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Funding Circle Plc (FCH)
Funding Circle Holdings plc Full Year 2022 Results Embargoed until 7.00am, 02 March 2023
THIS ANNOUNCEMENT INCLUDES INSIDE INFORMATION AS DEFINED IN ARTICLE 7 OF THE MARKET ABUSE REGULATION NO. 596/2014
Funding Circle Holdings plc (“Funding Circle”) today announces results for the year ended 31 December 2022. Lisa Jacobs, CEO at Funding Circle, says: “We’ve made good progress against our medium-term strategy, expanding our reach in distribution and depth in products. We introduced lending as a service in the US, and expanded our product set through the launch of super prime loans in the US and near prime loans in the "I’m really pleased with how the business reacted to the evolution of the economic environment and transitioned back to commercial lending, with government schemes phasing out in 2022. Overall we delivered a solid financial performance. We were prudent in our lending in 2022, and will continue to be whilst conditions remain challenging — as expected in the Executive Summary:
Financial Performance:
1 Funding Circle research in partnership with Oxford Economics. 2 Net investment income comprises investment income less investment expense. 3 Adjusted EBITDA (“AEBITDA”) is an alternative performance measure and represents operating profit/(loss) before depreciation and amortisation, share based payment charges, associated social security costs, foreign exchange gains / (losses), and exceptional items. A reconciliation between AEBITDA and operating profit/(loss) is shown in the Business Review.
Financial Summary:
Operating and Strategic Summary:
4 Unrestricted cash refers to total cash less cash that is restricted in use. The restricted cash is cash that is not available for general use by the company as it is held within investment vehicles and is payable to third parties.
We have introduced guidance for FY 23, updated our medium-term guidance for FY 25 and included FlexiPay guidance for the first time, as shown below.
Analyst presentation: Management will host an analyst and shareholder presentation and conference call at 9:30am
To watch and listen to the webcast, with the opportunity to submit written questions, please use this link to register and gain access to the event.
For conference call access, with the opportunity to ask live questions, please dial +44 33 0551 0200 or +1 786 697 3501. Quote Funding Circle Full Year Results if prompted.
An on-demand replay and transcript will also be available on the Funding Circle website following the presentation.
Investor relations and media relations: Funding Circle Investor Relations Morten Singleton (+44 7736 297 929) ir@fundingcircle.com Funding Circle Media Relations Abigail Whittaker (+44 7989 876 136) press@fundingcircle.com Headland Consultancy Mike Smith / Stephen Malthouse (+44 20 3805 4822)
About Funding Circle: Funding Circle (LSE: FCH) is a lending platform for SME borrowers. Established in the
For SME borrowers, Funding Circle provides an unrivalled customer experience, delivered through its technology and data, coupled with a human touch. Its solutions continue to help customers access the funding they need to succeed. For institutional investors, Funding Circle provides access to an alternative asset class in an underserved market, and delivers robust and attractive returns.
5 Previous Forward looking statements and other important information: This document contains forward looking statements, which are statements that are not historical facts and that reflect Funding Circle’s beliefs and expectations with respect to future events and financial and operational performance. These forward looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other factors, which may be beyond the control of Funding Circle and which may cause actual results or performance to differ materially from those expressed or implied from such forward-looking statements. Nothing contained within this document is or should be relied upon as a warranty, promise or representation, express or implied, as to the future performance of Funding Circle or its business. Any historical information contained in this statistical information is not indicative of future performance.
The information contained in this document is provided as of the dates shown. Nothing in this document should be construed as legal, tax, investment, financial, or accounting advice, or solicitation for or an offer to invest in Funding Circle.
At Funding Circle we deliver an unrivalled customer experience powered by data and technology, coupled with a human touch. We have now helped more than 135,000 SMEs to access more than
We have an attractive and proven business model:
Our world-class technology continues to deliver a superior customer experience:
Overview of the year ended 31 December 2022 Against a backdrop of an increasingly challenging
6 Other represents the previously presented Developing Markets segment. As this business has been closed and is in wind-down it has been renamed Other for segmental purposes. 7 Given the size, FlexiPay loans of
In the In the US, we have continued to offer our commercial loan product, expanding our offering to also serve super prime businesses. In the first half of 2021, we operated the Paycheck Protection Program (“PPP”) government-guaranteed loan scheme through the Small Business Administration (“SBA”) which closed in May 2021. During 2022, we have continued to grow originations via our Marketplace which connects borrowers with other lenders in the market, providing further products beyond what Funding Circle currently offers, such as larger loans, asset finance and invoice finance, and we see this growing further in the coming year. Our new line of credit product offering, FlexiPay, has been launched in the market and continues to gain traction. FlexiPay card is now in beta testing and we will continue to expand this during 2023. We remain very excited about the huge market opportunity for FlexiPay to support SMEs with their shorter-term financial needs.
