TIDMUKML
UK Mortgages Limited
ANNUAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the year from 1 July 2020 to 30 June 2021
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 Annual Report
and Audited Consolidated Financial Statements for the year ended 30 June 2021.
The Report will shortly be available from 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", the "Company") was incorporated with limited
liability in Guernsey as a closed-ended investment company on 10 June 2015. The
Company's shares were admitted to trading on the Specialist Fund Segment of the
London Stock Exchange ("LSE") on 7 July 2015. UKML and the affiliate structure
have been designed 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").
The company, the Acquiring Entity, the subsidiary warehouses and
securitisations established and controlled by the Company to hold its mortgage
investments (listed in note 2) (collectively, the "Company") are treated on a
consolidated basis for as long as control is held 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 risk
adjusted levels of leverage to portfolios of UK mortgages. In accordance with
Chapter 15 of the LSE Listing Rules, the Company can only make a material
change to its investment policy with the approval of its Shareholders by
Ordinary Resolution. At an EGM held on 16 August 2019, the Company's investment
policy was revised to allow investment into third party "triple A" (Standard
and Poor's AAA/Moody's Aaa) rated RMBS for cash management purposes and to
allow additional leverage in the Company's securitisations via the issuance of
mezzanine notes. Following an EGM in December 2020 the company's mandate was
further modified to enhance shareholder liquidity by requiring the Company to
dispose of a securitisation portfolio if the Company's share price is not
trading at a discount of less than 5% to NAV when the securitisation is due to
be re-financed. Shareholders also voted to require the Company to enter a
managed wind down consultation if the Company's shares are not trading at or
above the Company's NAV on the second anniversary of the EGM in December 2022.
In the event that a managed wind down is implemented the investment objective
of the company will be modified following a further shareholder consultation
during the next financial year beginning July 2022.
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
approximately 2 weeks after the last business day of the following month.
Financial Highlights
For the For the
year ended year ended
30.06.2021 30.06.2020
Total Net Assets at year end £139,091,962 £220,076,963
Net Asset Value per ordinary share at year end 77.79p 80.59p
Share price at year 72.40p 49.30p
end
Discount to Net Asset Value at year (6.93%) (38.83%)
end
Net Asset Value Total Return * 3.03% 2.78%
Dividends declared and paid in the 5.25p 3.75p
year **
Total dividends declared in relation to the year 4.50p 4.50p
(Loss)/earnings per share (0.50p) 2.30p
Ongoing Charges ***
- UKML 0.94% 0.81%
- DAC and subsidiaries 2.20% 2.34%
Total ongoing charges for the Company 3.14% 3.15%
*Net Asset Value Total return is an Alternative Performance Measure ("APM")
which aggregates the percentage movement in the Company's Net Asset Value with
dividends paid during the period. The definition and calculation of the
Company's APMs is shown in the Alternative Performance Measures (unaudited).
**The below is the breakdown of the dividends declared and paid in the year.
***Ongoing charges are an Alternative Performance Measure calculated in
accordance with the AIC methodology.
Payment Date Amount (p)
31 July 2020 0.375
30 October 2020 2.625
5 January 2021 1.125
7 May 2021 1.125
5.25
CHAIRMAN'S STATEMENT
for the year ended 30 June 2021
I am pleased to report the results of the Company for the year to the end of
June 2021. The year has been eventful, but ultimately one of significant
progress, leaving the Company very well placed to capitalise on what remains a
very favourable macro environment for mortgage related assets.
As the financial year began, markets were beginning to normalise after the
hiatus caused by the COVID-19 pandemic and it was becoming clear that our worst
fears over the effects of mortgage holidays and other forbearance measures on
our portfolio were not likely to be realised.
The most significant consequence of the temporary cessation of issuance in the
primary securitisation market in the second quarter of 2020 was that we were
unable to refinance Oat Hill No. 1 as initially expected in May 2020. However,
by July 2020 we were able to re-securitise this portfolio successfully and as a
Board we were considering the timing of the reinstatement of the regular
quarterly 1.125p dividend, which had been temporarily reduced in response to
the uncertainty caused by COVID-19.
Later the same month, the Company received an indicative bid approach from M&G
Specialty Finance Fund ("M&G") proposing a potential offer at 67p per share.
This approach was rejected by the Board as a material undervaluation of the
Company. M&G returned in early August 2020 with a further indicative bid of
70p, which was again rejected, following which M&G withdrew on 13 August 2020.
The details of this potential bid were covered in greater detail in previous
reports, but it is worth reflecting on why we believe the approach was made and
how the Company responded.
Importantly, the underlying premise of the Company was not called into
question. The attraction of a corporate vehicle that would deliver consistent
income from mortgage portfolios was clearly recognised. However, the
dislocation of markets in March and April last year had left the Company
trading at an unusually wide discount and once it became clear that forbearance
measures would be temporary, the appeal of buying such an attractive income
stream substantially below net asset value was entirely understandable.
During the Company's extensive consultations with shareholders throughout the
bid period, the attraction of the Company was also widely acknowledged.
Instead, the principal issues raised were around liquidity, the discount to net
assets and dividend cover. Addressing these was central to the Strategic Review
that was conducted by the Company and its advisers after the end of the bid
period, which culminated in the EGM in early December 2020, when over 80% of
shareholders approved specific revisions to the Company's strategy and the
addition of enhanced discount control measures which have been modelled in our
Viability and Going Concern analysis.
In the first half of 2021, these revisions have resulted in important changes
to the Company's portfolio, in particular the sales of the two mortgage pools
originated by the Coventry Building Society ("Coventry") and the continuation
of our financing of Keystone Property Finance ("Keystone"). The Coventry assets
always exhibited outstanding credit quality, with practically no arrears, but
were relatively low yielding pools. Selling these and using the proceeds to
repurchase shares allowed the Company to offer liquidity and narrow the
discount to net asset value, thereby responding to shareholders' concerns. More
significantly, these sales also provided capital to enable the financing of the
second Keystone portfolio, replacing low-yielding assets from a very
conventional originator with much higher-yielding ones from a specialist lender
but without compromising meaningfully on credit quality.
In the same period, the first Keystone portfolio was securitised as Hops Hill
No. 1 and excellent progress was made on the second Keystone pool. The
Portfolio Manager's report below goes into greater detail on our work with
Keystone as well as The Mortgage Lender ("TML") and Capital Home Loans ("CHL")
pools, but the net effect of the disposal of the Coventry portfolios and the
expansion of the Keystone assets has significantly increased the overall yield
of the Company portfolio.
As a result, the quarterly 1.125p dividend is now fully covered by our current
level of income. Our NAV per share movements and Earnings Per Share in these
statements do not show this as they reflect the historic impact of the Coventry
portfolio sales which we signalled in our Strategic Review presentations. Our
portfolio manager has provided a helpful chart to summarise how these sales
have impacted our NAV. The trajectory of monthly cash flows, which are
projected to exceed our dividend funding requirement should lead to a gradual
increase in our net asset value or provide funding for additional shareholder
distributions. The discount to NAV, which stood at over 38% at the beginning of
the financial year had narrowed to 7% at the financial year end and has widened
slightly to approximately 9% at the time of writing. As this year's changes to
the portfolio translate into consistently increased returns, it would be
reasonable to expect the discount to fall below 5%, to a level that will allow
the refinancing of the TML portfolio in the first quarter of 2022, which in
turn will be accretive to income.
Given the extensive work that went into responding to the M&G approach and the
subsequent Strategic Review, it is particularly pleasing to see how
successfully the approved portfolio changes have been implemented and the Board
would like to thank the Portfolio Manager for its hard work in the period.
Thank you also for your continuing support.
Christopher Waldron
Chairman
28 October 2021
PORTFOLIO OF INVESTMENTS
as at 30 June 2021
Portfolio Summary Buy-to-Let Owner Occupied
Purchased Forward Flow Originated
Oat Hill 2 Hops Hill 1 Cornhill 7 Barley Hill Cornhill
1 5
Originator Capital Home Keystone Property The Mortgage Lender
Loans Finance
Outstanding Balance £456m £395m £116m £113m £224m
Number Accounts 3,571 1,781 400 715 1,170
Average Mortgage Size £128k £222k £290k £158k £191k
WA Indexed LTV 60.66% 71.85% 72.16% 60.38% 66.30%
WA Interest Rate 1.37% 3.46% 3.44% 4.46% 3.90%
WA Remaining Term 106 261 282 268 300
(mth)
WA Seasoning (mth) 173 14 1 35 18
3mth + Arrears (% 1.38% 0.00% 0.00% 4.91% 0.85%
balance)
STRATEGIC REPORT
The Board has prepared this report on a voluntary basis as the Directors have
elected to comply with Premium Listing reporting and governance standards.
There is no requirement to comply with the UK regulations governing the
Directors' duty to prepare a strategic report.
Investment Objective and Business Model
The Company's investment objective as detailed in the Summary Information
section is to provide Shareholders with access to stable income returns through
the application of relatively conservative risk adjusted levels of leverage to
portfolios of UK mortgages. The Company is designed to purchase or originate
mortgages which are then held to produce income. Whilst the Company has sold
two of its lower-yielding mortgage portfolios following a Strategic Review
consultation with its Shareholders and may be required to sell further
portfolios if it is trading at a discount to NAV of more than 5% when the
portfolios require re-financing, the Company regards its core business model to
be holding mortgage portfolios to maximise income rather than buying and
originating mortgages for re-sale.
Investment Policy at Launch
The Company intends to pursue its investment objective by investing in Profit
Participating Notes issued by the Acquiring Entity which will acquire one or
more leveraged Mortgage Portfolios, which will subsequently be securitised so
that ongoing leveraged exposure to the Mortgage Portfolios will be provided by
holdings of Retention Notes, being the subordinated tranche of securities
issued on securitisation.
The Company may also, or alternatively (i) use certain derivative instruments
such as credit linked notes and credit default swaps to gain leveraged exposure
to Mortgage Portfolios; and/or (ii) invest in Retention Notes or similar
subordinated instruments issued by Issuer SPVs where the portfolio of Mortgages
which back the relevant notes is not one that the Acquiring Entity has at any
time owned.
Mortgages will be selected with a view to achieving appropriate diversification
across the UK housing market in terms of geographical location of the mortgaged
property, as well as being diversified by Borrower (given the typically small
size of Mortgages relative to the size of Mortgage Portfolios being purchased),
mortgage rate type and level, and property type.
Mortgage Portfolios are initially expected to be acquired in large secondary
market transactions from building societies, banks and other holders of
Mortgage Portfolios. The Portfolio Manager is currently reviewing a number of
Mortgage Portfolios that are available for sale, but there are no specific
assets identified for acquisition by the Acquiring Entity. In due course a
primary origination mechanism may be put in place under which the Acquiring
Entity would make complementary purchases of newly originated UK Mortgages from
an existing lender or lenders with a quality track record and robust
underwriting procedures.
The Company does not intend to invest in listed closed-ended investment funds
(other than money market funds as cash equivalents) or in any other investment
fund and in any event shall not invest more than 15 per cent of its total
assets in such assets (other than money market funds as cash equivalents).
Uninvested cash or surplus capital or assets may be invested on a temporary
basis in:
· Cash or cash equivalents, namely money market funds or short term money
market funds (as defined in the 'Guidelines on a Common Definition of European
Money Market Funds' published by the Committee of European Securities
Regulators (CESR) and adopted by the European Securities and Markets Authority
(ESMA)) and other money market instruments (including certificates of deposit,
floating rate notes and fixed rate commercial paper of banks or other
counterparties having a "single A" or higher credit rating as determined by any
internationally recognised rating agency selected by the Board); and
· Any UK "government and public securities" as defined for the purposes of
the FCA Rules.
In accordance with the Company's investment objective, Mortgage Portfolios will
be acquired by the Acquiring Entity, Warehouse SPVs established for the purpose
of warehousing Mortgage Portfolios and/or Issuer SPVs established for the
purpose of securitising Mortgage Portfolios using leverage. A typical leverage
multiple on Shareholders' funds is expected to be 4 to 7 times, with an
intention not to use leverage to the extent that this would result in RMBS
Senior Notes issued by an Issuer SPV being rated less than AAA at issue.
Investment Policy Revisions
At an EGM held on 16 August 2019, the Company's investment policy was revised
to allow investment into third party 'triple A' rated RMBS for cash management
purposes and to allow additional leverage in the Company's securitisations via
the issuance of mezzanine notes.
The Company's investment policy was further revised at an EGM held on 4
December 2020 to enhance shareholder liquidity by requiring the Company to
dispose of a securitisation if the Company's share price is not trading at a
discount of less than 5% to NAV at the time when the securitisation is due to
be re-financed.
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 ("NAV")
The Company's NAV has declined from 80.59p per share at the start of the year
to 77.79p at the year end. This decline in NAV is largely attributable to the
costs associated with the sale of the Coventry portfolios. The Directors and
Portfolio Manager believe that the current strategy incorporating the recent
changes to the investment policy will help to restore the capital value in the
long term and the liquidity of the Company.
· Discount/Premium
The Company was trading at a discount of under 7% to NAV at year end (June
2020: over 38%, December 2020: over 19%) helped by the programme of share
repurchases in the year.
· Ongoing Charges
The Company's ongoing charges ratio has slightly decreased to 3.14% from 3.15%
as the Company now has a smaller portfolio of securitisations with higher
operating costs associated with issuing higher margin loans. 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 ("UK Mortgages Limited") have increased from 0.81% to
0.94% of NAV, although this increase was alleviated by the Portfolio Manager's
fee of 0.51% being based on the Company's market capitalisation, which was less
than its net asset value during the year. The costs of servicing the underlying
mortgage portfolios have increased from 2.18% to 2.02% which is in line with
the fact that the some of the portfolios were sold during the year. 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
portfolios.
· Quarterly Dividends
The Company declared four interim dividends of 1.125p in relation to the year
in accordance with the dividend payment policy of 4.5p per annum. In September
2020 dividends declared included a 1.5p catch up fifth interim dividend in
relation to the year to 30 June 2020. The Company's dividends are reported as
being substantially uncovered in the past year due to the impact of the
Coventry portfolio sales. The Directors expect future dividends to be fully
covered by net income received.
· Investment Level
At 30 June 2021, the Company had approximately £66m of cash and near cash
working capital compared with £38m at 30 June 2020. As the Company has a
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.
Company Structure
The Company pursues its investment objective via UK Mortgages Corporate Funding
Designated Activity Company ("DAC"). DAC is an 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 securitisations, the junior
tranches of which are 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 enables DAC to attain leverage by a factor of up to twenty
times, the directors of DAC have historically limited the size of any senior
financing in order to meet the requirements for a AAA rating on issuance.
Following the shareholder vote in August 2019 the Company's investment policy
was amended to allow DAC to issue additional tranches with a rating of BBB or
higher with a view to increasing returns to shareholders by increasing
leverage.
A number of relevant additional explanation points are set out below for the
Malt Hill No. 2 Plc, Oat Hill No. 2 Plc, Barley Hill No.1 Plc and Hops Hill
No.1 Limited 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, OATH2, BARLH1, HOPSHL1), ABSNet (ticker: MALTH, MALTH2,
OATH, No ticker on ABSnet for Barley Hill No.1 Plc) and Bloomberg (ticker:
MALTH 1 Mtge, MALTH 2 Mtge, OATH 1 Mtge, OATH 2 Mtge, BARLH 1 Mtge, HOPSH 1
Mtge).
- Loan level data for the public securitisations is 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 after 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 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 notes of the relevant Issuer SPV to provide
long-term funding of the mortgage portfolio.
To facilitate efficient portfolio management the Company may also borrow up to
20% of its net asset value in addition to any leverage within the Company's
securitisations and warehouse facilities. The borrowing powers of the Company
were increased from 10% of NAV to 20% of NAV following an EGM in August 2019.
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 regular 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.
Corporate Governance Considerations
The following notes the key corporate governance considerations of the Board in
relation to its main stakeholders.
Stakeholder group Methods of engagement Benefits of engagements
Shareholders The Company engages with The Company was able to
The major investors in its shareholders through secure the backing of its
the Company's shares are the issue of regular shareholders for a
set out in the Corporate portfolio updates in the significant change in its
Governance Report. form of RNS announcements investment policy
and monthly factsheets. A required to generate a
A stable and contented series of Ad-hoc covered Dividend.
Shareholder base is vital announcements on the
to the Company's impact of COVID-19 on the The Company was able to
long-term growth Company's portfolio were secure the backing of its
objectives, and issued to the market via shareholders to reject
therefore, in line with the RNS. the proposed offer and to
its objectives, the instead conduct a
Company seeks to maintain The Company provides Strategic Review to
shareholder satisfaction in-depth commentary on release value to its
through: the investment portfolio, Shareholders, the
Progression to a fully corporate governance and recommendations of which
covered dividend. corporate outlook in its were approved at the EGM
interim management report held in November 2020.
Enhancing Liquidity in and unaudited condensed
the Company's shares by consolidated interim
targeting a discount to financial statements.
NAV of 5% or less.
The Company's Portfolio
Clearly communicating the Manager conducts webinars
status of the Company's on behalf of the Company
portfolio and its to inform and educate its
investment strategy. shareholders.
In addition, the Company,
through its brokers and
Portfolio Manager
undertook an extensive
programme of shareholder
consultation when
considering a prospective
unsolicited offer for the
Company.
Service providers
The Company does not have The Company has identified its key service The Feedback given by the
any direct employees; providers and on an annual basis undertakes a service providers is used
however, it works closely review of performance based on a questionnaire to review the Company's
with a number of service through which it also seeks feedback. policies and procedures
providers (the Portfolio to ensure open lines of
Manager, Administrators, Two additional layers of service provider communication, and
secretaries, third party oversight are provided by the Company's AIFM and operational efficiency.
valuation agent, brokers the Depositary and the Board receives quarterly
and other professional reports from them. The Board is able to
advisers). identify and resolve
problems with service
The independence, quality provider relationships
and timeliness of their via this process.
service provision is
critical to the success
of the Company.
Community & Environment
The Company does not have The Company aims to minimise its environmental Company meetings and
any direct employees. footprint by minimising air travel and by making Shareholder meetings were
maximum use of video conferencing for Company conducted exclusively via
related matters. The Company aims to protect its telephone and video
service providers by applying safe COVID-19 conference during the
working practices. final quarter of the
financial year. This has
The Portfolio Manager's Environmental, Social and minimised the use of air
Governance (ESG) considerations can be found at travel and the risk of
www.twentyfouram.com/about/ transmission of COVID-19.
our-responsible-investment-policy/ and
www.twentyfouram.com/about/ The Company is actively
our-corporate-and-social-responsibility-statement exploring the future
/ issue of "Green RMBS".
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 since 1 July 2017 a fee is payable quarterly in
arrears at a rate of 0.60% per annum 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 17.
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 £20,000 per annum and fees payable quarterly
in arrears at a rate of 0.07% of the NAV of the Company below £50 million,
0.05% on Net Assets between £50 million and £100 million and 0.03% on Net
Assets in excess of £100 million. 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 £40,000 per annum
payable monthly in arrears. The Depositary will charge an additional fee of £
20,000 for performing due diligence on each service provider/administrator
employed. The Depositary is also entitled to a custody fee at a rate of 0.01%
of the NAV of the Company as at the last business day of the month subject to a
minimum of £8,500 per annum. For additional information, refer to note 17.
Principal risks and Uncertainties
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 has
carried out a robust assessment of the principal risks facing the Company and
has looked at numerous risk factors, an overview of which is set out in the
Corporate Governance Report.
Directors
The Directors of the Company during the year and at the date of this report are
set out in the Corporate Information.
Directors' and Other Interests
As at 30 June 2021, Directors of the Company held the following Ordinary Shares
beneficially:
Number of Number of
Shares Shares
30.06.2021 30.06.2020
Christopher Waldron 80,000 80,000
Richard Burrows 5,000 5,000
Paul Le Page 67,800 112,800
Helen Green 21,250 21,250
Signed on behalf of the Board of Directors on 28 October 2021 by:
Christopher Waldron
Director
Paul Le Page
Director
PORTFOLIO MANAGER'S REPORT
for the year ended 30 June 2021
Commentary
As the events of the first half of the financial year have been extensively
covered in the half year report and previous commentaries, as well as in the
Chairman's Statement, this report focuses mainly on the Company's developments
in the second half of the period.
That said, the progress made in 2021 was driven by the positive outcome of the
shareholder vote held at the EGM in December 2020, which itself followed a
Strategic Review and detailed consultations with shareholders. The Company then
set about implementing the multiple objectives detailed under the proposal
dubbed "UKML 2.0".
