INTERIM CHIEF EXECUTIVE OFFICER'S REVIEW

 

Overview

 

Having joined Sancus at the beginning of 2021, I am delighted to have been offered the opportunity to assume the position of Interim CEO from 1 July 2021. The Company has ambitious growth objectives which will rely upon a combination of growing our loans under management together with improving our margins. In order to deliver these plans the Company is reviewing its capital requirements and considering its options in terms of potential sources of funding.

 

During the first half of 2021 we have completed a number of re-organisational initiatives which now enables the business to focus on its strategy to be a leading alternative lender in the residential lending space. The initiatives undertaken include the rebranding of the Company and reorganisation of staff into teams aligned with our business priorities: Origination, Funding, Lending and Finance & Operations. Our geographic focus remains unchanged, and we will continue to invest in growing our business across the jurisdictions in which we are active (UK, Ireland, and the Offshore markets of Channel Islands & Gibraltar). It is our belief that the UK and Irish markets offer us the greatest growth opportunities and consequently we foresee a significant scaling up of our businesses there. We are looking to simplify the Group over the course of 2021 and will be reporting a new simplified Group basis at the end of the year when we will set out the Group's strategy in further detail and set key performance metrics that we will report on going forward.

 

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, challenging and hugely disappointing 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 valuations in the past.

 

Business Priorities

 

The essence of the Sancus business involves matching sources of capital to appropriate risk/return lending opportunities. In order to continue to grow, the business therefore needs to (1) continue to focus on the Origination of suitable lending opportunities for its existing sources of capital; (2) work with current secured Funders and to identify complementary sources of capital seeking differing risk/return criteria; (3) continue to increase our Lending book and maintain a high quality loan management process; and (4) ensure Finance and Operations is fully equipped to support the growth of the business.

 

1.     Origination

 

We have seen a strong start to 2021 with new loan facilities written at £53m for the first half of 2021 against £50m for the full year 2020 and loan deployments of £46m for the first half of the year compared to £69m for the full year 2020. Arrangement fees and commitments fees are received on the full loan facility written and therefore we believe loan facilities written is a more meaningful metric when tracking growth. We continue to see significant demand for development finance and are increasing our presence in the bridging market with a couple of key hires.

 

2.     Funding

 

We are confident that as new loan opportunities arise, the loan book will increase as Co-Funders are attracted to the risk adjusted returns, especially when compared to the all-time low alternative yielding assets such as cash or bonds.  The business has recently recruited two senior team members to focus on both managing relations with our existing funding sources and identify additional complementary sources of funding. A longer-term objective remains to identify capital sources domestic to the market in which the lending opportunity has been identified and this is an ongoing initiative in Ireland for example. Growing and diversifying pools of lending capital is critical for our growth.  Our funding sources include institutional, corporate and high net worth individuals which are in excess of 200.  We also continue to target the Co-Funder base and nurture relationships.  The Honeycomb Investment Trust plc ("HIT") funding line, noted below, is designed to be complementary to our Co-Funder base and work alongside it to complete on larger sized loans which have a greater revenue impact on the Group.

 

Our existing committed sources of funding include Sancus Loan Notes ("SLNs") and a credit facility provided by HIT.

 

The SLNs comprise a series of Special Purpose Vehicles ("SPVs") designed to act like securitisation vehicles, enabling Co-Funders to participate in a diversified loan portfolio rather than individual loans. On 10 May 2021 SLN7 was launched with £16.6m assets managed by Amberton Limited, following the repayment of SLN5 and SLN6. SLN7 matures on 10 May 2024 and has a coupon of 7% p.a. (payable quarterly), with Sancus providing a 10% first loss guarantee.

 

As announced on 4 December 2020 the HIT credit facility was increased to £75m from £45m and the term was extended to 28 January 2025. At 30 June 2021 the total drawn was £47.5m (31 December 2020: £45.0m).

 

The availability and cost of funding is key to achieving our growth ambitions and we are reviewing the capital position of the business with a view to ensuring it's best placed to grow funding capacity on improved terms.

 

3.     Lending

 

The senior management team have carried out an extensive review of the current loan book, particularly in the context of Covid and the impact this has had on the wider real estate market and individual borrowers. Where concerns have been identified the loans have been placed on a recoveries watchlist allowing a more detailed recovery strategy to be prepared and worked through. The senior management team believe that initial progress is being made on the various recoveries strategies but note that working these through to realisation will take time to ensure the best result for all stakeholders. The Group has also refreshed its credit process and we expect to build out this team further as we execute on our growth strategy.

 

The Sancus asset backed lending loan book decreased by 7% since the end of 2020 from £171m to £160m as we saw some large loans repay in the period which does not reflect the increase in activities, we are seeing with new facilities written. We have a strong pipeline and expect the loan book to increase by the end of the year. Within the loan book, the Offshore loan book makes up the majority of this at the moment at £132m (Dec 2020: £147m) with the UK loan book £18m (Dec 2020: £15m) and Irish loan book at £10m (Dec 2020: £9m).

 

4.     Finance and Operations

 

Effective compliance and corporate governance remains a priority for the Board. This is critical to ensuring that only well-considered risks are taken, and expected returns emerge as planned.