Characteristics of government loan schemes The loans under each of the government schemes have different characteristics, and therefore the income that Funding Circle earns on them is different:
Loans under management declined during the year by 16% to
Funding Circle uses its balance sheet where it makes the business stronger. This has been through securitisation programmes and private funds in 2019/20, co-investing as required by the government-guaranteed loan schemes, short-term funding as we onboard new investors, and in funding the early stages of FlexiPay. At 31 December 2022, Funding Circle’s equity invested in the above Loans under Management was c.2.5% at
Segmental highlights
During the year we continued to originate loans under RLS until the scheme ended in June 2022 as well as providing commercial loans throughout the year. As expected, we experienced slower initial demand when the RLS scheme ended, consistent with CBILS ending, as both schemes brought forward the appetite for SMEs to take out loans.
Demand has largely returned, although general credit quality has weakened and accordingly our conversion levels are lower than they were before the pandemic. With the increasing economic uncertainty in the
Throughout 2022 there remained strong appetite from institutional investors to invest in both the RLS and commercial loans. Four forward flow agreements were signed totalling
As previously reported, investment from retail investors was closed at the start of the pandemic as they were not allowed to participate in the government loan schemes. We closed the retail platform to new investment altogether in March 2022 and retail investors now represent only 2% of the overall LuM.
The
The reduction in operating income was largely driven by lower volumes of originations, partially offset by higher servicing fees (reflecting higher LuM experienced during the peak of CBILS lending in early 2021).
The reduction in net investment income resulted from a reduction in the SME loans held on balance sheet. This was driven by the exit of the
The 8 Investment AEBITDA is defined as investment income, investment expense and fair value adjustments, and operating AEBITDA represents AEBITDA excluding investment AEBITDA. The US transitioned away from government-guaranteed loans in May 2021. We restarted commercial lending in July 2021, and although demand started at a low level this has gradually and consistently increased month on month. We also see continued demand from institutional investors to lend although, with increasing economic uncertainty and rising base rates, concluding funding deals with institutions is taking longer. We anticipate adding further new institutional investors during 2023.
In H2 2022, we funded c.
Originations for the year were
Total income for the US was
Similar to the
Operating AEBITDA was negative
Total AEBITDA was negative
Summary Financial Information
Finance review Overview Group total income was Net income is total income plus fair value movements on SME loans held for sale and investments in trusts. The fair value gain in 2021 reflected a strong performance from the consolidated SME loans with lower defaults and higher recoveries than expected. The Group’s operating loss was Profit and loss
Operating income includes transaction fees, servicing fees, interest income from loans held at amortised cost and other fees and was
In line with increasing base rates, our average origination fee yields grew in the
Net investment income represents the investment income, less investment expense, on loans within Funding Circle’s investment vehicles and was
The Group took the opportunity to simplify the balance sheet and wound up the
Net income, defined as total income after fair value adjustments, was
The fair value gain in 2021 reflected a strong performance from the consolidated SME loans with an improved economic outlook, lower defaults and higher recoveries than expected. The consolidated SME loans have continued to perform well, and ahead of our expectations in 2022, however, due to the amortising nature of the remaining loan book, loan sales that have occurred and higher discount rates (affected by higher base rates) utilised in valuations, the total fair value gains are much lower than 2021.
Operating expenses At an overall level, operating expenses were in line with 2021, with increased people costs (driven by increased headcount and inflation) being largely offset by reduced marketing spend (driven particularly by the effect of reduced originations on broker commission levels). People costs (including contractors), which represent the Group’s largest ongoing operating cost, increased during the year by 15% to
The share-based payment charge for the year, included in people costs, was
Marketing costs reduced in the year to
Depreciation, amortisation and impairment costs of
Balance sheet and investments The Group’s net equity was The majority of the Group’s balance sheet is represented by cash and equity invested as shown below. The equity invested is in certain SME loans, either directly or through investment vehicles, and in the FlexiPay lines of credit.
1 Trading business includes 2 US funding loans includes
The table below provides a further breakdown of Funding Circle’s net equity invested in products and vehicles:
1 These vehicles are bankruptcy remote
At 31 December 2022, the Group held cash and cash equivalents of
Total cash has reduced by
Free cash flow, which is an alternative performance measure, represents the net cash flows from operating activities less the cost of purchasing intangible assets, property, plant and equipment, lease payments and interest received. It excludes the investment vehicle financing and funding cash flows together with FlexiPay lines of credit. The Directors view this as a key liquidity measure and it is the net amount of cash used or generated to operate and develop the Group’s platform each year.
Free cash flow reduced in 2022 due to lower AEBITDA and large working capital movements associated with CBILS where
The table below shows how the Group’s cash has been utilised:
Statement of Director’s responsibilities The Funding Circle Report and Accounts for year end 31 December 2022 contains a responsibility statement in the following form:
The Directors consider that the Annual Report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s and Company’s position and performance, business model and strategy. Each of the Directors, whose names and functions are listed in the Report of the Directors confirm that, to the best of their knowledge:
In the case of each Director in office at the date the Directors’ report is approved:
By order of the Board
Lisa Jacobs, Chief Executive Officer
Oliver White, Chief Financial Officer
02 March 2023
Consolidated statement of comprehensive income for the year ended 31 December 2022
1. Exceptional items are detailed within note 4. 2. Interest income recognised on assets held at amortised cost under the effective interest rate method. 3. The comparative year ended 31 December 2021 has been re-presented to present “credit/(provision) for expected credit losses” which was previously included within “other costs”.