In brief these objectives comprised:
· The securitisation of the first Keystone portfolio
· The establishment of a new warehouse to build a second Keystone
portfolio
· The sale of the two Coventry portfolios in order to release capital
o To complete the capitalisation of that second Keystone portfolio
o And to enable a share tender (or two tenders as it turned out) to repurchase
£40m of shares
Encouragingly, in the first half of 2021, the Company has essentially
accomplished all those objectives, thereby putting in place a platform for
steady, stable income flows going forward with growing dividend cover and the
potential for further growth into the future.
Keystone Securitisation (Hops Hill No.1)
Looking firstly in more detail at the Keystone securitisation, the deal was an
outstanding success. The vast majority of the structuring and preparation work
had actually already been completed in the fourth quarter of 2020, but market
conditions were a little indeterminate as the calendar year-end approached with
macro-economic uncertainty driven by events such as the unresolved US
presidential election at that time prompting a number of investors to take a
more defensive view and sit on the side-lines.
As a result, and with the view that more conventional asset allocation would
resume after the winter break, the decision was taken to hold off from
announcing and marketing the deal until the New Year, when we could not only
take advantage of improving market conditions, but also build a larger asset
portfolio, thereby allowing a bigger deal to be issued when the time came;
saving money on fixed costs and importantly locking in the better return for
the company on the increased deal size.
This proved to be a very wise decision. The deal was the first to be announced
in the New Year, grabbing the entirety of investors' attention, and, after a
marketing period involving both individual and group investor meetings, the
transaction was a resounding success. The deal, Hops Hill No.1, was more than 3
times oversubscribed at the senior level, and 6 times to 8 times on the
mezzanine notes, with participation from 27 different investors, the broadest
number seen in any of the Company's RMBS deals to date. Moreover, by geography,
the deal saw investors from the UK, several European jurisdictions, the US and
Australia, and investor types included banks, asset managers, hedge funds and
even a central bank. This demand helped the deal to improve pricing by 15bps
from initial indications at the senior end, and by 25bps or more on the
mezzanine and more junior classes. The demand also ensured that we were able to
include a pre-funding feature, increasing the deal size from the £337m of loans
that had been originated by the end of December 2020, to include further loans
still in the pipeline but not yet completed, up to a deal total of £400m. This
further enhanced the return for the Company by diluting the fixed costs such as
legal and rating agency fees, which are relatively significant, extending the
term of the deal by around 4 months thereby spreading the costs over a longer
period and thereby locking in the higher than expected net income on the larger
deal size. We estimate that the yield now delivered on this transaction for the
approximately 3.25 years of its life will be in the region of 16% - a very
healthy return, in excess of the initial expectations of low-mid teens.
Second Keystone Portfolio (Cornhill No.7)
That success meant we could move straight on with arranging a new warehouse for
a second Keystone portfolio, Cornhill No.7. After seeking competing quotes from
a number of banks, Santander Corporate and Investment Banking ("Santander"),
who had also been Joint-Arranger and Joint-Lead Manager for the Hops Hill No.1
transaction and Sole-Arranger and Joint-Lead-Manager of the Oat Hill No.2 deal
in 2020, was chosen to arrange the facility and also to be the swap provider.
The documentation was completed during the pre-funding period for Hops Hill
No.1, which coincided with an outstanding period of origination from Keystone,
meaning that the pre-funding for Hops Hill No.1 was virtually completed by the
end of March - two months ahead of schedule. Therefore, all origination from
early April was essentially for the benefit of the second portfolio, albeit the
loans weren't officially transferred into the new vehicle until the end of the
Hops Hill No.1 pre-funding period on the Interest Payment Date ("IPD") in May,
maximising the size (and therefore leverage and returns) of the Hops Hill pool
on its first IPD as any prepayments could be replaced with new loans.
In fact, Keystone's origination levels have continued to outperform modelled
expectations and therefore origination for the new portfolio has also been
ahead of expectations. By the end of August 2021 the portfolio had reached
slightly more than £150m of completions - equivalent to around £30m a month
including the two quieter summer months of July and August. In the first three
months, origination levels had been running at well over £35m a month, compared
with initial expectations of around £25m-£30m a month. This has been partially
driven by a strong housing market thanks somewhat to the extension of the Stamp
Duty Relief period initially to the end of June 2021 and then at a tapered
level until the end of September. As a result, June was a bumper month with
over £38.5m of loans completed, and despite the slower summer months, Keystone
already has a strong pipeline for the rest of the year. From September we
expect a return to the higher volumes seen prior to the summer and for the
portfolio to reach around £275m by the end of 2021, and then go on to be ready
to be turned into a second public securitisation of a similar size to the first
one in Q2 of 2022. If strong RMBS market conditions continue to prevail,
supported by ongoing technical support from central bank funding schemes as
well as a healthy housing market, we would expect to once again lock in returns
at a similar level to that achieved on Hops Hill No.1.
Coventry Portfolio Sales
At the same time as the Hops Hill No.1 securitisation and the initial work on
the second Keystone warehouse, attention was also given to the commitment made
to dispose of the two lower-yielding portfolios originated by Godiva, the
Buy-to-Let ("BTL") lending subsidiary of Coventry Building Society
("Coventry"). These comprised Malt Hill No.2, the outstanding securitisation of
the second portfolio purchase from Coventry completed in 2018 and Cornhill
No.6, the residual pool of loans from the initial transaction in 2015 that was
sitting in a warehouse with Lloyds Bank at that time, awaiting the refinancing
date of the Malt Hill No.2 deal in May 2021 in the expectation that the two
pools could be combined. These had served us well from a credit point of view
with only one or two loans ever in arrears at any one time, good performance
with regard to Payment Holidays, no repossessions during the life of either
pool and therefore no losses of any kind. However, compressed mortgage rates
meant that even the leveraged returns were marginal versus the Company's target
returns and as a result it was agreed that the best course of action was to
dispose of the portfolios and use the proceeds both to complete the origination
of the second Keystone pool and also to provide liquidity to investors by
buying back shares in the Company by way of tender.
We examined a number of potential sale options, either via investment banks or
other intermediaries, and of course spoke directly to Coventry. Whilst the
various initial indications were not significantly different, it was clear that
a sale of the pools back to Godiva (Coventry's buy to let lending subsidiary),
would be far more efficient and cheaper, particularly from a documentation and
process point of view, given their familiarity with the pools as ongoing
servicer, and therefore lead to a compressed due diligence and pricing process.
Furthermore, whilst we had initially expected that the sales of both portfolios
would need to be timed to coincide with the first possible refinancing date of
the Malt Hill No.2 portfolio in May 2021, it became clear that with Godiva as
the buyer the sale of the Cornhill No.6 portfolio could be accelerated to the
IPD in February, thereby releasing capital and enabling a first share tender
sooner.
Therefore, in early February, we were able to announce that the sale of both
these portfolios had been agreed, with the Cornhill No.6 pool to be completed
at the end of February and the Malt Hill No.2 pool to follow in May and on
better terms than had initially been indicated to investors at the EGM at the
end of 2020.
There was however a cost to these sales, which flowed through to the NAV
throughout the first 6 months of 2021, adding a degree of volatility. In
particular, these comprised the mark-to-market on the two portfolios themselves
(although offset by the residual monthly income on the pools), and the costs of
unwinding the swap hedges which was particularly significant in the May 2021
NAV when the swap on the Malt Hill No.2 pool was unwound, given this pool - the
bigger of the two - had the longest duration loans and therefore the largest
swap exposure. These downsides were however offset at various points by the
uplift from the resultant share tenders at a discount to NAV and the release of
the IFRS 9 Expected Credit Loss ("ECL") provisions held against the two pools.
As of the June NAV, all the final elements of the portfolio sales have now been
accounted for and so looking forward the Company will begin to see the benefit
of the higher income from the resulting higher yielding assets in each monthly
NAV, and a significant reduction of the NAV volatility seen through 2021 to
date (other than the regular payments of dividends).
Share Tenders
Whilst the original expectation had been for a single sale of the two combined
portfolios in May leading to a consequent share tender with a value of
approximately £40m, the acceleration of the sale of the first, Cornhill No.6,
portfolio meant that two share tenders of £20m each could take place, rather
than one, with first one being earlier to match the earlier sale. This meant
shareholders wishing to take part in the tenders would receive funds earlier,
and the Company's dividend funding requirement would also be reduced sooner,
thereby improving the dividend cover level earlier.
The two tenders took place in March and June following the respective sales of
the two portfolios on their IPDs in February and May. Both tenders were at a
price of 75 pence per share - a discount to the prevailing NAVs at the time but
at a premium to the prevalent share prices - which when completed meant a total
of 53.333m shares were repurchased. Both tenders were oversubscribed, as in
addition to those investors who took the opportunity to take advantage of the
liquidity on offer to reduce their holdings, a number of other investors were
understandably constrained by the size of their holding percentage in the
Company and therefore were compelled to tender their holdings, thereby
inflating the number of shares tendered.
Dividend Funding Requirement
Nevertheless, the 53.333m shares repurchased reduced the annual dividend
funding requirement by £2.4m, which in combination with the growing, higher
yielding portfolios means that by the end of the financial year, the Company's
expected monthly income will now comfortably cover the Company's equivalent
monthly dividend funding requirement. For example, the monthly income from the
Keystone pools is already at a significant multiple of that earned previously
on the Coventry pools with further income to come as the second Keystone
portfolio continues to grow. For the foreseeable future at least, these
Keystone portfolios will form the foundation of the Company's income flows.
The expected growth in income is clear and this is driven primarily by the
expected growth in the second Keystone portfolio, which is expected to reach
securitisable size in the late spring/early summer of 2022. Whilst Keystone
have encouragingly been running ahead of target, this projection simply models
the expected monthly addition at the base target of between £25m and £30m of
new mortgages in the Keystone pool. The first Keystone portfolio was completed
with a Net Interest Margin ("NIM") of slightly over 1% for the transaction
(i.e. not including the OCF for the Company). We would expect the second
portfolio to achieve roughly the same. Therefore a NIM of 1% on origination of
£25m to £30m a month simply translates into approximately £20,000 to £25,000 of
additional net revenue growth every month. Furthermore, using the same 1% NIM
assumption, the £150m already originated in the second Keystone pool is already
earning the Company about £125,000 a month.
Future Milestones
Whilst the rest of 2021 should exhibit little other than steady income and
portfolio growth, which should also continue into next year, the Company will
be busy in this period preparing for an active first quarter. In February we
expect to refinance the TML pools, re-leveraging the prepayments that have
de-levered the Barley Hill No.1 pool in combination with the loans from the
Cornhill No.5 pool and thereby locking in further returns. In order to remove
any hurdles to this combined refinancing, and whilst completing the numerous
objectives described above, in the last month we have also concluded some
amendments with HSBC to the Cornhill No.5 facility which was due to increase in
cost.
We have negotiated the removal of that increase, saving the Company from the
increased outgoings, and simultaneously we have realigned the maturity of the
facility with the refinancing of Barley Hill No.1. Furthermore, we also amended
the prevailing Libor-based swap agreement to a Sonia-based formula given that
the facility will now extend beyond the Libor cessation date at the end of
2021.
Following that the second Keystone pool will likely be ready to securitise,
locking in those returns and we would then hope to start a third pool; adding
more income, and then looking to more refinances and securitisations as they
come up in the future.
This expected growth in revenue, and therefore in dividend coverage, with no
further expectation of any notable NAV volatility now the portfolio sales have
all been accounted for, will also, once an even greater level of cover is
reached, allow the consideration of possible adjustments to dividend policy in
the future.
IFRS 9 ECL Provisioning
In compliance with IFRS 9 accounting standards, the Company recalculates its
Expected Credit Losses (ECL) provisioning semi-annually. The calculation for
June 2021 resulted in a release of provisioning totalling approximately £
980,000, compared to previous provision in December 2020. Approximately £
180,000 of this came from the release of the existing provision held against
the two Coventry portfolios, which have since been sold. The remainder was
driven following the recalibration of the modelled scenarios and weightings to
reflect the improving economic conditions.
Overall the company's remaining provisions remain conservative in our opinion,
reflecting the continued uncertainty as to how a further recovery might evolve
as the various government support mechanisms from the COVID-19 pandemic are
unwound. The revised provision represents approximately 14bps of the Company's
assets at June 2021, compared to approximately 17bps in December 2020 and
18.5bps a year ago, at the height of the pandemic.
Building on the previous two financial reports, we made a number of significant
enhancements to our ECL modelling to give us a far more granular loan level
view of our potential losses with a new model linked to annual forecasts of
unemployment and house prices into the future, taking into account the expected
prepayment profiles of the portfolios. The stressed and severe stressed
scenarios reflect projections of unemployment as high as 9%, versus the 4.7%
level at the time of writing, and a severe housing market downturn of 25% over
the next 2 years with no subsequent recovery plus a further stressed haircut of
between 30% and 35% to reflect the potential of distressed asset sales.
Portfolio Review
At the end of June 2021 the overall portfolio comprised around £1.3bn of
mortgages. This represents a fall of approximately £360m since June 2020,
despite the sales of the two Coventry portfolios which totalled £475m at their
respective sale dates plus paydowns of £151m across the various portfolios.
Much of this has been replaced by approximately £275m of newly purchased loans,
mostly originated by Keystone, who by the time of writing had also added a
further £44m to the portfolio.
The mortgage payment deferral scheme has now come to an end and the vast
majority of those borrowers who utilised it have now returned to paying, in
most cases a revised monthly payment to reflect the deferred payments. Just 97
of the 7917 loans across all portfolios at the end of June are in arrears
having taken a payment holiday, and 44 of these are actually making payments.
Furthermore, it should be noted that, for those loans paying an initial fixed
rate, the entire value of any deferred payments will be fully repaid if a
borrower refinances at the end of their initial fixed rate period, as most
borrowers are expected to do given their reversion rate will likely be much
higher than the initial rate. This will therefore fully return the value of
those deferrals to the Company much quicker than might have been expected -
further enhancing returns.
As previously highlighted, we do expect that some borrowers will fall into
arrears and furthermore that some of these may possibly lead to foreclosures.
Arrears experience so far has been seen predominantly in the TML pools with a
small increase in the CHL pool, but levels are well within expectations. Other
than in the CHL pool which was purchased with a small number of loans already
in repossession, we are yet to see any foreclosures elsewhere. However, in our
ECL modelling we automatically assume that all loans 3 months or more in
arrears will be foreclosed, which is very unlikely to happen, plus we make
further foreclosure assumptions to varying degrees for all of the remaining
loans in the pools. Therefore, we take great comfort that our conservative
assumptions and the respective provisions will be more than enough to cover any
actual losses incurred.
Owner Occupied
Unsurprisingly, given the cohort of borrowers and the high and immediate uptake
of payment holidays, the TML portfolios have seen the highest levels of
arrears, which began growing in the fourth quarter of 2020 as some of those
initial payment holidays came to an end, but these now appear to have peaked
and have begun to diminish somewhat over the last two or three months. The
older loans in the Barley Hill No.1 pool have seen higher arrears than the
younger loans in the Cornhill No.5 pool, possibly due to the slightly more
conservative lending criteria applied to the second portfolio.
At the end of June, the Barley Hill No.1 pool had 4.91% by value of loans 3
months or more in arrears, although this represents just 25 loans from a pool
of 715 (3.5%). This was a sharp fall from the previous month's figure of 5.66%
driven by the completed sale of one large but low (40%) LTV loan of almost £1m,
which had fallen into arrears due to a relationship breakdown between the
borrowers and an elongated sale process driven by ongoing differences between
the couple. The Cornhill No.5 pool had just 0.85% of loans in arrears in June.
Both pools combined had just 23 loans 6 months or more in arrears by
mid-August. In 7 of these, litigation proceeds have begun, and of those 2
hearing dates have been set. Litigation does not always lead to foreclosure and
is often the catalyst for borrowers to finally take positive action to resume
payments or as we have already seen in a number cases, for the property to be
sold.
As expected, prepayments have increased in the Barley Hill No.1 pool more
recently as more loans reach their refinancing dates, but also as a number of
loans that reverted to a floating rate either late last year or earlier this
year likely found it more difficult to refinance in the immediate aftermath of
the pandemic, but are now able to do so. The earliest originated loans in the
Cornhill No.5 pool are also starting to reach their first refinancing dates so
we expect a pick-up in prepayment there as the next year progresses.
Purchased Buy-to-Let
The CHL portfolio saw a modest uptick in arrears, beginning in March this year
when the granting of new payment holidays ended, but this has begun to reverse
over the last couple of months. Prepayments have remained relatively stable in
the 5% to 6% range although have gradually been ticking-up, which is a trend we
expect to continue as a number of loans in the pool are now beginning to
getting closer to their maturity dates. The pool is now almost 14.5 years old
on average with an average remaining term of just 8.8 years.
The Hops Hill No.1 pool was originated as a forward flow pool but as this is
now completed it will be considered as a purchased portfolio under our
segmental reporting model. Performance has been exemplary with no loans in
arrears. Furthermore, of the 29 loans granted a payment holiday (the lowest in
the industry), 18 have already completely repaid their deferred amount whilst
the other 11 are all fully up to date with their repayment schedules - an
outstanding performance.
Forward Flow Buy-to-Let
The second Keystone portfolio is also performing exemplarily, and also has no
loans in arrears. None of these loans took payment deferrals, as they were all
originated after the scheme had come to an end.
For this second portfolio, Keystone have introduced two new elements to their
product range, the first is a green mortgage product, offering a discounted
lending rate to properties with higher Energy Performance Certificate ("EPC")
ratings, thereby incentivising landlords to upgrade their properties in order
to benefit. Whilst the expected contribution of these loans to the final pool
will be relatively small initially as a large number of regular loans were
already in the pipeline prior to the product being launched, this will be a
growing component and with an ever increased focus from RMBS investors on ESG
factors, they will play an increasingly important role in attracting RMBS
investment going forward and as the currently nascent Green RMBS market
develops will be instrumental in helping to drive better pricing.
Secondly they have launched a customer retention product. This is designed to
incentivise borrowers whose loans are reaching their reversion date to switch
to a new Keystone product with a lower arrangement fee and without the
complication of having to undergo another full mortgage application process
with its associated surveys and searches, subject of course to the borrower
meeting certain credit criteria, in particular having delivered a perfect
payment history on their existing loan.
RMBS and Housing Markets
House prices have risen sharply over the last year with the property market
catalysed by the government's reduction in Stamp Duty and then spurred on by
demand created by the desire for lifestyle change in the wake of the pandemic.
Double-digit house price growth, record transaction levels and mortgage demand
characterise the various data reports, and whilst there has been something of a
slowdown over the summer which also coincides with the tapering of the Stamp
Duty Relief scheme, there are no signs of a sharp house price reversal with
estate agent and surveyor enquiries still at strong levels.
RMBS markets have also seen strong performance. The second half of 2020 saw a
gradual recovery following the sharp spike wider at the onset of the first
lockdowns last year, and that trend has accelerated somewhat in 2021 with
spreads in the non-bank RMBS sector now approaching the tightest levels seen
for a number of years, albeit still far from spread levels prior to the Global
Financial Crisis.
Furthermore, a number of non-bank lenders have recently been acquired by larger
institutions - a trend which might well continue as banks and other larger
financial institutions look to boost their returns by adding businesses with
established higher yielding product ranges rather than attempting to grow these
organically. Fleet Mortgages, Foundation Home Loans/Paratus AMC, TML and Venn
have all been acquired in recent months by much larger, typically
well-capitalised institutions with access to far broader funding sources than
just RMBS, with the probable outcome being that they will be less active in
RMBS markets going forward thereby helping to constrain supply and so
supporting spreads.
Outlook
As highlighted above, the outlook for RMBS markets looks set to remain positive
supported by a strong underlying technical with banks comfortably funded by
cheap central bank term facilities and a likely diminishing number of non-bank
competitors utilising capital markets. This is coupled with ongoing strong
demand for an asset class that still offers a significant return pick-up versus
comparably rated corporates and, in a potentially inflationary environment, is
the only large scale, high quality floating rate market in the fixed income
arena, and so should continue to attract ongoing investment capital for the
foreseeable future.
Some uncertainty over the effects of the removal of the government's employment
and housing market support schemes leaves an element of doubt as to the
subsequent consequences for both the workforce and for housing demand and
prices. Increased unemployment could lead to a rise in arrears and potentially
foreclosures, and a fall in house prices could increase loss severities where
loan defaults occur. This could also reverse the current positive trend in RMBS
markets.
However, the tapering policies already in place for the Stamp Duty Relief
scheme and the furlough scheme are expected to obviate any cliff effect for
house prices following the end date in October and similarly ease the level of
potential job losses. Job losses could also be mitigated by the widely reported
number of vacancies, particularly in the hospitality and transport industries
due to both Brexit and the pandemic. Clearly a period of re-training may be
required for many roles which could result in a short term hiccup but
economists' forecasts are broadly benign about the possibility of anything more
severe. Furthermore, the potential for strong wage inflation driven by the
vacancy rate could even support further house price growth in contrast to the
potential for a fall as the various support schemes are unwound.
