate hikes
supporting demand for floating rate paper which makes up the entirety of the UK
RMBS market. This position persisted throughout almost the entire period until
the summer of 2018 when a perception of oversupply, coupled with volatility in
broader financial markets brought some spread weakness. In particular, GBP
market weakness was also driven by a marked return to issuance by high street
banks and building societies following the end of the BoE TFS and FLS
programmes.
Looking forward, the long-awaited new regulation, much of it designed
specifically to help further revive the use of securitisation as a funding tool
for banks and financial assets, will come into effect from 2019 once the final
technical details have been completed. Much of this new framework is centred on
promoting exactly the type of high quality product that is at the heart of the
Company's investments. It's likely that initial issuance under the new flagship
Simple, Transparent and Standardised ("STS") label will take some time to be
assumed and early issuance will be led by the largest issuers but in time the
new standard will likely be embraced by investors and issuers alike and become
the norm for all issuers that can meet its requirements.
Portfolio Review
Despite completing no new transactions during the first half of the period, a
number of opportunities of different types were assessed, some of which
progressed further than others. We were disappointed not to win one
particularly suitable opportunity, which was very sensitive to assumptive
inputs and where subsequently it so far appears that our more conservative
assumptions (than those that won the bid) were indeed justified. In other
matters however, the portfolio management team undertook a considerable amount
of work in order to maximise the efficiency of the existing transactions,
specifically relating to those loans in the Malt Hill No.1 (Coventry Building
Society) securitisation that were coming to the end of their initial fixed rate
period, and separately finessing the drawing process under the Cornhill
Mortgages No.2 (The Mortgage Lender) warehouse facility in order to achieve a
number of cost savings.
The reduction in investment management fees announced in June 2017 was
implemented from the beginning of the Company's new financial year and this,
along with the improved income from the Capital Home Loans ("CHL") portfolio
following the Oat Hill No.1 securitisation, saw improved cash flow, although
the dividend remained uncovered.
The second half of the period proved to be much busier than the first.
Following the confirmation from the BoE that the TFS would end on schedule,
important in itself as the previous FLS had been extended a number of times,
traditional lenders quickly began reviewing their funding and capital
management plans. For some this meant a direct return to securitisation
markets, as described above, but for others it also meant reviewing mortgage
portfolios, following the approx. GBP126.5bn extended to banks during the 18
month life of the scheme.
Since the first transaction in 2015, it was always expected that the Company
would have an ongoing relationship with Coventry Building Society ("CBS" or
"Coventry"). The TFS and other unforeseen regulatory changes in the BTL
mortgage market meant that CBS took more time to contemplate a second
transaction than originally envisaged. Despite this, we maintained an open
dialogue with them, and following preliminary discussions in the late part of
2017 more detailed negotiations began in early 2018 and in late April we were
able to announce that heads of terms had been agreed for a new portfolio
purchase of recently originated mortgages that was expected to deploy the
Company's remaining investable capital, albeit the seller's identity remained
confidential at that stage. Work began immediately on documentation, agreeing
and finalising the transaction details, but unlike the previous transaction,
work also began on the securitisation, with the intention that, rather than
using a warehouse to finance the transition period from purchase to
securitisation, the purchase and term funding parts of the transaction would
evolve alongside each other leading to considerable cost savings as well as
speeding up the time required to achieve the most efficient funding process.
On 1 June 2018, it was announced that final terms had been agreed and signed
for the acquisition, a pool of 2,077 BTL mortgages with a value of
approximately GBP350m, with CBS disclosed as the seller. The pool had an average
Loan-to-Value ("LTV") ratio of 60.8% and unlike the previous pool, where a
large percentage of the loans had an initial fixed rate period of two years,
all the loans in this pool had approximately five years until the end of their
current fixed rate period, with the vast majority falling between November 2022
and May 2023. The lower level of prepayments typically experienced during the
fixed rate period will therefore help the term securitisation to maintain
leverage for longer, thereby maintaining the investment return for longer. This
was particularly relevant as with mortgage margins at tighter levels than they
were at the time of the previous purchase, the overall yield of the transaction
would likely be lower than before.
As the first week of June comprised the annual Global ABS Conference (which
sees most of the market absent) marketing of the securitisation, Malt Hill No.2
plc, began the following week with a 3-day deal-marketing roadshow, followed by
a book-building process and finally the launch and pricing on 21 June 2018. The
senior AAA-rated notes were priced at 3-month Libor+0.75% to the 3-year
optional redemption date when the deal is expected to be refinanced. Based on
the assumption of two further refinancing securitisations this transaction will
generate an expected IRR of 6.41%.
In parallel with our second CBS acquisition we were working on a further
transaction. Almost simultaneously with the launch of Malt Hill No. 2, UKML was
able to announce that following a competitive process, terms had been agreed on
a forward flow purchase arrangement with Keystone Property Finance
("Keystone"), an existing specialist lender to portfolio landlords, to
originate an initial GBP350m book of BTL mortgages, the Company's fifth
transaction.
At the same time it was also announced that in order to complete the new CBS
transaction and to provide initial funding for the Keystone transaction, the
Company would seek to raise GBP20 million additional equity capital through the
issue of new ordinary shares. The share offer was launched on 21 June and
concluded on 25 June 2018 through the issue of 23,065,390 new ordinary shares
of 1p each in the capital of the UKML at a price of 86.71 pence per share
representing a premium of 1.5% to the ex-dividend unaudited NAV of 85.43 pence
per share as at 30 April 2018. The issue was significantly over-subscribed,
however the Board decided to cap the issue at the GBP20 million proposed.
Going forward, further capital to fund the growth of the Keystone portfolio
(and similarly for other future forward-flow arrangements, such as a follow-on
portfolio with TML) can be raised and allocated incrementally as the portfolio
grows, therefore minimising cash drag. In addition, the Company is seeking to
put in place a revolving credit facility as a further option for the most
efficient funding of future capital investments, and this project is ongoing.
The Portfolio Manager has subsequently spent the summer finalising the Keystone
transaction, carrying out significant pre-acquisition due diligence, appointing
National Australia Bank (rated Aa3/AA-/AA- by Moody's, Standard & Poor's and
Fitch) as warehouse provider, arranger and swap counterparty, and Pepper UK,
one of the most experienced and respected third party servicers to service the
loans, as well as negotiating the suite of asset acquisition, management and
financing documentation and other associated arrangements. In addition, various
ancillary roles such as the cash manager, SPV directors and administrator have
also been put in place, mostly using tried and tested counterparties already
engaged in the same roles for existing Company transactions, to ensure
consistency and benefits of scale.
Keystone began lending for the Company with a soft launch in the first week of
September and a full roll-out the following week. Early applications have been
strong, as was expected given that Keystone are an existing originator who have
been actively originating mortgages for various third parties since 2012 and
so able to switch origination from their existing previous provider to UKML
almost immediately, meaning lending scale could be achieved quickly from the
outset. Whilst it will be difficult to accurately assess the return until the
portfolio is fully assembled, the expectation is that this transaction will
generate a gross IRR for the Company significantly in excess of 7% (from the
date of purchase).
The deal adds a complementary growth channel to the Company's existing
investments, which now comprise almost the full complement of high quality
mortgages in the UK, with two Coventry transactions largely to individual
landlords, and the Keystone transaction to portfolio borrowers, plus the legacy
BTL loans from CHL and finally an owner-occupied transaction with TML.
Buy-to-Let Investments
Three of the Company's current investments along with the new Keystone
transaction are comprised of BTL mortgages. Whilst macro housing market and
credit drivers are similar to those in the Owner-Occupied sector, BTL lending
and property transactions are differentiated by regulatory specifics in the
mortgage market, the RMBS market and the housing market, such as rental value
tests, rating agency weightings and property tax, and therefore the two sectors
should be considered separately. Many of these issues have been introduced in
the last few years, including the ongoing phasing out of tax relief, new rules
for professional landlords, a 3% stamp-duty surcharge for BTL properties and
increases in minimum interest coverage ratios and stressed-payment thresholds.
Despite these changes, the sector has continued to perform extremely well
albeit there has been, and will likely continue to be some reshaping of the
property ownership mix between professionals and individuals. However,
mainstream press speculation of wholesale offloading of properties by landlords
seem to be overly doom-laden, and there is some evidence that private landlords
who are affected by the tax relief changes will in the most part gradually
covert to limited companies, should they decide to change lenders, rather than
choose to sell. Longer-term borrowers from before the crisis typically benefit
from low-margin floating rate loans, typically linked to the base rate, and
have broadly profited from a significant house price recovery over the last
8-10 years, reducing LTVs. Newer loans must meet the revised prudent lending
standards.
Whilst all the following portfolios are of BTL loans, each has slightly
different characteristics and so a further breakdown of each portfolio is given
below rather than a simple aggregation.
Malt Hill No.1 Portfolio (Coventry Building Society)
The loan portfolio continues to exhibit extremely strong performance, with the
increased principal prepayment activity experienced in 2017 during the first
round of loan resets having now returned to a normalised level, as can be seen
in the graph below, along with the paydown profile of the Malt Hill No.1 notes.
In terms of credit performance, in the 3-year lifetime of the loans, just three
have missed a monthly payment and all of these were cured by the following
month, meaning the portfolio is performing at 100%.
Given that the loans were predominantly originated between May and July of
2015, those with an initial two-year fixed rate period reached the end of that
term in either May 2017 or August 2017. Approximately 25% of these loans, a
relatively low percentage compared to the level of re-mortgaging typically seen
in the market, prepaid as the borrowers most likely moved to another lender.
The balance either reset to a new fixed rate with CBS or reverted to the SVR.
Most of the loans that reset with CBS for a new 2-year period will reach their
next reset date in May or August 2019. May 2019 is also the refinancing date
for the current securitisation so it is likely that at this time we will seek a
short term financing solution ahead of a further term securitisation to allow
those loans that prepay during that period to do so, whilst being able to
manage the capital efficiently by withdrawing any that becomes unnecessary and
putting it to work elsewhere (e.g. Keystone, or possibly purchasing further
Coventry loans).
Key Performance Indicators
The Malt Hill No.1 portfolio is an exceptionally high quality pool of loans.
The pool is well diversified with low (and therefore lower-risk) LTV ratios,
loan balances and, importantly for BTL properties, generally high Debt Service
Coverage Ratios ("DSCR" - being the level of rental income versus the
contractual monthly payment on the loan).
As the end of the period, 1,241 loans with a value of approximately GBP214m (down
from 1,561 loans worth GBP270m in June 2017) remain outstanding. The Weighted
Average Indexed LTV fell slightly from 63.8% to 63.1%, and there are no loans >
80% LTV.
The vast majority of the pool has a very healthy DSCR with 68% of the loans
having more than 2 times coverage, up from 52% in June 2017; a benefit of the
lower rate re-fixes whilst interest rates were low in 2017.
Malt Hill No.2 Portfolio (Coventry Building Society)
Given that the pool was purchased in the last month of the Company's financial
year, the pool has not changed since the purchase. As described above it is a
very high quality pool with a lower weighted average LTV than even Malt Hill
No.1 at 60.7%. The DSCR is also higher with 92.6% of the pool having a DSCR
greater than 2 times.
Oat Hill No.1 Portfolio (Capital Home Loans - CHL)
This investment remains very much in line with expectations, and therefore set
to deliver the strongest returns of all the Company's current investments.
It comprises a pool of vintage loans (mostly originated between 2004 and 2008).
Therefore any initial short term fixed-rate periods have long since expired and
all the loans now pay a floating rate of interest, with almost all of them
linked to the Bank of England base rate, and thereby also benefit from the two
UK base rate rises during the period and any further increases although these
are currently not expected until the middle of 2019.
However, this characteristic also means that most loans are paying a relatively
low rate of interest, with the weighted average interest rate expected to have
risen to 2.04% when the effects of the recent base rate hike are fully passed
on to customers, up from 1.54% when the pool was purchased. As a result of the
low rate, the pool was purchased at a significant discount, and much of the
return from this portfolio will be derived from that. The realisation of this
discount will be in steps, as firstly the current securitisation and then
subsequent ones are refinanced, typically every three years, with the leverage
essentially locked-in during the interim periods and then re-levered, and
therefore revalued, at each refinancing. The age of the pool means the weighted
average life of the loans is currently only 11 years.
Key Performance Indicators
Given the age of this pool, it's not surprising that the portfolio contains
some loans in arrears, especially given that the financial crisis reached its
peak shortly after many of the loans were originated. However, data from the
June loan-by-loan report shows just 74 loans are one month or more in arrears,
from a current pool of 4,589 loans and with an average arrears amount of only GBP
820.
Notably most of these loans are in the lowest 1-2 month category, and many are
actually historic, dating from the time of the financial crisis. Typically,
borrowers who fell into arrears, perhaps due to a period of unemployment, but
who are subsequently able to resume making payments, will put a plan in place
to reduce the balance of arrears by making an overpayment each month, thereby
reducing the arrears back to zero over time. In this pool, over 50% of the
loans in arrears already have such an arrangement plan in place, 40% of which
have been in place for more than 5 years.
Owner-Occupied Investments
Owner-Occupied mortgages continue to be a well performing sector. Loans are
typically differentiated by loans made by high street banks, generally to prime
(i.e. employed, clean credit history) borrowers, and specialist lending
(self-employed, variable-income and borrowers who may have experienced
historical credit issues).
The TML portfolio is the Company's only current investment in this sector
although others have been analysed and are likely to feature in the future. The
TML loans fall into the specialist category, albeit with a heavy focus at the
"near-prime/near-bank" end of the spectrum and only a minimal exposure to
credit impaired borrowers.
Cornhill No.2 Portfolio (The Mortgage Lender - TML)
Completions reached GBP152m by the end of June with a further GBP35m loans in the
pipeline. The portfolio continues to show underlying asset performance far
better than our original assumptions, with only three loans currently in
arrears; the only occurrences since lending began, and all three of these loans
are currently making payments but have experienced a shortfall along the way.
Other than a slight seasonal dip in the pipeline in December, the pace of
completions and origination has been relatively stable albeit subdued by the
slow mortgage market. Given the size of the portfolio it is contemplated that a
securitisation could be completed at around the turn of the calendar year,
depending on market conditions at that time, and work towards this has already
begun with a number of investor and rating agency meetings held at this year's
annual Global ABS conference in June and investor visits to TML's offices in
Glasgow being planned, along with some initial portfolio modelling and
structuring work.
As might be expected with a relatively new and growing business, the product
range, pricing, funding strategies etc., are reviewed on an ongoing basis.
Since launching the business, TML has originated loans graded by quality into
tiers numbering from 1 (highest) to 9 (lowest). These tiers are then further
grouped into 3 categories, 1-3, 4-6 and 7-9, whereby borrowers in each category
share similar characteristics, but are differentiated by credit score and
thereby pricing. The quality of the portfolio continues to be higher than
initially expected, with a greater proportion of lending and applications seen
in the highest quality credit category, albeit with the consequence that these
loans pay a lower rate of interest. Feedback from the distribution networks and
intermediaries who generate borrower introductions for TML, along with
competitor analysis has shown that the complexity of the 9-tier model may be
constraining origination volumes. Therefore, in Q1 2018 TML, in consultation
and agreement with TwentyFour and Natwest (as warehouse providers) began to
simplify their product range, initially focusing essentially on the 3 broader
current categories, with a blended interest rate in each category, although
this is currently being further refined to incorporate specific borrower
characteristics. This should help to boost returns going forward (as
historically more loans have fallen towards the higher end of each category),
whilst still retaining a similarly strong focus on credit.
Key Performance Indicators
Due to the risk-priced nature of loans there is a wide spread of mortgage rates
across the portfolio. However, as noted above, the portfolio has a high
concentration of loans in the higher credit quality categories and therefore
the majority of loans are concentrated in the 2% - 4% range, with a weighted
average interest rate for the whole pool at 3.66%, up from 3.51% in June 2017,
reflecting that newer loans incorporate the two UK base rate rises seen during
the period.
Around 65% of the loans have an initial two-year fixed rate period, 19% have a
five-year initial fixed rate period and the balance (around 16%) are floating
rate loans, tracking 3 month Libor. The two-year loans have a current average
interest rate of 3.49%, with the five-year loans at 4.23% and the floating rate
loans at 3.64%. The weighted average LTV of the pool is 67.9%.
Portfolio Performance Review
After issue costs, the NAV started at a base of 98 pence per share in July
2015. The table below shows the major contributors to the performance of the
NAV since that time. The longer time taken for the portfolio to become fully
invested and the ongoing payment of the dividend of 6p per annum have been the
major drivers of NAV performance, although the drag has reduced following the
securitisation of the Oat Hill No.1 transaction and will do so further
following the Malt Hill No.2 transaction, as the TML portfolio grows further
and as the Keystone portfolio begins to develop. The 1.1p fair value movement
in the swap valuation, reflects a change from 0.7p in June 2017. As the Company
had adopted hedge accounting effective 1 July 2017, the change is primarily due
to the new hedge on Malt Hill No. 2 being ineffective as at the year end.
However, this swap qualifies for hedge accounting for the period beginning July
2018 on a prospective basis.
NAV to end June - 2018
Start NAV 98.0
Net Interest 10.5
Dividend -13.5
Costs (Servicing, Operating, -8.3
Warehouse)
Swap MTM -1.1
Company NAV 85.7
Market and Investment Outlook
The broader market remains intrinsically linked to the vagaries of the ongoing
geopolitical situation. The Brexit negotiations continue with escalating
tensions between Leavers and Remainers both in parliament and within the
Conservative government itself. UK housing market uncertainty and subdued
mortgage lending is set to continue whilst this uncertainty remains. Meanwhile,
the possibility of an escalation to a full-blown trade war between China and
the US also remains, with the potential for a negative knock-on impact for both
sentiment and earnings.
To what extent RMBS markets suffer from contagion is yet to be seen but despite
the more supply-driven softening in the summer, RMBS market participants will
have been generally encouraged by the resilience to recent volatility in other
sectors. Fundamentals and performance remain very strong, and the future
direction of spreads is likely to be mainly determined by the level of primary
issuance in Q4 and beyond, as the end of the TFS has brought a combination of
hope of renewed issuance from the UK bank and building society sector, but
trepidation that over-supply and tapering in Europe could in fact lead to
spread widening.
Early indications of RMBS supply suggest that at the prime, high street end of
the market, some deals are likely to be placed into the US market where there
is currently a strong bid and a favourable swap basis for shorter dated bonds.
Given the lower than expected primary issuance since the summer and with
spreads having stabilised to a certain extent, it is anticipated that new
supply will be reasonably well received by the market initially for deals that
are competitively priced.
The impact of the new STS securitisation regulations should also help more
widely, although are expected to take some time before they are fully embraced
by the issuance community.
TwentyFour Asset Management LLP
17 October 2018
PORTFOLIO OF INVESTMENTS
As at 30 June 2018
Portfolio Summary as Buy-to-Let Owner Occupied
at 30 June 2018
Purchased Forward Flow
Malt Hill No. 1 Malt Hill No. 2 Oat Hill No. 1 Cornhill No. 2
Originator Coventry Coventry Capital Home The Mortgage
Building Building Loans Lender
Society Society
Outstanding Notional GBP214m GBP350m GBP544m GBP187m*
Balance
Number of Accounts 1,190 1,993 4,229 1,029
Average Mortgage Size GBP179k GBP176k GBP129k GBP185k
WA** Current Indexed LTV 63.11% 60.73% 66.31% 66.02%
WA Interest Rate 2.80% 2.71% 1.79% 3.62%
WA Remaining Term (mth) 213 240 137 294
WA Seasoning (mth) 35 17 138 9
3mth + Arrears (% 0.00% 0.00% 0.29% 0.04%
balance)
Refinancing Date May 19 May 21 May 20 n/a
* includes completions and pipelines
** weighted average
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 Crystal Amber Fund Limited and a director of JZ
Capital Partners Limited as well as a number of unlisted companies. 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. Mr Waldron was appointed to the Board
on 10 June 2015.
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. Mr Burrows was appointed to the Board on 12
June 2015.
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. 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.
Mr Le Page was appointed to the Board on 10 June 2015.
Helen Green - Independent Non-Executive Director - Guernsey resident
Mrs Green is a chartered accountant and has been employed by Saffery Champness,
a top 20 firm of chartered accountants, since 1984. She qualified as a
chartered accountant in 1987 and became a partner in the London office in 1998.
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, City Natural Resources High Yield Trust plc
and Acorn Income Fund Limited, of which she is Chairman. Mrs Green was
appointed to the Board on 16 June 2016.