All amounts relate to continuing activities.
Consolidated balance sheet as at 31 December 2022
1. The comparative year as at 31 December 2021 has been re-presented to present FlexiPay drawn lines of credit within “lines of credit” which was previously included within “SME loans (other)”.
Consolidated statement of changes in equity for the year ended 31 December 2022
Consolidated statement of cash flows for the year ended 31 December 2022
1. As disclosed in note 1, FlexiPay drawn lines of credit have been re-presented within “Origination of/cash receipts from lines of credit” within cash flows from operating activities and were previously presented within “Origination of/ cash receipts from SME loans (other)” in cash flows from investing activities in the year ended 31 December 2021.
The impact of exceptional items on the consolidated statement of cash flows is detailed in note 4.
Notes forming part of the consolidated financial statements for the year ended 31 December 2022 1. Basis of preparation The results for the year ended 31 December 2022 have been extracted from the audited financial statements of Funding Circle Holdings plc. The Group presents its annual financial statements in conformity with The financial information in this statement does not constitute statutory accounts within the meaning of s434 of the Companies Act 2006. The statutory accounts for the year ended 31 December 2022, on which the auditors have given an unqualified audit report, have not yet been filed with the Registrar of Companies. The preparation of financial statements requires the use of certain accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. Changes in assumptions may have a significant impact on the financial statements in the year the assumptions changed. Management believes that the underlying assumptions are appropriate. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 16. Except as described below in note 15, the principal accounting policies applied in the preparation of the consolidated financial statements are consistent with those of the annual financial statements for the year ended 31 December 2021, as described in those financial statements. Re-presentation of comparative information The Group has continued to scale up lending through lines of credit in its FlexiPay product. Through FlexiPay, borrowers are provided with a facility which can be drawn to pay invoices and expenses, and are subsequently repaid over three months. A fee of 3% was charged in 2022 on the drawn amount which is recognised over the three-month life of the drawdown in interest income under the effective interest rate method. The accounting policy regarding FlexiPay is outlined in note 15. As outlined later, the loans are measured at amortised cost. As FlexiPay will continue to become a larger part of the Group’s business, this has been disclosed as a separate segment within note 2. As a result the Group has presented FlexiPay under ‘lines of credit’ in the balance sheet and reclassified the comparative which was previously presented in ‘investment in SME loans (other)’ and cash flows have been re-presented within “Origination of/cash receipts from lines of credit” within cash flows from operating activities and were previously presented within “Origination of/ cash receipts from SME loans (other)” in cash flows from investing activities in the year ended 31 December 2021. Additionally, the comparative year ended 31 December 2021 has been re-presented to present “credit/(provision) for expected credit losses” which was previously presented within “other costs”.
Going concern The Group’s business activities together with the factors likely to affect its future development and position are set out in the Strategic Report. The financial statements are prepared on a going concern basis as the Directors are satisfied that the Group has the resources to continue in business for the foreseeable future (which has been taken as at least 12 months from the date of approval of the financial statements). The Group made a total comprehensive loss of The Group has prepared detailed cash flow forecasts for the next 15 months and has updated the going concern assessment to factor in the potential ongoing impact of Covid-19, inflation and related economic stress. The base case scenario assumes: • continued growth in origination of the Group’s commercial lending product until June 2024; • there remains macroeconomic stress in 2023 from inflation, and supply chain pressures with a peak in defaults, which gradually de-stress in the following years; • no extensions or new government schemes that the Group participated in; • the rollout of the new FlexiPay product using the Group’s balance sheet to fund it; and • costs and headcount grow modestly with the new product and with investment in technology. Management prepared a severe but plausible downside scenario in which: • further macroeconomic volatility continues through the period with increased inflation and interest rates reducing originations and increasing costs; • investment returns reduce owing to increased funding costs, widening discount rates and deterioration in loan performance; • an operational event occurs requiring a cash outlay; and • a downside loss scenario is applied to Funding Circle’s on-balance sheet investment in SME loans resulting in higher initial fair value losses and lower cash flows to the investments it owns. Management has reviewed financial covenants the Group must adhere to in relation to its servicing agreements. These are with institutional investors for which there are unrestricted cash, tangible net worth and debt to tangible net worth ratios. Management has also reviewed regulatory capital requirements. In the downside scenario the risk of covenant or capital requirement breach is considered remote. The Directors have made enquiries of management and considered budgets and cash flow forecasts for the Group and have, at the time of approving these financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future.