For the Company itself, with a period of stable income and portfolio growth
expected, the outlook for investor returns is positive. The share price has
made some good gains but still trades at a discount to the NAV, offering a
yield of 6.4% at the time of writing, and 5.7% to the June NAV, which arguably
offers very attractive value for a growing portfolio of high quality underlying
assets in the current low yielding environment.
TwentyFour Asset Management LLP
28 October 2021
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 a
number of unlisted companies. He has over 35 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. From 2014 until 2020,
Mr Waldron was a non-political member of the States of Guernsey's Investment
and Bond Sub-Committee. He is a Fellow of the Chartered Institute of Securities
and Investment. Mr Waldron was appointed to the Board on 10 June 2015.
Richard Burrows (Risk Committee Chairman) - Senior Independent Non-Executive
Director - UK resident
Mr Burrows works as Treasurer and Head of Real Estate of British Arab
Commercial Bank plc in London. He has previously held senior Treasury related
roles at Bank of China, London Branch (2015 - 2018), Co-operative Bank (2012 -
2015), Northern Rock (2009 - 2010) and Citi Alternative Investments (1994 -
2008). From 2010 to 2012, Mr Burrows worked in the Prudential Risk Division of
the Financial Services Authority as the UK regulator rolled out its post-crisis
requirements with specific focus on the liquidity regime. Mr Burrows was
appointed to the Board on 12 June 2015.
Paul Le Page (Audit Committee Chairman) - Independent Non-Executive Director -
Guernsey resident
Paul Le Page was formerly an Executive Director and Senior Portfolio Manager of
FRM Investment Management Limited, a subsidiary of Man Group. In this capacity
he managed alternative investment portfolios for institutional clients and was
a director of a number of group funds and structures. Prior to joining FRM, he
was employed by Collins Stewart Asset Management, a firm which was subsequently
acquired by Canaccord Genuity where he was responsible for managing the firm's
hedge fund portfolios and reviewing both traditional and alternative fund
managers in his capacity as Head of Fund Research following completion of his
MBA. He originally qualified as Chartered Electrical Engineer following a
successful career in industrial R&D where he led the development of robotic
immunoassay diagnostic equipment and software as R&D Director for Dynex
Technologies Guernsey. In addition to his private directorship roles, Mr Le
Page has chaired Audit and Risk Committees for a number of London Stock
Exchange-listed Investment Companies since January 2004. 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, CQS Natural Resources Growth and Income plc
and JPMorgan Global Core Real Assets Limited. Mrs Green was appointed to the
Board on 16 June 2016.
The Directors named above were the directors of the Company, and held this
office during the year and up to the date of signing the financial statements.
DISCLOSURE OF DIRECTORSHIPS IN PUBLIC COMPANIES LISTED
ON RECOGNISED STOCK EXCHANGES
The following summarises the Directors' directorships in other public listed
companies
Directorships
Company Name Stock Exchange
Christopher Waldron (Chairman)
Crystal Amber Fund Limited AIM
Richard Burrows
None
Paul Le Page
Bluefield Solar Income Fund Limited London
Highbridge Tactical Credit Fund Limited London
RTW Venture Fund Limited London
Helen Green
Aberdeen Emerging Markets Investment Company Limited London
CQS Natural Resources Growth and Income Plc London
JP Morgan Global Core Real Assets Limited London
Landore Resources Limited AIM
DIRECTORS' REPORT
The Directors present their Annual Report and Audited Consolidated Financial
Statements for the year ended 30 June 2021.
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. On 16 August 2019, the
Company resolved through an Extraordinary General Meeting ("EGM"), to amend the
Articles of the Company;
(i) to enable the Company to implement the reduction in the annual
dividend target from 6p to 4.5p;
(ii) to provide that the Continuation Resolution due to take place at
the Annual General Meeting ("AGM") in 2020 will now take place at the date of
the AGM in 2024 and every fifth AGM thereafter; and
(iii) the limit on borrowings be increased from 10 per cent. to 20 per
cent. of the NAV of the Company as at the time of drawdown.
The Company's Share Buyback Policy was also amended to enhance shareholder
liquidity at an EGM held on 4 December 2020. The Board does not intend to
reinvest further capital other than in the re-financing of the existing
portfolios, whilst the Company is trading at a discount in excess of 5 per
cent. to NAV per Ordinary Share. At this level of discount, subject to the
Board determining that the Company has sufficient surplus cash resources
available for the ongoing funding of the existing investments, repayment of any
existing credit facilities and any other foreseeable commitments, the Company
intends to buy back Ordinary Shares.
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 19.
Shareholders' Information
Shareholders' 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 Association of Investment Companies Code ("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.
The Company implemented an additional shareholder protection at an EGM held on
4 December 2020 that requires the directors to implement a managed wind down
consultation with its shareholders if the Company share price is not trading at
or above the most recently published NAV in the 20 business days prior to the
second anniversary of the EGM on 4 December 2022. Whilst the date of any
potential managed wind down is more than 12 months away and the form of any
wind down plan has not been agreed with shareholders, the directors have
modelled the Company's portfolio in a managed wind down stress scenario that
simulates the impact of surging levels of arrears and elevated financing costs
to assess the Viability of the Company's business model. Even if a wind down
was to be triggered, the viability cash flow model demonstrates that the
Company could continue to finance its operations whilst winding down over a
period to May 2024. The Board have concluded that the Company will continue in
operation for at least the next 12 months based on the Viability cash-flow
model and the following additional evidence:
. The Company has reduced its dividend financing requirement and
improved its dividend cover by repurchasing 1/3 of its issued share capital and
refocusing its portfolio to lend to high net interest margin professional
landlords. This should release further capital for re-investment, increased
dividends or share repurchases to reduce the discount to NAV following the
renewal of the Company's authority at the AGM.
. The Company's Strategic review conducted in the final quarter of
2020 has been well received, evidenced by a reduction in the Company's share
price discount to NAV to 6.93% as at 30 June 2021. Although this has since
closed to approximately 9%, it is below the 10.4% level in June 2019 prior to
the COVID-19 pandemic.
. The Company's Hops Hill No.1 securitisation in January 2021 was
heavily oversubscribed emphasising the attractiveness of the Company's
portfolio to both income investors and trade buyers.
. Securitisation spreads have tightened further during the year giving
the Board confidence that demand for the Company's assets has increased.
. The Company's administrator, portfolio manager and service providers
have demonstrated robust COVID-19 remote working protocols and are capable of
sustaining operations in the event of future lock-downs.
. The trigger date for the start of a managed wind down discussion
with shareholders would be first business day following the second anniversary
of the Company's EGM on Monday 5 December 2022. This date is more than one
year away. Even if a wind down was to be implemented, our viability cash flow
model demonstrates that the Company could continue to finance its operations
whilst winding down over a three-year period.
The directors also believe, based on the above evidence that the Company should
be able to re-finance or sell its mortgage portfolios as necessary including
its Cornhill 5 warehouse facility which is due for repayment by the end of the
first quarter of 2022 and is classified as a current liability.
Going Concern Conclusion
At the December 2020 EGM it was noted that if the Company's shares are trading
at a discount to NAV at the two year anniversary of the EGM, the directors
intend to place the Company into a wind down, a process which would require
further shareholder consultation and take at least three years, given the
nature of the Company's investments. Whilst the directors are encouraged by
recent improvements to returns generated from the sales of the Coventry
portfolios and the successful Keystone originations, there is uncertainty over
whether the shares will trade at a discount in December 2022. In line with
accounting standards, the Directors are obliged to disclose that this
uncertainty exists. These circumstances constitute a material uncertainty that
may cast significant doubt over the Company's ability to continue as a going
concern and the Company may be required to prepare future accounts on a basis
other than going concern. This uncertainty does not compromise the ability of
the Company to discharge its obligations over an extended period. Also, the
directors consider that there is a reasonable prospect that the Company will
continue to operate and therefore are content to prepare these accounts on a
going concern basis.
Results
The results for the year are set out in the Consolidated Statement of
Comprehensive Income. The Company declared dividends of £13,027,973(of which £
3,481,993 is the catch up fifth interim dividend in relation to 30 June 2020
and £9,545,980 relates to the year ended 30 June 2021) a breakdown of which can
be found in note 22. Distributions declared and paid during the year amount to
£12,040,474 as recognised in the Consolidated 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 partially paid out of the
capital of the Company, before considering the sales of the Coventry
portfolios. The impact on capital is reflected in the negative EPS for the
year.
Signed on behalf of the Board of Directors on 28 October 2021 by:
Christopher Waldron
Director
Paul Le Page
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 Corporate Governance Code July 2018 ("UK Code") issued by the Financial
Reporting Council (the "FRC"). The Company is also required to comply with the
Guernsey Financial Services Commission's Code of Corporate Governance ("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. There is no information that is required to be disclosed
under LR 9.8.4. 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 ("Association of Investment Companies") and
by complying with the 2019 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 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 updated its Code on 5 February 2019 to reflect revised Principles and
Provisions included in the UK Corporate Governance Code which was revised in
2018. These changes apply to financial years beginning on or after 1 January
2019 and the Directors are reporting on the Company's compliance with the
changes in this Annual Report for the year ended 30 June 2021.
The AIC Code is available on the AIC's website, www.theaic.co.uk. The UK Code
is available on the FRC's website, www.frc.org.uk.
Throughout the year ended 30 June 2021, the Company has complied with the
recommendations of the 2019 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 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.
Given the relatively small size of the Board, it has been decided that it is
unnecessary to have a separate Nomination Committee and relevant matters are
considered by the whole Board.
Details of compliance with the AIC Code are noted below. 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 to 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 and Risk 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 seventeen 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 Group'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 the Company 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 the Company's administrator which includes the subsidiaries'
Financial Statements. The administrator has a robust control environment in
place, and in addition each company is subject to an annual external audit. Oat
Hill No.1 Plc, Malt Hill No. 2 Plc, Cornhill Mortgages No. 4 Limited and
Cornhill Mortgages No. 6 Limited were not subject to an annual audit at 30 June
2021 but their results are included in the Company's consolidated results which
are audited by the independent auditor.
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 performance, asset
allocation, risk management, corporate governance, compliance, gearing,
structure, finance, marketing and general management.
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 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 Risk Committee
Meetings Meetings
Held Attended Held Attended Held Attended
Christopher Waldron 4 4 5 5 2 2
Richard Burrows 4 4 5 5 2 2
Paul Le Page 4 4 5 5 2 2
Helen Green 4 4 5 5 2 2
Management Committee Meetings Ad hoc Committee
Engagement Meetings
Committee Meetings
Held Attended Held Attended Held Attended
Christopher Waldron 1 1 4 4 5 5
Richard Burrows 1 1 4 4 5 5
Paul Le Page 1 1 4 4 5 5
Helen Green 1 1 4 4 5 5
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 by video conference
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 Director's Remuneration Report.
UK Criminal Finances Act 2017
In respect of the UK Criminal Finances Act 2017 which 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 16 March 2021, 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. Given the relatively small size of the Board, it
has been decided that the Audit Committee comprises the whole Board, under Paul
Le Page's chairmanship. 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. The Board is satisfied with the
performance of the Audit Committee and is satisfied that they have fulfilled
their duties.
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 the Audit
Committee. The process of risk management also includes procedures to identify,
manage and mitigate emerging risks faced by the Company.
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.
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 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 hereafter.
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
considers the following principal risks and uncertainties, an overview of which
is set out below. Green status risks require monitoring but no action; amber
status risks should be reviewed and discussed at each meeting; and red status
risks require an action plan and detailed monitoring until the plan is
implemented.
Red status risks:
· 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 wind down of the Company. The risk is managed by regular updates to
Shareholders from the Portfolio Manager, and regular shareholder engagement
both directly and via the Company's broker. The Board has formalised a Share
Buyback Policy and has successfully implemented the results of a Strategic
Review consultation with its shareholders by using the proceeds from selling
less profitable portfolios to fund two substantial share tenders. These actions
have helped to substantially improve shareholder sentiment and to reduce the
discount to NAV at which the Company's shares trade.
· The risk of failing to securitise purchased mortgage portfolios or
refinance warehouse portfolios. If there is any significant delay in the
ability to securitise a portfolio, the interest rates payable through warehouse
funding arrangements are likely to increase over time 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 is mitigated by the Portfolio Manager who retains team members with
extensive securitisation experience who are engaged with the UK RMBS market and
service providers. The Company may also use short term financing where needed
to enable it to optimise the timing of its securitisation transactions.
Amber status risks:
· The risk of the Company being unable to pay target dividends to
investors due to a shortfall in income received leading to an expansion of the
Company's discount, which could in turn trigger the wind down of the Company.
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 current and projected 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, mortgage
holidays, forbearance requests and the possibility and timing of defaults, all
of which could reduce cash flow to the Company. The Company has paid dividends
from capital with Board agreement, to the extent that the Board has assessed
the factors indicating that future income flows will be sufficient to restore
any distributed capital. In August 2019, a change to the Company's investment
policy was approved by a majority of the Company's shareholders with a view to
expediting progress to a fully covered dividend despite falling net interest
rate margins. The portfolio changes implemented as a result of the strategic
review in December 2020 also improve the risk-adjusted returns of the Company
and will improve dividend cover thereby reducing this risk.
Green status risks:
· The risk of the Company being unable to invest or reinvest capital
repaid from mortgage loans to purchase additional mortgage assets 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 has been further mitigated by the forward flow loan
origination programme established with Keystone and has reduced during the year
as loan issuance volumes are running ahead of schedule.
Emerging Risks and Uncertainties
In order to recognise any emerging risks that may impact the Company and to
ensure that appropriate controls are in place to manage those risks, the Audit
Committee undertakes regular reviews of the Company's Risk Matrix. An overview
of emerging risks is set out below:
Red status risks:
· Adjustments to the overall level and precise application of tax
increases will likely reduce disposable income levels that could affect the
first time buyer mortgage market disproportionately. Furthermore, monetary
policy measures taken internationally affect the absolute level of interest
rates and therefore the spread that can be achieved between financial assets
and liabilities.
· The risk on broader market conditions from Central Bank monetary
initiatives. Generic large injections of term liquidity injection could distort
the demand and supply of funds to support mortgage lending. Furthermore, the
risks associated with UK Base Rates moving to a negative rate. The likelihood
of UK Base Rates moving to a negative rate (from the current 0.10%) still
exists noting the Bank of England had recently asked some UK banks to report on
the operational implications of implementing a negative or zero policy rate.
The direct impact on the Company is assessed as minimal as whilst some of the
Company's underlying assets do directly reference the base rate, particularly
the majority of the CHL and Keystone portfolio, this risk is offset by the
Company's funding arrangements which are linked to SONIA which is closely
correlated to the base rate. Negative interest rates for some GBP Sterling
denominated products already exist as some Gilts trade at effective negative
interest rates in the secondary market. Longer term interest rates relating to
mortgage assets and securitisation liabilities may adjust downwards but the
risk for the Company remains the spread between the funding and the lending.
This risk is already factored into the ongoing assessment of the Company.
Other risks and uncertainties
The Board has identified the following other risks and uncertainties along with
the steps taken to mitigate them:
Red status risks:
Cyber security risks
The Company is exposed to risk arising from a successful cyber-attack through
its service providers. The Company requests of its service providers that they
have appropriate safeguards in place to mitigate the risk of cyber-attacks
(including minimising the adverse consequences arising from any such attack),
that they provide regular updates to the Board on cyber security, and conduct
ongoing monitoring of industry developments in this area. The Board is
satisfied that the Company's service providers have the relevant controls in
place to mitigate this risk.
COVID-19
The risks associated with the COVID-19 global pandemic. The UK government in
common with the governments of most developed countries has implemented
unprecedented measures to restrict the possibility of transmission of the
COVID-19 virus by limiting personal contact and international travel. In 2021
the UK Government has lifted many restrictions, however, the potential
requirement for future measures is plausible. If imposed they could have a
severe economic impact on the UK Economy, which the government and the Bank of
England would be likely to offset with both traditional and unconventional
fiscal and monetary policy measures. The Company's mortgage portfolios are
solely focused within the United Kingdom and as such the payment profiles of
the underlying loans will be impacted by any risks emerging from changes in the
macroeconomic environment. The likely removal of direct support measures,
particularly the financial support given to firms to furlough staff, will most
likely lead to an increase in unemployment, a key metric in determining
mortgage arrears data.
Operational risks
The Company is exposed to the risk arising from any failures of systems and
controls in the operations of the Portfolio Manager, Administrator, AIFM,
Custodian and the Depositary amongst others. The Board and its Audit Committee
regularly review reports from the Portfolio Manager, AIFM, the Administrator,
Custodian and Depositary on their internal controls. The Administrator,
Custodian and Depositary will report to the Portfolio Manager any operational
issues which will be brought to the Board for final approval as required.
Accounting, legal and regulatory risks
The Company is exposed to the risk that it may fail to maintain accurate
accounting records or fail to comply with requirements of its Admission
document and fail to meet listing obligations. The accounting records prepared
by the Administrator are reviewed by the Portfolio Manager. The Portfolio
Manager, Administrator, AIFM, Custodian, Depositary and Corporate Broker
provide regular updates to the Board on compliance with the Admission document
and changes in regulation. Changes in the legal or the regulatory environment
can have a major impact on some classes of debt. The Portfolio Manager monitors
this and takes appropriate action.
Income recognition risk
The Board considers income recognition to be a principal risk and uncertainty
of the Company as the Portfolio Manager estimates the pre-payment rates for the
underlying mortgage portfolios, which has an impact on the effective interest
rate of the Asset Backed Securities which in turn impacts the calculation of
interest income. The Board asked the Audit Committee to consider this risk with
work undertaken by the Audit Committee as discussed in the Audit Committee
Report. As a result of the work undertaken by the Audit Committee, the Board is
satisfied that income is appropriately stated in all material respects in the
Financial Statements.
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 2024. The Board
selected this period as it represents the shortest possible time period that
would be required to wind down the Company's portfolio assuming that each
portfolio is sold on its respective re-financing date.
The Strategic review has added a further level of complexity to the viability
analysis as the Company is required to return capital to shareholders when
mortgage portfolios are refinanced if the Company's share price is trading at a
discount of more than 5% to NAV. In addition, the Company will be required to
enter a managed wind down consultation with its shareholders should a share
price discount to NAV be present over a 20 day averaging period ending on the
4th of December 2022.
The Company's discount to NAV has reduced from 39% to 7% during the financial
year helped by the portfolio restructuring, the full utilization of the
Company's buy-back authority and two fully subscribed tender offers. The
directors intend to use similar discount control mechanisms in the current
financial year but there can be no assurance that these mechanisms will reduce
the Company's discount below the required 5% target level for portfolios to be
refinanced or for the Company to avoid a managed wind down. In view of this
the Company asked the portfolio manager to model three scenarios of increasing
severity.
A base holding scenario in which the Company is unable to re-finance or sell
its portfolios and is forced to pay step up margin on each of its financing
lines.
A stressed version of the holding scenario where the Company's portfolios
exhibit double-digit arrears in addition to paying step up margin.
A managed wind down scenario where the Company sells each underlying portfolio
on its respective refinancing date in an orderly market environment.
In each of these Viability cash-flow scenarios the Company was able to finance
its operating costs allowing for inflation and ignoring the impact of any
potential variable NAV related cost reductions.
Having considered the above, and with reference to the Company's current
position and prospects, and with the five year continuation vote not now due
until the AGM to be held in 2024, the Board is of the opinion that the Company
is viable until at least May 2024 and in all scenarios, would be able to meet
its liabilities as they fall due. The Board also continue to review the risks
noted above in the context of the Company and reassess these risks regularly.
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 28 October 2021, the Company has been notified of the following interests
in the share capital of the Company exceeding 3% of the issued share capital:
28.10.2021 26.10.2020
Number of Percentage Number of Percentage of
shares of issued shares issued share
share capital
capital
Twentyfour Asset Management* 41,071,258 22.97% 46,759,800 20.14%
Momentum Global Investment 15,377,141 8.60% N/a N/a
Management
Investec Wealth & Investment 14,785,829 8.27% 20,165,401 8.69%
Premier Miton Investors 11,866,922 6.64% 26,083,951 11.24%
Julius Baer Private Banking 6,918,250 3.87% N/a N/a
Seven Investment Management 6,898,387 3.86% 21,307,155 9.18%
Transact (EO) 6,601,501 3.69% N/a N/a
Banque Degroof Petercam 5,775,000 3.23% N/a N/a
Connor Broadley 5,506,107 3.08% 15,567,023 6.71%
West Yorkshire PF 5,496,217 3.07% 9,374,583 4.04%
Seneca Investment Managers N/a N/a 17,685,156 7.62%
*Twentyfour Asset Management acting as investment manager
of:
St. James Place Strategic Income 32,370,609 18.10% 38,059,151 16.40%
Unit Trust
MI TwentyFour Investment Funds - 8,700,649 4.87% 8,700,649 3.75%
Asset Backed 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%.