DISCLOSURE OF DIRECTORSHIPS IN PUBLIC COMPANIES LISTED
ON RECOGNISED STOCK EXCHANGES
The following summarises the Directors' directorships in other public listed
companies
Company Name Stock Exchange
Christopher Waldron (Chairman)
JZ Capital Partners Limited London
Richard Burrows
None
Paul Le Page
Bluefield Solar Income Fund Limited London
Highbridge Multi-Strategy Fund Limited London
Helen Green
Aberdeen Emerging Markets Investment Company London
Acorn Income Fund Limited Channel Islands and
London
City Natural Resources High Yield Trust PLC London
DIRECTORS' REPORT
The Directors present their Annual Report and Audited Consolidated Financial
Statements for the year ended 30 June 2018.
Business Review
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 on 7 July 2015. On 27 June
2018, the Company completed an additional capital raise.
Discount/Premium Management Policy
The Board of Directors monitors and has a policy to manage the level of the
share price discount/premium to NAV. See information set out in note 18.
Shareholder Information
Shareholder information is set out in the Summary Information.
Going Concern
As a Specialist Fund Segment entity, the Company has voluntarily chosen to
comply with the disclosure requirements of Premium Listing rules and as such
applies the AIC Code and applicable regulations. Under this code, the Directors
are required to satisfy themselves that it is reasonable to assume that the
Company is a going concern and to identify any material uncertainties to the
Company's ability to continue as a going concern for at least 12 months from
the date of approving these Consolidated Financial Statements.
Having reviewed the Company'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 Audited Consolidated Financial Statements
given the Company's holdings of cash and cash equivalents and the income
deriving from those investments, meaning the Company has adequate financial
resources to meet its liabilities as they fall due over a period of 12 months
from the approval of the Consolidated Financial Statements.
Results
The results for the year are set out in the Consolidated Statement of
Comprehensive Income. The Company declared dividends of GBP15,345,980 in respect
of the year ended 30 June 2018, a breakdown of which can be found in note 22.
Distributions declared and paid during the year amount to GBP15,000,000 as
recognised in the Statement of Changes in Equity.
Dividends paid with respect to any period comprise a significant majority of
net income for the Company. The Board expects that dividends will constitute
the principal element of the return to holders of Ordinary Shares. The
dividends for the year have, as anticipated, been mostly paid out of capital of
the Company.
Signed on behalf of the Board of Directors on 17 October 2018 by:
Paul Le Page
Director
Helen Green
Director
STRATEGIC REPORT
The Board has prepared this report on a voluntary basis as there is no
requirement to comply with the UK regulations governing the Directors' duty to
prepare a strategic report.
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.
Key Performance Indicators ("KPIs")
At each Board meeting, the Directors consider a number of performance measures
to assess the Company's success in achieving its objectives. Below are the main
KPIs which have been identified by the Board for determining the progress of
the Company:
* Net Asset Value
The Company's net asset value has declined from 98p per share at launch to
85.69p at the year end. This decline in NAV is largely attributable to
servicing and warehouse costs, and total dividend payments of 13.5p per share,
which have been mostly funded from capital during the portfolio investment
phase. The Directors and Portfolio Manager are confident that the current
strategy will restore the capital value of the Company and would expect the
Company's NAV to grow over time.
* Discount/Premium
The Company has traded at an average premium of 3.8% to NAV for its third year
which the Directors regard as a pleasing result in the context of volatility
within the investment companies sector.
* Ongoing Charges
The Company's ongoing charges ratio has increased to 2.58% from 2.18% mainly
due to additional costs on Malt Hill No.2 Plc. The Company reports a
consolidated view of the charges incurred at all levels of its structure and
effectively shows all of the underlying investment portfolio costs in addition
to its own costs and those of the Acquiring Entity. The costs of the parent
company, UKML, decreased from 1.07% to 0.92% of NAV mainly due to the reduction
in the management fee from 0.75% to 0.6% with effect from July 1 2017. The
costs of servicing the underlying mortgage portfolio have increased from 1.11%
to 1.27% which is in line with the increase in the size of the investment
portfolio. The Portfolio Manager incorporates servicing costs into their
portfolio models and projections and the directors expect that these costs will
rise in an approximately linear manner with the size of the underlying mortgage
portfolio.
* Quarterly Dividends
The Company declared four interim dividends of 1.5p in relation to the year in
accordance with the prospectus target. In the year to date, the Company's
dividends were mostly uncovered by income. Over the expected life of the
Company, the Directors expect dividends to be covered by income received.
* Investment Level
At 30 June 2018, the Company had approximately GBP43m of cash and near cash
working capital compared with GBP86m at 30 June 2017. As the Company now has a
substantially leveraged exposure to mortgage investments the Directors monitor
uncommitted cash levels and intend to keep average working capital balances to
a minimum over the life of the Company. The year end working capital balance
was elevated due to the repayment of loans in the Malt Hill No. 1 and Oat Hill
No. 1 portfolios and the capital raise during June 2018.
Company Structure
The Company pursues its investment objective via DAC. DAC is a SPV,
incorporated in Ireland under the Section 110 regime, which was established
prior to the Company acquiring the first mortgage portfolio from the Coventry
Building Society. DAC is responsible for acquiring and leveraging mortgage
portfolios in Warehouse SPVs. These portfolios are subsequently securitised by
selling each warehoused portfolio to an Issuer SPV. The Issuer SPV issues
tranches of securities, the junior tranche of which is then retained by DAC to
provide it with leveraged exposure to the underlying mortgages. DAC is
currently required under European law to retain a minimum of 5% of each
securitisation that it originates. Whilst this retention limit would enable DAC
to attain leverage by a factor of up to twenty times, the directors of DAC
limit the size of any senior financing in order to meet the requirements for an
AAA rating on issuance.
During the year, a new securitisation SPV, Malt Hill No.2 Plc, was incorporated
to hold and securitise loans following a purchase in June 2018. Malt Hill 2 Plc
did not require a Warehouse SPV.
This company structure, whilst complex, comprises a Guernsey domiciled company
listed on the Specialist Fund Segment with a portfolio of UK mortgage
securitisation structures underneath and the addition of DAC based in the EU.
DAC owns the junior class notes from each Issuer SPV and collects cash flows
for the Company. These cash flows are paid to the Company in the form of
coupons on Eurobonds, called Profit Participating Notes that DAC sells to UKML.
DAC qualifies for Irish tax relief on the income that it distributes which
ensures that UKML's investors are only taxed on their dividend income once,
upon payment by UKML.
A number of relevant additional explanation points are set out below for the
Malt Hill No.1 Plc, Malt Hill No. 2 Plc and Oat Hill No. 1 Plc transactions:
* The Servicer, typically the originator of the underlying mortgages, is
responsible for servicing the loans i.e. managing the underlying borrowers
and collecting the mortgage payments. It is also common practice for third
party servicers to be employed if the originator is incapable of servicing
the loans that they have originated. A back up servicer is retained by the
Issuer SPV to ensure continuity of cash flows in the event of failure of
the main servicer.
* The Trustee provides monthly reports on the mortgage pool and ensures that
the Issuer SPV complies with its investment policy.
* The Issuer SPV is a public Securitisation Vehicle modelled on Intex
(ticker: MLTH1, MLTH2, OATH1), ABSNet (ticker: MALTH, MALTH2, OATH) and
Bloomberg (ticker: MALTH 1 Mtge, MALTH 2 Mtge, OATH 1 Mtge).
* Loan level data for the public securitisations are published on EuroABS on
a monthly basis.
* The Administrator is responsible for the administration and financial
reporting of the securitisation.
* The Class A notes are the most senior part of the Issuer SPV securitisation
structure and receive regular floating rate distributions and priority in
the repayment of loan principal.
* The Class Z notes receive any residual income and capital distributions
after payments have been made to the Class A note holders and the operating
fees of Issuer SPV have been met.
Investment Process
Detailed "bottom-up" credit analysis is carried out on each mortgage portfolio
before it is considered as an investment. This analysis includes a
comprehensive review of the underlying mortgages in the transaction, including,
but not limited to, a review of the original loan application documents and
approval decisions, understanding the origination criteria of the lender and
the credit approval process, reviewing the product suite within the mortgage
pool and expected ongoing drivers of performance.
In the case of a forward flow portfolio purchase arrangement such as TML, the
Portfolio Manager will initially, and in conjunction with the third party
lender and originator, agree and if necessary design the product, lending and
underwriting criteria for the pool to be originated. During the origination
period, any modifications to such criteria that may be required due to changes
in the market (e.g. interest rates) will be monitored and agreed in a similar
tripartite manner.
Each mortgage portfolio is also analysed through a Rating Agency model to
assess portfolio risks and create an initial funding structure. A bespoke cash
flow model is then developed to create base case and stress test portfolio
yield scenarios. The Portfolio Manager will also work with the mortgage
Servicers to establish the servicing standards appropriate for each mortgage
portfolio and monitor performance against these on an ongoing basis.
The funding process for each transaction is an integral part of the Company's
investment proposition. The Portfolio Manager may establish a committed funding
line with a third-party lender to allow for the purchase of each mortgage
portfolio. The funding is expected to be a short/medium term facility utilised
by the relevant Warehouse SPV which will ultimately be replaced by senior notes
issued to securitisation investors via the relevant Issuer SPV. As appointed by
the Portfolio Manager, a lead investment bank will then arrange the
structuring, ratings and marketing of the senior notes of the relevant Issuer
SPV to provide long-term funding of the mortgage portfolio.
The Portfolio Manager will monitor performance of the mortgage portfolios.
Individual investment performance will be compared to the initial investment
hypothesis, and models will be updated to reflect differences in predicted and
actual performance. Differences will be analysed and discussed with the
relevant Servicers. The Portfolio Manager will continue to monitor the UK
residential mortgage market and the UK securitisation market for comparative
performance and to validate the ongoing investment thesis. The Portfolio
Manager provides updates to the Directors of the Company in relation to the
performance of the Company's investments.
Key Service Providers
The Company does not have any employees and as such the Board delegates
responsibility for its day to day operations to a number of key service
providers. The activities of each service provider are closely monitored by the
Board and they are required to report to the Board at each quarterly meeting.
In addition, a formal review of the performance of each service provider is
carried out once a year by the Management Engagement Committee.
Portfolio Manager
The Portfolio Manager provides a comprehensive range of portfolio management,
securitisation and investment monitoring services as detailed above. In
exchange for these services a fee is payable, quarterly in arrears at a rate of
0.60% per annum since 1 July 2017 of the lower of NAV, which is calculated
monthly on the last business day of each month, or market capitalisation. Prior
to this date, the portfolio management fee per annum was 0.75%. For additional
information refer to note 16.
The Board considers that the interests of Shareholders, as a whole, are best
served by the ongoing appointment of the Portfolio Manager to achieve the
Company's investment objectives.
Alternative Investment Fund Manager ("AIFM")
Alternative investment fund management services are provided by Maitland
Institutional Services Limited ("Maitland"). 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 GBP20,000 per annum and fees payable quarterly
in arrears at a rate of 0.07% of the NAV of the Company below GBP50 million,
0.05% on Net Assets between GBP50 million and GBP100 million and 0.03% on Net
Assets in excess of GBP100 million. For additional information refer to note 17.
Custodian and Depositary
Custodian and Depositary services are provided by Northern Trust (Guernsey)
Limited. The terms of the Depositary agreement allow Northern Trust (Guernsey)
Limited to receive depositary fees 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 GBP40,000 per annum
payable monthly in arrears. The Depositary will charge an additional fee of GBP
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 0.01%
of the NAV of the Company as at the last business day of the month subject to a
minimum of GBP8,500 per annum. For additional information refer to note 17.
Directors
The Directors of the Company during the year and at the date of this report are
set out in Corporate Information.
Directors' and Other Interests
As at 30 June 2018, Directors of the Company held the following Ordinary Shares
beneficially:
Number of Shares Number of
Shares
30.06.2018 30.06.2017
Christopher Waldron 20,000 5,000
Richard Burrows 5,000 5,000
Paul Le Page 20,000 20,000
Helen Green 10,000 -
Signed on behalf of the Board of Directors on 17 October 2018 by:
Paul Le Page
Director
Helen Green
Director
CORPORATE GOVERNANCE REPORT
The Board is committed to high standards of corporate governance and has
implemented a framework for corporate governance which it considers to be
appropriate for an investment company in order to comply with the principles of
the UK Code issued by the Financial Reporting Council (the "FRC"). The Company
is also required to comply with the GFSC Code.
The UK Listing Authority requires all UK premium listing companies to disclose
how they have complied with the provisions of the UK Code. As a company with a
Specialist Fund Segment listing, the Company has voluntarily chosen to report
against the UK Code. This Corporate Governance Statement, together with the
Going Concern Statement, Viability Statement and the Statement of Directors'
Responsibilities, indicate how the Company has complied with the principles of
good governance of the UK Code and its requirements on Internal Control.
The Company is a member of the AIC and by complying with the AIC Code is deemed
to comply with both the UK Code and the GFSC Code.
The Board has considered the principles and recommendations of the AIC Code, by
reference to the guidance notes provided by the AIC Guide, and consider that
reporting against these will provide appropriate information to Shareholders.
To ensure ongoing compliance with these principles the Board reviews a report
from the Corporate Secretary at each quarterly meeting, identifying how the
Company is in compliance and identifying any changes that might be necessary.
The AIC Code and the AIC Guide are available on the AIC's website,
www.theaic.co.uk. The UK Code is available in the FRC's website,
www.frc.org.uk.
Throughout the year ended 30 June 2018, the Company has complied with the
recommendations of the AIC Code and thus the relevant provisions of the UK
Code, except as set out below.
The UK Code includes provisions relating to:
* the role of the Chief Executive;
* Executive Directors' remuneration;
* annually assessing the need for an internal audit function;
* Remuneration Committee; and
* Nomination Committee.
For the reasons set out in the AIC Guide and as explained in the UK Code, the
Board considers these provisions are not relevant to the position of the
Company as it is an externally managed investment company. The Company has
therefore not reported further in respect of these provisions. The Directors
are all non-executive and the Company delegates its day to day operations and
does not have employees, hence no Chief Executive, Executive Directors'
remuneration or internal audit function is required for the Company. The Board
is satisfied that any relevant issues can be properly considered by the Board.
The Board, as a whole, fulfills the function of a Nomination and Remuneration
Committee as detailed in the Directors Remuneration report.
Details of compliance with the AIC Code are noted below and in the succeeding
pages. There have been no other instances of non-compliance, other than those
noted above.
The Company has adopted a policy that the composition of the Board of
Directors, which is required by the Company's Articles comprise of at least two
persons; that at all times a majority of the Directors are independent of the
Portfolio Manager and any company in the same group as the Portfolio Manager;
the Chairman of the Board of Directors is free from any conflicts of interest
and is independent of the Portfolio Manager and of any company in the same
group as the Portfolio Manager; and that no more than one director, partner,
employee or professional adviser to the Portfolio Manager or any company in the
same group as the Portfolio Manager may be a director of the Company at any one
time.
The Company's risk exposure and the effectiveness of its risk management and
Internal Control systems are reviewed by the Audit Committee at its meetings
and annually by the Board. The Board believes that the Company has adequate and
effective systems in place to identify, mitigate and manage the risks to which
it is exposed.
Role, Composition and Independence of the Board
The Board is the Company's governing body and has overall responsibility for
maximising the Company's success by directing and supervising the affairs of
the business and meeting the appropriate interests of Shareholders and relevant
stakeholders, while enhancing the value of the Company and also ensuring
protection of investors' interests. A summary of the Board's responsibilities
is as follows:
* statutory obligations and public disclosure;
* strategic matters and financial reporting;
* risk assessment and management including reporting compliance, governance,
monitoring and control; and
* other matters having a material effect on the Company.
The Board's responsibilities for the Annual Report and Audited Consolidated
Financial Statements are set out in the Statement of Directors'
Responsibilities.
The Board currently consists of four non-executive Directors, all of whom are
considered to be independent of the Portfolio Manager and as prescribed by the
Listing Rules.
Chairman
The Chairman is Mr Christopher Waldron. The UK Code requires the Chairman of
the Board be independent. Mr Waldron is considered independent because he:
* has no current or historical employment with the Portfolio Manager; and
* has no current directorships in any other investment funds managed by the
Portfolio Manager.
Senior Independent Director
Mr Richard Burrows is the Senior Independent Director of the Company. Mr
Burrows has extensive knowledge of the UK banking sector and mortgage lending
and co-ordinates the annual reviews of key service providers in his capacity as
Chairman of the Management Engagement Committee.
Chairman of the Audit Committee
Mr Paul Le Page is the Chairman of the Audit Committee. Mr Le Page was selected
for this role as he has over fourteen years' experience in this capacity with a
detailed knowledge of financial risk management and alternative asset classes.
Chairman of the Risk Committee
Mr Richard Burrows is the Chairman of the Risk Committee. Mr Burrows was
selected for this role as he has extensive knowledge of securitisations.
Biographies for all the Directors can be found in the Board Members section.
Composition of the Board
The Board considers that it has the appropriate balance of diverse skills and
experience, independence and knowledge of the Company and the wider sector, to
enable it to discharge its duties and responsibilities effectively and that no
individual or group of individuals dominates decision making. The Chairman is
responsible for leadership of the Board and ensuring its effectiveness.
Financial Reporting
The Board needs to ensure that the Annual Report and Audited Consolidated
Financial Statements, taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to assess the Company's
position and performance, business model and strategy. In seeking to achieve
this, the Directors have set out the Company's investment objective and policy
and have explained how the Board and its delegated committees operate and how
the Directors review the risk environment within which the Company operates and
set appropriate risk controls.
Furthermore, throughout the Annual Report and Audited Consolidated Financial
Statements the Board has sought to provide further information to enable
Shareholders to have a fair, balanced and understandable view.
The Financial Statements of UKML and its subsidiaries are subject to internal
review by their respective administrator, a further review by the Portfolio
Manager, and also their respective Directors. The final review is conducted by
UKML's administrator which includes the subsidiaries Financial Statements. Each
administrator has a robust control environment in place, and in addition each
company is subject to an annual external audit. Malt Hill No.2 Plc was not
subject to an annual audit at 30 June 2018 but it was reviewed by the
independent auditor as part of the UKML annual audit.
The Board has contractually delegated responsibility for the management of its
investment portfolio, the arrangement of custodial and depositary services and
the provision of accounting and company secretarial services.
The Board is responsible for the appointment and monitoring of all service
providers to the Company.
The Board recognises the importance of diversity, including gender, and has
given careful consideration to the recommendations of both of the Davies and
the Hampton-Alexander reviews. The Board operates a policy that aims to promote
diversity in its composition. Under this policy, director appointments are
evaluated against the existing balance of skills, knowledge and experience on
the Board, with directors asked to be mindful of diversity and inclusiveness
considerations when examining nominations to the Board. During its annual
evaluation, the Board considered diversity as part of the review of its
performance and effectiveness.
The Board has 25% female representation which is slightly in excess of the 23%
level achieved by FTSE 350 companies in the Hampton-Alexander review when it
was published in 2016. Our female representation is however below the
increased 33% target set for calendar year 2020. Whilst the Board is fully
aware of this revised target, the structure of the Board is determined by the
need to achieve an appropriate balance of skills and experience whilst
minimising operational costs in what is a relatively small company.
Directors' Attendance at Meetings
The Board holds quarterly Board meetings to discuss general management,
structure, finance, corporate governance, marketing, risk management,
compliance, asset allocation and gearing, contracts and performance.
The quarterly Board meetings are the principal source of regular information
for the Board enabling it to determine policy and to monitor performance,
compliance and controls but these meetings are also supplemented by
communication and discussions throughout the year.
A representative of the Portfolio Manager, AIFM, Administrator, Custodian and
Depositary and Corporate Broker attends each Board meeting either in person or
by telephone thus enabling the Board to fully discuss and review the Company's
operation and performance. Each Director has direct access to the Portfolio
Manager and Company Secretary and may, at the expense of the Company, seek
independent professional advice on any matter.
The Audit Committee meets at least twice a year, the Management Engagement
Committee meets at least once a year and dividend meetings are held quarterly.
In addition, ad hoc meetings of the Board to review specific items between the
regular scheduled quarterly meetings can be arranged. Between formal meetings
there is regular contact with the Portfolio Manager, AIFM, Administrator,
Custodian and Depositary and the Corporate Broker.
Attendance at the Board and committee meetings during the year was as follows:
Board Meetings Audit Committee Meetings Risk Committee
Held Attended Held Attended Held Attended
Christopher 4 4 4 4 2 2
Waldron
Richard Burrows 4 3 * 4 3 2 2
Paul Le Page 4 4 4 4 2 2
Helen Green 4 4 4 4 2 2
Management Engagement Committee Meetings Ad hoc Meetings
Attended Held Attended
Held
Christopher 1 1 8 5
Waldron
Richard Burrows 1 1 8 5
Paul Le Page 1 1 8 8
Helen Green 1 1 8 7
*Richard Burrows could not attend one meeting due to being on jury service.
