Annual Report for the year ended 31 January 2021

Economy and Financial Market Update

UK economic data saw significant volatility in 2020, with unprecedented GDP decline - highlighted by a 19.8% quarter-on-quarter fall in Q2 2020 - offset by an equally unparalleled rebound, with the economy growing by 16.9% in Q3 2020. UK GDP finished the year some 7.3% below its pre-pandemic level.

 

Moving into 2021, economic data has generally surprised to the upside given the return to a national lockdown in the UK from late-December. In its February Monetary Policy Report, the Bank of England was forecasting a Q1 2021 GDP fall of 4.2%; subsequently BoE policymakers have suggested the reduction is likely to be much more modest. This was reflected in the data, with the January 2021 GDP decline revised from 2.9% to 2.2%, followed by an uptick in February to a 0.4% month-on-month rise.

 

Given the magnitude of economic disruption caused by Covid-19 and the subsequent scale of the policy response, the effects of the UK reaching the end of the Brexit transition period has been difficult to quantify. Imports to and exports from the EU fell markedly in January 2021, on the face of it concerning but partially explained by stockpiling in the run up to year end. Exports to the EU rebounded by 46.6% in February, according to the ONS, but it is still too early to assess the overall effect.

 

Labour markets have also proved far more resilient than initial expectations, clearly aided by the furlough scheme.  Payroll employment rose modestly in January and February 2021, with underlying wage growth of 2.5% - 3% per annum, according to the ONS. Unemployment at the end of February 2021 was estimated at 4.9% and, whilst a slight fall from the January figure of 5.0%, it is not expected to peak until Q4 2021 (at 6.5%, according to the Office for Budgetary Responsibility).  The rate is still notably lower than following the financial crisis when it exceeded 8%.  It is also robust compared to the likes of Germany (6%), France (8%) and the Eurozone as a whole (8.1%). 

 

With business and consumer confidence surveys at their highest levels since the start of the pandemic, driven by the UK's successful vaccination programme, the economic outlook appears more positive than it has been for some months. Nonetheless we are mindful that much of the damage caused by Covid-19 - to the economy, labour market and public finances - has not fully filtered through.

 

Occupational Demand/Supply

 

Offices

A major narrative during the year has been the extent to which the enforced 'work from home' diktat, with employees becoming accustomed to flexible working, may shape longer term trends in the office market and particularly the level of occupational demand. Whilst many workers and companies are eager to see a return to the office, others will take a more flexible approach - PwC, BP and Nationwide have all announced that employees will be able to work from home more regularly. Whilst this points to the potential for lower space requirements, this could be offset by reducing densities (i.e. offering more space per worker and greater amenity provision) reversing a decade-long trend in the other direction. 

 

Nonetheless the most recent data point to demand falling, particularly in London, where vacancy has risen sharply as a marked slowdown in leasing activity combined with tenants shedding space has materially affected net absorption.  JLL reported a vacancy rate of 7.5% at the end of 2020, above the 20-year average. Since then, CBRE has reported that vacancy reached 8.8% in February 2021, the highest level since the dot-com crash.  This is very likely to rise further in the near term.  The impact on rents was most heavily felt in the City Core, with net effective levels down 5% in H2 2020, per Avison Young. The West End and Midtown were relatively less affected. 

 

In the regional office markets the story is somewhat different.  Manchester is the only market seeing a significant increase in supply, according to Savills, in part due to strong development activity in the city centre adding to available Grade A space. Headline rents in five of the 'Big Six' regional cities increased in 2020, led by Birmingham and Leeds, up 7.2% and 6.7% respectively. Many regional markets have seen only modest development activity and the pipeline remains limited, which should help support rental levels in future. 

 

The rise in London vacancy will clearly temper rental values in that market but, on a national basis, market observers remain relatively unmoved; the latest IPF consensus forecasts from February 2021 suggest a decline in office rents (nationally) of a modest 2.1% in 2021, returning to growth thereafter and averaging 1% per annum for the period 2021 - 2025. 

 

 

Industrial

Last year we highlighted the structural tailwinds benefiting the UK industrial market, and there is no doubt that Covid-19 has helped drive demand for the sector further.  CBRE reports that industrial and warehouse take up reached 43 million sq ft in 2020, a new record high.  Nearly half of this was in just two regions - the South East and East Midlands. Available space unsurprisingly fell, despite the delivery of over 8 million square feet of speculative space, with Colliers reporting a national vacancy rate in the warehouse market of only 5.8%, and a growing shortage of stock in some locations. 

 

This activity translated into continued growth in rental levels, with prime rents increasing in every quarter of 2020, according to CBRE, and annual rental growth of 2.6%. 

 

Retail

The Company has little exposure to the well-documented travails of the UK retail market, with the sector's exposure to structural changes in how consumers shop, together with oversized physical estates, continuing to provide challenges. The decline has been exacerbated by the marked drop off in non-food retail sales, with fashion hit particularly hard. According to Cushman & Wakefield, fashion retailers saw monthly sales declines averaging 37% between March and September 2020, compared to the equivalent period in the prior year.  For some operators the silver lining has been the rise in online sales, which accounted for nearly 30% of the overall total in 2020.

 

The impact on rental levels has been stark. According to Savills, average net effective rents (i.e. after adjusting for incentives such as rent free periods) fell by 15.4% in 2020 across shopping centre and high street units.   Cushman & Wakefield place the rental decline on the high street at a still higher level, of 19% year-on-year. 

 

While many retailers are clearly struggling, landlords in the sector have also been hit hard as tenants have used the Government's moratorium on commercial evictions to withhold rent payment, or to pay on their own terms.  Many have worked consensually with landlords to agree payment plans, but some retailers have taken a unilateral approach.  Knight Frank estimate that market-wide, 50% of 2020 retail rents were still owed going into 2021.  

 

It is important to note that not all retail is the same and not all retailers have suffered. Supermarkets have continued to trade well, as have discounters and many bulky goods retailers - Kingfisher plc reported a 44% rise in adjusted pre-tax profits in the year to 31 January 2021, driven by a 13% rise in B&Q sales in the UK.  As a result of this we have seen continued buyer demand for foodstore investments, and more recently a rise in out-of-town retail park transactions.

 

Hotel

Perhaps the starkest indication of the effect of the pandemic on UK hotel markets is in occupancy figures.  According to PwC, London hotels showed occupancy of 28.8% in 2020, compared to 83.4% in 2019, with much of this likely to have been weighted to Q1. Regional hotel occupancy also fell, from 75.4% to 37.5%, although domestic travel and 'staycations' over the summer saw some regions benefit from exceptionally strong trade, with markets such as Bournemouth, Brighton and Plymouth experiencing occupancy levels of over 90% over large parts of August, according to Savills.

 

Last year we reported that both London and the UK regions experienced both room rate and RevPAR growth, but rates collapsed in 2020.  PwC report that average daily room rates in London fell from £154 to £99 per night, with regional markets falling from £71 to £61 per night. The question for operators, investors and lenders is whether, and how soon, trading in this sector will bounce back to something in line with pre-pandemic levels.  There is a widely-held view that pent-up demand and ongoing international travel restrictions will lead to a favourable summer for parts of the UK hotel market, particularly in the regions, which should bode well for the Company's Southport Hotel loan. Parts of the London market in particular, reliant on international tourism and business travel, may continue to suffer.

 

Property Investment Market

Commercial property sales volumes were understandably muted during the year.  Q2 2020 saw only £4.2 billion of transactions, according to Jones Lang LaSalle (JLL), the lowest quarterly level since Q2 2009 and the height of the financial crisis.  Markets were notably brighter in Q4 2020 however, with sales of £19.4 billion being up 6% on the prior year and 10% above the 10 year average for the period. This led to an overall volume of investments in 2020 of £42.7 billion, some 15% down on the relatively sedate 2019 figure.  By comparison, JLL note that 10-year average volumes stand at £52 billion.

One of the notable impacts of Covid-19 on the property markets has been in reinforcing pre-existing structural changes and trends.  As such it is perhaps unsurprising that industrial property (seen as resilient to and in some instance benefiting from Covid-19  effects) had a comparatively strong year, with £8.3 billion of sales concluded, up 43% on 2019.  Approximately £16.6 billion of offices were traded, and in the sector perhaps most affected by Covid-19, hotel sales totalled only £1.7 billion, the lowest level since 2009.  Similarly the shopping centre market remained in almost total paralysis, with Knight Frank reporting only £340 million of trades, just 10% of the long-term average, with only five deals concluded in excess of £20 million.

In terms of returns, the MSCI index showed total returns for industrial property of 10.3% in the 12 months to February 2021, an almost mirror image of retail property returns, which were minus 10.1%.  Total returns for office properties were negative 1.7% on the year.

 

Finance Markets

Outstanding debt to the UK property markets, as reported to the Bank of England, rose by 2.8% in the year to January 2021, to £167.6 billion.  This appears somewhat counterintuitive given the lack of material transactional activity in property markets.  We attribute this growth in large part to borrowers drawing down on pre-existing funding lines (where they were able to do so), as evidenced by over £7 billion of net new lending reported in the three months from March 2020.  There is also likely to have been an effect from borrowers agreeing payment holidays or capitalising interest, particularly in the retail and hospitality sectors.  

Net new lending fell by £1.8 billion in Q4 2020, likely indicative of caution following the introduction of the tiering system and the second UK lockdown; this continued into January 2021 albeit February showed a modest bounce back.  We continue to expect finance markets to be relatively sedate in the coming year, particularly amongst UK clearing banks, although there remain substantial pockets of liquidity particularly amongst so-called alternative lenders, notably challenger banks, insurers and debt funds.

We did observe a material change in loan pricing during 2020, with senior loans of up to 60% LTV seeing credit margins widen by 50-100 basis points, and higher LTV loans perhaps 100-200 basis points wider. At the same time, LTVs have fallen as risk appetite has waned, and we have seen improved structural features including interest reserves - to protect against possible non-payment of tenant rents - and higher levels of amortisation.  

In large part liquidity in the finance markets was reserved for those sectors seen as more resilient to Covid-19, in particular industrial and warehousing property, residential for rent and food retail. This has broadened more recently, with greater activity returning to office markets and parts of the retail warehouse sector.

Whilst we have not seen any published data on the matter, we are anecdotally aware that lenders across the markets have worked collaboratively with their borrowers to agree covenant waivers, interest deferrals and payment holidays to help their customers address the challenges presented by Covid-19. The Company has taken a similar approach in a limited number of cases to its own portfolio, where it has been appropriate to do so.  As the UK steadily emerges from restrictions and markets reopen, we expect lenders to take a firmer hand in asserting their rights under loans.