Independent Auditor
On 2 December 2019, Deloitte LLP was appointed as auditor to replace
PricewaterhouseCoopers CI LLP ("PwC"). Deloitte LLP have indicated their
willingness to continue in office and a resolution to re-appoint Deloitte LLP
will be tabled 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 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 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, IFRS requires
that the Directors:
· properly select and apply accounting policies;
· present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
· provide additional disclosures when compliance with the specific
requirements in IFRSs are insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the entity's
financial position and financial performance; and
· make an assessment of the Company's ability to continue as a going
concern.
The Directors confirm that they have complied with these requirements in
preparing the Audited Consolidated Financial Statements.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
(Guernsey) Law, 2008. They are also responsible for safeguarding the assets of
the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the company's website.
Legislation in Guernsey and the United Kingdom 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 the Company and its
subsidiaries included in the consolidation taken as a whole, as at and for the
year ended 30 June 2021.
(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.
Responsibility statement
We confirm that to the best of our knowledge the financial statements, prepared
in accordance with International Financial Reporting Standards, give a true and
fair view of the assets, liabilities, financial position and profit or loss of
the Company and the undertakings included in the consolidation taken as a
whole.
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.
Signed on behalf of the Board of Directors on 28 October 2021 by:
Christopher Waldron
Director
Paul Le Page
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 9 December 2021.
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 £200,000 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 January 2021, the base Director fee level
should be £35,000 per annum with an additional £10,000 per annum for the
Chairman and £5,000 per annum for the Chairman of the Audit Committee.
In the year ended 30 June 2021, the Directors earned the following remuneration
in the form of Director's fees:
30.06.2021 30.06.2020
£ £
Christopher Waldron 42,500 40,000
Richard Burrows 32,500 30,000
Paul Le Page 37,500 35,000
Helen Green* 32,500 30,000
Total 145,000 135,000
*Fees are paid to Saffery Champness Management International Limited.
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, 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.
No Director has a service contract with the Company, nor are any such contracts
proposed.
Signed on behalf of the Board of Directors on 28 October 2021 by:
Christopher Waldron
Director
Paul Le Page
Director
AUDIT COMMITTEE REPORT
Below, 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 2021.
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 an 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. The Board receives confirmation from all service
providers that they comply with the requirements of the UK Bribery Act. As the
Company does not have any employees it does not have a "whistle blowing" policy
in place, however the Board has reviewed the whistleblowing procedures of the
Portfolio Manager and Administrator with no issues noted. The Company delegates
its main administrative functions to third-party providers who report on their
policies and procedures to the Board. A review of the service provider policies
took place at the Management Engagement Committee Meeting on 16 March 2021.
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 £1,278,886,108 (fair value of £1,331,548,188) as at 30 June
2021 and represent a substantial portion of gross assets of the Group. 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 Group as at 30 June
2021 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. The Audit Committee reviewed and challenged
key inputs into the valuation with a particular focus on Expected Credit Loss
provisions and Hedge Effectiveness which are covered below.
· Effective interest rate ("EIR") method
Management applies the EIR method to amortise any premium/discount over the
portfolio life with further assumptions on these loans' future cash flows, in
particular prepayments. The key judgement identified is in relation to the
determination of the loan prepayment curves as these impact the expected life
of the portfolio, and therefore the effective interest rate. The Company
appointed an external expert to calculate the EIR on the underlying mortgage
loan portfolio with the predetermined assumptions provided by the portfolio
manager.
· Mortgage loan impairment provision
The Audit Committee reviewed the Company's expected credit loss provision as
this has an impact on the amortised cost valuation of the Company's portfolio.
The provision calculations had been enhanced to reflect additional economic
scenarios and the increased risk of loss for loans subject to forbearance
measures and loans with higher loan to value ratios. The calculation for June
2021 resulted in a release of provisioning totalling approximately £980,000,
compared to previous provision in December 2020. Approximately £180,000 of this
came from the release of the existing provision held against the two Coventry
portfolios, which have since been sold. The remainder was driven following the
recalibration of the modelled scenarios and weightings to reflect the improving
economic conditions. Overall the company's remaining provisions remain
conservative, reflecting the continued uncertainty as to how a further recovery
might transpire as the various government support mechanisms from the COVID-19
pandemic are unwound. The revised provision represents approximately 14bps of
the Company's assets at June 2021, compared to approximately 17bps in December
2020 and 18.5bps a year ago, at the height of the pandemic. The Audit Committee
was satisfied that the mortgage loan impairment provision is appropriate in
light of appropriate past trends and patterns and events since the onset of the
COVID-19 pandemic.
· Hedge accounting
The Audit Committee reviewed the appropriateness of the designation of
derivatives held by the Company as fair value hedges. The Audit Committee was
satisfied that it is appropriate for the Company to apply hedge accounting to
all of the hedges in these circumstances and was satisfied with the offsetting
impact on the valuation of the Company's portfolio.
(ii) Income recognition:
The Audit Committee considered the calculation of income from investments
recorded in the Audited Consolidated Financial Statements as at 30 June 2021.
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.
(iii) 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.
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 has
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. Deloitte were
appointed in the prior reporting year as the 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.
The Company does not utilise the external auditor for internal audit purposes,
secondments or valuation advice. The Audit Committee has adopted the revised
FRC whitelist of permitted services and applies the 70% non-audit service fee
cap at both the UKML level and for each entity controlled by the Company.
Summary of activity during the year
The Audit Committee conducted a review of the cost effectiveness of the
Company's audit process by benchmarking the Company against its listed and
unlisted peers and negotiated the audit fee for the Company accordingly.
Significant further enhancements were made to the Expected Credit Loss
modelling by the portfolio manager to allow for the impact of pre-payments on
exposure at default and to link future projections for house prices and
unemployment levels to Loss at Default and Default Probabilities respectively.
These changes were reviewed by the Committee.
The Committee also reviewed the accounting treatment of the Company's portfolio
sales as the Company needed to ensure that the Company's net asset value fairly
reflected the impact of the sales.
The following table summarises the remuneration paid to Deloitte LLP and to
other Deloitte member firms for audit and non-audit services for the Company in
respect of the year ended 30 June 2021.
30.06.2021 30.06.2020
Deloitte LLP - Audit work £ £
Annual audit of the Company 75,750 30,000
Annual audit of the Company's subsidiaries 214,625 245,000
Deloitte LLP - Non-audit work including interim review 99,475 85,000
Ratio of non-audit to audit work 34% 31%
The Company does not qualify as EU Public Interest Entities ("PIEs") and is
therefore not subject to the restrictions on non-audit services provided by its
auditor under this regime. The company is in compliance with the Crown
Dependency rules and hence only services on the white list are permissible. The
SPVs and the DAC 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 Deloitte to the Company. Deloitte currently acts as auditor to the
Company and the underlying Issuer SPVs while a Deloitte member firm act as
auditor of the Acquiring Entity DAC.
Under EU PIE regulations audit partners are required to rotate every five
years. June 2021 marked the completion of Deloitte's second year as auditor.
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 28 October
2021 and signed on behalf by:
Paul Le Page
Chairman, Audit Committee
ALTERNATIVE INVESTMENT FUND MANAGER'S REPORT
Maitland Institutional Services Limited 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 (UK) International Standards on Auditing;
· 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;
· 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; and
· 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
The AIFM is subject to a staff remuneration policy which meets the requirements
of the AIFMD. The policy is designed to ensure remuneration practices are
consistent with, and promote, sound and effective risk management. It does not
encourage risk-taking which is inconsistent with the risk profiles, rules or
instrument of incorporation of the funds managed, and does not impair the
AIFM's compliance with its duty to act in the best interests of the funds it
manages.
The AIFM has reviewed the Remuneration Policy and its application in the last
year which has resulted in no material changes to the policy or irregularities
to process.
This disclosure does not include staff undertaking portfolio management
activities as these are undertaken by TwentyFour Asset Management LLP. The
investment manager is required to make separate public disclosure as part of
their obligations under the Capital Requirements Directive.
The AIFM also acts as Authorised Corporate director (ACD) for non-AIFs. It is
required to disclose the total remuneration it pays to its staff during the
financial year of the fund, split into fixed and variable remuneration, with
separate aggregate disclosure for staff whose actions may have a material
impact to the risk profile of a fund or the AIFM itself. This includes
executives, senior risk and compliance staff and certain senior managers.
The below data is unaudited information.
£ Number of Total Fixed Variable
Beneficiaries Remuneration Remuneration Remuneration
(unaudited) Paid (unaudited) Paid
(unaudited) (unaudited)
Total remuneration paid by
the ACD during the year 90 5,841,738 5,841,738
Total remuneration paid by
the delegate(s) during the 67 5,281,258 1,836,100 3,445,158
year
Remuneration paid to
employees of the ACD who 4 940,207 940,207
are material risk takers
Remuneration paid to
employees of the delegate 31 3,547,269 1,081,834 2,465,435
(s) who are material risk
takers
Further information is available in the AIFM's Remuneration Policy Statement
which can be obtained from www.maitlandgroup.com or, on request free of charge,
by writing to the registered office of the AIFM.
In so far as the AIFM is aware:
· there is no relevant audit information of which the Company's auditor 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 is
aware of that information.
We hereby certify that this report is made on behalf of the AIFM, Maitland
Institutional Services Ltd.
C O'Keeffe
Director
Maitland Institutional Services Limited
28 October 2021
DEPOSITARY STATEMENT
for the year ended 30 June 2021
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 2021, 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.
The Depositary and its affiliates is or may be involved in other financial and
professional activities which may on occasion cause a conflict of interest with
its roles with respect to the Company. The Depositary will take reasonable care
to ensure that the performance of its duties will not be impaired by any such
involvement and that any conflicts which may arise will be resolved fairly and
any transactions between the Depositary and its affiliates and the Company
shall be carried out as if effected on normal commercial terms negotiated at
arm's length and in the best interests of Shareholders.
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
28 October 2021
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF UK MORTGAGES LIMITED
Report on the audit of the financial statements
1. Opinion
In our opinion the financial statements of UK Mortgages Limited (the 'parent
company') and its subsidiaries (the 'group'):
· give a true and fair view of the state of the group's affairs as at 30
June 2021 and of the group's loss for the year then ended;
· have been properly prepared in accordance with International Financial
Reporting Standards (IFRSs) as issued by the International Accounting Standards
Board (IASB); and
· have been prepared in accordance with the requirements of the Companies
(Guernsey) Law, 2008.
We have audited the financial statements which comprise:
· the consolidated statement of comprehensive income;
· the consolidated statement of financial position;
· the consolidated statement of changes in equity;
· the consolidated statement of cash flows; and
· the related notes 1 to 25.
The financial reporting framework that has been applied in their preparation is
applicable law and IFRSs as issued by the IASB.
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards
are further described in the auditor's responsibilities for the audit of the
financial statements section of our report.
We are independent of the group in accordance with the ethical requirements
that are relevant to our audit of the financial statements in the UK, including
the Financial Reporting Council's (the 'FRC's') Ethical Standard as applied to
listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We confirm that we have
not provided any non-audit services prohibited by the FRC's Ethical Standard to
the group.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
3. Material uncertainty related to going concern
We draw attention to note 2 in the financial statements, which indicates that
the directors will be required to implement a managed wind down consultation
with the shareholders if the parent company share price is not trading at or
above the most recently published NAV in the 20 business days prior to the
second anniversary of the EGM on 4 December 2022.
As stated in note 2, these events or conditions along with the other matters as
set forth in note 2 to the financial statements, indicate that a material
uncertainty exists that may cast significant doubt on the group's ability to
continue as a going concern. Our opinion is not modified in respect of this
matter.
In auditing the financial statements, we have concluded that the directors' use
of the going concern basis of accounting in the preparation of the financial
statements is appropriate.
Our evaluation of the directors' assessment of the group's ability to continue
to adopt the going concern basis of accounting included:
- Reviewed the shareholder protection mechanism agreed at the EGM on 4
December 2020 and discussed its implications with the directors and assessed
these against the parent company's articles of association;
- Obtained the cash forecasts prepared by the portfolio manager; this
covered the period from the reporting date up until May 2024 under several
stress scenarios, including a managed wind down scenario;
- Challenged the group's ability to meet its obligations and pay quarterly
dividends under each scenario by considering management's assumptions in the
context of the information we obtained during the audit. We also assessed the
forecasts for mathematical accuracy;
- Performed an independent stress test on the default assumption to
evaluated whether the group will be able to meet its obligations, including the
quarterly dividends to the shareholders, when they become due;
- Performed reverse stress test on the defaulted loan assumption to
understand under what circumstances the business would not be viable; and
- Evaluated the appropriateness of the disclosures made in the financial
statements.
In relation to the reporting on how the group has applied the UK Corporate
Governance Code, we have nothing material to add or draw attention to in
relation to:
· the directors' statement in the financial statements about whether
the directors considered it appropriate to adopt the going concern basis of
accounting; and
· the directors' identification in the financial statements of the
material uncertainty related to the group's ability to continue as a going
concern over a period of at least twelve months from the date of approval of
the financial statements.
Our responsibilities and the responsibilities of the directors with respect to
going concern are described in the relevant sections of this report.
4. Summary of our audit approach
Key audit matters The key audit matters that we identified in the current year
were:
Going concern (see material uncertainty related to going
concern section)
Expected credit losses of mortgage loans; and
Revenue recognition.
Materiality The materiality that we used for the group consolidated
financial statements in the current year was £2.78 million
which was determined on the basis of being 2% of net asset
value (2020: £4.38 million).
Scoping We performed a full scope audit for all components of the
group. This was the second year of our appointment as auditor
of the group.
Significant Due to obtaining an understanding of the key judgements
changes in our associated with valuation of the derivative financial
approach instruments as well as the application of the hedge
accounting, we have no longer identified derivative financial
instruments and hedge accounting as a key audit matter. In
contrast, we have identified going concern matter as a key
audit matter in the current year due to the provided
protection mechanism to shareholders.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were
of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) that we identified. These matters included those
which had the greatest effect on: the overall audit strategy, the allocation of
resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters. In addition to the matter
described in the material uncertainty related to going concern section, we have
determined the matters described below to be the key audit matters to be
communicated in our report.
5.1. Expected credit losses of mortgage loans
Key audit matter The group's business is to acquire and securitise mortgage
description loans portfolios. As at 30 June 2021, the aggregate value of
mortgage loans amounted to £1,279 million (2020: £1,639
million), representing 93% of total assets (2020: 96%).
The group's mortgage loans are the key value driver for the
group's Net Asset Value ("NAV") and interest income. As a
result, judgements over the level of potential impairment of
these loans, including the application of the expected credit
loss ("ECL") model under IFRS 9, and recoverability of their
returns have been identified as a key audit matter. The key
area of judgement is the determination of the appropriate
assumptions for calculating the expected credit loss allowance
under IFRS 9. These include, but are not limited to: the
probability of default, the loss given default, exposure at
default, and the categorisation of loans into various credit
stages.
As noted in the portfolio manager report, following
observations from our audit work in the prior year, management
have made significant enhancements to the ECL model during the
year. The refined model is complex, but whilst it relies on a
number of judgements and sources of estimation uncertainty,
the inherent risk associated with the ECL was significantly
reduced compared to the prior year. However, due to the volume
of inputs and assumptions in the refined model, and the
significance of this matter in the allocation of resources in
the audit, it is still considered a key audit matter.
This matter is explained further in the Audit committee
report. Note 2 f) set out the associated accounting policy.
Note 7 sets out the composition of the mortgage loans balance
and note 18 setting out details of the associated risk
factors, including credit risk.
How the scope of We have:
our audit Obtained an understanding of the relevant controls over the
responded to the mortgage loans ECL estimation process;
key audit matter Assessed compliance of the group's accounting policy and the
assumptions used in the ECL model with IFRS 9 requirements;
Performed sensitivity analysis on the key inputs used in the
ECL model as part of the risk assessment procedures;
Tested, on a sample basis, the data inputs used in the ECL
model for accuracy and completeness;
Tested the clerical accuracy of the ECL model based on the
above inputs;
Challenged the judgments (including qualitative and
quantitative criteria) taken by management related to the
categorisation of loans into the various credit stages
required under IFRS 9 by comparing them to comparable
benchmarks in the market;
Evaluated the reasonableness of estimates applied to determine
the probability of default (PD), loss given default (LGD) and
exposure at default (EAD) for each stage within which loans
are classified and their compliance with IFRS 9 requirements;
Worked with our Modelling and Analytics specialists to perform
benchmarking analysis on the ECL by using comparable
benchmarks with similar risk profiles; and
Evaluated the adequacy of disclosures made in the financial
statements in light of the requirements of IFRS 7 and IFRS 9.
Key observations Based on our audit work, we are satisfied that the key
assumptions, judgements and estimates applied by the directors
underlying the ECL analysis are appropriate and therefore, the
ECL is appropriately stated. Whilst significant improvements
have been made to the ECL model in the current year, some
minor matters are yet to be addressed.
5.2. Revenue recognition
Key audit matter Interest income from mortgage loans totalled £51.3 million for
description the current year (2020: £47.6 million). Management applies the
effective interest rate ('EIR') method to amortise any premium
/discount over the portfolio life with further assumptions on
these loans' future cash flows, in particular prepayments. The
key judgement identified is in relation to the determination
of the loan prepayment curves as these impact the expected
life of the portfolio, and therefore the effective interest
rate. The group appointed an external expert to calculate the
EIR on the underlying mortgage loan portfolio with the
predetermined assumptions provided by management.
There is a risk that the assumptions made in calculating the
EIR, in particular the loan prepayments are not appropriate,
which could result in a material misstatement to revenue in
the financial statements. Taking into account the significant
impact of these assumptions as well as their judgemental
nature, we considered this key audit matter to be a potential
area for fraud.
The key accounting policies related to this key audit matter
can be found in note 2 j). The associated key source of
estimation uncertainty disclosure can be found in note 3 and
this matter is also described in the Audit committee report.
How the scope of We have:
our audit Obtained an understanding of the relevant controls over the
responded to the calculation of the EIR adjustments;
key audit matter Challenged management's judgments in respect of the estimated
contractual cash flows, in particular loans prepayment curve,
by performing sensitivity and scenario analysis as well as
performing benchmarking;
Reviewed the historical accuracy of management's estimate of
the prepayment curve in previous periods, against actual
prepayments;
Assessed the competence, capability and objectivity of the
directors' external expert; and
Tested the clerical accuracy of the EIR models by reperforming
the models' calculations independently, and also performed
substantive analytical procedures on overall interest income.
Key observations Based on our audit work, we are satisfied that the key
assumptions applied by the directors in the EIR application
are appropriate and therefore the revenue is appropriately
stated.
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial
statements that makes it probable that the economic decisions of a reasonably
knowledgeable person would be changed or influenced. We use materiality both in
planning the scope of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the
financial statements as a whole as follows:
Group £2.78 million (2020: £4.38 million)
materiality
Basis for 2% of net asset value (2020: 2% of the net asset value).
determining
materiality
Rationale for We believe net asset value is the most appropriate benchmark as it is
the benchmark considered to be a principal consideration for shareholders of the group
applied in assessing financial performance. The decrease in the group
materiality between the current year and the prior year is due to the
decrease in net asset value which was mainly due to share buyback
transactions as well as dividends declarations.
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the
probability that, in aggregate, uncorrected and undetected misstatements exceed
the materiality for the financial statements as a whole.
Group performance materiality was set at 70% of group materiality for the
current year audit (30 June 2020: 70% of the group materiality). In determining
performance materiality, we considered the following factors:
- Our risk assessment, including our assessment of the group's overall
control environment and that we consider it appropriate to rely on controls on
the loans origination business process; and
- Our past experience of the audit and developments in the control
environment from prior year, which address the cause of misstatements
identified in the prior period.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all
audit differences in excess of £139,000 (2020: £219,000), as well as
differences below that threshold that, in our view, warranted reporting on
qualitative grounds. We also report to the Audit Committee on disclosure
matters that we identified when assessing the overall presentation of the
financial statements.
7. An overview of the scope of our audit
7.1. Identification and scoping
Our audit was scoped by obtaining an understanding of the group and its
environment, including internal control, and assessing the risks of material
misstatement for the parent company and its subsidiaries.
Audit work performed for the subsidiaries was executed by the group audit team
at levels of materiality applicable to each subsidiary, which in all instances
was lower than group materiality and ranged between £2.64 million and £1.01
million (30 June 2020: ranged between £4.16 million and £1.55 million). All
subsidiaries in the group were subject to full scope audits.
