20 February 2017 – 7.00 (BST)

 

FOR IMMEDIATE RELEASE

 

INTERIM FINANCIAL RESULTS ANNOUNCEMENT

 

THE BOARD OF DIRECTORS OF SQN Asset Finance Income Fund Limited ANNOUNCES THE INTERIM REPORT AND UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2016

 

COMPANY OVERVIEW

 

The investment objective of SQN Asset Finance Income Fund Limited (the “Company” and together with its subsidiaries, the “Group”), is to provide its Shareholders with regular, sustainable dividends and to generate capital appreciation through investment, directly or indirectly, in business-essential, revenue producing (or cost-saving) equipment and other physical assets.

 

Company

SQN Asset Finance Income Fund Limited

Incorporated in Guernsey on 28 May 2014.

Registered Guernsey closed-end collective investment scheme.

Admitted to the Official List of the UK Listing Authority and to trading on the Main Market of the London Stock Exchange on 14 July 2014 for Ordinary Shares, 9 November 2015 for the first issuance of C Shares (the “2015 C Shares”) and 12 December 2016 for the second issuance of C Shares (the “2016 C Shares”).

Registration number 58519.

Investment Managers

SQN Capital Management, LLC (the “US Investment Manager”)

Incorporated in the United States of America on 7 December 2007.

A Registered Investment Adviser with the United States Securities and Exchange Commission. 

File number 4466472.

SQN Capital Management (UK) Limited (the “UK Investment Manager”)

Incorporated in England & Wales on 12 May 2014. 

A wholly owned subsidiary of the US Investment Manager.

Registration number 09033846.

(together the “Investment Managers”)

 

Details of other service providers are provided in the Company Information Section.

 

FINANCIAL HIGHLIGHTS, PERFORMANCE SUMMARY AND DIVIDEND HISTORY

 

Financial Highlights

 

On 25 October 2016, the 2015 C Shares were converted into Ordinary Shares using a conversion ratio of 0.9929 Ordinary Shares for every one 2015 C Share held.  

 

On 12 December 2016, 180,000,000 new 2016 C Shares were issued at a price of £1.00 each, raising net proceeds of £176,836,024. The 2016 C Share issue was fully subscribed. 

 

Performance Summary

 

Sterling in millions, except number of shares in issue

31 December 2016

30 June 2016

 

(Unaudited)

(Audited)

Number of Shares in Issue

- Ordinary Shares

357,707,507

178,985,507

- 2016 C Shares

180,000,000

-

- 2015 C Shares

-

180,000,000

Total Net Asset Value  (“NAV”)

- Ordinary Shares

£355.71

£178.00

- 2016 C Shares

£176.75

-

- 2015 C Shares

-

£176.83

NAV per share

- Ordinary Shares

99.44p

99.45p

- 2016 C Shares

98.20p

-

- 2015 C Shares

-

98.24p

Share Price1

- Ordinary Shares

114.50p

107.00p

- 2016 C Shares

103.14p

-

- 2015 C Shares

-

104.50p

Market Capitalisation1

- Ordinary Shares

£409.58

£191.51

- 2016 C Shares

£185.65

-

- 2015 C Shares

-

£188.10

 

1  Source: London Stock Exchange – 31 December 2016

 

Sterling in millions, except per share data

Six months ended      31 December 2016

Year ended

30 June 2016

(Unaudited)

(Audited)

Earnings / (loss) per share

- Ordinary Shares

3.90p

6.64p

- 2016 C Shares

(0.05)p

-

- 2015 C Shares

-

0.66p

Dividend paid per share

- Ordinary Shares

3.63p

7.12p

- 2016 C Shares

-

-

- 2015 C Shares

1.43p

0.7p

Total comprehensive income before dividends

£9.45

£13.08

Investments

£342.93

£278.38

Cash and cash equivalents

193.34

£87.82

Weighted average yield (in excess of)

9.50%

9.50%

Weighted average remaining term

91.46 months

82.69 months

 

Dividend History

Please refer to Note 14 for details of dividends paid during the period.

 

CHAIRMAN’S STATEMENT

 

I am once again pleased to report that the Group has seen a further period of strong performance and continued growth. So much so that the Company’s second C Share issue at the end of 2016 was once again oversubscribed taking the overall funds raised to £540 million. The Company’s shares also continued to trade at a healthy premium to the NAV throughout the second half of 2016 with the market capitalisation touching £600 million.

 

The Ordinary Shares have paid a monthly dividend equal to 7.25% annually and, in October 2016, the 2015 C Shares achieved a level of income allowing them to be converted into full Ordinary Shares.

 

With the market returning to a level of normality following the Brexit vote shock, a pipeline of more than £140 million of attractive investment opportunities set the stage for the Group to return to the market in November 2016 with the issuance of £180 million new 2016 C Shares.

 

Our ongoing charges ratio was in line with expectations and is now forecast to decrease with the increased capital base and the management fee reducing further to 0.8% per annum on net assets over £500 million.

 

As at the end of 2016, the Group had invested approximately £343 million in equipment leasing and asset financing transactions spread over more than 15 different industries and asset classes, maintaining our broad spread of investments.

 

Anaerobic digestion plants (“AD Plants”), which are considered assets in the agricultural industry, account for 18.06% of NAV and is the single largest asset class. Investments in this sector are slowing as government subsidies that support the economics of these projects are scheduled to be scaled back at the end of the first quarter of 2017. Projects certified prior to the scale back date will be eligible for the subsidies for 15 to 20 years which includes all such Group investments.

 

The Group continues to focus on business-essential assets and equipment in the £1 million to £50 million range, with a particular focus on transactions up to £30 million. This remains an underbanked segment of the market which can be increasingly efficiently served as the fund continues to grow and maintains its position as a leading participant in that market.

 

The average investment size is now just short of £7 million, with a weighted average term of 91.46 months. The weighted average projected yield on investments remains in excess of 9.5% which should result in consistent incremental month on month capital growth for the Ordinary Shares.

 

The portfolio continues to comprise primarily finance leases and secured asset financings with more than 95% of expected revenue from fixed, non-cancellable contracts. The current pipeline of transactions is anticipated to maintain this same proportion of full payout contracts.

 

Although the majority (71.1%) of the Group’s assets are in Sterling, part of the portfolio (15.3%) is in US Dollars and (13.6%) in Euros where both the capital and known income streams are appropriately hedged. With Sterling weakening following the Brexit vote, there have been margin calls which we have adequately met and we shall continue this strategy (see the Investment Managers’ Report for further details).

 

As is standard in all financing businesses, not all transactions proceed as originally planned and so, where there are signs of cash flow difficulties on the part of the Group’s debtors, both the Investment Managers and the Board are quick to identify these and react positively, where appropriate, to reschedule terms to the Group’s satisfaction.

 

The Group continues not to use leverage secured on the overall portfolio to fund investments. However, as a prudent measure, we are in the process of considering a revolving working capital facility to manage the Group’s cash requirements, between fund raisings, in a more efficient way which will also enable us to manage margin calls in the event that volatility in the currency markets continue.

 

The Investment Managers continue to find excellent deals in the marketplace and the task of investing the cash raised from the 2016 C shares issue in attractive opportunities remains a priority.

 

In these ways, your Board continues to manage the Group’s assets positively and effectively and is grateful to shareholders for their continuing confidence.

Peter Niven

Chairman

16 February 2017

INVESTMENT MANAGERS’ REPORT

 

Overview

 

In the second half of 2016, the Group invested £70.8 million which deployed the majority of the remaining proceeds raised from the 2015 C Share. That brought the Group’s total investments in business-essential assets and equipment subject to lease or other financing arrangements secured by tangible assets to £342.9 million. Following the conversion of the 2015 C Shares on 25 October 2016, the Group returned to the market for an additional £180 million 2016 C Share issue, which was again oversubscribed and so the Group entered 2017 with £193.3 million of cash on hand and a robust pipeline of opportunities.

 

Transactions during the Period

 

During the period, the Group made 66 investments across 19 different counterparties. Of the 19, 11 of those were to fulfil outstanding funding commitments on partially drawn transactions. Seven were new investments originated during the year, and one, the largest investment during the period, was in the due diligence and structuring process for almost a year.