2. Segmental information IFRS 8 Operating Segments requires the Group to determine its operating segments based on information which is used internally for decision making. Based on the internal reporting information and management structures within the Group, it has been determined that there are four reportable segments described below. Reporting on this basis is reviewed by the Global Leadership Team (“GLT”) which is the chief operating decision maker (“CODM”). The GLT is made up of the Executive Directors and other senior management and is responsible for the strategic decision making of the Group. The four reportable segments consist of the segments in Loans and in FlexiPay. The Loans businesses consist of three geographic segments: the The GLT measures the performance of each segment by reference to a non-GAAP measure, adjusted EBITDA, which is defined as profit/loss before finance income and costs, taxation, depreciation and amortisation (“EBITDA”), and additionally excludes share-based payment charges and associated social security costs, foreign exchange and exceptional items (see note 4). Together with operating profit/loss, adjusted EBITDA is a key measure of Group performance as it allows better comparability of the underlying performance of the business. The segment reporting, including Adjusted EBITDA, excludes the impact of the Group’s transfer pricing arrangements as this is not information presented to, or used by, the CODM in decision making or the allocation of resources. Net income
Segment (loss)/profit
3. Operating expenses
4. Exceptional items
Exceptional items are the items of income or expense that the Group considers are material, one-off in nature and of such significance that they merit separate presentation in order to aid the reader’s understanding of the Group’s financial performance. During the year to 31 December 2021 certain floors of the In 2020, the Group restructured the German and Dutch (Other) businesses to focus on referring loans it originates to local lenders. This restructuring resulted in one-off costs comprising redundancy costs and a related share-based payment credit and impairment on right-of-use assets. Cash payments associated with these items totalled 5. Employees The average monthly number of employees (including Directors) during the year was:
In addition to the employees above, the average monthly number of contractors during the year was 142 (2021: 125). Employment costs (including Directors’ emoluments) during the year were:
6. Income tax (credit)/charge The Group is subject to all taxes applicable to a commercial company in its countries of operation. The
The above current tax charge represents the expected tax on the Research and Development Expenditure Credit (“RDEC”) receivable for 2022 and US state taxes. In the prior year, the tax charge represents the tax liability on the Group’s taxable profit and the amount of tax deducted from the RDEC receivable for 2021. The deferred tax credit represents recognition of a deferred tax asset in respect of US losses previously unrecognised. The Group (credit)/charge for the year can be reconciled to the (loss)/profit before tax shown per the consolidated statement of comprehensive income as follows. Factors affecting the tax (credit)/charge for the year
The Group is taxed at different rates depending on the country in which the profits arise. The key applicable tax rates include the The statutory The Group has recognised a deferred tax liability of A deferred tax asset relating to unrelieved tax losses of The Group has recognised a deferred tax asset of The Group has utilised tax losses in the US for the first time in 2021 and the Group’s transfer pricing arrangements between the In determining the amount of losses to recognise as deferred tax assets the Group has used the forecasts applied in the Parent Company impairment testing with regards to the investment in the US business, which will be disclosed in the annual report and accounts for the year ended 31 December 2022. It has then applied probability weightings to those five-year forecasts the further out it projects to reflect greater levels of uncertainty with limited recognition beyond this point. The estimated amount of deferred tax recognised is not materially sensitive to reasonably possible changes in these assumptions.
7. (Loss)/earnings per share Basic (loss)/earnings per share amounts are calculated by dividing the (loss)/profit for the year attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year. For diluted (loss)/earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The dilutive potential ordinary shares include those share options granted to employees under the Group’s share-based compensation schemes which do not have an exercise price or where the exercise price is less than the average market price of the Company’s ordinary shares during the year. The following table reflects the (loss)/profit and share data used in the basic and diluted (loss)/earnings per share computations:
8. Intangible assets
9. Property, plant and equipment, right-of-use assets and lease liabilities The Group has right-of-use assets which comprise property leases held by the Group. Information about leases for which the Group is a lessee is presented below. Analysis of property, plant and equipment between owned and leased assets
Reconciliation of amount recognised in the balance sheet
1. Leasehold improvement additions in the year are non-cash in nature. Certain right-of-use assets related to the US San Francisco office have been sublet under an operating sublease. Due to a reduction in market values since inception of the sublet, the estimated cash flows expected on expiry of the existing sublet and negotiation of further sublet are lower and as a result an impairment of During the previous year ended 31 December 2021, certain other right-of-use assets related to the US San Francisco office were sublet in a finance sublease. As a result the right-of-use asset was derecognised and a net investment in sublease was recognised within other receivables. During the previous year the right-of-use asset related to
Lease liabilities Amounts recognised on the balance sheet were as follows:
Amounts recognised in the statement of comprehensive income were as follows:
The total cash outflow for leases (excluding short-term and low-value leases) in 2022 was As at 31 December 2022 the potential future undiscounted cash outflows that have not been included in the lease liability, due to lack of reasonable certainty the lease extension options might be exercised, amounted to £nil (2021: £nil).
10. Trade and other receivables
1. Includes £nil (2021:
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables described earlier. No trade receivables were overdue or impaired. Included in rent and other deposits are The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
11. Trade and other payables
The Directors consider that the carrying amount of trade and other payables approximates to their fair value. 12. Provisions and other liabilities
1. Restructuring provision is in relation to reorganisation of the US, German and Dutch businesses; see note 4. Other provisions includes provisions for operational buybacks.