7.2. Our consideration of the control environment
In assessing the control environment, we also considered the control
environments of the key service providers, including the administrators and
portfolio manager of the group, to whom the board have delegated certain
functions for the parent company and its subsidiary entities. We took a control
reliance approach on the loans origination business process by testing the
operating effectiveness of the relevant controls performed by the service
providers.
8. Other information
The other information comprises the information included in the annual report,
other than the financial statements and our auditor's report thereon. The
directors are responsible for the other information contained within the annual
report.
Our opinion on the financial statements does not cover the other information
and we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the course of the audit, or otherwise
appears to be materially misstated.
If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether this gives rise to a
material misstatement in the financial statements themselves. 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.
9. Responsibilities of directors
As explained more fully in the directors' responsibilities statement, the
directors are responsible for the preparation of the financial statements and
for being satisfied that they give a true and fair view, and for such internal
control as the directors determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the group's ability to continue as a going concern, disclosing as
applicable, matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the group or to
cease operations, or have no realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.
A further description of our responsibilities for the audit of the financial
statements is located on the FRC's website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditor's report.
11. Extent to which the audit was considered capable of detecting
irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and
regulations. We design procedures in line with our responsibilities, outlined
above, to detect material misstatements in respect of irregularities, including
fraud. The extent to which our procedures are capable of detecting
irregularities, including fraud is detailed below.
11.1. Identifying and assessing potential risks related to
irregularities
In identifying and assessing risks of material misstatement in respect of
irregularities, including fraud and non-compliance with laws and regulations,
we considered the following:
· the nature of the industry and sector, control environment and business
performance including the design of the group's remuneration policies, key
drivers for directors' remuneration, bonus levels and performance targets;
· results of our enquiries of management and the audit committee about
their own identification and assessment of the risks of irregularities;
· any matters we identified having obtained and reviewed the group's
documentation of their policies and procedures relating to:
o identifying, evaluating and complying with laws and regulations and whether
they were aware of any instances of non-compliance;
o detecting and responding to the risks of fraud and whether they have
knowledge of any actual, suspected or alleged fraud;
o the internal controls established to mitigate risks of fraud or
non-compliance with laws and regulations;
· the matters discussed among the audit engagement team and relevant
internal specialists, including tax, modelling and analytics, valuations,
hedging and industry specialists regarding how and where fraud might occur in
the financial statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives
that may exist within the organisation for fraud and identified the greatest
potential for fraud in the following areas: Revenue recognition which is
mentioned under section 5 of this report. In common with all audits under ISAs
(UK), we are also required to perform specific procedures to respond to the
risk of management override.
We also obtained an understanding of the legal and regulatory frameworks that
the group operates in, focusing on provisions of those laws and regulations
that had a direct effect on the determination of material amounts and
disclosures in the financial statements. The key laws and regulations we
considered in this context included the Listing Rules, Companies (Guernsey)
Law, 2008 and relevant tax legislation.
In addition, we considered provisions of other laws and regulations that do not
have a direct effect on the financial statements but compliance with which may
be fundamental to the group's ability to operate or to avoid a material
penalty.
11.2. Audit response to risks identified
As a result of performing the above, we identified revenue recognition as key
audit matters related to the potential risk of fraud. The key audit matters
section of our report explains the matters in more detail and also describes
the specific procedures we performed in response to those key audit matters.
Our procedures to respond to risks identified included the following:
· reviewing the financial statement disclosures and testing to supporting
documentation to assess compliance with provisions of relevant laws and
regulations described as having a direct effect on the financial statements;
· enquiring of management and the audit committee concerning actual and
potential litigation and claims;
· performing analytical procedures to identify any unusual or unexpected
relationships that may indicate risks of material misstatement due to fraud;
· reading minutes of meetings of those charged with governance and
reviewing correspondence with regulators; and
· in addressing the risk of fraud through management override of controls,
testing the appropriateness of journal entries and other adjustments; assessing
whether the judgements made in making accounting estimates are indicative of a
potential bias; and evaluating the business rationale of any significant
transactions that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential
fraud risks to all engagement team members including internal specialists, and
remained alert to any indications of fraud or non-compliance with laws and
regulations throughout the audit.
Report on other legal and regulatory requirements
12. Corporate Governance Statement
Given the directors voluntarily applied the requirements of the UK Corporate
Governance Code, we are required to review the directors' statement in relation
to going concern, longer-term viability and that part of the Corporate
Governance Statement relating to the group's compliance with the provisions of
the Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each
of the following elements of the Corporate Governance Statement is materially
consistent with the financial statements and our knowledge obtained during the
audit:
· the directors' statement with regards to the appropriateness of
adopting the going concern basis of accounting and any material uncertainties
identified;
· the directors' explanation as to its assessment of the group's
prospects, the period this assessment covers and why the period is appropriate;
· the directors' statement on fair, balanced and understandable;
· the board's confirmation that it has carried out a robust assessment of
the emerging and principal risks;
· the section of the annual report that describes the review of
effectiveness of risk management and internal control systems; and
· the section describing the work of the audit committee.
13. Matters on which we are required to report by exception
13.1. Adequacy of explanations received and accounting records
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; or
· proper accounting records have not been kept by the parent company; or
· the financial statements are not in agreement with the accounting
records.
We have nothing to report in respect of these matters.
14. Use of our report
This report is made solely to the company's members, as a body, in accordance
with Section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been
undertaken so that we might state to the company's members those matters we are
required to state to them in an auditor's report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the company and the company's members as a body, for our
audit work, for this report, or for the opinions we have formed.
David Becker (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Recognised Auditor
St. Peter Port, Guernsey
28 October 2021
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 June 2021
For the year For the year
from from
01.07.2020 01.07.2019 to
to 30.06.2020
30.06.2021
Notes £ £
Income
Interest income on mortgage loans 7 51,329,373 47,611,908
Interest income on cash and cash equivalents - 224,439
Net (loss)/gain from derivative financial 9 (5,341,255) 430,440
instruments
Total income 45,988,118 48,266,787
Interest expense on loan notes 13 10,491,141 13,799,827
Net interest expense on financial liabilities at 9 9,475,248 4,078,557
fair value through profit and loss
Interest expense on borrowings 14 5,580,011 7,171,939
Loss on disposals 4,278,053 -
Loan note issue fees and borrowing costs amortised 13 & 14 3,759,451 3,326,446
Trail fees 3,862,870 2,624,259
Mortgage loans servicing fees 17 3,436,648 3,455,141
Amortisation of discount on loan notes 13 1,641,628 752,837
Legal and professional fees 1,315,070 904,437
Portfolio management fees 17 925,685 1,022,296
General expenses 893,692 847,187
Mortgage loan write offs 7 692,353 1,543,544
Audit fees 461,982 310,000
Financing costs 2 339,175 329,373
Administration and secretarial fees 17 241,122 259,050
Directors' fees 16 145,000 135,000
AIFM fees 17 86,758 95,845
Borrowings facility fees 14 63,240 93,519
Depositary fees 17 54,935 65,947
Custody fees 17 26,581 23,519
Expected credit loss (reversal)/provision 7 (650,224) 1,195,954
Total expenses 47,120,419 42,034,677
Total comprehensive (loss)/income for the year (1,132,301) 6,232,110
(Loss) / income per ordinary share - basic & (0.005) 0.023
diluted 4
All items in the above statement derive from continuing operations. There is no
other comprehensive income during the year.
The notes form an integral part of these Audited Consolidated Financial
Statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 30 June 2021
30.06.2021 30.06.2020
Assets Notes £ £
Non-current assets
Mortgage loans 7 1,259,714,892 1,619,485,743
Reserve fund 8 20,329,566 6,683,000
Total non-current assets 1,280,044,458 1,626,168,743
Current assets
Mortgage loans 7 19,171,216 19,466,645
Reserve fund 8 2,500,000 13,521,519
Trade and other receivables 10 6,888,739 4,260,753
Cash and cash equivalents 11 65,650,168 37,905,366
Total current assets 94,210,123 75,154,283
Total assets 1,374,254,581 1,701,323,026
Liabilities
Non-current liabilities
Borrowings 14 125,278,599 604,296,701
Loan notes 13 890,356,122 848,876,889
Total non-current liabilities 1,015,634,721 1,453,173,590
Current liabilities
Borrowings 14 208,495,772 -
Financial liabilities at fair value 9 2,673,560 21,477,899
through profit and loss
Trade and other payables 12 8,358,566 6,594,574
Total current liabilities 219,527,898 28,072,473
Total liabilities 1,235,162,619 1,481,246,063
Net assets 139,091,962 220,076,963
Equity
Share capital account 196,937,773 264,749,999
Other reserves (57,845,811) (44,673,036)
Total equity 139,091,962 220,076,963
Ordinary shares in issue 178,799,556 273,065,390
Net Asset Value per ordinary share 5 0.7779 0.8059
UK Mortgages Limited is a closed-ended investment company incorporated in
Guernsey with registration number 60440.
The Audited Consolidated Financial Statements were approved and authorised for
issue by the Board of Directors on 28 October 2021 and signed on its behalf by:
Christopher Waldron
Director
Paul Le Page
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 2021
Share capital Other Total
account reserves equity
Notes £ £ £
Balance at 30 June 2020 264,749,999 (44,673,036) 220,076,963
Share buybacks 15 (67,812,226) - (67,812,226)
Dividends paid 22 - (12,040,474) (12,040,474)
Total comprehensive loss for the - (1,132,301) (1,132,301)
year
Balance at 30 June 2021 196,937,773 (57,845,811) 139,091,962
Share capital Other Total
Account reserves equity
Notes £ £ £
Balance at 30 June 2019 264,749,999 (40,665,194) 224,084,805
Dividends paid 22 - (10,239,952) (10,239,952)
Total comprehensive income for the - 6,232,110 6,232,110
year
Balance at 30 June 2020 264,749,999 (44,673,036) 220,076,963
The notes form an integral part of these Audited Consolidated Financial
Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 30 June 2021
For the year For the year
from from
01.07.2020 to 01.07.2019 to
30.06.2021 30.06.2020
Notes £ £
Cash flows from operating activities
Total comprehensive (loss)/income for the year (1,132,301) 6,232,110
Adjustments for:
Loss on disposal 4,278,053 -
Amortised mortgage acquisition fees released 7 181,517 130,580
Expected credit loss (reversal)/provision 7 (650,224) 1,195,954
Mortgage loan write offs 7 692,353 1,543,544
Net loss/(gain) from derivative financial instruments 5,341,255 (430,440)
Interest on derivative financial instruments 9 (423,623) 534,221
Amortisation adjustment under effective interest
rate method (7,488,472) (5,227,777)
Loan note issue fees amortised 13 2,190,588 1,768,885
Borrowings issue fees amortised 1,568,863 1,437,561
Amortisation of discount on loan notes 1,641,628 752,836
Capitalised interest (2,026,567) -
Purchase of mortgage loans 7 (284,351,787) (474,740,452)
Mortgage loans repaid 7 151,288,886 175,465,726
Sale of mortgage loans 480,940,662 -
Settlement on termination of derivative financial (5,568,000) -
instruments
Decrease/ (increase) in reserve fund 8 (2,625,047) (2,500,000)
Increase in trade and other payables 1,763,992 1,943,005
(Increase)/ decrease in trade and other (3,580,098) 570,509
receivables
Net cash inflow/(outflow) from operating 342,041,678 (291,323,738)
activities
Cash flows from financing activities
Proceeds from borrowings 231,572,969 401,000,000
Repayment of borrowings (502,778,738) (24,926,647)
Paid issuance fees for borrowings (885,424) (1,498,018)
Paid issuance fees for loan notes (4,700,847) -
Proceeds from issue of loan notes 818,137,043 -
Repayments of loan notes 13 (775,789,179) (86,627,803)
Share buybacks (67,812,226) -
Dividends paid 22 (12,040,474) (10,239,952)
Net cash (outflow)/inflow from financing (314,296,876) 277,707,580
activities
Increase/ (decrease) in cash and cash equivalents 27,744,802 (13,616,158)
Cash and cash equivalents at beginning of year 37,905,366 51,521,524
Cash and cash equivalents at end of year 65,650,168 37,905,366
The notes form an integral part of these Audited Consolidated Financial
Statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 30 June 2021
1. General Information
UK Mortgages Limited (the "Company") was incorporated with limited liability in
Guernsey, as a closed-ended investment company on 10 June 2015. The Company's
Shares were listed with the UK Listing Authority and admitted to trading on the
Specialist Fund Segment of the London Stock Exchange on 7 July 2015.
These Consolidated Financial Statements comprise the financial statements of UK
Mortgages Limited, UK Mortgages Corporate Funding Designated Activity Company,
Malt Hill No.1 Plc (dissolved on 27 May 2021), Malt Hill No. 2 Plc, Oat Hill
No.1 Plc (dissolved 28 August 2020), Oat Hill No.2 Plc (incorporated 25
February 2020), Barley Hill No.1 Plc (incorporated 18 February 2019), Hops Hill
No.1 Limited (incorporated 24 September 2020), and the Warehouse SPVs; Cornhill
Mortgages No.2 Limited (dissolved on 27 February 2020), Cornhill Mortgages No.
4 Limited (incorporated 7 August 2018), Cornhill Mortgages No. 5 Limited
(incorporated 24 May 2019), Cornhill Mortgages No. 6 Limited (dissolved 25
February 2021), Cornhill Mortgages No. 7 Limited (incorporated 24 March 2020)
as at 30 June 2021, together referred to as the "Company". The Warehousing SPVs
are placed into liquidation upon the transfer of the mortgage loans to the
Issuer SPVs, and are treated on a consolidated basis for as long as control is
held for the purpose of the Audited Consolidated Financial Statements.
The Company had previously included the financial statements for Cornhill
Mortgages No.1 Limited, Cornhill Mortgages No.3 Limited, Cornhill Mortgages No.
2 Limited and Malt Hill No. 1 Plc in its Audited Consolidated Financial
Statements. Cornhill Mortgages No.1 Limited was fully dissolved on 19 January
2018, Cornhill Mortgages No.3 Limited was fully dissolved on 15 August 2018,
Cornhill Mortgages No. 2 Limited was fully dissolved on 27 February 2020 and
Malt Hill No. 1 Plc was fully dissolved on 7 January 2020.
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
a) Statement of compliance
The Audited Consolidated Financial Statements have been prepared under the
historic cost convention as modified by financial instruments recognised at
fair value and in accordance 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.
b) Going concern
The Company implemented an additional shareholder protection at an EGM held on
4 December 2020 that requires the directors to implement a managed wind down
consultation with its shareholders if the Company share price is not trading at
or above the most recently published NAV in the 20 business days prior to the
second anniversary of the EGM on 4 December 2022. Whilst the date of any
potential managed wind down is more than 12 months away and the form of any
wind down plan has not been agreed with shareholders, the directors have
modelled the Company's portfolio in a managed wind down stress scenario that
simulates the impact of surging levels of arrears and elevated financing costs
to assess the Viability of the Company's business model. Even if a wind down
was to be triggered, the viability cash flow model demonstrates that the
Company could continue to finance its operations whilst winding down over a
period to May 2024. The Board have concluded that the Company will continue in
operation for at least the next 12 months based on the Viability cash-flow
model and the following additional evidence:
. The Company has reduced its dividend financing requirement and improved
its dividend cover by repurchasing 1/3 of its issued share capital and
refocusing its portfolio to lend to high net interest margin professional
landlords. This should release further capital for re-investment, increased
dividends or share repurchases to reduce the discount to NAV following the
renewal of the Company's authority at the AGM.
. The Company's Strategic review conducted in the final quarter of 2020 has
been well received, evidenced by a reduction in the Company's share price
discount to NAV to 6.93% as at 30 June 2021. Although this has since closed to
approximately 9%, it is below the 10.4% level in June 2019 prior to the
COVID-19 pandemic.
. The Company's Hops Hill No.1 securitisation in January 2021 was heavily
oversubscribed emphasising the attractiveness of the Company's portfolio to
both income investors and trade buyers.
. Securitisation spreads have tightened further during the year giving the
Board confidence that demand for the Company's assets has increased.
. The Company's administrator, portfolio manager and service providers have
demonstrated robust COVID-19 remote working protocols and are capable of
sustaining operations in the event of future lock-downs.
. The trigger date for the start of a managed wind down discussion with
shareholders would be first business day following the second anniversary of
the Company's EGM on Monday 5 December 2022. This date is more than one year
away. Even if a wind down was to be implemented, our viability cash flow
model demonstrates that the Company could continue to finance its operations
whilst winding down over a three-year period.
The directors also believe, based on the above evidence that the Company should
be able to re-finance or sell its mortgage portfolios as necessary including
its Cornhill 5 warehouse facility which is due for repayment by the end of the
first quarter of 2022 and is classified as a current liability.
Going Concern Conclusion
At the December 2020 EGM it was noted that if the Company's shares are trading
at a discount to NAV at the two year anniversary of the EGM, the directors
intend to place the Company into a wind down, a process which would require
further shareholder consultation and take at least three years, given the
nature of the Company's investments. Whilst the directors are encouraged by
recent improvements to returns generated from the sales of the Coventry
portfolios and the successful Keystone originations, there is uncertainty over
whether the shares will trade at a discount in December 2022. In line with
accounting standards, the Directors are obliged to disclose that this
uncertainty exists. These circumstances constitute a material uncertainty that
may cast significant doubt over the Company's ability to continue as a going
concern and the Company may be required to prepare future accounts on a basis
other than going concern. This uncertainty does not compromise the ability of
the Company to discharge its obligations over an extended period. Also, the
directors consider that there is a reasonable prospect that the Company will
continue to operate and therefore are content to prepare these accounts on a
going concern basis.
c) Standards, amendments and interpretations effective during the year
At the reporting date of these Consolidated Financial Statements, the following
standards, interpretations and amendments, were adopted for the year ended 30
June 2021:
LIBOR reform phase 1 (Effective 1 January 2020)
LIBOR reform phase 1 deals with the pre-replacement issues of replacing GBP
LIBOR with the Sterling Overnight Index Average (SONIA). This has impacted the
Company's application of hedge accounting. See note 9 for further details.
d) Standards, amendments and interpretations issued but not yet effective
At the reporting date of these Consolidated Financial Statements, the following
were standards, interpretations and amendments, which have not been applied in
these Consolidated Financial Statements, which were in issue but not yet
effective.
LIBOR reform phase 2 (Effective 1 January 2021)
LIBOR reform phase 2 finalises the response to the ongoing reform of inter-bank
offered rates (IBOR) and other interest rate benchmarks. This will impact the
Company's application of hedge accounting and the assets and liabilities and
their related financial statement disclosures.
IFRS 17 Insurance Contracts (Effective 1 January 2023)
The Company expects that the adoption of IFRS 17 in the future period will not
have an impact on the Company's Consolidated Financial Statements, as it does
not hold any insurance contracts.
Definition of Accounting Estimates (Amendments to IAS 8) (Effective 1 January
2023)
The definition of a change in accounting estimates is replaced with a
definition of accounting estimates. Under the new definition, accounting
estimates are "monetary amounts in financial statements that are subject to
measurement uncertainty". A change in accounting estimate that results from new
information or new developments is not the correction of an error. In addition,
the effects of a change in an input or a measurement technique used to develop
an accounting estimate are changes in accounting estimates if they do not
result from the correction of prior period errors. A change in an accounting
estimate may affect only the current period's profit or loss, or the profit or
loss of both the current period and future periods. The effect of the change
relating to the current period is recognised as income or expense in the
current period. The effect, if any, on future periods is recognised as income
or expense in those future periods.
Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice
Statement 2) (Effective 1 January 2023)
An entity is now required to disclose its material accounting policy
information instead of its significant accounting policies. Explanation has
been added regarding how an entity can identify material accounting policy
information and to give examples of when accounting policy information is
likely to be material. Accounting policy information may be material because of
its nature, even if the related amounts are immaterial. Accounting policy
information is material if users of an entity's financial statements would need
it to understand other material information in the financial statements. If an
entity discloses immaterial accounting policy information, such information
shall not obscure material accounting policy information.
The adoption of these new and amended standards did not impact the Company's
financial statements with the exception of what we have noted above.
e) Consolidation
The Company has not been deemed an Investment Entity under the definitions of
IFRS 10 'Consolidated Financial Statements' as the majority of the Company's
investments are measured at amortised cost rather than fair value and these
Consolidated Financial Statements are therefore prepared on a consolidated
basis.
Subsidiaries are all entities (including structured entities) over which the
Company has control. The Company controls an entity when the Company 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 the Company. They are derecognised from the
date that control ceases.
