7 April 2020

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

GLI Finance Limited

("the Group" or "GLI")

Final Results for the Year Ended 31 December 2019

GLI Finance (AIM: GLIF) announces its audited final results for the year ended 31 December 2019.

Andy Whelan, Chief Executive Officer of GLI Finance Limited, commented: "We reported an overall loss for 2019, in spite of making good progress in our core business, with continued growth in the Sancus loan book and loan deployments, and a continued reduction in Group costs, resulting in improvements towards our long-term strategic targets.

"We are pleased that Sancus BMS, the key operating unit within the Group, has delivered positive results during the year. The lending businesses that comprise Sancus are strong, well managed, and have the ability to deliver a very attractive return on capital. Our good relationship with Pollen Street Capital, who manage the Honeycomb Investment Trust (HIT), has helped us significantly grow the loan book via their £45m credit facility as well as lending alongside the facility on larger loans. The new management team in the UK is making excellent progress in integrating the businesses and delivering synergies.

"We have taken a further material write-down on the FinTech Ventures portfolio. The FinTech sector continues to grow strongly, but increased competition is making it difficult for smaller players, particularly those that are loss making, to raise further equity. Several of our platforms are looking to raise equity over the next 12 months, and given the material write-downs incurred, we believe there is upside potential if these raises are successful.

"The Board is optimistic but acknowledges we still have a way to go to reach our targets. I am pleased that we are making continued progress on the execution of our strategy and expect the strong Sancus BMS growth rates to continue into 2020."

Group Highlights

·      Group revenue for the year was £13.1m (2018: £13.2m);

·      Group loss for the year was £9.9m (2018: £23.2m), impacted by material write downs within the FinTech Ventures portfolio (leaving the carrying value of the portfolio at £6.3m (2018: £13.8m));

·      Focus on cost control has achieved a £1.5m reduction in Group operating costs over the last 12 months, largely linked to a reduction in headcount from 42 to 34 employees across the Group;

·      The Zero Dividend Preference shares ("ZDPs") were extended for a further year on 5 December 2019, with the Group buying back 22% of the ZDPs in issue and a further loan swap for 621,586 shares ZDP in March 2020, reducing the amount due for repayment on 5 December 2020 to £13.3m; and

·      Nick Wakefield was appointed to the Board as Non-Executive Director in June 2019.

Sancus BMS Highlights         

·      Over the last 18 months, we have scrutinised capital allocation and we have been divesting assets where return on capital, on a risk adjusted basis, is below other areas of the business. This has led to a reduction in our SME lending activities where loans tend to attract a higher risk weighting and require significant use of our own balance sheet. We have redirected resources to our core asset backed secured lending activities where third-party funding is more accessible and our balance sheet less utilised;

·      Costs have been managed well during the year and we have seen a reduction in Sancus BMS operating expenses by £0.9m largely in savings on employment costs; 

·      The combination of better asset utilisation and better cost control have delivered an improvement in return on tangible assets *("ROTA") to positive 0.9% in 2019, (2018: negative 0.4%);

·      Strong growth has been delivered across the asset backed secured lending businesses. Over the last year we have delivered an 18% increase in the asset backed loan book to £199m in 2019 (2018: £168m);

·      A key growth initiative for the Group has been the establishment of the UK business in April 2019 and Irish business in December 2018.  These have significantly larger markets than in our traditional offshore islands, and we expect the future growth of the Group to be driven by these jurisdictions which are gaining traction and building strong pipelines of new business;

·      In line with our focus to improve asset efficiency and the quality of our earnings, during 2019 on-balance sheet loan exposure excluding loans consolidated in HIT, reduced by 31% compared to 2018, with revenue falling by far less, 17% to £9.6m (2018: £11.7m);

·      Proforma operating profit for the year was £0.4m (2018: loss £0.2m).  Results are impacted by a £1.5m IFRS 9 provision in the year (2018: £1.2m). £1.1m of this movement relates to an SME loan within the BMS UK Fund where the underlying SME business is facing financial difficulties. Sancus is focussed on asset backed lending and is exiting business/working capital lending with the BMS Finance loan book in run-off; and

·      We continue to diversify and grow our sources of capital and lending capacity.  At the end of 2019, Sancus had loans outstanding of £199m with Co-Funders providing £187m, equating to a co-funding ratio of 94% (2018: 89%). 

* A proforma reconciliation to Statutory Results is noted in Table 3 and performance measurement calculations are included in Note 27.

Enquires:

CHAIRMAN'S STATEMENT

Positioning the business for the future

Our focus remains on maximising the earning potential of our two distinct business units, whilst recognising that Sancus is the key focus for GLI.

Sancus BMS comprises the Group's property backed and SME lending businesses. FinTech Ventures represents the Group's investments in a portfolio of SME focussed lending platforms. Over the last few years we have seen the valuation of FinTech Ventures become a much smaller part of the Group's assets as certain platforms within the portfolio have not been successful and numerous valuations in the sector have reduced.  We are in a difficult position as a minority investor with limited financial resources to continue to support the platforms, but we continue to work hard to maximise the value from this portfolio.

Sancus BMS is our core trading business and continues to show good growth with an 18% increase in the asset backed loan book from £168m at 31 December 2018 to £199m at 31 December 2019.  Sancus BMS revenue on a statutory reporting basis was £12.6m (2018: £13.3m). £3.7m of this revenue related to Sancus Loans Limited ("SLL") which increased by 96% in comparison to the prior year, highlighting the demand we have seen in loan origination. In our view, to show the true economic performance of the Group, all Co-Funders should be assessed in the same way.  However, as SLL is 100% owned by Sancus BMS Group Limited (as it was required to be set up as an SPV for the HIT facility) it is consolidated into the Group's results. In our proforma statements on Table 3 the SLL results have been deducted from the consolidated statement of comprehensive income ("SOCI") and we show the results on a net basis which is the same for all our other syndicated arrangements.