Assets and Equipment

Investment Amount1

New/Existing

Projected Yield

Waste Treatment Facility with 5MW AD Plant

£23,720,439

New

9.50%

AD, Gas Clean Up, and Compression Plant with Tanker Trailers

£7,285,148

Existing

9.80%

Portfolio Interest

£6,227,904

Existing

9.46%

Waste Water Treatment Facility

£6,100,368

New

9.80%

Industrial Painting and Coating Equipment

£5,937,189

 New

10.50%

Portfolio of Boilers and Heating Equipment

£5,702,929

 New

9.30%

Gas to Grid AD Plant

£4,374,327

Existing

9.96%

Heavy Hose Manufacturing and Turning Equipment

£4,040,000

New

9.29%

AD Plant

£1,493,385

Existing

9.85%

Wind Turbines

£1,183,222

New

10.02%

Reel Drive Systems with Container and Control Van

£1,010,000

New

9.29%

Farm-based AD Plant (NI Funding Platform)

£950,000

New

9.85%

Wind Turbines

£868,251

Existing

10.02%

Farm-based AD Plant (NI Funding Platform)

£796,763

Existing

9.85%

Farm-based AD Plant (NI Funding Platform)

£362,784

Existing

9.85%

Farm-based AD Plant (NI Funding Platform)

£243,058

Existing

9.86%

Solar Cell and Chip Manufacturing Equipment

£211,393

Existing

10.51%

Farm-based AD Plant

£185,700

Existing

11.25%

Farm-based AD Plant (NI Funding Platform)

£94,647

Existing

9.85%

Total

£70,787,515

 

1 The investment amount does not include capitalised interest of £8,648,981.

 

During the half year, the Group:

 

·     entered into a £23.7 million sale-leaseback for a waste treatment facility with a 5MW AD Plant located in the north of England. The investment term is 14 years which makes it the second longest termed investment in the portfolio to date. The investment is anticipated to yield a net return in excess of 9.5% over the term, but will likely be refinanced prior to maturity resulting in a premium over the projected yield. This investment represents 4.5% of NAV;

 

·     invested an additional £7.3 million, through a series of 16 payments tied to performance milestones and engineering certifications, in a 4MW AD Plant and gas clean up and compression plant in Northern Ireland, along with tanker trailers to transport the gas to 5 CHP sites in the Republic of Ireland. The total investment in this project, by the end of the period, was £14.7 million of which £4.1 million was an advance on VAT which will be recovered by the Group within six months;

 

·     provided £6.2 million of additional financing under one of two existing  loans to two entities within the same group of companies, supported by a diversified portfolio of financial assets, including manufacturing and transportation equipment. The total investment under the two notes was increased to approximately £24.8 million. The US Dollar denominated investment is appropriately hedged and is guaranteed by the group parent company. Total exposure to this group of companies was 4.7% of NAV;

 

·     entered into a £6.1 million sale-leaseback for a waste water treatment facility in the Republic of Ireland. The facility incorporates a 1MW AD Plant. The investment term is 12 years with a contracted 25% balloon payment due on the last day of the term;

 

·     invested £5.9 million as part of a syndicated, asset-secured 60 month term loan with one of the largest industrial painting and coating company in the United States. The company undertakes high-profile, long-term, infrastructure projects for a customer base that is 90% governmental entities. Subsequent to the Group’s investment, the company secured a contract to refurbish and paint a series of airplane hangars under a US-government programme. The profit on that project alone would amortise the Group’s investment;

 

·     agreed to provide up to £10 million of financing, under a wholesale financing programme, secured by a portfolio of boilers located in residential homes throughout the United Kingdom and also invested £5.7 million which is secured by an existing portfolio of leases with a 90% advance rate. Each future drawing under the programme will be coterminous with a 12-year vendor repair and complete after-sales service plan for the equipment; and

 

·     invested an additional £4.4 million in a gas to grid 2.4MW AD Plant located in Scotland, through another series of payments, tied to performance milestones and engineering certifications. The total credit-approved facility for this project is £13 million for a term of 15 years. At year end, £12.2 was drawn which represents 2.29% of NAV.

 

In addition to the above and including co-investments with the Green Investment Bank under the Northern Ireland Funding Platform, the Group invested an additional £5 million in AD Plants throughout the United Kingdom. All but one of those investments were for existing projects as they achieved their funding milestones. The Group entered into what is likely to be the last investment in the space with an initial investment of £950,000 out of £1.9 million for a 499KW farm-based AD Plant through the Northern Ireland Funding Platform. The subsidies that support the economics in this asset class will be scaled back at the end of the first quarter of 2017. Projects that receive their certifications prior to that date will have the benefit of the subsidies for 15 to 20 years and all the Group’s projects in this sector have been carefully managed to ensure that the subsidies are or will be in place.

 

The Group has also provided:

 

·     £4 million of financing against approximately £8.6 million of industrial hose manufacturing and turning equipment. This company manufactures high-quality fluid transfer systems at factories in United States, China and the United Kingdom. The company’s customer base is made up primarily of blue chip enterprises and the 7 year hire purchase agreement is for assets and equipment at the factory in the United Kingdom that produces the company’s highest margin products;

 

·     £868,251 of financing for two wind turbines in Northern Ireland under an existing commitment and funded £1.2 million in a new investment for two wind turbines in South Wales. Each investment has a term of 12 years and is projected to deliver a 10.02% return to the Group; and

 

·     entered into a transaction to refinance a 400 ton reel drive system along with a spares container and a control van. The value of the equipment was in excess of £2.5 million. The Group provided £1 million against the equipment including paying off the existing encumbrance. A portion of the refinancing proceeds were used to complete the construction of a new 85-ton reel drive system which also became part of the Group’s collateral package. The equipment is used offshore for both undersea pipeline and power cable construction, laying and maintenance. The hire purchase contract is for a term of 60 months.

 

In the United States, the Group had previously entered into a transaction to provide financing for manufacturing production lines for the leading American manufacturer of high-efficiency, cost-competitive PV solar cells and panels. During the period, the Group funded the final payment under this commitment to bring the total investment up to £21.4 million. The US Dollar denominated investment is appropriately hedged and has a guarantee from a publicly traded conglomerate that purchased a majority stake in the company during our due diligence process. This investment represented 4.02% of NAV.

 

Top Ten Holdings

 

At period end, the top ten holdings of the Group were as follows:

Asset

Investment Amount

% of NAV

Asset Class

Industry

Anaerobic Digestion Plant

£25,851,335

4.86%

AD Plant

Agricultural

Glass Manufacturing Facility

£25,775,039

4.84%

Manufacturing

Glassware

Anaerobic Digestion Plant

£24,783,987

4.65%

AD Plant

Agricultural

Portfolio Interest

£24,516,708

4.60%

Diversified

Diversified

Solar Manufacturing Lines

£21,350,721

4.01%

Manufacturing

Solar

Combined Heat and Power Centres

£18,141,518

3.41%

Energy

Agricultural

Paper Production and Processing Plant

£18,049,916

3.39%

Paper Mill

Paper

Anaerobic Digestion Plant

£13,596,127

2.55%

AD Plant

Agricultural

Marine Vessels

£13,175,069

2.47%

Vessels

Transportation

Marine Vessels

£12,884,179

2.42%

Vessels

Transportation

Total

£198,124,599

37.20%

Portfolio Diversification

 

Investments in the portfolio are spread over 15 asset classes and industries.

Currency and Effects of Hedging on the Portfolio

 

The Group has a policy of appropriately hedging both the principal and the committed income arising from investments denominated in non-Sterling currencies. The policy adopted seeks to ensure that there will be no actual FX losses over the term of the hedged investment. This policy does, however, result in monthly variations in unrealised FX gains and losses arising from the hedged future income which can have an effect on the NAV and the income reported each month.

 

Following the Brexit vote and changes in U.S. interest rates, the value of Sterling has experienced a high level of volatility which has resulted in a higher cost to hedge non-Sterling investments requiring the Group to post additional cash in margin accounts for the existing hedges. Over the period, at certain times, the Group has had more than £20 million of cash in margin accounts. This created an element of drag on the portfolio leading up to closing the 2016 C Shares in December. The Group is in the process of making arrangements for a working capital facility to better manage such cash situations but facilities of this nature take considerable time to conclude.

 

Looking forward, the pipeline of transactions intended for the new 2016 C Shares funds is predominately Sterling-denominated which will dampen the effects of currency volatility on the portfolio.

 

Performance

 

The Group has made over 200 individual investments, including progress and staged drawings, with more than 50 distinct counterparties since the initial public offering. In line with expectations, following the ramp-up periods for each share class, the Group has consistently paid a monthly dividend which annualises to 7.25%. Investor support has been very strong and shares have traded at a consistent premium.

 

There have been a number of accounts that have required attention but that is to be expected given the rates achieved and the project-finance structure of many of the transactions. The underwriting process is designed to address these situations when they arise. Each investment is underwritten from a credit quality and asset security point-of-view. The primary analysis is cash flow coverage with the asset security being an additional enhancement. In the event that there is a disruption in cash flows, the business essential element of the assets creates opportunities to manage through.

