b) Going concern

The Directors, at the time of approving the Financial Statements, are required to satisfy themselves that they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future and whether there is any threat to the going concern status of the Company. At the EGM of the Company on 14 January 2021, following a recommendation from the Board published in a circular on 16 December 2020, shareholders voted by the requisite majority in favour of a change to the Company's Objectives and Investment Policy which would lead to an orderly realisation of the Company's assets and a return of capital to shareholders.

It is intended that the investments will be realised over time and the Directors expect that some investments will be held past the formal maturity date of the last loan, currently due for repayment by the end of 2023. The Company may take actions with the consequence of accelerating or delaying repayment in order to optimise shareholder's returns in the context of the Company's size and position at that time. 

Whilst the Directors are satisfied that the Company has adequate resources to continue in operation throughout the remaining realisation period and to meet all liabilities as they fall due, given the Company is now in a managed wind down, the Directors consider it appropriate to adopt a basis other than going concern in preparing the financial statements.

In the absence of a ready secondary market in real estate loans by which to assess market value, the basis of valuation for investments is amortised cost net of impairment, recognising the anticipated realisable value of each investment in the orderly wind down of the Company. In accordance with the Company's IFRS 9 Policy there has been a change in the carrying value of some investments following the increase of the lifetime ECL allowances on the stage three loans, as detailed in Note 4. No material adjustments have arisen solely as a result of ceasing to apply the going concern basis.

c) Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors as a whole. The key measure of performance used by the Board to assess the Company's performance and to allocate resources is the total return on the Company's Net Asset Value, as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the Financial Statements.

For management purposes, the Company is organised into one main operating segment, being the provision of a diversified portfolio of UK commercial property backed senior debt investments.

The majority of the Company's income is derived from loans secured on commercial and residential property in the United Kingdom.

Due to the Company's nature, it has no employees.

The Company's results do not vary significantly during reporting periods as a result of seasonal activity.

3.  Critical accounting judgements and estimates in applying the Company's accounting policies

The preparation of the Financial Statements under IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and other factors that are believed to be reasonable under the circumstances, including the Company's timeframe for orderly realisation of investments in order to return capital to shareholders.  These factors help form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Critical judgements

In assessing the ECL, the Board has made critical judgements in relation to the staging of the loans and assessments which impact the loss given default. In assessing whether the loans have incurred a significant increase in credit risk the Investment Manager, on behalf of the Board, assesses the credit risk attaching to each of the loans and the realisable value of the underlying property on which the loans are secured. Realisable value is an estimate informed by third party valuations, but also taking into consideration property market liquidity, availability of debt funding and the timeframes in which the Company is seeking to return capital to its shareholders.

The Company has adopted the Investment Manager's Internal credit rating methodology and has used its loss experience to benchmark investment performance and potential impairment for Stage 1, Stage 2 and Stage 3 loans under IFRS 9 considering both probability of default and loss given default. It is noted that the Company's remaining loans are either past due or have a residual contractual maturity of less than one year.

In the case of past due loans, the Investment Manager and the Board will also take into consideration the likely repayment term of such loans and of actions taken to repay such loans. Consequently, a loan which is past due, but otherwise performing, may continue to be assessed as Stage 1 where there is an active repayment plan in place, or supporting evidence that the loan can be repaid in full and the Company has given a period of forbearance whilst reserving its rights to, or charging, default interest.

The sustained rise in UK interest rates, up four percentage points in a little over a year, has dramatically reduced liquidity in property and finance markets as well as affecting asset prices in many property sectors.  As a result, the number of UK commercial property transactions in the first half of 2023 was over 50% lower than the same period in the prior year, and 37% below the 10-year average. Hotel sales in the first half were at their lowest levels for over a decade. More recently, the data has trended weaker: Colliers International reports that investment transactions in July were less than £1bn, the lowest level since 2008. 

Against this backdrop the Investment Manager and Board agree that, other than the Northlands loan, all remaining investments have a heightened credit risk.  At the reporting date all three loans are subject to enforcement action and, in the absence of an active and liquid property market, are considered as Stage 3 assets with a material risk of credit loss.