The Company 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 the Company. 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. The Company 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 Originator Date of
Control Incorporation Place of Dissolution
Business
UK Mortgages Corporate 19/11/2015 Ireland Ireland -
Funding Designated
Activity Company
Cornhill Mortgages No.2 02/03/2016 UK UK The Mortgage 27/02/2020
Limited Lender
Malt Hill No.1 Plc 02/06/2016 UK UK Coventry Building 07/01/2020
Society
Oat Hill No.1 Plc * 23/06/2017 UK UK Capital Home Loans 28/08/2020
Malt Hill No.2 Plc * 28/06/2018 UK UK Coventry Building -
Society
Cornhill Mortgages No.4 07/08/2018 UK UK Keystone Property -
Limited * Finance
Barley Hill No.1 Plc 18/02/2019 UK UK The Mortgage -
Lender
Cornhill Mortgages No.5 24/05/2019 UK UK The Mortgage -
Limited Lender
Cornhill Mortgages No.6 18/03/2019 UK UK Coventry Building 25/02/2021
Limited * Society
Oat Hill No.2 Plc 25/02/2020 UK UK Capital Home Loans -
Cornhill Mortgages No.7 24/03/2020 UK UK Keystone Property -
Limited Finance
Hops Hill No.1 Limited 24/09/2020 UK UK Keystone Property -
Finance
* Malt Hill No. 2 Plc, Cornhill Mortgages No. 4 Limited, Cornhill Mortgages No.
6 Limited and Oat Hill No. 1 Plc fully repaid their borrowings and hence ceased
to be under the Company control at the date of the borrowings repayments.
Based on control, the results of the Acquiring Entity, the Issuer SPVs (Malt
Hill No.1 Plc (dissolved on 27 May 2021), Malt Hill No. 2 Plc, Oat Hill No.1
Plc (dissolved 28 August 2020), Oat Hill No.2 Plc (incorporated 25 February
2020), Barley Hill No.1 Plc (incorporated 18 February 2019), Hops Hill No.1
Limited (incorporated 24 September 2020)) and the Warehouse SPVs Cornhill
Mortgages No.2 Limited (dissolved on 27 February 2020), Cornhill Mortgages No.
4 Limited (incorporated 7 August 2018), Cornhill Mortgages No. 5 Limited
(incorporated 24 May 2019), Cornhill Mortgages No. 6 Limited (dissolved 25
February 2021), Cornhill Mortgages No. 7 Limited (incorporated 24 March 2020)
are consolidated into the Consolidated Financial Statements up to the point
that the Company no longer has control.
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.
f) Financial Assets
Classification and measurement
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).
There are 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.
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:
i. it is held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets; and
ii. 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.
Financial assets have been classified into two categories: financial assets at
fair value through profit and loss, and financial assets at amortised cost.
Derivative Instruments are classified as financial assets or liabilities at
fair value through profit and loss.
Financial assets 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.
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 mortgage portfolio level because this best
reflects the way the business is managed and information is provided to the
Portfolio Manager.
The Company intends to hold mortgage portfolios to maturity and therefore to
generate income in accordance with the investment mandate.
The information that was considered included:
· The stated policies and objectives for each 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 aremanaged.
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
All mortgage loans are secured on residential property. Refer to note 18 for
the value of the past due loans and their respective collateral value.
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.
Credit loss allowances are 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 expected credit losses is 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.
The Company presumes that the credit risk on a financial asset has increased
significantly since initial recognition when contractual payments are more than
30 days past due.
For estimated credit loss provisioning, the Company considers that default has
occurred when a financial asset is more than 3 months in arrears.
Write off policy
The Company writes off financial assets when it has exhausted all practical
recovery efforts and has concluded that there is no reasonable expectation of
recovery.
g) Recognition and de-recognition of financial assets and liabilities
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 and liabilities are derecognised only when either the
contractual rights to cash flows from the financial assets or liabilities
expire or the transfer otherwise qualifies for de-recognition in accordance
with IFRS 9.
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.
h) 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.
The Directors designated the derivatives as a fair value hedge and applied
hedge accounting from 1 July 2017.
Hedge accounting
The Company adopted hedge accounting from 1 July 2017 to reduce volatility in
the Consolidated Statement of Comprehensive Income. All existing hedging
relationships qualify as continuing hedging relationships.
The hedge accounting requirements of IFRS 9 are designed to create a stronger
link with financial risk management. However, this does not cover macro hedge
accounting. Pending development of the IASB's proposals for dynamic risk
management covering this area, to be considered in a separate accounting
standard, IFRS 9 allows the option to continue to apply the existing hedge
accounting requirements of IAS 39. Accordingly, the Company continues to apply
IAS 39 requirements for the 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)
and could affect profit or loss. All hedge relationships designated by the
Company are therefore classified as fair value hedges.
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 assessed on an
ongoing basis over the life of the hedge relationship. On each reporting date,
both retrospective and prospective analyses are performed to assess the
effectiveness of the hedging 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.
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 hedged asset 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.
i) 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.
j) Interest income and interest expense
Interest income on mortgage loans is recorded using the effective interest rate
method. Interest income and expense on derivative financial instruments is
based on the net settlement of the periodic interest using contracted notional
principals and the relevant interest rates. Interest income also includes
income from cash and cash equivalents. Interest expense on borrowings and loan
notes are recorded using the effective interest rate method.
k) 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.
l) Reserve funds
Reserve funds 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. This is the reason it is
considered restricted cash in the Consolidated Statement of Cash Flows.
m) 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.
n) 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.
o) Other reserves
Other reserves consist of dividends paid and cumulative comprehensive gain or
loss since establishment.
p) 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. Given they are considered transaction costs for the related
borrowings and loan notes respectively 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.
q) Expenses
All other expenses are included in the Consolidated Statement of Comprehensive
Income on an accruals basis. As part of the Company's commercial agreements,
the purchase price of the loans includes an upfront origination premium paid at
the time of acquisition, which is part of the effective interest rate, and a
performance related trail fee that is paid over the life of the mortgage.
r) Segment reporting
An operating segment is a component of the Company that engages in business
activities from which it may earn revenues and incur expenses.
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.
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.
s) Taxation
The Company is a tax-exempt Guernsey limited company. Please refer to note 6
for additional information.
t) 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 ECL
using simplified approach.
u) 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.
v) 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 declared 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:
Fair value of derivative financial instruments
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 18 for sensitivity analysis and note 21 for additional
information.
Amortised cost and effective interest rate model assumptions
In determining the amortised cost of the mortgage portfolio loans using the
effective interest rate method, the Portfolio Manager uses its judgement at the
outset of the acquisition of the portfolio in estimating the remaining life of
the underlying mortgages, based on the same judgements used in determining the
acquisition value of the portfolio. In doing so the Portfolio Manager uses cash
flow models which include comparable assumptions on the likely macroeconomic
environment factors, including interest rates, loan level and portfolio level
attributes to derive prepayment rates. 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.
At 30 June 2021, if the future prepayment rate vectors assumed for each
portfolio had been increased by a linear 25% with all other variables held
constant, the Amortised Cost Valuation for Company would have been £
1,620,152.88 higher. In contrast, if the future prepayment rate vectors assumed
for each portfolio had been decreased by a linear 25% with all other variables
held constant, the Amortised Cost Valuation for Company would have been £
1,413,548.76 lower.
The key areas where judgements are made are as follows:
Sale of underlying assets
The Board considers that the primary business model of the Company is to
originate and purchase mortgage portfolios to produce income as detailed in the
Strategic Report. Whilst two portfolio sales occurred during the financial
year the Board considers that the Company's primary business objective is to
collect contractual cash flows of principal and interest and continues to apply
an amortised cost valuation policy in accordance with IFRS 9.
The Coventry portfolios have been disposed of during the year despite the
business model of the Company being to buy and hold assets. The directors
regarded the sale of the portfolios as being unexpected transactions and
accordingly these have not affected the business model of the Company. If an
alternative judgement was taken by considering the sale of the portfolios being
part of the normal business, the measurement basis of the mortgage assets would
be changed to fair value rather than amortised cost. Refer to note 2(f) for
further information on mortgage loans balance at amortised cost and the fair
value of the mortgage loans.
4. (Loss)/gain per Ordinary Share - basic and diluted
The loss per Ordinary Share of £0.005 (30 June 2020: gain £0.023) - basic and
diluted has been calculated based on the weighted average number of Ordinary
Shares of 252,111,020 (30 June 2020: 273,065,390) and a net loss of £1,132,301
(30 June 2020: net gain £6,232,110).
5. Net Asset Value per Ordinary Share
The Net Asset Value of each share of £0.7779 (30 June 2020: £0.8059) is
determined by dividing the net assets of the Company of £139,091,962 (30 June
2020: £220,076,963) by the number of shares in issue at 30 June 2021 of
178,799,556 (30 June 2020: 273,065,390).
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 £1,200. The
Acquiring Entity qualifies as a qualifying company within the meaning of
Section 110 of the Irish Taxes Consolidation Act, 1997 ("TCA 1997") (as amended
by subsequent Acts up to and including the Finance Act 2020).
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 (until it was dissolved), Malt Hill No.2
Plc, Cornhill Mortgages No.1 Limited (until it was dissolved), Cornhill
Mortgages No.2 Limited (until it was dissolved), Cornhill Mortgages No.3
Limited (until it was dissolved), Oat Hill No.1 Plc (until it was dissolved),
Barley Hill No.1 Plc, Cornhill Mortgages No.4 Limited, Cornhill Mortgages No.5
Limited, Cornhill Mortgages No. 6 Limited, Oat Hill No.2 PLC, Hops Hill No.1
Limited and Cornhill Mortgages No. 7 Limited) 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
companies Cornhill Mortgages No.1 Limited, Cornhill Mortgages No.2 Limited,
Cornhill Mortgages No.3 Limited, Malt Hill No. 1 Plc and Oat Hill No. 1 Plc
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 from
01.07.2020 to 01.07.2019 to
30.06.2021 30.06.2020
£ £
Mortgage loans at start of the year 1,638,952,388 1,323,721,509
Mortgage loans purchased 284,351,787 474,740,452
Capitalised interest 2,026,567 -
Effective interest rate adjustment (1,466,714) 5,227,777
Mortgage loans repaid (151,288,886) (175,465,726)
Sale of mortgage loans (475,311,417) -
Amortised mortgage acquisition fees released (181,517) (130,580)
Fair value adjustment for hedged risk* (18,153,971) 13,598,454
Expected credit loss provision 650,224 (1,195,954)
Mortgage loan write offs (692,353) (1,543,544)
Mortgage loans at end of the year 1,278,886,108 1,638,952,388
Amounts falling due within one year 19,171,216 19,466,645
Amounts falling due after more than one year 1,259,714,892 1,619,485,743
1,278,886,108 1,638,952,388
* 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 loan write offs relates to mortgages that have been written off during
the year while the expected credit loss provision relates to mortgages that are
still outstanding.
As at As at
30.06.2021 30.06.2020
£ £
Non-current mortgage loans
Mortgage loans 1,261,547,892 1,621,967,037
Impairment allowance (1,833,000) (2,481,294)
1,259,714,892 1,619,485,743
Current mortgage loans
Mortgage loans 19,199,112 19,496,471
Impairment allowance (27,896) (29,826)
19,171,216 19,466,645
Mortgage loans at 30 June 2021 comprise of three securitised mortgage
portfolios legally held in Hops Hill No. 1 Plc, Oat Hill No. 2 Plc and Barley
Hill No. 1 Plc and two mortgage portfolios held with Cornhill Mortgages No. 5
Limited, Cornhill Mortgages No. 7 Limited. Please refer to the Portfolio of
Investments for breakdown of portfolios.
During the year, the Company recognised £51,329,373 (2020: £47,611,908) of
interest income on the mortgage loans.
8. Reserve funds
The reserve funds are held with Citibank N.A. London Branch. The Company is
required to maintain this reserve for both the securitised entities, for which
these funds may only be used in accordance with the Issue and Programme
Documentation, and for the unsecuritised entities, as a contractual requirement
for the senior debt facility. These funds are therefore not readily available
to the Company. These are restricted and hence have not been included within
cash and cash equivalent balance for the cash flow preparation purpose.
9. Financial liabilities held at fair value through profit and loss
Derivative instruments
Malt Hill No.1 Plc / Cornhill Mortgages No. 6 Limited
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 was 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. In May 2019, the Interest
Rate Swap was novated to Cornhill Mortgages No. 6 Limited on the refinancing of
Malt Hill No. 1 Plc. In February 2021, the portfolio was sold and then the
related swap was terminated.
Cornhill Mortgages No.2 Limited / Barley Hill No. 1 Plc
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 3 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. In April 2019, the Interest Rate Swap was novated to
Barley Hill No. 1 Plc on the securitisation of the Cornhill Mortgages No. 2
Limited 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 was 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. In May 2021, the portfolio
was sold and the related swap was terminated.
Cornhill Mortgages No. 4 Limited / Hops Hill No. 1 Plc
The Company has entered into a series of vanilla Interest Rate Swaps (under an
ISDA agreement) to convert the fixed rate loan exposure into 3 Month LIBOR.
Swaps are added on a regular basis, at varying maturities, in order to align
with the fixed rate reset profile of new originations. After the period end,
upon novation to Hops Hill No. 1 the reference rate on these swaps will be
moved to SONIA. The Company has novated all the individual vanilla Interest
Rate Swaps (under an ISDA agreement) from Cornhill No. 4 into a single
amortising swap to convert the fixed rate loan exposure into Sonia. The
amortising profile of the swaps are broadly aligned with the fixed rate reset
profile of the underlying loan portfolio.
Cornhill Mortgages No. 5 Limited
The Company has entered into a series of vanilla Interest Rate Swaps (under an
ISDA agreement) to convert the fixed rate loan exposure into 1 month LIBOR.
Swaps are added on a regular basis, at varying maturities, in order to align
with the fixed rate reset profile of new originations.
Cornhill Mortgages No. 7 Limited
The Company has entered into a series of vanilla Interest Rate Swaps (under an
ISDA agreement) to convert the fixed rate loan exposure into Sonia. Swaps are
added on a regular basis, at varying maturities, in order to align with the
fixed rate reset profile of new originations.
The total net interest expense on financial liabilities at fair value through
profit or loss settled during the year was £9,475,248 (30 June 2020: £
4,078,557).
Notional and fair value balances:
Cornhill Barley Hill Malt Hill Cornhill Cornhill Cornhill 30.06.2021
Mortgages No. 1 Plc No. 2 Plc Mortgages Mortgages Mortgages Total
No. 6 No. 5 No. 7 No. 4
Limited Limited Limited Limited /
Hops Hill
No.1
Limited
£ £ £ £ £ £ £
Notional amount - 58.5m - 238.6m 106.8m 393.2m 797.1m
of Interest
Rate Swap
Fair value of - (1,077,722) - (695,905) (102,298) (797,635) (2,673,560)
Interest Rate
Swap
Cornhill Barley Hill Malt Hill Cornhill Cornhill Cornhill 30.06.2020
Mortgages No. 1 Plc No. 2 Plc Mortgages Mortgages Mortgages Total
No. 6 No. 5 No. 7 No. 4
Limited Limited Limited Limited
£ £ £ £ £ £ £
Notional amount 152.3m 132.5m 339.9m 232.2m - 248.3m 1,105.2m
of Interest
Rate Swap
Fair value of (1,561,269) (2,386,002) (9,144,159) (2,706,838) - (5,679,631) (21,477,899)
Interest Rate
Swap
Net gain/(loss) from derivative financial instruments
On 1 July 2017, the Directors designated the Malt Hill No.1 Plc and Cornhill
No.2 Limited derivatives as fair value hedges and applied hedge accounting from
that date. The swaps on Malt Hill No. 1 and Cornhill No. 2 were subsequently
novated into Cornhill No. 6 and Barley Hill No.1, respectively upon
refinancing. Hedge accounting in relation to Malt Hill No.2 Plc derivative
commenced on 1 July 2018. The vanilla swaps on Cornhill No. 4 (subsequently Hop
Hill No. 1 Plc),Cornhill No. 5 Cornhill No. 7 were designated as fair value
hedges since June 2019,June 2020 and June 2021, respectively. Additional
vanilla swaps are added to each of the portfolios on an ongoing basis as the
portfolios grow.
Interest income and expense on derivative financial instruments is based on the
net settlement of the periodic interest using contracted notional principals
and the relevant interest rates.
Cornhill Barley Hill Malt Hill Cornhill Cornhill Cornhill 30.06.2021
Mortgages No. 1 Plc No. 2 Plc Mortgages Mortgages Mortgages Total
No. 6 No. 5 No. 7 No. 4
Limited Limited Limited Limited /
Hops Hill
No.1
Holdings
Limited
£ £ £ £ £ £ £
Movement on 1,561,269 1,201,912 3,242,383 2,029,436 (95,221) 4,872,937 12,812,716
derivatives in
designated fair
value hedge
relationships*
Adjustment to (1,591,077) (1,248,303) (8,666,896) (1,736,675) 187,915 (5,098,935) (18,153,971)
mortgage loans in
fair value hedge
relationship
Net (29,808) (46,391) (5,424,513) 292,761 92,694 (225,998) (5,341,255)
ineffectiveness
Cornhill Barley Hill Malt Hill Cornhill Cornhill Cornhill 30.06.2020
Mortgages No. 1 Plc No. 2 Plc Mortgages Mortgages Mortgages Total
No. 6 No. 5 No. 7 No. 4
Limited Limited Limited Limited
£ £ £ £ £ £ £
Movement on (941,224) (445,455) (4,020,255) (2,706,837) - (5,054,243) (13,168,014)
derivatives in
designated fair
value hedge
relationships
Adjustment to 2,416,507 256,072 4,345,241 2,106,768 - 4,473,866 13,598,454
mortgage loans in
fair value hedge
relationship
Net 1,475,283 (189,383) 324,986 (600,069) - (580,377) 430,440
ineffectiveness
*The movement on derivative financial instruments in designated fair value
hedge relationships includes £110,595 of interest on derivative financial
instruments.
The net gain/(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.
The net ineffectiveness is primarily due to timing differences in income
recognition between derivative instruments and the hedged assets. The
ineffectiveness on Malt Hill No.2 is due to the termination of hedging
instrument and the portfolio. 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
30.06.2021 30.06.2020
£ £
Advanced payment on mortgage loans 4,731,754 -
Interest receivable on mortgage loans 1,762,172 3,563,076
Other receivables and prepayments 394,813 697,677
6,888,739 4,260,753
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
30.06.2021 30.06.2020
£ £
Cash at bank 65,650,168 37,905,366
65,650,168 37,905,366
12. Trade and other payables
As at As at
30.06.2021 30.06.2020
£ £
Interest due on loan notes and borrowings 5,751,760 3,940,655
Loan notes and borrowings issue fees payable 1,010,589 909,660
Portfolio management fees payable 678,307 444,763
Mortgage loans servicing fees payable 274,127 711,347
Legal and professional fees payable 244,752 219,668
Audit fees payable 163,438 115,357
General expenses payable 100,527 68,531
Administration and secretarial fees payable 99,751 105,507
AIFM fees payable 19,721 23,638
Depositary fees payable 11,462 16,263
Custody fees payable 4,132 5,435
Directors' fees payable - 33,750
8,358,566 6,594,574
13. Loan notes
The Barley Hill No. 1 Plc, Oat Hill No.2 Plc and Hops Hill No. 1 Plc (30 June
2020: Barley Hill No. 1 Plc, Oat Hill No.1 Plc, 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.
Oat Hill No.1 Plc completed the public sale of £477.1m of AAA-rated notes 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 was payable quarterly and was listed on the
Irish Stock Exchange. In May 2020 the discount on the loan notes and issue
costs were amortised. The step up margin costs were incurred for the period
since 27 May 2020 until the transaction call date of 27 August 2020. The issue
fees on loan notes will be amortised over the expected life of the loan notes,
which is 3 years, being the period up to the call date. These loan notes were
repaid as part of the re-securitisation of this portfolio in August 2020.
Oat Hill No. 2 Plc completed the public sale of £436m of publicly distributed
notes across 4 rated classes on 10 July 2020. On a weighted average basis, the
notes were issued with a coupon of SONIA plus 0.95%, which are payable monthly
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 period up to the call date. Loan notes have been classified as non-current
based on their contractual obligations.
Malt Hill No. 2 Plc completed the public sale of £317.5m of AAA-rated notes 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 period up to the call date. These loan
notes were fully repaid following the sale of the underlying portfolio.