 

Portfolio Outlook

Over 60% of the investment portfolio security has been originated or revalued post Covid-19, and for the balance we have seen either positive business plan progress or visibility towards a repayment.  As a result, we are satisfied with the underlying security position of all of the Company's investments.  With a weighted average LTV exposure of 69.3% at year end and a highest exposure of 80.1%, the portfolio has proved able to withstand the sharp contraction in the UK economy and stressed market conditions seen during the period, as detailed further in the Viability Statement. 

 

The investments which have proved most problematic during the period, being the Quattro, Southport and RoyaleLife loans, have each seen credit improvements in the latter part of the year which has continued post-year end, with a £1.1 million partial repayment of the Southport loan. 

 

The Company is now pursuing an orderly realisation of its investments, with the portfolio largely on a stable footing.  As such part of our focus has turned to managing the portfolio towards exit, where possible supporting borrowers in their business plan delivery to allow for timely sales or refinancing strategies, whilst ensuring the portfolio continues to generate sufficient coupon and fees to allow for a fully-covered dividend for as long as possible.  In doing so we will continue to balance maximisation of returns from the loans against timely return of capital to shareholders. 

 

Loan Portfolio

A summary of each of the individual loans as at 31 January 2021 is set out below:

 

Halcyon

Originally a £8.60 million senior loan facility utilised to refinance a portfolio of freehold ground rents.   During the loan term, certain assets have been sold or refinanced with the loan being paid down accordingly.  Given the continued stable performance, the loan term was extended to December 2020.  Whilst now past due, we are aware that a refinancing of the sponsor's wider portfolio (including the subject assets), is in solicitors' hands and is expected to complete shortly which will result in repayment of the loan in full.   The loan is secured by a portfolio of defensive freehold ground rent investments, and the security position is considered strong.

 

Property profile			Debt profile
Number of properties	17		Day one debt	£8,600,000
Property value	£8,796,000		Debt outstanding	£5,732,465
Property value per sq. ft.	£33		Original term	5.0 years
Property area (sq. ft.)	263,545		Maturity	December 2020
Number of tenants	4		LTV as at 31 January	65.2%
Weighted lease length	81.7 years		Loan exposure per sq. ft.	£21.75

 

 

Quattro

In October 2017, the Group advanced a new £9.00 million loan to a private property company, secured by three mixed use assets in and around the London Borough of Kingston.  The Group initially financed a £6.00 million participation in the loan subsequently acquiring the minority £3.00 million position from ICG following an equity issuance under the 2017 Placing Programme.  The initial LTV ratio was 84.2%.   During the financial year, the interest arrears experienced on the loan continued as the initial interest reserve was exhausted, and a value-add capital expenditure programme at the largest asset affected working capital.  All rights have been reserved in respect of this default. The LTV based on the outstanding loan balance is 80.1%, and total loan exposure including unpaid interest and fees at year end was £9.3 million, reflecting 83.3% LTV.    A payment plan has been agreed with the sponsor under which all interest has been met in full for the last two quarters, together with a catch up of outstanding arrears in addition to further equity expenditure on the properties.  Following year end the Sponsor has completed a development of residential apartments above one of the portfolio properties, with the sales proceeds to be applied in reduction of the loan and applied for formal planning permission for the redevelopment of the largest portfolio property, which if granted should be accretive to value.   The loan has passed its maturity date and the sponsor is pursuing an exit from the loan via a combination of sales and refinancing, which we are monitoring carefully.  We remain comfortable with the Company's security position.

 

Property profile			Debt profile
Number of properties	3		Day one debt	£9,000,000
Property value	£11,050,000		Debt outstanding	£8,853,459
Property value per sq. ft.	£290		Original term	3.2 years
Property area (sq. ft.)	38,038		Maturity	January 2021
Number of tenants	7		LTV as at 31 January	80.1%
Weighted lease length	7.2 years		Loan exposure per sq. ft.	£232.75

 

 

Affinity

On 28 February 2018, a new £16.20 million commitment was made, of which £14.20 million was advanced, to refinance a multi-let office property in Bristol, and to provide a £2.00 million capital expenditure facility to fund a refurbishment programme.  Subsequently, the loan was increased to £16.70 million in support of the borrower's business plan, and during the year a further £1.00 million loan commitment was made, which currently remains undrawn.   The property is currently leased to 15 tenants with a contracted rent of £1.9 million per annum, and a further £0.3 million of rent under offer and expected to complete shortly. The sponsor has continued to invest in the property, most recently introducing a flexible workspace offering which was launched to the market after period end.

 

Property profile			Debt profile
Number of properties	1		Day one debt	£14,200,000
Property value	£25,300,000		Debt outstanding	£16,700,000
Property value per sq. ft.	£221		Original term	4.2 years
Property area (sq. ft.)	114,364		Maturity	May 2022
Number of tenants	15		LTV as at 31 January	66.0%
Weighted lease length	3.1 years		Loan exposure per sq. ft.	£146

 

 

Southport

Initially a £15.0 million loan commitment, secured by a hotel and leisure complex in Southport, Merseyside.  The initial loan to value ratio was 59.5%.  The business plan focused on investing in improving the asset, renovating the bedrooms and thereafter driving room rates.  Substantially all business plan works across the hotel were completed prior to the onset of Covid-19.    During the period the UK Government mandated the closure of all UK hotels save for those supporting key workers or vulnerable groups.  Accordingly, the hotel and ancillary leisure units closed for trading and remained closed for much of the year.  Given this disruption to cashflows, the Company agreed to capitalise interest due during the period, adding the sums owed to the loan balance. As a result the LTV at year end is 68.3%. LTV is calculated based on the most recent third party valuation of the property, plus capital expenditure works at cost.   Following year-end, the sponsor reached agreement with one of the property's commercial tenants for a lease surrender.  The premium paid by the tenant has been partially applied to reduce the loan balance by the amount of the previously capitalised interest.  Accordingly, the outstanding balance is now £15.0 million, in line with the original loan commitment. In  May 2021, the property was revalued at £20.6 million, providing an LTV as at the signing date of this Annual Report of 72.8%.

 

Property profile			Debt profile
Number of properties	1		Day one debt	£12,500,000
Property value (£)	£23,440,000		Debt outstanding	£16,059,285
Property value (£/bedroom)	£176,240		Original term	4 years
Property value (£/sq. ft.)	£516		Maturity	April 2023
Bedrooms	133		LTV as at 31 January	68.3%
Property area (sq. ft.)	45,430		Loan exposure per bedroom	£120,747

 

 

Northlands

In October 2019 the Company provided a £12.50 million commitment to the sponsor, secured by a highly diversified portfolio of high street retail, office and tenanted residential units located predominantly in London and the South East.  The initial loan amount was £9.00 million with an LTV ratio of 55.3%.    The sponsor's business plan includes implementation of a planning consent to develop residential apartments on one of the sites in the portfolio, and in support of this the Company has provided a £3.50 million capital expenditure commitment.  This commitment was partially drawn during the period, with the outstanding balance now £9.58 million and LTV 58.8%.

 

Property profile			Debt profile
Number of properties	14		Day one debt	£9,000,000
Property value	£16,282,500		Debt outstanding	£9,578,514
Property value per sq. ft.	£134		Original term	3.0 years
Property area (sq. ft.)	121,285		Maturity	October 2022
Number of tenants	113		LTV as at 31 January	58.8%
Weighted lease length	3.4 years		Loan exposure per sq. ft.	£79

 

 

RoyaleLife

In September 2019 the Company provided a £24.6 million commitment to an affiliate of RoyaleLife, the UK's leading provider of bungalow homes, secured by a portfolio of ten assets in the residential bungalow homes sector.  The facility forms part of a larger four-year, £142.7 million loan originated by the Investment Manager, with the Company participating alongside two other funds managed by the Investment Manager.   The initial loan drawn down was £20.3 million, with the balance comprising a capital expenditure commitment in support of the borrower's business plan. The loan was fully drawn during the period.    The Sponsor's home sales were adversely affected by Covid-19 and the subsequent lockdown restrictions, and as a result the Company capitalised some of the interest due on the loan during the period, with the sponsor also committing new equity capital into the business. The total outstanding loan balance is now £25.38 million, above the day 1 commitment owing to the capitalised interest.   The sponsor secured several major new planning permissions during the period, in line with its business plan.  When combined with its continued investment in the portfolio, this has led to an improvement in value, with the LTV at period end being 75.4%.

 

Property profile			Debt profile
Number of properties	10		Day one debt	£20,267,119
Property value (£) *	£33,657,676		Debt outstanding	£25,382,017
Number of tenants	n/a		Original term	4.1 years
Weighted lease length	n/a		Maturity	October 2023
			LTV as at 31 January	75.4%
*pro rata based on Company's share of total loan

 

 

LBS

In September 2019, the Group entered into a £6.5 million loan commitment with a fund advised by LBS Properties, secured by a multi-let office property in Farringdon, London.    The loan carried an initial LTV ratio of 69.0%, and includes a capital expenditure commitment in support of the borrower's business plan which includes a full refurbishment of the property.  During the period the refurbishment works were completed ahead of schedule, a new tenant was secured for the majority of the space and an improvement in the valuation was recorded, with the LTV now 57.1%.

 

Property profile			Debt profile
Number of properties	1		Day one debt	£4,922,000
Property value	£11,000,000		Debt outstanding	£6,283,119
Property value per sq. ft.	£1,042		Original term	3.1 years
Property area (sq. ft.)	10,557		Maturity	October 2022
Number of tenants	1		LTV as at 31 January	57.1%
Weighted lease length	9.5 years		Loan exposure per sq. ft.	£595

 

Knowsley

The Group entered into a new £7.75 million loan commitment in March 2020 to an affiliate of Seybourne Estates, secured by a multi-let industrial property in Knowsley, Merseyside.   The property is spread over 37 acres and originally comprised an income-producing industrial estate which provides cashflow to service the loan, alongside a development site which was pre-let to a new tenant.  The Sponsor completed the build out of this property after period end, and the lease has now commenced with the loan fully drawn. The LTV at year end is 69.2%, where LTV is calculated based on the most recent third party valuation of the property, plus capital expenditure works at cost.   Following period end and substantial completion of the Sponsor's business plan, the property was independently revalued at £12.29 million, reflecting an LTV as at the date of these accounts of 63.1%.

 

Property profile			Debt profile
Number of properties	1		Day one debt	£3,500,000
Property value	£11,206,000		Debt outstanding	£7,750,000
Property value per sq. ft.	£70		Original term	3.1 years
Property area (sq. ft.)	160,149		Maturity	April 2023
Number of tenants	5		LTV as at 31 January	69.2%
Weighted lease length	7.4 years		Loan exposure per sq. ft.	£48

 

 

GMG

In July 2020 the Company entered into a £16.9 million commitment with an affiliate of GMG Real Estate, secured by an office property in St James's, London.  The Company is participating in a larger three-year, £22.3 million loan alongside another client of the Investment Manager.   The property was originally leased to a UK Government Agency, with a short unexpired lease term.  The tenant has now vacated and a renovation of the property is underway, in line with the business plan, using funds from the committed facility.