Critical accounting estimates

The measurement of both the initial and ongoing ECL allowance for loan receivables measured at amortised cost is an area that requires the use of significant assumptions about credit behaviour such as the ability of borrowers to refinance; the likelihood of them defaulting; the realisable value of the secured properties; and the resulting losses. In assessing the probability of default and ECL, the Board has taken note of the experience and loss history of the Investment Manager which may not be indicative of future losses in changing market conditions. The default probabilities are based on a number of factors including rental income trends, interest cover and LTV headroom and sectoral trends which the Investment Manager believes to be a good predictor of the probability of default, in accordance with recent market studies of European commercial real estate loans.

In line with the Company's investment strategy at the time, all loans benefited from significant LTV headroom at origination, with business plans designed to deliver further value increases over time. This combined with tight covenants had enabled the Investment Manager to manage risk over the term of the loans. Following the change in Investment Strategy to one of orderly wind down, the Investment Manager and the Board have placed greater emphasis on the source and delivery of repayment over the residual term of each loan when assessing valuation of the Company's loans and the risk of capital loss.

The Board's valuation of Stage 3 assets (those loans considered to have a material risk of credit loss), is first informed by third party property valuations and supporting comparative transactional evidence.  The Investment Manager and the Board will then overlay property level cashflows, expected sales costs and other factors considered necessary to achieve exits within the target timeframes for returning capital to shareholders.

Since the Russian invasion of Ukraine in February 2022, UK inflation has been rising, and UK monetary policy has tightened. Inflation and therefore interest rate expectations have remained high driven by rising fuel and food costs and, more recently, wage settlements.  These factors have combined to make the UK's economic outlook less certain, with GDP growth of less than 1% per annum forecast for the next two years. 

As such, investor confidence in the UK commercial property markets is low as reflected by market transaction volumes discussed above.  Higher inflation and interest rates are also now beginning to impact consumer spending patterns and filter through to house prices.

All of the Company's Stage 3 assets were either past due or subject to enforcement action in the form of administration or receivership at the reporting date. As a result, the Company has considered the likelihood of achieving sales at the most recent third-party valuation or at discounts to reflect the current lack of liquidity in the relevant property sector and the Company's target timeframes and the probability of such outcomes. These probabilities and discounts are further informed by prospective purchasers' offers or expressions of interest where properties have been marketed.  

In arriving at the investment valuations, the Investment Manager has overlayed the expected costs of sale and exit timeframes to determine a weighted average valuation of each loan under the expected interest rate method and, thereby, the expected credit loss for each loan that may result.

Revenue recognition is considered a significant accounting judgement and estimate that the Directors make in the process of applying the Company's accounting policies. In respect of the Company's Stage 3 loans, Interest Income will be recognised through in the Statement of Comprehensive Income as and when it is received. In view of the trading conditions of the Southport hotel and liquidity challenges facing the RoyaleLife loan, the Directors consider it unlikely that interest payments will be received in the near term.  The Affinity loan is also a Stage 3 asset, however the property remains well occupied and the Directors expect interest will continue to be paid in full and such receipts will be recognised as and when received.

Following the period end, the remaining companies within the RoyaleLife loan's security structure were placed into administration, and a partial restructure of the investment has taken place. These actions have been taken together with the Company's co-lenders in order to preserve the value of the underlying property security, to stabilise operations and to protect corporate cashflows. The property securing the Affinity loan was placed into receivership following the period end and is now being remarketed for sale. The properties and companies securing the Southport Hotel loan were placed into administration in September 2022.

4.  Loans advanced

(i) Loans advanced

(ii)  Valuation considerations

As noted above, the Company is now in the process of an orderly wind down. It had been the intention of the Investment Manager and Directors to hold loans through to their repayment date, and seek a borrower led repayment in order to maximise value for the shareholders.  Economic and property market conditions have not enabled this, with commercial property transactions in some sectors at their lowest levels for 15 years.

The carrying value amounts of the loans, recorded at amortised cost in the Financial Statements have been adjusted for expected credit losses. For further information regarding the status of each loan and the associated risks see the Investment Manager's Report.

Amortised cost is calculated using the effective interest rate method which takes into account all contractual terms (including arrangement and exit fees) that are an integral part of the loan agreement. As these fees are taken into account when determining initial net carrying value, their recognition in profit or loss is effectively spread over the life of the loan.

As loans have fallen past due and enforcement actions have been taken, the Directors have reassessed the likelihood and timing of receipt of such exit fees in the context of the current underlying property value and weak market conditions.