The dilapidation provision represents an estimated cost for dismantling the customisation of offices and restoring the leasehold premises to its original state at the end of the tenancy period. The provision is expected to be utilised by 2025. Loan repurchase liability In certain historical circumstances, in Under IFRS 9, the Group is required to provide for these loan repurchases under the expected credit loss (“ECL”) model. The liability related to each loan arranged is based on the ECLs associated with the probability of default of that loan in the next 12 months unless there has been a significant increase in credit risk of that loan since origination. The Group assumes there has been a significant increase in credit risk if outstanding amounts on the loan investment exceed 30 days, in line with the rebuttable presumption per IFRS 9. The Group defines a default, classified within non-performing, as a loan investment with any outstanding amounts exceeding a 90-day due date, which reflects the point at which the loan is considered to be credit impaired. If the loan is bought back by the Group, at the point of buyback, the financial asset associated with the purchase meets the definition of purchased or originated credit impaired (“POCI”), this element of the reserve is therefore based on lifetime ECLs. After being bought back, POCI loans and associated impairment provisions are recognised within investment in SME loans (other) on the balance sheet. The Group bands each loan investment using an internal risk rating and assesses credit losses on a collective basis.
The percentages applied above are based on the Group’s past experience of delinquencies and loss trends, as well as forward-looking information in the form of macroeconomic scenarios governed by an impairment committee, which considers macroeconomic forecasts such as changes in interest rates, GDP and inflation which are incorporated into scenarios and probability weighted. Estimation is required in assessing individual loans and when applying statistical models for collective assessments, using historical trends from past performance as well as forward-looking information including macroeconomic forecasts in each market together with the impact on loan defaults. The maximum exposure the Group might have to pay at the balance sheet date if 100% of eligible loans were required to be bought back would be
13. Financial risk management The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and ensure any limits are adhered to. The Group’s activities are reviewed regularly and potential risks are considered. Risk factors The Group has exposure to the following risks from its use of financial instruments: • credit risk; • liquidity risk; and • market risk (including foreign exchange risk, interest rate risk and other price risk). Principal financial instruments The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows: • SME loans; • lines of credit; • investments in trusts and co-investments; • trade and other receivables; • cash and cash equivalents; • trade and other payables; • bank borrowings; • bonds; • lease liabilities; and • loan repurchase liabilities. Categorisation of financial assets and financial liabilities The tables show the carrying amounts of financial assets and financial liabilities by category of financial instrument as at 31 December 2022:
The tables show the carrying amounts of financial assets and financial liabilities by category of financial instrument as at 31 December 2021:
Financial instruments measured at amortised cost Financial instruments measured at amortised cost, rather than fair value, include cash and cash equivalents, trade and other receivables, certain SME loans (other), bank borrowings, lease liabilities, certain bonds and trade and other payables. Due to their nature, the carrying value of each of the above financial instruments approximates to their fair value. Other financial instruments Loan repurchase liabilities are measured at the amount of loss allowance determined under IFRS 9. Financial instruments measured at fair value IFRS 13 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement. Disclosure of fair value measurements by level is according to the following fair value measurement hierarchy: • level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; • level 2 inputs are inputs other than quoted prices included within level 1 that are observable for the assets or liabilities, either directly or indirectly; and • level 3 inputs are unobservable inputs for the assets or liabilities. The fair value of financial instruments that are not traded in an active market (for example, investments in SME loans) is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. An assessment that the level applied to financial instruments is appropriate and whether a transfer between levels is required is undertaken at the end of each accounting period. There were no transfers between levels during the year or prior year. The Finance department of the Group performs the valuations of items required for financial reporting purposes, including level 3 fair values. This team reports to the Chief Financial Officer (CFO). Discussions of valuation processes and results are held regularly at Balance Sheet Management and Investment Valuation Committees along with regular updates provided to the Audit Committee.