 

Property profile			Debt profile
Number of properties	1		Day one debt	£12,753,393
Property value	£18,219,133		Debt outstanding	£12,981,133
Property value per sq. ft.	£1,102		Original term	2.2 years
Property area (sq. ft.)	21,786		Maturity	October 2022
Number of tenants	-		LTV as at 31 January	71.3%
Weighted lease length	-		Loan exposure per sq. ft.	£785
* pro rata based on Company's share of total loan

 

 

 

ICG Real Estate

7 May 2021

 

Investment Policy

 

Investment objective

The investment objective of the Group, as approved by the shareholders of the Company, was revised during the year and is now to conduct an orderly realisation of the assets of the Group.  

 

Investment policy

The assets of the Group will be realised in an orderly manner, returning cash to Shareholders at such times and in such manner as the Board may, in its absolute discretion, determine. The Board will endeavour to realise all the Group's investments in a manner that achieves a balance between maximising the net value received from those investments and making timely returns to Shareholders. The Group may not make any new investments save that:

 

·      investments may be made to honour commitments under existing contractual arrangements or to

preserve the value of the underlying property security; and

·      cash held by the Group may be invested in quoted bond and other debt instruments with a final

maturity of less than 365 days as well as money market funds for the purposes of cash management;

provided any such instrument has a minimum credit rating.

 

The Group may utilise borrowings from time to time to finance its working capital requirements provided

such borrowings will not exceed an amount equal to 20% of the Group's Net Asset Value immediately

following the drawdown of the borrowings.

 

The Group will continue to comply with the restrictions imposed by the Listing Rules in force from time

to time.

 

Any material change to the Company's published investment policy will be made only with the prior approval

of Shareholders by ordinary resolution at a general meeting of the Company.

 

 

Board of Directors

 

Jack Perry CBE - Chairman and Non-Executive Independent Director

Appointment: Appointed to the Board and as Chairman in November 2012

Experience: Jack is an independent non-executive board member and adviser to a number of public and private companies.  He is currently Chairman of European Assets Trust PLC and a director and chairman of the audit committee of the Witan Investment Trust plc. He previously served as Chief Executive of Scottish Enterprise, Scotland's enterprise, innovation and investment agency for six years until November 2009. 

Prior to this he was the managing partner of Ernst & Young in Glasgow.  In addition, he was Regional Industry Leader for Scotland and Northern Ireland for Ernst & Young's Technology & Communications and Consumer Products practices. Jack is a former Chairman of the Confederation of British Industry (CBI) Scotland and was a member of the CBI President's Committee. 

 

He is a former non-executive director of FTSE 250 company, Robert Wiseman Dairies PLC and Capital for Enterprise Ltd.  He also served as a member of the Advisory Committee of Barclays UK & Ireland Private Bank. 

 

Jack is a member of the Institute of Chartered Accountants of Scotland.

 

Committee Membership: Nomination Committee, Management Engagement Committee, Remuneration Committee

 

Stuart Beevor - Non-Executive Independent Director

Appointment: Appointed to the Board in November 2012

Experience: Stuart is an Independent Consultant with various roles advising clients in real estate fund management, investment, development and asset management. He is a non-executive director of Empiric Student Property plc and a Trustee Director of the Legal & General UK Senior Pension Scheme.  From 2004 to 2013 he was a non-executive director at Unite Group Plc and from 2013 to 2020 a non-executive director of Metropolitan Thames Valley Housing.  From 2002 to 2011 he was Managing Director of Grosvenor Fund Management Limited and a member of the Board of Grosvenor Group Limited, the international property group. Prior to joining Grosvenor, he was Managing Director at Legal and General Property Limited, having previously held a number of roles at Norwich Union (now Aviva). Stuart is a Chartered Surveyor with over 35 years' experience in real estate both in the UK and overseas.

Committee Membership: Audit and Operational Risk Committee, Management Engagement Committee, Nomination Committee, Remuneration Committee

 

 

Patrick Firth - Non-Executive Independent Director

Appointment: Appointed to the Board in November 2012

Experience: Patrick qualified as a Chartered Accountant with KPMG Guernsey in 1991 and is also a member of the Chartered Institute for Securities and Investment. He worked in the fund industry in Guernsey since joining Rothschild Asset Management (CI) Limited in 1992 before moving to become Managing Director at Butterfield Fund Services (Guernsey) Limited (subsequently Butterfield Fulcrum Group (Guernsey) Limited), a company providing third party fund administration services, where he worked from April 2002 until June 2009. He is a non-executive director of a number of investment funds and management companies, including GLI Finance Limited, Riverstone Energy Limited, India Capital Growth Fund Limited and NextEnergy Solar Fund Limited.

Committee Membership: Audit and Operational Risk Committee, Nomination Committee, Management Engagement Committee

 

Fiona Le Poidevin - Non-Executive Independent Director

Appointment: Appointed to the Board in September 2020

Experience: Fiona is a non-executive director with a particular focus on listed investment companies and private equity. A Chartered Director, Fellow of the Institute of Directors and Chartered Accountant (FCA), Fiona has over 23 years' experience working in financial services in both London and the Channel Islands across the accounting and tax professions with experience in strategy, marketing, PR and the regulatory and listed company environments.

 

Until the end of July 2020, Fiona was Chief Executive Officer of The International Stock Exchange Group Limited, a company listed on The International Stock Exchange, where she was responsible for the commercial aspects of the exchange group's operation. Previously Fiona was Chief Executive of Guernsey Finance, the promotional body for Guernsey's finance industry internationally, and prior to this she was an auditor and latterly tax adviser at PwC (London and Channel Islands) and KPMG (Channel Islands) for over 13 years.

 

Fiona is a member of the AIC Channel Islands Committee and the IoD Guernsey Committee and non-executive Chairman of a local Sea Scouts group.

 

Committee Membership: Audit and Operational Risk Committee, Nomination Committee, Management Engagement Committee, Remuneration Committee

 

Paul Meader - Non-Executive Independent Director

Appointment: Appointed to the Board in November 2012

Experience:

Paul is an independent director of investment companies, insurers and investment funds.  Until the autumn of 2012 he was Head of Portfolio Management for Canaccord Genuity based in Guernsey, prior to which he was Chief Executive of Corazon Capital.  He has 35 years' experience in financial markets in London, Dublin and Guernsey, holding senior positions in portfolio management and trading.  Prior to joining Corazon he was Managing Director of Rothschild's Swiss private banking subsidiary in Guernsey.  He is a non-executive director of the following listed companies: Volta Finance Limited and Schroder Oriental Income Fund Limited.

 

Paul is a Chartered Fellow of the Chartered Institute of Securities & Investments, a past Commissioner of the Guernsey Financial Services Commission and past Chairman of the Guernsey International Business Association. 

 

He is a graduate of Hertford College, Oxford. Paul is a resident of Guernsey.

Committee Membership: Audit and Operational Risk Committee, Nomination Committee, Management Engagement Committee, Remuneration Committee

 

Report of the Directors

 

The Directors hereby submit the Annual Report and Consolidated Financial Statements for the Group for the year ended 31 January 2021. This Report of the Directors should be read together with the Corporate Governance Report.

 

General Information

The Company is a non-cellular company limited by shares incorporated in Guernsey on 29 November 2012 under the Companies Law. The Company's registration number is 55917 and it  is registered with the GFSC as a registered closed-ended collective investment scheme. The Company's ordinary shares were admitted to the premium segment of the FCA's Official List and to trading on the Main Market of the London Stock Exchange on 5 February 2013. As reported in the Company's interim report and accounts, the Board resolved to simplify its corporate structure by collapsing the Luxembourg subsidiary company which has historically acted as the lender for the Group's investments. These investments have now been transferred to the Company, at par, and in a manner that does not cause any adverse tax consequences for the Group or its shareholders.  The process of winding up the Luxembourg company has now commenced, and over time the Company expects this restructuring to reduce pro forma operating expenses by approximately £200,000 per annum, the benefit of which will support the dividend and process of shareholder capital return in future periods.

 

Principal Activities

In line with the revised Investment Objective and Policy approved by shareholders in the Extraordinary General Meeting in January 2021, the Company is now undertaking an orderly realisation of its investments.  As sufficient funds become available the Board intends to return capital to shareholders, taking account of the Company's working capital requirements and funding commitments. 

 

 

Business Review

A review of the Group's business and its likely future development is provided in the Chairman's Statement and in the Investment Manager's Report.

 

Listing Requirements

Since being admitted on 5 February 2013 to the Official List, maintained by the FCA, the Company has complied with the applicable Listing Rules.

 

Results and Dividends

The results for the year are set out in the Financial Statements below.

 

During the year, and since the year end, the Directors declared the following dividends:

Dividend	Quarter Ended	Date of Declaration	Payment Date	Amount per Ordinary Share (pence)
Interim dividend	31 January 2020	27 March 2020	1 May 2020	1.5
Interim dividend	30 April 2020	3 July 2020	7 August 2020	1.5
Interim dividend	31 July 2020	28 September 2020	30 October 2020	1.5
Interim dividend	31 October 2020	11 December 2020	22 January 2021	1.5
Interim dividend	31 January 2021	24 March 2021	30 April 2021	1.5

 

Share Capital

The Company has one class of ordinary shares. The issued nominal value of the ordinary shares represents 100% of the total issued nominal value of all share capital. Under the Company's Articles of Incorporation, on a show of hands, each shareholder present in person or by proxy has the right to one vote at Annual General Meetings. On a poll, each shareholder is entitled to one vote for every share held.

 

Shareholders are entitled to all dividends paid by the Company and, on a winding up, providing the Company has satisfied all of its liabilities, the shareholders are entitled to all of the surplus assets of the Company. The ordinary shares have no right to fixed income.

 

Shareholdings of the Directors

The Directors with beneficial interests in the shares of the Company as at 31 January 2021 and 2020 are detailed below:

 

Director	Ordinary Shares of £1 each held 31 January 2021	% holding at 31 January 2021	Ordinary Shares of £1 each held 31 January 2020	% holding at 31 January 2020
Mr Perry	89,398	0.07	50,000	0.04
Mr Beevor	30,000	0.02	30,000	0.02
Mr Meader(1)	210,766	0.17	80,000	0.06
Mr Firth	10,000	0.01	10,000	0.01
Mr Huntley(2)	110,000	0.09	10,000	0.01
Mrs Le Poidevin(3)	-	0.00	-	0.00

(1)      Shareholding is held via PCAs

(2)      Mark Huntley retired 25 September 2020

(3)      Fiona Le Poidevin appointed 1 September 2020

 

Directors' beneficial interests in the shares of the Company as at 13 April 2021, being the most current information available, are unchanged from those disclosed above.