Sancus BMS revenue on a proforma basis has not moved in line with the loan book growth with a reduction of 17% (£2.0m) compared to 2018.  This is predominantly due to the sale of the Irish BMS Fund mandate last year, which resulted in a reduction in admin fee income and interest income of £1.4m. Interest income did reduce within the Sancus entities as expected as we reduced our on-balance sheet loan book to use funds to repay the ZDPs and reduce our debt. This is in line with our long-term strategy to increase return on tangible assets over time with reduced on-balance sheet loan risk.

The growth in the loan book is a factor of growth in Co-Funder appetite, which includes the £45m HIT facility. It is the Directors intention this facility will renew at the end of the term for a further three years. In addition to this facility and regular participation by other Co-Funders, we also have the Sancus Loan Note programme that has proven very successful and provides Co-Funders with the option of participating in a wider pool of loans with a fixed rate of return.  As seen by the HIT facility this diversification of funding has allowed us to grow the Sancus BMS loan book and we continue to look at other similar debt providers to aid expansion plans.

ZDPs

The repayment of our ZDPs has been at the forefront of our mind during the last year and on the 5 December 2019, these were extended for a further year at an increased coupon of 8% following shareholder approval. This extension was sought as the timing of the repayment of some of the larger loans on our balance sheet have taken longer to repay than previously expected. As part of the extension we noted our intention to make a tender offer in March 2020 and on the 6 March 2020, shareholder approval was received to buyback 25% of the total ZDP shares in issue (excluding treasury shares) (of which 22% was taken up) and to approve a loan swap in exchange for a shareholders entire holding of 621,586 ZDP shares. This represented £3.8m in cash repaid to ZDP shareholders and a loan transfer for £0.8m, reducing our liability now due on 5 December 2020 to £13.3m.

We remain focussed on the repayment of the remaining ZDPs on 5 December 2020. Based on current cash reserves plus the loan maturity profiles of the Sancus and BMS Fund loan books as well as forecast sales of our real estate assets during 2020, the Going Concern model indicates there will be sufficient cash available to meet the repayment of the ZDPs at the end of 2020. However, as we have seen in the past, timings of the repayment of loans can vary and deviate from expectations as development loans may run over and in the case of the BMS Fund, the refinance of some of the loans may not occur as planned. In the past year especially, we have seen this occur with the impact of Brexit playing some part, but this risk is now heightened by COVID-19 which we go into more detail in the section below. Should there be a shortfall on 5 December 2020 for the repayment of the ZDPs in full, the Directors' intention is either to obtain a commercial loan at a similar rate or, subject to Shareholder consultation may seek approval to extend the ZDPs on similar terms or may offer a swap into GLI Bonds. Taking into account the various possible outcomes and assumptions as part of the Going Concern model, these constitute a material uncertainty that may cast significant doubt over the Company's and Group's ability to continue as a Going Concern, such that it may be unable to realise its assets and discharge its liabilities in the normal course of business.  The Directors note that the HIT facility expires in January 2021 and it is the intention to seek an extension of this facility. The Directors further note that the £10m bond is repayable on 30 June 2021, which we will look to refinance if there are not sufficient cash assets to repay on the maturity date. The Directors expect that if they are able to action the mitigations being considered above, the material uncertainties will be extinguished.  Refer Note 2(a) for further details.

Coronavirus COVID-19

At the time of writing this report we are faced with a truly stressful global event created by the emergence of COVID-19, which is a coronavirus that emanated from Wuhan in China.  The World Health Organisation has confirmed the virus is now a pandemic (meaning it has spread worldwide) and unfortunately at this stage we cannot truly understand the impact and the duration of the damage caused to the global economy, financial markets and humanity.  We have remained convinced that the world economy was close to global recession and COVID-19 has certainly pushed us closer to this reality. Andy goes into more detail in his report about how we think this may impact the Group, but at this time it is hard to estimate with absolute certainty.

Overview

We have made significant strides to lay the foundations for growth and operational improvements to create and build shareholder value in the Sancus BMS Group. The funding facility, the Loan Note Programme and Co-Funder network help to support this growth, but we are also continuing to secure a steady flow of new Co-Funders due to the attractive risk-adjusted returns that are available on our lending opportunities. Our focus for the foreseeable future is growing the UK and Irish operations and continuing to expand the offshore jurisdictions.

We shall continue to carefully manage the FinTech Ventures portfolio and explore options to maximise the return to Shareholders, although we note the continuing challenges on these investments and the extremely poor performance to date.  

We are also pleased to welcome Nick Wakefield as a Director of the Company. Nick was proposed as a representative of our largest shareholder and brings significant experience to the Board.    

Following the resignation of Aaron Le Cornu, Dan Walker has taken on the role of Chief Operating Officer with effect from 1 January 2020 and will continue to be the UK Managing Director of Sancus. We thank Aaron for his contribution to the business over the last two and a half years.

Following shareholder feedback at the 2019 AGM a new Company Remuneration Policy has been approved  and details of this are included in the Remuneration Report.

Dividend and Shareholders

In line with our dividend policy, it is not proposed to declare a dividend for this year.  We expect the Sancus offices in Ireland and the UK, together with a further focus on operational matters to drive free cash flow in future years. We fully intend to recommence the dividend program but only at such time as the Company is in a strong enough position to make such payments. We are mindful of the Bond repayment in June 2021 and no dividend would be paid before this Bond is successfully refinanced or repaid. I am grateful to all our shareholders who have kept confidence with the Group through what continues to be a challenging period as reflected in the depressed share price. We believe that the share price is trading well below the inherent value of the business and we look forward to seeing it recover in due course on the back of the strong growth delivered by the Executive Team within Sancus BMS. 