At the Board meetings, the Directors review the management of the Company's
assets and liabilities and all other significant matters so as to ensure that
the Directors maintain overall control and supervision of the Company's
affairs.
The Board has a breadth of experience relevant to the Company and the Directors
believe that any changes to the Board's composition can be managed without
undue disruption. With any new director appointment to the Board, consideration
will be given as to whether an induction process is appropriate.
Board Performance and Training
The Directors consider how the Board functions as a whole taking balance of
skills, experience and length of service into consideration and also reviews
the individual performance of its members on an annual basis.
To enable this evaluation to take place, the Company Secretary will circulate a
detailed questionnaire plus a separate questionnaire for the evaluation of the
Chairman. The questionnaires, once completed, are returned to the Company
Secretary who collates responses, prepares a summary and discusses the Board
evaluation with the Chairman prior to circulation to the remaining Board
members. The performance of the Chairman is evaluated by the other Directors.
The board also conducts a 360 degree approach to their performance evaluation
and requests that service providers each complete board performance
questionnaires which are reviewed to understand whether there are any aspects
such as communication which require improvement. On occasions, the Board may
seek to employ an independent third party to conduct a review of the Board.
These evaluations consider the balance of skills, experience, independence and
knowledge of the Board, its diversity and how the Board works together as a
unit as well as other factors relevant to its effectiveness.
Training is an on-going matter as is discussion on the overall strategy of the
Company and the Board has met with the Portfolio Manager at their offices and
elsewhere during the year to discuss these matters. Such meetings will be an
on-going occurrence.
Retirement by Rotation
Under the terms of their appointment, each Director is required to retire by
rotation as detailed in the Remuneration Report.
UK Criminal Finances Act 2017
In respect of the UK Criminal Finances Act 2017 which has introduced a new
Corporate Criminal Offence of "failing to take reasonable steps to prevent the
facilitation of tax evasion", the Board confirms that it is committed to zero
tolerance towards the criminal facilitation of tax evasion.
The Board also keeps under review developments involving other social and
environmental issues, such as the General Data Protection Regulation ("GDPR"),
which came into effect on 25 May 2018, and Modern Slavery, and will report on
those to the extent they are considered relevant to the Company's operations.
Board Committees and their Activities
Terms of Reference
All Terms of Reference of the Board's Committees are available from the
Administrator upon request.
Management Engagement Committee
The Board has established a Management Engagement Committee with formal duties
and responsibilities. The Management Engagement Committee commits to meeting at
least once a year and comprises the entire Board with Richard Burrows appointed
as Chairman. These duties and responsibilities include the regular review of
the performance of and contractual arrangements with the Portfolio Manager and
other service providers and the preparation of the Committee's annual opinion
as to the Portfolio Manager's services.
At its meeting held on 20 March 2018, the Management Engagement Committee
carried out its review of the performance and capabilities of the Portfolio
Manager and other service providers and the Committee recommended that the
continued appointment of TwentyFour Asset Management LLP as Portfolio Manager
was in the best interests of Shareholders. The Committee also recommended that
the appointment of all of the Company's current service providers should
continue.
Audit Committee
An Audit Committee has been established consisting of all Directors with Paul
Le Page appointed as Chairman. The terms of reference of the Audit Committee
provide that the committee shall be responsible, amongst other things, for
reviewing the Consolidated Interim and Consolidated Annual Financial
Statements, considering the appointment and independence of the external
auditor, discussing with the external auditor the scope of the audit and
reviewing the Company's compliance with the AIC Code.
Further details on the Audit Committee can be found in the Audit Committee
Report.
Risk Committee
The Board has established a Risk Committee with formal duties and
responsibilities. The Risk Committee commits to meeting at least twice a year
and comprises the entire Board with Richard Burrows appointed as Chairman.
These duties and responsibilities include the review of the effectiveness of
the Company's internal control policies and systems and to report to Audit
Committee.
Nomination Committee
There is no separate Nomination Committee. The Board as a whole fulfils the
function of a Nomination Committee. Whilst the Directors take the lead in the
appointment of new Directors, any proposal for a new Director will be discussed
and approved by all members of the Board.
Remuneration Committee
In view of its non-executive and independent nature, the Board considers that
it is not appropriate for there to be a separate Remuneration Committee as
anticipated by the AIC Code. The Board as a whole fulfils the functions of the
Remuneration Committee, although the Board has included a separate Directors'
Remuneration Report.
International Tax Reporting
For purposes of the US Foreign Account Tax Compliance Act, the Company
registered with the US Internal Revenue Service ("IRS") as a Guernsey reporting
FFI, received a Global Intermediary Identification Number
(IV8HG9.99999.SL.831), and can be found on the IRS FFI list.
The Common Reporting Standard ("CRS") is a global standard for the automatic
exchange of financial account information developed by the Organisation for
Economic Co-operation and Development ("OECD"), which has been adopted in
Guernsey and which came into effect on 1 January 2016. The CRS has replaced the
inter-governmental agreement between the UK and Guernsey to improve
international tax compliance that had previously applied in respect of 2014 and
2015.
The Board has taken the necessary actions to ensure that the Company is
compliant with Guernsey regulations and guidance in this regard.
Strategy
Having purchased and securitised three existing pools of Buy-to-Let mortgages
and committed to a customised residential mortgage origination programme the
Company is preparing to securitise this fourth portfolio whilst the lender
originates mortgages under the supervision of the Portfolio Manager. This
parallel work-flow should enable a rapid securitisation process on completion
of the loan portfolio. In addition the Company is seeking to commit the
available capital to its next transaction, with a view to achieving a covered
6p dividend as soon as practically possible.
Internal Controls
The Board is ultimately responsible for establishing and maintaining the
Company's system of internal financial and operating control and for
maintaining and reviewing its effectiveness. The Company's risk matrix is the
basis of the Company's risk management process in establishing the Company's
system of internal financial and reporting control.
The risk matrix is prepared and maintained by the Board and identifies the
risks facing the Company and then collectively assesses the likelihood of each
risk, the impact of those risks and the strength of the controls operating over
each risk. The Board uses the product of risk and impact scores to determine
key areas requiring their attention. The system of internal financial and
operating control is designed to manage rather than to eliminate the risk of
failure to achieve business objectives and by their nature can only provide
reasonable and not absolute assurance against misstatement and loss.
These controls aim to ensure that assets of the Company are safeguarded, proper
accounting records are maintained and the financial information for publication
is reliable. The Board confirms that there is an ongoing process for
identifying, evaluating and managing the significant risks faced by the
Company.
This process has been in place for the year under review and up to the date of
approval of this Annual Report and Audited Consolidated Financial Statements
and is reviewed by the Board and is in accordance with the AIC Code.
The AIC Code requires Directors to conduct at least annually a review of the
Company's system of internal financial and operating control, covering all
controls, including financial, operational, compliance and risk management. The
Board has evaluated the systems of Internal Controls of the Company. In
particular, it has prepared a process for identifying and evaluating the
significant risks affecting the Company and the policies by which these risks
are managed. The Board also considers whether the appointment of an internal
auditor is required and has determined that there is no requirement for a
direct internal audit function.
The Board has delegated the day to day responsibilities for the management of
the Company's investment portfolio, the provision of depositary services and
administration, registrar and corporate secretarial functions including the
independent calculation of the Company's NAV and the production of the Annual
Report and Audited Consolidated Financial Statements which are independently
audited.
Formal contractual agreements have been put in place between the Company and
providers of these services. Even though the Board has delegated responsibility
for these functions, it retains accountability for these functions and is
responsible for the systems of Internal Control. At each quarterly Board
meeting, compliance reports are provided by the Administrator, Company
Secretary, Portfolio Manager, AIFM and Depositary. The Board also receives
confirmation from the Administrator of its accreditation under its Service
Organisation Controls 1 report.
The Company's risk exposure and the effectiveness of its risk management and
Internal Control systems are reviewed by the Audit Committee and the Risk
Committee at meetings and annually by the Board. The Board believes that the
Company has adequate and effective systems in place to identify, mitigate and
manage the risks to which it is exposed. Principal Risks and Uncertainties are
set out below.
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 carried out a robust assessment of 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 Company, the Board takes account of
the risk which has been taken in order to achieve that return. The Board looks
at the principal risks and uncertainties, an overview of which is set out
below:
* 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
monitored by the Board receiving quarterly reports from the Portfolio
Manager, in conjunction with the Company's Administrator, which monitor the
Company's cash flow and income position, as well as the macro economic
environment, paying particular attention to movements in the house price
index, unemployment levels and interest rates as well as loan level and
portfolio attributes such as prepayment rates and the possibility and
timing of defaults, all of which could reduce cash flow to the Company. The
Company can also pay dividends from capital with Board agreement.
* The risk of the Company being unable to invest or reinvest 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.
* The risk of investor dissatisfaction leading to a weaker share price,
causing the Company to trade at a discount to its underlying asset value
and a potential lack of market liquidity. The risk is mitigated by regular
updates to Shareholders from the Portfolio Manager, and regular shareholder
engagement both directly and via the company's brokers.
* 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 Company. 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 Company. The risk has been mitigated by the
Portfolio Manager hiring additional team members with extensive
securitisation experience and by being engaged with the UK RMBS market and
service providers. The Company will also use short term warehouse
facilities where needed to enable it to optimise the timing of its
securitisation transactions.
* The risk of the Company's hedges being deemed ineffective following the
adoption of hedge accounting which has been applied since 1 July 2017. With
the adoption of hedge accounting, the Company is required to assess the
historic effectiveness of the Company's hedges in accordance with IAS 39 up
to 30 June 2018 and the prospective effectiveness of the Company's hedges
in accordance with IFRS 9 with effect from 1 July 2018. Should prospective
testing show the hedges to be effective, the Company may continue to hedge
account until the point that the Board can prove the hedges to be
ineffective. Thereafter, the Company would need to cease hedge accounting,
meaning that the fair value movements on the derivative instruments are
taken through the Statement of Comprehensive Income in full.
Viability Statement
The UK Code requires the Board to explain how they have assessed the prospects
of the Company, taking account of its current position, principal risks, the
period of this assessment and why the period is considered appropriate. The
Board has conducted a robust assessment of the principal risks faced by the
Company and has conducted detailed reviews of the Company's underlying mortgage
portfolio models for the period up to and including May 2021, being the
refinance date of Malt Hill No. 2 plc. The models subject the underlying
mortgage pools to a variety of stresses including elevated levels of default,
reduced levels of recovery following default, financing stresses and delays in
loan origination.
Having considered the above, and with reference to the Company's current
position and prospects, and assuming the Company successfully passes the five
year continuation vote due during 2020, and in the event of a dividend trigger
(see note 19) a continuation vote would be passed, the Board is of the opinion
that the Company is viable until at least May 2021 and in all scenarios, would
be able to meet its liabilities as they fall due.
Shareholder Engagement
The Board welcomes Shareholders' views and places great importance on
communication with its Shareholders. Shareholders wishing to meet the Chairman
and other Board members should contact the Company's Administrator.
The Portfolio Manager and Corporate Broker maintain a regular dialogue with
institutional Shareholders, the feedback from which is reported to the Board.
In addition, the Company maintains a website which contains comprehensive
information, including links to regulatory announcements, share price
information, financial reports, investment objective and investor contacts
(www.ukmortgagesltd.com).
The Company's Annual General Meeting ("AGM") provides the Shareholders a forum
to meet and discuss issues of the Company and as well as the opportunity to
vote on the resolutions as specified in the Notice of AGM. The Notice of the
AGM and the results are released to the London Stock Exchange in the form of an
announcement. Board members will be available to respond to Shareholders'
questions at the AGM.
Significant Shareholdings
As at 17 October 2018, the Company has been notified of the following interests
in the share capital of the Company exceeding 3% of the issued share capital:
Number of shares Percentage of
issued
share capital
Twentyfour Asset Management* 46,759,800 17.12
Coutts & Co 26,430,811 9.68
Investec Wealth & Investment 20,630,279 7.56
Seven Investment Management 19,496,689 7.14
Premier Fund Managers Limited 15,607,017 5.72
Old Mutual Global Investors 14,855,777 5.44
Fidelity International 13,209,817 4.84
Brooks Macdonald Nominees Limited 12,515,172 4.58
City Financial Investment Company 11,304,984 4.14
*Twentyfour Asset Management acting as investment manager of:
St. James's Place Strategic Income Unit Trust 38,059,151 13.93
MI TwentyFour Investment Funds - Asset Backed 8,700,649 3.19
Income Fund
The percentage of Ordinary Shares shown above represents the ownership of
voting rights at the year end.
It is the responsibility of the shareholders to notify the Company of any
change to their shareholdings when it reaches 3% of shares in issue and any
change which moves up or down through any whole percentage figures above 3%.
Disclosure of Information to Auditor
The Directors who held office at the date of approval of these Audited
Consolidated Financial Statements confirm that, so far as they are each aware,
there is no relevant audit information of which the Company's auditor is
unaware; and each Director has taken all the steps that they ought to have
taken as a Director to make themselves aware of any relevant audit information
and to establish that the Company's auditor is aware of that information.
Independent Auditor
A resolution for the reappointment of PricewaterhouseCoopers CI LLP ("PwC")
will be proposed at the forthcoming AGM.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Audited
Consolidated Financial Statements in accordance with International Financial
Reporting Standards and applicable Guernsey law and regulations.
Guernsey Company law requires the Directors to prepare Audited Consolidated
Financial Statements for each financial year. Under that law, they have elected
to prepare the Audited Consolidated Financial Statements in accordance with
IFRS and the Companies (Guernsey) Law, 2008.
The Audited Consolidated Financial Statements are required to give a true and
fair view of the state of affairs of the Company and of the profit or loss of
the Company for that period.
In preparing these Audited Consolidated Financial Statements, the Directors are
required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and estimates that are reasonable and prudent;
* state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the Audited
Consolidated Financial Statements; and
* prepare the Audited Consolidated Financial Statements on the going concern
basis unless it is inappropriate to presume that the Company will continue
in business.
The Directors confirm that they have complied with these requirements in
preparing the Audited Consolidated Financial Statements.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the Audited Consolidated Financial
Statements have been properly prepared in accordance with the International
Financial Reporting Standards and the Companies (Guernsey) Law, 2008. They have
general responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Company and to prevent and detect fraud and other
irregularities.
So far as the Directors are aware, there is no relevant audit information of
which the Company's auditor is unaware, and each Director has taken all the
steps that he or she ought to have taken as a Director in order to make himself
or herself aware of any relevant audit information and to establish that the
Company's auditor is aware of that information.
The Directors are responsible for the oversight of the maintenance and
integrity of the corporate and financial information in relation to the Company
website; the work carried out by the auditor does not involve consideration of
these matters and, accordingly, the auditor accepts no responsibility for any
changes that may have occurred to the financial statements since they were
initially presented on the website.
Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
The Directors confirm that to the best of their knowledge:
(a) The Annual Report and Audited Consolidated Financial Statements have been
prepared in accordance with IFRS and give a true and fair view of the assets,
liabilities, financial position and profit or loss of UKML and its subsidiaries
included in the consolidation taken as a whole, as at and for the year ended 30
June 2018.
(b) The Annual Report which includes information detailed in the Summary
Information, Chairman's Statement, Portfolio Manager's Report, Directors'
Report, Strategic Report, Corporate Governance Report, Directors' Remuneration
Report, Audit Committee Report, Alternative Investment Fund Manager's Report
and Depositary Statement provides a fair review of the information required by:
(i) DTR 4.1.8 and DTR 4.1.9 of the Disclosure and Transparency Rules,
being a fair review of the development and performance of the Company business
during the year and the position at year end and a description of the principal
risks and uncertainties facing the Company; and
(ii) DTR 4.1.11 of the Disclosure and Transparency Rules, being an
indication of important events that have occurred since the end of the
financial year and the likely future development of the Company.
In the opinion of the Board, the Annual Report and Audited Consolidated
Financial Statements taken as a whole, are fair, balanced and understandable
and the Annual Report provides the information necessary to assess the
Company's position and performance, business model and strategy.
Signed on behalf of the Board of Directors on 17 October 2018 by:
Paul Le Page
Director
Helen Green
Director
DIRECTORS' REMUNERATION REPORT
The Directors' remuneration report has been prepared by the Directors in
accordance with the UK Code as issued by the UK Listing Authority. An ordinary
resolution for the approval of the annual remuneration report will be put to
the Shareholders at the AGM to be held on 6 December 2018.
Remuneration Policy
The Company's policy in regard to Directors' remuneration is to ensure that the
Company maintains a competitive fee structure in order to recruit, retain and
motivate non-executive Directors of excellent quality in the overall interests
of Shareholders.
The Directors do not consider it necessary for the Company to establish a
separate Remuneration Committee. All of the matters recommended by the UK Code
that would be delegated to such a committee are considered by the Board as a
whole.
It is the responsibility of the Board as a whole to determine and approve the
Directors' remuneration, following a recommendation from the Chairman who will
have given the matter proper consideration, having regard to the level of fees
payable to non-executive Directors in the industry generally, the role that
individual Directors fulfil in respect of Board and Committee responsibilities
and the time committed to the Company's affairs. The Chairman's remuneration is
decided separately and is approved by the Board as a whole.
No element of the Directors' remuneration is performance related, nor does any
Director have any entitlement to pensions, share options or any long term
incentive plans from the Company.
Remuneration
The Directors of the Company are remunerated for their services at such a rate
as the Directors determine provided that the aggregate amount of such fees does
not exceed GBP200,000 per annum.
Directors are remunerated in the form of fees, payable quarterly in arrears. No
Directors have been paid additional remuneration by the Company outside their
normal Director's fees and expenses. The Management Engagement Committee
recommended that with effect from 1 July 2017, the base Director fee level
should be GBP30,000 per annum with an additional GBP10,000 per annum for the
Chairman and GBP5,000 per annum for the chairman of the Audit Committee.
In the year ended 30 June 2018, the Directors received the following
remuneration in the form of Director's fees:
30.06.2018 30.06.2017
GBP GBP
Christopher Waldron 40,000 30,000
Richard Burrows 30,000 25,000
Paul Le Page 35,000 27,500
Helen Green* 30,000 25,000
Total 135,000 107,500
*Fees are paid to Saffery Champness Management International Limited.
The remuneration policy set out above is the one applied for the year ended 30
June 2018 and is not expected to change in the foreseeable future.
Directors' and Officers' liability insurance cover is maintained by the Company
on behalf of the Directors.
The Directors were appointed as non-executive Directors by letters issued prior
to their appointment. Each Director's appointment letter provides that, upon
the termination of his/her appointment, that he/she must resign in writing and
all records remain the property of the Company. The Directors' appointments can
be terminated in accordance with the Articles of Incorporation and without
compensation.
There is no notice period specified in the articles for the removal of
Directors. The articles provide that the office of Director shall be terminated
by, among other things: (a) written resignation; (b) unauthorised absences from
board meetings for six months or more; (c) unanimous written request of the
other Directors; and (d) an ordinary resolution of the Company.
Under the terms of their appointment, given its non-executive nature, the Board
does not think it is appropriate for the Directors to be appointed for a
specified term of no more than 3 years as recommended by the AIC Code. The
Directors are also required to seek re-election if they have already served for
more than nine years. The Company may terminate the appointment of a Director
immediately on serving written notice and no compensation is payable upon
termination of office as a Director of the Company becoming effective. All
Directors have agreed to stand for re-election annually.
The amounts payable to Directors shown in note 16 are for services as
non-executive Directors.
Signed on behalf of the Board of Directors on 17 October 2018 by:
Paul Le Page
Director
Helen Green
Director
AUDIT COMMITTEE REPORT
On the following pages, we present the Audit Committee's Report, setting out
the responsibilities of the Audit Committee and its key activities for the year
ended 30 June 2018.
The Audit Committee has scrutinised the appropriateness of the Company's system
of risk management and internal controls, the robustness and integrity of the
Company's financial reporting, along with the external audit process. The
Committee has devoted time to ensuring that controls and processes have been
properly established, documented and implemented.
During the course of the year, the information that the Audit Committee has
received has been timely and clear and has enabled the Committee to discharge
its duties effectively.
The Audit Committee supports the aims of the UK Code and best practice
recommendations of other corporate governance organisations such as the AIC,
and believes that reporting against the AIC Code allows the Audit Committee to
further strengthen its role as a key independent oversight Committee.
Role and Responsibilities
The primary function of the Audit Committee is to assist the Board in
fulfilling its oversight responsibilities. This includes reviewing the
financial reports and other financial information and any significant financial
judgement contained therein, before publication.
In addition, the Audit Committee reviews the systems of internal financial and
operating controls on a continuing basis that the Administrator, Portfolio
Manager, AIFM, Custodian and Depositary and the Board have established with
respect to finance, accounting, risk management, compliance, fraud and audit.