The fair value of SME loans (warehouse) has been estimated by discounting future cash flows of the loans using discount rates that reflect the changes in market interest rates and observed market conditions at the reporting date. The estimated fair value and carrying amount of the SME loans (warehouse) was The fair value of SME loans (securitised) represents loan assets in the securitisation vehicles and legacy loans of this nature and has been estimated by discounting future cash flows of the loans using discount rates that reflect the changes in market interest rates and observed market conditions at the reporting date. The estimated fair value and carrying amount of the SME loans (securitised) was Bonds represent the unrated tranches of bond liabilities measured at fair value through profit and loss (the rated tranches of bonds are measured at amortised cost). The fair value has been estimated by discounting estimated future cash flows in relation to the bonds using discount rates that reflect the changes in market interest rates and observed market conditions at the reporting date. The estimated fair value and carrying amount of the bonds was £nil at 31 December 2022 (2021: Investment in trusts and co-investments represents the Group’s investment in the trusts and other vehicles used to fund CBILS, RLS and certain commercial loans and is measured at fair value through profit and loss. The government-owned British Business Bank will guarantee up to 80% of the balance of CBILS loans in the event of default (and between 70% and 80% of RLS loans). The fair value has been estimated by discounting future cash flows in relation to the trusts using discount rates that reflect the changes in market interest rates and observed market conditions at the reporting date. The estimated fair value and carrying amount of the investment in trusts and co-investments was The SME loans (other) held at fair value represents loan assets temporarily funded by the Group in relation to the relaunch of commercial loans and is estimated by discounting future cash flows of the loans using discount rates that reflect the changes in market interest rates and observed market conditions at the reporting date. The estimated fair value and carrying amount of the SME loans (other) was The most relevant significant unobservable inputs relate to the default rate estimate and discount rates applied to the fair value calculation, details of which are set out in note 16 for those with material estimation uncertainty. Fair value movements on SME loans (warehouse), SME loans (securitised), SME loans (other), investments in trusts and bonds (unrated) are recognised through the profit and loss account in fair value gains/(losses). A reconciliation of the movement in level 3 financial instruments is shown as follows:
Financial risk factors Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and cash and cash equivalents held at banks. The Group’s maximum exposure to credit risk by class of financial asset is as follows:
1. Included within bank borrowings are
In addition the Group is subject to financial guarantees it has issued to buy back loans detailed in the loan repurchase liability in note 12. The Group’s maximum exposure to credit risk on financial guarantees were every eligible loan required to be bought back would be An expected credit loss allowance related to undrawn lines of credit on the FlexiPay product of SME loans (warehouse) and SME loans (securitised) relate to the underlying pool of SME loans in both the warehouse and securitisation vehicles or are loans from the legacy warehouses and SPVs that have since been purchased or novated into other Funding Circle entities, but remain held at FVTPL with the business model of holding the loans for sale. Whilst there is credit risk from the loans defaulting, certain of these SME loans (securitised) and the third party bonds that remain in SPVs are held within bankruptcy remote vehicles. If the SME loans were to all default, then the bank debt or third party bonds do not receive their money back. Therefore the overall exposure to the Group for these investments is the Group’s net investment in the SME loans which is after taking account of the bank debt and third party bonds. SME loans (other) includes Under IFRS 9, the Group is required to provide for loans measured at amortised cost under the expected credit loss (“ECL”) model. The impairment related to each loan is based on the ECLs associated with the probability of default of that loan in the next 12 months unless there has been a significant increase in credit risk of that loan since origination. The Group assumes there has been a significant increase in credit risk if outstanding amounts on the loan investment exceed 30 days, in line with the rebuttable presumption per IFRS 9. The Group defines a default, classified within non-performing, as a loan investment with any outstanding amounts exceeding a 90-day due date, which reflects the point at which the loan is considered to be credit impaired. In some circumstances where loans are bought back by the Group, the financial asset associated with the purchase meets the definition of purchased or originated credit impaired (“POCI”); this element of the impairment is therefore based on lifetime ECLs. Lines of credit utilised the same default definition and probability of default under IFRS 9, however, are assessed based on 12-month probability of default at the overall available line of credit level, estimating the expected utilisation of the line of credit at the estimated point of default. The expected credit loss impairment associated with undrawn lines of credit is disclosed within other liabilities in note 15 and in note 27. SME loans (other) includes PPP loans funded by the use of the PPPLF. The loans are guaranteed by the US government in the event of default and the loans are anticipated to be forgiven. At the point of default and subsequent collection of the guarantee or point of forgiveness, the loan and the respective borrowings under the PPPLF are extinguished. SME loans (other) also includes loans which have been brought back from investors and are held at amortised cost. Lines of credit comprises An impairment credit of
Trade receivables represent the invoiced amounts in respect of servicing fees due from institutional investors. The risk of financial loss is deemed minimal because the counterparties are well established financial institutions. Ongoing credit evaluation is performed on the financial condition of other receivables and, where appropriate, a provision for expected credit losses is recorded in the financial statements. Other receivables include net investment in subleases of offices representing the present value of future sublease payments receivable. Where appropriate, impairment is recorded where the receivable is in doubt. Individual risk limits for banks and financial institutions are set by the Group with reference to external rating agencies. The Group’s treasury policy has set limits and quantities that the Group must remain within. No credit or counterparty limits were exceeded during the year. The Group’s cash and cash equivalents split by S&P counterparty rating were A/A- rated: 14. Notes to the consolidated statement of cash flows Cash (outflow)/inflow from operating activities
1. As disclosed in note 1, FlexiPay drawn lines of credit have been re-presented within “Origination of/cash receipts from lines of credit” within cash flows from operating activities and were previously presented within “Origination of/ cash receipts from SME loans (other)” in cash flows from investing activities in the previous year ended 31 December 2021.
Cash and cash equivalents
The cash and cash equivalents balance is made up of cash, money market funds and bank deposits. The carrying amount of these assets is approximately equal to their fair value. Included within cash and cash equivalents above is a total of At 31 December 2022, money market funds totalled
15. Significant changes in the current reporting year The financial position and performance of the Group were affected by the following events and transactions during the year ended 31 December 2022: i) Sale of securitised SME loans and unwind of In May 2022, Funding Circle exercised the call rights associated with the majority ownership of the unrated junior residual tranches of Small Business Origination Loan Trust 2019-3’s bonds in the In October 2022, Funding Circle exercised the call rights associated with the ownership of the unrated junior residual tranches of Small Business Lending Trust 2019-A’s bonds in the US. The call option became exercisable as the portfolio and bond liabilities of the SPV had amortised to below the minimum threshold. Funding Circle purchased the loans from the SPV at fair value. The proceeds, cash and other assets of the vehicle were liquidated and used to repay outstanding expenses, and interest and principal on the bond liabilities. As the SPV is consolidated, the net impact on the Group’s financial statements was the repayment of the bond liabilities of the vehicle. The Group continues to consolidate 100% of the securitised SME loans, now owned directly by the subsidiary FC Marketplace LLC. The Group continues to consolidate both the SPVs, which subsequently began a liquidation process, and holds an immaterial amount of cash and accruals, through exposure to the majority of the variability in any excess cash flows available after the liquidation is completed. The loans retained continue to be held at fair value through profit and loss, within SME Loans (securitised), as the Group continues to hold these with the intention of selling them if, and when, an attractive price can be realised.