Patrick Firth

Chairman

CHIEF EXECUTIVE OFFICER'S REVIEW

Overview

During the year we have been focussed on reducing our on-balance sheet exposure and repaying our ZDPs as they become available in the market which in turn will increase our return on tangible assets over time. As noted in the Chairman's Statement, we received shareholder approval to extend the repayment date of the ZDPs by a further year to 5 December 2020 at 8% and bought back 22% (£3.8m) as part of the tender offer post year-end, along with a loan swap of £0.8m.

We remain focussed on our core business, Sancus BMS and have been working hard to drive loan origination and our loan book, and as a result we have seen loan deployment growth of 7% over the last year and 18% growth in the Sancus asset backed lending book. Total loan origination for Sancus BMS has now surpassed £1billion. We have reduced costs further across the Group by £0.9m in Sancus BMS but our 2019 results have suffered further write downs in the FinTech Ventures portfolio which materially impact the overall results.

Our main focus is on asset backed lending and we believe there is exciting growth potential in the UK through Sancus Funding which is FCA regulated. This is an area we know well and in which we have experience. Over time we expect this to be our largest market. Sancus Ireland was also launched in the second half of 2018 and we anticipate this will add to our growth plans and importantly provides a Euro denominated loan offering to our Co-Funders who are currently earning a negative return in holding Euro cash.

We have seen an improvement in our KPI targets over the last 12 months, and whilst we still have a way to go to reach the targets, we have set ourselves I am pleased that we are making continued progress on the execution of the strategy. I expect the strong Sancus BMS growth rates to continue into 2020 and beyond with a healthy pipeline of loan origination. Whilst we expect COVID-19 to negatively impact us in the short term, we are still also seeing many lending opportunities that we would hope to be able to benefit from during the remainder of the year. The FinTech Ventures portfolio has been a disappointment and the write downs overshadow the good results seen in Sancus BMS Group. However, we will continue to work hard on this portfolio and explore exits where we can realise appropriate value for shareholders.

Summary of Financial Performance

We are reporting a statutory operating loss of £0.6m for the Group for the year (2018: loss of £2.3m). However, the operating profit before changes in expected credit losses ("ECLs") and realised losses was £1.1m (2018: £0.7m). The increase in the operating profit before expected credit losses demonstrates the strong progress that we have made across the business during the year in particular to cost savings whilst still driving growth in the new operations in the UK and Ireland where we have not yet hit revenue levels that we believe they are capable of. The change in ECLs in the year was £1.5m (2018: £1.2m), £1.1m of this relates to an SME loan within the BMS UK Fund where the underlying SME business is facing financial difficulties. Total provisions on our balance sheet amounted to £3.2m (£2.9m against loans and £0.3m against interest receivable) at the end of 2019 (2018: £2.6m). As was noted in our trading update on 4 February 2020, we had previously made a £1.5m provision against a development loan, the outcome of which is highly contingent on a proposed refinancing. £1.2m of this provision still remains on our balance sheet and we continue to closely monitor this. Should the proposed refinancing be successful this year, we expect to release this provision in 2020.  We continue to grow our market share and as the Sancus brand is becoming increasingly well known, we are receiving a healthy flow of new lending opportunities and have a strong pipeline of new Co-Funders. In addition, we have had fair value write downs totalling £7.5m on the FinTech Ventures portfolio which is disappointing.

We are confident of building on this performance by improving profits and getting back to a position where we can recommence paying dividends, in line with our policy noted below. The focus on driving efficiencies has enabled us to reduce operating costs by a further £1.5m in the year, totalling over £2.0m savings over the last two years. This has been achieved by insourcing more functions and reducing headcount primarily in the UK and at head office.

Sancus BMS

The Sancus BMS loan book is now at £199m, an 18% increase on last year (2018: £168m) and we have seen a 7% increase in loan deployment to £123m (2018: £115m). This is on the back of reduced headcount and a reduction in operating costs of £0.9m during the year. This is testament to the hard work of the senior management team to build our profile in the markets in which we operate and secure a strong pipeline of new lending opportunities whilst also deepening our base of Co-Funders.  Our relationship with Pollen Street Capital and the HIT facility has also strengthened our ability to fund larger loan opportunities and helped contribute to the increase in revenues.

The Sancus Loan Notes ("SLNs") comprise a planned series of Special Purpose Vehicles ("SPVs") designed to act like securitisation vehicles to help offset capital constraints and enable additional Co-Funder participation in loan opportunities. These are attractive to clients that want to participate in a pooled diversified vehicle, delivered across a number of loans, rather than via direct participation in individual loans. During the year SLN4 repaid and we now have two Loan Notes in place (SLN5 was initially launched with £7.6m and has a maximum raise of £50m) and SLN6 which was launched 30 December 2019.  As part of the structure of the Loan Notes, in the past Sancus BMS has provided first loss positions but the latest loan note launched does not have a first loss position. This reduces further the Company's risk exposure. Further details are outlined in Note 26 to the accounts.

Following the sale of the BMS Irish Fund loans in 2018, the BMS UK Fund entered into run-off in 2019, with BMS now representing just £8.2m (2018: £10.0m) of Sancus BMS gross loans on balance sheet with £1.1m IFRS9 provision (2018: £Nil). During 2019, £1.8m was repaid in cash and we expect to receive some material repayments before the end of 2020 which will be used to buy back ZDPs in the market as they become available and subject to cash flow requirements.

The Group continues to invest in its technology, further enhancing the online reporting platform for offshore Co-Funders and during the year launched a fully transactional, online platform in the UK.