Each property on which investments are secured was subject to an independent, third-party valuation at the time the investment was entered into and updated valuations are obtained as deemed appropriate. All investments are made on a hold to maturity basis. Each investment is being closely monitored including a review of the performance of the underlying property security.

Third party property valuations are typically based on the specific particulars of the property (rent, Weighted Average Unexpired Lease Term (WAULT), vacancy, condition and location) and assume a normal marketing period and sales process.  Valuers benchmark against comparative evidence from recent transactions in similar properties.

Other than the Northlands loan, the remaining Investments are considered to be Stage 3 assets and were at period end, or are now, subject to enforcement action.  Accordingly, the carrying value of each loan has been reviewed and further provisions for expected credit loss raised.  The carrying value of each Stage 3 investment has been calculated to reflect the net present value of the expected net proceeds from, and timing of, exit under a range of scenarios reflecting the latest property valuation, the cost of disposal (including enforcement action taken), and potential discount to valuation that a willing buyer may offer in the current market for a purchase out of administration/receivership in an accelerated process.

(iii) IFRS 9 - Impairment of Financial Assets

As discussed above, during 2023 the UK commercial property market has experienced a period of historically low transaction volumes, as buyers adjust their pricing in order to generate target returns in a higher interest rate environment with uncertain occupational demand in many sectors. Conversely, unless forced, sellers are inclined to hold properties where they can in the expectation of improved liquidity as the economic outlook stabilises and medium-term interest rates fall. In this context, valuation and, therefore, the ECL of each investment has been recalculated based on the underlying property performance and valuations together with any sales/marketing experience to date and is discussed further below.

The internal credit rating of each loan as at 31 July 2023 has been reviewed. One loan was identified as a Stage 3 asset at 31 January 2023, and the loan has remained a Stage 3 asset, with an ECL provision of £7,418,760 (31 January 2023: £2,288,651). Of the two loans that were identified as Stage 2 assets at 31 January 2023, RoyaleLife is now identified as a Stage 3 asset, with an ECL provision of £12,224,576 (31 January 2023: £1,638,828). Affinity  is also now identified as a Stage 3 asset, with an ECL provision of £1,676,853 (31 January 2023: £12,702).

As at 31 July 2023

As at 31 January 2023

The Northlands loan has been largely repaid through the sale of newly built residential properties and the break-up of the commercial portfolio on which it is secured. As at 31 July 2023, the outstanding loan balance was £85,737 with a further £432,198 of accrued interest and exit fees outstanding.  Two further property sales have completed since period end with proceeds applied against interest, and the loan is expected to be fully repaid from a series of further property sales which are currently under offer.  As a result, the look-through LTV is below 10% and the loan is expected to repay in full.

The Southport hotel was placed into administration in September 2022, following a failed marketing and refinancing exercise by the sponsor. The hotel has continued to trade throughout this period and, following a refreshed marketing process, was placed under conditional offer in the first quarter of 2023. The purchaser has not been able to satisfy themselves that all conditions could be met in a reasonable timeframe and, despite significant diligence costs, withdrew from the process following period end.  The property was last valued in late March 2023 at £12.5 million. The hotel has been brought back to the market and new bids are being solicited. The Company has provided a working capital facility to the administrator. Whilst trading has been profitable, it is insufficient to meet administrative and advisor costs and no interest payments are expected. Based on an expected remarketing period, sales and administration costs and the likelihood of achieving valuation in the current market environment, a further ECL of £5,130,109 has been recognised in the period.

Occupational demand for the Affinity office property has remained strong, with discussion underway in respect of the only remaining vacant space. Interest at 10.5% has been paid in full and further default interest is being accrued.  The borrower engaged an agent to sell the property in February 2023 but, despite a number of inspections, no formal offer has been forthcoming.  After a period of forbearance, the Company appointed a receiver over the property in September 2023 who has re-engaged with the sales agent to re-launch the property. The property was last valued in April 2023 at £20.15 million representing an LTV of 85.8%. The regional office market remains difficult as investors contemplate the ongoing occupational demand, with changing working practices following the Covid-19 pandemic. The Investment Manager and Board have adopted a probability-based approach to achieving full valuation and discounts thereto, whilst taking into account the full costs of receivership and eventual sale. As a result, the Company has made a provision for ECL of £1,676,853 against the carrying value of the loan.