The Audit Committee also reviews the accounting and financial reporting
processes, along with reviewing the roles, independence and effectiveness of
the external auditor. The AIC Code requires the Audit Committee to annually
consider the need for internal audit function.
The ultimate responsibility for reviewing and approving the Annual Report and
Audited Consolidated Financial Statements remains with the Board.
The Audit Committee's full terms of reference can be obtained by contacting the
Company's Administrator.
Risk Management and Internal Control
The Board, as a whole, considers the nature and extent of the Company's risk
management framework and the risk profile that is acceptable in order to
achieve the Company's strategic objectives. As a result, it is considered that
the Board has fulfilled its obligations under the AIC Code.
The Audit Committee has delegated responsibility for reviewing the adequacy and
effectiveness of the Company's on-going risk management systems and processes
to a Risk Committee. The system of Internal Controls, along with its design and
operating effectiveness, is subject to review by the Risk Committee through
reports received from the Portfolio Manager, AIFM and Custodian and Depositary,
along with those from the Administrator and external auditor.
Fraud, Bribery and Corruption
The Audit Committee has relied on the overarching requirement placed on the
service providers under the relevant agreements to comply with applicable law,
including anti-bribery laws. A review of the service provider policies took
place at the Management Engagement Committee Meeting on 20 March 2018. The
Board receives confirmation from all service providers that they comply with
the requirements of the UK Bribery Act.
Financial Reporting and Significant Financial Issues
The Audit Committee assesses whether suitable accounting policies have been
adopted and whether the Portfolio Manager has made appropriate estimates and
judgements. The Audit Committee reviews accounting papers prepared by the
Portfolio Manager and Administrator which provides details on the main
financial reporting judgements.
The Audit Committee also reviews reports by the external auditor which
highlight any issues with respect to the work undertaken on the audit.
The significant issues considered during the year by the Audit Committee in
relation to the Annual Report and Audited Consolidated Financial Statements and
how they were addressed are detailed below:
(i) Valuation of investments:
The Company's investments in mortgage loans are carried at amortised cost, have
a carrying value of GBP1,215,803,865 (fair value of GBP1,274,277,755) as at 30 June
2018 and represent a substantial portion of net assets of the Company. As such
this is the largest factor in relation to the consideration of the Audited
Consolidated Financial Statements. These investments are valued in accordance
with the Accounting Policies set out in note 2 with further details in notes 20
and 21 to the Audited Consolidated Financial Statements. The Audit Committee
considered the valuation of the investments held by the Company as at 30 June
2018 to be reasonable from information provided by the Portfolio Manager, AIFM,
Administrator, Custodian, Depositary and Valuation Agent on their processes for
the valuation of these investments with regular reporting being provided during
the year to the Board as a whole.
(ii) Income Recognition:
The Audit Committee considered the calculation of income from investments
recorded in the Audited Consolidated Financial Statements as at 30 June 2018.
The Audit Committee reviewed the Portfolio Manager's processes for income
recognition and found it to be reasonable based on the explanations provided
and information obtained from the Portfolio Manager. The Audit Committee was
therefore satisfied that income was appropriately stated in all material
aspects in the Audited Consolidated Financial Statements.
(i) Expense Recognition:
The Audit Committee reviewed schedules provided by the Administrator to ensure
that the costs associated with the Company's securitisations have been fully
recognised and apportioned. The Audit Committee concluded that the
apportionment and expense recognition policy had been followed correctly.
(ii) Taxation:
The Audit Committee agreed with PwC that it would be appropriate to review the
tax status of the Acquiring Entity to confirm that it was being managed in
accordance with Section 110 rules. On the basis of a tax structure legal
opinion from Eversheds, and a subsequent review by PwC Dublin, the committee
was satisfied that the Acquiring Entity was being managed in accordance with
Section 110 rules.
Following a review of the presentations and reports from the Portfolio Manager
and Administrator and consulting where necessary with the external auditor, the
Audit Committee is satisfied that the Audited Consolidated Financial Statements
appropriately address the critical judgements and key estimates (both in
respect to the amounts reported and the disclosures). The Audit Committee is
also satisfied that the significant assumptions used for determining the value
of assets and liabilities have been appropriately scrutinised, challenged and
are sufficiently robust.
At the request of the Audit Committee, the Administrator and Portfolio Manager
confirmed that they were not aware of any material misstatements including
matters relating to Consolidated Annual Financial Statement presentation. At
the Audit Committee meeting to review the Annual Report and Audited
Consolidated Financial Statements, the Audit Committee received and reviewed a
report on the audit from the external auditor. On the basis of its review of
this report, the Audit Committee is satisfied that the external auditor have
fulfilled their responsibilities with diligence and professional scepticism.
The Audit Committee advised the Board that these Audited Consolidated Financial
Statements, taken as a whole, are fair, balanced and understandable and provide
information necessary for Shareholders to assess the Company's position.
The Audit Committee is satisfied that the judgements made by the Portfolio
Manager and Administrator are reasonable, and that appropriate disclosures have
been included in the Audited Consolidated Financial Statements.
Going concern
The going concern consideration and disclosures can be found in the Directors'
Report.
External Auditor
The Audit Committee has responsibility for making a recommendation on the
appointment, re-appointment and removal of the external auditor. PwC were
appointed as the first auditor of the Company. During the year, the Audit
Committee received and reviewed audit plans and reports from the external
auditor. It is standard practice for the external auditor to meet privately
with the Audit Committee without the Portfolio Manager and other service
providers being present at each Audit Committee meeting.
To assess the effectiveness of the external audit process, the auditor was
asked to articulate the steps that they have taken to ensure objectivity and
independence, including where the auditor provides non-audit services. The
Audit Committee monitors the auditor's performance, behaviour and effectiveness
during the exercise of their duties, which informs the decision to recommend
reappointment on an annual basis.
As a general rule, the Company does not utilise the external auditor for
internal audit purposes, secondments or valuation advice. Services which are in
the nature of audit, such as tax compliance, private letter rulings, accounting
advice, quarterly reviews and disclosure advice are normally permitted but will
be pre-approved by the Audit Committee.
Summary of activity during the year
The implementation of IFRS9 was one of the biggest issues that the Audit
Committee had to oversee during the financial year. As the Company has a 30
June financial year end, we did not formally commence reporting under this
standard until 1 July 2018. In order for this to happen an accounting workshop
was held in January to ensure that all of our service providers and our
Portfolio Manager understood the implications of this new standard on the NAV
calculation and financial reporting processes.
As many of our peers in the LSE listed Investment Company sector have December
year ends they effectively commenced reporting under the new IFRS 9 standard in
January. To give our shareholders the ability to compare UKML against its peers
the Audit Committee worked with the Portfolio Manager to produce some guidance
on the level of materiality of our portfolio credit impairment charges for our
shareholders which was published on a monthly basis. The implementation process
concluded with our auditors PwC reviewing our impairment models and resulting
provisions against the standard.
Another topic of critical importance to the Audit Committee and the Company as
a whole is to ensure that UKML pays fully covered dividends. The Audit
Committee worked with Northern Trust to design and implement an independent
dividend coverage projection model to monitor the transition process.
During the course of the year PwC provided two non-audit services to the
Company which the Committee reviewed (and subsequently approved) as required by
our non-audit service policy. The first service related to the provision of
technical accounting papers to help implement hedge accounting and to ensure
that financial reporting of our securitisations as held by the Acquiring Entity
complied with revised Irish regulations. The second service related to take on
due diligence services provided as part of our purchasing process for the
second Coventry portfolio which was securitised in the Malt Hill 2
securitisation.
As part of the preparation for the year end reporting cycle the Audit Committee
revisited whether it would be appropriate to use individual portfolios as
segments under IFRS8 and concluded that with the addition of the second
Coventry portfolio and likely future growth of the Company's portfolio that it
would be better to analyse the Company's portfolio under two broad headings :
(1) Owner Occupied vs Buy to Let as the repayment profiles and contractual cash
flows are very different; (2) Purchased vs Forward Flow portfolios as Forward
Flow portfolios are subject to origination completion across multiple lenders.
The following table summarises the remuneration paid to PwC CI LLP and to other
PwC member firms for audit and non-audit services for the Company in respect of
the year ended 30 June 2018.
For the year For the year
from 01.07.2017 from
to 30.06.2018 01.07.2016 to
30.06.2017
PricewaterhouseCoopers CI LLP - Assurance work GBP GBP
- Annual audit of the Company 46,000 31,000
- Annual audit of the Company's subsidiaries 12,500 25,000
- Interim review 26,250 25,000
Other PwC member firms - Assurance work
- Annual audit of the Company's subsidiaries 159,593 111,839
Other PwC member firms - Non-assurance work
- Accounting papers 60,000 -
- Securitisation procedures 48,000 -
- Taxation 12,431 13,684
Ratio of assurance to non-assurance work 67% / 33% 94% / 6%
UKML and the DAC do not qualify as an EU Public Interest Entity and are
therefore not subject to the restrictions on non-audit services provided by its
auditor under this regime. The SPVs however do qualify as EU PIEs, and
accordingly the Board has considered the impact of this on the evaluation and
approval of non-audit services performed to the Company.
The Audit Committee reviews and authorises any non-audit related services
provided by PwC to the Company. PwC currently acts as auditor to the Company,
specifically the Acquiring Entity DAC and the underlying securitisation SPVs.
For any questions on the activities of the Audit Committee not addressed in the
foregoing, a member of the Audit Committee will attend each AGM to respond to
such questions.
The Audit Committee Report was approved by the Audit Committee on 17 October
2018 and signed on behalf by:
Paul Le Page
Chairman, Audit Committee
ALTERNATIVE INVESTMENT FUND MANAGER'S REPORT
Maitland Institutional Services Ltd acts as the Alternative Investment Fund
Manager ("AIFM") of UK Mortgages Limited ("the Company") providing portfolio
management and risk management services to the Company.
The AIFM has delegated the following of its alternative investment fund
management functions:
* It has delegated the portfolio management function for listed investments
to TwentyFour Asset Management LLP.
* It has delegated the portfolio management function for unlisted investments
to TwentyFour Asset Management LLP.
The AIFM is required by the Alternative Investment Fund Managers Directive
2011, 61/EU (the "AIFM Directive") and all applicable rules and regulations
implementing the AIFM Directive in the UK (the "AIFM" Rules):
* to make the annual report available to investors and to ensure that the
annual report is prepared in accordance with applicable accounting
standards, the Company's articles of incorporation and the AIFM Rules and
that the annual report is audited in accordance with International
Standards on Auditing;
* to be responsible for the proper valuation of the Company's assets, the
calculation of the Company's net asset value and the publication of the
Company's net asset value; and,
* to make available to the Company's shareholders, a description of all fees,
charges and expenses and the amounts thereof, which have been directly or
indirectly borne by them,
* to ensure that the Company's shareholders have the ability to redeem their
share in the capital of the Company in a manner consistent with the
principle of fair treatment of investors under the AIFM Rules and in
accordance with the Company's redemption policy and its obligations.
The AIFM is required to ensure that the annual report contains a report that
shall include a fair and balanced review of the activities and performance of
the Company, containing also a description of the principal risks and
investment or economic uncertainties that the Company might face.
AIFM Remuneration
Under the Alternative Investment Fund Managers Directive, acting as the AIFM,
Maitland Institutional Services Ltd is required to disclose how those whose
actions have a material impact on the Company are remunerated.
Due to the nature of the activities conducted by Maitland Institutional
Services Ltd, it has deemed itself as a lower risk firm in accordance with SYSC
19B and the remuneration code. The only employees at Maitland Institutional
Services Ltd permitted to have a material impact on the risk profile of the AIF
are the Board and the Head of Risk and Compliance.
The delegated Portfolio Manager, TwentyFour Asset Management LLP, is subject to
regulatory requirements on remuneration that are broadly equivalent to those
detailed in the Alternative Investment Fund Managers Directive, which include
the Capital Requirements Directive or Markets in Financial Instruments
Directive. While a portion of the remuneration paid by the Portfolio Manager
is variable and based, in part, on the performance of the investment portfolio,
the investment discretion of the Portfolio Manager is strictly controlled
within certain pre-defined parameters as detailed in the prospectus of the
Company.
Under the AIFM Directive, the AIFM is required to stipulate how much it pays to
its staff, in relation to fixed and variable remuneration and how much, in
relation to the Company, is firstly attributed to all staff and those that are
deemed, under the directive, to have an impact on the risk profile of the
Company. Maitland Institutional Services Ltd does not pay any form of variable
remuneration.
June 2018 Number of Total remuneration Fixed remuneration
Beneficiaries paid
Total remuneration 74 GBP95,033 GBP95,033
paid to the AIFM by
UKML during the
year
Remuneration paid 5 GBP17,106 GBP17,106
to employees of the
AIFM who have a
material impact on
the risk profile of
the AIF
In so far as the AIFM is aware:
* there is no relevant audit information of which the Company's auditors or
the Company's board of directors are unaware; and
* the AIFM has taken all steps that it ought to have taken to make itself
aware of any relevant audit information and to establish that the auditors
are aware of that information.
We hereby certify that this report is made on behalf of the AIFM, Maitland
Institutional Services Ltd.
D. Jones
P.F. Brickley
Directors
Maitland Institutional Services Ltd
17 October 2018
DEPOSITARY STATEMENT
for the year ended 30 June 2018
Report of the Depositary to the Shareholders
Northern Trust (Guernsey) Limited has been appointed as Depositary to UK
Mortgages Limited (the "Company") in accordance with the requirements of
Article 36 and Articles 21(7), (8) and (9) of the Directive 2011/61/EU of the
European Parliament and of the Council of 8 June 2011 on Alternative Investment
Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations
(EC) No 1060/2009 and (EU) No 1095/2010 (the "AIFM Directive").
We have enquired into the conduct of Maitland Institutional Services Limited
(the "AIFM") and the Company for the year ended 30 June 2018, in our capacity
as Depositary to the Company.
This report including the review provided below has been prepared for and
solely for the Shareholders. We do not, in giving this report, accept or assume
responsibility for any other purpose or to any other person to whom this report
is shown.
Our obligations as Depositary are stipulated in the relevant provisions of the
AIFM Directive and the relevant sections of Commission Delegated Regulation
(EU) No 231/2013 (collectively the "AIFMD legislation").
Amongst these obligations is the requirement to enquire into the conduct of the
AIFM and the Company in each annual accounting period.
Our report shall state whether, in our view, the Company has been managed in
that period in accordance with the AIFMD legislation. It is the overall
responsibility of the AIFM and the Company to comply with these provisions. If
the AIFM, the Company or their delegates have not so complied, we as the
Depositary will state why this is the case and outline the steps which we have
taken to rectify the situation.
Basis of Depositary Review
The Depositary conducts such reviews as it, in its reasonable discretion,
considers necessary in order to comply with its obligations and to ensure that,
in all material respects, the Company has been managed (i) in accordance with
the limitations imposed on its investment and borrowing powers by the
provisions of its constitutional documentation and the appropriate regulations
and (ii) otherwise in accordance with the constitutional documentation and the
appropriate regulations. Such reviews vary based on the type of Company, the
assets in which a Company invests and the processes used, or experts required,
in order to value such assets.
Review
In our view, the Company has been managed during the period, in all material
respects:
(i) in accordance with the limitations imposed on the investment and
borrowing powers of the Company by the constitutional document; and by the
AIFMD legislation; and
(ii) otherwise in accordance with the provisions of the constitutional
document; and the AIFMD legislation.
For and on behalf of
Northern Trust (Guernsey) Limited
17 October 2018
INDEPENT AUDITOR'S REPORT
To the Members of UK Mortgages Limited
Report on the audit of the consolidated financial statements
_________________________________________________________________________
Our opinion
In our opinion, the consolidated financial statements give a true and fair view
of the consolidated financial position of UK Mortgages Limited (the "Company")
and its subsidiaries (together "the Group") as at 30 June 2018, and of their
consolidated financial performance and their consolidated cash flows for the
year then ended in accordance with International Financial Reporting Standards
and have been properly prepared in accordance with the requirements of The
Companies (Guernsey) Law, 2008.
_________________________________________________________________________
What we have audited
The Group's consolidated financial statements comprise:
* the consolidated statement of financial position as at 30 June 2018;
* the consolidated statement of comprehensive income for the year then ended;
* the consolidated statement of changes in equity for the year then ended;
* the consolidated statement of cash flows for the year then ended; and
* the notes to the consolidated financial statements, which include a summary
of significant accounting policies.
_________________________________________________________________________
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
("ISAs"). Our responsibilities under those standards are further described in
the Auditor's responsibilities for the audit of the consolidated financial
statements section of our report.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
________________________________________________________________________________
Independence
We are independent of the Group in accordance with the ethical requirements
that are relevant to our audit of the consolidated financial statements of the
Group, as required by the Crown Dependencies' Audit Rules and Guidance, and we
have fulfilled our ethical responsibilities in accordance with these
requirements.
Materiality
- Overall Group materiality, was GBP5.8 million which
represents 2.5% of Group net assets.
Audit scope
- The Company is incorporated and based in Guernsey.
- The Group has a number of subsidiaries, which are based
in Ireland and the United Kingdom ("UK"), and we perform our
audit of the consolidated financial statements of the Group.
- The subsidiaries were established for the purposes of
acquiring, securitising and holding mortgage portfolios.
- As the Group auditor, we are responsible for the Group
audit opinion. We conducted our audit in Guernsey from
information provided by Northern Trust International Fund
Administration Services (Guernsey) Limited (the
"Administrator") to whom the board of directors has delegated
the provision of certain functions. The Group engages
TwentyFour Asset Management LLP (the 'Portfolio Manager') to
manage its assets.
- Our component and supporting audit firm (a separated
PwC network firm) perform their audit work on the relevant
subsidiaries in the UK and Ireland, and we perform our audit
of UK Mortgages Limited.
- We have included in scope all subsidiaries within the
Group. We have confirmed that two immaterial subsidiaries are
in liquidation and thus no audit work was performed on these
entities.
- We tailored the scope of our audit taking into account
the types of investments within the Group, the accounting
processes and controls, and the industry in which the Group
operates.
Key audit matters
- Valuation of mortgage loans (carried at amortised cost)
- Risk of fraud in revenue recognition pertaining to
interest income on mortgage loans
- Errors in the priority of payments to noteholders
("waterfalls")
Audit scope
As part of designing our audit, we determined materiality and assessed the
risks of material misstatement in the consolidated financial statements. In
particular, we considered where the directors made subjective judgements; for
example, in respect of significant accounting estimates that involved making
assumptions and considering future events that are inherently uncertain. As in
all of our audits, we also addressed the risk of management override of
internal controls, including among other matters, consideration of whether
there was evidence of bias that represented a risk of material misstatement due
to fraud.
We tailored the scope of our audit in order to perform sufficient work to
enable us to provide an opinion on the consolidated financial statements as a
whole, taking into account the structure of the Group, the accounting processes
and controls at the subsidiaries' and Company level, and the industry in which
the Group operates. We communicated clearly with the component audit team
regarding the scope and timing of their work on the financial information
related to the subsidiaries. Our communication and audit procedures were
tailored to ensure that we obtained sufficient appropriate audit evidence
regarding the financial information of the subsidiaries and the consolidation
process to express an opinion on whether the consolidated financial statements
are prepared, in all material respects, in accordance with the applicable
financial reporting framework.
________________________________________________________________________________
Materiality
The scope of our audit was influenced by our application of materiality. An
audit is designed to obtain reasonable assurance whether the financial
statements are free from material misstatement. Misstatements may arise due to
fraud or error. They are considered material if individually or in aggregate,
they could reasonably be expected to influence the economic decisions of users
taken on the basis of the consolidated financial statements.
Based on our professional judgement, we determined certain quantitative
thresholds for materiality, including the overall Group materiality for the
consolidated financial statements as a whole as set out in the table below.
These, together with qualitative considerations, helped us to determine the
scope of our audit and the nature, timing and extent of our audit procedures
and to evaluate the effect of misstatements, both individually and in aggregate
on the financial statements as a whole.
Overall Group materiality GBP5.8 million (2017: GBP5.6 million)
How we determined it 2.5% of net assets
Rationale for the materiality We believe that net assets is the most
benchmark appropriate benchmark because this is
the key metric of interest to members
of the Company. It is also a generally
accepted measure used for companies in
this industry.
We agreed with the Audit Committee that we would report to them misstatements
identified during our audit above GBP0.3 million, as well as misstatements below
that amount that, in our view, warranted reporting for qualitative reasons.