FinTech Ventures

The FinTech Ventures portfolio continues to disappoint with a further write down of £7.5m during 2019. FinTech Ventures now represents 5.8% of our gross assets, down from 14% in 2018.  As detailed in our 2019 interim report, one of our larger platforms, The Credit Junction, ceased trading in September 2019 following an enforcement from their debt provider. Another of our platforms, UK Bond Network, also completed a prepack administration during 2019 on the back of failing to raise fresh equity, and our equity holding was wiped out. As we have previously outlined, we are largely a passenger on this journey and due to capital constraints, we have not been able to follow our money and participate in the latest capital raisings where platforms have been able to complete them. Whilst FinTech as a sector continues to grow, the increased competition is making it difficult for smaller players, particularly those that are loss making, to raise further equity. However, two of our FinTech platforms were successful in raising fresh capital from third party investors during 2019. 

Dividend Policy

The Group dividend policy recognises the need to balance dividend payments in the short term with the opportunities to grow the business for shareholders in the longer term. As such the Group's policy is to make dividend payments which is consistent with prudent capital and liquidity management, covered by cash earnings and realised profits on the sale of investments. In line with this dividend policy, no dividend is being declared for this period.

Related Party Transactions

Related party transactions are disclosed in Note 24. There have been no material changes in the related party transactions described in the last annual report.

Governance, Risk Management and Operations

Effective governance processes both at subsidiary and holding company level continue to be a priority for the Board. This is critical to ensuring that only well-considered risks are taken, and expected returns emerge as planned. At Group level we have implemented projects to take a more strategic approach to the assessment, reporting and management of investment risk.

The development of the digital trading platform continues with increased online functionality for Co-Funders. This has now been rolled out to Sancus UK clients, allowing them to participate online in asset backed lending opportunities.

Long-term strategy and business objectives

Since the end of 2016 we have made good progress in delivering against the objectives we agreed as a Board. We have this year updated these objectives, which we believe will shape the business going forward with the focus on value creation, creating a capital efficient business that in turn will enable us to pay dividends.

Sancus BMS is our core operating unit and we have seen this continue to grow strongly. The coordination across the executive and senior management team, complemented with strong new business development expertise, is delivering a healthy flow and pipeline of lending opportunities. COVID-19 has not so far slowed down this pipeline but has created positive pricing opportunities for new loans. Our solid reputation in the markets in which we operate is also enabling us to lower our cost of funding, through the extension of our successful Loan Note Programme and the credit facility from HIT. We note the HIT facility matures on 28 January 2021 and we expect to renew this facility on maturity for a further three years.

We are looking at our options for the FinTech Ventures portfolio and we will communicate any developments to shareholders as appropriate. It has certainly been a difficult and challenging journey over the years with the FinTech Ventures portfolio.  Many of the platforms have reached key points in their development and the market for raising equity and debt financing is challenging, which has had a material impact on the latest valuations. Clearly COVID-19 will have an impact on these Companies' abilities to perform, the outcome of which is difficult to predict.

However, we do still believe that the best option is to retain our economic interest so that we can hopefully benefit from any upside against current valuations for those platforms, which do deliver on their strategy and forecasts.  We are however acutely aware that we do not have excess capital to deploy into the platforms, and thus we are seeking a structure where we can retain the potential for future upside whilst limiting the demand for further capital deployment.

Brexit

Geopolitical tensions and the impact of Brexit on the property market across all Sancus related jurisdictions (the UK and Gibraltar in particular) remains to be ascertained.  As the UK economy moves closer to a heightened risk of recession, we expect the banking sector to focus more on the potential impact to their Tier 1 capital ratios, which may have a negative impact on their appetite for lending.

This creates further opportunity for alternative lenders in terms of both loan origination and the interest rate margin charged.  However, the potential downside is increased risks associated with more volatile property valuations, demand from buyers of properties contracting and the potential for more risks of loan defaults.

Outlook

2019 was a year of reorganisation as we built out the Sancus BMS entities and focused on core business capable of creating significant value for shareholders. Our target was to deleverage our balance sheet and become a capital efficient business, which in turn will enable us to start paying dividends again. Management remains focussed on these objectives which it expects to translate into improved profitability and ROTA in 2020 and beyond albeit we are acutely aware 2020 will have its challenges which undoubtedly will arise as a consequence of COVID-19.

Coronavirus COVID-19

We have entered an unprecedented period of global disruption, the likes of which have not been seen since World War II. The World Health Organisation confirmed that COVID-19 is a pandemic (meaning it has spread worldwide) and unfortunately at this stage the situation is changing so rapidly that we cannot yet understand the full impact. We have previously highlighted that we believed the world economy was close to global recession and COVID-19 has certainly pushed us closer to this. The only real question now is how deep and how long a global recession could last. 

As a Group we already have practiced recovery plans in place for business disruption with a workforce fully equipped with remote access to enable working from home. We are confident that even if we are all required to work from home for a prolonged period we can function as normal and our high level of service shall not be disrupted. With regard to our lending practices, we had already tightened our credit criteria last year in anticipation of an increased possibility of a global recession, but we are applying even more stringent criteria during this difficult time. We have seen an increased number of lending opportunities; however, we will focus on Sancus's core philosophy on lending to "asset rich cash poor" borrowers.

As the majority of our lending exposure is asset/property backed and only a small percentage of the portfolio exposed to the most vulnerable sectors such as commercial and retail lending, we do not anticipate any real difficulties in the short term.  Our loan book is exposed primarily to development and bridge financing. One key concern is the effect on the supply chain in the event of this current pandemic lasting longer than currently forecast - UK government health announcement is expecting the peak of infections to be within 10/12 weeks. Clearly property values may be affected and thus for development loans, Loan to Values (LTV), Gross Development Costs (GDC) and Gross Development Values (GDV) may be impacted in the short term, longer term it truly depends on the depth and duration of a recession and the impact this will have on our Borrowers. Bridge financing may be affected as potential buyers sit on the side lines until we have clarity on the unfolding health crisis and the Government and Central Bank (globally) response in terms of fiscal and monetary support to businesses adversely affected.