Barley Hill No.1 PLC completed the public sale of £209.15m of senior notes on 8
April 2019. The securitisation is backed by a pool of owner-occupied mortgages
originated by The Mortgage Lender ("TML") completed between October 2016 and 8
April 2019 and purchased on a forward flow basis. The transaction also
contained a "Prefunding" feature which allowed for further purchases of future
completions by TML up until the securitisation's first Interest Payment Date in
August 2019. Due to the nature of the origination of the pool, which took place
on a highly consistent basis over more than two years, the loans that were
originated with a two-year fixed rate term are expected to pre-pay relatively
quickly and therefore the notes were split into two tranches - £202.2m of Class
A notes, rated Aaa/AAA by Moody's and DBRS, and £6.95m of Class B notes rated
Aa1/AA (high) respectively. The Class A notes were issued with a coupon of 3m
GBP LIBOR plus 1.10%, with a 2.24yr Weighted Average Life ("WAL") to the
refinancing date in February 2022, and the Class B notes carry a coupon of 3m
GBP LIBOR plus 1.60% with a 2.89yr WAL. Loan notes have been classified as
non-current based on their contractual obligations.
Hops Hill No. 1 Plc completed the public sale of £388m of publicly distributed
notes across four rated classes on 15 January 2021. On a weighted average
basis, the notes were issued with a coupon of SONIA plus 108bps, which are
payable monthly 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, being
the period up to the first optional call date in May 2024. Loan notes have been
classified as non-current based on their contractual obligations.
For the year For the year
30.06.2021 30.06.2020
£ £
Loan notes at start of the year 848,876,889 932,982,970
Loan notes issued 824,000,000 -
Loan notes repaid (775,789,179) (86,627,803)
Discount on loan notes capitalised (non cash (5,862,957) -
item)
Discount on loan notes to be amortised (non 1,641,628 752,837
cash item)
Loan note issues fees incurred (cash item) (4,700,847) -
Loan note issue fees amortised (non cash item) 2,190,588 1,768,885
Loan notes at end of the year 890,356,122 848,876,889
Interest expense on loan notes for the year amounted to £10,491,141 (30 June
2020: £13,799,827). Any covenant breaches will be dealt with in line with the
documentation for each facility. At 30 June 2021 and 2020, there were no
breaches identified.
14. Borrowings
Cornhill Mortgages No.4 Limited agreed a borrowing facility of £200m from
September 2018, with National Australia Bank Limited, with the facility size
increased to £300m as part of amendments signed in March 2020. National
Australia Bank Limited has permitted Cornhill Mortgages No.4 Limited to
dynamically change the facility amount, which has resulted in no commitment
fees being incurred to date on the facility. This facility had a repayment date
of October 2022 but was repaid in full during the year on the refinancing of
Hop Hill No.1 Plc.
Cornhill Mortgages No.5 Limited agreed a borrowing facility of £250m from
August 2019, with Regency Assets Designated Activity Company, a bankruptcy
remote asset backed commercial paper conduit sponsored by HSBC Bank plc. This
facility is due for repayment by the end of the first quarter of 2022, and is
classified as a current liability.
Cornhill Mortgages No.6 Limited agreed a borrowing facility of £184m from May
2019, with Lloyds Bank Corporate Markets Plc. The total facility was utilised
on day one. Cornhill Mortgages No.6 has fully repaid the total facility in
February 2020 following the sale of the underlying mortgage asset portfolio.
Cornhill Mortgages No.7 Limited agreed a borrowing facility of £400m from April
2021 with Santander. This facility has a final maturity date of 25 March 2055
and is classified as a non-current liability.
The Company is subject to covenants, representations and warranties commonly
associated with corporate bank debt and credit facilities. The Company was
compliant with all covenants at the year end.
For the year For the year
30.06.2021 30.06.2020
£ £
Borrowings at start of the year 604,296,701 228,283,804
Borrowings issued 231,572,969 401,000,000
Borrowings repaid (502,778,738) (24,926,646)
Borrowings issue fees incurred (cash item) (885,424) (1,618,018)
Borrowings issue fees amortised (non cash item) 1,568,863 1,557,561
Borrowings at end of the year 333,774,371 604,296,701
The facility fees of £63,240 (2020: £93,519) were expensed in the year. The
interest expense charged on borrowings of £5,580,011 (2020: £7,171,939) were
expensed in the year.
Any covenant breaches will be dealt with in line with the documentation for
each facility. At 30 June 2021 and 2020, there were no breaches identified.
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 as 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 2021, 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 them.
Issued Share Capital
As at As at
30.06.2021 30.06.2020
Ordinary shares £ £
Share capital at the beginning of the 264,749,999 264,749,999
year
Share buybacks (67,812,226) -
Total share capital at the end of the 196,937,773 264,749,999
year
During September 2020, March 2021 June 2021, the Company purchased ordinary
shares of £0.01 each in the capital of the company at prices per share as noted
below in accordance with the company's share repurchase programme. These shares
were cancelled upon settlement.
Price per No. of shares
share
1 September 2020 £0.640 100,000
3 September 2020 £0.650 50,000
8 September 2020 £0.665 350,000
10 September 2020 £0.670 250,000
14 September 2020 £0.675 925,000
15 September 2020 £0.6775 1,600,000
16 September 2020 £0.680 4,390,000
17 September 2020 £0.680 2,311,920
18 September 2020 £0.680 1,735,000
21 September 2020 £0.680 18,123,000
22 September 2020 £0.680 11,097,582
26 March 2021 £0.750 26,666,666
24 June 2021 £0.750 26,666,666
94,265,834
The total number of shares outstanding is shown in the table below.
As at As at
30.06.2021 30.06.2020
Ordinary shares shares shares
Shares at the beginning of the year 273,065,390 273,065,390
Shares redeemed (94,265,834) -
Total shares in issue at the end of the 178,799,556 273,065,390
year
16. Related Parties
a) Directors' Remuneration and Expenses
The Directors of the Company are remunerated for their services at such a rate
as the Directors determine. The aggregate fees of the Directors will not exceed
£200,000 per annum.
The annual Directors' fees, effective from 1 January 2021, comprise £45,000 (30
June 2020: £40,000) payable to Mr Waldron, the Chairman, £40,000 (30 June 2020:
£35,000) to Mr Le Page as Chairman of the Audit Committee, and £35,000 (30 June
2020: £30,000) each to Mrs Green and Mr Burrows. During the year ended 30 June
2021, Directors' fees of £145,000 were charged to the Company (30 June 2020: £
135,000), of which £nil remained payable at the end of the year (30 June 2020:
£33,750).
b) Shares held by related parties
As at 30 June, Directors of the Company held the following shares in the
Company
beneficially:-
Number of Number of
Shares Shares
30.06.2021 30.06.2020
Christopher Waldron 80,000 80,000
Richard Burrows 5,000 5,000
Paul Le Page 67,800 112,800
Helen Green 21,250 21,250
As at 30 June 2021, the Portfolio Manager held Nil shares (30 June 2020: Nil)
and partners and employees of the Portfolio Manager held 6,913,067 shares (30
June 2020: 6,719,088), which is 3.87% of the issued share capital (30 June
2020: 2.461%).
c) Group entities
The Company'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 £20,000 per
annum and fees payable quarterly in arrears at a rate of 0.07% of the NAV of
the Company below £50 million, 0.05% on Net Assets between £50 million and £100
million and 0.03% on Net Assets in excess of £100 million. During the year
ended 30 June 2021, AIFM fees of £86,758 (30 June 2020: £95,845) were charged
to the Company, of which £19,721 (30 June 2020: £23,638) 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 £100 million, 0.05% on net assets between
£100 million and £200 million and 0.04% on net assets in excess of £200 million
as at the last business day of the month subject to a minimum £75,000 per
annum. These NAV based fees commenced from 19 November 2015 being the date the
Company acquired its initial investment.
In addition, an annual fee of £60,500 will be charged for corporate governance
and company secretarial services and accounting services. Total administration
and secretarial fees for the year amounted to £241,122 (30 June 2020: £259,050)
of which £99,751 (30 June 2020: £105,507) 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 £40,000 per annum. Total depositary fees
and charges for the year amounted to £54,935 (30 June 2020: £65,947) of which £
11,462 (30 June 2020: £16,263) remained payable at the year end.
The Depositary will charge an additional fee of £20,000 for performing due
diligence on each service provider/administrator employed.
The Depositary is also entitled to a custody fee at a rate of 0.01% of the NAV
of the Company as at the last business day of the month subject to a minimum of
£8,500 per annum. These NAV based fees commenced from 19 November 2015 being
the date Company acquired its initial investment. Total custody fees for the
year amounted to £26,581 (30 June 2020: £23,519) of which £4,132 (30 June 2020:
£5,435) remained payable at the year end.
d) 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 was at a
rate of 0.60% per annum of the lower of NAV, or market capitalisation of each
class of shares. Prior to this date, the portfolio management fee per annum was
0.75%.
Total portfolio management fees for the year amounted to £925,685 (30 June
2020: £1,022,296) of which £678,307 (30 June 2020: £444,763) remained payable
at the year end.
The Portfolio Management Agreement dated 23 June 2015 remains in force until
determined by the Company or the Portfolio Manager giving the other party not
less than twelve months' notice in writing. Under certain circumstances, the
Company or the Portfolio Manager is entitled to immediately terminate the
agreement in writing.
e) Servicers
Servicing fees are payable to the Servicer of the mortgage loan portfolios.
Standard servicing fees are in the region of 0.20% of the outstanding balance
of the loans in the pool plus an additional fee for loans in arrears. On a
consolidated basis, total servicing fees payable during the year were £
3,436,648 (30 June 2020: £3,455,141) of which £274,127 (30 June 2020: £711,347)
remained payable at 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, mortgage loans, receivables, and cash and
cash equivalents, loan notes, borrowings and trade payables. 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 and floating
rates, meaning the current exposure to interest rate fluctuations on the
portfolios are limited. However, floating rate interest is payable on the loan
notes. Where the mortgage portfolios are payable on fixed rates, interest is
hedged using swaps. Interest on all liabilities is payable on floating rates.
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 securitisation, these swaps were novated to the
relevant Issuer SPV.
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. 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 30.06.2021
£ £ £ £
Assets
Mortgage loans 531,046,622 773,071,822 (25,232,336) 1,278,886,108
Reserve fund 22,829,566 - - 22,829,566
Trade and other - - 6,888,739 6,888,739
receivables
Cash and cash equivalents 65,650,168 - - 65,650,168
Total assets 619,526,356 773,071,822 (18,343,597) 1,374,254,581
Liabilities
Financial liabilities at 797,132,663 (797,132,663) - -
fair value through profit
and loss *
Trade and other payables - - (8,358,566) (8,358,566)
Borrowings (note 14) (334,495,774) - 721,403 (333,774,371)
Loan notes (note 13) (898,862,902) - 8,506,780 (890,356,122)
(436,226,013) (797,132,663) 869,617 (1,232,489,059)
Total interest 183,300,343 (24,060,841) (17,473,980) 141,765,522
sensitivity gap
Non interest Total as at
Floating rate Fixed rate bearing 30.06.2020
Reclassed
£ £ £ £
Assets
Mortgage loans 546,265,951 1,102,128,153 (9,441,716) 1,638,952,388
Reserve fund 20,204,519 - - 20,204,519
Trade and other - - 4,260,753 4,260,753
receivables
Cash and cash equivalents 37,905,366 - - 37,905,366
Total assets 604,375,836 1,102,128,153 (5,180,963) 1,701,323,026
Liabilities
Financial liabilities at 1,105,147,058 (1,105,147,058) - -
fair value through profit
and loss *
Trade and other payables - - (6,594,574) (6,594,574)
Borrowings (605,701,543) - 1,404,842 (604,296,701)
Loan notes (note 13) (850,652,082) - 1,775,193 (848,876,889)
(351,206,567) (1,105,147,058) (3,414,539) (1,459,768,164)
Total interest 253,169,269 (3,018,905) (8,595,502) 241,554,862
sensitivity gap
* Financial liabilities at fair value through profit and loss is shown as the
notional amounts which represent the gross exposure to interest rate risk and
not the fair value of £2,673,560 (2020: £21,477,899).
If interest rates had been 50 basis points higher and all other variables were
held constant, the Company's total comprehensive gain for the year ended 30
June 2021 would have increased by approximately £916,502 (2020: £1,265,846) or
0.067% (2020: 0.074%) of total assets, due to an increase in the amount of
interest receivable.
If interest rates had been 50 basis points lower and all other variables were
held constant, the Company's total comprehensive gain for the year ended 30
June 2021 would have decreased by approximately £911,942 (2020: £1,259,549) or
0.066% (2020: 0.074%) of total assets, due to a decrease in the amount of
interest receivable.
This 50 basis point is taken as it is the stresses rate change based on the
recent movements of interest rates in the market.
The Company's exposure to interest rate risk on loans with fixed interest rates
is protected by virtue of the fact that there are balance guarantee swaps and
vanilla swaps in place to limit the exposure on the fixed rate interest rates.
For the exposure in relation of floating interest rate risk, the Portfolio
Manager is managing this by matching the asset exposures to the liabilities
exposures using the interest rate swaps derivatives.
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 is valued on a fair value mark-to-market basis by the
swap counterparty, using the observable information on swap rates. The
difference in fair value of the interest rate swap and amortised cost valuation
of the mortgage loans could lead to volatility in the Company's NAV, had hedge
accounting not been adopted.
1.3 Currency risk: As at 30 June 2021 and 2020, 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, using the funds raised from equity issuances. 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 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. 5 Limited and Cornhill
Mortgages No. 7 Limited portfolios were in the warehousing phase (June 2020:
Cornhill Mortgages No. 4 Limited, Cornhill Mortgages No. 5 Limited and Cornhill
Mortgages No. 6 Limited).
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 20% of NAV for short term liquidity
purposes, including financing share repurchases or redemptions, making
investments or satisfying working capital requirements. This can be through a
loan facility or other types of collateralised borrowing instruments including
stock lending or repurchase transactions. The directors also believe, based on
the above evidence that the Company should be able to re-finance or sell its
mortgage portfolios as necessary including its Cornhill 5 warehouse facility
which is due for repayment by the end of the first quarter of 2022 and is
classified as a current liability.
The Company's funding providers are entitled to receive repayment of principal
from principal funds generated by the mortgage loans, but their right to the
repayment of principal is limited to the cash available in the relevant SPV.
Similarly, payment of accrued interest to the funding providers is limited to
cash generated within the relevant SPV. There is no requirement for any group
company other than the issuing SPV to make principal or interest payments in
respect of the loan notes or borrowings. This matching of the maturities of the
assets and the related funding substantially reduces the Group's exposure to
liquidity risk. Due to the contractual nature of the funding, the Directors do
not consider there to be any difference between the Company's discounted and
the undiscounted liquidity position in relation to the loan notes and
borrowings.
The following liquidity analysis is based on contractual payment terms and
maturity dates. Expected cash flows are expected to be different to these
contractual cash flows.
Less than More than More than Total as at
one year one year five years 30.06.2021
£ £ £ £
Assets
Mortgage loans 19,171,216 93,603,716 1,166,111,176 1,278,886,108
Reserve fund 2,500,000 - 20,329,566 22,829,566
Trade and other 6,888,739 - - 6,888,739
receivables
Cash and cash 65,650,168 - - 65,650,168
equivalents
Total assets 94,210,123 93,603,716 1,186,440,742 1,374,254,581
Liabilities
Financial liabilities at 2,673,560 - - 2,673,560
fair value through profit
and loss
Trade and other 8,358,566 - - 8,358,566
payables
Borrowings 208,495,772 - 125,278,599 333,774,371
Loan notes - - 890,356,122 890,356,122
Total 219,527,898 - 1,015,634,721 1,235,162,619
liabilities
Less than More than More than Total as at
one year one year five years 30.06.2020
£ £ £ £
Assets
Mortgage loans 19,466,645 104,896,456 1,514,589,287 1,638,952,388
Reserve fund 13,521,519 6,683,000 - 20,204,519
Trade and other 4,260,753 - - 4,260,753
receivables
Cash and cash 37,905,366 - - 37,905,366
equivalents
Total assets 75,154,283 111,579,456 1,514,589,287 1,701,323,026
Liabilities
Financial liabilities at 21,477,899 - - 21,477,899
fair value through profit
and loss
Trade and other 6,594,574 - - 6,594,574
payables
Borrowings - 604,296,701 - 604,296,701
Loan notes - - 848,876,889 848,876,889
Total 28,072,473 604,296,701 848,876,889 1,481,246,063
liabilities
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+ (per Standards and Poor). At year end, there is no such exposure in place as
they are in a liability position.
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).
The following table shows the maximum exposure to credit risk:
As at As at
30.06.2021 30.06.2020
£ £
Mortgage loans 1,304,118,444 1,648,394,104
Reserve fund 22,829,566 20,204,519
Trade and other receivables 6,888,739 4,260,753
Cash and cash equivalents 68,650,168 37,905,366
1,399,486,917 1,710,764,742
Mortgage loans written off during the year amounted to £692,353 (2020: £
1,543,544), with an expected reversal of the credit loss provision of £650,224
(June 2020: additions to the credit loss provision of£1,195,954). 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
30.06.2021 30.06.2020
Loan to value £ £
0-49% 163,560,746 211,966,217
50-75% 690,857,506 954,101,240
75-100%+ 449,700,192 482,326,647
1,304,118,444 1,648,394,104
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. In accordance
with the Company's policy, the credit impaired loans amounted £13,798,095 as at
30 June 2021 (2020: £7,445,962) with underlying collateral value of £23,016,591
(2020: £14,093,217).
Book value Collateral value
As at As at As at As at
30.06.2021 30.06.2020 30.06.2021 30.06.2020
£ £ £ £
>1 month but <2 months 7,828,767 3,216,112 13,655,770 4,795,785
>2 months but <3 months 3,013,467 4,801,137 5,556,518 7,063,327
>3 months but <6 months 5,836,230 3,525,284 9,604,045 6,728,027
>6 months 7,961,864 3,920,678 13,412,546 7,365,190
24,640,328 15,463,211 42,228,879 25,952,329
The table below discloses the maximum exposure to credit risk at 30 June 2021
of mortgage loans with exposure to credit risk, the transfers between ECL
levels in the year ended 30 June 2021, and the allowance for ECL allowance for
each stage at 30 June 2021. Refer to note 2(f) for further information
regarding the measurement of credit loss allowances according to a three-stage
expected credit loss impairment model.
Principal Principal Principal Principal
balance balance balance balance
Mortgage Loans Mortgage Mortgage Total
Loans Loans
ECL Stage 1 ECL Stage 2 ECL Stage 3
£ £ £ £
Principal balance at 1 July 1,625,843,619 15,104,524 7,445,962 1,648,394,105
2020
Increase due to new loans 280,409,534 - - 280,409,534
purchased
Transfers to Stage 1 9,141,184 (8,209,014) (932,170) -
Transfers to Stage 2 (9,385,931) 9,650,610 (264,679) -
Transfers to Stage 3 (8,263,700) (2,940,363) 11,204,063 -
Increase/(decrease) in (618,098,004) (2,730,356) (3,180,942) (624,009,302)
mortgage loans
Mortgage loans written off (168,586) (33,167) (474,140) (675,893)
during the year
Principal balance at 30 June 1,279,478,116 10,842,234 13,798,094 1,304,118,444
2021
The table below discloses the movements in ECL provisioning during the year.
ECL ECL ECL
Provisioning Provisioning Provisioning
Stage 1 Stage 2 Stage 3 Total
£ £ £ £
ECL Provisioning as at 1,697,715 130,725 682,681 2,511,121
1 July 2020
Increase in ECL due to new 81,418 - - 81,418
loans purchased
Transfers to Stage 1 187,627 (83,936) (103,691) -
Transfers to Stage 2 (32,063) 51,057 (18,994) -
Transfers to Stage 3 (68,366) (25,464) 93,830 -
Increase/(decrease) in (1,411,707) 11,739 668,325 (731,643)
credit risk
ECL Provisioning as at 454,624 84,121 1,322,151 1,860,896
30 June 2021
Refer to note 2(f) for details on the assessment of collective ECLs.
Concentration of credit risk related to any mortgage borrower does not exceed 5
per cent of gross mortgage assets of the Company at any time during the year.
The concentration of credit risk is limited due to the fact that the customer
base is large, diverse and unrelated.
At 30 June 2021, if the housing price index forecasts in the ECL model had been
decreased by 10% with all the other variables held constant, the expected
credit loss for the year would have been £2,072,333 greater. In contrast, if
the housing price index forecasts had been increased by 10% with all the other
variables held constant, the expected credit loss for the year would have been
£1,091,013 lower. It should be noted that such a change produces a non-linear
result as stresses are calculated on a loan-by-loan basis and changes in asset
values will therefore affect loans with different LTVs to a greater or lesser
extent. These calculations are therefore a guide to variation not further
expected losses.
The ECL model applies a credit factor to each originator's portfolio based on
the credit characteristics of the loan types. At 30 June 2021, if these credit
factors had been increased by 25% with all other variables held constant, the
expected credit loss for the year would have been £463,652 greater. In
contrast, if the credit factors had been decreased by 25% with all other
variables held constant, the expected credit loss for the year would have been
£464,235 lower.