________________________________________________________________________________
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of
most significance in our audit of the consolidated financial statements of the
current period. These matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
Key audit matter How our audit addressed the Key audit
matter
Valuation of mortgage loans (carried We assessed the accounting policy for
at amortised cost) mortgage loans for compliance with
Mortgage loans, carried at GBP1.216 International Financial Reporting
billion at year end as shown under Standards and we ensured the mortgage
note 7 of these consolidated financial loans have been measured in accordance
statements are measured at amortised with the stated accounting policy.
costs and comprise four distinct
portfolios of UK mortgages including We understood and evaluated the
buy-to-let and owner-occupied internal control environment in place
mortgages. at the Portfolio Manager and the
relevant service providers to the
We note that the mortgage loans Group in relation to the servicing and
represent the most significant balance valuation of the mortgage loans.
on the consolidated statement of Our approach to testing the portfolios
financial position and the valuation was predominantly substantive in
of these loans is driven by complex nature, as we considered this the most
models that take into account effective approach to testing the
management's judgements and closed portfolios; however, one of the
estimates. portfolios is a forward flow
transaction, and for this one we
The models rely on the accuracy of adopted a controls based approach,
underlying loan book data including supplemented by substantive testing.
interest rates, principal amounts, For this portfolio, we evaluated the
term structures and delinquency controls around the loan origination
status. process as well as the IT general
controls.
Such factors mean there is a high
degree of subjectivity and reliance on We tested the mortgage loan data of
the accuracy of information used in each portfolio, on a sample basis, by
the valuation process over the performing the following substantive
mortgage loans, and we therefore audit procedures:
consider this to be a key audit - We agreed the portfolio balances at
matter. year end to the underlying loan books.
- We verified standing data within the
mortgage loan books, such as interest
rates, principal and maturity dates,
to the relevant supporting
documentation.
- We agreed cash collections /
advances / redemptions to supporting
documentation and bank statements.
- We recalculated the split of
interest and principal repayments
during the year and confirmed they
were correctly captured in the
accounting records.
- Title deeds were inspected to
validate the existence of the
underlying properties.
We agreed the mortgage loan balances
on all four portfolios through to
management's appointed third party
valuation specialist's models. We
reviewed these effective interest rate
("EIR") models and understood the
methodology adopted and the key
assumptions applied within each model
and assessed the assumptions for
reasonableness.
We reviewed investor reporting and the
loan books for balances in arrears for
indications of impairment. Further, we
reviewed customer complaints raised
during the year to assess whether the
nature of these complaints indicated a
heightened risk of arrears due to
inaccurate servicing of the loans.
No significant issues or concerns were
noted with regards to the valuation of
mortgage loans which required
reporting to those charged with
governance.
Risk of fraud in revenue recognition We assessed the accounting policy for
pertaining to interest income on the recognition of interest income for
mortgage loans compliance with International
Interest income for the year of GBP26.8 Financial Reporting Standards and we
million, as reflected in the ensured that interest income has been
consolidated statement of recognised in accordance with the
comprehensive income, was measured in stated accounting policy.
accordance with the effective interest
rate method as required by We understood and evaluated the
International Financial Reporting internal control environment in place
Standards. at the Portfolio Manager and
associated service providers to the
The requirement to estimate the Group in relation to the recognition
expected cash flows when forming an of interest income.
effective interest rate model is
subject to management judgement and We verified the interest rates and
estimation, and as such could be open mortgage portfolio standing data
to manipulation by management which is thereby confirming the inputs used in
why we considered this a key audit the EIR models were appropriate and
matter. supportable.
We reviewed management's third party
specialist's EIR models, assessed the
reasonableness of assumptions used in
the models and recalculated the
initial EIR computed (arising from
purchase price premium / discount,
fees and expected prepayments on the
mortgage loan portfolios) and tested
the unwinding of this EIR adjustment
which impacts revenue recognition for
the year.
We performed substantive analytical
procedures to assess the
reasonableness of interest income
recognised for the year based on
average monthly interest rates and the
average monthly portfolio balances, as
obtained from the loan servicers.
No indications of management bias or
manipulation of data with regards to
revenue recognition were noted which
required reporting to those charged
with governance.
Errors in the priority of payments to We have understood the controls in
noteholders ("waterfalls") place at the corporate service
There is a risk that payments to provider to the UK subsidiaries over
noteholders are not processed in line the priority of payments structure and
with the priority of payments as we noted the high level of segregation
prescribed by the transaction in duties and layers of review within
documents and prospectus, and as noted the process.
under note 13 of these consolidated
financial statements, given the We have reviewed the legal transaction
complexity of the transactions. Due to documentation and ensured that the
this risk of error, we considered this waterfall calculation, as set out in
a key area of focus to our audit. these documents, had been correctly
applied in accordance with these
agreements.
No significant issues or concerns with
the priority of payments to the
noteholders were noted which required
reporting to those charged with
governance.
Other information
The directors are responsible for the other information. The other information
comprises all the information included in the Annual Report and Audited
Consolidated Financial Statements but does not include the consolidated
financial statements and our auditor's report thereon.
Other than as specified in our report, our opinion on the consolidated
financial statements does not cover the other information and we do not express
any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our
responsibility is to read the other information identified above and, in doing
so, consider whether the other information is materially inconsistent with the
consolidated financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If, based on the work we have
performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in
this regard.
________________________________________________________________________________
Responsibilities of the directors for the consolidated financial statements
The directors are responsible for the preparation of the consolidated financial
statements that give a true and fair view in accordance with International
Financial Reporting Standards, the requirements of Guernsey law and for such
internal control as the directors determine is necessary to enable the
preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the directors are
responsible for assessing the Group's ability to continue as a going concern,
disclosing, as applicable, matters relating to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the Group or to cease operations, or have no realistic alternative
but to do so.
________________________________________________________________________________
Auditor's responsibilities for the audit of the consolidated financial
statements
Our objectives are to obtain reasonable assurance about whether the
consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor's report
that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs will
always detect a material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or in
aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated financial
statements.
As part of an audit in accordance with ISAs, we exercise professional judgement
and maintain professional scepticism throughout the audit. We also:
* Identify and assess the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that
is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher
than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal
control.
* Obtain an understanding of internal control relevant to the audit in order
to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Group's internal control.
* Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by the
directors.
* Conclude on the appropriateness of the directors' use of the going concern
basis of accounting and, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that may cast
significant doubt on the Group's ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw
attention in our auditor's report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor's report. However, future events or
conditions may cause the Group to cease to continue as a going concern.
* Evaluate the overall presentation, structure and content of the
consolidated financial statements, including the disclosures, and whether
the consolidated financial statements represent the underlying transactions
and events in a manner that achieves fair presentation.
* Obtain sufficient appropriate audit evidence regarding the financial
information of the entities or business activities within the Group to
express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the Group
audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with governance, we determine
those matters that were of most significance in the audit of the consolidated
financial statements of the current period and are therefore the key audit
matters. We describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should not be communicated in
our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
________________________________________________________________________________
Report on other legal and regulatory requirements
Under The Companies (Guernsey) Law, 2008 we are required to report to you if,
in our opinion:
* we have not received all the information and explanations we require for
our audit;
* proper accounting records have not been kept; or
* the consolidated financial statements are not in agreement with the
accounting records.
We have no exceptions to report arising from this responsibility.
The directors' have volunteered to report on how they have applied the UK
Corporate Governance Code (the "Code").
We have nothing to report in respect of the following matters which we have
reviewed:
* the directors' statement in relation to going concern. As noted in the
directors' statement, the directors have concluded that it is appropriate
to adopt the going concern basis in preparing the consolidated financial
statements. The going concern basis presumes that the Group has adequate
resources to remain in operation, and that the directors intend it to do
so, for at least one year from the date the consolidated financial
statements were signed. As part of our audit we have concluded that the
directors' use of the going concern basis is appropriate. However, because
not all future events or conditions can be predicted, these statements are
not a guarantee as to the Group's ability to continue as a going concern;
* the directors' statement that they have carried out a robust assessment of
the principal risks facing the Group and the directors' statement in
relation to the longer-term viability of the Group. Our review was
substantially less in scope than an audit and only consisted of making
inquiries and considering the directors' process supporting their
statements; checking that the statements are in alignment with the relevant
provisions of the UK Corporate Governance Code; and considering whether the
statements are consistent with the knowledge acquired by us in the course
of performing our audit; and
* the part of the Corporate Governance Statement relating to the Group's
compliance with the ten further provisions of the UK Corporate Governance
Code specified for our review.
This report, including the opinion, has been prepared for and only for the
members as a body in accordance with Section 262 of The Companies (Guernsey)
Law, 2008 and for no other purpose. We do not, in giving this opinion, 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.
Evelyn Brady
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
17 October 2018
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 June 2018
For the year For the year
from from
01.07.2017 01.07.2016
to to
30.06.2018 30.06.2017
Note GBP GBP
Income
Interest income on mortgage 26,806,700 15,594,254
loans
Interest income on cash and cash 8,176 11,423
equivalents
Unrealised gain/(loss) on financial 9 - 2,269,926
liabilities at fair value through
profit and loss
Net loss from derivative financial 9 (856,186) -
instruments
Total income 25,958,690 17,875,603
Interest expense on loan notes 13 8,715,238 4,526,663
Mortgage loans servicing fees 2,181,286 1,416,073
Net interest expense on financial liabilities 1,809,444 2,487,186
at fair value through profit and loss
Loan note issue fees 1,653,078 1,533,495
Portfolio management fees 16 1,313,002 1,714,555
Interest expense on borrowings 14 1,165,171 2,216,204
Legal and professional fees 720,394 246,456
Borrowings facility fees 14 496,370 1,261,233
Financing costs 380,862 -
Audit fees 333,886 182,246
General expenses 324,218 206,744
Swap costs amortised 265,239 -
Administration and secretarial 17 243,847 279,518
fees
Directors' fees 14 135,000 107,500
Amortisation of set up costs 106,790 29,235
AIFM fees 17 95,033 96,730
Depositary fees 17 71,337 68,503
Corporate broker fees 48,038 50,131
Mortgage loan write offs 7 24,367 405,699
Custody fees 23,799 22,559
Total expenses 20,106,399 16,850,730
Total comprehensive gain for 5,852,291 1,024,873
the year
Earnings per ordinary share -
basic and diluted 4 0.023 0.004
All items in the above statement derive from continuing operations.
The notes form an integral part of these Audited Consolidated Financial
Statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 30 June 2018
30.06.2018 30.06.2017
Assets Note GBP GBP
Non-current assets
Mortgage loans 7 1,205,151,843 829,201,473
Reserve fund 8 17,761,100 13,157,350
Total non-current assets 1,222,912,943 842,358,823
Current assets
Mortgage loans 7 10,652,022 12,674,700
Trade and other receivables 10 3,722,809 3,522,323
Cash and cash equivalents 11 43,784,286 86,022,869
Total current assets 58,159,117 102,219,892
Total assets 1,281,072,060 944,578,715
Liabilities
Non-current liabilities
Borrowings 14 104,445,310 -
Loan notes 13 937,924,240 715,734,468
Total non-current liabilities 1,042,369,550 715,734,468
Current liabilities
Financial liabilities at fair value through 9 1,371,362 1,808,049
profit and loss
Trade and other payables 12 3,340,720 3,648,060
Total current liabilities 4,712,082 5,456,109
Total liabilities 1,047,081,632 721,190,577
Net assets 233,990,428 223,388,138
Equity
Share capital account 15 264,749,999 245,000,000
Other reserves (30,759,571) (21,611,862)
Total equity 233,990,428 223,388,138
Ordinary shares in issue 15 273,065,390 250,000,000
Net Asset Value per ordinary share 5 0.8569 0.8936
The Audited Consolidated Financial Statements were approved and authorised for
issue by the Board of Directors on 17 October 2018 and signed on its behalf by:
Paul Le Page
Director
Helen Green
Director
The notes form an integral part of these Audited Consolidated Financial
Statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 30 June 2018
Share Other Total
capital
account reserves equity
GBP GBP GBP
Balance at 1 July 2017 245,000,000 (21,611,862) 223,388,138
Issue of shares 20,000,000 - 20,000,000
Share issue costs (250,001) - (250,001)
Dividends paid - (15,000,000) (15,000,000)
Total comprehensive gain for the - 5,852,291 5,852,291
year
Balance at 30 June 2018 264,749,999 (30,759,571) 233,990,428
Share capital Other Total
account reserves equity
GBP GBP GBP
Balance at 1 July 2016 245,000,000 (7,636,735) 237,363,265
Dividends paid - (15,000,000) (15,000,000)
Total comprehensive gain for the - 1,024,873 1,024,873
year
Balance at 30 June 2017 245,000,000 (21,611,862) 223,388,138
The notes form an integral part of these Audited Consolidated Financial
Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 30 June 2018
For the year For the year
from 01.07.2017 from
to 30.06.2018 01.07.2016 to
30.06.2017
Note GBP GBP
Cash flows from operating
activities
Total comprehensive gain for the 5,852,291 1,024,873
year
Adjustments for:
Borrowing charges amortised 7 - (424,709)
Amortised borrowing charges 7 159,658 52,218
released
Mortgage loans written off 7 24,367 405,699
Net loss from derivative 9 856,186 -
financial instruments
Amortisation adjustment under effective interest
rate method 7 (5,845,006) (1,626,884)
Unrealised gain on financial
liabilities
at fair value through profit - (2,269,926)
and loss
Purchase of mortgage loans 7 (465,950,403) (576,732,728)
Mortgage loans repaid 7 96,390,819 40,035,931
Increase in reserve fund 8 (4,603,750) (8,417,950)
Decrease in trade and other (307,340) (462,080)
payables
(Increase)/Decrease in trade and (755,176) 1,270,201
other receivables
Net cash outflow from operating (374,178,354) (547,145,355)
activities
Cash flows from financing
activities
Proceeds from issue of ordinary 15 20,000,000 -
shares
Share issue costs 15 (250,001) -
Proceeds from borrowings 14 105,000,000 437,381,692
Repayment of borrowings 14 - (437,381,692)
Proceeds from issue of loan notes 13 317,500,000 474,695,416
Repayments of loan notes 13 (95,431,974) (19,433,084)
Loan note issue fees paid 13 (1,028,869) (1,795,120)
Loan note issue fees amortised 13 1,150,615 482,763
Dividends paid (15,000,000) (15,000,000)
Net cash inflow from financing 331,939,771 438,949,975
activities
Decrease in cash and cash (42,238,583) (108,195,380)
equivalents
Cash and cash equivalents at 86,022,869 194,218,249
beginning of year
Cash and cash equivalents at end 43,784,286 86,022,869
of year
The notes form an integral part of these Audited Consolidated Financial
Statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 30 June 2018
1. General Information
UKML was incorporated with limited liability in Guernsey, as a closed-ended
investment company on 10 June 2015. UKML'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.
These Consolidated Financial Statements comprise the financial statements of UK
Mortgages Limited, UK Mortgages Corporate Funding Designated Activity Company,
Malt Hill No.1 Plc, Malt Hill No. 2 Plc, Oat Hill No.1 Plc and the Warehouse
SPVs; Cornhill Mortgages No.1 Limited, until being placed into liquidation on 4
May 2017, Cornhill Mortgages No.2 Limited and Cornhill Mortgages No.3 Limited,
placed into liquidation on 9 February 2018, together referred to as the
"Company". The Warehouse SPVs are placed into liquidation on the transfer of
the mortgage loans to the Issuer SPVs.
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.
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
Statement of compliance
The Audited Consolidated Financial Statements have been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Conduct Authority
and with IFRS which comprise standards and interpretations approved by the
International Accounting Standards Board, and interpretations issued by the
International Financial Reporting Standards Interpretations Committee as
approved by the International Accounting Standards Committee which remain in
effect and are in compliance with the Companies (Guernsey) Law, 2008.
The Audited Consolidated Financial Statements have been prepared on a going
concern basis. The Directors are satisfied that, at the time of approving the
Audited Consolidated Financial Statements, it is appropriate to adopt the going
concern basis in preparing the Audited Consolidated Financial Statements as
they anticipate that the Company will be able to continue to operate and meet
its liabilities as they fall due over a period of 12 months from the approval
of these Consolidated Financial Statements.
New accounting policy
The Company adopted hedge accounting from 1 July 2017 to reduce volatility in
the Consolidated Statement of Comprehensive Income. No prior period restatement
has been made as the Company only became eligible to hedge account from that
date.
Standards, amendments and interpretations issued but not yet effective
At the date of this document, the following applicable standards were in issue
but not yet effective:
IFRS 9 'Financial Instruments'
IFRS 9 'Financial Instruments', brings together the classification and
measurement, impairment and hedge accounting phases of the IASB project to
replace IAS 39, and is effective for annual periods beginning on or after 1
January 2018. The key elements of the standard are as follows:
Classification and measurement
IFRS 9 contains a new classification and measurement approach for financial
assets that reflects the business model in which assets are managed and their
cash flow characteristics. IFRS 9 introduces a principal based approach and
applies one classification approach for all types of financial assets. Two
criteria are used to determine how financial assets should be classified and
measured: (a) the entity's business model (i.e. how an entity manages its
financial assets in order to generate cash flows by collecting contractual cash
flows, selling financial assets or both); and (b) the contractual cash flow
characteristics of the financial asset (i.e. whether the contractual cash flows
are solely payments of principal and interest).
IFRS 9 includes three principal classification categories for financial assets
which must be designated at initial recognition. Financial assets are measured
at fair value through profit or loss ("FVTPL"), fair value through other
comprehensive income ("FVOCI") or amortised cost based on the nature of the
cash flows of the assets and an entity's business model. These categories
replace the existing IAS 39 classifications of fair value through profit and
loss ("FVTPL"), available for sale ("AFS"), loans and receivables, and
held-to-maturity.
A financial asset is measured at amortised cost if it meets both of the
following conditions and is not designated as at FVTPL: (a) it is held within a
business model whose objective is to hold assets to collect contractual cash
flows; and (b) its contractual terms give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal amount
outstanding.
A financial asset is measured at FVOCI if it meets both of the following
conditions and is not designated as at FVTPL:
(a) it is held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets; and (b) its
contractual terms give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.
Equity instruments are measured at FVTPL, unless they are not held for trading
purposes, in which case an irrevocable election can be made on initial
recognition to measure them at FVOCI with no subsequent reclassification to
profit or loss. This election is made on an investment by investment basis.
All financial assets not classified as measured at amortised cost or FVOCI as
described above are measured at FVTPL. In addition, on initial recognition the
Company may irrevocably designate a financial asset that otherwise meets the
requirements to be measured at amortised cost or at FVOCI as FVTPL if doing so
eliminates or significantly reduces an accounting mismatch that would otherwise
arise.
For financial liabilities, most of the pre-existing requirements for
classification and measurement previously included in IAS 39 were carried
forward unchanged into IFRS 9.
Business model assessment
The Company has made an assessment of the objective of the business model in
which a financial asset is held at a portfolio level because this best reflects
the way the business is managed and information is provided to the Portfolio
Manager.
The information that was considered included:
· The stated policies and objectives for the portfolio and the operation
of those policies in practice, including whether the strategy focuses on
earning contractual interest revenue, maintaining a particular interest rate
profile, matching duration of the financial assets to the duration of the
liabilities that are funding those assets or realising cash flows through the
sale of assets;
· How the performance of the portfolio is evaluated and reported to the
Portfolio Manager; and
· The risks that affect the performance of the business model (and the
financial assets held within that business model) and how those risks are
managed.
Assessments whether contractual cash flows are solely payments of principal and
interest
For the purposes of this assessment, 'principal' is defined as the fair value
of the financial asset on initial recognition. 'Interest' is defined as
consideration for the time value of money, for the credit risk associated with
the principal amount outstanding during a particular period of time and for
other basic lending risks and costs (e.g. liquidity risk and administrative
costs), as well as a reasonable profit margin.
In assessing whether the contractual cash flows are solely payments of
principal and interest, the contractual terms of the instrument will be
considered. This will include assessing whether the financial asset contains a
contractual term that could change the timing or amount of contractual cash
flows such that it would not meet this condition. In making the assessment the
following features will be considered:
· Contingent events that would change the amount and timing of cash flows;
· Leverage features;
· Prepayment and extension terms;
· Terms that limit the Company's claim to cash flows from specified assets
e.g. non-recourse asset arrangements; and
· Features that modify consideration for the time value of money, e.g.
periodic reset of interest rates.
Impairment
The "incurred loss model" under IAS 39 is replaced with a new forward looking
"expected loss model". Impairment provisions are driven by changes in credit
risk of instruments, with a provision for lifetime expected credit losses
recognised where the risk of default of an instrument has increased
significantly since initial recognition. Risk of default and expected credit
losses must incorporate forward-looking and macroeconomic information.
Under IFRS 9, no impairment loss is recognised on equity investments. IFRS 9
requires a loss allowance to be recognised at an amount equal to either 12
month expected credit loss ("ECL"), or lifetime ECL.