 

In all cases, the investment term is shorter than the useful economic life of the underlying assets and equipment. This is the case with the Group’s investment in medical equipment at a hospital in the United States. The hospital experienced a delay in receiving reimbursement under certain insurance plans and was unable to attract a number of key doctor groups in the timeframe that it had anticipated. As a result, the Group was asked to extend the payment terms to the hospital. The equipment has a useful economic life in excess of eight years and an initial investment term of 48 to 60 months on the two schedules. The hospital cannot function without the equipment and given these facts, the Group has sufficient room to work with the hospital on terms that better met their current cash flows without comprising yield or collateral coverage.

 

Another key attribute in the underwriting process is establishing a risk-appropriate loan-to-value in light of the liquidity of the specific asset’s secondary market. This came into play when, early in 2015, the Group had to reposition two remote operating vehicles (“ROVs”) when the counterparty went into administration. The same approach is currently being taken with the Group’s £1.2 million investment, at an 80% advance rate, in a small, newly built supply vessel. The vessel is being repositioned from one operator to another while maintaining the same economics to the Group.

 

Not all equipment and assets have liquid secondary markets at attractive levels. This is often the case with investments that contain a component of project finance. In these situations, extensive security packages are built around the investments which, in most cases, includes personal guarantees, performance bonds, manufacture’s warranties, and in all cases, insured EPC contracts. As an example, the Group made an initial investment of £108,010 in an AD plant in Northern Ireland. The project failed to meet the milestone requirements for subsequent funding so the Group exercised its rights under the security package and exited the investment with a 23.20% IRR.

 

Overall, yields on individual investments in the portfolio remain above 9.50% supporting the 7.25% dividend after costs. There have been no negative consequences outside of the currency volatility as a result of Brexit and the successful 2016 C Shares raising will help to further diversify an already well-balanced portfolio.

 

Performance by Sector

 

Industry

% of NAV 

Investment Amount1

Average Yield

Agriculture

22.57%

£120,182,813

10.41%

Transportation (including vessels)

6.13%

£32,626,112

10.05%

Glassware

4.84%

£25,775,039

9.14%

Diversified Portfolios

4.60%

£24,516,708

9.57%

Solar

4.01%

£21,350,721

10.51%

Hospitality

3.49%

£18,570,301

9.18%

Paper

3.39%

£18,049,916

9.47%

Energy

1.67%

£8,893,823

11.07%

Medical

1.67%

£8,893,182

10.19%

Marine (excluding vessels)

1.19%

£6,340,690

9.41%

Environment

1.17%

£6,228,992

9.80%

Infrastructure

1.14%

£6,080,024

10.18%

Wholesale Portfolios

1.06%

£5,650,818

9.30%

Plastics

0.85%

£4,500,517

9.85%

Semiconductors

0.75%

£4,000,298

10.00%

IT & Telecom

0.67%

£3,550,296

6.93%

Automotive

0.63%

£3,341,834

9.82%

Government

0.26%

£1,362,123

9.80%

 

1 Investments denominated in US Dollar and Euro have been translated into Sterling as at the trade date of investment and do not include any gains or losses on foreign exchange movements as at 31 December 2016.  

 

Asset Class

% of NAV              

Investment Amount1

Average Yield

AD

18.06%

£96,141,295

10.44%

Manufacturing

11.07%

£58,968,409

10.02%

Vessels

5.27%

£28,044,836

10.28%

Diversified Portfolios

4.60%

£24,516,708

9.57%

CHP

4.52%

£24,041,518

9.36%

Paper Mill

3.39%

£18,049,916

9.47%

IT & Telecom

2.81%

£14,975,547

8.50%

Wind Turbines

1.67%

£8,893,182

10.19%

Medical

1.56%

£8,320,886

11.26%

Modular Buildings

1.45%

£7,717,987

9.17%

Marine equipment (excluding vessels)

1.19%

£6,340,690

9.41%

Waste Processing

1.17%

£6,228,992

9.80%

Infrastructure Equipment

1.14%

£6,080,024

10.18%

Wholesale Portfolios

1.06%

£5,650,818

9.30%

Aviation

0.74%

£3,929,311

10.50%

VAT Receivable

0.26%

£1,362,123

9.80%

Ground Support

0.12%

£651,965

9.47%

 

1 Investments denominated in US Dollar and Euro have been translated into Sterling as at the trade date of investment and do not include any gains or losses on foreign exchange movements as at 31 December 2016.  

 

Outlook

 

The Group is going into 2017 with a strong cash position and the largest pipeline of transactions to date. The team dedicated to managing the portfolio has increased from seven people at the time of the initial public offering to fifteen people leading up to the 2016 C Shares offering. Vendor and manufacturer relationships remain strong. Deal flow coming from advisors and consultants is increasing and no significant competitors have entered the market with banks remaining, for the most part, focused on pure credit lending. Rising interest rates should have a minimal effect on the pipeline but, to the extent that it does, it should make the Group’s pricing relatively more attractive or result in slightly increased yields on new investments.

 

SQN Capital Management, LLC                   SQN Capital Management (UK) Limited

16 February 2017                                              16 February 2017  

 

DIRECTORS’ STATEMENT OF RESPONSIBILITIES

 

The principal risks and uncertainties of the Group remain unchanged from those disclosed in the 30 June 2016 Annual Report and Financial Statements. The Board’s view is that these risks and uncertainties remain unchanged up to 30 June 2017.

 

We confirm to the best of our knowledge that:

 

·     the Unaudited Condensed Consolidated Financial Statements within the Interim Report have been prepared in accordance with International Accounting Standard 34 – “Interim Financial Reporting” (“IAS 34″) as adopted by the European Union (“EU”); and

 

·     the Chairman’s Statement, the Investment Manager’s Report and the notes to the Unaudited Condensed Consolidated Financial Statements include a fair view of the information required by:

 

a)   Rule 4.2.7R of the Disclosure Rules and Transparency Rules of the UK’s Financial Conduct Authority (“DTR”), being an indication of important events that have occurred during the first six months of the financial year and their impact on the set of Unaudited Interim Condensed Financial Statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

 

b)   Rule 4.2.8R of the DTR, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the last annual report that could have a material effect on the financial position or performance of the Group in the first six months of the current financial year.

Signed on behalf of the Board of Directors on 16 February 2017 by:

 

Peter Niven                                                        Christopher Spencer

Chairman                                                             Director

 

INDEPENDENT AUDITOR’S REVIEW REPORT TO THE MEMBERS OF SQN ASSET FINANCE INCOME FUND LIMITED

 

Introduction

We have been engaged by SQN Asset Finance Income Fund Limited (referred to as the “Company” and together with its subsidiaries as “the Group”) to review the unaudited condensed consolidated financial statements in the interim report of the Group  for the six months to 31 December 2016 (“interim financial information”), which comprise the unaudited condensed consolidated statement of comprehensive income, unaudited condensed consolidated statement of financial position, unaudited condensed consolidated statement of changes in equity, unaudited condensed consolidated statement of cash flows and the related explanatory notes to the unaudited condensed consolidated financial statements.

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 unaudited condensed consolidated financial statements.

Directors’ responsibilities

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 letter of engagement, the London Stock Exchange’s Rules for Premium Listed companies and other applicable legislation and regulations.

As disclosed in note 2 of the interim financial information, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”). The unaudited condensed consolidated financial statements included in the interim report have been prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting”, as adopted by the European Union (“IAS 34″).

Our responsibility

Our responsibility is to express to the Group a conclusion on the unaudited condensed consolidated financial statements in the interim report based on our review.

Our report has been prepared in accordance with the terms of our engagement and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent.  Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ”Review of Interim Financial Information Performed by the Independent Auditor of the Entity”, issued by the Auditing Practices Board for use in the United Kingdom and Ireland. 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 Ireland) 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.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the unaudited condensed consolidated financial statements in the interim report for the six months to 31 December 2016 are not prepared, in all material respects, in accordance with IAS 34 as adopted by the European Union and other applicable legislation and regulations.