As disclosed in the Financial Statements as at 31 January 2023 and subsequent RNS announcements, the sponsor group behind the RoyaleLife loan was undergoing severe liquidity issues as a result of a slowdown in sales during, and following, the Covid-19 pandemic. Whilst sales resumed, the borrower was circa 2 years behind its original business plan, and no longer able to fully support its operations.  As a result, and following a winding up petition issued by a third party creditor against some entities within the structure, the Company, acting together with its co-lenders, appointed an administrator over three group companies in May 2023, and over the remainder of the borrower structure in August 2023.

The Investment Manager on behalf of the lenders continues to work with the administrator and advisors to stabilise the park operations and has recently completed a partial restructure in order to bring in a new operator and preserve value in the underlying property security.

The Investment Manager is in discussion with a number of parties who have expressed an interest in acquiring the borrower group and these discussions are continuing. The property valuations have been updated since period end and following the appointment of the administrator. Based upon this, the Company's current exposure is at 95.6% LTV, an increase from 72.4% as at January 2023.  As previously reported, the borrower group is not expected to service interest in the near term and, at the lower valuation, exit fees in excess of £4 million are no longer likely to be received. In valuing the investment, the Investment Manager and Board have considered a number of scenarios based on discussions in hand and a full workout and have discounted the projected cashflow in each scenario to the reporting date. As a result, the Board has increased the ECL from £1,638,828 to £12,224,576, which includes a provision for impairment against exit fees previously recognised under the amortised cost accounting policy, as well as the accrued default interest.

A reconciliation of the ECL allowance is presented as follows:

(iv) IFRS 9 Impairment - Stress Analysis

The carrying values of the remaining investments above contemplate sales in a difficult market and have been adjusted for expected credit losses, making allowance for the potential impact sales out of receivership/administration on the properties' underlying liquidity and attractiveness to buyers, as well as the timeframe in which the Company is seeking to realise its investments.

Other than the Northlands loan, the remaining loans are subject to enforcement processes, which may be an additional factor in the liquidity of and buyer pools for the subject assets.  Following the additional provision for ECL, all three of those loans are held at 100% LTV.  Two of the loans (Southport and RoyaleLife) are secured against operating assets which brings additional complexity for buyers when compared to, say, single tenant investment properties and, in the case of RoyaleLife, operates in a new and emerging sector of retirement living.

The Investment Manager and the Board have considered the impact of a further 10%, 20% and 30% reduction in the underlying property values, broadly reflecting a one, two and three stage credit deterioration as previously presented, and recalculated its probability weighted valuations on this basis.  The impact of these further declines in property values on the portfolio as a whole is set out below.

Stress test impact on Expected Credit Loss at 31 July 2023

All efforts continue to be made by the Investment Manager and the Board to crystalise the value in the remaining investments in a reasonable time frame in order to return capital to shareholders and proceed to the liquidation of the Company. However, as discussed above, in the current market  many properties for sale are not receiving any bids, even where they are considered distressed, and the limited number of buyers active in the market are seeking out the maximum distress in order achieve best relative value and maximise their potential returns. Accordingly, the timing of the final realisation of the Company's remaining assets cannot be predicted with certainty.

5. Earnings per share and Net Asset Value per share

(Loss)/Earnings per share

The calculation of basic and diluted (Loss)/Earnings per share is based on the (loss)/profit for the period and on the weighted average number of ordinary shares in issue during the period. 

There are no dilutive shares at 31 July 2023 (31 January 2023: £Nil).

Net Asset Value per share

The calculation of NAV per share is based on Net Asset Value and the number of ordinary shares in issue at the period/year end.  

After the period end and following the substantial repayment at par of the Northlands loan, a further return of capital of £9.0 million or 7.40 pence per ordinary share to shareholders was made on 1 September 2023.  

6. Share Capital

The authorised share capital of the Company is represented by an unlimited number of ordinary shares with or without a par value which, upon issue, the Directors may designate as (a) ordinary shares; (b) B shares; and (c) C shares, in each case of such classes and denominated in such currencies as the Directors may determine.

Return of Capital

Return of Capital is recognised by the Company in the quarterly NAV calculation following the declaration date.