ii) Scaling up of new products The Group has continued to scale up lending through lines of credit in its FlexiPay product. Through FlexiPay, borrowers are provided with a facility which can be drawn to pay invoices and expenses, and are subsequently repaid over three months. A fee of 3% was charged in the year on the drawn amount which is recognised over the three-month life of the drawdown in interest income under the effective interest rate method. The accounting policy regarding FlexiPay is outlined below. As outlined later, the loans are measured at amortised cost. As FlexiPay will continue to become a larger part of the Group’s business, this has been disclosed as a separate segment within note 2. As a result the Group has presented FlexiPay under “lines of credit” on the balance sheet and reclassified the comparative which was previously presented in “investment in SME loans (other)”. Lending through the FlexiPay product is recognised on the balance sheet within lines of credit. This represents the drawn amount of the facilities. The contractual cash flows represent solely payments of principal and interest (“SPPI”) and the business model under which they are held is in order to collect the contractual cash flows resulting in the lines of credit being measured initially at fair value and subsequently at amortised cost. The Group has presented FlexiPay under “lines of credit” in the balance sheet and reclassified the comparative which was previously presented in “investment in SME loans (other)” where they were also measured at amortised cost. The origination fee associated with FlexiPay is recognised under IFRS 9 within interest income at the effective interest rate in the consolidated statement of comprehensive income and is recognised over the contractual term of the draw down. The FlexiPay lines of credit are held net of expected credit loss allowances under IFRS 9, the methodology and definitions of which align to the existing Group accounting policy on impairment of financial assets held at amortised cost with the exception of being assessed at the available line of credit level, estimating the utilisation of the line of credit to the estimated point of default and are detailed further within note 13. Additionally, the Group assesses the expected credit loss allowance in relation to undrawn lines of credit, estimating the probability of default, loss given default and exposure at default in relation to these lines of credit were they to be drawn. This has resulted in a
iii) Redemption of investment in associate In July 2022 an agreement was signed by Funding Circle European Private Fund DAC I to sell the loans held by the fund as part of its strategy to return capital to shareholders in a cost effective manner. The Group received
16. Critical accounting judgements and key sources of estimation uncertainty The preparation of the consolidated financial statements requires the Group to make estimates and judgements that affect the application of policies and reported amounts. Critical judgements represent key decisions made by management in the application of the Group accounting policies. Where a significant risk of materially different outcomes exists due to management assumptions or sources of estimation uncertainty, this will represent a key source of estimation uncertainty. Estimates and judgements are continually evaluated and are based on experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. The significant judgements and estimates applied by the Group in the financial statements have been applied on a consistent basis with the financial statements for the year to 31 December 2021.
Critical judgements Consolidation and deconsolidation of special purpose vehicles (“SPVs”) and investment in trusts and co-investments (note 13) As part of its asset-backed securitisation programmes, the Group has established warehouse and securitisation SPVs. Judgement is required in determining who is most exposed to the variability of returns and who has the ability to affect those returns and therefore who should consolidate these vehicles and subsequently deconsolidate them. Where the Group has a significant interest in the junior tranches of the securitisation vehicles or the subordinated debt in the warehouses, the Group is deemed to be exposed to the majority of the variability of the returns of those vehicles and controls them, and therefore consolidates them. Where this interest is reduced, the Group considers whether the vehicles should be deconsolidated. The Group also holds a minority beneficial ownership in trusts set up to fund CBILS, RLS and commercial loans with the remaining majority of the beneficial ownership held by institutional investors. The SME loans are originated by a Group subsidiary, Funding Circle Focal Point Lending Limited for CBILS and Funding Circle Eclipse Lending Limited for RLS and commercial loans, which retain legal title to the loans. These entities hold this legal title of trust on behalf of the majority investors who substantially retain the economic benefits the CBILS, RLS and commercial loans generate and therefore the trusts and the assets held within, including the SME loans, are not consolidated. The Group assesses whether it controls the trust structure under the criteria of IFRS 10. Control is determined to exist if the Group has the power to direct the activities of entities and structures and uses this control to obtain a variable return, to which it is exposed to the majority of the variability. As the Group’s holding is small in comparison to the majority investor and is pari passu, the Group is not exposed to the majority of the variability in the cash flows of the trust, and it is not considered to control the trust structures, so they are not consolidated by the Group. Loans originated through the platform The Group originates SME loans through its platform which are funded primarily by banks, asset managers, other institutional investors, funds, national entities, retail investors or by usage of its own capital. Judgement is required to determine whether these loans should be recognised on the Group’s balance sheet. Where the Group, its subsidiaries or SPVs which it consolidates have legal and beneficial ownership to the title of those SME loans, they are recognised