 

Directors' Authority to Buy Back Shares 

The Directors believe that the most effective means of minimising any discount to Net Asset Value which may arise on the Company's share price, is to deliver strong, consistent performance from the Group's investment portfolio in both absolute and relative terms. However, the Board recognises that wider market conditions and other considerations will affect the rating of the shares in the short term and the Board may seek to limit the level and volatility of any discount to Net Asset Value at which the shares may trade. The means by which this might be done could include the Company repurchasing shares. Therefore, subject to the requirements of the Listing Rules, the Companies Law, the Articles and other applicable legislation, the Company may purchase shares in the market in order to address any imbalance between the supply of and demand for shares or to enhance the Net Asset Value of shares.

 

In deciding whether to make any such purchases the Directors will have regard to what they believe to be in the best interests of shareholders and in accordance with the applicable Guernsey legal requirements which require the Directors to be satisfied on reasonable grounds that the Company will, immediately after any such repurchase, satisfy a solvency test prescribed by the Companies Law and any other requirements in its Memorandum and Articles of Incorporation. The making and timing of any buybacks will be at the absolute discretion of the Board and not at the option of the shareholders. Any such repurchases would only be made through the market for cash at a discount to Net Asset Value.

 

Annually the Company passes a resolution granting the Directors general authority to purchase in the market up to 14.99% of the shares in issue immediately following Admission at a price not exceeding the higher of (i) 5% above the average mid-market values of shares for the five business days before the purchase is made or (ii) the higher of the last independent trade or the highest current independent bid for shares. The Directors intend to seek renewal of this authority from the shareholders at the Annual General Meeting.

 

Pursuant to this authority, and subject to the Companies Law and the discretion of the Directors, the Company may purchase shares in the market on an on-going basis with a view to addressing any imbalance between the supply of and demand for shares.

 

Shares purchased by the Company may be cancelled or held as treasury shares. The Company may borrow and/or realise investments in order to finance such share purchases.

 

The Company has not purchased any shares for treasury or cancellation during the year or to date. During the year the Board considered if such a purchase of shares would be appropriate and concluded that it would not be in the best interests of shareholders.  While the Directors consider it valuable to retain this authority, in light of the process to effect an orderly realisation of assets, it is considered unlikely that this authority would be exercised.

 

Directors' and Officers' Liability Insurance

The Group maintains insurance in respect of directors' and officers' liability in relation to their acts on behalf of the Group.

 

Substantial Shareholdings

As at 31 January 2021, the Company had been notified, in accordance with Chapter 5 of the Disclosure and Transparency Rules, of the following substantial voting rights as shareholders of the Company.

 

Shareholder	Shareholding		% holding
Close Brothers Asset Management	20,093,615		16.56
Canopius	12,276,107		10.12
TDC Pensionskasse	10,653,156		8.78
Premier Miton Investors	10,500,000		8.66
Intermediate Capital Group	10,000,000		8.24
Brewin Dolphin, Stockbrokers	7,494,854		6.18
Kleinwort Hambros	5,377,096		4.43

 

In addition, the Company also provides the same information as at 31 March 2021, being the most current information available.

 

Shareholder	Shareholding		% holding
Close Brothers Asset Management	20,130,615		16.60
Canopius	12,276,107		10.12
TDC Pensionskasse	10,653,156		8.78
Premier Miton Investors	10,500,000		8.66
Intermediate Capital Group	10,000,000		8.24
Brewin Dolphin, Stockbrokers	7,321,844		6.18
Hargreaves Lansdown, Stockbrokers	5,330,530		4.39

 

The Directors confirm that there are no securities in issue that carry special rights with regard to the control of the Company.

 

Independent External Auditor

Deloitte LLP has been the Company's external auditor since the Company's incorporation. The Audit and Operational Risk Committee reviews the appointment of the external auditor, its effectiveness and its relationship with the Company, which includes monitoring the use of the external auditor for non-audit services and the balance of audit and non-audit fees paid, as included in Note 15. Following a review of the independence and effectiveness of the external auditor, a resolution will be proposed at the 2021 Annual General Meeting to re-appoint Deloitte LLP. Each Director believes that there is no relevant information of which the external auditor is unaware. Each had taken all steps necessary, as a Director, to be aware of any relevant audit information and to establish that Deloitte LLP is made aware of any pertinent information. This confirmation is given and should be interpreted in accordance with the provisions of Section 249 of the Companies Law. Further information on the work of the external auditor is set out in the Report of the Audit and Operational Risk Committee.

 

Articles of Incorporation

The Company's Articles of Incorporation may only be amended by special resolution of the shareholders.

 

NMPI Status

There is no change to the Company's status in respect of NMPI and the Company remains on the AIC list of exempted securities.

 

The Company continues to make all reasonable efforts to conduct its affairs in such a manner so that its shares can be recommended by UK financial advisers to ordinary retail investors in accordance with the FCA's rules relating to non-mainstream investment products.

 

AIFMD

The Company is a non‐EU domiciled alternative investment fund and appointed ICG Alternative Investments Limited as its discretionary Investment Manager on 25 November 2020. Prior to this appointment the Company was internally managed. Any offer of shares to prospective investors within selected member states of the European Economic Area and the UK will be made in accordance with the applicable national private placement regime, and the Company will notify its intention to market to the competent authority in each of the selected member states for the purposes of compliance with AIFMD.

 

AEOI Rules

Under AEOI Rules the Company continues to comply with both FATCA and CRS requirements to the extent relevant to the Company.

 

The Board is committed to upholding and maintaining a zero-tolerance policy towards the criminal facilitation of tax evasion.

 

Change of Control

There are no agreements that the Company considers significant and to which the Company is party that may affect its control following a takeover bid.

 

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 Group has adequate resources to continue in operational existence for the foreseeable future and do not consider there to be any threat to the going concern status of the Group. 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 as and when the loans fall due, and the Directors expect that

the investments will be held to maturity with the last loan repaying by the end of 2023. Whilst the Directors are satisfied that the Company has adequate resources to continue in operation throughout the 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 a going concern in preparing the consolidated financial statements. No material adjustments arose as a result of ceasing to apply the going concern basis.

 

Viability Statement

The AIC Code requires that, the Directors make a viability statement in which they assess the prospects of the Group over a period longer than the 12 months required by the going concern provision.

 

A change in Investment Policy was approved by the shareholders at the EGM on 14 January 2021 with the resultant intention that the Company undergo an orderly realisation of assets,  returning capital to shareholders. For this reason, and as discussed above, the Company is preparing the consolidated financial statement on a basis other than a going concern due to the Company being in a managed wind down. Reflecting the maturity profile of the Company's investments, the Board expects the wind down of the Company to be completed within two to three years, although this cannot be guaranteed.

 

Cashflow projections have been prepared based on the Board's current intention to hold all investments to maturity, and in two scenarios reflecting expected maturity and legal maturity. The Board intends to return surplus capital to investors following each loan repayment, whilst it remains prudent to do so and taking into account the commitments and liabilities of the Company at the time.

 

Having conducted a robust analysis of the above scenarios, the Directors remain satisfied that the Group can, in all quarters, meet its liabilities as they fall due over the period under consideration (to January 2024). The Company expects to maintain positive cashflows in all but the final quarter, and intends to distribute surplus net profits by way of dividend whilst it remains prudent to do so.

 

Directors' Responsibilities to Stakeholders

 

Section 172 of the UK Companies Act 2006 applies directly to UK domiciled companies. Nonetheless the AIC Code requires that the matters set out in section 172 are reported on by all companies, irrespective of domicile. This requirement does not conflict with Guernsey company law.

 

Section 172 recognises that directors are responsible for acting in a way that they consider, in good faith, is the most likely to promote the success of the Company for the benefit of its shareholders as a whole. In doing so, they are also required to consider the broader implications of their decisions and operations on other key stakeholders and their impact on the wider community and the environment. Key decisions are those that are either material to the Company or are significant to any of the Company's key stakeholders. The Company's engagement with key stakeholders and the key decisions that were made or approved by the Directors during the year are described below.

 

 

Stakeholder Group	Methods of Engagement	Outcomes of Engagements
Shareholders   The major investors in the Company's shares are set out above in the Substantial Shareholdings section.   Continued access to capital was critical to the company's long term objectives. Following the Covid-19 pandemic and the Company share price falling to a deep discount to NAV, shareholders supported a recommendation by the Board to wind down the Company.   The Company sought to maintain shareholder satisfaction through: -           Transparency of communication -           Capital preservation, and -           Payment of regular and sustainable dividends	The Company engages with its shareholders through the issue of regular portfolio updates in the form of RNS announcements and quarterly factsheets.   The Company provides in depth commentary on the investment portfolio, corporate governance and corporate outlook in its semi-annual financial statements.   In addition, the Company, through its broker and Investment Manager undertake regular roadshows to meet with existing and prospective investors to solicit their feedback and understand any areas of concern.   The Board receives quarterly feedback from its Broker in respect of their investor engagement and investor sentiment.   The engagement with shareholders, including the AGM, will continue through the wind down period as capital is returned to investors.	In the financial year the Company issued: -           eight Portfolio updates by way of RNS -           four Quarterly fact sheets.   Through its Roadshows the Company met with ten major shareholders.  All meetings were conducted virtually.   None of the Company's investments is impaired or considered to be at risk of loss.   The Company, through its Investment Manager, Broker and the Board liaised with major shareholders in connection with the change in Investment Policy leading to an orderly realisation of assets of the Company, receiving over 75% support from shareholders.
Borrowers The Group's principal clients are its borrowers to whom the Group provides term finance.   The Board believes that the Company and its Investment Manager have a duty to act fairly in respect of its borrowers and that strong engagement with borrowers drives favourable outcomes for stakeholders and borrowers themselves.	The Group engages with its borrowers through its Investment Manager.   The Investment Manager forms and maintains a close working relationship with borrowers through the underwriting and the ongoing quarterly monitoring of such loans over their respective terms.   The Board monitors the timeliness and quality of these engagements through its regular engagement with the Investment Manager.   The Investment Manager works closely with borrowers to support the delivery of their business plans.	During the course of the year the Investment Manager has undertaken and the Board has reviewed four monitoring reports.   At the request of the borrowers, in two instances the Investment Manager has agreed to capitalise loan interest due under the respective investments, which the Board considers to be evidence of positive and consensual engagement.   Two investments have passed their maturity date.  The Investment Manager is working with both borrowers to assist in their efforts to repay the respective loans and in each case is satisfied with the plans put in place, which it does not consider will increase the risk profile of the Company.   There have been no borrower complaints.
Service Providers The Company does not have any direct employees; however, it works closely with a number of service providers (the Investment Manager, Administrator, Company Secretary, brokers and other professional advisers) whose interests are aligned to the success of the Company. The quality and timeliness of their service provision is critical to the success of the Company.	The Company's Management Engagement Committee has identified its key service providers. On an annual basis it undertakes a review of performance based on a questionnaire through which it also seeks feedback.   Furthermore, the Board and its sub-committees engage regularly with its service providers on a formal and informal basis. The Management Engagement Committee will also regularly review all material contracts for service quality and value.	The Feedback given by the service providers is used to review the Company's policies and procedures to ensure open lines of communication, operational efficiency and appropriate pricing for services provided.
Lenders The Company has a three-year Revolving Credit Facility. The Facility provides the Company with a flexible funding line which can be used to finance working capital, under the previous Investment Policy its availability was a key component of the Company's ability to remain fully invested and minimise cash drag.	The Company's engagement with its lender is primarily through its Investment Manager who provides regular reports to the Bank and has an open line of communication in respect of the ongoing operation and maintenance of the Facility.   The Investment Manager provides feedback to the Board in terms of actual and planned utilisation of the Facility as well as covenant compliance.	The Facility has continued to operate and remain available throughout the period, and no issues or concerns have been raised by the lender.
Community & Environment As an Investment Company whose purpose is the provision of, and investment in commercial real estate debt, the Company's direct engagement with the local communities and in relation to  the environment is limited.   However, the Board recognises the role the Company can play in terms of the environment by supporting and guiding borrowers to find environmentally  sustainable solutions in the maintenance of their properties and delivery of their business plan objectives more generally.	Within its Investment Strategy, the environmental and social impact of the properties on which the Company's loans are secured is a consideration when making new investments.	In the year to 31 January 2021 the Company made three new loans, two of which  included substantial capital expenditure facilities.  One such facility supports development a new-build property with environmental benefits including rooftop solar panels; the other assists with the refurbishment of an existing property which will have a substantially lower environmental impact than demolition and redevelopment, and will improve its energy performance and occupier amenities.   The ESG report provides further information on the Investment Manager's approach to this important subject.