 

A key milestone at the end of last year was the successful new equity raise as well as restructuring our debt (Bonds and ZDPs) and increasing and extending the term of our facility with HIT. This transaction had the full support of our largest shareholder Somerston Group who participated in both the equity raise and new bond issue.

 

The development of our digital trading platform (Loan Management System "LMS") continues with increased online functionality for Co-Funders across the Group allowing them to participate online in asset backed lending opportunities. During the course of 2021 we have been making further improvements to the platform to ensure it is well set to support our growth plans.

 

As highlighted above, we have made a number of recent hires across the business, in particular to bolster our Funding and Origination capabilities in the markets in which we are active. At the end of June 2021, the Group headcount stood at 29 (31 December 2020: 25) and as we build out our presence across the UK and Ireland, we expect this to increase over time. 

 

Summary of Financial Performance

 

Group revenue for the first half of 2021 was £5.0m against £5.5m last year and an operating loss of £4.1m (June 2020: loss of £0.5m). As disclosed in Note 4 of the accounts, transaction fees were £1.7m in the first half of 2021, in comparison to £0.6m last year, which highlights the increase in activity of loans written as noted above. Exit fees which were £0.9m last year have reduced this year to £0.3m. Due to the nature of these fees, they can vary significantly year on year.

 

Note 3 Segmental Reporting sets out the results by Offshore, UK and Ireland. We have seen Offshore revenue decrease by 11% in the period, largely due to some large exit fees which were received in 2020. The UK for the first time has reported an operating profit of £0.1m against a loss of £0.5m last year with revenue growth up five-fold in comparison to last June. Ireland results are relatively flat (revenue up 6%) against last year however loan closures have been slow in the first half of the year due to continued lockdowns in that region, so we expect results to pick up in the second half of the year.

 

The movement in expected credit losses (IFRS 9) of £3.0m in the period (June 2020: £0.2m) predominantly relates to interest debtor balances where we have seen loan repayments taking longer to complete over the last eighteen months due to market conditions and this has impacted the expected recoverability of the interest due. The underlying loans however have not seen a material deterioration.

 

The loss for the period was £4.2m (30 June 2020: loss of £6.5m)

 

The Group's net assets have reduced in the period from £29.5m at 31 December 2020 to £25.2m as a result of the operating loss in the period which includes an increase in the expected credit loss provision of £3.0m.

 

The Board has carried out a full impairment review of the carrying amount of goodwill and the resultant value-in-use calculation indicated that no impairment of goodwill was required in either Sancus Jersey or Sancus Gibraltar. The goodwill value therefore remains at £22.9m.

 

Group cash remains healthy. Within the £16.2m of cash and cash equivalents balance at 30 June 2021, £3.8m relates to Group operational cash with £12.4m within Sancus Loans Limited. Post period end one of the development sites within Sancus Properties Limited was sold for £0.7m cash, leaving just one block of flats which is being developed and due to complete around the end of this year.  

 

On balance sheet loans (excluding those loans in Sancus Loans Limited) were £11.4m before IFRS9 provisions at 30 June 2021 compared to £11.8m at 31 December 2020. During the period £1.8m was received following the sale of the BMS fund, leaving £1.9m on the balance sheet by way of a convertible loan note in one entity. Following this sale, Sancus BMS Holdings Limited was liquidated on 13 September 2021. Sancus Loans Limited has loans of £40.6m at 30 June 2021 (31 December 2021: £45.0m).

 

The Group's liabilities consist of the Bond of £12.5m which has a quarterly coupon of 7% p.a. and matures on 31 December 2025; and ZDPs of £10.1m with a coupon of 8% and payable on 5 December 2022. As the Group considers what capital mix will best support its growth ambitions, it may seek to acquire ZDPs in the market during the course of the year and explore other options for reducing balance sheet leverage. The HIT credit facility was increased to £75m from £45m on 4 December 2020 and at 30 June 2021 was £40.6m (31 December 2020: £45.0m).

 

Outlook

 

The wider market offers a positive outlook for an alternative lender such as Sancus, particularly in the development lending space where traditional banks remain inactive. Whilst we have recently seen some increased competition from alternative lenders, the residential property supply/demand dynamic in all of our target markets remains favourable meaning that there is sufficient scale of opportunity for the business to achieve its growth objectives. With reasonable prospects for economic growth in the remainder of the year and thereafter, it is expected that there will continue to be favourable underlying market fundamentals for the foreseeable future. 

 

Finally, I want to thank all shareholders for their support during this period of change. We are excited about the opportunities that lie ahead of us and look forward to delivering profitability in due course.  In the short time I have been in my new position, I have done my best to meet as many stakeholders as possible and look forward to continuing that during the second half of the year.

 

 

Rory Mepham

Interim Chief Executive Officer

 

 

 

 

RISKS, UNCERTAINTIES AND RESPONSIBILITY STATEMENT

 

Risks and uncertainties

 

There are a number of potential risks and uncertainties which could have a material impact on the group's performance over the remainder of the financial year. These include, but are not limited to, Capital and liquidity risk, Regulatory and compliance risk, Market risk, Credit risk with respect to the loan book (primarily bridging loans and, increasingly, development loans), Operational risk and the execution of Sancus strategy. These risks remain unchanged from December 2020 and are not expected to change in the 6 months to the end of the financial year. Further details on these risks and uncertainties can be found in the December 2020 Annual Report.