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. The Company also has reserves that
they are required to meet. These reserve funds are detailed further in note 8.
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.
Following the EGM on 16 August 2019, the Company has adopted the changes to its
Articles, changes to the Company's investment policy, to the Company's share
buyback policy and continuation vote, to reflect asset yield reductions and the
compression of the margin between 5 year and 2 year rates from around 100 bps
to approximately 25 bps. The changes have resulted in the following:
(i) Share Buybacks
The Board will not reinvest further capital other than in the re-financing of
the existing portfolio, whilst the Company is trading at a discount in excess
of 5 per cent. to Net Asset Value per Ordinary Share. At this level of
discount, subject to the Board determining that the Company has sufficient
surplus cash resources available for the ongoing funding of the existing TML
and Keystone investments, repayment of any existing credit facilities and any
other foreseeable commitments, the Company intends to buy back Ordinary Shares.
The making and timing of any share buybacks is at the absolute direction of the
Board. 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. 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.
Share buybacks made in the period are detailed in note 15.
(ii) Continuation Vote
The Continuation Resolution which was scheduled for the AGM of the Company to
be held in 2020 will now be proposed at the AGM held in 2024 and every fifth
AGM thereafter as it was agreed to defer the continuation vote at an EGM held
in August 2019. The Company implemented an additional shareholder protection at
an EGM held on 4 December 2020 that requires the directors to implement a
managed wind down consultation if the Company share price is not trading at or
above the most recently published NAV in the 20 business days prior to the
second anniversary of the EGM on 4 December 2022. The Company is also required
to propose a continuation resolution to shareholders in the event that it does
not pay total dividends of 4.5p per share in any given calendar year.
(iii) Dividend Reduction
The Company has been paying dividends from capital since its launch, and this
had a consequential decrease in the NAV of the Company on an ongoing basis.
Following the EGM on 19 August 2019, the Company reduced the annual dividend to
4.5p per annum. A further temporary reduction to 1.5p per annum was implemented
in April 2020 in the light of the uncertainty caused by the COVID-19 pandemic.
However, on 8 October 2020, the Company declared a dividend of 1.1125p in
relation to the 3 month period to 30 September 2020 plus a catch up fifth
interim dividend of 1.5p in relation to 30 June 2020.
(iv) Cash Management Policy
The Company will have the ability to invest uninvested cash into AAA rated UK
RMBS. This should allow the Portfolio Manager to more effectively manage cash
and improve returns as AAA rated UK RMBS ordinarily provide a real return over
cash equivalent instruments, as they typically have stable pricing and deep
liquidity.
The Company utilised its full share buyback authority during the financial year
and intends to renew this authority at its AGM on 9 December 2021 with the
intention of using either additional share repurchases or paying additional
dividends to reduce the discount to NAV at which its shares trade.
20. Analysis of Financial Assets and Liabilities by Measurement Basis
Financial Assets at Financial Assets
30 June 2021 fair value through at amortised
profit and loss cost Total
Financial Assets as per Audited £ £ £
Consolidated Statement of
Financial Position
Mortgage loans - 1,278,886,108 1,278,886,108
Reserve fund - 22,829,566 22,829,566
Cash and cash equivalents - 65,650,168 65,650,168
Trade and other receivables - 6,888,739 6,888,739
- 1,374,254,581 1,374,254,581
Financial Financial
Liabilities at
fair value through Liabilities at
profit and loss amortised cost Total
Financial Liabilities as per £ £ £
Audited Consolidated Statement
of Financial Position
Financial liabilities at fair 2,673,560 - 2,673,560
value through profit and loss
Trade and other payables - 8,358,566 8,358,566
Borrowings - 333,774,371 333,774,371
Loan notes - 890,356,122 890,356,122
2,673,560 1,232,489,059 1,235,162,619
Financial Assets at Financial Assets
30 June 2020 fair value through at amortised
profit and loss cost Total
Financial Assets as per Audited £ £ £
Consolidated Statement of
Financial Position
Mortgage loans - 1,638,952,388 1,638,952,388
Reserve fund - 20,204,519 20,204,519
Cash and cash equivalents - 37,905,366 37,905,366
Trade and other - 4,260,753 4,260,753
receivables
- 1,701,323,026 1,701,323,026
Financial Financial
Liabilities at
fair value through Liabilities at
profit and loss amortised cost Total
Financial Liabilities as per £ £ £
Audited Consolidated Statement
of Financial Position
Financial liabilities at fair 21,477,899 - 21,477,899
value through profit and loss
Trade and other payables - 6,594,574 6,594,574
Borrowings - 604,296,701 604,296,701
Loan notes - 848,876,889 848,876,889
21,477,899 1,459,768,164 1,481,246,063
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
years ended 30 June 2021 and 30 June 2020.
Level 1 Level 2 Level 3 Total
£ £ £ £
Liabilities
Financial liabilities at - (1,595,838) (1,077,722) (2,673,560)
fair value through
profit and loss
Total liabilities as at
30 June 2021 - (1,595,838) (1,077,722) (2,673,560)
Level 1 Level 2 Level 3 Total
£ £ £ £
Liabilities
Financial liabilities at - (8,386,469) (13,091,430) (21,477,899)
fair value through
profit and loss
Total liabilities as at
30 June 2020 - (8,386,469) (13,091,430) (21,477,899)
Vanilla swaps have been classified as Level 2. Balance guarantee swaps have
been classified as Level 3 as they are based on unobservable market data such
as counterparty's assumptions of prepayments and the Company's
creditworthiness. Please refer to note 9 for a reconciliation of the movement
for the year on the interest rate swaps.
For the year For the year
30.06.2021 30.06.2020
Financial liabilities at fair value through profit £ £
and loss -
Level 3
Balance at start of the year (13,091,430) (7,775,666)
Movement on derivatives in designated fair value 12,013,708 (5,315,764)
hedge relationships
Balance at end of the year (1,077,722) (13,091,430)
The following details the Company's sensitivity to an increase and decrease of
50 basis points in the interest rate, with 50 basis points being the
sensitivity rate used when reporting price risk internally to key management
personnel and representing management's assessment of the possible change in
market prices and is similar to the interest rate risk.
The Company's balance guaranteed swaps are designed to match the cash flows of
the underlying portfolios and therefore providing sensitivity analysis for the
key inputs for these instruments is considered to be irrelevant.
The following table analyses within the fair value hierarchy the Company's
assets and liabilities not measured at fair value at 30 June 2021 but for which
fair value is disclosed.
Level 1 Level 2 Level 3 Total
30.06.2021 30.06.2021 30.06.2021 30.06.2021
£ £ £ £
Assets
Mortgage loans - - 1,331,548,188 1,331,548,188
Reserve fund 22,829,566 - - 22,829,566
Cash and cash 65,650,168 - - 65,650,168
equivalents
Total 88,479,734 - 1,331,548,188 1,420,027,922
Liabilities
Trade and other 8,358,566 - - 8,358,566
payables
Borrowings - 333,774,371 - 333,774,371
Loan notes - 890,356,122 - 890,356,122
Total 8,358,566 1,224,130,493 - 1,232,489,059
Level 1 Level 2 Level 3 Total
30.06.2020 30.06.2020 30.06.2020 30.06.2020
£ £ £ £
Assets
Mortgage loans - - 1,680,454,116 1,680,454,116
Reserve fund 20,204,519 - - 20,204,519
Cash and cash 37,905,366 - - 37,905,366
equivalents
Total 58,109,885 - 1,680,454,116 1,738,564,001
Liabilities
Trade and other 6,594,574 - - 6,594,574
payables
Borrowings - 604,296,701 - 604,296,701
Loan notes - 848,876,889 - 848,876,889
Total 6,594,574 1,453,173,590 - 1,459,768,164
The carrying values of trade and other receivables and payables are approximate
to fair value.
The fair value of the mortgage loans is calculated through an appropriate proxy
securitisation structure based on existing deals with current and transparent
pricing. For movement from opening to closing of the mortgage loans classified
as Level 3 see note 7.
The fair value of borrowings and loan notes is deemed to equate to their
notional amounts, as they are at an entirely variable rate and have been
secured within the last three years on an arm's length basis.
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 and borrowings 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 three months. Their fair value is deemed to approximate their book
value, due to their short duration.
Trade and other payables represent the contractual amounts and obligations due
by the Company for settlement of trades and expenses. Their fair value is
deemed to approximate their book value, due to their short duration.
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 2021:
Period to Dividend Net dividend Record date Ex-dividend Pay date
rate per payable (£) date
Share
(pence)
30 September 2020 2.625 6,093,488 16 October 15 October 30 October 2020
2020 2020
31 December 2020 1.125 2,611,495 22 January 22 January 5 February 2021
2021 2021
31 March 2021 1.125 2,311,495 23 April 2021 22 April 2021 07 May 2021
30 June 2021 1.125 2,011,495 16 July 2021 15 July 2021 30 July 2021
The original dividend policy for the Company was for dividends on the Ordinary
Shares to be payable quarterly, all in the form of interim dividends (the
Company does not intend to pay any final dividends). It was intended that the
first three interim dividends of each financial year was to 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. Following the EGM on the 16 August 2019, the Company made the
decision that in order rebuild the NAV, improve the Company's cash flow and
reconstitute capital to generate returns in excess of the required divided, to
reduce the annual dividend to 4.5p per annum (the "new dividend policy"). The
dividend paid on 31 March 2020 reflected this new dividend policy. A temporary
reduction to 1.5p per annum was implemented in April 2020 in the light of the
uncertainty caused by the COVID-19 pandemic. However, on 8 October 2020, the
Company declared a dividend of 1.1125p in relation to the 3 month period to 30
September 2020 plus a catch up fifth interim dividend of 1.5p in relation to 30
June 2020.
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 Forward Flow contains Cornhill
No. 4, Hops Hill No 1 and Cornhill No. 7. The Buy to Let Purchased contains
Malt Hill No.2, Oat Hill No.1 Cornhill No. 6 and Oat Hill No. 2. Owner Occupied
Forward Flow contains Barley Hill No. 1 and Cornhill No. 5. The Owner Occupied
segment is solely forward flow hence purchased subsegment is not disclosed
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 Total as at
Occupied
Forward Flow Purchased Forward Flow 30.06.2021
£ £ £ £
Interest income on mortgage 14,112,759 22,848,831 14,367,783 51,329,373
loans
Net interest expense on (1,605,360) (5,529,175) (2,340,713) (9,475,248)
financial liabilities at fair
value through profit and loss
Net gain from derivative 133,304 5,454,321 (246,370) 5,341,255
financial instruments
Interest expense on borrowings (1,793,649) (1,054,682) (2,731,680) (5,580,011)
Interest expense on loan notes (2,023,163) (6,824,389) (1,643,589) (10,491,141)
Servicer fees (913,365) (1,774,268) (749,015) (3,436,648)
Loss on disposal (37,002) (4,241,051) - (4,278,053)
Other expenses (4,338,093) (3,694,669) (2,179,307) (10,212,069)
Total net segment income 3,535,431 5,184,918 4,477,109 13,197,458
Buy-to-Let Owner Total as at
Occupied
Forward Flow Purchased Forward Flow 30.06.2020
£ £ £ £
Interest income on mortgage 11,833,953 28,607,975 7,389,587 47,831,515
loans
Net gain from derivative (352,412) (2,690,082) (1,014,656) (4,057,150)
financial instruments
Net interest expense on (7,914,359) (5,158,172) (656,484) (13,729,015)
financial liabilities at fair
value through profit and loss
Interest expense on borrowings (4,283,701) (2,888,238) - (7,171,939)
Interest expense on loan notes - (10,235,020) (3,564,808) (13,799,828)
Servicer fees (650,417) (2,127,206) (677,518) (3,455,141)
Other expenses 9,902,059 (1,206,716) (1,124,603) 7,570,740
Total net segment income 8,535,123 4,302,541 351,518 13,189,182
A reconciliation of total net segmental income to total comprehensive loss is
provided as follows.
30.06.2021 30.06.2020
£ £
Total net segment 13,197,458 13,189,182
income
Other fees and (14,329,759) (6,957,072)
expenses
(1,132,301) 6,232,110
There are no transactions between the reportable segments.
Total segment assets include:
Buy-to-Let Owner Total as at
Occupied
Forward Flow Purchased Forward Flow 30.06.2021
£ £ £ £
Mortgage loans 521,538,492 415,191,503 342,156,113 1,278,886,108
Reserve fund 8,486,566 7,660,000 6,683,000 22,829,566
Other 18,834,260 4,236,875 16,026,884 39,089,019
548,859,318 427,088,378 364,865,997 1,340,813,693
Buy-to-Let Owner Total as at
Occupied
Forward Flow Purchased Forward Flow 30.06.2020
£ £ £ £
Mortgage loans 496,014,014 964,506,625 178,431,751 1,638,952,390
Reserve fund 2,500,000 13,521,519 4,183,000 20,204,519
Other 13,353,469 7,781,642 10,600,291 31,735,402
Total net segment 511,867,483 985,809,786 193,215,042 1,690,892,311
income
30.06.2021 30.06.2020
£ £
Segment assets for reportable segments 1,340,813,693 1,690,892,311
Other 33,440,888 10,430,715
Total assets 1,374,254,581 1,701,323,026
Total segment liabilities include:
Buy-to-Let Owner Occupied Total as at
Forward Flow Purchased Forward Flow 30.06.2021
£ £ £ £
Borrowings 125,278,599 - 208,495,772 333,774,371
Loan notes 384,880,816 406,308,066 99,167,240 890,356,122
Financial liabilities at 899,932 - 1,773,628 2,673,560
fair value through
profit and loss
Other 5,587,970 291,431 1,194,060 7,073,461
516,647,317 406,599,497 310,630,700 1,233,877,514
Buy-to-Let Owner Occupied Total as at
Forward Flow Purchased Forward Flow 30.06.2020
£ £ £ £
Borrowings 449,911,285 154,385,416 - 604,296,701
Loan notes - 689,925,877 158,951,012 848,876,889
Financial liabilities at 8,365,062 10,705,428 2,386,002 21,456,492
fair value through
profit and loss
Other 3,681,808 1,710,646 432,871 5,825,325
461,958,155 856,727,367 161,769,885 1,480,455,407
30.06.2021 30.06.2020
Unaudited Audited
£ £
Segment liabilities for reportable 1,233,877,514 1,480,455,407
segments
Trade and other payables 1,285,105 790,656
Total liabilities 1,235,162,619 1,481,246,063
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 1.125p per Ordinary Share was declared on 16
July 2021 and paid on 30 July 2021.
The first interim dividend of 1.125p per Ordinary Share in relation to the 3
month period to 30 September 2021 was declared on 13 October 2021. The payment
date is 5 November 2021.
These Audited Consolidated Financial Statements were approved for issuance by
the Board on 28 October 2021. There were no other subsequent events up until
this date.
SUBSIDIARY DETAILS
Company Registered Office
UK Corporate Funding Designated Activity 5 George's Dock, IFSC, Dublin 1, Ireland.
Company
35 Great St. Helen's, London, EC3A 6AP,
Cornhill Mortgages No.2 Limited United Kingdom.
(Dissolved 27 February 2020)
35 Great St. Helen's, London, EC3A 6AP,
Cornhill Mortgages No.4 Limited United Kingdom.
(Ceased to be under the Company's control
in January 2021) 35 Great St. Helen's, London, EC3A 6AP,
United Kingdom.
Cornhill Mortgages No.5 Limited
35 Great St. Helen's, London, EC3A 6AP,
Cornhill Mortgages No.6 Limited United Kingdom.
(Dissolved 25 February 2021)
35 Great St. Helen's, London, EC3A 6AP,
Malt Hill No.1 Plc United Kingdom.
(Dissolved 7 January 2020)
35 Great St. Helen's, London, EC3A 6AP,
Malt Hill No.2 Plc United Kingdom.
(Ceased to be under the Company's control
in May 2021)
35 Great St. Helen's, London, EC3A 6AP,
Oat Hill No.1 Plc United Kingdom.
(Dissolved 28 August 2020)
35 Great St. Helen's, London, EC3A 6AP,
Oat Hill No.2 Plc United Kingdom.
Barley Hill No.1 Plc 35 Great St. Helen's, London, EC3A 6AP,
United Kingdom.
Cornhill Mortgages No.7 Limited
35 Great St. Helen's, London, EC3A 6AP,
Hops Hill No.1 Limited United Kingdom.
35 Great St. Helen's, London, EC3A 6AP,
United Kingdom.
Alternative Performance Measures (Unaudited)
APM Definition Purpose Calculation
Net Asset The percentage A key measure of the The difference between the
Value Total increase/(decrease) in success of the NAV per share at the end
return NAV, inclusive of Investment Adviser's of the period (77.79p) and
dividends paid, in the investment strategy. the NAV per share at the
reporting period. beginning of the period
(80.59), plus dividends
paid of 5.25p, expressed
as a percentage of the NAV
per share at the start of
the period.
(77.59-80.59+5.25)/80.59=
3.03%
Shareholder The percentage A measure of the The difference between the
Total return increase/(decrease) in return that could have price per share at the end
share price, inclusive been obtained by of the period (72.4p) and
of dividends paid, in holding a share over the NAV per share at the
the reporting period. the reporting period. beginning of the period
(49.3), plus dividends
paid of 5.5p, expressed as
a percentage of the price
per share at the start of
the period.
(72.4-49.3+5.5)/49.3=58.0%
NAV per The Company's closing A measure of the value The net assets
Ordinary Share share price on the of one Ordinary Share. attributable to Ordinary
London Stock Exchange Shares on the statement of
for a specified date. financial position (£
139.09m) divided by the
number of ordinary shares
in issue (178799556) as at
the calculation date
Discount/ The percentage This is a key measure The difference between the
Premium to NAV difference between the of shareholder company's share price and
Company's share price sentiment to the its Net Asset Value per
and its Net Asset Company and the share divided by the Net
Value per share. When Investment Company Asset Value per share.
the number is positive sector in which its (72.40-77.79)/77.79= a
it is a premium and sits. discount of -6.93% at 30
when it is negative it June
is a discount.
Ongoing The recurring costs A measure of the Calculated in accordance
Charges Ratio that the Company has minimum gross profit with the AIC methodology.
incurred during the percentage that the
period excluding Company needs to
performance fees and produce to make a
one off legal and positive return for
professional fees Shareholders
expressed as a
percentage of the
Company's average NAV
for the period.
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 Directive Alternative Investment Fund Managers Directive
2011, 61/EU
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 the
Statements 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
CCJs County Court Judgements
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 UK Mortgages Limited
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
ECL Expected Credit Loss
EGM Extraordinary general meeting. An extraordinary
general meeting (EGM) is a meeting other than a
company's annual general meeting (AGM)
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
FTBs First Time Buyers
FVTPL Fair value through profit or loss
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)
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
ICR Interest Coverage Ratio, a debt ratio and
profitability ratio used to determine how easily
a company can pay interest on its outstanding
debt
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 Issuer 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 1.000p 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
Purchased portfolio A purchased portfolio is the purchase of a large
group of related financial assets in a single
transaction
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 warehouse or 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 an 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
SONIA the Sterling Overnight Interest Average rate
which is replacing LIBOR as a cost of interbank
funding
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 2018 (published
in July 2018) applies to accounting periods
beginning on or after 1 January 2019. It places
greater emphasis on relationships between
companies, shareholders and stakeholders. It also
promotes the importance of establishing a
corporate culture that is aligned with the
company purpose, business strategy, promotes
integrity and values diversity. All companies
with a Premium Listing of equity shares in the UK
are required under the Listing Rules to report in
their annual report and accounts on how they have
applied the 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. Five warehouse SPVs;
Cornhill Mortgages No. 1 Limited, Cornhill
Mortgages No. 2 Limited, Cornhill Mortgages No. 3
Limited, Cornhill Mortgages No. 4 Limited,
Cornhill Mortgages No. 5 Limited, Cornhill
Mortgages No. 6 Limited have been established for
the purpose of warehousing
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 Depositary
Christopher Waldron - Chairman Northern Trust (Guernsey) Limited
Richard Burrows PO Box 71
Paul Le Page Trafalgar Court
Helen Green 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
Hamilton Centre 45 Gresham Street
Rodney Way London, EC2V 7BF
Chelmsford, Essex, CM1 3BY
Portfolio Manager Independent Auditor
TwentyFour Asset Management LLP Deloitte LLP
8th Floor PO Box 137
The Monument Building Regency Court
11 Monument Street Glategny Esplanade
London, EC3R 8AF St Peter Port
Guernsey, GY1 3HW
UK Legal Adviser to the Company Receiving Agent
Eversheds Sutherland LLP Computershare Investor Services plc
One Wood Street The Pavilions
London, EC2V 7WS Bridgwater Road
Bristol, BS99 6ZZ
Guernsey Legal Adviser 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
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