 

 

Key Decisions

Key decisions are defined as both those that are material to the Group, but also those that are significant to any of our key stakeholder groups as discussed above.

 

In making the following key decision the Board considered the outcome from its stakeholder engagement as well as the need to maintain a reputation for high standards of business conduct and the need to act fairly between the members of the company:

 

During the year, following changes in Guernsey regulations and substance requirements for self-managed alternative investment funds, the Board decided to appoint ICG Alternative Investments Ltd (ICG AIL) (a sister company of the incumbent Investment Adviser, Intermediate Capital Managers Limited) as its discretionary Investment Manager.  The Board was satisfied that ICG AIL had the requisite procedures, controls and approvals to fulfil the role and that the same ICG Real Estate team would continue to support the Company as they had done whilst acting for the Investment Adviser.  The Board and the Investment Manager have agreed a remit and operating framework which is fully aligned to the Company's Investment Policy and Objectives.

 

Following the outbreak of the Covid-19 Pandemic and its continuing impact on the Company's share price, which has maintained a material discount to NAV, and acknowledging the consequential difficulty in delivering growth (a key objective based on shareholder feedback), the Board decided to approach shareholders to recommend that the Company be placed into an orderly realisation.  The Board was satisfied that, after consultation with major shareholders, such measures were in the best interests of the Company and its shareholders by offering shareholders some certainty as to returns in the short term faced with the uncertainty of being able to raise further capital necessary to deliver the original investment objectives in the longer term.  The Board further believe that, given the nature and uncertainty of the secondary loan market in UK commercial property finance, an orderly realisation through repayment at maturity currently offers better returns than asset sales. As a result of the decision to wind down the Company the Board is reviewing its composition and succession arrangements and is expected to reduce in size in line with the ongoing requirements of the Company.

 

Financial Risk Management Policies and Procedures

Financial Risk Management Policies and Procedures are disclosed in Note 11 to the Financial Statements .

 

Principal Risks and Uncertainties

Principal Risks and Uncertainties are discussed in the Corporate Governance Report.

 

Subsequent Events

Significant subsequent events have been disclosed in Note 19 to the Financial Statements.

 

Alternative Performance Measures

The Directors believe that the performance indicators detailed in the Financial Highlights and Financial Summary, which are typical for entities investing in real estate debt, will provide shareholders with sufficient information to assess how effectively the Group is meeting its objectives. The alternative performance measures are described in the table in the Alternative Performance Measures section.

 

Annual General Meeting

The AGM of the Company will be held at 14.00 BST on 28 June 2021 at Floor 2, Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 4LY, subject to any alterations brought about by Covid-19. Details of the resolutions to be proposed at the AGM, together with explanations of the AGM arrangements, will appear in the Notice of Meeting to be distributed to shareholders.

Due to the ongoing Covid-19 pandemic, whilst restrictions in the Bailiwick of Guernsey have been eased, any person arriving into the Bailiwick of Guernsey is presently required to register their journey on a travel tracker and is required to self-isolate for a period of 7 to 21 days upon arrival. In light of the restrictions currently in place, whilst Guernsey based shareholders are permitted to physically attend the AGM, all Shareholders are strongly encouraged to appoint the "Chairman of the Meeting" as their proxy and provide voting instructions in advance of the AGM, in accordance with the instructions explained in the Notice and on the accompanying Form of Proxy. If the Board believes it has become appropriate to make alternative arrangements for the holding of the AGM due to Covid-19, it will ensure that Shareholders are given as much notice as possible.  Any further information will be made available by an announcement through a Regulatory Information Service and through the Company's website.

By order of the Board

 

 

 

 

Jack Perry

Chairman

7 May 2021

 

Directors' Responsibilities Statement

 

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.

 

The Companies Law requires the Directors to prepare Financial Statements for each financial year.  Under that law the Directors are required to prepare the Consolidated Financial Statements in accordance with IFRS as adopted by the European Union. Under the Companies Law, the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period.  In preparing these Financial Statements, the Directors are required to:

 

·      select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

·      make judgements and estimates that are reasonable and prudent;

·      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 IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance;

·      state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the Financial Statements; and

·      prepare the Financial Statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business.

 

The Directors confirm that they have complied with the above requirements in preparing the Financial Statements.

 

The Directors are responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time, the financial position of the Group and enable them to ensure that the Financial Statements comply with Companies Law. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud, error and non-compliance with law and regulations.

 

The Directors are responsible for ensuring that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's performance, business model and strategy.

 

The Directors are also responsible under the AIC Code to promote the success of the Group for the benefit of its members as a whole and in doing so have regard for the needs of wider society and other stakeholders.

 

As part of the preparation of the Annual Report and Consolidated Financial Statements the Directors have received reports and information from the Company's Administrator and Investment Manager.  The Directors have considered, reviewed and commented upon the Annual Report and Financial Statements throughout the drafting process in order to satisfy itself in respect of the content.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the website (www.lbow.co.uk).

 

Legislation in Guernsey governing the preparation and dissemination of the Financial Statements may differ from legislation in other jurisdictions.

 

Responsibility Statement of the Directors in Respect of the Annual Report under the Disclosure and Transparency Rules

Each of the Directors, whose names are set out in the Board of Directors section, confirms to the best of their knowledge and belief that:

·      the Financial Statements, prepared in accordance with IFRS, 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;

·      the Annual Report includes a fair review of the development and performance of the business and the position of the Company and its subsidiary, together with a description of the principal risks and uncertainties faced.

 

Responsibility Statement of the Directors in Respect of the Annual Report under the Corporate Governance Code

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations. Having taken advice from the Audit and Operational Risk Committee, the Directors consider the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and that it provides the information necessary for shareholders to assess the Group's performance, business model and strategy.

 

By order of the Board

 

 

 

 

Jack Perry	Patrick Firth
Chairman	Director
7 May 2021	7 May 2021

 

Corporate Governance Report

 

As a UK premium listed Company, ICG-Longbow Senior Secured UK Property Debt Investment Limited's governance policies and procedures are based on the principles of the Corporate Governance Code as required under the Listing Rules. The Corporate Governance Code is available on the Financial Reporting Council's website, www.frc.org.uk.

 

The Company became a member of the AIC effective 27 February 2013 and has therefore put in place arrangements to comply with the AIC Code and, in accordance with the AIC Code, voluntarily complies with the Corporate Governance Code. The Directors recognise the importance of sound corporate governance, particularly the requirements of the AIC Code. The AIC Code is available on the AIC's website, www.theaic.co.uk.

 

The Company is subject to the GFSC Code, which applies to all companies registered as collective investment schemes in Guernsey. The GFSC has also confirmed that companies which report against the Corporate Governance Code or AIC Code are deemed to meet the GFSC Code.

 

The AIC Code addresses all the principles set out in the Corporate Governance Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to investment companies such as the Company. The Board considers that reporting against the principles and recommendations of the AIC Code provides better information to shareholders.

 

The Board monitors developments in corporate governance to ensure the Board remains aligned with best practice and has welcomed new recommendations introduced by the AIC in 2019 regarding the Board's culture and values and relationships with key stakeholders.

 

Throughout the year ended 31 January 2021, the Company has complied with the recommendations of the AIC Code and the relevant provisions of Section 1 of the Corporate Governance Code, except as set out below.

 

The Corporate Governance Code includes provisions relating to:

·      the role of the chief executive;

·      executive directors' remuneration; and

·      the need for an internal audit function.

 

For the reasons set out in the AIC Code, and as explained in the Corporate Governance Code, the Board considers that the above provisions are not currently relevant to the position of the Company which delegates most day-to-day functions to third parties.

 

As an investment company, the Company has no employees, all Directors are non-executive and independent of the Investment Manager and therefore the Directors consider the Company has no requirement for a Chief Executive or Senior Independent Director and the Board is satisfied that any relevant issues can be properly considered by the Board. The absence of an internal audit function is discussed in the Report of the Audit and Operational Risk Committee.

 

 

Environmental Social and Governance Report

As an investment company, the Group's activities only have a limited impact on the environment.  The Group has no employees and its offices are based in Guernsey and Luxembourg.

 

Following the change in Investment Objective and Policy approved by shareholders in January 2021, the Group is now conducting an orderly realisation of its investments.  As such the opportunity to implement material ESG changes across its portfolio is likely to be relatively limited, and ESG considerations are expected to be limited to monitoring the existing investments for their own performance in this area.

 

Nonetheless the Board continues to believe that it is in shareholders' interests to consider environmental, social and governance factors in monitoring its investments.  The parent of the Investment Manager is a longstanding signatory to the UN Principles for Responsible Investment and has a fully formalised and embedded Responsible Investing Policy which is applied to all investment decisions and the monitoring of each investment opportunity. 