 

Responsibility statement

 

The Directors confirm that to the best of their knowledge:

 

§  The Interim Report has been prepared in accordance with the AIM rules of the London Stock Exchange;

 

§  This financial information has been prepared in accordance with IAS 34 as adopted by the UK;

 

§  The interim results include a fair review of the important events during the first half of the financial year and their impact on the financial information as required by DTR 4.2.7R; and

 

§  The interim results include a fair review of the disclosure of related party transactions as required by DTR 4.2.8R.

 

 

 

 

 

INDEPENDENT REVIEW REPORT ON INTERIM FINANCIAL INFORMATION

 

Conclusion

 

We have been engaged by Sancus Lending Group Limited (the "Company") to review the condensed set of Consolidated Financial Statements in the Interim Report for the six months ended 30 June 2021 which comprises the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Changes in Shareholders' Equity, the Condensed Consolidated Statement of Cash Flows and related Notes 1 to 19. We have read the other information contained in the Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of Consolidated Financial Statements.

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2021 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the UK and the AIM Rules of the London Stock Exchange.

 

Basis for Conclusion

 

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" (the "ISRE") issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

As disclosed in Note 2 of the annual financial statements of the Company are prepared in accordance with IFRS as adopted by the UK. The condensed set of financial statements included in this half-yearly financial report has been prepared in International Accounting Standard 34, "Interim Financial Reporting", as adopted by the UK.

 

Conclusions Relating to Going Concern

 

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis of Conclusion section of this report, nothing has come to our attention to suggest that management have inappropriately adopted the going concern basis of accounting or that management have identified material uncertainties relating to going concern that are not appropriately disclosed.

 

This conclusion is based on the review procedures performed in accordance with the ISRE, however future events or conditions may cause the entity to cease to continue as a going concern.

 

Responsibilities of Directors

 

The Interim Report is the responsibility of, and has been approved by, the Directors.  The Directors are responsible for preparing the Interim Report in accordance with the AIM Rules of the London Stock Exchange.

 

In preparing the half-yearly financial report, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

 

Our responsibilities for the review of the financial information

 

In reviewing the half-yearly report, we are responsible for expressing to the Company a conclusion on the condensed set of consolidated financial statement in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

 

 

Moore Stephens Audit and Assurance (Guernsey) Limited

Level 2 Park Place

Park Street

St Peter Port

Guernsey, GY1 3HZ

 

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

 

 

	Notes	Period ended	Period ended
		30 June 2021 (unaudited)   £'000	30 June 2020 (unaudited)   £'000
Revenue	4	5,002	5,498
Cost of sales	5	(3,386)	(3,011)
Gross profit		1,616	2,487
Operating expenses	6	(2,671)	(2,824)
Changes in expected credit losses	17	(3,028)	(161)
Operating loss		(4,083)	(498)
FinTech Ventures fair value movement	17	8	(4,238)
Other net losses		(95)	(1,712)
Loss for the period before tax		(4,170)	(6,448)
Income tax expense		(58)	(67)
Loss for the period after tax		(4,228)	(6,515)
Items that may be reclassified subsequently to profit and loss
Foreign exchange arising on consolidation		9	(26)
Other comprehensive income/(loss) for the period after tax		9	(26)
Total comprehensive loss for the period		(4,219)	(6,541)
Basic loss per Ordinary Share	7	(0.88)p	(2.14)p
Diluted loss per Ordinary Share		(0.81)p	(2.14)p

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

 

 

		30 June 2021 (unaudited)	31 December 2020 (audited)
ASSETS	Notes	£'000	£'000
Non-current assets
Fixed assets	8	638	774
Goodwill	9	22,894	22,894
Other intangible assets	10	97	168
Sancus loans and loan equivalents	17	18,683	3,863
FinTech Ventures investments	17	500	-
Investments in joint ventures and associates		766	866
Other investments		50	-
Total non-current assets		43,628	28,565
Current assets
Other assets	12	1,067	1,015
Sancus loans and loan equivalents	17	29,600	49,369
Trade and other receivables	11	6,984	8,204
Cash and cash equivalents		16,246	15,786
Total current assets		53,897	74,374
Total assets		97,525	102,939
EQUITY
Share premium	13	116,218	116,218
Treasury shares	13	(1,172)	(1,099)
Other reserves		(89,844)	(85,625)
Total Equity		25,202	29,494
LIABILITIES
Non-current liabilities
Borrowings		69,705	69,450
Other liabilities		357	469
Total non-current liabilities	14	70,062	69,919
Current liabilities
Trade and other payables	14	1,235	1,638
Tax liabilities	14	106	118
Provisions	14	733	1,542
Other liabilities	14	187	228
Total current liabilities		2,261	3,526
Total liabilities		72,323	73,445
Total equity and liabilities		97,525	102,939

 

 

 

 

 

 

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