We continue to stress test our loan book and the possible impact this may have on delinquencies (interest and principal) and on technical covenant defaults (for example on the valuation of security). On the Sancus asset backed lending book we have reviewed the loan portfolio's ability to perform under the current and unprecedented Coronavirus COVID-19 pressure that we are facing globally. We have kept our focus on a Borrower's Loan to Value (LTV).  We have tested this in two ways:

·      Taking a discount on the valuation of the security;

·      Projecting forward any delay and the impact this has on the accrued interest on roll up loans.

Obviously, there are other sensitivity indicators, we can and do consider and monitor, but these two metrics are the most important in terms of the loan liquidity and recoverability in accordance with contractual due dates. From our analysis we can quickly identify which loans could become an issue and thus ensure these loans receive more frequent updates and monitoring of with the Borrower.  We can also adjust either the valuation discount and / or the delay period. On the analysis we have carried out to date there are currently no incurred loss events or defaults that require immediate action, but we will continue to monitor this closely and update loss allowances in consideration of any significant increase in credit risk or objective evidence of impairment.

Communication with our stakeholders is a high priority and we are in frequent contact with all our Co-Funders to provide an update on the loans they are invested in and how we expect COVID-19 may impact them.

For the BMS Fund, which is exposed to working capital lending, the management team have been in close contact with the underlying borrowers (SMEs) and are receiving updated cash flow forecasts and projections. At the time of writing this report there are no immediate loan loss events or defaults, but cash flow will remain key to these SMEs. The BMS Fund received £0.9m at the end of March 2020 on one loan which repaid on time. This cash will be retained by the Fund for the immediate future. We expect the anticipated repayment dates of some of the underlying loans may be delayed. 

With interest rates and bond yields at historic lows the Sancus syndicated loan model will remain attractive to investors and may create opportunities for the alternative sector as a whole. One potential advantage for our industry is that Bank lending will probably contract further, thus creating more opportunity for the alternative sector.  Secondly, we don't think this will affect our pricing model, if anything this should remain as is and may be an opportunity to increase pricing on certain lending opportunities. Thirdly, with interest rates and bond yields at historic lows we don't believe that our Co-Funding model will be adversely affected as there are very few places you can find attractive risk-adjusted income plays such as direct lending.

In respect of our FinTech Ventures portfolio the current market unrest and economic uncertainties due to COVID-19 represent rapid developments which might have a material impact on the operations and also on the valuations of the FinTech investments.  It is possible that some of our FinTech companies are unable to survive through this COVID-19 crisis, but we have already written several of the platforms down to zero.  However, the Government's support package and launch of the Coronavirus Business Interruption Loan Scheme (CBILS) could create additional opportunities for those FinTech companies providing or promoting lending to SMEs. Short term cash flow is critical and we desire to work closely with all the FinTech portfolio companies to assist them through this challenging period. 

We will continue to monitor the situation closely and consider the effect it may have on recoverability of loans advanced in the future and the impact this may have to our FinTech Ventures portfolio.

Andrew Whelan

Chief Executive Officer

FINANCIAL REVIEW

Group Overview

The business is split into 2 operating units, Sancus BMS and FinTech Ventures. In addition, there are Group operating costs, which are split out separately in Note 4.

While the headline financial results for the year ended 31 December 2019 remain disappointing, they mask some crucial developments in asset efficiency and cost controls that have led to a significant improvement in return on tangible assets in our core business. Impressive loan growth in asset backed secured lending in our offshore jurisdictions, together with the establishment of offices in our future growth markets in the UK and Ireland are where operations have barely begun, lay the foundations for improved financial results in the years ahead.

Statutory Group revenue remained stable at £13.1m for the year (2018: £13.2m) however as noted below in the Sancus BMS section the HIT revenue is consolidated into these numbers, excluding this, Sancus BMS revenue decreased by 17%.

A focus on cost control has achieved a further £1.5m reduction in Group operating costs over the last 12 months, largely linked to a reduction in headcount from 42 to 34 employees. Over the past 2 years £2.0m has been saved in total operating costs.

The Group loss for the year is £9.9m (2018: loss £23.2m) and Group net assets are £40.4m (2018: £50.2m).

The overall result is once again impacted by material write downs within the FinTech portfolio. The carrying value of the FinTech Ventures portfolio is £6.3m (31 December 2018: £13.8m). The portfolio now consists of nine investments. The movement on this portfolio is detailed later on in this report.

2019 has seen a focus on the repayment of the Zero Dividend Preference shares ("ZDPs") which were due on 5 December 2019. Due to some of the loan maturities not repaying as expected by this date, shareholder approval was granted to extend this for a further year, to 5 December 2020 at an increased rate of 8% from 5.5%. During 2019 prior to the extension the Group had been selling down some of our on-balance sheet loan exposure and using cash assets to repay the ZDPs as funds become available. In 2019 the Group acquired back 6.4m ZDPs at a cost of £7.6m. The amount due at 31 December 2019 was £16.8m (2018: £26.7m).

As approved at the EGM on the 6 March 2020, 22% of the ZDPs in issue have been repaid in cash (£3.8m) and a loan swap of £0.8m for ZDPs, reducing the amount that will be due on 5 December 2020 to £13.3m. As loans repay and cash allows during 2020, the Group will continue to look to acquire further ZDPs as they become available in the market.

Cash management and debt costs

The focus during 2019 and ongoing into 2020 has been the repayment plan for the ZDPs. We have been managing cash carefully and have been buying back ZDPs as they become available in the market and will continue to do so in 2020 by managing the cash returned on the maturing Sancus and BMS loans, subject to cash flow requirements. 