Baker Tilly CI Audit Limited

Chartered Accountants

St. Sampsons, Guernsey

Date: 16 February 2017

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 31 December 2016

 

 

Notes

Six months ended

31 December 2016

Six months ended

31 December 2015

(Unaudited)

(Unaudited)

£

£

Income

Finance income

12,336,612

6,725,479

Interest on cash and cash equivalents

25,611

148,128

Other income

78,333

1,360,568

Total income

12,440,556

8,234,175

Net unrealised gain on revaluation of investments

61,285

171,120

Net unrealised foreign exchange gain on investments

 

801,175

 

3,641,577

Net unrealised foreign exchange gain/(loss) on forward contracts

 

4,349,009

 

(2,260,388)

Other unrealised foreign exchange gains

5,948

544,652

Net realised foreign exchange gain on investments

4,393,037

963,755

Net realised foreign exchange loss on forward contracts

 

(10,200,378)

 

(3,166,355)

Net realised and unrealised loss

(589,924)

(105,639)

Operating expenses

Investment management fees

(1,338,277)

(1,150,766)

Directors’ fees and travel expenses

(69,428)

(95,035)

Other operating expenses

6

(335,987)

(342,181)

Depreciation

(175,884)

(175,884)

Accumulated retained loss on the 2015 C Shares at point of conversion

 

13/14

 

(482,568)

 

-

Total operating expenses

(2,402,144)

(1,763,866)

Total comprehensive income for the period

9,448,488

6,364,670

Total comprehensive income / (loss) for the period analysed as follows:

Attributable to Ordinary Shareholders

9,530,299

6,106,691

Attributable to 2016 C Shareholders

(81,811)

-

Attributable to 2015 C Shareholders

-

257,979

Total

9,448,488

6,364,670

Basic and diluted earnings per Ordinary Share (pence)

 

7.1

 

3.90p

 

3.41p

Basic and diluted loss per 2016 C Share (pence)

7.2

(0.05)p

-

Basic and diluted earnings per 2015 C Share (pence)

 

7.3

 

-

 

0.14p

 

All results are derived from continuing operations.

 

The Group has no items of other comprehensive income, and therefore the profit for the period is also the total comprehensive income.

 

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

 

UNAUDITED Condensed CONSOLIDATED Statement of    Financial Position

As at 31 December 2016

 

Notes

31 December 2016

30 June 2016

(Unaudited)

(Audited)

£

£

Non-current assets

Property, plant and equipment

8

6,441,251

4,631,548

Residual value

1,102,910

1,041,623

Investments designated as fair value through profit

or loss

 

9.2

 

4,837,860

 

4,373,701

Finance lease and hire-purchase investments

10

72,494,288

62,389,028

Loans and other investments

9.1

258,056,019

205,944,354

342,932,328

278,380,254

Current assets

Cash and cash equivalents

193,335,837

87,815,244

Interest receivables

2,895,740

2,494,276

Other receivables and prepayments

2,274,486

1,974,907

Investment receivables

517,726

173,632

199,023,789

92,458,059

Total assets

541,956,117

370,838,313

Current liabilities

Other payables and accrued expenses

11

(1,838,497)

(794,431)

Derivative financial liability

9.2/15

(7,651,449)

(15,213,964)

(9,489,946)

(16,008,395)

Net assets

532,466,171

354,829,918

Equity

Share capital

13

530,552,458

353,716,434

Retained earnings

1,913,713

1,113,484

532,466,171

354,829,918

NAV per Share

-     Ordinary Shares

7.1/16

99.44p

99.45p

-     2016 C Shares

7.2/16

98.20p

-

-     2015 C Shares

7.3/16

-

98.24p

 

These unaudited condensed consolidated financial statements were approved and authorised for issue by the Board of Directors on 16 February 2017, and signed on its behalf by:

Peter Niven                                                                              Christopher Spencer                                                                                        Director                                                                                 Director

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

 

UNAUDITED CONDENSED CONSOLIDATED Statement of Changes in Equity

 

For the six months ended 31 December 2016 (Unaudited)

 

 

 

Net Assets Attributable to Shareholders

 

Note

Share

Capital

Retained Earnings

 

Total

£

£

£

Opening balance as at 1 July 2016

353,716,434

1,113,484

354,829,918

Total comprehensive income for the period

-

9,448,488

9,448,488

 

Transactions with Shareholders, recorded directly in equity

Issue of 2016 C Shares

13

180,000,000

-

180,000,000

2016 C Shares issue costs

13

(3,163,976)

(3,163,976)

Dividends paid – Ordinary Shares

14

-

(8,648,259)

(8,648,259)

Total transactions with Shareholders

176,836,024

(8,648,259)

168,187,765

Closing balance as at 31 December 2016

530,552,458

1,913,713

532,466,171

 

For the six months ended 31 December 2015 (Unaudited)

 

 

Net Assets Attributable to Shareholders

Note

Share

Capital

Retained Earnings

 

Total

£

£

£

Opening balance as at 1 July 2015

176,808,446

2,046,797

178,855,243

Total comprehensive income for the period

-

6,364,670

6,364,670

 

Transactions with Shareholders, recorded directly in equity

Issue of 2015 C Shares

180,000,000

-

180,000,000

2015 C Shares issue costs

(3,101,549)

(3,101,549)

Dividends paid

14

-

(6,263,240)

(6,263,240)

Total transactions with Shareholders

176,898,451

(6,263,240)

170,635,211

Closing balance as at 31 December 2015

353,706,897

2,148,227

355,855,124

 

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

 

UNAUDITED Condensed CONSOLIDATED Statement of Cash  Flows

 

For the six months ended 31 December 2016

Note

Six months ended

31 December 2016

Six months ended

31 December 2015

(Unaudited)

(Unaudited)

£

£

Operating activities:

Total comprehensive income for the period

9,448,488

6,364,670

Adjustments for:

Unrealised gain on investments

(61,285)

(171,120)

Unrealised gain on investments relating to the 2015 C Shares

 

(2,768,305)

 

-

Unrealised foreign exchange gain in the period

(5,156,132)

(1,925,841)

Unrealised foreign exchange gain in the period relating to the 2015 C Shares

 

(3,213,504)

 

-

Depreciation

8

175,884

175,884

Realised foreign exchange gain on investments

(4,393,037)

(963,755)

Increase in interest receivables

(401,464)

(1,130,517)

(Increase)/decrease in investment receivables

(344,094)

168,833

Increase in other receivables and prepayments

(299,579)

(1,023,430)

Increase/(decrease) in investment payables

1

(130,000)

Increase in other payables and accrued expenses

11

1,044,065

536,819

Acquisition of investments

8/9/10

(79,436,496)

(94,481,848)

Amortisation of investment principal during the period

 

8/9/10

 

17,203,010

 

17,310,375

Disposals during the period

9

5,529,332

-

Net cash outflow from operating activities

(62,673,116)

(75,269,930)

Cash flow from financing activities

2016 C Share issue (net proceeds)

13

176,836,024

-

2015 C Share issue (net proceeds)

13

-

176,898,451

Dividends paid

14

(8,648,259)

(6,263,240)

Net cash flows provided by financing activities

168,187,765

170,635,211

Net increase in cash and cash equivalents

105,514,649

95,365,281

Cash and cash equivalents at start of the period

87,815,244

75,654,965

Effect of exchange rate changes on cash and cash equivalents

 

5,944

 

544,652

Cash and cash equivalents at end of the period

193,335,837

171,564,898

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

NOTES TO THE UNAUDITED Condensed CONSOLIDATED FINANCIAL STATEMENTS

 

1.     General Information

 

The Company was incorporated on 28 May 2014 and registered in Guernsey as a closed-end collective investment scheme. The Company‘s registered office is BNP Paribas House, St Julian’s Avenue, St Peter Port, Guernsey, GY1 1WA. The Company‘s Ordinary Shares were admitted to the Official List of the UK Listing Authority and to trading on the Main Market of the London Stock Exchange on 14 July 2014.

 

In November 2015, the Group raised additional capital by the issuance of the 2015 C Shares, which were listed on the Main Market of the London Stock Exchange. Net proceeds of £176,907,988 were raised through the issue of 180,000,000 2015 C Shares. On 25 October 2016, the 2015 C Shares were converted to Ordinary Shares using a conversion ratio of 0.9929 Ordinary Shares for each 2015 C Share. The conversion ratio was based on the NAV per 2015 C Share as at 14 October 2016, which was the conversion date (the “Conversion Date”) (refer to note 13 for further details).  

 

In December 2016, the Group raised additional capital by the issuance of the 2016 C Shares. Net proceeds of £176,836,024 were raised through the issue of 180,000,000 2016 C Shares. The 2016 C Shares are listed separately on the Main Market of the London Stock Exchange and were admitted on 12 December 2016 (refer to note 13 for further details).

 

The 2016 C Shares net proceeds and the investments made with the net proceeds will be accounted for and managed as a separate pool of assets in accordance with the Company’s investment policy until the conversion of 2016 C Shares to Ordinary Shares. Expenses are split between Ordinary Shares and 2016 C Shares in proportion to their respective NAV.