Credit loss allowances will be measured on each reporting date according to a
three-stage expected credit loss impairment model:
· Stage 1 - from initial recognition of a financial asset to the date on
which the asset has experienced a significant increase in credit risk relative
to its initial recognition, a loss allowance is recognised equal to the 12
month ECL.
· Stage 2 - Following a significant increase in credit risk relative to
the initial recognition of the financial asset, a loss allowance is recognised
equal to the Lifetime ECL.
· Stage 3 - When a financial asset is considered to be credit-impaired, a
loss allowance equal to full lifetime ECLs will be recognised. Interest revenue
is calculated based on the carrying amount of the asset, net of the loss
allowance, rather than on its gross carrying amount.
Stage 1 and Stage 2 effectively replace the collectively-assessed allowance for
loans not yet identified as impaired recorded under IAS 39, while Stage 3
effectively replaces the individually and collectively assessed allowances for
impaired loans. Under IFRS 9, the population of financial assets and
corresponding allowances disclosed as Stage 3 will not necessarily correspond
to the amounts of financial assets currently disclosed as impaired in
accordance with IAS 39. Consistent with IAS 39, loans are written off when
there is no realistic probability of recovery.
Given all financial assets within the scope of the IFRS 9 impairment model will
be assessed for at least 12-months of ECLs, and the population of financial
assets to which full lifetime ECL applies is larger than the population of
impaired loans for which there is objective evidence of impairment in
accordance with IAS 39, loss allowances will be higher under IFRS 9 relative to
IAS 39.
Changes in the required credit loss allowance, including the impact of
movements between Stage 1 and Stage 2, will be recorded in profit or loss. The
impact of moving between 12 month and lifetime ECLs and the application of
forward looking information, means provisions are expected to be more volatile
under IFRS 9 than IAS 39.
The measurement of expected credit losses will primarily be based on the
product of the instrument's probability of default ("PD"), loss given default
("LGD"), and exposure at default ("EAD"), discounted to the reporting date. The
main difference between Stage 1 and Stage 2 is the respective PD horizon. Stage
1 estimates will use a maximum of a 12- month PD while Stage 2 estimates will
use a lifetime PD. Stage 3 estimates will continue to leverage existing
processes for estimating losses on impaired loans, however, these processes
will be updated to reflect the requirements of IFRS 9, including the
requirement to consider multiple forward-looking scenarios.
Movements between Stage 1 and Stage 2 are based on whether an instrument's
credit risk as at the reporting date has increased significantly relative to
the date it was initially recognised. Movements between Stage 2 and Stage 3 are
based on whether financial assets are credit-impaired as at the reporting date.
The determination of credit-impairment under IFRS 9 will be similar to the
individual assessment of financial assets for objective evidence of impairment
under IAS 39. Assets can move in both directions through the stages of the
impairment model.
In assessing whether a borrower is credit impaired the following indicators
will be considered:
· Qualitative; e.g. breaches of covenant;
· Quantitative; e.g. overdue status; and
· Based on data developed internally and obtained from external sources.
Inputs into the assessment of whether a financial instrument is in default and
their significant may vary over time to reflect changes in circumstances.
Under IFRS 9, when determining whether the credit risk (i.e. the risk of
default) on a financial instrument has increased significantly since initial
recognition, reasonable and supportable information that is relevant and
available without undue cost or effort, including both quantitative and
qualitative information is used to complete an analysis based on historical
experience, credit assessment and forward looking information.
The criteria for determining whether credit risk has increased significantly
will vary by portfolio and will include a backstop based on delinquency.
The measurement of ECLs for each stage and the assessment of significant
increases in credit risk must consider information about past events and
current conditions as well as reasonable and supportable forward looking
information. A 'base case' view of the future direction of relevant economic
variables and a representative range of other possible forecast scenarios. The
process will involve developing two or more additional economic scenarios and
considering the relative probabilities of each outcome.
The base case will represent a most likely outcome and be aligned with
information used for other purposes, such as strategic planning and budgeting.
The other scenarios will represent more optimistic and more pessimistic
outcomes.
The estimation and application of forward-looking information requires
significant judgement. PD, LGD and EAD inputs used to estimate Stage 1 and
Stage 2 credit loss allowances are modelled based on the macroeconomic
variables (or changes in macroeconomic variables) that are most closely
correlated with credit losses in the relevant portfolio. The Bank of England
macroeconomic scenarios as well as baseline upside and downside economic
scenarios have been used in the expected credit loss calculation by the
Company.
Hedge accounting
The hedge accounting requirements of IFRS 9 have been simplified and are more
closely aligned to an entity's risk management strategy. Under IFRS 9 all
existing hedging relationships will qualify as continuing hedging
relationships. This will have no impact on the balance sheet at 1 July 2018.
Transition
To manage the transition to IFRS 9, the Portfolio Manager implemented a
comprehensive program that focused on the key areas of impact, including
financial reporting, data, systems and processes. Throughout the project the
Audit Committee has been provided with updates, to ensure escalation of key
issues and risks. As part of the implementation of IFRS 9 the Portfolio Manager
has:
· reviewed the classification and measurement of financial instruments
under the requirements of IFRS 9;
· developed and validated a set of IFRS 9 models for calculating expected
credit losses on the Company's mortgage portfolios; and
· implement internal governance processes which are appropriate for IFRS
9.
The new classification and measurement and impairment requirements will be
applied by adjusting the Consolidated Statement of Financial Position on 1 July
2018, the date of initial application. The Company will take advantage of the
exemption allowing it not to restate comparative information for prior periods
with respect to financial information. Differences in the carrying amounts of
financial assets and financial liabilities resulting from the adoption of IFRS
9 will be recognised in retained earnings and reserves as at 1 July 2018.
Loans and advances that are classified as loans and receivables and measured at
amortised cost under IAS 39 will in general also be measured at amortised cost
under IFRS 9. While held to maturity investment securities measured at
amortised cost under IAS 39 will in general also be measured at amortised cost
under IFRS 9.
The implementation will result in a reduction to retained earnings of
approximately GBP538 thousand (0.20 per cent of year end NAV) as at 1 July 2018.
The impact of 0.20% is relatively minimal in the context of the entire
portfolio and reflects the high credit quality of the loans as demonstrated by
the low LTVs and prudent lending criteria on the underlying mortgages. Future
projections use assumptions based on observable low historical losses in
existing or comparable pools.
IFRS 15 'Revenue from Contracts with Customers'
IFRS 15 'Revenue from Contracts with Customers' was published in May 2016 and
specifies how and when to recognise revenue as well as requiring entities to
provide users of financial statements with more informative, relevant
disclosures. The standard provides a single, principles based five-step model
to be applied to all contracts with customers. IFRS 15 is effective for annual
reporting periods beginning on or after 1 January 2018. Material revenue
streams have been reviewed and it is not anticipated that there will be a
material impact on timing of recognition or gross up for principal/agent
considerations. There will be no material impact on the Company's financial
statements.
Consolidation
UKML has not been deemed an Investment Entity under the definitions of IFRS 10
'Consolidated Financial Statements' as the majority of UKML's investments are
measured at amortised cost rather than fair value and these Audited
Consolidated Financial Statements are therefore prepared on a consolidated
basis.
Subsidiaries are all entities (including structured entities) over which UKML
has control. UKML controls an entity when UKML has power over the entity, is
exposed to, or has rights to, variable returns from its involvement with the
entity and has the ability to affect those returns through its power over the
entity. Subsidiaries are fully consolidated from the date on which control is
transferred to UKML. They are derecognised from the date that control ceases.
UKML applies the acquisition method to account for business combinations. The
consideration transferred for the acquisition of a subsidiary (for accounting
purposes) is the fair value of the assets transferred, the liabilities incurred
to the former owners of the acquiree and the equity interests issued by UKML.
The consideration transferred includes the fair value of any asset or liability
resulting from a contingent consideration arrangement. Identifiable assets
acquired and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the acquisition
date. UKML recognises any non-controlling interest in the acquiree on an
acquisition-by-acquisition basis, either at fair value or at the
non-controlling interest's proportionate share of the recognised amounts of
acquiree's identifiable net assets.
The following table outlines the consolidated entities. All subsidiaries are
100% held.
Subsidiaries Date of Country of Principal
Control Incorporation Place of
Business
UK Mortgages Corporate Funding 19/11/2015 Ireland Ireland
Designated Activity Company
Cornhill Mortgages No.1 Limited* 19/11/2015 UK UK
Cornhill Mortgages No.2 Limited 02/03/2016 UK UK
Malt Hill No.1 Plc 02/06/2016 UK UK
Cornhill Mortgages No.3 Limited* 21/02/2017 UK UK
Oat Hill No.1 Plc 26/06/2017 UK UK
Malt Hill No. 2 Plc 28/06/2018 UK UK
* Cornhill Mortgages No. 1 Limited and Cornhill Mortgages No. 3 Limited were
placed into liquidation on 4 May 2017 and 9 February 2018 respectively.
Based on control, the results of the Acquiring Entity, the Issuer SPVs (Malt
Hill No.1 Plc, Oat Hill No.1 Plc, Malt Hill No.2 Plc) and the Warehouse SPVs
(Cornhill Mortgages No.1 Limited, Cornhill Mortgages No.2 Limited and Cornhill
Mortgages No.3 Limited) are consolidated into the Audited Consolidated
Financial Statements.
Inter-company transactions, notes, balances and unrealised gains/losses on
transactions between group companies are eliminated on consolidation. When
necessary, amounts reported by subsidiaries have been adjusted to conform to
the Company's accounting policies. During the year no such adjustments have
been made given all subsidiaries have uniform accounting policies.
Financial Assets
Financial assets are classified into two categories: financial assets at fair
value through profit and loss, and loans and receivables.
Derivative Instruments are classified as financial assets or liabilities at
fair value through profit and loss.
Mortgage loans are classified as loans and receivables. Loans and receivables
are initially recognised at fair value and subsequently carried at amortised
cost using the effective interest rate method, other than where an adjustment
is made as part of a fair value hedging arrangement.
Loans and receivables are non-derivative financial assets with fixed or
determinable repayments that are not quoted in an active market and include
mortgage loans. Loans and receivables are initially recognised at fair value
and subsequently carried at amortised cost using the effective interest rate
method. Amortised cost is the amount at which the financial instrument was
recognised at initial recognition less any principal and interest repayments,
and where relevant less any write-down for incurred impairment provision.
Loans and receivables are included in current assets, except for maturities
greater than 12 months after the end of the reporting period, which are
classified as non-current assets. Accrued interest includes amortisation of
transaction costs deferred at initial recognition and any premium or discount
to maturity using the effective interest method.
Mortgage loans impairment provisions
All mortgage loans are secured on residential property, and the Company places
strong emphasis on the market value of the properties and the borrower's
ability to service the loan.
Impairment provisions are recorded on mortgage loans in arrears where the value
of the loan in arrears is in excess of the estimated forced sale value of the
underlying property held as security based on the probability of the loan going
to repossession. Estimates are required of the likely forced sale discount on
the property and likelihood of the loan going to repossession based on the
limited historical loss experience of the Company. Impairment provisions made
during the year are charged to the Consolidated Statement of Comprehensive
Income.
Impaired mortgages are written off after all the necessary collections
procedures have been completed, the property repossessed and sold and the
shortfall charged to Consolidated Statement of Comprehensive Income.
Recognition and de-recognition of financial assets
Financial assets are recognised on the Consolidated Statement of Financial
Position when, and only when, the entity becomes a party to the contractual
provisions of the instrument.
Financial assets are derecognised only when either the contractual rights to
cash flows from the financial assets expire or the transfer otherwise qualifies
for de-recognition in accordance with IAS 39 " Financial Instruments:
Recognition and Measurement".
Loan notes
Loan notes are initially recognised in the Consolidated Statement of Financial
Position at proceeds received net of any direct issue costs. Loan notes are
subsequently measured at amortised cost.
Financial assets or liabilities held at fair value through the profit and loss
Interest rate swaps
Financial assets or liabilities held at fair value through profit and loss
include interest rate swaps, which are utilised by the Company to reduce
exposures to fluctuations in interest rates, and to exchange fixed rate income
payments on mortgage portfolios for floating rates required to access
borrowings and hedge floating rate payments on issued loan notes.
Derivatives are carried in the Consolidated Statement of Financial Position as
financial assets when their fair value is positive and as financial liabilities
when their fair value is negative.
On 1 July 2017 the Directors designated the derivatives as a fair value hedge
and began hedge accounting from that date.
Hedge accounting
The Company uses derivatives only for interest rate risk management purposes.
It does not use derivatives for trading purposes. All derivatives entered into
by the Company are to provide an economic hedge of the exposure to changes in
fair value of a recognised asset or liability (such as fixed rate mortgages) or
an unrecognised firm commitment that is attributable to a particular risk
(changes in benchmark interest rates impacting the fair value of fixed coupons)
and could affect profit or loss. All hedge relationships designated by the
Company are therefore classified as fair value hedges.
When transactions meet the criteria specified in IAS 39, the Company applies
fair value hedge accounting so that changes in the fair value of the underlying
mortgage loan cash flows ("the hedged item") that are attributable to the
hedged risk are recorded in the Consolidated Statement of Comprehensive Income
to offset the fair value movement of the related derivative ("the hedging
instrument").
To qualify for hedge accounting, the hedge relationship must be formally
designated and documented. Additionally, there must be an expectation that the
hedging instrument will be highly effective in offsetting the changes in the
fair value of the hedged item. Effectiveness must then be tested on an ongoing
basis over the life of the hedge relationship.
Derivatives are initially recognised at fair value on the date on which a
derivative contract is entered into, and are subsequently remeasured at their
fair value. Fair values of derivative financial instruments are calculated by
discounted cash flow models using yield curves and counterparty credit risk
assumptions that are based on observable market data. All derivatives are
carried as assets when their fair value is positive and as liabilities when
their fair value is negative. Changes in the fair value of derivatives are
recognised immediately in the Consolidated Statement of Comprehensive Income
together with changes in the fair value of the hedged item that are
attributable to the hedged risk within net gain from derivative financial
instruments.
All derivatives entered into by the Company are for the purposes of providing
an economic hedge. Hedge accounting is an optional treatment but the specific
rules and conditions in IAS39 have to be complied with before it can be
applied.
If a hedging relationship is designated at a point where the fair value of the
hedged item is not nil, an additional adjustment (known as a "pull to par"
adjustment) is typically required to ensure that the fair value hedge
adjustment fully reverses over the remaining life of the hedged item.
If the hedging derivative expires or is sold, terminated, or exercised, or the
hedge no longer meets the criteria for fair value hedge accounting, or the
hedge designation is revoked, hedge accounting is discontinued prospectively.
If the underlying instrument is sold or repaid, the unamortised fair value
adjustment is immediately recognised in the Consolidated Statement of
Comprehensive Income. A summary of the effects of hedging and the associated
fair value adjustments can be found in note 9.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the
Consolidated Statement of Financial Position when there is a legally
enforceable right to offset the recognised amounts and there is an intention to
settle on a net basis or realise the asset and settle the liability
simultaneously.
Interest income and interest expense
Interest income on financial assets that are classified as mortgage loans,
interest expense on borrowings and loan notes are recorded using the effective
interest rate method. Interest income also includes income from cash and cash
equivalents and interest expense on financial liabilities held at fair value
through profit and loss, are recorded on an accruals basis.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, short-term deposits held at
call with banks and other short-term investments in an active market with
original maturities of three months or less and bank overdrafts. Bank
overdrafts are shown in current liabilities in the Consolidated Statement of
Financial Position.
Reserve fund
Reserve fund includes all cash held with banks with maturities of over three
months. This cash is held on reserve with depositories and is not readily
available to the Company and may only be used in accordance with the Issue and
Programme Documentation for related securitisations.
Borrowings
Borrowings are recognised initially at fair value, net of transaction costs
incurred. Borrowings are subsequently carried at amortised cost; any difference
between the proceeds (net of transaction costs) and the redemption value is
recognised in the Consolidated Statement of Comprehensive Income and amortised
over the period of the borrowing facility using the effective interest method.
Borrowings are classified as current liabilities unless the Company has an
unconditional right to defer settlement of the liability for at least 12 months
after the date of the Consolidated Statement of Financial Position.
Share capital
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new Ordinary Shares are shown in equity as a
deduction, net of tax, from the proceeds.
Foreign currency translation
a) Functional and presentation currency
Items included in the financial statements are measured using Sterling the
currency of the primary economic environment in which the entity operates,
('the functional currency'). The financial statements are presented in
Sterling, which is the Company's presentation currency.
b) Transactions and balances
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign
currency assets and liabilities are translated into the functional currency
using the exchange rate prevailing at the Consolidated Statement of Financial
Position date.
Foreign exchange gains and losses relating to the financial assets and
liabilities carried at fair value through profit and loss are presented in the
Consolidated Statement of Comprehensive Income.
Transaction costs
Transaction costs on financial assets or liabilities at fair value through
profit and loss include fees and commissions paid to agents, advisers, brokers
and dealers. Transaction costs, when incurred, are immediately recognised in
the Consolidated Statement of Comprehensive Income.
Transaction costs on mortgage loans are amortised over the average life of the
mortgage portfolio. Issuer costs on the set up of the warehousing and issuer
entities will be capitalised and amortised over the expected life of the
warehousing phase or securitisation, as appropriate.
Expenses
All other expenses are included in the Consolidated Statement of Comprehensive
Income on an accruals basis.
Segment reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision-maker. The chief operating
decision-maker, who is responsible for allocating resources and assessing
performance of the operating segments, has been identified as the Portfolio
Manager. The Directors are of the opinion that the Company is engaged in two
segments of business, being Buy to Let and Owner Occupied Mortgage portfolios,
secured against UK residential property. This has been subdivided into Forward
Flow and Purchased. The Directors manage the business in this way.
Taxation
The Company is a tax-exempt Guernsey limited company. Please refer to note 6
for additional information.
Trade and other receivables
Trade and other receivables are amounts due in the ordinary course of business.
If collection is expected in one year or less, they are classified as current
assets. If not, they are presented as non-current assets. Trade and other
receivables are recognised initially at fair value and subsequently measured at
amortised cost using the effective interest method, less provision for
impairment.
Included in the trade and other receivables are formation expenses which have
been capitalised and will be expensed over the expected life of the SPV.
Trade and other payables
Trade and other payables are obligations to pay for services that have been
acquired in the ordinary course of business. Trade and other payables are
classified as current liabilities if payment is due within one year or less. If
not, they are presented as non-current liabilities. Trade and other payables
are recognised initially at fair value and subsequently measured at amortised
cost using the effective interest method.
Dividend distributions
Dividend distributions to the Company's Shareholders are recognised as a
liability in the Company's financial statements in the period in which the
dividends are approved by the Board.
3. Critical accounting judgements and estimates and assumptions
The preparation of financial statements in conformity with IFRS requires the
use of estimates and judgements that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting year. Although these estimates are
based on management's knowledge of the amount, actual results may differ from
these estimates. If actual results differ from the estimates, the impact will
be recorded in future years.
Estimates and judgements are regularly reviewed based on past experience,
expectations of future events and other factors. The key areas where estimates
are made are as follows:
Mortgage loan impairment provision
Mortgage Loans are considered impaired when it is probable that the Company
will be unable to collect all amounts due according to the contractual terms of
the agreement.
In addition, the directors consider how appropriate past trends and patterns
could impact the current economic climate and may make any adjustments they
believe are necessary to reflect the current economic and market conditions.
The accuracy of impairment calculations would therefore be affected by
unexpected changes to the economic situation, variances between the models used
and the actual results, or assumption which differ from the actual outcomes.
Credit enhancement is provided to the securitised portfolios in a number of
ways. The income on the Mortgage Loans is expected to exceed the interest
payable on the Notes. This excess spread is available to make good any
reductions in the principal balance of the Mortgage Loans as a result of
defaults by customers.
The recoverability of the Loan to the Seller is dependent on the collections
from the underlying Mortgage Loans. Mortgage Loans are considered impaired when
it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the agreement. The key assumptions for
recoverability relate to estimates of the probability of any account going into
default, cash flows from borrowers' accounts, their timing and expected
proceeds from the sale of repossessed collateral. These key assumptions are
based on observed data from historical patterns and are updated by the servicer
as new data becomes available.
Fair value
Fair values are used in these financial statements for recognition and
disclosure purposes and to assess impairment of the carrying value. Fair value
is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable and willing parties in an arm's length transaction. The
existence of published price quotation in an active market is the best evidence
of fair value and when they are available they are used. If the market for a
financial instrument is not active, fair value is established using a valuation
technique. Fair value represents point in-time estimates that may change in
subsequent reporting years due to market conditions or other factors. The only
financial instruments included in the Company's Consolidated Statement of
Financial Position that are measured at fair value are the interest rate swaps.
Refer to note 21 for additional information.