To measure business unit performance, finance costs are allocated to Sancus BMS to recognise its use of the Group's debt facilities in its lending activities. FinTech Ventures is treated as being funded by equity. This allocation best matches the risk profile of each business unit with its capital structure, as well as recognising that interest costs are effectively serviced by interest income from Sancus BMS.

Total cost of sales of £5.1m for 2019 (2018: £4.0m) includes: debt interest costs on the ZDPs and Bond of £1.7m (2018: £1.8m); £3.0m interest on the HIT facility (2018: £1.6m) and broker fees of £0.4m (2018: £0.6m).

At the year end, interest bearing debt comprised:

·      £10m 5-year Bond (7%) matures 30 June 2021, interest paid half yearly;

·      £16.8m 2019 ZDPs (8%) income entitlement and principal due on expiry 5 December 2020 (£18.1m); and

·      £44.2m HIT facility expires 28 January 2021 (7.25%) (total facility £45m), interest paid monthly.

Commentary on the repayment and/or extension plans of the debt instruments listed above are included in the Going Concern commentary.

Financial Position (Table 2)

The Group's net assets have decreased in the year by £9.8m to £40.4m. The majority of this movement is due to the £7.5m write down on the FinTech Ventures portfolio, and IFRS 9 loan impairment adjustments and incurred losses on financial assets of £1.6m.

The Group's liabilities are £73.6m, £44.2m relating to the HIT facility. Excluding HIT, liabilities are £29.4m (2018: £36.7m). The reduction is due to a series of ZDP buybacks during the year.

Cash Flow

Cash generated from operating activities, excluding loan movements, for the year was £0.6m compared to cash generated of £0.1m in 2018. The major operating cash flows during the year included £1.8m divested in BMS Finance Loans (2018: £11.5m), £20.4m invested in Sancus Loans Limited loans (2018: £25.6m), and £3.3m received from the repayment of Sancus Loan Notes (2018: £8.1m). In respect of investing activities nothing has been invested in FinTech Ventures in the year (2018: £3.0m). £0.95m has repaid in respect of preference shares in Sancus IOM (2018: £0.95m invested) and £0.9m has been received from the sale of 2 properties held in Sancus Properties Limited (2018: £Nil). In respect of financing activities £21.4m (after costs) was received from the drawdown of the HIT facility (2018: £22.6m (after costs)) and £7.7m was used to purchase ZDP shares (2018: £1.8m).

Sancus BMS

The key focus of the business is to lend money safely. To do this Sancus BMS relies on obtaining funding from its Co-Funders to provide loans to borrowers. The ability to provide this money is crucial to the business and availability of funds is a key area to enable future growth. Sancus BMS has a number of Co-Funders, which include the HIT line, Sancus Loan Notes, individual Co-Funders which may be high net worth individuals ("HNWI") or Trust Companies for example and Sancus BMS's own capital, although we have been reducing our own on balance sheet exposure.

The ability to find borrowers is also key to the business and something the business has invested in employing highly experienced business development teams who are highly experienced in the sector with good connections.

Pricing is another key area as we work in a competitive environment and we are constantly assessing how we compare to other lenders in the market. Our pricing strategy is to be competitive, but we are able to price at a premium as we are a small and efficient team who can turn around loans in a matter of weeks rather than what is currently seen in the banking sector, which can be many months.

Over the last few years we have reduced the headcount in the UK office as the unprofitable supply chain finance offering was closed with the focus now in the UK on asset backed lending. We have invested in a strong team in the UK as we view this as a key growth area. Revenue in the UK has taken longer to get up to the levels we were targeting a year ago. We saw a slowdown in deals from the Brexit effect, but we also focussed on quality review as opposed to volume. This means this year cost income ratios are still high as we set the foundations but expect to see improvements on this over the coming years. 

The Board reviews the economic performance for Sancus BMS by referring to our proforma statement of comprehensive income ("SOCI"). In our view, all Co-Funders should be assessed in the same way.  However, as Sancus Loans Limited ("SLL") is 100% owned by Sancus BMS Group Limited (as it was required to be set up as an SPV for the HIT facility) it is consolidated into the Group's results. In our proforma statement the SLL results have been deducted from the consolidated SOCI noted below and we show the results on a net basis which is the same for all our other Co-Funder arrangements.  We show the reconciliation of the proforma SOCI with accounting statements below.

Financial Results for the year ended 2019 (Table 3) - Sancus BMS Group

Financial Results of the operating entities in Sancus BMS (Table 4)

Revenue

Sancus BMS Group revenue on a proforma basis was £9.6m for 2019 (2018: £11.7m). On a statutory basis revenue was £12.6m (2018: £13.3m). A reconciliation between the proforma and statutory results is included in Table 3. On a proforma basis the £2m reduction in revenue in the year is partly within the BMS business where we saw a £1.4m decrease following the sale of the BMS Irish Fund in May 2018 which in turn led to a reduction in interest income and a reduction in admin fees received during 2019. The UK saw a £0.8m reduction in revenue as the supply chain finance offering closed in 2018 but in turn the UK operating expenses decreased as the UK team reduced in head count.

The UK and Ireland asset backed lending businesses are our primary focus going forward. The UK office only became fully operational in April 2019 and we are expecting to report an improvement of this revenue stream in 2020. During 2019 we did experience a negative Brexit impact on our revenue expectations which we hope to see recover. Revenues from interest income on loans relates to the Sancus BMS on-balance sheet loans. These have reduced in the period by 9% as on-balance sheet loans have reduced.  

Total Cost of Sales

Total cost of sales which includes interest and other direct costs, has reduced by 12% in the year with lower interest costs (reducing our capital intensity) and lower broker costs which is as a result of reduced UK revenue in comparison to last year.    