 

The Company’s subsidiaries, SQN Asset Finance (Guernsey) Limited, SQN AFIF (AMBER) Limited, SQN AFIF (BRONZE) Limited, SQN AFIF (Cobalt) Limited and SQN AFIF (Diamond) Limited (the “Subsidiaries’), are wholly owned subsidiaries incorporated in Guernsey and established for the primary purpose of acting as investment holding companies. The Subsidiaries’ registered office is BNP Paribas House, St Julian’s Avenue, St Peter Port, Guernsey, GY1 1WA.

 

2.   Basis of Preparation

 

The Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with IAS 34. They do not include all the disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the Annual Report and Financial Statements for the year ended 30 June 2016, which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”).

 

These financial statements have been prepared on a going concern basis. After reviewing the Group’s projections and cash flow forecast for the next financial period, the Company’s Directors are satisfied that, at the time of approving these financial statements, it is appropriate to adopt the going concern basis. 

 

3. Significant Accounting Policies

 

The preparation of the Unaudited Condensed Consolidated Financial Statements in accordance with IAS 34 requires the application of certain critical accounting estimates and also requires the Company’s Directors to exercise judgement in applying its accounting policies. The areas where significant judgements and estimates have been used are included in Note 4.

 

The Group has applied the same accounting policies as in its Annual Report and Financial Statements for the year ended 30 June 2016. 

 

A number of amendments to standards have become effective for financial periods beginning on or after 1 January 2016. The Directors have reviewed these amendments and while they have not formally assessed the impact they will have on the financial statements of the Group, their initial opinion is that they will not be applicable or will not have a material impact in these Unaudited Condensed Consolidated Financial Statements or in the Annual Report and Financial Statements for the year ended 30 June 2017.

 

4. Use of Estimates and Judgements

 

There have been no material revisions to the nature and amount of changes in estimates of amounts reported in the Annual Report and Financial Statements for the year ended 30 June 2016.

 

5.   Changes to Material Agreements

 

There were no changes to any material agreements during the six months’ period ended 31 December 2016.

 

6.   Other Operating Expenses

 

31 December 2016

31 December 2015

(Unaudited)

(Unaudited)

£

£

Administration fees

118,232

102,700

Company secretarial fees

15,092

53,015

Audit fees1

25,604

18,415

Brokerage fees

16,001

23,421

Public relation fees

24,841

25,163

Registrar fees

14,432

20,803

Legal fees

900

5,574

Professional fees

48,889

26,776

Other expenses

71,996

66,314

Total other operating expenses

335,987

342,181

 

1 The Group’s auditor, Baker Tilly CI Audit Limited, provided non-audit services on the issue of the 2016 C Shares.

 

7   Earnings per Share and NAV per Share

 

7.1   Ordinary Shares

 

The calculation of basic earnings per Ordinary Share is based on the operating profit attributable to Ordinary Shares of £9,530,299 (31 December 2015: £6,106,691) and on the weighted average number of Ordinary Shares in issue during the period of 244,419,245 (31 December 2015: 178,985,507).

 

The calculation of the NAV per Ordinary Share is based on a NAV attributable to Ordinary Shares of £355,711,958 (30 June 2016: £177,996,266) and the number of Ordinary Shares in issue as at 31 December 2016 of 357,707,507 (30 June 2016: 178,985,507).

 

7.2   2016 C Shares

 

The calculation of basic earnings per 2016 C Share is based on the operating loss attributable to 2016 C Shares of £81,811 and on the weighted average number of 2016 C Shares in issue during the period of 180,000,000.

 

The calculation of the NAV per 2016 C Share is based on a NAV attributable to 2016 C Shares of £176,754,213 and the number of 2016 C Shares in issue as at 31 December 2016 of 180,000,000.

 

7.3   2015 C Shares

 

The calculation of basic earnings per 2015 C Share is based on the operating profit attributable to 2015 C Shares of £Nil (31 December 2015: £257,979) and on the weighted average number of 2015 C Shares in issue during the period of 103,278,689 (31 December 2015: 180,000,000).

 

The calculation of the NAV per 2015 C Share is based on a NAV attributable to 2015 C Shares of £Nil (30 June 2016: £176,833,652) and the number of 2015 C Shares in issue as at 31 December 2016 of Nil (30 June 2016: 180,000,000).

 

8.   Property, Plant and Equipment

 

Property, Plant and Equipment comprises plant and machinery originally subject to:

 

a)   a hire purchase agreement which was re-leased to an alternative third party under an operating lease. The asset has a remaining useful life of 13 years (30 June 2016: 13.5 years).

b)   a finance lease which was terminated during the period and where the underlying asset was recovered by the Group. As at 31 December 2016, this asset is being remarketed by the Group.

 

The carrying amount is detailed in the table below:

 

31 December 2016

30 June 2016

(Unaudited)

(Audited)

Cost

£

£

Opening balance

5,100,572

5,100,572

Additions during the period/year

-

-

Reclassified investments1

1,985,587

-

Closing balance

7,086,159

5,100,572

Accumulated depreciation

Opening balance

(469,024)

(117,256)

Depreciation during the period/year

(175,884)

(351,768)

Net book value

6,441,251

4,631,548

 

1 This item, detailed above in note 8 b, relates to an investment that has been reclassified from the Finance Lease investments category. Please refer to notes 10 and 18 for additional information.

 

9.   Financial Instruments

 

9.1   Loans and Other Investments

 

The following table summarises the changes in investments measured at amortised cost using the effective interest method:

 

31 December 2016

(Unaudited)

Loans

Construction Finance

Receivables

Total

£

£

£

£

Opening balance

92,965,222

103,530,815

9,448,317

205,944,354

Advances and purchases during the period

9,903,268

58,609,048

-

68,512,316

Principal amortisation during the period

(4,579,288)

(6,514,935)

(1,963,046)

(13,057,269)

Disposals during the period

(5,401,127)

(128,205)

-

(5,529,332)

Reclassified investments1

21,139,325

(26,327,265)

-

(5,187,940)

2015 C Shares reclassification2

2,339,953

200,290

-

2,540,243

Realised foreign exchange gain on

investments

 

345,865

 

3,777,382

 

270,090

 

4,393,337

Unrealised foreign exchange gain on revaluation

 

1,073,694

 

(550,995)

 

(82,389)

 

440,310

Closing balance

117,786,912

132,596,135

7,672,972

258,056,019

 

1 This item relates to advances in the Construction Finance investments category that were reclassified as additions in the Loans, Finance Lease and Hire-Purchase investments categories, that appear in this note and in note 10 respectively. 

 

2 This item relates to the treatment of foreign exchange and accrued interest on investments that were held in the 2015 C Shares portfolio at the Conversion Date. The conversion of the 2015 C Shares class on the Conversion Date to the Ordinary Shares class realised foreign exchange movements in the 2015 C Shares portfolio which formed the cost basis of the transfer amount to the Ordinary Shares portfolio. Accrued interest up to the Conversion Date on the 2015 C Shares portfolio has been capitalised.

 

30 June 2016

(Audited)

Loans

Construction Finance

Receivables

Total

£

£

£

£

Opening balance

47,664,651

22,131,934

2,845,605

72,642,190

Advances and purchases during the year

66,985,094

98,071,965

8,638,201

173,695,260

Principal amortisation during the year

(33,854,841)

(1,037,392)

(3,015,862)

(37,908,095)

Reclassified investments1

-

(20,290,025)

-

(20,290,025)

Realised foreign exchange gain on

investments

 

1,689,357

 

22,324

 

108,137

 

1,819,818

Unrealised foreign exchange gain on revaluation

 

10,480,961

 

4,632,009

 

872,236

 

15,985,206

Closing balance

92,965,222

103,530,815

9,448,317

205,944,354

 

1 This item relates to advances in the Construction Finance category that were reclassified as additions in the Finance Lease and Hire-Purchase investments categories that appear in note 10. 

 

Construction Finance investments comprise initial drawings or advances made under loan agreements, finance leases or hire-purchase agreements during a period of procurement or construction of underlying assets (the “Construction Period”). During the Construction Period, interest or similar service payments on the advances may be paid or (more usually) rolled-up and capitalised on expiry of the Construction Period, typically when the assets have been commissioned and, (if applicable), commercial operations have commenced. 

 

The amortisation period (in the case of a loan) or lease/hire term (in the case of a finance lease or hire-purchase) commences at the end of the Construction Period and the service payments or lease/hire payments rentals are calculated by reference to the total advances during the Construction Period plus interest accrued (if not paid).  In the case of a finance lease, the advances (and accrued interest) are repayable in full if a default or insolvency event occurs or if the Construction Period has not ended by a specified long-stop date.