Amortised cost and effective interest rate model assumptions
In determining the amortised cost of the mortgage portfolio using the effective
interest rate method, the Portfolio Manager exercises significant judgement in
estimating the remaining life of the underlying mortgages. In doing so the
Portfolio Manager uses cash flow models which include assumptions on the likely
macroeconomic environment, including the house price index, unemployment levels
and interest rates, as well as loan level and portfolio attributes and the
Company's limited history used to derive prepayment rates, and the probability
and timing of defaults. The estimated life of the mortgage portfolio, impacts
the effective interest rate of the mortgage portfolio which in turn impacts the
interest income recognised during the accounting period.
The key area where judgement is made is as follows:
Determining operating segments
An operating segment is a component of the Company that engages in business
activities from which it may earn revenues and incur expenses.
In the Annual Report and Audited Consolidated Financial Statements for the year
ended 30 June 2018, the Directors reported the Company is engaged in two
segments of business, being Buy-to-Let and Owner Occupied mortgage portfolios
secured against UK residential property.
In order to determine the operating segments, the following factors have been
considered by the Directors:
* The information sent to the Board of Directors; and
* Whether the level of the organisation viewed makes sense as operating
segments in the context of the core principles/business activities.
The Directors will continue to monitor financial information for each segment
and will ensure this financial information is considered when decisions of how
to allocate the resources of the Company are being made.
4. Gain/(loss) per Ordinary Share - basic and diluted
The gain per Ordinary Share of GBP0.023 (30 June 2017: GBP0.004) - basic and
diluted has been calculated based on the weighted average number of Ordinary
Shares of 250,252,771 (30 June 2017: 250,000,000) and a net gain of GBP5,852,291
(30 June 2017: GBP1,024,873).
5. Net Asset Value per Ordinary Share
The Net Asset Value of each share of GBP0.8569 (30 June 2017: GBP0.8936) is
determined by dividing the net assets of the Company GBP233,990,428 (30 June
2017: GBP223,388,138) by the number of shares in issue at 30 June 2018 of
273,065.390 (30 June 2017: 250,000,000).
6. Taxation
The Company has been granted Exempt Status under the terms of The Income Tax
(Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in Guernsey. Its
liability for Guernsey taxation is limited to an annual fee of GBP1,200.The
Acquiring Entity should qualify as a qualifying company within the meaning of
Section 110 of the Irish Taxes Consolidation Act, 1997 ("TCA 1997").
As such, the profits are chargeable to corporation tax under Case III of
Schedule D of S.110, at the rate of 25%, but are computed in accordance with
the provisions applicable to schedule D case I of TCA 1997 subject to one
important distinction, that being interest payments made by the Company on its
PPN should be tax deductible.
UK based companies (Malt Hill No.1 Plc, Malt Hill No.2 Plc, Cornhill Mortgages
No.1 Limited (until its liquidation), Cornhill Mortgages No.2 Limited, Cornhill
Mortgages No.3 Limited (until its liquidation) and Oat Hill No.1 Plc) should,
in relation to any business they carried on in the year, be treated as being
securitisation companies for the purposes of the United Kingdom's Taxation of
Securitisation Companies Regulations 2006 '(SI2006/3296)'. Therefore these
companies are not required to pay corporation tax on their accounting profit or
loss and should only be liable for UK corporation tax on amounts that form part
of their "retained profit" as specified in the transaction documentation. UK
based company Cornhill Mortgages No.1 Limited and Cornhill Mortgages No.3
Limited should not be liable for corporation tax in respect of the year as no
business was carried on.
7. Mortgage loans
For the year For the year
from 01.07.2017 from
to 30.06.2018 01.07.2016 to
30.06.2017
GBP GBP
Mortgage loans at start of the year 841,876,173 303,585,700
Mortgage loans purchased 465,950,403 576,732,728
Effective interest rate adjustment 5,845,006 1,626,884
Mortgage loans repaid (96,390,819) (40,035,931)
Borrowings charges amortised - 424,709
Amortised borrowing charges released (159,658) (52,218)
Fair value adjustment for hedged risk (1,292,873) -
*
Mortgage loans written off (24,367) (405,699)
Mortgage loans at end of the year 1,215,803,865 841,876,173
Amounts falling due after more than one year 1,205,151,843 829,201,473
Amounts falling due within one year 10,652,022 12,674,700
1,215,803,865 841,876,173
*Please refer to note 9 which explains how the fair value adjustment is
calculated and note 18 sets out the liquidity and credit risk profile of the
mortgage loans.
Mortgage loans at 30 June 2018 comprise of three securitised mortgage
portfolios legally held in Malt Hill No.1 Plc, Malt Hill No.2 Plc and Oat 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 portfolios.
8. Reserve fund
The reserve funds are held with Citibank N.A. London Branch within the
securitisation structures. The Company is required to maintain this reserve
which is not readily available to the Company and may only be used in
accordance with the Issue and Programme Documentation.
9. Financial liabilities held at fair value through profit and loss
Derivative instruments
Malt Hill No.1 Plc
On 3 November 2015, the Company entered into an Interest Rate Swap (under an
ISDA agreement) at the point of the initial mortgage loan portfolio purchase to
convert the fixed rate loan exposure back into 3 Month Libor. The notional
value of the swap is balance guaranteed in order to track the principal balance
of the mortgage loan portfolio and changes thereto quarterly in line with the
movement in the mortgage loan portfolio.
Cornhill Mortgages No.2 Limited
On 7 July 2016, the Company entered into an Interest Rate Swap (under an ISDA
agreement) to hedge the fixed rate loan exposure of the mortgages in the
portfolio into 1 Month Libor. The notional value of the swap is balance
guaranteed in order to track the new originations and the amortisation of the
mortgage loan portfolio and changes on a monthly basis to reflect the principal
balance of the portfolio.
Malt Hill No.2 Plc
On 29 June 2018, the Company entered into an Interest Rate Swap (under an ISDA
agreement) at the point of the initial mortgage loan portfolio purchase to
convert the fixed rate loan exposure back into 3 Month Libor. The notional
value of the swap is balance guaranteed in order to track the principal balance
of the mortgage loan portfolio and changes thereto quarterly in line with the
movement in the mortgage loan portfolio.
Notional and fair value balances:
Malthill Cornhill Malthill 30.06.2018
No. 1 Plc No. 2 No. 2 Plc Total
Limited
Notional amount of Interest Rate 182.1m 116.7m 351.1m 649.8m
Swap
Fair value of Interest Rate Swap (415,880) (225,982) (729,500) (1,371,362)
Malthill Cornhill Malthill 30.06.2017
No. 1 Plc No. 2 No. 2 Plc Total
Limited
GBP GBP GBP GBP
Notional amount of Interest Rate 288.5m 35.5m - 324.0m
Swap
Fair value of Interest Rate Swap (1,734,294) (73,755) - (1,808,049)
On 1 July 2017, the Directors designated the Malt Hill No.1 Plc and Corn Hill
No.2 Limited derivatives as fair value hedges and began hedge accounting from
that date. Hedge accounting in relation to Malt Hill No.2 Plc derivative
commenced on 1 July 2018.
Net loss from derivative financial instruments
Malthill Cornhill Malthill 30.06.2018
No. 1 Plc No. 2 No. 2 Plc Total
Limited
GBP GBP GBP GBP
Movement on derivatives in 1,318,414 (152,227) (729,500) 436,687
designated fair value hedge
relationships
Adjustment to mortgage loans in fair (1,363,359) 70,486 - (1,292,873)
value hedge relationship
Net (44,945) (81,741) (729,500) (856,186)
ineffectiveness
The net loss from derivative financial instruments represents the net fair
value movement on derivative instruments that are matching risk exposure on an
economic basis. Some accounting volatility arises on these items due to
accounting ineffectiveness on designated hedges. At the year end, Malt Hill
No.2 and Cornhill No.2 did not qualify for hedge accounting due to the
retrospective testing being ineffective. As such the movement in Cornhill
No.2's fair value swap since December 2017, which was the date previously
tested and proved to be effective, and all of the movement in Malt Hill No.2's
fair values have been charged directly to the Statement of Comprehensive
Income. Prospective testing has shown these swaps to be effective therefore
they qualify for hedge accounting under IFRS9 going forward.
The net ineffectiveness is primarily due to timing differences in income
recognition between derivative instruments and the hedged assets. This gain or
loss will trend to zero over time and this is taken into account by the Board
when considering the Company's underlying performance.
10. Trade and other receivables
As at As at
30.06.2018 30.06.2017
GBP GBP
Interest receivable on mortgage loans 1,627,428 1,343,479
Other receivables and prepayments 1,448,181 747,706
Capitalised formation expenses 647,200 1,431,138
3,722,809 3,522,323
Capitalised formation expenses are the set up costs of Cornhill Mortgages No.2
Limited and Malt Hill No.2 plc, which are being amortised over 3 years.
11. 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
30.06.2018 30.06.2017
GBP GBP
Cash at bank 43,784,286 86,022,869
43,784,286 86,022,869
12. Trade and other payables
As at As at
30.06.2018 30.06.2017
GBP GBP
Loan note issue fees payable 1,303,113 1,707,580
Interest due on loan notes 848,058 398,870
Portfolio management fees payable 329,854 832,816
Mortgage loans servicing fees payable 301,552 104,054
Audit fees payable 252,446 199,316
General expenses payable 120,939 63,376
Legal and professional fees payable 109,818 81,201
Directors' fees payable 33,750 26,875
AIFM fees payable 23,469 48,148
Depositary fees payable 11,223 5,498
Custody fees payable 3,784 3,793
Administration and secretarial fees payable 2,714 176,533
3,340,720 3,648,060
13. Loan notes
The Malt Hill No.1 Plc, Oat Hill No.1 Plc and Malt Hill No. 2 Plc mortgage
portfolio acquisitions are 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.
Malt Hill No.1 Plc completed the public sale of GBP263.3m 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 are amortised over the expected life of the loan
notes, which is 3 years, being the call date.
Oat Hill No.1 Plc completed the public sale of GBP477.1m of AAA-rated bonds on 26
June 2017. The AAA notes were issued with a coupon of 3 month LIBOR plus 0.65%
and a step up margin of 1.30% 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.
Malt Hill No. 2 Plc completed the public sale of GBP317.5m of AAA-rated bonds on
27 June 2018. The AAA notes were issued with a coupon of 3 month LIBOR plus
0.75% 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. Loan notes have been
classified as current based on their contractual obligations.
As at As at
30.06.2018 30.06.2017
GBP GBP
Loan notes at start of the year 715,734,468 261,784,493
Loan notes issued 317,500,000 474,695,416
Loan notes repaid (95,431,974) (19,433,084)
Loan note issue fees paid (1,028,869) (1,795,120)
Loan note issue fees amortised 1,150,615 482,763
Loan notes at end of the year 937,924,240 715,734,468
Interest expense on loan notes for the year amounted to GBP8,715,238 (30 June
2017:GBP4,526,663).
14. Borrowings
Cornhill Mortgages No.2 Limited was paying a commitment fee for GBP150m until
1 June 2017. The facility was restructured in June 2017, in order to improve
the cost efficiency of the structure, with changes involving reduction of
commitment fees and drawn margins on the facility. Any increase to the
commitment amount is subject to NatWest Markets approval and the total facility
size remains at GBP250m. The facility fees of GBP496,370 (2017: GBP1,261,233) were
expensed in the year. At the year end the Company had a liability of GBP
104,445,310 consisting of GBP105,000,000 of the utilised borrowing facility and GBP
554,690 of borrowing costs which are being amortised over the life of the
borrowing facility. At the year end the Company had utilised GBP105,000,000 of
the borrowing facility (30 June 2017: nil). The interest expense charged on
borrowings of GBP1,165,171 (2017: GBP2,216,204) was expensed in the year.
Cornhill Mortgages No.3 Limited had a loan from Bank of America Merrill Lynch
International Limited of GBP437,381,692 that commenced on 20th February 2017 and
was repaid on 26 June 2017. Interest expense of GBPnil (2017: GBP2,216,204) was
incurred during the year.
15. Share Capital
Authorised Share Capital
The share capital of the Company consists of an unlimited number of shares with
or without par value which, upon issue, the Directors may designate Ordinary
Shares or C shares or such other classes of shares as the Board shall
determine, in each case of such classes and denominated in such currencies as
the Directors may determine.
As at 30 June 2018, one share class has been issued, being the Ordinary Shares
of the Company.
The Ordinary Shares carry the following rights:
a) are entitled to participate in dividends which the Company declares from
time to time proportionate to the amounts paid or credited as paid on such
Ordinary Shares.
b) all Ordinary Shares are entitled to a distribution of capital in the same
proportions as capital is attributable to them (including on winding up).
c) every shareholder shall have one vote for each Ordinary Share held by it.
Issued Share Capital
As at As at
30.06.2018 30.06.2017
Ordinary shares GBP GBP
Share capital at the beginning of the 245,000,000 245,000,000
year
Issued share capital 20,000,000 -
Share issue costs (250,001) -
Total share capital at the end of the 264,749,999 245,000,000
year
As at As at
30.06.2018 30.06.2017
Ordinary shares shares shares
Shares at the beginning of the year 250,000,000 250,000,000
Issue of 23,065,390 -
shares
Total shares in issue at the end of 273,065,390 250,000,000
the year
During June 2018, the Company raised GBP20,000,000 (before costs and expenses)
through the issue of 23,065,390 new Ordinary shares at a price of 86.71 pence
per share.
16. Related Parties
a) Directors' Remuneration and Expenses
The Directors of UKML are remunerated for their services at such a rate as the
Directors determine. The aggregate fees of the Directors will not exceed GBP
200,000.
The annual Directors' fees comprise GBP40,000 (30 June 2017: GBP30,000) payable to
Mr Waldron, the Chairman, GBP35,000 (30 June 2017: GBP27,500) to Mr Le Page as
Chairman of the Audit Committee, and GBP30,000 (30 June 2017: GBP25,000) each to
Mrs Green and Mr Burrows. During the year ended 30 June 2018, Directors' fees
of GBP135,000 were charged to UKML (30 June 2017: GBP107,500), of which GBP33,750
remained payable at the end of the year (30 June 2017: GBP26,875).
b) Shares held by related parties
As at 30 June 2018, Directors of UKML held the following shares in UKML
beneficially:-
Number of Shares Number of
Shares
30.06.2018 30.06.2017
Christopher Waldron 20,000 5,000
Richard Burrows 5,000 5,000
Paul Le Page 20,000 20,000
Helen Green 10,000 -
As at 30 June 2018, the Portfolio Manager held Nil shares (30 June 2017: Nil)
and partners and employees of the Portfolio Manager held 7,048,299 shares (30
June 2017: 7,040,076), which is 2.581 % of the issued share capital (30 June
2017: 2.812%).
c) Portfolio Manager
With effect from 1 July 2017, the portfolio management fee payable to the
Portfolio Manager quarterly on the last business day of the quarter at a rate
of 0.60% per annum of the lower of NAV, which is calculated monthly on each
valuation day, or market capitalisation of each class of shares. Prior to this
date, the portfolio management fee per annum was 0.75%.
UKML has also agreed to pay a marketing fee equal to 12.5% of the Placing
commission calculated and payable to Numis Securities Limited 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 year amounted to GBP1,313,002 (30 June
2017: GBP1,714,555) of which GBP329,854 (30 June 2017: GBP832,816) remained payable
at the year end.
The Portfolio Management Agreement dated 23 June 2015 remains in force until
determined by UKML or the Portfolio Manager giving the other party not less
than twelve months' notice in writing. Under certain circumstances, UKML or the
Portfolio Manager are entitled to immediately terminate the agreement in
writing.
d) Group entities
UKML's subsidiaries are as disclosed under note 2.
17. Material Agreements
a) Alternative Investment Fund Manager
The Company's Alternative Investment Fund Manager (the "AIFM") is Maitland
Institutional Services Limited (formerly Phoenix Fund Services (UK) 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 GBP20,000 per
annum and fees payable quarterly in arrears at a rate of 0.07% of the NAV of
the Company below GBP50 million, 0.05% on Net Assets between GBP50 million and GBP100
million and 0.03% on Net Assets in excess of GBP100 million. During the year
ended 30 June 2018, AIFM fees of GBP95,033 (30 June 2017: GBP96,730) were charged
to the Company, of which GBP23,469 (30 June 2017: GBP48,148) remained payable at
the end of the year.
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 GBP100 million, 0.05% on net assets between
GBP100 million and GBP200 million and 0.04% on net assets in excess of GBP200 million
as at the last business day of the month subject to a minimum GBP75,000 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 GBP60,500 will be charged for corporate governance
and company secretarial services and accounting services. Total administration
and secretarial fees for the year amounted to GBP243,847 (30 June 2017: GBP279,518)
of which GBP2,714 (30 June 2017: GBP176,533) remained payable at the year 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 GBP40,000 per annum. Total depositary fees
and charges for the year amounted to GBP71,337 (30 June 2017: GBP68,503) of which GBP
11,223 (30 June 2017: GBP5,498) remained payable at the year end.
The Depositary will charge an additional fee of GBP20,000 for performing due
diligence on each service provider/administrator employed.
The Depositary is also entitled to a custody fee at a rate of 0.01% of the NAV
of the Company as at the last business day of the month subject to a minimum of
GBP8,500 per annum. These NAV based fees commence from 19 November 2015 being the
date Company acquired its initial investment. Total custody fees for the year
amounted to GBP23,798 (30 June 2017: GBP22,559) of which GBP3,784 (30 June 2017: GBP
3,793) remained payable at the year end.
18. Financial Risk Management
The Company's objective in managing risk is the creation and protection of
shareholder value. Risk is inherent in the Company's activities, but it is
managed through an ongoing process of identification, measurement and
monitoring.
The Company'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 Company'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 Company.
Market risk
Market risk embodies the potential for both losses and gains and includes
interest rate risk, price risk and currency risk. The Company's strategy on the
management of market risk is driven by the Company's investment objective. The
Company'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.
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 1 July 2017, the Directors designated the derivatives as a fair value hedge
and began hedge accounting from that date therefore hedging the interest risk
exposure on the fixed rate mortgages shown in the table below.
The retrospective testing completed at the year end identified that both the
Cornhill No.2 and Malt Hill No.2 hedges were ineffective. The hedge on Malt
Hill No. 2 was not effective as at the year-end due to the write down of the
initial premium paid on the balance guaranteed swap, however it is effective on
a prospective basis and is expected to be so going forward. The hedge on
Cornhill No. 2 was only partially ineffective and the impact is minimal and
similar to Malt Hill No. 2 was effective on a prospective basis beginning July
2018. Refer to note 9 for further details.
The below table shows exposure to interest rate risk if the portfolio was
unhedged.
Non interest Total as at
Floating rate Fixed rate bearing 30.06.2018
GBP GBP GBP GBP
Assets
Mortgage loans 604,295,653 656,990,009 (45,481,797) 1,215,803,865
Reserve fund 17,761,100 - - 17,761,100
Trade and other - - 3,722,809 3,722,809
receivables
Cash and cash equivalents 43,784,286 - - 43,784,286
Total assets 665,841,039 656,990,009 (41,758,988) 1,281,072,060
Financial liabilities at (1,371,362) - - (1,371,362)
fair value through profit
and loss
Trade and other payables - - (3,340,720) (3,340,720)
Borrowings (104,445,310) - - (104,445,310)
Loan notes (note 13) (943,043,748) - 5,119,508 (937,924,240)
Total liabilities (1,048,860,420) - 1,778,788 (1,047,081,632)
Total interest (383,019,381) 656,990,009 (39,980,200) 233,990,428
sensitivity gap
Non interest Total as at
Floating rate Fixed rate bearing 30.06.2017
GBP GBP GBP GBP
Assets
Mortgage loans 628,248,344 275,030,969 (61,403,140) 841,876,173
Reserve fund 13,157,350 - - 13,157,350
Trade and other - - 3,522,323 3,522,323
receivables
Cash and cash equivalents 86,022,869 - - 86,022,869
Total assets 727,428,563 275,030,969 (57,880,817) 944,578,715
Financial liabilities at (1,808,049) - - (1,808,049)
fair value through profit
and loss
Trade and other payables - - (3,648,060) (3,648,060)
Loan notes (note 13) (720,966,916) - 5,232,448 (715,734,468)
Total (722,774,965) - 1,584,388 (721,190,577)
liabilities
Total interest 4,653,598 275,030,969 (56,296,429) 223,388,138
sensitivity gap
The Company is protected against interest rate risk by virtue of the fact that
there is balance guarantee swaps in place to limit the exposure on the fixed
rate interest rates.
With the adoption of hedge accounting, the Company has reduced its exposure to
interest rate risk as changes in the fair value of the interest rate swaps are
offset by adjustments to the fair value of the mortgage loans. Consequently
there is no material movement in net assets of the Company arising from
interest rate fluctuations.