To measure business unit performance, finance costs are allocated to Sancus BMS to recognise its use of the Group's debt facilities in its lending activities.  FinTech Ventures is treated as being funded by equity.  This allocation best matches the risk profile of each business unit with its capital structure, as well as recognising that interest costs are effectively serviced by interest income from Sancus BMS.

Operating Expenses

We continue to manage costs carefully and within the Sancus BMS Group £0.9m of cost savings were achieved in the year with operating expenses falling from £6.4m to £5.5m.  Savings relate predominantly to employment costs in the UK following the restructure of the team to focus solely on asset backed lending.

IFRS 9

IFRS 9 was introduced on 1 January 2018 and at 31 December 2019 we have a year-end provision of £3.2m following the methodology as set out in Note 22, which applies an expected credit loss model. £2.9m of the provision relates to the loan portfolio and £0.3m to interest receivable. We have seen a £1.5m charge to the profit and loss this year. £1.1m of this has been applied to the BMS UK loan instrument where one of the underlying SME businesses is facing financial difficulties. The remainder of the movement in expected credit losses (£0.4m) relates to our Sancus asset backed lending loan portfolio where for example the secured loans have gone into default and we are actively working on to resolve (Refer Note 22.) Our actual loss rate to date still remains low across the Sancus BMS portfolio at less than 1% reflecting our strong underwriting criteria and procedures. As highlighted by the IFRS 9 provision, there is always the risk of further defaults and potential losses as lending is clearly not risk free, however the expected risk adjusted return is considered very attractive.

Other net losses and gains

We have reported a £1.6m other net loss in the period (2018: gain £0.2m).  This balance includes revaluations of our associate holdings in Amberton Asset Management and Sancus Isle of Man ("IOM"), but the largest movement was due to additional costs associated with Sancus Properties Limited which accounted for £1m of the loss.  These costs relate to security previously held by a former borrower. During the year unbudgeted remediation expenses were incurred to enable them to be sold at the highest possible value.

Sancus Properties Limited

In August 2018 a 100% owned SPV called Sancus Properties Limited (previously Sancus Developments Limited) was incorporated to hold assets previously held by a former borrower. The intention is to realise these assets via orderly transactions, the timing of which will be determined so as to best maximise shareholder value. These are reported as other assets and accounted for under IAS 2 Inventories whereby they are held at the lower of cost or net realisable value. At 31 December 2019, these assets which consist of a combination of houses, apartments and a large plot of land have a carrying value of £3.3m (2018: £4.4m)  During the year 2 houses were sold for £0.9m and we expect to realise further cash sales over the course of 2020.

Honeycomb Investment Trust (HIT) Facility

A special purpose loan vehicle called Sancus Loans Limited ("SLL"), which is non-recourse to GLI, was established during 2018 with a £50m funding capacity.  This has been backed by a £45m credit facility from HIT, with a term of 3 years ending on 28 January 2021. It is the intention of the Directors to extend this facility. Sancus has £5m equity invested in this vehicle.  Although non-recourse to GLI the SPV is 100% owned by the Group and is therefore consolidated.  As a result, both the Sancus Loans Limited loans and HIT facility appear on the consolidated balance sheet but deducted from our proforma results as noted earlier.

Revenue within Sancus Loans Limited has increased by £1.8m in the year from £1.9m to £3.7m. This reflects the increased draw down of the facility from £22.7m at 31 December 2018 to £44.2m at end of 2019 (maximum facility £45m).  At the year end, interest bearing debt comprised:

·      £44.2m HIT facility ends 28 January 2021 (7.25%) (maximum facility £45m), interest paid monthly.

Sancus BMS on-Balance Sheet Loans and loan equivalents (Table 5)

On-balance sheet loan and loan equivalents have decreased in the period from £26.7m to £18.3m.  As previously noted, the disinvestment from SME lending is allowing asset utilisation to improve, which will drive an improvement in ROTA and shareholder value over time.  As we have also seen from our loan book funding, our access to capital has also improved allowing funding of asset backed secured loans from other sources such as the HIT facility, SLNs and Co-Funders.

KPIs

We set out in our 2018 Annual Report that we will be reporting our KPIs going forward to demonstrate the progress we are making over time.  We are committed to driving shareholder value through judicious growth, improving asset utilisation and cost controls.  We believe the share price will positively reflect improvement in these metrics overtime (Refer to Note 27 Performance Measures).

The Directors consider the following financial indicators as KPIs:

·      Lending - loan deployment and loan book growth;

·      Return on tangible assets (ROTA);

·      Profitability.

The table below gives a breakdown of Sancus BMS KPIs. This also includes those items not considered KPI's, but which give a better understanding of the figures.

* Previous total Sancus BMS loan book numbers quoted included supply chain finance loan book (£18m in 2017 and £11m in 2018). As this has now closed, these figures are no longer included in the totals noted above.

Lending - loan deployment and loan book growth

Sancus asset back lending has increased by 18% in the year from £168m at the end of 2018 to £199m at the end of 2019.  We have stated that we would be reducing our own on balance sheet loan exposure and so this growth has been driven by Co-Funder lending. The total asset backed lending book was made up of 94% of Co-Funder money compared to 89% at the end of 2018 and 81% at the end of 2017. Of this, the HIT facility made up £37m at the end of 2019, a 76% increase from 2018 when it was £21m. Co-funder participation, excluding HIT and Sancus Loan Notes increased by 24% in the year, demonstrating the continued support and enthusiasm for asset backed lending.

As previously mentioned, the BMS loan book is in runoff and we will utilise the cash coming back into the business for the repayment of the ZDPs on 5 December 2020.

Loan deployment in 2019 rose by a further 7% to £123m from £115m in 2018. Loan deployments are classified as new loans written in the year and a key target for the sales teams to focus on.