 

The parent of the Investment Manager continues to develop its ESG policies and procedures.  Its responsible investment policy is available to view at: ICG Responsible Investing Policy

 

The Board relies on the Investment Manager to apply its Responsible Investment Policy and any associated ESG considerations to the investments of the Group.  As a lender to rather than direct owner of real estate assets, the Group is generally in a position only to influence rather than control the ESG impacts of its borrowers.  Moreover, as the Group will no longer make any new investments, it is considered unlikely there will be significant opportunities to support borrowers in ESG matters outside of the delivery of existing business plans.

 

During the challenges presented by Covid-19, the Investment Manager has worked consensually with borrowers to assist them in preserving the social as well as economic value in their business.  In particular, the Group agreed to capitalise interest payments on the Southport Hotel and RoyaleLife investments, which are partially or wholly reliant on operating cashflows to service debt.  This has allowed the borrowers of those investments greater freedom to manage working capital, meet supplier payments, and retain or furlough staff.  The investments are still considered to be well secured and the Group has, therefore, been able to use its strong financial position to  assist its borrowers directly in delivering what the Board considers to be a social good.

 

Culture and Values

The Board recognises that its tone and culture is important and will greatly impact its interactions with shareholders and service providers as well as the development of long-term shareholder value. The importance of sound ethical values and behaviours is crucial to the ability of the Company to achieve its objectives successfully.

 

The Board individually and collectively seeks to act with diligence, honesty and integrity. It encourages its members to express differences of perspective and to challenge but always in a respectful, open, cooperative and collegiate fashion. The Board encourages diversity of thought and approach and chooses its members with this approach in mind. The governance principles that the Board has adopted are designed to ensure that the Company delivers long term value to its shareholders and treats all shareholders equally. All shareholders are encouraged to have an open dialogue with the Board.

 

The Board recognises that the Company will take investment and other risks in order to achieve its objectives but these risks are monitored and managed and the Company seeks to avoid excessive risk-taking in pursuit of returns. A large part of the Board's activities are centred upon what is necessarily an open and respectful dialogue with the Investment Manager. The Board believes that it has a very constructive relationship with the Investment Manager whilst holding them to account and questioning the choices and recommendations made by them.

 

 

The Board

The Company is led and controlled by a Board of Directors, which is collectively responsible for the long-term success of the Company. It does so by acting in the interests of the Company, creating and preserving value and has as its foremost principle to act in the interests of shareholders.

 

The Company believes that the composition of the Board is a fundamental driver of its success as the Board must provide strong and effective leadership of the Company. The current Board was selected, as their biographies illustrate, to bring a breadth of knowledge, skills and business experience to the Company. All Directors are members of professional bodies and serve on other boards, which ensures that they are kept abreast of the latest technical developments in their areas of expertise. The Directors details are listed in the Board of Directors section which set out their range of investment, financial and business skills and experience represented.

 

The Chairman leads the Board and is responsible for its overall effectiveness in directing the Company.  The Chairman must be independent and is appointed in accordance with the Company's Articles of Incorporation. In considering the independence of the Chairman, the Board took note of the provisions of the AIC Code relating to independence and has determined that Mr Perry is an independent director.

 

The Board meets at least four times a year and, in addition, there is regular contact between the Board, the Investment Manager and the Administrator. At each meeting the Board follows a formal agenda that covers the business to be discussed.  Directors meet regularly with the senior management employed by the Investment Manager both formally and informally to ensure the Board remains regularly updated on all issues. Ordinarily, the Board also has regular contact with the Administrator, and the Board requires to be supplied in a timely manner with information by the Investment Manager, the Company Secretary and other advisers in a form and of a quality to enable it to discharge its duties.

 

The Company has adopted a share dealing code which is complied with by the Directors of ICG Longbow Senior Secured UK Property Debt Investments Limited and relevant personnel of the Investment Manager.

 

Board Tenure and Re-election

Four of the five Directors were appointed in November 2012 and Fiona Le Poidevin was appointed on 1 September 2020 therefore no member of the Board has served for longer than nine years to date. As such no issue has arisen to be considered by the Board with respect to long tenure. In accordance with the AIC Code, when and if any Director shall have been in office (or on re-election would at the end of that term of office) for more than nine years the Company will consider further whether there is a risk that such a Director might reasonably be deemed to have lost independence through such long service.

 

The Board recognises that Directors serving nine years or more may appear to have their independence impaired. However, the Board may nonetheless consider Directors to remain independent as noted further below.

 

The Nomination Committee shall take the lead in any discussions relating to the appointment or re-appointment of Directors, and give consideration to Board rotation in advance of the nine year tenure limit. 

 

A Director who retires at an Annual General Meeting may, if willing to continue to act, be elected or re-elected at that meeting. If, at a general meeting at which a Director retires, the Company neither re-elects that Director nor appoints another person to the Board in the place of that Director, the retiring Director shall, if willing to act, be deemed to have been re-appointed unless at such meeting it is expressly resolved not to fill the vacated office or a resolution for the re-appointment of the Director is put to the meeting and lost.

 

Directors are appointed under letters of appointment, copies of which are available at the registered office of the Company. The Board considers its composition and succession planning on an on-going basis. The Company's Articles of Incorporation specify that at each annual general meeting of the Company all Directors shall retire from office and may offer themselves for election or re‐election by the Members. Mr Perry, Mr Beevor, Mr Meader and Mrs Le Poidevin will retire as Directors of the Company in accordance with the Articles and will be put forward for re-election at the forthcoming AGM. Mr Firth will not be offering himself for re-election and will retire from the Board following the AGM.

 

Any Director who is elected or re-elected at that meeting is treated as continuing in office throughout. If he or she is not elected or re-elected, he or she shall retain office until the end of the meeting or (if earlier) when a resolution is passed to appoint someone in his place or when a resolution to elect or re-elect the Director is put to the meeting and lost.

 

The Board remains confident that its membership respects both the letter and the spirit of the Code regarding Board composition, diversity, particularly with respect to gender, and how effectively members work together to achieve the Company's objectives.

 

The Company's policy on Chair tenure is that the Chair should not normally serve longer than nine years as a Director and/or Chair unless it is determined to be in the best interests of the Company, its shareholders and stakeholders. In such circumstances, the independence of the other directors will ensure that the Board as a whole remains independent.

 

On 14 January 2021, the Company's shareholders voted for the orderly realisation of the Company's assets and the return of capital to shareholders.  As the Company now has a finite remaining operating life, not expected to exceed three years, it is considered in the best interests of shareholders and stakeholders to maintain the continuity and experience of the existing Board.  In addition, it is considered impractical to attract, recruit and induct new Board members for such a short period of time.  Accordingly, the current Chair of the Company, barring unforeseen circumstances, is expected to remain in office until the Company is placed into liquidation.  In practice this may mean that his tenure exceeds the recommended nine-year term. Similarly, some other Directors may remain beyond nine years.

 

Subject to the above, retirements of Directors will take place starting during 2021 ensuring that the Company complies with the 2019 AIC Code.

 

Directors' Remuneration

The level of remuneration of the Non-executive Directors reflects the time commitment and responsibilities of their roles. The Chairman is entitled to annual remuneration of £50,000 (31 January 2020: £50,000). The Chairman of the Audit and Operational Risk Committee is entitled to annual remuneration of £40,000 (31 January 2020: £40,000). The other independent Directors are entitled to annual remuneration of £35,000 (31 January 2020: £35,000).

 

During the year ended 31 January 2021 and the year ended 31 January 2020, the Directors' remuneration was as follows:

 

 

	Expected Fees 1 February 2021 to	1 February 2020 to	1 February 2019 to
	31 January 2022	31 January 2021	31 January 2020
Director	£	£	£
Mr Perry	50,000	50,000	50,000
Mr Firth	16,219	40,000	40,000
Mr Meader	35,000	37,500	37,500
Mr Beevor	35,000	35,000	35,000
Mr Huntley1	-	22,870	35,000
Mrs Le Poidevin2	40,000	14,583	-

(1)      Mark Huntley retired 25 September 2020

(2)      Fiona Le Poidevin appointed 1 September 2020

 

The Company Directors' fees for the year amounted to £199,953 (31 January 2020: £197,500) with outstanding fees of £45,995 due to the Directors at 31 January 2021 (31 January 2020: £49,375) (see Note 13).  Total fees for the year to 31 January 2022 are expected to be £176,219. 

 

All of the Directors are non-executive and are each considered independent for the purposes of Chapter 15 of the Listing Rules.

 

Duties and Responsibilities

The Board 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 the protection of investors. The Board has adopted a Schedule of Matters which sets out the particular duties of the Board. Such reserved powers include the following:

 

•         strategic matters;

•         risk assessment and management including reporting, compliance, governance, monitoring and control and financial reporting;

•         statutory obligations and public disclosure;

•         declaring Company dividends;

•         managing the Company's advisers; and

•         other matters having a material effect on the Company.

 

The Directors have access to the advice and services of the Administrator, who is responsible to the Board for ensuring that Board procedures are followed and that it complies with Companies Law and applicable rules and regulations of the GFSC and the London Stock Exchange. Where necessary, in carrying out their duties, the Directors may seek independent professional advice and services at the expense of the Company. The Company maintains appropriate Directors' and Officers' liability insurance in respect of legal action against its Directors should it occur.

 

The Board's responsibilities for the Annual Report are set out in the Directors' Responsibility Statement. The Board is also responsible for issuing appropriate Interim Reports and other price-sensitive public reports.

 

One of the key criteria the Company uses when selecting non-executive Directors is their confirmation prior to their appointment that they will be able to allocate sufficient time to the Company to discharge their responsibilities in a timely and effective manner. New Directors receive an induction on joining the Board and the Board assesses the training needs of Directors on an annual basis.

 

The Board formally met five times during the year and ad-hoc Board meetings were called in relation to specific events or to issue approvals, often at short notice and did not necessarily require full attendance. Each Board member receives a comprehensive Board pack at least five days prior to each meeting which incorporates a formal agenda together with supporting papers for items to be discussed at the meeting. Directors are encouraged when they are unable to attend a meeting to give the Chairman their views and comments on matters to be discussed, in advance. Representatives of the Investment Manager attend relevant sections of the Board meetings by invitation and the Directors also liaise with the Investment Manager whenever required and there is regular contact outside of the Board meeting schedule.