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 valued 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 trades are 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 Company's NAV,
had hedge accounting not been adopted.
1.3 Currency risk: As at 30 June 2018, the Company 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 Company will not have sufficient resources
available to meet its liabilities as 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 SPVs or Issuer SPVs
until such time as the securities of the relevant Issuer SPVs have been
redeemed in full (whether at final maturity or early redemption). This places
limitations on the Company'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
Company'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 Company's mortgage loans advanced are
illiquid and may be difficult or impossible to realise for cash at short
notice. At the year end, Cornhill Mortgages No.2 was in the warehousing phase.
The Company 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
Company 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.
The following liquidity analysis is based on contractual payment terms and
maturity dates (consistent with the disclosure in the Consolidated Statement of
Financial Position). Expected cash flows are expected to be different to these
contractual cash flows.
Less than More than Total as at
one year one year 30.06.2018
GBP GBP GBP
Assets
Mortgage loans 10,652,022 1,205,151,843 1,215,803,865
Reserve fund - 17,761,100 17,761,100
Trade and other receivables 3,722,809 - 3,722,809
Cash and cash equivalents 43,784,286 - 43,784,286
Total assets 58,159,117 1,222,912,943 1,281,072,060
Liabilities
Financial liabilities at fair value 1,371,362 - 1,371,362
through profit and loss
Trade and other payables 3,340,720 - 3,340,720
Borrowings - 104,445,310 104,445,310
Loan notes - 937,924,240 937,924,240
Total liabilities 4,712,082 1,042,369,550 1,047,081,632
Less than More than Total as at
one year one year 30.06.2017
GBP GBP GBP
Assets
Mortgage loans 12,674,700 829,201,473 841,876,173
Reserve fund - 13,157,350 13,157,350
Trade and other receivables 3,522,323 - 3,522,323
Cash and cash equivalents 86,022,869 - 86,022,869
Total assets 102,219,892 842,358,823 944,578,715
Liabilities
Financial liabilities at fair value 1,808,049 - 1,808,049
through profit and loss
Trade and other payables 3,648,060 - 3,648,060
Loan notes - 715,734,468 715,734,468
Total liabilities 5,456,109 715,734,468 721,190,577
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
Company.
The Company'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 Company also has credit risk to the counterparty with which the Warehouse
or Issuer SPVs transact 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 Company'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 reserve
fund is held with Citibank N.A. London Branch (credit rating A+ per Standards
and Poor).
Mortgage loans written off during the year amounted to GBP24,367 (2017: GBP
405,699). In order to give an indication of credit quality the below table,
shown as book value, is the current indexed loan to value ratio:
As at As at
30.06.2018 30.06.2017
Loan to value GBP GBP
0-49% 185,723,429 101,602,362
50-75% 753,485,955 473,438,989
75-100%+ 276,594,481 266,834,822
1,215,803,865 841,876,173
The value of the loans past due but not yet impaired and their respective
collateral value at the year end are shown in the table below.
Book value Collateral value
As at As at As at As at
30.06.2018 30.06.2017 30.06.2018 30.06.2017
GBP GBP GBP
>1 month but <2 months 8,552,587 1,552,194 8,548,958 1,552,194
>2 months but <3 months 1,118,202 1,075,168 1,118,202 1,075,168
>3 months but <6 months 853,657 1,109,153 853,657 1,109,153
>6 months 1,018,857 1,186,031 799,089 1,186,031
11,543,303 4,922,546 11,319,906 4,922,546
19. Capital risk management
The Company manages its capital to ensure that it is able to continue as a
going concern while following the Company's stated investment policy. The
capital structure of the Company consists of Shareholders' equity, which
comprises share capital and other reserves. To maintain or adjust the capital
structure, the Company may return capital to Shareholders or issue new shares.
There are no regulatory requirements to return capital to Shareholders.
(i) Share Buybacks
Under the articles of incorporation, the Company may purchase shares in the
market at prices which represent a discount to the prevailing NAV per share of
that class so as to enhance the NAV per share for the remaining holders of
shares of the same class. Subject to satisfying a statutory solvency test, the
Company is authorised to make market purchases of up to 14.99% of the aggregate
number of issued shares immediately following admission. This authority is
subject to approval by a shareholder vote at each Annual General Meeting.
The Directors will consider whether the Company should purchase shares where
such shares are quoted in the market at a discount in excess of 5% to NAV per
share of that class. The making and timing of any Share Buybacks is at the
absolute discretion of the Directors and is expressly subject to the Directors
determining that the Company has sufficient surplus cash resources available
(excluding borrowed monies). The listing rules published by the UK Listing
Authority prohibit the Company from conducting any Share Buybacks during close
periods immediately preceding the publication of annual and interim results.
There have been no share buybacks during the current year.
(ii) Continuation Vote
Shareholders will have the opportunity to vote on the continuation of the
Company at the fifth Annual General Meeting ("AGM") following admission of the
Ordinary Shares issued pursuant to the Issue, or every fifth AGM thereafter,
and otherwise if: (i) a dividend trigger event (where the total dividend per
Ordinary Share in respect of any financial year, commencing on or after 1 July
2016, being less than 6 pence) occurs, the articles of incorporation provide
that if this events occur a general meeting will be convened at which the
Directors will propose an ordinary resolution that the Company should continue
as an investment company.
20. Analysis of Financial Assets and Liabilities by Measurement Basis
Financial Assets Financial
at Assets
fair value at amortised
through
profit and loss cost Total
GBP GBP GBP
30 June 2018
Financial Assets as per Audited
Consolidated Statement of
Financial Position
Mortgage loans - 1,215,803,865 1,215,803,865
Reserve fund - 17,761,100 17,761,100
Cash and cash equivalents - 43,784,286 43,784,286
Trade and other receivables - 3,722,809 3,722,809
- 1,281,072,060 1,281,072,060
Financial Financial
Liabilities at Liabilities at
fair value amortised
through
profit and loss cost Total
Financial Liabilities as per GBP GBP GBP
Audited Consolidated Statement of
Financial Position
Financial liabilities at fair value 1,371,362 - 1,371,362
through profit and loss
Trade and other payables - 3,340,720 3,340,720
Borrowings - 104,445,310 104,445,310
Loan notes - 937,924,240 937,924,240
1,371,362 1,045,710,270 1,047,081,632
Financial Assets Financial Assets
at
fair value through at amortised
profit and loss cost Total
GBP GBP GBP
30 June 2017
Financial Assets as
per Audited
Consolidated
Statement of
Financial Position
Mortgage - 841,876,173 841,876,173
loans
Reserve fund - 13,157,350 13,157,350
Cash and cash equivalents - 86,022,869 86,022,869
Trade and other receivables - 3,522,323 3,522,323
- 944,578,715 944,578,715
Financial Financial
Liabilities at
fair value Liabilities at
through
profit and loss amortised cost Total
Financial Liabilities as per Audited GBP GBP GBP
Consolidated Statement of Financial
Position
Financial liabilities at fair value 1,808,049 - 1,808,049
through profit and loss
Trade and other payables - 3,648,060 3,648,060
Loan notes - 715,734,468 715,734,468
1,808,049 719,382,528 721,190,577
21. Fair Value Measurement
IFRS 13 requires the Company 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 Company's
financial assets and liabilities (by class) measured at fair value for the year
ended 30 June 2018 and the period ended 30 June 2017.
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Liabilities
Financial liabilities at fair - - (1,371,362) (1,371,362)
value through profit and loss
Total liabilities
as at
30 June 2018 - - (1,371,362) (1,371,362)
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Liabilities
Financial liabilities at fair - - (1,808,049) (1,808,049)
value through profit and loss
Total liabilities
as at
30 June 2017 - - (1,808,049) (1,808,049)
Due to the balance guarantee nature of the swap, they have been classified as
Level 3. Please see note 9 for details of the movement for the year on the
interest rate swaps.
The following table analyses within the fair value hierarchy the Company's
assets and liabilities not measured at fair value at 30 June 2018 but for which
fair value is disclosed.
Level 1 Level 2 Level 3 Total
30.06.2018 30.06.2018 30.06.2018 30.06.2018
GBP GBP GBP GBP
Assets
Mortgage loans - - 1,274,277,755 1,274,277,755
Reserve fund - 17,761,100 - 17,761,100
Cash and cash - 43,784,286 - 43,784,286
equivalents
Trade and other - 3,722,809 - 3,722,809
receivables
Total - 65,268,195 1,274,277,755 1,339,545,950
Liabilities
Trade and other - 3,340,720 - 3,340,720
payables
Borrowings - 104,445,310 - 104,445,310
Loan notes - 937,924,240 - 937,924,240
Total - 1,045,710,270 - 1,045,710,270
Level 1 Level 2 Level 3 Total
30.06.2017 30.06.2017 30.06.2017 30.06.2017
GBP GBP GBP GBP
Assets
Mortgage loans - - - 881,512,233 881,512,233
Reserve fund - 13,157,350 - 13,157,350
Cash and cash - 86,022,869 - 86,022,869
equivalents
Trade and other - 3,522,323 - 3,522,323
receivables
Total - 102,702,542 881,512,233 984,214,775
Liabilities
Trade and other - 3,648,060 - 3,648,060
payables
Loan notes - 715,734,468 - 715,734,468
Total - 719,382,528 - 719,382,528
The fair 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. Loan notes approximate fair value as the underlying interest rates are
linked to the market rates. During the year there were no transfers between the
levels. Cash and cash equivalents include cash in hand and short-term deposits
with original maturities of three months or less.
Trade and other receivables includes collateral due and interest receivable due
within 3 months.
Trade and other payables represent the contractual amounts and obligations due
by the Company for settlement of trades and expenses.
Reserve fund includes cash held as part of the securitisation structure and so
can only be used in accordance with the Issue and Programme Documentation.
22. Dividend Policy
The Company declared the following interim dividends in relation to the year
ended 30 June 2018:
Period to Dividend Net dividend Record date Ex-dividend Pay date
rate per payable (GBP) date
Share
(pence)
30 September 1.5 3,750,000 20 October 2017 19 October 31 October 2017
2017 2017
31 December 2017 1.5 3,750,000 19 January 2018 18 January 31 January 2018
2018
31 March 2018 1.5 3,750,000 20 April 2018 19 April 2018 30 April 2018
30 June 2018 1.5 4,095,980 20 July 2018 19 July 2018 31 July 2018
In each subsequent financial year, 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.
23. Segment reporting
Operating segments are reported in a manner consistent with the internal
reporting used by the chief operating decision-maker. The chief operating
decision-maker, who is responsible for allocating resources and assessing
performance of the operating segments, has been identified as the Portfolio
Manager. The Portfolio Manager makes the strategic resource allocations on
behalf of the Company. The Company has determined the operating segments based
on the reports reviewed by the Portfolio Manager that are used to make
strategic decisions. The reports are measured in a manner consistent with IFRS
for all operating segments.
The Portfolio Manager considers the business as two segments which are
categorised as Buy-to-Let and Owner Occupied. These are further sub-divided
into Forward Flow and Purchased with each being managed by separate specialist
teams at the Portfolio Manager. The Buy to Let Purchased contains Malt Hill
No.1, Malt Hill No.2 and Oat Hill No.1. Owner Occupied Forward Flow contains
Cornhill No.2. This is a change from the previously reported segmental
reporting as it was considered by the Portfolio Manager and the Audit Committee
that with the addition of the second Coventry portfolio and likely future
growth of the Company's portfolio that it would be better to analyse the
Company's portfolio under two broad headings : (1) Owner Occupied vs Buy to Let
as the repayment profiles and contractual cash flows are very different; (2)
Purchased vs Forward Flow portfolios as Forward Flow portfolios are subject to
origination completion across multiple lenders.
The reportable operating segments derive their income by seeking investments to
achieve targeted returns consummate with an acceptable level of risk within
each portfolio. These returns consist of interest and the release of the
discount/premium.
The segment information provided to the Portfolio Manager for the reportable
segments is as follows:
Buy-to-Let Owner Occupied Total as at
Forward Purchased Forward Purchased 30.06.2018
Flow Flow
GBP GBP GBP GBP GBP
Interest income - 23,126,534 3,680,166 - 26,806,700
on mortgage loans
Net interest - (1,548,358) (261,086) - (1,809,444)
expense on
financial
liabilities at
fair value
through profit
and loss
Net loss from - (703,959) (152,227) - (856,186)
derivative
financial
instruments
Interest expense - - (1,165,171) - (1,165,171)
on borrowings
Interest expense - (8,715,238) - - (8,715,238)
on loan notes
Servicer fees - (1,860,444) (320,842) - (2,181,286)
Other expenses - (2,720,324) (1,242,410) - (3,962,734)
Total net segment - 7,578,211 538,430 - 8,116,641
income
Buy-to-Let Owner Occupied Total as at
Forward Purchased Forward Purchased 30.06.2017
Flow Flow
GBP GBP GBP GBP GBP
Interest income on - 15,017,904 576,350 - 15,594,254
mortgage loans
Net interest - (2,458,538) (28,648) - (2,487,186)
expense on
financial
liabilities at fair
value through
profit and loss
Unrealised gain/ - 2,343,681 (73,755) - 2,269,926
(loss) on financial
liabilities at fair
value through
profit and loss
Interest expense on - (4,526,663) - - (4,526,663)
loan notes
Other expenses - (5,066,638) (2,024,710) - (7,091,348)
Total net segment - 5,309,746 (1,550,763) - 3,758,983
income
A reconciliation of total net segmental income to total comprehensive gain/
(loss) is provided as follows.
30.06.2018 30.06.2017
GBP GBP
Total net segment income 8,116,641 3,758,983
Other fees and expenses (2,264,350) (2,734,110)
5,852,291 1,024,873
There are no transactions between the reportable segments.
Total segment assets include:
Buy-to-Let Owner Occupied Total as at
Forward Flow Purchased Forward Flow Purchased 30.06.2018
GBP GBP GBP GBP GBP
Mortgage - 1,061,021,766 154,782,099 - 1,215,803,865
loans
Reserve fund - 16,261,100 1,500,000 - 17,761,100
Other - 17,131,723 3,148,927 - 20,280,650
- 1,094,414,589 159,431,026 - 1,253,845,615
Buy-to-Let Owner Occupied Total as at
Forward Purchased Forward Purchased 30.06.2017
Flow Flow
GBP GBP GBP GBP GBP
Mortgage - 784,381,310 57,494,863 - 841,876,173
loans
Reserve fund - 11,657,350 1,500,000 - 13,157,350
Other - 1,721,871 23,476 - 1,745,347
- 797,760,531 59,018,339 - 856,778,870
30.06.2018 30.06.2017
GBP GBP
Segment assets for reportable 1,253,845,615 856,778,870
segments
Other 27,226,445 87,799,845
Total assets 1,281,072,060 944,578,715
Total segment liabilities include:
Buy-to-Let Owner Occupied Total as at
Forward Purchased Forward Purchased 30.06.2018
Flow Flow
GBP GBP GBP GBP GBP
Borrowings - - 104,445,310 - 104,445,310
Loan notes - 937,924,240 - - 937,924,240
Financial - 1,145,380 225,982 - 1,371,362
liabilities at
fair value
through profit
and loss
Other - 2,598,009 71,128 - 2,669,137
- 941,667,629 104,742,420 - 1,046,410,049
Buy-to-Let Owner Occupied Total as at
Forward Flow Purchased Forward Flow Purchased 30.06.2017
GBP GBP GBP GBP GBP
Loan notes - 715,734,468 - - 715,734,468
Financial
liabilities at
fair
value through - 1,734,294 73,755 - 1,808,049
profit and loss
Other - 1,874,164 120,121 - 1,994,285
- 719,342,926 193,876 - 719,536,802
30.06.2018 30.06.2017
GBP GBP
Segment liabilities for reportable segments 1,046,410,049 719,536,802
Trade and other payables 671,583 1,653,775
Total liabilities 1,047,081,632 721,190,577
24. Ultimate Controlling Party
In the opinion of the Directors on the basis of shareholdings advised to
them, the Company has no ultimate controlling party.
25. Subsequent Events
The fourth interim dividend of 1.5p per Ordinary Share in respect of year
ending 30 June 2018 was declared on 12 July 2018 and paid from the capital on
31 July 2018.
On 2 October 2018, UKML announced the completion of a forward flow purchase
arrangement with Keystone Property Finance Limited ("Keystone"). Under this
investment Keystone will originate a book of Buy-to-Let ("BTL") mortgages, into
a warehouse financing structure. TwentyFour have subsequently appointed
National Australia Bank as both financing and swap provider and Pepper UK as
servicer.
On 11 October 2018, the Company declared a dividend of 1.5p in relation to the
3 month period to 30 September 2018.
These Audited Consolidated Financial Statements were approved for issuance by
the Board on 17 October 2018. There were no other subsequent events until this
date.
GLOSSARY OF TERMS
ABS Asset-backed security whose income payments
and hence value are derived from and
collateralised (or "backed") by a specified
pool of underlying assets
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 Audited Consolidated Financial Statements of
Statements the Company
BoAML the Bank of America Merrill Lynch
BTL Buy-to-let
BoE Bank of England
Board of Directors or Board or the Directors of the Company
Directors
CHL Capital Home Loans
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 means UKML, Acquiring Entity, Issuer SPV and
Warehouse SPVs
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
DSCR Debt Service Coverage Ratio
FFI Foreign Financial Institution
FLS Funding for Lending Scheme
Forward Flow transaction Forward flow transactions involve the
appointment of a third party to originate
mortgages that meet criteria defined by the
investment manager with the intention of
securitising these mortgages at a future
date. These transactions have the advantage
that they can be customised with a view to
meeting desired levels of risk and return.
The disadvantage of this type of transaction
is that the timing of loan origination is a
function of the market demand for the
mortgages and the size and quality of the
originator's sales infrastructure.
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
Hedge Accounting This is the process by which the change in
fair value of a hedging instrument is offset
by a proportionate change in the fair value
of the company's portfolio to neutralise the
volatility of the company's net asset value.
It requires initial proof and ongoing
monitoring of the hedge effectiveness.
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
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 two-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
QE Quantitative easing (QE), also known as Large
Scale Assets Purchases, is an expansionary
monetary policy whereby a central bank buys
predetermined amounts of government bonds or
other financial assets in order to stimulate
the economy.
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
RNS Regulatory News Service
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.
Seasoning The weighted average age of a mortgage
portfolio.
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 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
SVR Standard variable rate
TFS Term Funding Scheme
TML The Mortgage Lender
UK Code The UK Corporate Governance Code 2016
UKML UK Mortgages Limited
Valuation Agent Kinson Advisors LLP
WA LTV Weighted average loan-to-value
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. Three
warehouse SPVs; Cornhill Mortgages No. 1
Limited, Cornhill Mortgages No. 2 Limited and
Cornhill Mortgages No. 3 Limited, have been
established for the purpose of warehousing
the first and second transactions of the
company respectively
Warehouse SPV a special purpose vehicle, incorporated in
the UK, established for the purpose of
warehousing the mortgage portfolio
CORPORATE INFORMATION
Directors Custodian, Principal Banker and
Christopher Waldron - Chairman Depositary
Richard Burrows Northern Trust (Guernsey) Limited
Paul Le Page PO Box 71
Helen Green Trafalgar Court
Les Banques
St Peter Port
Guernsey, GY1 3DA
Registered Office Secretary and Administrator
PO Box 255 Northern Trust International Fund
Trafalgar Court Administration
Les Banques Services (Guernsey) Limited
St Peter Port PO Box 255
Guernsey, GY1 3QL Trafalgar Court
Les Banques
St Peter Port
Guernsey, GY1 3QL
Alternative Investment Fund Manager Corporate Broker
Maitland Institutional Services Limited Numis Securities Limited
Springfield Lodge The London Stock Exchange Building
Colchester Road 10 Paternoster Square
Chelmsford, CM2 5PW London, EC4M 7LT
Portfolio Manager Independent Auditor
TwentyFour Asset Management LLP PricewaterhouseCoopers CI LLP
8th Floor PO Box 321
The Monument Building Royal Bank Place
11 Monument Street 1 Glategny Esplanade
London, EC3R 8AF St Peter Port
Guernsey, GY1 4ND
UK Legal Advisers to the Company Receiving Agent
Eversheds Sutherland LLP (formally Computershare Investor Services plc
Eversheds LLP) The Pavilions
One Wood Street Bridgwater Road
London, EC2V 7WS Bristol, BS13 8AE
Guernsey Legal Advisers to the Company
Carey Olsen Registrar
Carey House Computershare Investor Services
Les Banques (Guernsey) Limited
St Peter Port 1st Floor
Guernsey, GY1 4BZ Tudor House
Le Bordage
St Peter Port
Guernsey, GY1 1DB
END
(END) Dow Jones Newswires
October 18, 2018 05:33 ET (09:33 GMT)
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