Return on Total Assets ("ROTA") (Refer Note 27 for performance measure calculations)

We have seen an improvement in this ratio during 2019 from (0.4%) in 2018 to a positive 0.9% return for the year ended 2019. This improvement is as a result of net operating profits increasing and the total tangible assets figure has reduced following the reduction of our on-balance sheet loans and concurrent reduction in our liability to purchase the ZDPs in the market. 

Cost Income Ratio ("CIR") (Refer Note 27 for performance measure calculations)

The total costs include operating expenses, debt costs and broker costs as set out in Note 27. CIR for 2019 has reduced to 96% from 102% for the full year 2018.  Cost efficiencies have been delivered across a number of areas, but primarily in employment costs. The Group is focused on improving this ratio which we believe will be achievable as we see an increase in revenue in our growth markets. Following extensive cost savings over the past few years and reduction in headcount we do not expect to continue to reduce the operating costs to such a large extent in future years.

Asset Backed Lending

Sancus

www.sancus.com

Sancus has loaned in total £719m since it became fully operational in January 2014, including the Isle of Man.

On average, the profile of the loan book is as follows:

·      Loans size is £2.2m;

·      Duration is 21 months;

·      Interest rates charged are 10.4%; and

·      Loan to Values (LTV) are 59%.

Loan Book

The total loan book has increased by 18% from £168m at the end of December 2018 to £199m at the end of December 2019, with HIT contributing 36% to this increase. Co-Funder participation increased by 32% from last year.  The Sancus on balance sheet loans have decreased from £18m to £13m as cash has been released to acquire back our ZDPs in line with our corporate strategy.

Revenue

Sancus BMS Group revenue for 2019 was £12.6m compared to £13.3m in 2018. In line with our ZDP repayment strategy we have been utilising cash as it becomes available from loans on balance sheet to acquire ZDPs, so we would not expect to see the same revenue growth we have seen previously. The Sancus revenue of £6.9m represents the asset backed lending from the Sancus Group, a decrease from £7.2m in 2018 as a result of lower on balance sheet loans. During the year we have seen a large increase from revenue consolidated into the Group results from Sancus Loans Limited (the HIT facility) from £1.9m to £3.7m. We have also seen a decline in the BMS revenue from £2.9m to £1.5m from the sale of the Irish BMS fund last year and a decline in the balance in the UK fund. As these have been running off, cash has been deployed into acquiring ZDPs. Following the closure of the supply chain finance business at the start of the year we have ceased to receive income from this revenue stream, but overtime we expect Sancus revenue to increase as the UK and Irish ABL offering grows.

Sancus Loan Note Programme - Table 8

The Sancus Loan Notes provide Sancus BMS with another pool of funders who wish to be part of a group of assets rather than 1 specific loan. These are managed by Amberton Asset Management which is a joint venture with Somerston Group and is regulated by The Protection of Investors (Bailiwick of Guernsey) Law, 1987 ("POI") License. Since the programme was launched in November 2016, 6 have been launched to date. The table below shows the history of the loan notes to date.

There are currently 2 live loan notes and the Group has a total guarantee of £1.9m, being 10% of SLN5. The latest launched loan note 6 does not include a first loss position.

SME Finance

BMS Finance (www.bms-finance.com) provides UK loans funded by long term committed capital from investors including circa 49% being subscribed by the government investment vehicle, namely British Business Investments (formerly British Business Bank Investments). Following the departure of certain key individuals in 2018, the fund is in managed run-off and the loan book has amortised (total capital committed is now at £36m). GLI holds 25.25% of total capital commitments.

Sancus Finance ceased to offer working capital finance in 2019, with the UK team now focussed on core Sancus asset-backed lending activities.

FinTech Ventures

As highlighted in the CEO report, it is disappointing that the FinTech Ventures portfolio has suffered further material write downs during the year.  The portfolio is now valued at £6.3m, plus £0.2m for interest.

The interest income revenue has reduced compared to previous years as we are only making selective new investments to protect our position on certain platforms.  During 2019, we have made a fair value adjustment against accrued interest on loans and preference shares where we have concerns around potential recoverability.

Operating expenses are allocated to FinTech Ventures on a percentage basis of Group overall costs.  Following the resignation of Aaron Le Cornu who leaves the Company in April 2020, the responsibility for the various FinTech platforms are being allocated out among other members of the Executive Team, and operating costs allocated to FinTech Ventures will reduce accordingly.

FinTech Ventures Portfolio Asset Split (Table 9)

The total fair value at 31 December 2019 of £6.3m is made up of investments in the following instruments: £4.5m of Equity, and £1.8m of Debt mainly in the form of convertible loan notes where we retain the potential upside from being able to convert on favourable terms should the platforms deliver a successful opportunity for us to exit. Given the difficult market conditions, some tough decisions have been made to write down the valuations of several of the platforms in the portfolio.

At the time that these minority stakes in the various platforms were acquired by the Group back in 2014 and 2015, it was expected that they would achieve profitability far quicker than they have. In practice, the plethora of FinTech start-ups has created a very competitive market and scale has been harder to achieve.  As a portfolio of early stage businesses, it is perhaps inevitable that some platforms have either failed or have underperformed to the point where it has been appropriate to take write-downs. Whilst investment risk related to this portfolio will remain an ongoing feature, we hope that there is significant potential to secure enhanced valuations from those platforms which are performing well.

The valuation methodology employed by the Group is unchanged and remains compliant with IFRS 13, based on a fair value approach and taking into account the International Private Equity and Venture Capital Valuation Guidelines ("IPEV"), which provides guidance on fair value valuation practices.

For commercial reasons we do not disclose the carrying value of each platform.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

The accompanying Notes form an integral part of these financial statements.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The financial statements were approved by the Board of Directors on 6 April 2020 and were signed on its behalf by:

The accompanying Notes form an integral part of these financial statements.