 

Receivables comprise the legal right to streams of contracted payments arising under lease, hire, licence or similar agreements made between an end-user, lessee or licensee and lessor, owner or licensor of goods or other assets, in respect of which the right to receive payment has been sold or assigned absolutely to the Group by a third party, but legal title to the goods or other assets lies with that third party.    

 

9.2   Fair Value Investments

 

Investments held at fair value comprise the Group’s share in financial assets and financial liabilities designated at fair value through profit and loss.

 

The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements:

 

Level 1: Inputs that reflect unadjusted price quotes in active markets for identical assets or liabilities that the Group has the ability to access at the measurement date.

 

Level 2: Inputs that reflect price quotes of similar assets and liabilities in active markets, and price quotes of identical assets and liabilities in markets that are considered to be less than active as well as inputs other than price quotes that are observable for the asset or liability either directly or indirectly.

 

Level 3: Inputs that are unobservable for the asset or liability and reflect the Investment Managers’ own assumptions based upon experience of similar assets and/or on third party appraised values. This category includes instruments that are valued based on price quotes for which the inputs are unobservable or price quotes for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

 

The fair values of derivative instruments are calculated using quoted prices. Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts.

 

For financial assets not carried at amortised cost, the Investment Managers determine fair value using valuation techniques approved by the Company’s Directors.

 

The table below analyses the financial assets and financial liabilities held at the end of the reporting period by the level in the fair value hierarchy into which the fair value measurement is categorised:

 

31 December 2016 (Unaudited)

Level 1

£

Level 2

£

Level 3

£

Total

£

Financial Assets

Investments designated at fair value through profit and loss

 

-

 

-

 

4,837,860

 

4,837,860

Finance lease residual value

-

-

1,102,910

1,102,910

Equity holding

-

-

-

-

Total Financial Assets

-

-

5,940,770

5,940,770

Financial Liabilities

Derivative financial liability

-

(7,651,449)

-

(7,651,449)

Total Financial Liability

-

(7,651,449)

-

(7,651,449)

 

30 June 2016 (Audited)

Level 1

£

Level 2

£

Level 3

£

Total

£

Financial Assets

Investments designated at fair value through profit and loss

 

-

 

-

 

4,373,701

 

4,373,701

Finance lease residual value

-

-

1,041,623

1,041,623

Equity holding

-

-

-

-

Total Financial Assets

-

-

5,415,324

5,415,324

Financial Liabilities

Derivative financial liability

-

(15,213,964)

-

(15,213,964)

Total Financial Liability

-

(15,213,964)

-

(15,213,964)

 

The following table summarises the movements in fair value of the Group’s Level 3 investments:

 

31 December 2016

30 June 2016

(Unaudited)

(Audited)

£

£

Opening balance

5,415,324

4,387,648

Additions during the period / year

104,375

183,821

Sales during the period/year

(1,322)

(94,916)

Realised foreign exchange gain on investments

241

9,258

Unrealised foreign exchange gain on revaluation

422,152

929,513

Closing balance

5,940,770

5,415,324

 

Transfers between levels are deemed to have occurred at the date of the event or change in circumstances that caused the transfer. There were no transfers of investments between the levels during the period.

The Lease Participation investments represent a single participation investment in a portfolio of leases. The carrying value of £4,837,860 (30 June 2016: £4,373,701) represents the value attributable to the ‘principal’ element of the participation interest, determined in accordance with the participation agreement.

 

The participation agreement entitles the Group to receive interest on the principal balance at the rate of 10.5%. Payment amounts are not fixed and are dependent on the actual proceeds received on the Lease Portfolio each month. Any shortfall in interest payments is added to the principal balance and accrues interest at the same rate. The Group does not have any rights to any amounts received on the portfolio over and above the repayment of their principal plus any interest accrued at the rates stated above.

 

The Directors and the Investment Managers believe this is a reasonable approximation of the fair value. The Group has therefore not presented quantitative information on the valuation of the Lease Participation investments.

 

Information about the Secondary Market for Level 3 Investments

 

The Investment Managers make assumptions about the residual value of certain assets and equipment. As determined by the Investment Managers, the residual value is a function of the in-place value and/or the secondary market value of the equipment or assets.

 

The in-place value is an assessment of the value of the equipment or assets if the equipment or assets were to continue to operate and provide value to the end-user. This takes into account the marginal cost of keeping the asset in place as well as the cost to the end-user of decommissioning, redelivering, and replacing the equipment. In some cases, this amount (or a maximum value) is negotiated in advance with the end-user.

 

The secondary market value is determined by the Investment Managers’ historical experience, quotes from dealers, third party appraisals and recent sales. The secondary market value also takes into account the geography of the equipment or assets, the time frame required to conduct a sale, and the associated costs that are not passed on to the end-user.

 

Equity Holding

 

These represent asset finance facilities in the form of construction finance and hire purchase investments to five investee companies. In addition to these finance arrangements the Group acquired a 25.5% equity holding in each investee company.

 

The equity holdings are valued by the Directors, taking into consideration a range of factors including the NAV of the investee, (if available), the existence of the call option exercisable on the holding and other relevant available information, including the price of recent transactions of equity holdings (if any), and advice received from the Investment Manager and such other factors as the Directors, in their sole discretion, deem relevant in considering a positive or negative adjustment to the valuation.

 

The estimated fair values of the equity holdings may differ from the values that would have been realised had a ready market existed and the difference could be material.

 

The fair value of the equity holdings are reassessed on an ongoing basis by the Board.

 

9.3   Valuation Process

 

The following table provides information about fair value measurements using significant unobservable inputs.

 

 

Description

Fair Value

Valuation Techniques

Unobservable Inputs

£

Lease participation

4,837,860

Principal balance

Third party appraisal

Finance lease residual value

1,102,910

Market approach

In place value

/ secondary market value

Equity holding

-

Market approach

N/A

 

30 June 2016 (Audited)

 

Description

Fair Value

Valuation Techniques

Unobservable Inputs

£

Lease participation

4,373,701

Principal balance

Third party appraisal

Finance lease residual value

1,041,623

Market approach

In place value / secondary market value

Equity holding

-

Market approach

N/A

 

10.   Finance Lease and Hire-Purchase Investments

 

The Group’s investments include a portfolio of leases of plant and machinery leased under finance lease agreements that transfer substantially all the risks and rewards incidental to ownership to the lessee and in hire-purchase agreements that include a purchase option exercisable by the lessee upon fulfilment of specified conditions. Under these agreements, the lessee pays periodic rent for the use of the assets for a fixed or minimum initial term of typically 3 to 10 years and at the end of the fixed or minimum term, the lessee can elect to:

 

·     return the asset to the Group;

·     in the case of hire-purchase, exercise an option to purchase the assets, typically at a ‘bargain’ price;

·     extend the lease for a further minimum term or from year to year on payment of a pre-agreed rent (which is typically substantially lower than the rent paid during the initial term); or

·     arrange a sale of the asset to a third party and (typically) receive all or the majority of the proceeds of sale. Legal title to the leased assets remains with the Group at all times prior to such sale.

 

The following tables summarise the movements in Finance Lease and Hire-Purchase investments:

 

31 December 2016 (Unaudited)

Finance Lease

Hire-Purchase

Total

£

£

£

Opening balance

23,662,205

38,726,823

62,389,028

Additions during the period

1,101,260

9,718,545

10,819,805

Reclassified Construction Finance investments1

3,382,506

1,805,434

5,187,940

Reclassified Property, Plant and Equipment investments2

(1,985,587)

-

(1,985,587)

2015 C Shares reclassification3

13,009

215,053

228,062

Realised loss on investment

-

(541)

(541)

Principal amortisation during the period

(2,336,505)

(1,807,914)

(4,144,419)

Closing balance

23,836,888

48,657,400

72,494,288

 

1 This item relates to advances that previously appeared in the Construction Finance investments category in note 9.1 and have been reclassified as Finance Lease or Hire-Purchase Investments.

 

2 This item relates to an investment that has been reclassified to the Property, Plant and Equipment investments category. Please refer to notes 8 and 18 for additional information.

 

3 This item relates to the treatment of accrued interest on investments that were held in the 2015 C Shares portfolio at the Conversion Date. Accrued interest up to the Conversion Date on the 2015 C Shares portfolio have been capitalised.

 

30 June 2016 (Audited)

Finance Lease

Hire-Purchase

Total

£

£

£

Opening balance

17,230,475

-

17,230,475

Additions during the year

6,886,027

22,592,633

29,478,660

Reclassified construction finance investments

2,880,118

17,409,907

20,290,025

Principal amortisation during the year

(3,334,415)

(1,275,717)

(4,610,132)

Closing balance

23,662,205

38,726,823

62,389,028

 

Assets leased to third parties under finance leases had an unguaranteed residual value at the end of the period of £1,102,910 (30 June 2016: £1,041,623).