The Directors announced one return during the period ended 31 July 2023 and have returned an amount of 5.50 pence per Ordinary Share to shareholders, being £6,671,653 in total based on the current number of ordinary shares in issue. This return of capital was effected by way of an issue of redeemable B Shares to existing shareholders pro rata to their shareholding on the record date set out below and the subsequent redemption of those B Shares.

After period end, a further £9.00 million of shareholder capital was returned, equating to 7.40 pence per ordinary share.

7. Dividends

Dividends are recognised by the Company in the quarterly NAV calculation following the declaration date. A summary of the dividends declared and/or paid during the period/year ended 31 July 2023 and 31 January 2023 is set out below:

Following shareholder approval of proposed changes to the Company's Investment Objectives and Investment Policy which allows an orderly realisation of the Company's assets and return of capital to shareholders, the Board has made it clear that payment of quarterly dividends would continue only whilst it remained prudent to do so. 

As three of the remaining investments have significant ECL provisions, there is projected to be a significantly reduced level of operating cashflow.

The Company has a predictable cost base and the ability to hold back capital from the imminent (contracted) and prospective future repayments to meet costs and preserve working capital over the medium to long-term. However, it is no longer considered appropriate to distribute a regular dividend.

The Company has a single class of ordinary shares which are not entitled to a fixed dividend. The company had one issue of redeemable B shares which were redeemed throughout the period ended 31 July 2023 on a Return of Capital payment to shareholders of the redeemable B shares. At any General Meeting of the Company each ordinary shareholder is entitled to have one vote for each share held. The ordinary shares also have the right to receive all income attributable to those shares and participate in distributions made and such income shall be divided pari passu among the holders of ordinary shares in proportion to the number of ordinary shares held by them.

The Company's Articles include a B Share mechanism for returning capital to shareholders and following shareholder approval on 14 January 2021, the Company has and will continue to utilise this mechanism in future. When the Board determines to return capital to shareholders, the Company has issued B Shares, paid up out of the Company's assets, to existing shareholders pro rata to their holding of ordinary shares at the time of such issue. The amount paid up on the B Shares will be equal to the cash distribution to be made to shareholders via the B Share mechanism. The B Shares shall be redeemable at the option of the Company following issue and the redemption proceeds (being equal to the amount paid up on such B Shares) paid to the holders of such B Shares on such terms and in such manner as the Directors may from time to time determine. It is, therefore, expected that the B Shares will only ever be in issue for a short period of time and will be redeemed for cash shortly after their issue in order to make the return of capital to shareholders.

It is intended that following each return of capital the Company will publish a revised estimated Net Asset Value and Net Asset Value per Ordinary Share based on the prevailing published amounts adjusted to take into account the return of capital.  The number of ordinary shares in issue will remain unchanged.

8. Financial Risk Management

The Company through its investment in senior loans is exposed to a variety of financial risks. The main risks arising from the Company's financial instruments are: market risk (including currency risk and interest rate risk), credit risk and liquidity risk and are fully disclosed in the Annual Report and Financial Statements for the year ended 31 January 2023 in addition to the principal risks as set out above in this Interim Report.

The Company's principal risk factors were also discussed in the Company's Prospectus, available on the Company's website (www.lbow.co.uk) and should be reviewed by shareholders.

9. Related party transactions and Directors' remuneration

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the party in making financial or operational decisions.

In the opinion of the Directors, on the basis of shareholdings advised to them, the Company has no immediate or ultimate controlling party.

Directors

The Company Directors' fees for the period amounted to £80,000 (31 July 2022: £80,000) with outstanding fees at 31 July 2023 of £31,250 due to the Directors (31 January 2023: £31,250).

Investment Manager

Investment management fees for the period amounted to £369,261 (31 July 2022: Investment management/advisory fees £519,039) of which £233,198 was outstanding at the period/year end (31 January 2023: £517,343).

10. Other expenses

The other expenses shown in the Statement of Comprehensive Income are made up as shown below.

11. Subsequent events

After period end and following the substantial repayment of the Northlands loan, a further return of capital of £9.0 million or 7.40 pence per ordinary share to shareholders was made on 1 September 2023. 

In September 2023 the Company appointed a receiver over the asset securing the Affinity loan, in order to seek to accelerate ultimate repayment of that investment.