 

Attendance is further set out below:

Director	Scheduled Board Meetings 5	Ad-hoc Board Meetings 5	Audit and Operational Risk Committee Meetings 4	Investment Risk Committee Meetings 3	Nomination Committee Meeting 3	Management Engagement Committee Meeting 1	Remuneration Committee Meeting 0
Mr Beevor	5	5	4	3	3	1	n/a
Mr Firth	5	5	4	3	3	1	n/a
Mr Huntley(1)	4	2	n/a	3	2	1	n/a
Mr Meader	5	5	4	3	3	1	n/a
Mr Perry (2)	5	4	n/a	n/a	3	1	n/a
Mrs Le Poidevin (3) (4)	2	3	2	n/a	2	0	n/a

Footnotes

(1)      Resigned 25 September 2020

(2)      Mr Perry is not a member of the Audit and Operational Risk Committee and was not a member of the Investment Risk Committee, which was disbanded on 10 December 2020.

(3)      Appointed 1 September 2020 at which point 2 Audit and Operational Risk Committee Meetings, 2 Investment Risk Meetings, 1 Nomination Committee Meeting and 1 Management Engagement Committee Meeting had already occurred.

(4)      Mrs Le Poidevin was not a member of the Investment Risk Committee which was disbanded on 10 December 2020.

 

A quorum is comprised of any two or more members of the Board from time to time, to perform administrative and other routine functions on behalf of the Board, subject to such limitations as the Board may expressly impose on this committee from time to time.

 

An EGM of the Company was held on 14 January 2021. The recommendations at the EGM were not universally supported, with some 23.8% of votes cast against the proposals. The Board, having evaluated all alternative options, continues to believe that the proposals represent the best course of action for the Company.  The positive endorsement of over 75% of our shareholders and the narrowing of the share price discount to NAV in the period following the announcement provides some support to this view.   

 

Conflicts of interest

A Director has a duty to avoid a situation in which he or she has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the Company. The Board requires Directors to declare all appointments and other situations that could result in a possible conflict of interest and has adopted appropriate procedures to manage and, if appropriate, approve any such conflicts. The Board is satisfied that there is no compromise to the independence of those Directors who have appointments on the boards of, or relationships with, companies outside the Company.

 

Committees of the Board

The Board believes that it and its committees have an appropriate composition and blend of backgrounds, skills and experience to discharge their duties effectively. The Board is of the view that no one individual or small group dominates decision-making. The Board keeps its membership, and that of its committees, under review to ensure that an acceptable balance is maintained, and that the collective skills and experience of its members continue to be refreshed. It is satisfied that all Directors have sufficient time to devote to their roles and that undue reliance is not placed on any individual.

 

Each committee of the Board has written terms of reference, approved by the Board, summarising its objectives, remit and powers, which are available on the Company's website (www.lbow.co.uk) and are reviewed on an annual basis. Each Committee has access to such external advice as it may consider appropriate.

 

All committee members are provided with an appropriate induction on joining their respective committees, as well as on-going access to training. Minutes of all meetings of the committees are made available to all Directors and feedback from each of the committees is provided to the Board by the respective committee Chairmen at the next Board meeting.

 

The Board and its committees are supplied with regular, comprehensive and timely information in a form and of a quality that enables them to discharge their duties effectively. All Directors are able to make further enquiries of the Investment Manager and Administrator whenever necessary, and have access to the services of the Company Secretary.

 

Audit and Operational Risk Committee

The Audit and Operational Risk Committee is chaired by Mr Firth and also comprises Mr Beevor and Mr Meader, who held office throughout the year, and Mrs Le Poidevin who was appointed on 25 September 2020. Mr Huntley retired from the committee on 25 September 2020. Mrs Le Poidevin is expected to Chair the Audit and Operational Risk Committee following the AGM on 28 June 2021 at which point Mr. Firth will retire. Other Directors have a standing invitation to attend meetings. However, their attendance at these meetings is as an observer only.  The Chairman of the Audit and Operational Risk Committee, the Investment Manager and the external auditor, Deloitte LLP, have held discussions regarding the audit approach and identified risks. The external auditors attend Audit and Operational Risk Committee meetings and a private meeting is routinely held with the external auditors to afford them the opportunity of discussions without the presence of the Investment Manager or Administrator. The Audit and Operational Risk Committee activities are contained in the Report of the Audit and Operational Risk Committee.

 

Investment Risk Committee

The Investment Risk Committee was established on 21 September 2017 and was chaired by Mr Meader and also comprised Mr Beevor, Mr Firth and Mr Mortimer, a representative of the Investment Manager. Following the appointment of an external Investment Manager, the Investment Risk Committee was disbanded on 10 December 2020 and its remaining duties assumed by the Board as a whole.

 

The Investment Risk Committee's remit was to monitor the risks associated with the investments and to monitor the compliance of the investment portfolio with the investment restrictions of the Group. The Investment Risk Committee reviewed the performance and investment risks associated with the individual investments, the effectiveness of the Investment Adviser's investment underwriting and investment structuring/documentation processes and its compliance with them, and the effectiveness of the Investment Adviser's investment management and risk reporting processes, challenging where appropriate.

 

Management Engagement Committee

The Management Engagement Committee is chaired by Mr Perry and also comprises Mr Firth, Mr Meader, Mr Beevor and Mrs Le Poidevin all of whom, with the exception of Mrs Le Poidevin who was appointed member of the committee on 25 September 2020 and Mr Beevor who was appointed member of the committee on 10 December 2020, held office throughout the year. The Management Engagement Committee meets not less than once a year pursuant to its terms of reference which are available on the Company's website.

 

The Management Engagement Committee's main function is to review and make recommendations in relation to the Company's service providers. The Management Engagement Committee will review, in particular, any proposed amendment to the Investment Advisory Agreement and will keep under review the performance of the Investment Manager (including effective and active monitoring and supervision of the activities of the Investment Manager) in its role as investment manager to the Company as well as the performance of other principal service providers to the Company. The Audit and Operational Risk Committee also report on their relationship with the external auditor.

 

Nomination Committee

The Nomination Committee is chaired by Mr Perry and also comprises Mr Beevor, Mr Firth, Mr Meader and Mrs Le Poidevin all of whom, with the exception of Mrs Le Poidevin who was appointed member of the committee on 25 September 2020, held office throughout the year. Mr Huntley retired from the committee on 25 September 2020.  The Nomination Committee meets at least once a year pursuant to its terms of reference and last met on 10 December 2020. The Nomination Committee's remit is to review regularly the structure, size and composition of the Board, to give full consideration to succession planning for Directors, to keep under review the leadership needs of the Company and be responsible for identifying and nominating, for the approval of the Board, candidates to fill Board vacancies as and when they arise.

 

Board Performance Evaluation

In accordance with Provision 26 of the AIC Code, the Board is required to undertake a formal and rigorous evaluation of its performance on an annual basis. The Board believes that annual evaluations are helpful and provide a valuable opportunity for continuous improvement. Such an evaluation of the performance of the Board as whole, the Audit and Operational Risk Committee, the Nomination Committee, the Management Engagement Committee, the Remuneration Committee, individual Directors and the Chairman is carried out under the mandate of the Nomination Committee.

 

The internal evaluation conducted by the Nomination Committee during the year took the form of self-appraisal questionnaires and discussion to determine effectiveness and performance as well as the Directors' continued independence. The responses were consolidated and anonymised and common themes identified in order for the Nomination Committee to determine key actions and next steps for improving Board and Committee effectiveness and performance.

 

The evaluation concluded that the Board is performing satisfactorily and is acquitting its responsibilities well in the areas reviewed which incorporated: investment matters, Board composition and independence, relationships and communication, shareholder value, knowledge and skills, Board processes and the performance of the Chairman. The Board believes that the current mix of skills, experience, knowledge and age of the Directors is appropriate to the requirements of the Company.

 

The Nominations Committee has also reviewed the composition, structure and diversity of the Board, the independence of the Directors and whether each of the Directors has sufficient time available to discharge their duties effectively.  The Committee and the Board confirm that they believe that the Board has an appropriate mix of skills and backgrounds and that all Directors should be considered as Independent in accordance with the provisions of the AIC Code and have the time available to discharge their duties effectively.

 

Accordingly, the Board recommends that shareholders vote in favour of the Directors proposed for re-election at the forthcoming AGM.

 

Succession Planning

The Nomination Committee recognises the continuing importance of planning for the future and ensuring that succession plans are in place. During the year the Nomination Committee engaged an executive search consultant, OSA, to assist with recruitment. Members of the Board had interviewed several shortlisted candidates and Mrs Fiona Le Poidevin, the former head of The International Stock Exchange was appointed on 1 September 2020.

 

In considering appointments to the Board, the Nomination Committee takes into account the ongoing requirements of the Company and evaluates the balance of skills, experience, independence, knowledge and time commitments of each candidate. Appointments are therefore made on personal merit and against objective criteria with the aim of bringing new skills and different perspectives to the Board whilst taking into account the existing balance of knowledge, experience and diversity. The Board also believes that diversity of experience and approach, including gender diversity, amongst Board members is of great importance and it is the Company's policy to give careful consideration to issues of Board balance and diversity when making new appointments.

 

Remuneration Committee

The Remuneration Committee comprises of Mr Perry, Mr. Meader and Mr Beevor who have held office from 12 December 2019, when the Remuneration Committee was formed, and Mrs Le Poidevin who was appointed to the Committee on 10 December 2020. Mr. Huntley retired from the committee on 25 September 2020 and Mr. Meader was subsequently appointed as the Chairman which has been ratified since the year ended 31 January 2021.The Remuneration Committee is responsible for recommending and monitoring the level and structure of remuneration for all the Directors, including any compensation payments, taking into account the time commitments and responsibilities of Directors and any other factors which it deems necessary, including the recommendations of the AIC Code. The Remuneration Committee meets at least once a year pursuant to its terms of reference. Due to the restrictions placed on travel to Guernsey during 2020 and onwards, as a result of the Covid-19 pandemic, it had not been possible to form a quorum in Guernsey for the Committee to meet during 2020. Consequently no meetings have been held during the year. The Board have kept the matter of remuneration under observation and the  Directors' fees remained unchanged for the year to 31 January 2021.  No change in remuneration is proposed for the year to 31 January 2022.

 

Internal Control and Financial Reporting

The Directors acknowledge that they are responsible for establishing and maintaining the Group's and the Company's systems of internal controls and reviewing its effectiveness. Internal control systems are designed to manage rather than eliminate the failure to achieve business objectives and can only provide reasonable but not absolute assurance against material misstatements or loss. The Directors can confirm 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.  The key procedures which have been established to provide internal control are:

 

•        the Board has delegated the day to day operations of the Group and Company to the Administrator and Investment Manager, however, it remains accountable for all functions it delegates;

 

•        the Board clearly defines the duties and responsibilities of the Company's agents and advisers and appointments are made by the Board after due and careful consideration. The Board monitors the on-going performance of such agents and advisers and will continue to do so through the Management Engagement Committee;

 

•       the Board monitors the actions of the Investment Manager at regular Board meetings and is also given frequent updates on developments arising from the operations and strategic direction of the underlying borrowers; and

 

•        the Administrator provides administration and company secretarial services to the Company. The Administrator maintains a system of internal control on which it reports to the Board.