 

During the period, residual investments sold totalled £Nil (30 June 2016: £94,916).

 

11.   Other Payables and Accrued Expenses

 

31 December 2016

30 June 2016

(Unaudited)

(Audited)

£

£

Investment management fees

378,675

312,856

Administration and secretarial fees

33,724

56,104

Audit fees

24,086

39,889

Printing fees

9,972

4,972

Brokerage fees

18,625

18,625

Rental reserve

444,148

353,741

Director fees

46,972

-

Other payables

428,301

6,408

Deferred loan pay down and interest

452,157

-

Investment payables

1,837

1,836

Total other payables and accrued expenses

1,838,497

794,431

 

Investment payables of £1,837 (30 June 2016: £1,836) represent amounts due for investments purchased that have been contracted for but not settled at the reporting date.

 

The Group has financial risk management policies in place to ensure that all payables are paid within the credit time frame.

 

The Directors considers that the carrying amount of all payables approximates to their fair value.

 

12.   Commitments and Contingent Liabilities

 

As at 31 December 2016, the Group had committed to invest a further £24,946,278 (30 June 2016: £39,584,941). These commitments are classified as “hard commitments” of £8,190,178 (30 June 2016: £39,584,941) which represent investments for which the documentation is finalised. As at 31 December 2016, there were “soft commitments” of £16,756,100 (30 June 2016: £Nil) which represent investments at varying stages of documentation.

 

The Group does not have any contingent liabilities.

 

13.   Share Capital

 

The authorised share capital of the Company is represented by an unlimited number of shares of no par value which may be designated as Ordinary Shares, C Shares or otherwise as the Directors may from time to time determine. All shares hold equal rights with no restrictions and no shares carry special rights with regard to the control of the Company. There are no special rights attached to the shares in the event that the Company is wound up.

 

The Company‘s share capital is denominated in Sterling.

 

Number of Shares

Stated Capital

Number of Shares

Stated Capital

31 December 2016

31 December 2016

30 June 2016

30 June 2016

(Unaudited)

(Unaudited)

(Audited)

(Audited)

£

£

Ordinary Shares*

357,707,507

353,716,434

178,985,507

176,808,446

2016 C Shares**

180,000,000

176,836,024

-

-

2015 C Shares*

-

-

180,000,000

176,907,988

Total

537,707,507

530,552,458

358,985,507

353,716,434

 

Share Movements (Net proceeds)

 

Number of Shares

Stated Capital

Ordinary Shares

C Shares

Ordinary Shares

C Shares

Total

£

£

£

Balance at 1 July 2016

178,985,507

180,000,000

176,808,446

176,907,988

353,716,434

Conversion of 2015 C Shares to Ordinary Shares*

 

178,722,000

 

(180,000,000)

 

176,425,420

 

(176,425,420)

 

-

2016 C Shares issued during the period**

-

180,000,000

 

-

176,836,024

 

176,836,024

Balance at

31 December 2016

357,707,507

180,000,000

353,233,866

177,318,592

 

530,552,458

 

* In November 2015, the Group raised additional capital by the issuance of 2015 C Shares. Net proceeds of £176,907,988 were raised through the issue of 180,000,000 2015 C Shares. On 25 October 2016, the 2015 C Shares were converted into Ordinary Shares using an Ordinary Share conversion ratio of 0.9929 for each 2015 C Share. The conversion ratio was based on the NAV per 2015 C Share as at 14 October 2016, which was the calculation date. The 2015 C Shares issue costs were finalised in the year ended 30 June 2016 as £3,092,012. The reported figure in the 31 December 2015 financial statements was overstated by £9,537 and this additional amount has been reinvested into the Group during the year ended 30 June 2016.

 

** On 8 December 2016, the Board announced that gross proceeds of £180,000,000 been raised by issuing 180,000,000 2016 C Shares. The proceeds net of issue costs of £3,163,976 (1.76% of the gross proceeds), amounted to £176,836,024. The terms and timing of the conversion of 2016 C Shares to Ordinary Shares will be announced at a later date. The un-invested proceeds were held in cash and on fixed deposit as at 31 December 2016. Please refer to the Investment Manager’s Report for details on the investment portfolio, opportunities and outlook.

 

14.   Dividends

 

The Company declared and paid the following dividends to its Shareholders during the period:

 

Period

Announcement Date

Payment Date

Amount per Share

Amount

Ordinary Shares

£

1 to 31 May 2016

21 June 2016

25 July 2016

0.6042p

1,081,430

1 to 30 June 2016

21 July 2016

22 August 2016

0.6042p

1,081,430

1 to 31 July 2016

18 August 2016

19 September 2016

0.6042p

1,081,430

1 to 31 August 2016

21 September 2016

24 October 2016

0.6042p

1,081,430

1 to 30 September 2016

21 October 2016

21 November 2016

0.6042p

2,161,269

1 to 31 October 2016

15 November 2016

19 December 2016

0.6042p

2,161,270

Total

8,648,259

 

The dividend for December 2016 had an ex-dividend date after the period end and is stated in Note 19. 

 

2015 C Shares 1

£

1 to 31 May 2016

21 June 2016

25 July 2016

0.2000p

360,000

1 to 30 June 2016

21 July 2016

22 August 2016

0.3300p

594,000

1 to 31 July 2016

18 August 2016

19 September 2016

0.4167p

750,060

1 to 31 August 2016

21 September 2016

24 October 2016

0.4861p

874,980

Total

2,579,040

 

1 When the 2015 C Shares were converted to Ordinary Shares, the accumulated retained loss on the 2015 C Shares of £482,568, included the paid 2015 C Share dividends.

 

During the period ended 31 December 2015, the Company declared and paid the following dividends to its Shareholders:

 

Period

Announcement Date

Payment Date

Amount per Share

Amount

Ordinary Shares

£

1 to 31 May 2015

19 June 2015

20 July 2015

0.5200p

930,725

1 to 30 June 2015

20 July 2015

20 August 2015

0.5625p

1,006,795

1 to 31 July 2015

21 August 2015

18 September 2015

0.6042p

1,081,430

1 to 31 August 2015

17 September 2015

20 October 2015

0.6042p

1,081,430

1 to 30 September 2015

21 October 2015

27 November 2015

0.6042p

1,081,430

1 to 31 October 2015

20 November 2015

18 December 2015

0.6042p

1,081,430

Total

6,263,240

 

15.   Derivative Financial Liability

 

The Group had the following open forward foreign exchange contracts:

 

As at 31 December 2016

    Notional

Buy/Sell Currency

Foreign Currency

GBP

Fair Value / GBP Equivalent

Settlement Date Month/Year

GBP/EUR

788,187

673,207

(2,467)

January 2017

GBP/EUR

455,808

389,578

(1,343)

February 2017

GBP/EUR

14,328,170

12,259,455

(1,932,155)

March 2017

GBP/EUR

25,171,299

21,549,557

(1,354,563)

April 2017

GBP/USD

48,861,718

39,495,992

(1,236,396)

June 2017

GBP/EUR

44,851,831

38,438,826

(231,759)

June 2017

GBP/USD

21,621,969

17,448,568

119,788

June 2017

GBP/USD

62,735,535

50,618,523

(3,764,047)

July 2017

GBP/EUR

15,770,921

13,560,800

751,493

October 2017

(7,651,449)

 

 

As at 30 June 2016

   Notional

Buy/Sell Currency

Foreign Currency

GBP

Fair Value / GBP Equivalent

Settlement Date Month/Year

GBP/EUR

28,937,566

24,067,026

(3,150,292)

July 2016

GBP/EUR

226,613

188,524

(10,710)

August 2016

GBP/USD

33,192,961

24,830,961

(1,458,927)

September 2016

GBP/EUR

6,773,233

5,643,146

(429,775)

September 2016

GBP/EUR

18,515,140

15,431,610

(896,184)

October 2016

GBP/EUR

45,150,513

37,675,891

(2,862,012)

November 2016

GBP/USD

82,266,109

61,401,921

(6,406,064)

December 2016

(15,213,964)

 

16.   Segmental Reporting

 

There are two reportable segments as at 31 December 2016: Ordinary Shares and 2016 C Shares. For the year ended 30 June 2016 and the period ended 31 December 2015, two reportable segments were identified, Ordinary Shares and 2015 C Shares. Each Share Class has its own portfolio, is listed separately on the Main Market of the London Stock Exchange and the Company’s Directors review internal management reports for each segment separately on a quarterly basis.