on the Group’s balance sheet. Where this is not the case, the loans are not recognised at the point of origination. Key sources of estimation uncertainty The following are the key sources of estimation uncertainty that the Directors have identified in the process of applying the Group’s accounting policies and have the most significant effect on the amounts recognised in the financial statements. Fair value of financial instruments (note 13) At 31 December 2022, the carrying value of the Group’s financial instrument assets held at fair value was In accordance with IFRS 13 Fair Value Measurement, the Group categorises financial instruments carried on the consolidated balance sheet at fair value using a three-level hierarchy. Financial instruments categorised as level 1 are valued using quoted market prices and therefore there is minimal estimation applied in determining fair value. However, the fair value of financial instruments categorised as level 2 and, in particular, level 3 is determined using valuation estimation techniques including discounted cash flow analysis and valuation models. The most significant estimation is with respect to discount rates and default rates. Since 31 December 2021 the assumptions related to estimating fair value have been revised to reflect the observed actual performance of SME loans (securitised) and a revision to the timing of the assumed defaults to occur later in light of the observed resilience of the loans performance and noting that the macroeconomic environment may lead to a later, more gradual but longer lasting stress than the sooner and sharper stress previously expected. Additionally, recoveries have been observed to have performed more favourable to previous stress assumptions and expectations have been revised upwards. The combination of favourable observed performance, higher recoveries and later defaults on an amortising pool of loans has led to a lower lifetime cumulative default expectation and a higher relative estimation of fair value. However, market drivers of discount rates such as observed widening in collateralised loan obligation spreads and increases in the risk-free rate due to central bank interest rate rises in order to curb inflationary pressures have resulted in the estimated cash flows being discounted at a higher rate, which has led to a lower relative estimation of fair value compared to carrying value of the loans partially offsetting the favourable revisions from default and recovery expectations. With respect to investments in trusts and co-investments, where the Group holds a minority equity pari passu co-investment structured through warehouse vehicles, the increase in interest rates and future expected increases in interest rates has decreased the estimated fair value in these structures, as the floating rate interest on senior borrowing facilities within the vehicle is paid before returns to the equity holders, including Funding Circle, are made. Additionally, while the majority of default stress particularly on CBILS loans was previously expected to occur at the end of the product’s first year payment free period, with lower defaults observed than anticipated, the macroeconomic environment may lead to further defaults on these portfolios through the same more gradual default stress outlined above. The nature of the vehicles is such that, while the loans may be government guaranteed, an uptick in defaults in combination with higher borrowing costs will reduce the lifetime return to the equity holder and the inbuilt mechanisms of the vehicles which prioritise repayments to the senior lender could lead to cash flowing to the equity holder later. As a result the estimated fair value of the investment has decreased. Sensitivities to assumptions in the valuation of, SME loans (warehouse), SME loans (other) and money market funds within cash and cash equivalents are not disclosed below as reasonably possible changes in the current assumptions would not be expected to result in material changes in the carrying values. Sensitivities to the default rates and discount rates are illustrated below.
1. Two cumulative default rates are presented for the US representing the portfolios in each of the two respective pools of SME loans (securitised) related to the remaining and legacy securitisation vehicles. Separate sensitivities to default rates for the US securitisation vehicles represent the respective seasoning of the loans and the different reasonably possible range of outcomes. US SPV2 default definition is ”synthetic default” being 90+days past due based on original contractual terms including where borrowers became 90+ days late due to going on approved forbearance measures such as payment holidays.
The above sensitivities represent management’s estimate of the reasonably possible range of outcomes and as a result the fair value of the assets and liabilities measured at fair value could materially diverge from management’s estimate.
It is considered that the range of reasonably possible outcomes in relation to the discount rate used could be +/-200 bps and as a result the fair value of the assets could materially diverge from management’s estimate. As the discount rate is risk adjusted, it should be noted that the sensitivities to discount rate and to lifetime cumulative default rate contain a level of overlap regarding credit risk. The sensitivity in expected lifetime cumulative defaults should not also be applied to the sensitivity of the credit risk element of the risk-adjusted discount rate and the sensitivities are most meaningful viewed independently of each other.
17. Subsequent events
Subsequent to the 31 December 2022, an agreement was signed in February 2023 to sell loans valued at
Dissemination of a Regulatory Announcement, transmitted by EQS Group. The issuer is solely responsible for the content of this announcement. |
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| ISIN: | GB00BG0TPX62 |
| Category Code: | FR |
| TIDM: | FCH |
| LEI Code: | 2138003EK6UAINBBUS19 |
| OAM Categories: | 3.1. Additional regulated information required to be disclosed under the laws of a Member State |
| Sequence No.: | 226823 |
| EQS News ID: | 1572519 |
| End of Announcement | EQS News Service |
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