 

Internal Control and Financial Reporting

The Board has reviewed the need for an internal audit function and has decided that the systems and procedures employed by the Administrator and Investment Manager, including their own internal controls and procedures, provide sufficient assurance that an appropriate level of risk management and internal control, which safeguards shareholders' investment and the Group's assets, is maintained. An internal audit function specific to the Company is therefore considered unnecessary.

 

Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes. The Administrator and Investment Manager both operate risk-controlled frameworks on a continual ongoing basis within a regulated environment. The Administrator undertakes an ISAE 3402: Assurance Report on Controls at a Service Organisation audit annually which is provided to the Board when finalised. The Administrator also formally reports to the Board quarterly through a compliance report. The Investment Manager formally reports to the Board quarterly, including relevant updates regarding their policies and procedures, and also engages with the Board on an ad-hoc basis as required. No weaknesses or failing within the Administrator or Investment Manager have been identified.

 

The systems of control referred to above are designed to ensure effectiveness and efficient operation, internal control and compliance with laws and regulations. In establishing the systems of internal control, regard is paid to the materiality of relevant risks, the likelihood of costs being incurred and costs of control. It follows, therefore, that the systems of internal control can only provide reasonable but not absolute assurance against the risk of material misstatement or loss. This process has been in place for the year under review and up to the date of approval of this Annual Report and Financial Statements. It is reviewed by the Board and is in accordance with the FRC's internal control publication: Guidance on Risk Management, Internal Control and Related Financial and Business Reporting.

 

The Company has delegated the provision of services to external service providers whose work is overseen by the Management Engagement Committee at its regular scheduled meetings. Each year a detailed review of performance pursuant to their terms of engagement is undertaken by the Management Engagement Committee. An on-site review of the Investment Manager and an assessment of the Luxembourg Administrator were undertaken in February 2019. The conclusions of these reviews were highly satisfactory, providing assurance to the Board. This year due to Covid-19 restrictions, the visit to the Investment Manager has been postponed. In addition, the Company maintains a website which contains comprehensive information, including regulatory announcements, share price information, financial reports, investment objectives and strategy, investor contacts and information on the Board.

 

Investment Management Agreement

The Company entered into an agreement with the Investment Manager on 25 November 2020 replacing the Investment Advisory Agreement with Intermediate Capital Managers Limited. This sets out the Investment Manager's key responsibilities, which include identifying and recommending suitable investments for the Company to enter into and negotiating on behalf of the Company the terms on which such investments will be made. The Investment Manager is also responsible to the Board for all issues relating to the maintenance and monitoring of existing investments.

 

In accordance with Listing Rule 15.6.2(2) R and having formally appraised the performance and resources of the Investment Manager, in the opinion of the Directors the continuing appointment of the Investment Manager on the terms agreed is in the interests of the shareholders as a whole.

 

Whistleblowing

The Board has considered the AIC Code recommendations in respect of arrangements by which staff of the Investment Manager or Administrator may, in confidence, raise concerns within their respective organisations about possible improprieties in matters of financial reporting or other matters.

 

It has concluded that adequate arrangements are in place for the proportionate and independent investigation of such matters and, where necessary, for appropriate follow-up action to be taken within their organisation.

 

Principal risks and uncertainties

During the year the Board has overseen the continued enhancement of the Group's risk management framework and risk culture. This has been achieved via the Audit and Operational Risk Committee and Investment Risk Committee. Following the appointment of an external Investment Manager, the Investment Risk Committee was disbanded on 10 December 2020 and its remaining duties assumed by the Board as a whole. The Audit and Operational Risk Committee undertook a robust assessment of the Group's principal risks and associated risk appetite, taking into account changes in the business and the external environment.

 

The Board in the past, through these committees, and now through the Audit and Operational Risk Committee and via the Board thoroughly considers the process for identifying, evaluating and managing any significant risks faced by the Company on an on-going basis and these risks are reported and discussed at Board meetings. This ensures that effective controls are in place to mitigate these risks and that a satisfactory compliance regime exists to ensure all applicable local and international laws and regulations are adhered to.

 

The Board can confirm that it has undertaken a robust assessment of the principal risks facing the Company. In its most recent assessment of risks the Board has considered the particular risks that the Company may face as a result of Covid-19 either directly or indirectly. The risks set out below represent a snapshot of the Company's current principal risk profile. These risks have been ranked considering the magnitude of potential impact, probability and taking into account the effectiveness of existing controls. This is not an exhaustive list of all risks the Company faces. As the macro environment changes and country and industry circumstances evolve, new risks may arise or existing risks may recede or the rankings of these risks may change.

 

For each material risk, the likelihood and potential impact are identified. The Company's financial instrument risks are discussed in Note 11 to the Financial Statements.

 

The Directors have identified the following as the key risks faced by the Company:

 

 

 

Description	Nature of Risk	Potential Impact	Mitigation
Non-payment of interest	The challenges presented by Covid-19 may mean some businesses, including tenants of the Group's borrowers, are unwilling or unable to pay rents when due.   The UK government has restricted some of the actions available to a landlord if a tenant fails to pay rent, which may increase the likelihood of non-payment.	Rental income is generally the primary source of income for the Group's borrowers and has a direct link, in most cases, to the borrower's ability to service its debt obligations and pay interest.   The Board notes that certain tenants may take advantage of the eviction moratorium in order to defer or fail to pay rents when due.  It also anticipates that some tenants will fail and the borrowers may be unable quickly to replace the lost income.   Should a material number of the tenants in the properties securing the Group's investments fail to pay rents, the Group may experience a shortfall in receipt of interest or receive requests to defer or capitalise interest.	The Board and the Investment Manager have stepped up their monitoring of all the Group's investments, to understand the potential effect of Covid-19 on their rental profile and property business plans, including ability to service interest.   Aside from Southport and RoyaleLife, the Group's borrowers who are reliant on rental income to service interest collected sufficient rents during the period to make interest payments in full, or alternatively paid interest from other means such as equity injections or cash reserves.   Should any shortfall in interest payments be experienced in future, it is anticipated the outstanding interest will be deferred or capitalised and received by the Group at a later date.
Operating Businesses	The Group's borrowers who own or run operating assets, such as hotels, may suffer cashflow challenges.	Two of the Group's investments (the Southport Hotel and RoyaleLife loans) are wholly or partially reliant on operating cashflows to service interest, and these cashflows have suffered a downturn owing to Covid-19 impacts.   This has led, and may continue to lead, to requests from the relevant borrowers to capitalise loan interest until such time as the businesses are able to re-open or return to normalised trade.	The Group has a strong cash position and no borrowings as of the date of these accounts, and consequently is well placed to support its borrowers if required and endure any temporary shortfall of interest, whilst continuing to meet its liabilities as they fall due for the foreseeable future.
Fall in collateral values, and accuracy of valuations	Property values are typically linked to a property's ability to generate cashflows.  The property industry may not therefore be able accurately to value certain UK commercial real estate assets.	During the period, the Royal Institution of Chartered Surveyors (RICS) determined that Covid-19 was a matter which created material uncertainty in terms of property valuations, and for a large part of the year and for many sectors, the industry should only issue new valuations on a suitably qualified basis.   This may impact the Group's ability to accurately determine collateral values and test financial covenants, and to appropriately consider the permanent impairment of any particular investment.	The Group invests on a hold to maturity basis and given a comfortable equity cushion on all loans as such its loans are not directly exposed to short-term volatility in the valuation of the underlying real estate on which its loans are secured.     The Group's underlying property portfolio is diversified by sector, region and tenant base, and as such is not overly exposed to any one property sector which may be harder hit by, or slower to recover from, the economic impacts of Covid-19.
Inability to secure sales or refinancing of underlying properties	Material sections of the UK economy have been temporarily shut down, and liquidity for certain real estate sectors and assets is likely to be affected.	Additionally, the Group's borrowers may find it challenging to secure sales or refinancing of the underlying properties, in order to allow for timely repayment of the loans.	Further, the Group currently enjoys a strong balance sheet with a healthy cash surplus and no leverage, and as such has the ability to extend loans where its borrowers are unable to sell or refinance properties due to the market dislocation.
Uncertain Economic Outlook	The UK, like other governments around the world, has taken extraordinary and unprecedented measures to insulate the UK economy against the impacts of a forced shut-down across many sectors of commerce.	Despite unprecedented levels of economic support from the UK Government, the near and medium-term impacts of Covid-19 on business, employment and the economy more generally are unknown.   The effects of such uncertainty on the Group include potential negative impacts on the existing loan portfolio in terms of interest receipts and property valuations as discussed above; and possible positive effects on returns from, for example, charging default interest or fees.	The Group is undertaking an orderly realisation of its investments in order to return capital to shareholders.   The portfolio has a robust weighted average LTV of 70.8% as at the date of signing these financial statements, which the Board expects to prove generally resilient against ongoing impacts of Covid-19, at least in the short term, although the properties securing some investments may take longer to fully recover.
Portfolio Diversification	As loans repay and capital is returned to shareholders, the value of the Group's assets will reduce and be concentrated in fewer holdings.	As the loan portfolio reduces, the effect on the Group of any challenges experienced on the remaining investments (such as non-payment of interest) will be magnified and could lead to increased volatility in cashflows or net asset values.   Further, some of the Group's costs are fixed and will therefore comprise  a greater proportion of the Group's revenues, which may impact the funds available for distribution to shareholders.	The Board believes each individual loan investment remains well secured, with a maximum LTV of 83.3% as at the date of signing these financial statements.    The Board will closely manage the Group's costs, including the number of Board members, to ensure best value is obtained during the realisation of the portfolio.

 

 

The Company's principal risk factors, subject to the recent change in the Investment Policy, are fully set out in the Company's 2018 Prospectus, available on the Company's website (www.lbow.co.uk) and should be reviewed by shareholders.

 

Emerging risks are regularly considered to assess any potential impact on the Group and to determine whether any actions are required. Emerging risks include those related to regulatory/legislative change and macroeconomic and political change.

 

In summary, the above risks are mitigated and managed by the Board through continual review, policy setting and updating of the Company's detailed risk matrix to ensure that procedures are in place with the intention of minimising the impact of the above mentioned risks. The Board relies on periodic reports provided by the Investment Manager and Administrator regarding risks that the Group faces. When required, experts will be employed to gather information, including property surveyors, tax managers, legal managers, and environmental managers.

 

 

By order of the Board

 

 

Jack Perry	Patrick Firth
Chairman	Director
7 May 2021	7 May 2021