 

The Directors view the operations of the two reportable segments as one operating segment, being investment business and both segments have the same investment objectives. All significant operating decisions are based upon analysis of the Group‘s investments as one segment. The financial results from this segment are equivalent to the financial results of the Group as a whole.

 

The tables below provide a breakdown of the Condensed Statement of Comprehensive Income between the reportable segments:

31 December 2016 (Unaudited)

Ordinary Shares

2016 C Shares

Total

£

£

£

Total income

12,417,044

23,512

12,440,556

Net realised and unrealised gain

(1,072,492)

-

(1,072,492)

Total operating expenses

(1,814,253)

(105,323)

(1,919,576)

Total comprehensive income for the period

9,530,299

(81,811)

9,448,488

 

31 December 2015 (Unaudited)

Ordinary Shares

2015 C Shares

Total

£

£

£

Total income

7,662,680

571,495

8,234,175

Net realised and unrealised gain

(105,639)

-

(105,639)

Total operating expenses

(1,450,350)

(313,516)

(1,763,866)

Total comprehensive income for the period

6,106,691

257,979

6,364,670

 

The tables below provide a breakdown of the Condensed Statement of Financial Position between the  reportable segments:

 

31 December 2016 (Unaudited)

Ordinary Shares

2016 C Shares

Total

£

£

£

Non-current assets

342,932,328

-

342,932,328

Current assets

21,855,145

177,168,644

199,023,789

Total assets

364,787,473

177,168,644

541,956,117

Current liabilities

(9,075,515)

(414,431)

(9,489,946)

Net assets

355,711,958

176,754,213

532,466,171

Equity

355,711,958

176,754,213

532,466,171

 

 

30 June 2016 (Audited)

Ordinary Shares

2015 C Shares

Total

£

£

£

Non-current assets

175,573,063

102,807,191

278,380,254

Current assets

14,853,833

77,604,226

92,458,059

Total assets

190,426,896

180,411,417

370,838,313

Current liabilities

(12,430,630)

(3,577,765)

(16,008,395)

Net assets

177,996,266

176,833,652

354,829,918

Equity

177,996,266

176,833,652

354,829,918

 

17. Related Party Transactions

 

Below are details of any significant updates to the related party disclosure in the annual set of financial statements for the year ended 30 June 2016. 

 

During the period, the management fees paid to the Investment Managers amounted to £1,338,277 (31 December 2015: £1,150,766). At 31 December 2016, management fees amounting to £378,675 (30 June 2016: £312,856) were unpaid.

 

During the period, structuring fees of £671,870 (31 December 2015: £870,749) were received by the Investment Managers.

 

Share Interest

 

Neil Roberts, a Director of the UK Investment Manager holds 149,645 Ordinary Shares and 59,256 2016 C Shares in the Company as at 31 December 2016 (30 June 2016: 100,000 Ordinary Shares and 50,000 2015 C Shares).

 

Tim Spring, a Director of the UK Investment Manager holds 150,572 Ordinary Shares and 67,512 2016 C Shares in the Company (30 June 2016: 73,085 Ordinary Shares and 74,800 2015 C Shares).  

 

The table below provides details of the Ordinary Shares and C Shares held by the Directors:

31 December 2016

Number of Ordinary Shares

Number of 2016 C Shares

Peter Niven

59,858

5,000

John Falla

19,637

4,961

Carol Goodwin

44,893

5,000

Christopher Spencer

19,929

4,982

 

 

30 June 2016

Number of Ordinary Shares

Number of 2015 C Shares

Peter Niven

40,000

20,000

John Falla

10,000

9,706

Carol Goodwin

30,000

15,000

Christopher Spencer

10,000

10,000

 

SQN Asset Finance (Ireland) DAC

 

During the period, the Group acquired £5,187,697 of GBP denominated bonds due 6 June 2018 (30 June 2016: €42,670,000 of EUR denominated bonds due 12 May 2018) which were issued by SQN Asset Finance (Ireland) DAC, an unconsolidated structured entity incorporated in the Republic of Ireland. The UK Investment Manager acts as investment adviser to this entity.

 

18. Credit Risk

 

Restructurings during the period ended 31 December 2016

 

During the period ended 31 December 2016, certain finance investments (a secured loan and two finance leases) were restructured resulting in repayment terms being amended.

 

As at 31 December 2016, the Group continues to hold these investments at their combined carrying amount of £20,045,186. The Directors do not consider these investments to be impaired following the restructuring of the finance agreements.

 

During the period ended 31 December 2016, one finance investment (a finance lease) was terminated because of default by the lessee and the leased asset was recovered. As at 31 December 2016, the Group continues to hold this investment at its carrying amount of £1,985,587. The Directors believe that the full carrying amount is recoverable, so do not consider this asset to be impaired.

 

Restructurings during prior periods

 

Three finance investments (two secured loans and one finance lease), were restructured in prior periods. Two of the investments (the two secured loans) may require further restructuring; the third (the finance lease) is now performing in accordance with the agreed terms (as restructured).

 

As at 31 December 2016, the Group continues to hold the two investments for which further restructuring may be necessary at their combined carrying amount of £20,267,886 (30 June 2016: £19,201,474). The Directors do not consider these investments to be impaired.


During the period ended 31 December 2016, one finance investment (a construction finance loan), with a  carrying amount of £119,588, on which interest recognition had been previously suspended, was liquidated and the carrying amount was received in full.


19. Events Occurring After the Reporting Period

 

On 19 December 2016, the Company declared a dividend of 0.6042p per Ordinary Share for the month ended 30 November 2015. This dividend was paid to the Shareholders on 23 January 2016.

 

On 23 January 2017, the Company declared a dividend of 0.6042p per Ordinary Share for the month ended 31 December 2016. This dividend will be paid to the Shareholders on 20 February 2017.

 

20.   Ultimate Controlling Party

 

In the opinion of the Directors, there is no single ultimate controlling party.

 

COMPANY INFORMATION

 

Non-Executive Directors

Peter Niven

(Chairman of the Board)

Christopher Spencer

(Chairman of Audit and Risk Committee)

John Falla

(Chairman of Management Engagement Committee)

Carol Goodwin

(Chairman of Remuneration and Nomination Committee)

 

Registered Office

BNP Paribas House, St Julian’s Avenue, St Peter Port, Guernsey, GY1 1WA

 

US Investment Manager

SQN Capital Management, LLC, 100 Wall Street, 28th Floor, New York, New York, 10005, USA

 

UK Investment Manager

SQN Capital Management (UK) Limited, Melita House, 124 Bridge Road, Chertsey, Surrey, KT16 8LA

 

Financial Adviser and Broker

Winterflood Securities Limited, The Atrium Building, Cannon Bridge House, 25 Dowgate, Hill, London, EC4R 2GA

 

Auditor 

Baker Tilly CI Audit Limited, Mont Crevelt House, Bulwer Avenue, St Sampsons, Guernsey, GY2 4LH

 

Registrar

Capita Registrars (Guernsey) Limited, Mont Crevelt House, Bulwer Avenue, St Sampsons, Guernsey, GY2 4LH

 

Principal Bankers

BNP Paribas Securities Services S.C.A., BNP Paribas House, St Julian’s Avenue, St Peter Port, Guernsey, GY1 1WA

 

Designated Administrator, Custodian and Secretary

BNP Paribas Securities Services S.C.A., Guernsey Branch, BNP Paribas House, St Julian’s Avenue, St. Peter Port, Guernsey, GY1 1WA

 

Receiving Agent

Capita Asset Services Corporate Actions, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU

 

Legal Advisers (English Law)

Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH

 

Legal Advisers (Guernsey Law)

Mourant Ozannes, PO Box 186, 1 Le Marchant Street, St Peter Port, Guernsey, GY1 4HP

 

Website www.sqnassetfinance.com 

 

-ENDS-

 

Enquiries:

BNP Paribas Securities Services S.C.A., Guernsey Branch                           01481 750 822

Company Secretary

Sarah Hendry

 

A copy of the Company’s Interim Report and Unaudited Condensed Consolidated Financial Statements will be posted to the shareholders of the Company. Copies are also available from the Company Secretary, BNP Paribas Securities Services S.C.A., Guernsey Branch at BNP Paribas House, St Julian’s Avenue, St Peter Port, Guernsey, GY1 1WA, or on the Company’s website www.sqnassetfinance.com. 

 

Neither the contents of the Company’s website nor the contents of any website accessible from hyperlinks on the Company’s website (or any other website) is incorporated  into, or forms part of, this announcement.